CECO Environmental Corp. (CECO) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Matt Eckl, CFO of CECO Environmental. Please go ahead, sir.

Thank you for joining us on the CECO Environmental first quarter 2018 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 materials can be accessed through the Investor Relations section of the Web site. I'd 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 on Form 10-K for the year ended December 31, 2017. Except to the extent required by applicable securities laws, we undertake 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.

Good morning and thank you for joining us. I'll begin today's call with a summary of our first quarter results, which I am pleased to say shows we're building momentum as a result both in market recovery and the traction gain from the implementation of our 4-3-3 operating strategy. I'll then highlight some specific actions we've taken or completed as we continue to transform CECO to become a market leader in air quality and fluid handling solutions. Matt will then go into the first quarter financial details, and I'll follow that with a wrap up by offering some thoughts on the outlook of our end markets and a couple of examples of our success in protecting the environment while gaining share and creating value. Turning to slide three, it's apparent that we're moving forward and building momentum in the first quarter. And as you'll see, the numbers are beginning to reflect the actions we've taken. Orders were $95 million, which is up 13% year-over-year, and 4% sequentially. I'd like to emphasize that it's the second consecutive quarter of both increase in bookings and a positive book-to-bill ratio after a series of quarters with a book-to-bill of less than one that dates back to Q1 of 2016, swift [ph] key milestone in our turnaround strategy of the company. You'll see that the refinery and fluid handing areas lead the way in our Q1 bookings growth. Our gross margins were also favorable, at 34.5%, which exceeded the 2017 total year average. Our team continues to demonstrate the value of the CECO brands and deliver projects with solid execution. And our non-GAAP operating income and adjusted EBITDA improved versus the fourth quarter of 2017 based on our cost restructuring actions and rebounding refinery market. We completed the sale of two non-core assets in Q1, Keystone Filter, which I touched upon during last quarter's call, and more significantly, Strobic, which we closed on the final day of the quarter. Combined, these divestitures generate gross proceeds of approximately $35 million, enabling us to repay $30 million of term debt in the quarter and support the growth investments within our 4-3-3 operating strategy. Further, the sale of Keystone Filter and Strobic represent key steps towards aligning our business to better serve the industrial air quality improvement and fluid handling markets. At $74.1 million, revenue was down 20% year-over-year, and flat versus the fourth quarter of 2017. The reduced revenue reflects the tail end of lower bookings that occurred last year and the wake of down market demand in the power-gen and refinery market segments. Adjusted EBITDA was $5.6 million, down 60% from a year ago, but an improvement of 14% sequentially. This is a modest improvement signaling the end of five-quarter slide. And finally, our free cash flow was $3 million, a solid, positive indicator of our business model given the reduced net income on lower sales in the quarter. Turning to slide four, I'd like to reiterate the clarity of purpose around which we are transforming CECO Environmental. We're all about growth, and specifically, enabling our industrial customers to grow. And we do so with clean, safe, and more efficient solutions that protect our shared environment. It's exciting to know that we can align our interests with our customers for growth, and generate benefits to workers' safety and the world in which we live. It's been rewarding to hear from our associates that they're getting behind this purpose with a renewed sense of passion and commitment. And as we outlined for many of you back in November and with an update on our Q4 call in March, we're aggressively implementing our 4-3-3 operational strategy to transform CECO Environmental in order to reach our full potential for growth by consistently winning share and creating shareholder value. Slide five, shows the components of our 4-3-3 operational strategy. I'm amazed at the number of you who have approached me about my 4-3-3 soccer, or as we purists say, football analogy, with the support and understanding that we are on offence. Not to mention hearing about some of your favorite offensive-minded 4-3-3 teams, like Liverpool and Barcelona. The long-term success of our 4-3-3 operational strategy is based on the implementation of four value creation enablers; outside-in leadership, portfolio management, simplification, and innovation. Outside-in leadership is all about an increased focus on listening to our customers guiding a positive cultural shift throughout the company and investing in the sales enablement and process excellence training as we build our brand. Active portfolio management is essential for allocating capital to the highest yielding returns, as well as brining clarity to targeted and winnable end markets. Simplification at CECO Environmental can unlock significant value through reducing the inefficient complexity within our organization. As I mentioned in last quarter's call, our biggest target is to reduce the 64 legal entities and 13 ERP systems within CECO which are not only inefficient but also a barrier to productive interactions with our customers. Finally, there's innovation. This is nothing but a necessary investment action. Innovation as an enabler of growth will likely require the most time to gain traction and produce results until a pipeline of valuable ideas are fully quantified, but we've rekindled the creative juices across the company. Next is the three compelling end markets that we've chosen to operate in: Clean Energy, Industrial Air Pollution Control, and Fluid Handling. We've identified competitive and winnable spaces in each of these end markets. Combined, these three end markets represent a sizable $6.2 billion in market opportunity in which we currently have only about 6% share. So it's clear there's plenty of opportunity to gain share. In the clean energy market we're a key part of helping meet the global demand for energy, with products and services that support our customers with efficient solutions and technologies that keep the world clean and safe. In industrial air pollution control our aim is to address the growing need to protect the air we breathe and help our customers with their goals for sustainable