CECO Environmental Corp. (CECO) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference over to Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.

Thank you for joining us on the CECO Environmental third quarter 2018 conference call. On the call today is Dennis Sadlowski, Chief Executive Officer; and myself, 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'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. Thank you for joining us. And I hope your top candidates came through in the U.S. elections yesterday. As in the past, we've divided this morning's call into several parts. First, I'll highlight our strong third quarter results. In fact, let me say upfront that we've performed very well. That'll then follow up with a discussion of financial details, and finally I'll wrap up with a review of our end market outlook before we open up the call to your questions. I'll begin this morning where we left off last quarter. I continue to be very excited about our growing momentum, providing for excellent results with a very strong third quarter across CECO Environmental. Turning to slide three, I want to mention that today's call marks the one-year anniversary since we launched our 4-3-3 operating strategy. When our 4-3-3 operating strategy was launched I was confident that it would set us on a path to win share and create value. At that time, we announced a range of commitments and initiatives with the intent of fundamentally transforming the way CECO does business, and placing a premium on organic growth. The strategy was designed to help us genuinely deliver on our value proposition of enabling industrial companies to grow with clean, safe, and more efficient solutions that protect our shared environment. Transforming CECO involved three major strategic initiatives, which included several tough decisions and aggressive steps. First, we changed how we do business through our four value-creation enablers and involve both subtle and disruptive actions. Second, we actively shaked our portfolio and organizational structure to more efficiently and effectively address our compelling end market. And third, we invested into three growth platforms aligned to winnable and compelling end markets. I want to emphasize that all three of our target end markets are aligned to our capabilities. All three are big, all three offer significant potential. Coincidentally, with the launch of our 4-3-3 operating strategy, we took a couple of immediate and consequential actions. Without a doubt they represented an inflection point in our outlook. We restructured our Energy segment to address the near-term market conditions that could not be ignored, and did so while supporting focused resources to capitalize on opportunities that address the long-term need of our end markets. And we curtailed our dividend to fund long overdue investments into programs and infrastructure that generate benefits for our customers and create value for our shareholders. A year into our updated strategy, I'm convinced that we're on the right path, because we're building increasing momentum and posting impressive results. Turning to slide four, you can see our strategy and team are delivering solid results. Our team generated new organic orders in the third quarter of nearly $98 million, which is a robust 48% over last year's third quarter. Moreover, I'm pleased to say that while we were just shy of another quarter of sequential orders growth; all three of our CECO operating segments delivered a positive book-to-bill ratio above 1.0. Clearly, our customer orientation and solid execution is fueling momentum, and our strong performance is companywide. Since we launched the 4-3-3 operating plan, we've built a sizable backlog, adding $65 million, up over $210 million of backlog, which is a leading indicator of future revenue increases. Moreover, the strength of our value proposition continues to allow us to generate gross margins of 32.5%, which is in line with our expectations as the market conditions tighten. Our adjusted EBITDA was just over $8 million, and came in at 9.4% of sales, which is a 51% improvement over last year and up 20% sequentially. Free cash flow went negative in the quarter, a lone disappointment, after posting great results in Q2. We expected a challenge after the great numbers we posted in the second quarter, but did not anticipate a negative $6.7 million. Our asset light business model is set up to do better, and I'm confident that we'll demonstrate that once again going forward. Our free cash flow conversion over the trailing 12 months remains close to 50% of EBITDA. So again, I'm pleased with the progress across the company. Finally, I want to highlight our recent announcement from just a few weeks ago at the Jiangsu [ph] Zhongli Environmental Technology Company has agreed to acquire CECO's Zhongli business unit. The Zhongli unit primarily serves the China coal-fired power generation market. So it should not be a surprise to anyone that we're continuing to reduce our end market exposure here. We anticipate the transaction to close in the next 90 days subject to Chinese regulatory approval. Matt will cover the financial implications of the sale, as the agreement does trigger a GAAP impairment against our otherwise strong Q3 operating results. As we've stated, active portfolio management is a part of our 4-3-3 operating strategy. And together with the two previous announced divestitures of our Keystone and Strobic units earlier this year, the sale of Zhongli brings a further sharpening of focus for CECO on our large and winnable target market. The sale will also reinforce our emphasis on organic growth, improving operating margins, and our asset light business model. The Zhongli sale sets up a good segue into slide five, which recaps a number of moves we made in the last year which were guided by the clarity of our 4-3-3 strategy to transform CECO Environmental. We began and are continuing to execute a series of operational changes. These changes were and are aimed at resetting and reaffirming our commitment to the transparency with our shareholders. There were many changes, and three stand out. In competitive markets, there's no substitute for leadership. And with that in mind we made significant additions to our leadership team, including the new position of Chief Technology Officer, brining in individuals that are both commercially oriented and agents of change. We began removing complexity and driving simplification throughout the organization, a process that's still underway, because we had to become more agile, efficient, and resilient in attracting and retaining customers in a competitive marketplace, this range from breaking down long-standing organizational silos to reducing our legal entities and ERP. And through the sale of non-core business units that I previously mentioned, we've reduced our debt by more than $35 million. We began making investments into a much needed modernization of our specialty pumps business to enable us to continue to grow the business with competitively done and high quality production. Several innovation programs have been initiated around advancing our technology leadership in the market. These will require time before they are ripe for commercialization, but we're on a good pathway. Finally, once we got the 4-3-3 operating strategy rolling, we made a commitment