Good morning, and welcome to the CECO Environmental Earnings Conference call. [Operator Instructions] Please note, this event is being recorded. I would now 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 fourth quarter 2019 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've provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website.I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts 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, 2019.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 the result of new information, future events or otherwise.Today's presentation will also include references to certain non-GAAP financial measures. We've 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 with that, I'll toss the ball over to Dennis.

Good morning everyone. And thank you for joining today’s call. I’m pleased that you could join us for this update on our 2019 fourth quarter and full year results. As in past calls, I'll be reviewing our results and discussing the outlook of our markets with a few added comments on how they could be influenced by the global coronavirus pandemic, with Matt following me with the financial details. I'll then summarize our progress and plans before leading us into the Q&A session, where we'll address your questions.As we jump in, I want to underscore that we're confident in our ability to accelerate growth remain committed to delivering top-tier returns to our investors and are steadfast in pursuing our environmentally driven business strategy.Let me start with a brief look back and have you turn to Slide 3. It highlights our 4-3-3 Operating Strategy that we launched in late 2017 to guide our priorities, investments and execution. It's proven to be a successful blueprint for transforming CECO Environmental into a vibrant growth company. In the past couple of years, we've upgraded the leadership team, expanded our international footprint, made investments in new product innovation, streamlined our operations and substantially improved the capital structure. In reinforcing our organizational and operating foundation, we transformed our execution so it is customer-focused, culturally aligned and delivering excellence. Execution is what makes us even stronger and more resilient than the sum of our organizational parts.Moving to Slide 4, you can see the results of the team's exceptional execution around our Bluepoint 4-3-3 Strategy since it was implemented two years ago. I can sum up those results in two words: solid, progress. And executing against this strategy, I stated that we were aiming to generate organic growth. And in two years' time, we've delivered 29% growth in…

Thanks, Dennis. Before digging in, I want to emphasize that I’ll be discussing the detailed financial results and how we strengthened our capability and capacity to accelerate growth. Let’s start with Slide 11, which shows that although our trend in orders growth was snapped, a sequential increase in revenue drove profitability higher. Orders were down $48 million sequentially, and 7% year-over-year. Starting from the top of the stack bar chart on a sequential basis fluid orders declined slightly, reflecting the continued softness in the end markets.MRO spending slowed 2019 especially in oil and gas markets, putting fluid handling down 12% organically for the total year. We are not pleased with the performance and are making changes to course correct in 2020. On the other hand, our pipeline for new aquarium opportunities has grown significantly and we’re optimistic in our ability to win with our market-leading fiber operating. And as Dennis mentioned, there are some sizable projects on the horizon and we’ll be in on the hub.Moving down the stack bar, industrial orders were healthy, up 11% sequentially and 22% year-over-year at $21 million. It’s a tough market, and I’m pleased to say that our results suggest for gaining share on the competition. While there’s some mixed signals in this market, we feel good about our very healthy pipeline heading into 2020. By far, the most significant factor in our fourth quarter orders results came from our Energy segment. After a steady increase in orders through Q3, this project-based segment hit a speed bump with project tighting awards leading to less than desired results. Meaning some orders were pushed out especially in the Refinery segment, where fewer than $5 million of projects were awarded globally in Q4.Our Gas Power Gen segment has been stabilizing and the sales pipeline remains active. We…