upgrades beyond carbon footprint issues. And in the fluid handling markets we have unique pump and filtration solutions that maintain safe and clean operations even in the most corrosive environments. Across the board, we'll continue our emphasis on aftermarket opportunities that protect and deepen our end user relationships with long-term high-value service contracts. Finally, we have three growth platforms that are being built out to generate customer benefit and win market share. Engineered equipment is our largest and most global platform. We have blue chip customer and superior products and applications that produce robust cash flows. In air quality improvement we have best-in-class portfolio solutions, exceptional expertise, and customer service to outperform against small fragmented competitors. Finally, for specialty pump, we have a niche and mission critical specialty pump where delivery and high quality are necessity for customers in the end markets like petrochemicals and water desalinization. Turning to slide six, I’ll discuss the significant progress that’s being made in implementation and executing our 4-3-3 operation strategy. I’ll begin with value creation enablers and provide an example for each of them. Our outside-in approach has shown its value already in the power gen market which remains in what can only be called a micro recession. While the market has been down, our interaction with existing and potential customers has been up. Our recent win demonstrates our visibility and capability are shining through in the down market. A supporting installation on two SCR units at a gas power site in New Jersey, our team was asked to help the customer understand and resolve a number of performance issues that are plaguing their older units with competitors SCR units. We promptly received an order for engineering analysis and some field work on their most problematic unit with a potential to upgrade all eight units with CECO Peerless technology. Our outside-in approach aligns perfectly with this customer solutions mindset. In this type of intensified customer orientation, we are actually gaining market share as attracting existing and new customers to us in power gen is both the strength of our high caliber solutions and high quality products along with our staying power, our ability to endure the downturn and be a long-term player. It turns out that customers want dependability not just delivering today but being there for tomorrow. In terms of portfolio management, I have already mentioned that we have sold two non-core business units which generate approximately $35 million gross proceeds. These sales make us leaner and more focused, and in terms produced solid returns which we applied to debt reduction for flexibility to invest in our growth strategy. We are driving out complexity on a number of fronts to unleash the productivity that results from focus and simplicity. We made further progress in the first quarter by eliminating one more of the two ERPs targeted to be retired this year. The clear benefit of this progress is that we continue to improve our operating efficiency and remove the barrier to productive interaction with customers. Innovation is a key enabler of growth. It’s part of our long-term commitment to investing in growth. We also made a small step forward with creation of Tandem seal for our DRA pump which is unique feature in air-cooled pumps. Tandem seal eliminates the need for an external flush providing for both improved safety and cost productivity. Importantly, this small step demonstrates how value creation enablers can overlap and can originate from an outside-in approach to dealing with customers. We cover their need, design a solution and delivered on it. We’ve made deliberate decisions on the markets we serve. And while we don’t control the directions of the market, we do have to anticipate and adapt to changing conditions. And we are pleased that over the last quarter we have seen improvements in our end markets. The refinery segment we serve with our Emtrol-Buell cyclones has literally snapped with a wave of investments that are making up for lost time. Current stability of oil prices helps a number of our end market segment and support investments by our customers. The attractive fundamentals in air quality market haven’t changed. In fact, they have become more so. The World Health Organization just released the result of a study showing that 7 million people die each year from air pollution. The industrial expansion is leading to air pollution, but government environmental regulations and companies as part of their increasing social responsibility are becoming aggressive in reducing emissions. And the power gen segment remains significant slump. But rebound is inevitable as natural gas remains a vital bridge fuel for the world’s increasing dependence on renewable sources. Even companies like Apple, who boast 96% renewable power, obtain half of its electricity from non-renewable sources to operate their data centers with required power system reliability. The rest are traded credit. They get to them to 96% Unlike our end markets, we do have control over our growth platforms. And we’ve been taking a range of actions oriented at improving our ability to win share by generating valuable customer benefits. Here is a few examples. In specialty pumps and air quality, we have approved $2 million in growth capital investments to make long overdue upgraded to our production equipment. The pay off will be increased output and shorter lead time for our customers. We have also begun cross-training members of our air quality sales team to improve their ability to present and sell a wider range of products. This will create synergy in terms of efficiency, coverage, and follow through even before we increase the size of our sales teams. Clearly, we need to make every customer touch as productive as possible. And finally, we held a technical symposium in Dubai on our products and services in the engineered equipment platform. Awareness of our products and services is paramount if CECO is to be top-of-mind vendor for our customers. I’ll add that we have a great team in Dubai serving a number of key customers in the Middle East and around the globe. In summary, we made steady and significant progress in implementing and executing our 4-3-3 operational strategy. I am pleased with the results that we’ve achieved thus far. We have a long way to go. And we are just scratching the surface in terms of what the 4-3-3 operational strategy has to offer to us in terms of wining share and creating value. With that, I’ll turn it over to Matt who will discuss the financial results for the quarter before returning to close up the call a few comments on our served markets.

