Greetings, and welcome to the CECO Environmental Third Quarter 2017 Earnings Conference Call. 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, Matt Eckl, Chief Financial Officer. Thank you. You may begin.

Thank you for joining us on this CECO Environmental third quarter 2017 conference call. On the call today is Dennis Sadlowski, 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 Web site at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the Web site. 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 ending 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.

Thanks and good morning. We plan to take some time this morning to cover both the third quarter as well as our plans and actions aimed at transforming the company based on the strategic assessment we just wrapped up. Before we go into the financial details, I want to summarize our market conditions as we exit the third quarter and their impact on our results. Next, I have Matt provide some color and detail around the numbers, and then I'll share with all of you our path forward to win share and create value for our customers, employees, and shareholders. Turning to page three, two of our important end markets in power generation in the niche refinery segment that we serve are experiencing increasingly steeper cyclical downturns. During the last quarter, the two top players in the power generation market, GE and Siemens, further downgraded their outlook. Both have acknowledged that an overbuild in thermal power generation has significantly dampened near-term demand, and our share gain efforts are just not able to offset the unexpected downturn which GE is now forecasting to continue at least into 2018. Oil and gas refiner operations have increased their capacity utilization, as the chart shows. That means that maintenance downtime is being deferred, leading to an historic decline in our year-over-year FCC cyclone orders. Maintenance can only be deferred for so long, and we are finally starting to see the bottom of this trough. Overall, general and industrial is looking better than the other two markets. The U.S. market for air quality solutions is still characterized by uncertainty as customers prolong capital budget decisions in this area, while demand for fluid handling has increased by double-digits since 2016. There's an absolute correlation between the unforeseen worsening of headwinds challenging two of our markets and…

Thanks, Dennis. As I walk through the financials I'll highlight some of the finer points that will include both GAAP and non-GAAP performance for the third quarter of 2017. As a reminder, our non-GAAP adjustments include but are not limited to expenses associated with executive transition, facility exits, acquisition integration, earn-outs, legacy design repairs, and goodwill and intangible asset impairments. Our non-GAAP presentation is intended to provide trend analysis and assessment of our core business performance. A bridge of non-GAAP items is referenced in the appendix. Starting with page six, I'll restate that Q3 results were below our targets and continue to be impacted by the markets we serve. Orders, at $71 million, were down 26% year-over-year, and 19% sequentially, which breaks our streak of consecutive orders growth. We had anticipated a second-half rebound in our energy markets. Our refinery orders are being delayed, and power generation markets are noticeably starker as earning reports from GE, Siemens, and Mitsubishi make clear. Revenue, at $85 million, was down 16% year-over-year, and 9% sequentially due to reduced orders in our Energy businesses over the past few quarters, offset slightly by increases in our fluid handling segment. Our GAAP operating profit, of $5.6 million, was down 47% year-over-year primarily on volume, although it favorably benefited from a further reduction in our expected 2017 Zhongli earn-out liability. The China coal-fired power generation market is considerably lower as utilization has decreased, and the government is making strides to curb air pollution. On the brighter side, we see regulatory action as a market benefit for our air quality businesses. Non-GAAP gross margins were 32.1%, and down 1.3 points year-over-year. While our fluid handling business continues to grow with favorable margins, it's not enough to offset the pricing pressure we're seeing in our power generation product lines,…

Thanks Matt. Turning to Page 14, I want to follow up on my comments from last quarter by focusing on the rollout of our strategic plan to transform CECO with the aim of winning share and creating value. As a reminder, one of the first priorities that we set upon my appointment of CFO in February was to invest in a comprehensive strategic assessment of the company, we dug indeed to assess our markets and trends, organization structure and business processes across company. In parallel, I met with numerous customers across the globe, visited our CECO colleagues in over 15 locations, met and spoke with vendors and partners, spent time with our banking syndicate and boil down a significant effort from our team into several intensive discussions with our board on the future priorities and direction for the company. I'll add that a deterioration in our key markets that led to the financial performance that Matt has summarized has only made this effort more important, if not more challenging. One of the compelling outputs of our strategic assessment process has been the sharpened view of our winning value proposition. Specifically, that we enable our industrial customers' growth with clean, safe and more efficient solutions that help protect our shared environment. It's what we stand for? And it serves as a guidepost for transforming CECO to win market share and create value. It's all about growth. You'll be seeing that we've sharpened our focus to become the leader in two key applications industrial air quality solutions and fluid handling. And as a sidenote, clean energy remains a primary market for air quality improvement and fluid handling solutions. Now turning to Page 15, I'd like to share a bit on our historical performance with three themes that led to stagnant earnings per…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Sean Hannan of Needham & Co. Please go ahead.