Thanks, Matt. Nice job as always. In closing, I want to touch on our transformation, progress and steps towards accelerating growth. The entire organization is proud of what we’re achieving and remains confident and determined to achieve even more. The 4-3-3 operating strategy has been a blueprint for transforming how we do business and driving growth throughout the organization. It required tough decisions and sustained actions and a commitment to achieving our 2021 financial goals.Our organizational and operational foundation have been reinforced to become a much more agile, resilient and capable organization that can and does beat the competition and adapt to changing market conditions with an attractive value proposition.Importantly, we substantially improved our capital structure to give us greater flexibility, more capacity and less leverage. That’s already paying off, and we’ll continue to do so as we accelerate our growth.CECO has a talented and highly focused team that has been exceptional in executing the 4-3-3 Operating Strategy. Over the past couple of years, we’ve transformed ourselves into an engine of organic growth, organic orders have increased 29%, revenue up 10% and backlog closed $35 million higher than two years ago.In the process, we’ve expanded our EBITDA margins and our ROTC closed at a record high of 59%. One of the keys to those impressive results is our team’s ability to bring home exciting project wins, it drives growth and produce solid financial returns. In looking at these wins, I see two things that point to CECO’s transformation. First, our investments in an expansion of technical sales coverage are paying off in both new projects and the aftermarket.Second, we’ve developed a competitive one, two punch that’s becoming tougher and tougher to be, offering superior products and capabilities to protect the environment and improving the customers’ operations to be more efficient…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Chris Van Horn of B. Riley FBR. Please go ahead.

Good morning. Thanks for taking my questions.

Good morning, Chris.

Good morning, Chris.

So just to talk about the order headwinds during the quarter? It sounds like most of those were deferred. Could you give us a little more color on maybe the timing and what you see around those orders coming back?

Yes, Chris. Orders were short of our target that we thought would happen in the fourth quarter, even as we anticipated fewer closings. And so at the same time, as we see that, you can tell, we remain committed to growth. Orders are important. We don’t shy away from that. It’s a key indicator, and we weren’t completely pleased with the results.Having said that, the key variables in us continuing to do what we need to do is regular customer interaction, including adding people in new segments and new territories. And then our hit rate on projects. And both of these are still in great shape. So while we didn’t keep the trend of increasing orders going, the pipeline is still very large, very active and most of what we see is still moving forward.Our pipeline and Energy segment alone over for closings over the next 12 months is over $1 billion in the date in all three of our segments has continued to grow. And the only thing that really put a question mark out in the current period, it’s a coronavirus. It’s absolutely changing activity in a number of regions of the world. I mentioned China already this morning. But we are seeing other activities in and around the world, where there are slowing travel that’s causing slower decision making that’s affecting both orders and, in cases, slowing down inspections and things like that related to project execution and revenue.

Okay, great. Thanks for that color. And then, you continue to execute well on the margin line. And when you look out through 2020 and into 2021, do you still have additional operational levers to pull is most of it volume-driven? And then how do you see kind of that margin trajectory getting to that 12% to 14%?

Yes, I’ll make a few comments on the gross margin. But I think you’re referring mostly to the operating margins and how we move forward. At the gross margin line, the team has done a fantastic job, I think, of really transitioning to sell value, especially in our custom and engineered product scope where a lot of people can get into the habit of doing a cost-plus modeling as to how they view the market.And that in conjunction with aftermarket sales and follow-on and service revenues. Have continued to help us keep a nice, solid blended gross margin even as we grow the mix of type and area of projects and sales activity. So at the gross margin line, we’ve been very pleased that the ability that we’re getting out of a whole mix of activities and a whole mix of different market conditions.

Yes, over the longer period, Chris, I’d suggest 32% to 34% on gross margin. And if you look at the last three years, our SG&A has actually declined as we’ve taken cost out of G&A and increased sales. So we get a decent flow through in operating revenue. It’s all about growth for us in maintaining that gross margin.

Got it. All right, great. And then last for me. Obviously, despite Q4, you still had a really good backlog growth for the year. And I just want to know, I think the answer is probably a mix of both, but maybe some detail around that? Is it macro driven? Are you seeing a little bit more push from your customers to sustainable projects and as well as some competitive factors? And maybe you could highlight each of those. Thanks.