Thanks Dennis. As we get into financials, a quick reminder that our non-GAAP adjustments include but are not limited to expenses associated with acquisitions, divestures, executive transition, facility exit, earn-outs, legacy design repairs, restructuring ,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. Kicking off with slide eight, I want to echo Dennis’ remark that Q1 results demonstrate a shift towards positive momentum. This team understands the meaning of execution and delivered on many fronts in Q1 coupled with a rebound in our refinery market. Our orders were $95 million which was up 13% year-on-year as our Emtrol-Buell business booked $24 million of orders more than all of 2017 combined. The rebound in Emtrol-Buell has also helped to lift CECO orders sequentially by 4%. Revenue of $74.1 million was down 20% year-over-year primarily due to lower backlog within our long cycle businesses at the beginning of the quarter. What is happening is that revenue has slackened up sequentially. And with orders up over the past couple of quarters, we are poised for growth. Our GAAP operating profit was exceptional at $12.2 million due to the book gain on sale of both Keystone and Strobic. Cash flow from operations in the quarter were $3.2 million which is not a better performance due to depressed revenues. However, I am pleased to with our conversion EBITDA at 55%, which I’ll touch on later. Non-GAAP gross margins at 34.5% were still strong in the quarter and exceed our 2017 average of 33.5%; a good start for the year. Q1 non-GAAP operating margin at 5.4% marked a turning point from prior period loss as our cost restructuring actions are keeping SG&A in control. It’s good to see both operating income and adjusted EBITDA up double digit sequential even off a low base. Concluding this slide is non-GAAP diluted earnings per share was $0.05, up $0.10 from the prior quarter. Before getting into segment results and further details on the financials, I would like everyone to understand that we have organized our segment reporting to align with the strategy and organizational responsibilities. We have prepared a brief explanation of the changes on slide nine. So, let me a take a moment to walk you through. It all started with our common focus at CECO Environmental of enabling our customer's growth while helping to protect their shared environment. This team is committed to being a leader in air quality and fluid handling solutions. We’ve organized around served end markets and with the recent divestitures, we have also allowing external reporting going forward. The three new reporting segments going forward will be named Industrial Solutions, Energy Solution, and Fluid Handling Solutions. We expect this will also help solidify the overall CECO story as it sharpens our focus. In our new reporting structure, we moved our Emtrol-Buell cyclone business, which serves the refinery market, from the former environmental segment into our energy solutions segment where we have commonalities in our supply chain and commercial synergies in our strategic account management approach. Within our new industrial solutions segment previously known as environmental technologies, we have now have a board suite of air pollution control offering [indiscernible] industrial customers. Finally, our fluid handling solutions segment includes our specialty pump and fluid filtration brands. Both Keystone filter and Strobic were previously part of the fluid handling and filtration segment. With the sale of these two units, the leadership team has a renewed sense of focus on growing where we have a competitive advantage. Moving forward to slide 10, our orders and sales trend by segment are displayed. For transparency purposes, we’ve specifically broken up results associated with our divested business units and our Emtrol-Buell business which going forward will be part of energy solutions. A close look at Emtrol-Buell shows that we generate $36 million in new bookings in the last two quarters. I think it’s clear the last year’s slowdown was a cyclical slumps and the results put forward are hypothesis that there pent up demand as refinery maintenance CapEx had been deferred. Activity from the larger players in refinery suggests that we are likely to get back to historical levels of demand. And on another positive note, fluid handling on an organic basis grew orders 14% sequentially and 7% versus Q1 of 2017. Within the rest of energy, the team continues to execute well. Our midstream oil and gas businesses are seeing modest growth on improved oil prices. At the same time, further wins have not been enough to offset the micro recession being experienced in power generation. Recent news in power gen market is still murky with new gas turbine placements expected to be flat to down 10% in 2018 versus 2017. All the major market players are making adjustments based on the near-term outlook. Despite this situation, Dennis and I are actively engaged with our team and there is still lot of business to be awarded for those companies that are