Yes, good morning folks. Thanks for taking my question here or questions, actually I have many. So the first thing, Dennis and Matt, that I'd ask here is if we were to reverse course maybe nine to 12 months ago I think there were some viewpoints that the internal operations and execution under the prior management team probably could've been a little bit stronger in terms of capturing bookings and revenue growth. Since you folks have been in your seats what it appears like is that as you've been trying to address a number of the internal, whether process changes, cultural change, et cetera, that we've had it looks like some material weakening within some of your end markets really being quite incremental over the course of the last couple of months to quarters. Is that fair, or is there perhaps something that may not have been previously recognized nine to 12 months ago as there actually was a bit more weakness fundamentally within those markets than what was previously appreciated.

Yes, Sean, good morning. And thanks for the question. I think you have captured that correctly. When we first -- when I first came off of the Board and into the business we were aware that within the refinery Emtrol-Buell business that we would see a dip this year. We have pretty good visibility there into the medium and longer-term of what's happening with a lot of early dialogue with customers all over the globe. I knew that would be a bit of a tough point on new bookings for this year. We're fortunate to come into the year with solid backlog against our number one global market share position. But in the energy power gen space that's a cloud that formed and came in like some of the storms that hit the country in the last quarter. There was some modest slowing down perhaps, but I think both GE and Siemens, the two big dogs in this space, were very surprised by the steepness and the quickness of the downturn. Both of them are out making major restructuring in their own businesses. And there's nothing we could do to completely offset that steepening and accelerating market downturn. So that put about 50% of the company into its own little micro recession. As we work through our internal process, as we work through our execution path, and as we build the strategy going forward.

Okay. And so there are some pretty tough challenges we have here with where the bookings in the backlog are. Certainly appreciate some of the commentary around how you folks are looking to address the business. But as we step back and we look at the results from this quarter, as well as our models, it seems like we probably, just based on timing lags going from order bookings and really kind of getting into then that revenue generation, we might have another two sequential revenue declines here in December and March before some of these other efforts to stimulate the top line could really take affect. Is that logic something that holds water? What commentary would you provide around that? Just trying to understand when we can think about an inflection point given what's been communicated today.

Yes, so I'll say something about the market and the bookings, and let Matt also comment on your question about timing and history, and backlog. Bookings-wise, again it's been a challenging market environment, and not without a great deal of effort. One of the things I am pleased with is the strength of leadership across our Energy and engineered equipment business is that they do give me confidence that in spite of a very challenging market outlook, that we have leaders that are leaning into the market and establishing and maintaining our strength, the brand, to make sure that we're getting more than our historical share. And I think we're going to see that in the refinery space with our Emtrol-Buell business. A lot of the delays that Matt spoke about, what we think are finally going to start translating into new wins based on the accelerating activity and discussions that we're having in a number of those markets. So that will pick up. I think we are pretty optimistic with the quarter we're in now with some early wins and a good start to the month of October. But you're right, in some cases, and I'll let Matt add some color. A portion of our future revenues are based on prior periods' bookings. That's the way it is with the long-cycle nature of some of our units. Matt?

Yes, on the revenue side, Sean, with the book bill less than one, your inclination towards sequential decline in revenue is correct. I think we have some tough end markets for the next few quarters ahead of us.

Okay. And then last question here. It's going to be multi-part, and then I'll hop back in the queue. I'm sorry if I'd missed this, can you talk about the timing of the restructuring actions in terms of cash outlay when we see the benefits materialize and then full ramp. And then part two to that really is I think if I interpret your slide deck correctly, your bank defined leverage is nearly two times at this point. And if I remember correctly, the leverage requirement you guys dropped to this year is at about three times. So I just want to validate if that's correct, and try to understand your perspective around any risks around tripping covenant penalties, and what we're looking at on that front?