I’m not sure I followed your question precisely, but we were pleased throughout the year to be growing backlog and ended the year $35 million above where we ended the prior year. And so find ourselves again in good shape with the backlog. Our markets are very large, they’re growing in importance with the – importance of sustainability all around the world, and we’re executing our plan to drive the CECO growth engine. So I think we’re long-term, medium-term in a good place to be. There is a question mark right now over the short term, as this virus does change some of the activity and the pace that people are moving to close.

Okay. Great. Thank you so much for the time.

The next question today comes from Jim Ricchiuti of Needham and Company. Please go ahead.

Thanks. Good morning, Matt and Dennis. Dennis, just a follow-up on some of the commentary that you just provided, it sounds like you are seeing a little bit more foot dragging in the last couple of weeks, I guess, as we’re seeing more of an impact outside of China from the COVID-19 outbreak. Is that fair to say?

I have to say, yes, unfortunately. So China, for sure, we saw immediate impact everybody was asked to stay out for an extra week after the Chinese New Year, and there’s been quite a bit of government disruption, including we’re trying to stagger and have a lot of our people work from home. But beyond that, we started to see other elements that are slowing down, not changing long-term anything but for example, we have a large project wants to be fast tracked. It’s in the Middle East, and it has an influence from an EPC in Asia.As a part of the process, even on a fast track, they need to audit all the major facilities, including our headquarters, and they have curtailed travel in order to get that done. So they have pressure on a fast track product from their end customer. And at the same time, we’re not able to take care of some of the small issues, if I might, to execute along the way. And as a similar example, where we’re producing a large order also on a fast track with a tight timetable in Northern Italy. And at the moment, everybody is showing up to work, progress is being made. But it looks like there will be delays around people flying in for normal inspections that always take place on projects like these. And so those are the elements that are driving more uncertainty in the short run, haven’t seen anything affect longer-term at this point.

So I’m wondering how we should be thinking about this near term. Is there the potential that this potentially could impact your revenue short-term or just causes folks to maybe delay on some of the projects and has some fallout for the near-term booking visibility?

Yes, Jim, this is Matt. I'll start with revenue and tell you that. We do think that Q1 will be tough, but we'll make it up later in the year. I'll remind you that we're ending the year with the largest backlog from a year-end perspective in the history of the company at $271 million. So that's nice as we head into 2020. The long-term prognostications of what's happening with COVID-19 are still to be determined, but our pipeline is strong, and we're seeing a lot of order activity. So I feel pretty good about the order side and revenue for full year, Q1 will be tough.

Okay, that’s helpful. And if I may, just a question on selling and administrative expense that was surprisingly low. It looks like lowest level we've seen in a couple of years. How should we think about that going forward? I assume that there may be some normalization of that as we look out to Q1 and into the balance of the year. Was that an unusually low number?

It was to the extent of roughly about $1 million. So CECO's SG&A includes sales, new product innovation, application engineering, project management and then the support functions like finance, IT, HR. And if you looked at reported SG&A, it also includes stock comp and depreciation. So SG&A was lower in Q4 as we trued up our future stock compensation accrual and there's about $1 million benefit in there. As we look at future stock awards, the analysis, we concluded that we were over accrued. So that's a onetime event that you would have seen in Q4.

Okay, that’s helpful. And final question for me, I'll jump back in the queue. Interested in that, the slide that you showed about expanding into adjacent markets. And I'm wondering Dennis, if there's anything you might be able to say about that, whether that's something that you think you're going to be in a position to accomplish organically or if inorganic is going to be the main way that you look at some of these opportunities? And just in general, how does the M&A pipeline look?

Before the answer that question look Jim, I want to add one other point on SG&A guide. I mentioned to you, doesn't impact EBITDA. That's kind of something I know, but everyone knows that I want to make sure that I pointed out to you, it only impacts operating income and GAAP SG&A. So go ahead, Dennis.