financially stable, have deep technical expertise and can sell the solutions and products. Industrial solutions had $21 million of orders in Q1 with a lot of potential as we feel that we have much untapped capability. When Dennis talked about commercial process excellence and strategic account management, air quality has the most to gain from the coordinated CECO sale and marketing price that we are building. I would characterize air quality results as on the road on recent performance and sky is the limit potential as we execute in the future. Briefly turning to slide 11, we outlined CECO’s total backlog orders and revenue. It’s refreshing to report a second consecutive quarter of growing backlog. Excluding the performance divested units in Q1, our book-to-bill ratio eclipsed 1.3 turns and grew 4% compared to Q1 ‘17 on a like-for-like basis. CECO’s 4-3-3 operation strategy is gaining traction and one year later CECO organic growth engine is revenue. Slide 12 shows trends in our gross profit, operating income and adjusted EBITDA. Outlined in the slide, you can see an inflection point in our bottom line driven primarily by the benefit of cost restructuring partially offset by seasonal SG&A expenses and growth investments. As we progress throughout ‘18 with an improving top line, we expect to see improved operating leverage on our SG&A. Despite intense competitive pressures in our power generation market, I am pleased with our non-GAAP gross margins of 34.5%. Our focus on aftermarket, which grew as a percentage of sales in Q1 and the richness of the pump business drove our margins to 16 in 2017 average gross margin. With the divestures coming out in Q2, we don’t anticipate a material impact on overall CECO growth margins. On slide 13, we continue to improve our free cash flow conversion rate which specifically measures how well we turn EBITDA in the cash flow. This is a key financial metric that we are in the process of operationalizing deep within the organization. Transferring earnings to cash is the core capability of the CECO business model and we are starting to make strides. On the right side of the page, we highlight trade working capital and broken up project WIP because it tells an interesting story. Prior to 2017, our project businesses generally operated a negative working capital business. With the downturn in volume through 2017, we have seen project WIP grow as a percentage of sales; a trend that we are committing to reversing. Our longer cycle businesses often maintained favorable turn and low returns. And our team is committed to driving improvements and create bar as backlog grows. As per the blue bar, Q1 saw modest improvement primarily on fluid handling inventory returns and accounts receivable in China. We see uncapped value [technical difficulty] bar, thus reducing our working capital to simplification and automation of our processes. Starting with United States, we have initiated a shared service model in Cincinnati to drive working capital productivity. To lead the charge we hired Scott Christy, Shared Service Manager to architect and execute the center of excellence. Scott comes to us with extensive shared service experience at Delaware Corporation and JMs Marker. Today in U.S. alone we operate six ERPs, 30 plus legals, and 100 plus bank accounts. Scott has a few months under his belt, and we are quite pleased with the progress we are making in value share mapping, building operating metrics, and early execution. Real value will be measured by free cash flow and customer loyalty. On page 14, I'm please to report an improved balance sheet with the extinguishment of quarter of our debt which now stands at $87 million. The divestiture of two non-core assets sharpened our strategic focus and very attractive multiples yielded approximately $35 million in gross proceeds. We predominantly want to pay down our debt. On the right-side of the page, you will see a market change in our leverage ratio affording us the opportunity to invest in our organic growth strategy. I want to personally thank our fluid handling team lead by Chris Brown, segment President, for executing the divestitures ahead of our internal schedule while delivering another quarter of orders growth in Q1. His team based primarily in Pennsylvania and Indianapolis, Indiana understands the meaning of execution, and I'm very proud of their team work. Wrapping up with slide 13, we have largely completed our internal reorganization for growth, execute restructuring to align with challenged energy market and paired down our portfolio to focus on air quality and fluid handling solutions. With a new baseline and sharpened strategy, we are working in the next 90 days to confirm our 2020 targets and roadmap to show with investors. In closing, it's been a tough trailing 12 months in the phase of challenges end-markets, but I would like to say we are starting on the front foot and start playing off. The good news is that CECO team has a strong defense and a lot of goal scorers as well. With that, I will turn the call back to Dennis.