to our investors and the investment community to aggressive three-year financial targets that should provide top tier returns for our shareholders. It's with great pride that I can sum up our notable progress over the past year by calling out that new orders are up 34% on a trailing 12-month basis, which led to the additional $65 million to our backlog. We have been clear about our intention, taking decisive action, and most importantly, delivering results. Slide six provides an opportunity to highlight our engineering and application depth has led to some impressive wins during the third quarter and a 48% increase in new orders from year ago. We are not waiting for customers to come to us. We are ceasing the initiative and oftentimes going directly to them to leverage our expertise, and I am really excited about the teamwork as well because it validates the elimination of many organizational silos that we have broken down. But the big differentiator and final decision influencer has often been our technical competence. I will note right away that our sales team often gets the glory of closing orders with customers. Like goal scores in soccer, it's natural for them to shine when we win. But I will be remiss in failing to note that the very significant contributions from our technical team. Customers rely on us for deep engineering capability and applications know-how, and it's the basis for many of our market win. Today, I am taking a moment to applaud their efforts and acknowledge that it's a big part of our success. With that in mind, let me describe a few notable market wins from the third quarter. CECO Busch are leaders in the metal industry with rolling new fume exhaust system installation references around the world, and we were pleased to assist a significant North American aluminum producer who is expanding their rolling mill capacity. Our Busch high efficiency oil mist collection technology will keep them running clean as they increase output of high quality aluminum. The engineering team provided customer support from the early project development stages including technical specifications, environmental permitting support, and detailed system design engineering. The customer's confidence in CECO Busch's experience was the key point of differentiation in closing this win. Our [indiscernible] team, thanks to great technical leadership from [indiscernible] also won a sizeable project to redesign two oil mist systems for a large Korean auto manufacturing plant in Alabama. A couple of great wins for the industrial segment based on strong market references. In our Energy segment, the team continues to show distinctive leadership in NOx reduction solution was another major Brownfield win at a gas power plant in Michigan. Nitrous oxide or a byproduct of carbon fuel combustion it can cause ozone depletion leading to a variety of harmful effects. CECO offers multiple technologies for reducing and in certain combinations virtually eliminating NOx emission. So when our customer decided to invest in upgrading their gas turbine power plant output, our engineers were the obvious and best choice for this emission solution. In the refinery market, our very capable technical team led by Gary Mower with our Emtrol-Buell business unit continues to shine. As part of an upgrade at a refinery in Spain, the customer push into advanced territory with their FCC regenerator process design, our team had to do detailed analysis of the particle size distribution for the catalyst entering both stages of the cycle. These calculations led to numerous iterations with the customer's process to optimize the system and our cycle. The extensive design iterations then put the project timeline on a critical path. So our supply team came forward with alternative recommendation for efficient fabrication to deliver this innovative design on timetables required for the upcoming turnaround. A big team effort and a huge technical win. And finally, new tandem seal RTA pump product are gaining traction in the market. As a reminder, the tandem seal innovation protects pumps from leaking high temperature oil into the operating environment. The newly engineered line extension eliminates the needed for added water cooling required by competitor's pump solution. We've had several repeat orders for these new RTA pump. Again, these are just a few representative wins that's contributing to our third quarter success. And they all provide for future aftermarket add-ons from CECO through their operating line. As I turn to slide seven, I want to reinforce that transforming CECO Environmental is still a work in process. While we maintain a full core thrust [ph] in all areas. There is a few priorities that are worth highlighting as we head into 2019. As I have emphasized, cooperating in compelling end market, but there are also competitive markets. So we are going to take steps to deepen our account management capability to beat this competition. First, we've established a preferred partner supplier program, which makes us the first call when customers have a need. In fact, we would like that first call to be the last call that the customer make. And second, we are increasing our focus on the lucrative aftermarket by adding long-term service program which provide economies of scale and added responsiveness for customer and certainty for CECO. This program showcases our engineering depth and application expertise in providing unique value to customer from procurement to long-term operations and maintenance. I already mentioned our progress on simplifying our operating environment. And going forward, we will continue down the roadmap to further reduce both ERP systems and legal entity. The fact is that reduced complexity and streamlined organization will make this more agile, efficient, and resilient going forward as we drive for profitable growth. We have begun priming the new product and innovation pipeline and should be seeing more output. Most of our new products and innovations will be evolutionary. But our engineers are testing a few ideas that could prove to be quite compelling. I'll keep you posted. Finally, we are relentlessly building our brand awareness. We have a powerful combination of talent, product and value proposition that not only solve client need but protects people in the environment. It's cliché but it's true. We've got to get our message out and be as accessible as possible to customer. Here're some examples of what we are going to be doing; first, for improving our digital content and intent to use to this communication channel more in all phases of our sales and service. It will complement our person-to-person interaction and will be more creative with more efforts like our Breath of Fresh Air campaign which we recently launched. The second, we are striving to be a globally recognized stock leader in air quality and fluid handling through active and provocative, whitepapers, and prominent speaking engagements with professional conferences. Let me assure you that we haven't come this far to only go this far; we are aiming high, and that's to provide our investors with top tier return. With that, I will turn it over to Matt Eckl, who will discuss our financial results in the quarter. I will be back with you to close out the call with a few comments on our share market before we take your questions. Matt?