So I think your question was, as we look out forward in what we're executing on and buying. We have made a number of investments over the last year – two years. So to put people in regions that we think we can get traction. For example, in our industrial business has been predominantly North American, probably good at a time like this, where we're crisis hasn't really hit the U.S. as much. But we've deployed people in Europe, in India, in China and are getting good traction on there.So the point being we're not counting exclusively on the market, and we continue to make selective adds in ways that we to make selective adds in ways that we could think can generate good, new orders mix. We've also, as you've heard, made some investments in new product innovation. A number of those wins are finding their way into the market and getting some traction. So they're too, not just counting on the market, but controlling those things that we can do to drive organic growth in these large markets, in these attractive markets and over the sustained longer term.We have been active in the M&A market, assessing targets and candidates, kicking tires, looking at opportunities. We expect to continue to do that. We think that's a part of how we build value. We think it's a great place to be with the growing importance on sustainability and so the kinds of solutions that we execute on, and we'll continue to do so.

Got it. Thank you.

Yes, thanks Jim.

The next question today comes from Sameer Joshi of H.C. Wainwright. Please go ahead.

Thanks Dennis, thanks Matt for taking my questions. Just following up on the theme of the energy market order flow for the midstream oil and gas, you are showing promising like optimistic growth next year, what gives you that confidence?

Yes. So how do we look at and report an outlook of our external markets, a number of factors, direct dialogue with customers and what we're hearing and seeing from them, industry reports and projections to a lesser degree. And then what's really in our active sales pipeline, our sales pipeline that we are referring to is a project or sales opportunity that one of our people has actually touched, reviewed with a customer, it has a value, and it has an anticipated a onetime award timetable and everything in the next 12 months.And so we've continued to see over the last year and even early into this year, slowing but modest growth in that overall sales pipeline. So that's, again, the number of in dollarized value going out into the future. I think I mentioned our Energy segment alone has over $1 billion in that rolling 12-month pipeline and growing modestly. And so it's that, that gives us the confidence that things are moving, things are being placed. Our reputation continues to grow. We've extended into a number of new applications, and we think that there's still a lot of opportunity in all kinds of regions around the world. And that's largely where we built quite a bit of success in the last year on the order side.

Okay, thanks for that. You may have touched upon this. But just a clarification, are you seeing more of a competitive pressure in addition to the weakness in the industry that has caused this Q4 and then Q1 expected the weakness?

Let me just see if I heard your question, were you asking about competitive pressure in the industrial arena?

In Energy.

In the Energy segment. I think we've seen that, in particular, when the Power Gen market went into dive, the market last year were probably about half of what they were in 2016 when they were very robust. And so the growth that we've generated over the last three years comes at a time when we still had our – what was our largest served end market segment at about half. That half is stable, it's growing. We've lost a few competitors along the way. And so it's still intensely competitive, but we're really believe that we have the best team, the best product to the technical capability. And if things pick up, we are also one that can move very swiftly to address opportunities as they come.

Okay, thanks for that. One last one, are you forcing further reduction in debt? And what is the optimal level that you're targeting?

Further reductions in what?

In the debt.

In the debt, okay. We've actually done a really nice job of paying down debt over last few years, as you can tell. I think our net leverage ratio is hitting sub one, which in today's market, I think, is a benefit for us. We have a very healthy balance sheet. We'll continue to pay down debt opportunistically. We have very low interest rates. So it's really about how do we take our capital apply it to value creation ideas, which was M&A target as well as investments. So we'll continue to pay it down as we have as sitting on the balance sheet. But at less than one time net basis and 1.5 times on a growth basis, we're in a very good position.

Thanks for taking that question.

You bet, thanks a lot.

Thanks Sameer.

[Operator Instructions] The next question today comes from Gerry Sweeney of ROTH Capital. Please go ahead.

Hey good morning Dennis, Matt how are you doing.

Good morning Garry

Obviously, I mean, I think you've done a really nice job over the last couple of years with the 4-3-3 Strategy, streamline ops, take out the friction, balance sheet, all that. But I want to take a little bit of a step back and maybe [indiscernible] that could stretch your vision per say a little bit. I mean, if you look out the next two to three years, what's the biggest opportunity? What gets you excited? What do you want to sort of be this next big step forward for CECO?