Sure, so Sean, I'll start by saying thanks for sticking with us. There's been -- we had about six analysts covering us. We now have three, with three of them leaving recently for other positions outside of their firms and they're looking to back those. I appreciate all your questions. If you have more you're free after this to ask a couple more. But I want to go back to your first, and then I'll answer the second one, the timing of restructuring. So a majority of the actions have and will take place in Q4 with full quarter benefit being recognized by Q1. And the actions are quantifiable and our leadership team is accountable to de-levering those benefits. We will still need to make some discreet investment and simplification in our growth platforms. And we also have accountability to make sure that those yield future benefits. Though the total SG&A reductions may be less than transparent in the full P&L but rest assured, we have a clear delineation between restructuring and investing, and we'll see a majority of those $5 million to $7 million savings in Q1. As far as the costs associated with those, we're still working through the finer details of the program here in Q4, but right now we anticipate to be about $1 million to $2 million of severance and exit costs associated with our footprint, so more details of that will be rolled out here in Q4 as we finalize that in the current Q4 quarter. Your second question about the leverage ratio, I think it was we're currently sitting at under three -- roughly around 2.6 turns, and our new covenant allows for a leverage ratio of 3.75 through second quarter of '19. That gives us two things; one, it gives us the ability to invest which is sorely needed in sales, engineering, service talent, all the items that Dennis spoke about and the growth strategy. It also helps to shield us through the trough of the power gen market that we're seeing here for the next, let's call it, 12 months that will ensue. And there's a lot of other items in the finer details of our credit agreement that our lending team has helped us to include the definition of EBITDA and re-clarify that so that we have some flexibility for the future. And I'm appreciative of their support. So at this point, where we're seeing right now, I don't feel nervous about, as you've called it, tripping any covenants at this point.

Okay. Thanks so much for addressing the question, folks.

Sure. Thanks a lot, Sean. And if had more you're welcome to ask.

[Operator Instructions] Our next question is coming from Gerry Sweeney of ROTH Capital. Please go ahead.

Hi, good morning, guys. How are you?

Good morning, Gerry.

Good morning, Gerry.

I wanted to talk a little bit about, I guess, the strategic initiatives going on. And pardon me because there's a lot here, and we're still working through it a little bit and reading -- just actually going through the slide deck. But it seems to me we have a few different things going on. And I just wanted to get your thoughts on this. It seems like headwinds are created by -- you have a few high-profile brands that are hitting some headwinds, i.e., the Emtrol-Buell and the Energy business. And they've really taken a hit on the top line and hurting profitability. And then on the other side of that, you're looking at the bunch of smaller, probably, brands and businesses that aren't impacting the top line and may actually be a drag on the profitability side. And it seems like the perfect world would be keeping the Emtrol-Buells, keeping the Energy business -- keeping those higher profile businesses, but adding on additional areas to probably alleviate some of that, we'll say, revenue concentration. Is that a fair sort of assessment what's going on here at the top line?

Well, thanks, Gerry, for the question. If I understood it, you accurately described a couple of things. One, we have, as you outlined as we discussed, some serious headwinds in a couple of our key end markets going on. As I mentioned, the refinery releases at the beginning of this year. We saw we were headed for a trough; it was going to be deep. And it was going to kind of take the lion's share of '17 before we started to see new bookings in that business. Power gen kind of hit a cloud that turned into a major storm, and again I mentioned that as well, with our biggest market customers there all in serious and major restructuring right now as we speak. That said, those are real, we're dealing with them. I think Emtrol will come out earlier, and we'll start to get very favorable comparisons as we go into '18. I think power gen will be tough. What we like in our portfolio, and what we're decided with going forward with the concentrated three growth platforms is we very much are going to be about competitive differentiation, units that have good strong cash flow generation, and developing and harnessing sticky customer relationships with our aftermarket efforts. So those are things that you will find within the focused areas of our growth platforms, and into what are some pretty compelling long-term markets. It is what we think makes a difference as we go forward, and transform the company for the future. That's what I have great confidence in that we will succeed in winning share and ultimately creating value for our shareholders.