Thanks, Dennis. Like Dennis, I am very pleased with the great progress we have made in the last year and the momentum building across the organization. Starting on slide nine, our comment on some of the key points surrounding what was a very solid quarter for CECO. As a quick point of reference, like for like comparisons have been provided to exclude the impact of divestures in prior period. Comparables on a reported basis are available in our 10-Q. That being said, revenues from core operations grew 13% year-over-year in the third quarter and 9% sequentially. Non-GAAP gross margin at 32.5% were in line with our expectation as we are managing input cost pressures as well paying the balance of our [indiscernible] to a greater portion of new original equipment win. We posted $6.5 million of non-GAAP operating income in the quarter which was up 67% year-over-year and 25% sequentially. EBITDA followed suit by growing 51% year-on-year and 20% sequentially. We are clearly building momentum. With both operating income and EBITDA, you'll see margin expansion of four points which is indicative of the operating leverage we get wrap. In October, we signed an agreement with the Zhongli business, exiting the China coal power-generation market. With this pending divestiture, we booked non-cash impairment charge of $15 million in our Q3 financials, reducing the Zhongli asset preferred value based in the sale agreement and moving the business to an asset held-for-sale status on the balance sheet. This charge is reflected in our GAAP operating income, which drove the negative $10 million operating loss. The Zhongli unit has been an asset-heavy business within CECO, and with the structurally-challenged third end market, we see this transaction is having limited impact on our future operating performance, and more importantly, we expect it to be value accretive to CECO shareholders. We are working exponentially to finalize closing in the next 90 days. Including the headline of financial, our normalized tax rate year-to-date is 25.5% and non-GAAP diluted earnings per share was $0.10, which is up $0.07 year-over-year and up $0.05 sequentially. Turning to left side of page 10, orders continued to be strong at $97.5 million, and all three segments grew year-over-year and contributed increased backlog with a favorable book-to-bill ratio. Keeping with transparency, we split out Zhongli to highlight the materiality as it relates to CECO. Looking to our Reporting segment, Energy Solutions continues to be the biggest driver in the quarter growing 80% year-on-year. Our Emtrol-Buell refinery business that we highlighted in previous periods remains healthy booking $20 million in the quarter. Remarkably, our power-gen net gas product lines continue to take share going at 133% in Q3 and up 18% on a TTM basis despite the headline news coming from the high coal power OEM. I want to give a quick shout out to Jeff Robert on our energy team that booked an exceptional large Brownfield SCR upgrade win in the quarter is facing a competitor purely based on a superior technical knowledge. The Industrial segment put up a stellar quarter at 21 million, growing 10% year-over-year and 11% sequentially, and our fluid handling business also grew 14% year-over-year, which is above most of its larger publicly reported pump peers; hats off to both of these teams in Q3. Briefly on the right-side of the page, revenue at 88.3 million continues to grow for the third consecutive quarter as we successfully execute on both new orders and our backlog. Touching on slide 11, I'm pleased to report a fourth consecutive quarter of growing backlog and a book-to-bill ratio eclipsing +1.0 in the quarter. Looking back, backlog for CECO is near an all-time high and will provide us a comfortable mix of production in the coming quarters. Slide 12 shows the trends of our gross profit operating income and adjusted EBITDA, all of which have improved sequentially with the increase in volume coupled with the benefits of our restructuring action. On a year-over-year basis, all three profitability measures have improved on a dollar and a percentage basis in Q3. Non-GAAP gross margins are a key indicator of our tangibility that generates differentiated value for our customers. At 32.5% in the quarter, we are well within our expectations for strong results. However, the trend over the past few quarters is down from a recent high in Q4 '17. As we dive in, the modest down drop is driven by a mix of factors. First, as our backlog has grown, our margin profile has shifted in more new original equipment in major Brownfield wins from aftermarket revenue. Second, there is no doubt that we have pressure on our input cost, inflation predominantly in the form of steel and freight are rising. We are offsetting most of that through our competitive pricing action and revisiting our qualified vendor base. And third is the pricing pressure that still remains in the highly competitive power-generation space while capacity at 4x of the current demand is winning on the market. Despite the headwinds, our gross margins are at 33.6% year-to-date, which are flat year-over-year, and in line with our previously-communicated full-year expectations at 32.5%. We are happy to say our team is doing a great job. Touching on non-GAAP operating income and EBITDA, I'm happy to report strong gains against all comparables, and even more pleased with operating results that kick in driving our incremental margin GAAP. Moving to slide 13, I want to outline our key operational cash metric. Starting with the left-side, our free cash flow in the quarter was frankly disappointing, where the use of cash totaling 6.7 million, trade AR coupled with the timing of tax payments and CapEx reimbursement into the business was the primary driver. To be more specific, we collected early on our large fast track project in June and had two other projects delayed $5 million of payments into October. As favorably demonstrated in Q2, this activity is inherent in a lumpy nature of our project. However, when spread out over time, our project cash flows are extremely favorable and a hallmark of our asset light model. On the right-side of the page, our reported trade working capital is $40 million or 12.7% of sales, which benefited sequentially from the $16 million Zhongli impairment. While we have work to do to improve our normalized working capital specifically noted on this page, there are two valuable points to highlight. First, our project mix as a percentage of sales was nearly zero, which demonstrates the fantastic low level of asset intensity our project businesses operate at. Second is the five-point benefit received in working capital from the impairment; with the pending sale of an asset heavy Zhongli unit, we shared nearly a third of our working capital and exit a 180,000 square feet of underutilized manufacturing space. When this transaction is completed, we will become a more efficient working capital machine and reinforce our preferred variable cost structure as an asset light company. On Page 14, I am pleased to report, our balance sheet continues to strengthen as our bank defined leverage ratio has reduced quarter turn to 2.6x in Q3. The operating cash flows in the quarter were less than remarkable. We did make solid traction on a few key outstanding non-operating cash item worth mentioning. Specifically, we successfully executed Keystone shelters TSA bringing up the remaining $2.5 million held in escrow and sold two underutilized property included our China PCMC manufacturing facility and [indiscernible] totaling $6 million in proceed. While we are still working to repatriate the cash from China, proceeds from these actions went to pay down $1.5 million on our note payable and $2 million of term debt. I am pleased with the rate at which we are cleaning up a lot of these loose ends. Lastly, on slide 15, I want to share how we are performing against our three-year financial target. As outlined last quarter, these targets are both aggressive and achievable and are a clear sign that we are driving for top tier return. I am confident that we are making solid progress. Starting in the upper-left quadrant, we believe we can organically outgrow our market 2x over time. With continued market share wins discussed earlier by Dennis, we are substantially outgrowing the market in booking in the quarter and the trailing four month. Revenue will likely follow suit and move us into the green territory in the coming quarters as we execute the backlog. In the upper-right quadrant, our EBITDA margins continue to expand in the third consecutive quarter to 9.4%. It's important to note these results include a balance of investments in our future in the form of marketing, brand awareness, people, training, systems, and innovation. On the bottom, we regressed on cash flow conversion in the quarter. But the fundamentals are still there. On a TTM basis, 48% free cash flow conversion is down from 66% last quarter, but still emblematic of our capability. As we work towards 2021, our aim will be to smoothen out our quarterly cash flows while continuing to push towards greater than 65% free cash flow conversion. Lastly is our return on tangible capital metric, the hallmark of our asset light business model. In Q3, we improved 2 point sequentially to 27% providing a solid start. And while we expect to be a positive trend, all the actions discussed earlier driving this metric up and to the right. In conclusion, CECO is moving in the right direction and continues to gain momentum towards its 2021 target. I look forward to updating you quarterly on the progress of these core metrics. With that, I'll turn things over to Dennis.