Thanks, Matt. As you heard, we are building some positive momentum. Our 4-3-3 operational strategy has kicked off with early wins and positive results to show already. This strategy will require more time to fully gain traction and capitalize on the attractive end-markets that we have chosen to operate in. It's all about execution, and also the challenge. Before moving to your questions, I want to share some quick thoughts on the outlook of our end-markets and offer a couple of examples of projects where CECO is shared environment while gaining share and creating value. Slide 17 shows that with the exception of power generation, all of our served markets are trending up. Let me offer some color beginning with our energy solutions end-markets. We anticipated that the refinery segment that we serve and demand for our market share leading FCC cycle will return as maintenance could no longer be differed. As oil prices stabilized, CECO and our highly responsive team remain well-position to capitalize on increasing demand. Midstream oil and gas market segment also continues to be positive with activity picking up in the Middle East in particular. Power generation is still there, and likely to stay down in 2018 based on projections with largest players in this space. However, we have significant opportunities to gain share and we are pursuing those aggressively in the area of silencers and SCR machine controls. CECO's reputation, including strong brands such as Arding and Peerless based on capabilities and staying power make us particularly attractive in the down market where owners need partners to ensure the success of long cycle power plant assets. In the coal power segment, we are accelerating our effort to servicing our largest install base with aftermarket support and resize those operations accordingly. This impact both China and the U.S. results. Need for improved air quality will continue to drive the industrial solution segment, and the outlook remains positive both domestically and internationally. And finally, the same can be said about fluid handling, it's a growing market that we are well-positioned in. In summary, outside of the continued pressed demand for power-generally, our markets are strong, and going forward, our performance should not be hindered by headwinds. Our markets offer us no excuses going forward. Now turning to slide 18, I wanted to highlight three examples of successes in protecting the environment while gaining share and creating value. First, involves a lithium battery Giga-factory expansion of one of the leading producers of electric vehicles. When it's complete this production facility is anticipated to be the biggest building in the world, and producing batteries for this manufacturer's electric vehicles and backup power that supplements intermittent renewable energy. CECO's Dean pumps solved this company's high temperature fluid handling needs by offering the highest safety with the highest reliability. Both parameters are essential for lowering the cost and increasing the production of lithium ion batteries. We've had two orders in the past 12 months as this factory construction and expansion continues. We also won a major project in support of a refinery coking system at a large facility in Kawasaki, Japan. Specifically, this Japanese oil company turned to CECO's Emtrol-Buell team to provide technical expertise and solutions to reduce corrosion in their burner cyclones which was causing premature failure of equipment and excessive maintenance costs. The company indicators and operations people told us that they value CECO's ability to meet their specific needs, including full fabrication of equipment thereby ensuring proper field fit-up and alignment. And one final win that tells you we're making solid progress as an organization was awarded from a power producing customer for a retrofit work at one of their combined cycle gas plants. I highlight this win because it demonstrates the coordination and teamwork across CECO segments, specifically CECO Peerless and CECO Kirk & Blum successfully teamed up to upgrade the ammonia injection grid and catalyst cleaning system to maximize NOx reduction at a combined cycle power plant. The customer was attracted to us because of our technical expertise and seamless installation capability. This is a performance strength that we successfully demonstrated again across business units and segments to show the full value of CECO to this customer. I hope it's valuable to our investor community to understand some of the great things we do in support of our customers' growth and our commitment to protecting people and the environment. In closing, and turning to slide 19, we take pride in our purpose and have confidence in our operating strategy. There's much to do in transforming the company and winning share and creating value. But we're off to a good start in 2018 and our focus is to keep building on the momentum. And now, we'd like to welcome your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Julius Sanders [ph] from [indiscernible]. Please go ahead.

