Greetings, and welcome to the CECO Environmental Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Mr. Matt Eckl, Chief Financial Officer for CECO. Thank you, Mr. Eckl. You may now begin.

Thank you for joining us on the CECO Environmental second quarter 2017 conference call. On the call today are Dennis Sadlowski, Chief Executive Officer; and myself 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 website at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the website. 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 the supplemental tables in the back of the slide deck. And now, I'll turn the call over to Dennis.

Thank you, Matt, and good morning everyone. I'm extremely pleased to have been selected by the Board of CECO as the Company's full-time CEO and I'm excited about the Company's future potential because their products and technologies and especially our people are world-class. I'm working closely with the Board and the senior leadership team to execute our strategic plans so that we maximize customer value and increase shareholder returns. This morning I want to discuss three areas of interest. I’ll begin with a summary of our second quarter financial performance, with Matt providing the details in a few minutes. And I'll highlight several of the key actions that we've undertaken to transform how we do business and exploit our strengths in a fragmented marketplace. And finally, I’ll share some insights on the roadmap for sustainable growth that we're creating with the aim of a rollout before year ends. So let’s talk about the quarter starting with Page 3. Given the softer marketplace in a few key segments we're operating in, and three specific items realized in the quarter, our second quarter 2017 financial performance didn't meet our desired results and remains below our future potential. When I reflect on the quarter's results, bookings of $87 million and revenue of $94 million so on the one hand disappointing but in the context of the slowdown in some of our core markets and our improved win rates, I think we executed well in many corners of CECO. The quarter began with the promise of a burgeoning pipeline in several businesses so we expected to do better but as the quarter continued more push-out often into Q4, dampen that optimism. Gross margins held relatively strong in spite of a few charges in the quarter for project overruns. We outperformed last year in both…

Thank you, Dennis. I'll now discuss highlights of our recent performance adding color as we walk through slides. Detail will include both GAAP and non-GAAP performance for the second quarter and six months of 2017 for our consolidated CECO results and three individual segments. As a reminder, a bridge of non-GAAP items is referenced in the appendix. Starting with Page 10, I'll cover 2Q '17 stated on a GAAP and non-GAAP basis. We had lower than desired overall results but as Dennis said, we don't believe the second quarter is indicative of our future potential. Orders were up modestly for the third straight quarter at $87.2 million but down 20% or $22 million year-over-year of which 19.5 is driven by our Emtrol-Buell refinery base business that is experiencing a severe market trough. Revenue at $93.9 million was down 16% year-over-year due to reduced backlog primarily from a few large service contracts executed in Q2 of the prior-year. Revenue improved slightly on a sequential basis due to growth in our short cycle business. Non-GAAP gross margins were 32.4% and up 2.1 point year-over-year on project mix and structural cost reduction initiated in second half of 2016. Q2 non-GAAP operating income was $9.4 million or 10% of sales which is down $3.6 million or 1.6 points year-on-year. Revenue decline of $18 million year-over-year impacted operating income by $6 million offset by $3 million of structural cost reductions. Non-GAAP diluted earnings per share was $0.08 compared with $0.21 in Q2 '16. Cash flow from operations was unsatisfactory in the quarter with the use of cash totaling $3 million. It is important to note that 4.4 of 11.8 paid in Q2 for the 2016 Zhongli earn-out is recorded in CFOA. Included in our GAAP operating income was a $5.6 million gain from a fair…

[Operator Instructions] Our first question is from Kyle Dickie of William Blair. Please go ahead.

For the $9.7 million in orders that were taken out of backlog. Can you just provide a little more detail on that how dormant were those orders, what end markets where they in and did you say that to the customers as - they need financing in order for you to come back or just little more detail there?

For the $9.7 million approximately $3 million of the de-bookings were related to cancellations, a portion related to change in project specifications that required by customer to revisit the project, and the remainder is driven by a changes in market assumptions. To answer your other question, I think you asked around the de-bookings was, how long have they been dormant and I’d say that, they are beyond our 18 month timeline from an activity level standpoint. We do believe that some of those and a large chunk of those could come back into backlog once the customer is able to raise the financing for that project.

I know you talked a little bit about kind of from a employee turnover issues you’ve had. Is that being kind of at all levels of the organization and do you think that’s impacted topline growth at all?