Thanks, Matt. Turning to slide 17, I want to share some quick thoughts on the outlook of our end market before moving on to your questions. Clearly, we are entering the fourth quarter with considerable momentum and some impressive wins across CECO Environmental. Our teams are visible in the market and focused on providing valuable solutions for our customer. As I look ahead, I sense that the markets are going to be a bit more challenging, still growing but at a slower rate. Power Gen has been hurting for the last 18 months. And there is sign of an immediate change for the better. And while the rest of our served end markets are healthy and stable, the rate of growth may be flattening. Our aim remains on further gains in market share. With slide 17 as your reference, let me offer a few thoughts in each of our end segments, beginning with our Energy Solutions end market. I'll start at the top, with our Refinery segment. As you might recall, we were ready when this segment rebounded at the end of last year. The bounce-back was welcomed, and we've maintained a strong hit rate through the cycle. Going forward, we don't expect the same growth in the Refinery segment, but it remains healthy and its stability should mean solid activity into the New Year. I'll point out that this is a segment where we generally highlight only our Emtrol-Buell brand of market-leading FCC Cyclones. However, refiners are posting solid financial results so they're actively investing in their operations in way that ensure that they are cleaner and safer producers. This in turn is creating opportunities for both Emtrol-Buell as well as our Peerless team's NOx-removing SDR System. Working counterclockwise, the Midstream Oil & Gas market segment continues to be positive with good activity in the Middle East and the U.S., with opportunities for us in the areas of LNG, processed water, and gas separation. I also want to add that there's a reasonable flow of EPC contracts being awarded, which means that future opportunities for CECO could be forthcoming. Power Gen remains in some distress, and is likely to remain so well into 2019. I'll say that there has been some spotty new activity initiated during the quarter, which on a relative basis is a positive signal. But it's a weak one with much uncertainty remaining in the outlook for future new original equipment demand. So it's not all clear when we will get help from the overall market for this segment. However, a weak market doesn't mean there aren't opportunities for us to seize on. In the third quarter, or team once again demonstrated the value of CECO capabilities with key Brownfield wins which are allowing us to gain share, meaning results in recent periods are clearly tied to this effort. Our restructured sales force under the initiatives under our 4-3-3 operating strategy is taking advantage of CECO's reputation, capabilities, and staying power. Moving to the bottom of the pie chart, the Coal Power Gen market segment has seen an uptick in activity in India and a few parts of Southeast Asia, but the overall market remains in decline, and we remain focused exclusively on servicing our large installed base with the aftermarket support. And with that strategy in mind, we further reduced our exposure to coal, as I mentioned earlier, with the sale of CECO's Zhongli business. Undeniably, the Power Gen segment remains weak. And our recent orders history has been nothing short of fantastic. The order strength in Power Gen could be challenging to maintain into the year end. Moving on to Fluid Handling, the growing market that we're well positioned in, our results have been solid. Unfortunately, this increased demand has taxed some of our capability. We're placing a maximum of effort to quickly recover to ensure that we have the capability to support this growing demand. And closing the circle is our Industrial Solutions market. Inherent need for improved air quality will continue to offer solid potential for this segment, with the near-term outlook remaining positive, both domestically and internationally. While passing through London last week on a return trip from several customer meetings in Europe and Dubai, I saw a CNN report that 90% of the world's children breathe toxic air. Addressing such poor air quality is what we're all about. And the world's people really do need us to be successful. While the markets remain active, we're experiencing some sluggish decision-making in the industrial market. Our sense is that inflationary pressure and geopolitical uncertainty could be making our industrial customers more cautious about capital investment. CECO has been adapting to changing customer needs with the appropriate investments, so I believe that we can still outperform the market. Certainly, I'm confident that our teams are actively engaging with customers and offering high-quality solutions to their air quality needs. Here's the bottom line. As I look ahead, my sense is that the markets are going to be a bit more challenging. At the same time, our target markets are large and will still offer us compelling opportunity, so we intend to be active and creative in seizing them. Turning to slide 18, I want to reemphasize our collective commitment to our purpose and the initial success of or 4-3-3 operating strategy. Our strong results in this past quarter were another big step forward, but as I said, we're aiming high and striving for top tier return. And now, I'd like to welcome your questions. Operator?