Great job. You guys have definitely turned the company around and going the right direction. I have one question. With the stock trading at an all-time low is there any reason why we are not taking advantage of stock buyback and purchase at such a low price?

Yes, thanks, Julius. So what you've seen with the proceeds that we generated and the free cash flow that we have, we have had a commitment through our banking agreement to use the first $25 million from proceeds and target that towards debt reduction as a part of our overall banking agreement. And we think that is also prudent in the context of looking at growth investments in the business. So as we look forward we certainly, in the future, would consider those kind of things, especially as you noted, where we find our current share price. But I think the business right now is focused on the best long-term returns. And we think there is a number of areas where we're reinvesting into growth programs that will generate those kind of returns.

Okay, thanks for your answer, and keep up the great work. Appreciate it. Have a nice day.

Thanks, Julius.

And the next question comes from Gerry Sweeney from ROTH Capital. Please go ahead.

Good morning, Matt and Dennis. Thanks for taking my call. I apologize; I'm multitasking on a couple of calls this morning so this may or may not have been covered. But I did hear you talk a little bit about Keystone and Strobic's divestiture, and the positive impact you had on the balance sheet. Could you walk me through maybe some of the -- what that does to the income statement, how much orders were there, maybe the margin profile of those two businesses in comparison to, I guess, the Fluid Handling segment in general?

Yes, thanks Gerry, and good morning. In both cases what we agreed upon with the buyers was that we would not disclose the specific details. However on both our statutory reporting and as well some of the key metrics we did released with the individual releases in both of those transactions. And so I'll let Matt comment a bit on how that really comes out and why we think we both sold a good business to a good future owner, but also why we think we got a good value for our shareholders and the like. What I would tell you first, before I let Matt comment on the specifics around the details there, is that in both cases our strategic assessment last year said our target customer base is heavy industrial. And that's the community that we think we can help. We can help with their growth programs, their expansions, and with helping them run efficient operations. And in both of these the target end markets of both Strobic, which was largely commercial and institutional. A good business, but less of an overlapping fit. And Keystone, which had a residential component to it as well, and somewhat of a consumer oriented component were just the reasons that we said we're probably not the best long-term owners. Matt, you want to update what we can on the financials of the transaction?

Sure. If you take a look at our 8-K filing for the Strobic transaction was published, you'll see that the Strobic operating income was $1.6 million, and revenue was roughly $18 million. And we published the Keystone revenues as well, roughly was a little bit under $4 million for last year, Gerry. And I would just say that as far as operating income goes directionally in line with Strobic. And then your second question was for Fluid Handling, how does the margin profile look, what I'd say is it's -- both those businesses were below the operating -- or sorry, the gross margin profile of Fluid Handling's segment. And then last thing I would say is, while not the best metric, we did disclose revenues on a sales multiple basis. The two businesses generated 1.6 times sales which is more than twice CECO's recent valuation. So I'd say we generated a return significantly above CECO's recent valuation.

Okay, that's helpful actually, got it. And, again apologize if this was covered, but you had been looking at divestitures. Obviously you had Strobic and Keystone. I think you're always sort of maybe looking at some other pieces of the company I know to top performance and there could be [indiscernible], but any other opportunities internally, you think? Are you done with the process? And are there maybe small tagalongs or maybe something larger still out there?