So, the issue that I spoke to around turnover does have a fairly lengthy tail to it. So, right at the outset, one of the things we’ve been addressing is really rebuilding the organization in a way to focus outside in to get people energized about solutions that help customers and using that to really build and motivate people, who care about the industry, who can impact the industry and those are kind of guys we have in all levels of the company. The fact is that, we had some turnover that we would otherwise call regrettable and it probably did impact some of our potential in the past. Its why put a great attention on air. It’s why I am pretty optimistic that we’re turning the corner there. And I think some of the changes of why we’re seeing people trying to find their way back to the company, some of our former talented guys.

And then just last one from me. Can you talk about your aftermarket connectivity? What level is it kind of currently at or how high could it get and how long do you think it will take to get there?

So, I mentioned on the call that aftermarket, the percentage of revenue was 28% in the quarter, 30% versus last year. On our first half basis, 30% of our total revenue was aftermarket. Does that answer your question or are you asking what target we’d like to get to?

Correct. Yes, just kind of what target, do you think you can get to and what point, how long do you think it takes get there?

I think what we spoke to in past quarters was that we activity - connectivity by actually kind of order in the last 12 month on some of our $5 billion of installed base was in the neighborhood of 10%, you know a low teens, and we think that best-in-class could get into the 30s perhaps a little higher than that. And so, that's why we continue to be optimistic while we continue to employ people, while we continue to look at engineering solutions that enhance the customer's investment and are making good progress there.

Thanks. That’s it for me.

There is a real benefit as well Kyle that I would add of course with our aftermarket and then it builds the stickiness with our customer relationships and brings us a lot closer to the end users. Lot of our sales end up going through an OE intermediary, perhaps an engineered construct intermediary and so, our aftermarket effort also rebuilds that stickiness where the installed base is, where the ultimate users are of our products.

[Operator Instructions] And our next question is from Gerry Sweeney of ROTH Capital Partners. Please go ahead.

Thanks for all the detail. I apologize I was jumping around a little bit, but I’m not sure if you covered it this exactly. But taking a look back over the years, CECO has always been a little bit more challenging on the organic growth side of the equation and obviously I think this is something that you’ve been talking about addressing, in particular, what the outside and mantra. And I assume that also assumes connecting better communications with your clients and also moving more from a product sale to a solution based sale and to help achieve better sales et cetera. What do we need to get there? Do you need more boots on the ground, do you need more internal? Are we going to look at maybe some lower gross margins on a go forward basis as you build out some of these organic sales initiatives? I'm not sure if you're exactly at that point where you can discuss it, but I want to see what you can give us at this point.

So, first off, I’d say you’re correct. Organic growth has been a big part of the focus this year. And when I think about the results as I talked about, they didn't meet the targets that we set for ourselves and they’re still below what I believe our future potential is. That said, the first thing that we need is probably a little better market conditions in some of our business. 33 million coming from our Emtrol-Buell business alone that we highlighted year-to-date on bookings, they're big number and that's in a market where we believe we’re the leading market share player, have a great business, see most of the worldwide demand and our hit rates are up. So I can't do too much about that outside of continue to support a strong business and get us through this trough as it gets back. The other items that we're doing and we’re seeing some traction from and give us the reason why we have optimism is that we do have much better global teamwork and energy attacking global projects with strong technical capability. That's driving our hit rates up. We have continued to add slices of technical capability particularly when we think about our Peerless pressure products and new applications and separation for projects going on in the Middle East even with the moderated oil prices. And in air quality, I talked about it. A big part of the potential that I see, that our team sees is reorienting from the fragmented approach we’ve taken in the past due to really stepping up as a leader in air quality. As we think about being a leader in air quality, industrial air quality, it is about approaching customers with that and applying a variety of the different solutions we have depending on the type of problems that they need us to help remediate as they grow. And those things are part of the solution that we’re seeing. This gives us optimism because we’re seeing that in our hit rates.

And then on the fluid handling, obviously, I mean excellent margins always. I haven’t seen the Q this quarter, but historically, very good margins. And there was a little bit of a push in that business to move into Europe. Is that move part of the benefit in the uptick in backlog and bookings for that business?

Yes, fluid handling, we're seeing good execution and better market conditions both. So we’re pretty pleased there. And you're right. In terms of how it affects our overall margin mix, fluid handling has been a contributor to the margin mix for the overall company. So it’s a good thing. We do have efforts, specifically with Jerry D'Alterio, focusing on the global growth there of the business, and we saw a good traction in the first quarter. We’re seeing good activity continuing in the second quarter. So I expect that that will continue. It is from a relatively small base though, Gerry. You probably know that. So the growth numbers are actually pretty substantial when you look at them on a relative basis. On an absolute basis, it’s still a fairly small number for us.