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Sean Hannan from Needham and Company. Please go ahead with your question.

Yes, thanks. Good morning. Thanks for taking the question here. Congratulations on the results. First one I want to start with is just follow-up on some of your comments, Dennis, on looking into next year and the markets in terms of growth. So just trying to understand, is this perhaps a reflection that we're going to see a little bit of a slower pace from a revenue standpoint kind of coming off of what was a bit of a bounce that occurred here in '18, or is that really in terms of bookings and the ability to bring in some higher dollar-level bookings? I do appreciate that there's certainly a lag time, right, between what we accomplish in brining in the wins and then when it'll hit the top line, so just trying to understand the difference between the two to better understand the comments there. Thanks.

Yes. So, Sean, good morning, and thank you. What I think you should take away, if anything, is our markets in the aggregate are still growing. So we're pleased with that. We see opportunities. Our markets are large, they're sizable, there's a lot of room for us to continue to gain share. And so that is the overall view of what we see, with the exception, of course, of the power gen market. Now, if you look at our, both reporting and what we've broken out in terms of outlook, expectations, and then year-over-year results, you see that our team in power gen has still been way outperforming the market. And so to a degree that's what I'm signaling, it's going to continue to be difficult. What we've been doing is just nothing short of fantastic. I think it's good. The markets are still growing. If anything, there's a slowing growth that maybe we're seeing in terms with decision-making going on across a lot of the industrial segment. Where that takes us in the next year, I think it's way too early to tell, but I think we have a lot of good momentum. Backlog we've built will then likely be an indicator of revenue increases going forward, and team is very committed to continuing to gain market share along the way.

Okay, that's helpful. And then, industrial, it sounded like you're seeing across a lot of different areas. Are there any sub-segments that particularly stand out or is it truly, truly broad-based?

In industrial, I think that we are still experiencing a fairly broad segment-related improvement, particularly here in North America, where I think as we mentioned on other calls and I'm sure you've heard from others, that the tax changes at the corporate level have put on the margin the U.S. and North America a better place to invest in manufacturing. So that's a positive. We have a very diversified set of end markets, and so there isn't one particular area within our industrial segment, both Fluid Handling or our Industrial Solutions segment that particularly stands out in any way.

Okay, all right. So condition sounds certainly very good. All right, question for Matt, just clarification on gross margins. Should we expect mix or other factors to pull the margin down sequentially in the fourth quarter or should we be interpreting when we talk about the 32.5% that that's actually holding steady through the year versus it being a reflection of the aggregate?

Yes, full-year we're still expecting to be between 32% and 33%, as we've indicated in our prior calls. Obviously, I mentioned on the call that we do have some commodity pressure. We have been offsetting that as best as possible. And then there's been the question around tariffs in the past. And I would say that there is minor rest [ph], we have one large project that'll certainly impact that in Q4. But for the most part, we're still expecting to be in the 32% to 33% range for the full-year, as previously communicated.

Okay, so -- but mathematically that would indicate will tick down a little bit in 4Q?

Correct. Yes.

Okay, all right. Thanks so much, folks.

Yes, thanks, Sean. And thanks for joining us.

Our next question comes from Carter Driscoll from B. Riley FBR. Please go ahead with your question.

Good morning, guys. Thanks for taking my questions.

Good morning, Carter.

