Shawn Severson - Blueshirt Group Jeff Lang - President and Chief Executive Officer Ed Prajzner - Chief Financial Officer.

Tim Mulrooney - William Blair Gerry Sweeney - ROTH Capital Partners John Quealy - Canaccord Genuity Scott Graham - Jefferies & Co. Jeffrey Osborne - Cowen and Co..

Good day, and welcome to the CECO Environmental’s Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Shawn Severson. Please go ahead, sir..

Thank you. Good morning, everyone. Thank you for joining us on CECO Environmental’s conference call and webcast to discuss the financial results for the three months and six months ended June 30, 2015. On the call with me today are Jeff Lang, CEO and President; and Ed Prajzner, Chief Financial Officer.

Jeff and Ed will be reviewing the financial results and will also provide an update on the company’s strategy and outlook. Please note that in addition to traditional reported GAAP earnings we provide non-GAAP financial measures in our press release today to enable better assessment of the ongoing nature of CECO’s core operations.

Jeff Lang’s comments will primarily focus on these non-GAAP financial measures, and Ed Prajzner will address differences between GAAP and non-GAAP financial measures in his remarks. Following our prepared remarks, we will open the call to questions.

As a reminder, there is a presentation for today’s conference call, and we encourage you to find that at CECO’s website and following along. Please click on each slide to go through the presentation. This call is being webcast and can be accessed at CECO’s website at cecoenviro.com.

The webcast will be posted on CECO’s website for replay approximately 2 hours following the end of this call. The replay will remain on site for on-demand review over the next several months. Before we begin, I would 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 results may vary materially from those expressed or implied by forward-looking statements.

We encourage you to read the risks described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2014.

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 reconcile the comparable GAAP and non-GAAP numbers in today’s press release. And with that, I like to turn the call over to Jeff to begin the discussion..

Thank you, Shawn. Good morning everyone. We appreciate your continuing interest in CECO Environmental as we continue to grow and evolve our business into a world class industrial technology company. Please turn to Slide 6.

Revenue in the quarter increased $20.7 million to $87 million or roughly 31% higher than last year’s second quarter, and approximately 7% higher sequentially than Q1. This revenue is another record for CECO and it was driven by a combination of sales excellence and revenue from acquisitions.

On an organic basis, revenue in Q2 was flat, but was up 4.5% year-to-date June on a constant currency basis. On a consolidated basis, bookings were $74.6 million for the quarter, up 29% compared to last year’s $57.7 million. Year-to-date bookings were roughly $169 million versus $121 million last year.

Year-to-date June bookings were up 4% organically and roughly flat in Q2. However, we did win a very large USA major refinery order in July for roughly $14.5 million that we originally expected to book in June Q2. Either way it was an excellent win for the Emtrol-Buell global cyclone business.

Our backlog remained strong, reaching $140 million in June 30, 2015, down from $153 million in the prior quarter. EPS on a GAAP basis for Q2 for $0.08 compared to $0.17 in the prior year, however EPS on a non-GAAP basis for the quarter was $0.32 versus $0.25 in the prior quarter; $0.32 was a record for CECO Environmental for a quarter.

Please turn to Slide 7, gross margin in the second quarter was 30.7% as compared to 26.2% in Q1 and we are very pleased with the sequential quarterly improvement. Non-GAAP operating income increased to 14.1% in Q2 compared to 9.3% in Q1, and non-GAAP net income per diluted share was $0.32 in Q2 as compared to $0.21 in Q1.

We view the bottom line growth on a non-GAAP basis in Q2 as a positive momentum and signal, so a special thank you for the entire CECO team. Please note that in Q2 we outperformed on both gross profit and operating margin as we are expecting some of those trends to take shape in the second half of the year.

The current second half of 2015 research analyst consensus estimates of our margins are consistent with our current thinking. The Q2 margin improvement was driven by several operational factors. One, the increase of aftermarket mix helped. Two, higher margin due to operation on project execution.

Three, our fluid handling group had better revenue and margin expansion in the quarter. Four, we had a couple of environmental business that improved from Q1 to Q2, and five, the energy segment [Aarding-Flextor] improved in Q2.

The entire CECO organization is meticulously focused on revenue and operating income growth as a core fundamental of our business. Please turn to Slide 7 or as we continue on Slide 7, SG&A management and a lean asset light sharp overhead are integral to our operating model and future operating leverage opportunities.