Yes I think it’s easy to be excited right now because sustainability continues to take on a larger and larger themes all around the world in business with our customers, with our power generation, with our energy customers, you see it more and more as a key topic in and around business. And that's exactly the kinds of solutions that we address. So we address sustainability needs that come with industrial progress. And that's what we're all about. That's what we've been all about. And so for that a great place to be because we continue to anticipate. We'll see a tailwind around those kind of sustainability solutions that we offer.Having said that, we built a growth engine, we leaned into that. We're doing a lot better at translating unmet customer needs into new products and more active, as we said, in looking at a to add to the portfolio through targeted M&A that also address this growing trend on sustainability.

On the M&A part, and that’s really, I think an area of interest. I mean it particular for me, if you can sort of start building out this industrial platform a little bit. If we see some short-term or even short to medium-term dislocations in the market because of corona, it feels as though you’re in a position to be opportunistic and go after some opportunities. Is that sort of a fair assessment with?

Yes. There’s no doubt that the improvements we’ve made in the balance sheet right now to Samir’s last question, right now, we have a very flexible debt structure that allows us to pay down debt and anytime we don’t have new ideas in front of us to invest in, but it also allows us to flex pretty quickly to attack and seize opportunities that we might come out and find in the market. And we’ve been active. We know the areas that I mentioned around sustainable solutions that we like. We’re a technology company, and so we continue to seek technologies that enhance the way we do things and the way we impact customers. So absolutely, we like the positioning. We have the company in right now.

Got it. And then come to the granular level a little bit. Just from the backlog, I mean, on a year-over-year basis, that’s the way I generally to take a look at, it’s very good. But anything, any rumblings in the backlog or any projects that have potentially shifted because of the coronavirus from solidly in the backlog to question marks or things like that?

So, if the question, the first off, I say our backlog, it’s solid. It’s active, it’s moving, has been for the last year and even as we’ve grown, continues to be solid, growing in active. And so the backlog is as best I could say, no risk except for delays right now. That we see, when I say no risk. Interestingly enough, I would say the orders profile today has the same profile. So, the sales pipeline is also getting some push out, but I don’t see anything that suggests anybody is putting their hands back in their pocket or rethinking major investment at this point, every day there’s new data. And so in both cases, we like the long-term prospects of what we have.At the same time, I think, I mentioned at least one project where there’s likely to be production delays due to people not wanting to travel to regions that are showing signs of the virus growing in certain regions in Northern Italy. But we are doing other major bid work even in China via video conference on projects that are wanting to have a fast track, but have a lot of technical complexity where we would love to be face to face, because we are very clear who the technical leaders are and it CECO Environmental, and we’re trying to move those things through. But it’s more around shortage term delay right now than anything we’re seeing that would change any of our long-term views.

Got it. And then one final question. This is probably more for Matt. $35 million of cash, I think 75% give or take a little bit overseas. I think the rest U.S. We’ve talked in the past, some of that cash got – gets caught up in some of the legal entities, et cetera. What can you get that down to over the course of the next year and what would be a good carrying amount and then to 75% overseas, is that stuck there? Just keeping it there for operational opportunities, it better? Where can you bring some of that back? Just like takeoff some of the cash off the balance sheet?

Yes. The international cash, the only [indiscernible] for bringing it back home is really withholding taxes that are local to the country, which that cash reside. Sometimes it doesn’t make sense to send it back. On the domestic side, we can move cash within the U.S. and Canada no problem. In fact, if I could make that zero, I would, because I can get into that revolvers back, and I want to run this pretty efficiently. Do I think, we could bring more back from international? Absolutely. We’re working those levers right now. The only thing that’s working against us is that we’re actually generating pretty good cash flow internationally. So, we’ll keep bringing it back as we can. And the number, I’d say that’s optimum for us, Gerry, in the future, lead something sub 10 internationally, do I think we’ll get there in the near future maybe two to three years, but we don’t necessarily need the cash right now, because of our liquidity and our credit facility.