Hey, guys. And maybe just back up a sec. At a high level, obviously, you're still in the process of really remaking this organization. Can you talk, maybe Dennis or Matt, your criteria for your divestitures, outside the obvious, if they're not performing financially. I mean is it a level of the concentration of the competitors, the potential for share gain, ability to price, maybe from a portfolio perspective does it help offset from cyclicality. Just trying to get a sense of what those high level drivers are in terms of what's left going forward in terms or planning --

Yes, so I'd be happy to. When we laid out our strategy and communicated that about the year ago here externally on our similar calls from 2017, what we said and what we're all about is leadership in fluid handling and air quality improvement. And so the business units that ended up on the bubble, and subsequently we've divested three units, Keystone, which was more of a residential filtration business, fairly small revenue, where we didn't think we were the best owner to really continue to grow and make that work; Strobic, which was mostly serving a commercial market, so not serving the industrial customer base and had limited synergy to cross into our other areas. And most recently, while we haven't divested yet, we have intention to do so the Zhongli business. And meeting product lines there, our [indiscernible] mills for crushing and managing coal at coal power generation stations in China. So I think we've been fairly clear about what we like, and our criteria around portfolio at this juncture has been very much related to those decisions that we made when we re-communicated the strategy going forward. As we get our portfolio aligned we like what we're doing. We're generating solid new growth around that. And as we look forward, forward will also be when is it appropriate to get back to acquiring other businesses to further try and grow our position in what still is a pretty distributed market. You should look to the three-year financial targets that we set forward, businesses in areas that we think we can outgrow the market, that generate solid EBITDA return on sales, that have a high degree of earnings into cash flow generation, and a low asset intensity. Those are things we like. Those are things we think that help generate top tier returns for our shareholders. And those are things we believe we're good at leading and moving forward.

Okay, that's helpful. Thank you. So you've laid out maybe a slight softening of end market demand. Is it fair to characterize the softening as more of a reaction to somewhat of an uncertain global environment to increasing trade hindrances, whether from tariffs or just geopolitical problems, versus -- I guess I'm trying to rank the factors versus an uptick in input prices and/or kind of just a natural leveling after maybe a fairly protracted global expansion out of the '09 debacle. And just trying to get a sense are we going to a more normalized environment and/or you can still take share in that environment or are we heading or prefacing a recessionary environment or a near zero growth environment, and would that be reflected or reflective in maybe a weakening of our backlog conversion and/or trying to close some of these deals may be an extension of the timeframe to do so?

Yes, so let me first say what I hopefully communicated with slowing growth, not any kind of contracting expectations. Keep in mind that on a trailing 12 months, our orders are up 34% over the prior year. And we've added $65 million to the backlog. So we've put ourselves in a very good position for future revenue gains based on the strength of what the team's been doing, the share gains that we've been making. And so all I wanted to help communicate is what we're seeing is, and it's reflected on slide number 17, I believe, is by end market segment kind of how we're seeing the outlook as compared to the periods we're just coming from. We have a stable pipeline of ongoing demand in most of these segments. We have fairly broad diversification in the industrial segment. Refinery has popped very strongly for us. And so we can see that it's continuing to be strong in what our outlook would be. Oil & Gas, similarly, there are some big EPC contracts being awarded all around the world that would have future potential demands for us. And absolutely, we're about trying to gain share. And so the message that I was communicating was some reduction of the growth rate in the external markets, as we see it. And what are factors, the factors are yet some of the geopolitical with tariffs and the like, some of the factors around inflationary affects that cause people to think twice, three times before they pull the trigger on new investment. And this Power Gen segment here for new power demand and new gas turbine power demand in particular, which is where we're strong and focused and have been doing quite frankly outstandingly well, and areas where it's just going to continue to be tough. So, I know our team is up to it, and I expect that we'll continue to lean in to that. But don't see anything that I would say, not sure what your words were, but declining. It is more of a slowing growth rate that we're seeing in the current activity.

And, Carter, one think I'd like to just add is, Dennis was talking about outlook in orders. As it pertains to revenue and the trajectory of revenue, I'd like to remind you that for most of our business it's long cycle, so revenue trails orders by about two to three quarters on average.

Yes. I know you guys have don't an excellent job billing the book, I'm just trying to think of on a fuller basis, not implying that things have been in decline, just the rate of deceleration in terms of from modeling perspective. Would you see that in the backlog conversion, maybe ticking down a little bit. Would that be where you would see it reflected over a period of quarters?

If your backlog conversion -- our backlog does continue, you know, turns to revenue, again, as Matt said, over a period of somewhere between two and four quarters.

Yes.

And so the growth in backlog that we've been generating is absolutely a precursor of improving revenues in future periods.

Got it. Okay. Maybe just two quick other ones; so in power gen, you know, you've highlighted the capacity demand mismatch is one of the primary drivers, growth in electricity demand, overall from industrial and residential and certainly and what we've seen as somewhat of a flattening of that growth in the curve despite what you've seen whether it's from efficiency or migration away from consumption, is that a primary driver of the mismatch or is it more specific to maybe some of the travails of the leading four players of that market? Just trying to get a sense of how that turns when it turns, is this a maybe cyclical or stagnation that seems to be the one drag potentially of your core business segment, I mean, of…