I think that when we think about 2018 we're largely complete with the shaping of the portfolio. The growth platforms are now really what's in focus to get on the front foot to make the necessary investments to continue to lean into what are mostly good markets. There are few areas that we said are not part of what we think are investing or areas in the company that we're investing, like coal and nuclear component of the business. But we're largely aligned with what we think we can drive forward and grow the business. And as I said, get back to gaining market share.

Okay. Switching gears a little bit over to maybe some of the end market stuff, midstream oil and gas -- I mean, obviously upstream is performing very, very well. I think if you listened to the Halliburtons and Schlumbergers of the world they're even talking about money originally earmarked for international investments coming to North America because it's short-cycle oil and it's just easier, quicker to market and a heck of a lot less risk than large offshore fields, et cetera. How much activity are you seeing in midstream? How big was this in the last peak? Any shape, any -- sort of provide any shape around that context if you could?

Yes, well I'll just say first that when you're thinking about our midstream oil and gas segment that we have on our page 17 of the deck that we released, we're a lot more gas oriented than oil. And so a lot of what we're doing throughout the world, both North America, Asia, Middle East is a lot more around gas separation, although we do have some areas to make sure that we can do separation of water from oil which is an important component in the process. There's LNG activity, a lot of which has been earmarked and is moving, but there does appear to be a wave still in front of us. I don’t know if we have data here to talk about last peaks and valleys, but there's a decent amount of activity and it's not just shifting to North America, it is in a balance right now with oil prices well above what people are using for their investment hurdle. It's just making some of those decisions that our customers have deferred more attractive than they would've been at, say, $50.

Got it, that's helpful. And then do you have a targeted sort of leverage ratio where, obviously, lower is better, but at some point just from financial standpoint you want some balance. What are you targeting if you can discuss that?

Sure. So you obviously know that we operate in cyclical end markets, so studying a specific target is challenging. But we would prefer that our leverage ratio not exceed two-and-a-half times at the trough of the downturn, right. And we want to be ahead of a downturn to execute to that level. Obviously we're in the downturn. We think we're coming out of that downturn. And this guideline provides ample capacity in the future to invest, so the upturn when our competitor may struggle. So we want to make sure that we have ample cushion into the future. And that'll be our kind of target range for the foreseeable future.

Got it. And then final question, I mean, if there was one area that you're most excited for in 2018, is it the rebound of, I think, the SCR catalysts or is it just the broad portfolio?

I'm excited across the board. The momentum that we're starting to build into the market, the team's excitement to go out and execute has me excited across the board. It's been amazing even to our own guys who are very close and connected in the refinery segment. The amount of business that's been pulled forward and the success we had in the first quarter alone on new orders off of Emtrol-Buell, which was really a drag on bookings in the last 12 months. So that's exciting. We got a great team; we got a great business, a great franchise. We told most of our team understood that. I think we told most of the investment community that we had a good business, and when the market pulls back we'll demonstrate it. And I think they are demonstrating the strength of we've build over a number of years. So I'm excited across the board. When I think a little longer term, the amount of room to continue to step and lead in industrial air quality improvement in North America, in Asia, and -- are big opportunities for us. And in the longer-term we are inching our way forward really creating the platform that customers want and need and expect.

Got it, that's helpful. I will jump back, thank you very much.

Thanks, Gerry.

[Operator Instructions] Being that there are no further questions, this concludes our question-and-answer session. I would like to turn the call back to Mr. Dennis Sadlowski for any concluding remarks.

Hi, thank you, and thanks again for joining us on our call this morning for first quarter earnings release. I like to just close by repeating that it's clear that we're gaining traction with our 4-3 operating strategy and the focus that brings to our team and approach. And there is momentum that's building. It's modest in terms of the bottom line results, but I believe that's showing that we are getting traction in the market. And our markets appear to be rebounding and relatively solid. Outside of the power-gen space, no excuses, so going forward, we will be pretty bullish. We like what we are doing, and we look forward to speaking with you again in 90 days. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.