Got it. So suffice to say, if you wanted that cash or other investment opportunities overseas, you could bring it back. You just got it?

Oh, yes. The only place that, because we have large projects and the moves around a lot, and I don’t want revolvers all over the world. It’s nice to have cash available to match terms with our vendors and payers collect from our customers as the need be. The only place that’s somewhat primitive that we’ve been very successful in is China, where we brought $5 million back year-to-date in 2019. That’s the only place that’s a little bit harder to get the cash out of, but we have a good plan and consolidations of legal entities really help to move that forward.

Got it. Perfect. I appreciate it. Thanks guys.

Thank you, Gerry.

The next question comes Tate Sullivan of Maxim Group. Please go ahead.

Hey, thank you. Good morning. Just a couple follow-up from me. Matt, I think you mentioned, so revenue in 1Q 2020, and thanks for all the comments on temporary or hopefully impacts from coronavirus on, 1Q 2020 do you comment revenue week compared to the prior year, or prior quarter or can you follow-up that comment please?

I think that we’ll have comparable challenges in both Q1 – sorry, in Q1 against prior year and sequentially. Again, I want to reiterate strongest backlog leading any year for CECO ever at $217 million. We do not see any risks at this point in time of backlog canceling. It’s more of delays later into the year. And so Q1 will be a little bit tough, but we are very confident about the full year.

Okay, thank you. And then with the unchanged EBITDA margin target, but did you say earlier, continue to guide gross profit margin of 32% to 33%.

Yes. I mean, we don’t provide quarterly or annual guidance as you know, but, we’ve had said that for the most part, 32% and 34% is that range that out there that typically works. If you look at our last four year history falls right into that range.

Oh, 32% to 34 %range.

Yes.

Okay. All right. Thank you very much for the follow-ups. Have a good rest of the day.

Thanks, Tate.

The next question comes from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

Yes. Good morning. Thanks for fitting me in here, Dennis.

Good morning, Bill.

Just wanted to get your comments and insights that Dennis and Matt, what’s going on in terms of your focus on your installed base, your aftermarket business, and how do you see that coming along, and how much of a priority is that for you to looking at longer term?

Yes. So Bill, thanks for asking. Because aftermarket has been and continues to be an important element of the overall sales mix. A lot of the project based businesses that we sell into are on a mix of greenfield and brownfield projects extension. And quite a few, a lot of our equipment, customer equipment on the only side, has that 10 plus year operating life cycle – lifetime. And with all of that we continue to mine opportunities for break fix type parts, services, service contracts and a as well as consumables and spares in the light.So aftermarket remains instrumental to CECO and achieving those three-year targets and growing 2x in the market. We’ve made a number of investments that continue to a mine and harness opportunities for aftermarket. And we’re also looking at ways to design products that not only help customers, that they new equipment, but also help us and help them with aftermarket capabilities to build stickiness for us and build a value and efficiency for them.

Okay. So that was lucky you got a good initiatives going on there. As I imagine the addition of your technical sales personnel is helped you quite a bit in that market also and Dennis, do you expect it to?

So absolutely. We’ve added technical salespeople in various regions of the world and in U.S. and still have a very focused group exclusively working in the aftermarket opportunities with inside sales, outside sales and a growing service team.

Thank you very much. Thanks.

Thanks, Bill.

This concludes our question-and-answer session. I would like to now turn the conference over to Dennis Sadlowski for any closing remarks.

Okay. Well thanks again for joining us. I think 2019 was another year of progress for CECO Environmental. We’re executing to our blueprint for organic growth or pleased with the fourth quarter profitability, and we continue to work towards accelerating our success is going forward. So thank you all.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.