Yes, from an end market point of view it's been a drag from an actual performance point of view. I think you'd see that if we have been growing even in the power gen segment in its current state where you can read from the big players on what's happening at GE, Siemens, et cetera. So what we see in power gen started a little -- about a year-and-a-half ago, which is there were quite a few coal projects converting over to cleaner sources of fuel, like gas creating quite a bit of gas turbine, new demand along with global demand for electricity and some of that caught the bigger players off guard because of the increasing impact of renewables into the system. So you have efficiencies, you have renewables and you had this coal conversion if I might to cleaner sources that were driving the peak that then came to an end about a year-and-a-half ago, and so now we're in a bit of a cyclical trough and the big players are trying to adjust to how do they see that new reality and our anticipation is that gas and gas power generation will continue to be a very important part of the overall energy mix if not a more important mix as more renewables are placed in the system. If you study the market and have the background, you would know that to provide high robust, high nine reliability in the power system, you're not going to get it from a completely intermittent source like wind or like solar and so you need to supplement that with something. And honestly, what -- while our battery business is in a interesting new technology space it's far from in a position to be competitive with gas and those kind of things. So we do see demand still in the medium and longer term still coming back to healthy position and even from the position we're in today, I think you would have to agree with me that the orders growth that we've been able to generate over the last few quarters in this sub segment of our business which was over 100% from a year ago in third quarter is just phenomenal and a demonstration that our team is getting the right things done that the technical strength of what we've done in the past and what we can do in the future is valuable to the market.

No, your performance over the past -- over your [technical difficulty] has obviously been stellar, not too…

Yes, it's been with very little with what we would say real, new demand per gigawatt since a lot of it has been in the strength of ground field upgrade and retrofit.

Yes. No, absolutely. It is the last one for me. In terms of helping with rising input costs, how does that play into your pricing strategy, is it one where you're hoping to pass along or to share some of the pain, how does that play into your competitive strategy from what you could see from rising inputs, it don't seem to be moving in the other direction?

Good question, and we have addressed this as well on calls in the past. The lion's share of our business being application oriented, we can price using spot costs from the market and so we have the ability in most cases to pass on what is happening in terms of spot costs or input materials in our input costs. As pressure has come from the bottom largely through the period of announced tariffs, in metals and those kinds of input costs, we shortened the timeframe of how long our quotes are standing before they have to be updated and so we've been able to manage through the cycle fairly well at holding on strong margins, at maintaining -- I would say the spread between input cost increases and pricing for the most part. Where that starts to have a limitation is when we're not the only ones having to price in increases and customers making investment decisions are starting to see broader cost increases in their expectation that might slow down their overall investment appetite or new lines, new production and those kinds of things. So that's a little bit of where we see our impact more secondarily. For the most part, we're able to price in spot costs in the market.

Appreciate you taking on the questions, gentlemen, thank you.

Yes, thanks Carter.

Our next question comes from Gerry Sweeney from ROTH Capital. Please go ahead with your question.

Hey, good morning

Good morning, Gerry.

Good morning, Gerry.

Just to follow-up a little bit more on the power side, curious as to when -- particular on the energy, the natural gas and the coal side. At what point would you start to see a pickup, I mean, would it be once the products are to hit the drawing board again? In other words, would you get a visibility into that market a year ahead of time or when would discussion start with [indiscernible] up?

It's good question. We are probably somewhere half a year or so often in terms of when our, call it orders and to come after new demand contracts have been placed more often with the larger OEMS, but that can vary. There are times when there are very fast tracked projects and with the restructuring going on by some of the larger OEMs in this space, where they are taking out some of the fixed resources that they would otherwise have had in place, they need to rely on people who can do things quickly and that's where we fill in as well, but probably, six to nine months, depending on the type of project.

Okay. And then on power gen, is it about 40% of the energy revenue, is that a fair guesstimate -- I'm sorry, I'm looking at Page 17, just trying to add it all real quick.

Yes, so 17 relative values -- Page 17, i.e. for everybody and yourself Gerry, are based on the aggregated 2017 revenue mix.

Okay.

So we have in natural gas about 24% and in solid fuels, so coal and nuclear, about 7%. I think you can do the math and see that the 7% has been coming down and so we're in that range in the past in terms of what's our end market mix.

And Gerry, if you take the TTM orders basis, because that's the most relevant and [technical difficulty] most recent, power gen net gas is 35% of the Energy segment.

Got it. But that was 2017, is that…

No, my…

Oh, no, you got TTM, I'm sorry, yes.

Yes, TTM you were asking how big power gen net gas --

Yes.

- was of the piece of energy. It's 35% of energy.

Got it. Okay. And then take -- sorry, go ahead Matt.

Yes. You want the company numbers as well, Gerry?

No, that's fine, that's fine.

Okay.

Taking a little bit of a step back from a macro perspective or you know, in terms about growth. So obviously we've had a nice pick up in orders and revenue etcetera. I take it some of it's rebounded some end market i.e. in Tokyo, you were seeing demand market growth, you did some revamp in sales positioning etcetera, is there anything else outside of there areas that you see that could add -- actually add incremental growth, and I'm taking maybe investment in certain areas, things that you need, things that you still want to continue to do, excluding some of the things I just mentioned?

Well, there is no doubt that we think we have opportunities in a lot of under-capped part of our market. I would say that even in the strength of our U.S. industrial targets, we have a lot of room to continue to outperform the market substantially considering the fragmented nature of the overall served markets. But we are finding some good opportunities as well through our global growth, you know what, substantially this year in India, finding some industrial opportunities in Europe, where in the past we have done very little, and subsequent to the Zhongli sale we are looking to get back to rebuilding the rest of our business in China as well. So I think there is still a lot of potential out in front of the company and it's -- those are just a few geographic areas that we think are important. We began investing in innovation. So that we're also thinking about new product or services for the markets we serve and that too help us continue with our long-term target to outgrow the markets by 2x.