Okay. And then talking about some of the businesses you may exit. I mean, do you have a sort of rough estimate of how much revenue that may be, and sort of what that those two profitability -- not sure if -- does that become a positive net profitability because there's just more of a drag than anything?

So I think what I mentioned there is that we're pretty advanced in our assessment of that. And we do believe that we may have a few business units where we might not be the best owner. They're good operating units, they're vibrant, they generate good cash flows and the like. But when you make the tradeoffs of can we invest equally across the board to make sure that we drive the best long-term value, that's where we're in the discussion and looking at how do we sharpen around these three growth platforms. So as we make progress there we'll certainly be able to share that, but there's nothing that I could share today that would be definitive.

Got it, okay. I think that is it from my end. I appreciate it.

Yes. And we appreciate your continued coverage. As Matt mentioned, we lost three of your colleagues to new roles at different firms. I think they are looking at backfilling coverage. And there is a lot to digest today as we conclude and more forward on our strategic plan.

Great, thank you.

Thank you. Our next question is coming from Sean Hannan of Needham & Co. Please proceed with your follow-up question.

Yes, thanks for the follow-up here, guys. Just one or two if I can also go back into some of the commentary and slides you have around some of this refocused strategy here. If I look in your slide deck, in slide 18, we call out a few growth platforms, for example, Engineered Equipment. Trying to get a better sense of as you folks identify these themes can you talk to us in a little bit more detail in terms of what you feel that you're holding there as market share? How you size this? How you really see some of this developing? And the reason I ask that is, for example, when we look in the Engineered Equipment, we have cyclones. And we know you folks have done a lot of cyclones business in the various submarkets for a long period of time. But as a grouping, that's down pretty good right now. And so, you know, as we are looking at this slot calling it out into clean energy, it is simply pivoting, existing technology into a bigger focus and push. How pleasant are you? Just trying to really get a better understanding, you know, what is this opportunity here, what can we see that's a little bit more tangible, how you size this, how do you grow this? Thanks.

So, I think a portion of your question is also delineated on page 17, where we talk more about our markets.

Sure.

And we talk about clean energy, because essentially a lot of what we do and where we are putting our growth investments are in and around clean energy production. I talked about coal being on the decline, serious decline all over the world, and that's why we've -- I'll say collapse that for serving the aftermarket in a profitable fashion, but don't see much reinvestment going there because there is not a market that we would anticipate, you know, comes back anytime soon. With that said, even there we have some interesting discussion underway with the core technology that we've developed, and how to apply that in the future for benefits for the company. But we are very much in and around the gas market, both gas production, gas distribution, L&G bill that is underway in this country and looking to be exported around the world with the shale gas findings all over the country. We are all about the gas-fired power-gen market. And that's where a big portion of the current mix is in our engineered equipment space. We still see that, but a fairly fragmented overall market, especially in solutions that are more around distribution and separation of gas. And so, that's why we still see a lot of opportunities there to continue to consolidate to use differentiation where we have strength and silence as we have strength and separation, we have strength in ACRs, we have strength in FCC cyclones, and to continue to use that differentiation in our strong project capability to generate cash flows for the business. These units have done well with favorable cash generation, particularly as we are growing the businesses. And frankly, in the current marketing conditions they put not only some strain on growth, but some strain on our working capital as well because of the nature of us to work out ahead with customers. The other two: industrial air pollution, fluid handling, similarly, we have a pretty broad market in a fragmented space. Still see room to be a consolidator, but first things first as we want to bring in the focus to making the internal investments that we are confident will generate pretty near-term payback as well.

All right, thank you. I'm going to see if I can maybe redefine some of these offline. Thanks for taking the questions folks.

Yes, thanks, Sean.

[Operator Instructions] Gentlemen, I'm showing no further questions in queue. Do you have any additional or closing comments?

Yes, thank you operator, and thanks to all of you again for joining us today. Before I close the call, I'll just leave you with the final confirmation that we are accelerating our transformation to win share and create value. We are focusing our efforts on three attractive end-markets with targeted investments and redeployment or resources into the three growth platforms that I covered. Much has been accomplished in recent months, and we still have a great deal to do. So I'm looking forward to sharing our progress with all of you in the future. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.