Yes, I mean that business has always been very niche so there's always an opportunity to expand it and there's probably a big opportunity to expand globally in that business not only I think geographically but I would assume also into some other additional end markets adjacent end markets.

Yes, we've added people in both Europe and the Middle East to do just that.

And then Matt, this is probably more for you, this is just a quickie easy question. On the debt updates that you gave us, any costs associated with that or was that just a standard move by the banks or allowed to do without charging normal like that they like to do sometimes?

Yes, it’s noted in our Q that will be published later today but it was not material.

[Operator Instructions] And the next question is from Sean Hannan of Needham. Please go ahead.

I apologize some of this might be a little repetitive and perhaps I miss this now. Your bookings are picking up slightly for the second consecutive quarter here so that’s good sign. We’ve been pulling out of backlog of course. So just trying to get a better understanding of how we should think about the revenue trends from the second quarter here as we go into third and fourth quarter directionally at this point?

Yes, so first thing I would say is yes, we have three consecutive quarters of improved bookings overall in this case pretty modest from our first quarter results. And the good news is four consecutive quarters of growing bookings and fluid handling and filtration, similarly three in energy. And those are good signs especially considering some of the market conditions that I noted in gas turbine placements. That said we have been below 90 million I think for three quarters as well and so the second half outlook will certainly be taking that into account.

So should we interrupt that as second half outlook will be weaker than the first?

So, what we were thinking most recently Sean and that is, as you know we don't give guidance, but what we were thinking that the year would continue to progress on a bookings level kind of quarter-over-quarter, I still think that potential is in front of us even with some of the push-out and some of the headwinds that we have based on our ability to execute in the market and continue with the improved hits rates and wins rates exactly how that translates to the second half sales from our starting point is going to also be a challenge. So you’re well aware that we have a lot of our business on POC revenue recognition and that tends to smoothen out some of the history as well.

On the OpEx front and Matt perhaps this is for you, so could you size or give us some perspective around any incremental optimizing you could implement within the model or within the business in pulling out some costs say versus the level of investments you might be making in turning this around. Just trying to understand some of the puts and takes for what contributes to the progress of SG&A from here?

So SG&A as of Q2 was 23% of sales it's - we recognize that, but we see this more of a topline issue versus cost issue but I think to your point what we’re focused on shifting our cost from G&A to selling and being BD or business development. And I think Dennis touched on this earlier, we need to be more customer oriented. Simplification comes into practice here. I mentioned on the call, we have 13 ERPs of which six of those are in the United States alone. So you can imagine the amount of cost structure that goes into administering those systems. So we think there is a benefit that comes along with reducing those and we think there is an investment need to be made. We’re sizing how big that investment is right now. And I like to take that cost and pump it back into the selling side and our BD side of the business.

And then last question here. There’s certainly been some mentioning around the hit rates. Is there a way, Dennis, if you could share with us, or Matt as well, something to characterize the outreach or bid activity versus prior quarters. And where do you feel your win rates or hit rates are today and how they’re moving.

So, it’s very difficult, John, to aggregate kind of the information we have in a way that is perfectly meaningful for you guys because of the nature of the different units and how they impact our outlook. Emtrol's hit rate we'll just say are always very, very good historically and they are getting better in the current market that's translated to a 33 million year-over-year decline in bookings for the first half. Not much I can do about that. What we’re seeing again, the activity - and the way we measure our hit rates in the like are projects that are active and bid that either have been awarded to us or to a competitor, that's our win rate. Some of those might be abandoned. And in the most recent quarter, we have a lot of things pushed out as delays. So those don't go into the calculation. We’re just looking on close projects. Because there's also some timing issues on feedback, perhaps a delay, perhaps an abandoned project, that either didn't pass funding or somebody decided on certain of the risk factors that maybe will push this out and started over again, it is a little harder for to translate that perfectly for you guys. It's one of the goals we have so that we could help you understand what we're seeing as well.

[Operator Instructions] It appears we have no further questions in the queue at this time. I would like to turn the conference back over to management for closing comments.

Okay. Well, thank you and thanks all of you for joining us. I’ll say again that the results in the second quarter did not meet our targets, but we think we’re well below our future potential. We are transforming how we do business to exploit our strengths and making good progress on our strategic roadmap. So all of this is intensely focused on maximizing customer value and increasing shareholder returns. I thank you all for your participation this morning.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.