Got it. And then fluid handling, one of my more favorable segment just because of the margin profile etcetera, it sounds like things are going pretty well there; you said 14% uptick, what's driving that growth? I know you were even piggybacking [indiscernible] marketing into new areas with the pump business etcetera. Just curious as to what's driving that growth to gain demand on that.

Yes. In this case I would have to say a lot of it is good market activity, good visibility by our team in the market, and as well some of the innovative adaptations what we are making to our products like the Dual Seal RTA Pump. These are areas that provide the customer productivity while still protecting the environment, sort of speak in this case from any kind of oil leakage into [indiscernible] application. So that's where we see and that's why we discuss with as a part of a strategy some investments that we need to make to continue to keep up with the growth that is out there in the market at the potential that our team can get. It's a good result so far, and we have some more work to do to continue to ensure that we can deliver on lead times high quality with what currently is still a very high mix of business, low back size high mix business.

Got it. And then, Matt, just a quick question, obviously working capital, there was a little bit of disappointment in the third quarter, but expect a jump in the fourth quarter and orders pushed into -- I'm sorry, pushed into October, is that a fair statement, no offerings being equal…

Yes.

Okay, great, thanks guys. I appreciate taking the time today for answering my questions.

Yes. Thanks, Gerry.

Thanks, Gerry.

[Operator Instructions] Our next question comes from Bill Baldwin from Baldwin Securities. Please go ahead with your question.

Thank you, and good morning, Matt, Dennis.

Good morning, Bill.

Good morning, sir.

Congratulations on the job that you all have been accomplishing here over the last year, year-and-a-half, that's definitely showing up.

Thank you.

Yes, I know it's been a lot of hard work. Can you kind of talk a little bit about the performance of your contract manufacturers, how they are performing in line with your expectations, and whether or not they have the capability and capacity to continue to grow as you continue to grow your business over the next several years?

Yes. Thanks, Bill. One of the reasons that -- there is couple of reasons that we really like our asset-light business model that for the most part uses production partners for a lot of what we do in manufacturing. And one of which is of course the variable nature of the cost structure that gives us. So that when the markets are down, we have a variable going down; when the markets are up, it gives us virtually infinite capacity. And so, your question was how are they positioned and are we able to keep up? And I would say this is again one of the strengths of what we do, especially getting better and better at viewing the pipeline, what's coming in and trying to prepare ourselves for where the demand is that we are very well-positioned. For the most part, I would say we are absolutely not only keeping up, but demonstrating that strength in front of customers what we are -- where they need somebody who can deliver on time, deliver with high-quality and deliver to all parts of the world. So I would say we are very well-positioned here. We continue to put a great degree of emphasis there because it's important to our customers that they continue to feel like we deliver, and we deliver on our commitment whether that is delivering services for the aftermarket, add-ons, ideas, to improve their operation or whether that is delivering on the timetables and cost schedules of new OE projects.

Well, that really puts you in a strong competitive position if you got that kind of performance coming out of our contract manufacturers.

Yes. We think so…

I guess you've had a longstanding relationship with a lot of these folks, I mean the long-term relationship you have been.

Yes, absolutely. I think you might know that is all over the world, so we have strength in manufacturers in China and Asia [technical difficulty] we have in Europe as well as in North America, Mexico, Canada and the U.S. And so we are able to drop on their strength depending on where projects are, what the customer demand profile is, and where the individual product capability needs to be.

And just one final -- area here, when you talk about that you are saying potential, Dennis, out of Europe and India and so forth and your industrial air quality area, is that market intelligence, Dennis, is coming from your own direct sales force or is that coming through other avenues or other channels into CE you know, into CECO?

Yes…

-- and retails markets is I guess is what I'm really trying to get a hand on…

Yes. So, for the most part, our initial reach in many cases today, Bill, is still our direct sales people, which have applications strength. So we have guys in India on direct staff. We also -- and in Europe we have a couple of business units headquartered in Europe, and so we are able to tap into as well. The colleagues from other business unit as needed to get in front of customers where we see demand whether that is -- us in Germany visiting couple of German customers, one of which though is for large potential opportunity here in the States. The other is where local opportunity where they're familiar with the technology leadership that we have in a particular area, and believe that they need that for their environmental compliance-oriented demand into a couple of site, production sites that they have in country there. So, a lot of that originally comes through our direct guys and our direct regional leaders also have reps in a number of the key markets that help with the reach.

Got it. Is your engineering talent basically domestically, or do you have some engineering talent also in some of these overseas locations…

Our engineering talent is distributed largely by technical area into a variety of offices around the world, both domestic, U.S. here, China, Dubai, we're adding some strength in India and we have two key technical businesses based out of the Netherlands.

Okay. Thank you very much, and wish you continued success.

Yes, thank you, Bill. Thanks for your questions. Thanks for joining us this morning.

Ladies and gentlemen, that does conclude today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Okay, well, thank you, and thank all of you for joining us today. You know, I hope that you agree that our 4-3-3 operating strategy is gaining traction. And the third quarter demonstrated continued momentum and solid market wins. We look forward to discussing with you again our full-year results on our next call. Thanks again.

Ladies and gentlemen, that conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.