Over the next 12 months we look forward to working with the CECO PMFG team in the integration process to adopt the legacy operating model to help the combined operating performance to create more shareholder value, and we are very excited to work with the senior leadership team at PMFG.

Adjusted EBITDA in the quarter was $13.5 million, up from $11 million for the same period last year and significantly higher than $8.6 million generated in Q1 of ’15. In summary, we are gaining momentum in 2015, we have achieved record revenues and a solid backlog.

We made solid improvements on operating margins in the quarter as compared to the first quarter and I am proud to say that our team is on track to achieve our long-term operating model of 15% margin.

We will continue our focus on high margin revenues, operational excellence and asset light manufacturing optimization, while expanding revenues globally. Please moving onto Slide 8, I would like to provide you with an update on business conditions and review key strategic points.

First, we believe the overall end market conditions are essentially unchanged from the first quarter, except China has slowed. In terms of business segments, let us start with the environmental technology group.

Results in our environmental operating segment continue to reflect solid momentum gains, in particular our Emtrol-Buell cyclone business, Kirk & Blum contract services, Flex-Kleen dust collection technology and HEE Duall scrubbers, and a couple of others improved in Q2 2015 with margin expansion and solid bookings.

Overall our environmental segment is making solid progress on both revenue and operating income objectives. We will still strive for additional sales excellence traction, more around the One-CECO sales initiative, increased bookings and margin improvement in the second half of the year. We had a solid first half overall.

We do need more improvement to reach our full 2015 operating plans. Also there is a particular opportunity to increase reoccurring revenues in the environment group. So we are positioned well for a strong second half.

And lastly the One-CECO initiative will bundle technologies to provide a better solution for customers, continues to be a business driver for us. In reference to the energy technology group, the global natural gas power activities continued to be a strong market for us and the China domestic utility market has been solid in the first half as well.

We continue to see solid demand for natural gas fired power generation around the world domestically through our Aarding division that continued to do a very good job for us.

Nearly all geographies are on track regarding natural gas-fired turbine expansion and we are encouraged by the latest activity here in North America around natural gas turbine activity. The traditional power generation markets domestically are flat, but much stronger internationally.

We are also gearing up for improved domestic after-market opportunities and additional global RFQs in this sector. However, we continue to believe that developing countries remain a source of growth over the long term.

To supplement this growth, we continue to focus on driving growth in the aftermarket business as noted previously, and we’re very pleased with the Zhongli’s utility business in China. They are on plan and doing well and we will continue to focus on the opportunity in all of our geographies. The fluid handling filtration sector.

Our fluid handling and GPS operating segment is performing well with solid revenues and improved operating margins. I would also point out that we have added key positions in talent in this division to help execute on our sales excellence strategies and after market growth efforts with strong aftermarket sales contributing to the margins in Q2.

We have added a strong vice president of sales in both the fluid handling business and our filtration business to lead our organic growth initiative. Our filtration business has been flat year-to-date but we expect improvement in the second half of the year.

We are expecting more business in the second half of the year to reach our operating plans, but overall the fluid handling and filtration segment is rock solid and operationally excellent.

We will continue to emphasize greater sales excellence and productivity in the second half of the year and our team is being challenged to deliver more organic growth. Additionally, we see aftermarket sales continue to gain momentum at CECO.

In reference to the announcement of our Vice President of Global Aftermarket and Recurring Revenues, we have added a very talented Vice President of Aftermarket strategy leader to help accelerate our teams’ efforts and harvest opportunities from our sizeable installed base in a more strategic fashion.

The Aftermarket and Recurring Revenue segment of the business reminds a very important strategy and strategic initiative for CECO as it adds stability to our revenue base, improve margins and it enhances our connectivity with our core customer base.

Next, I’m happy to announce that the integration of Zhongli, Emtrol-Buell and HEE Duall is 100% complete. We are very pleased with the traction and progress of these sizeable acquisitions. With the integration of these acquisitions behind us, the team will be completely focused on the PMFG integration in September.

We continue to believe the acquisition of PMFG is a major strategic even for CECO and I’m very excited by the business opportunity going forward. Please note the CECO PMFG integration process strategies and actions have been formalized in Q2, so we’re ready to go.

Please note that thanking to the CECO leadership management team for the excellent integration, best practices and disciplined weekly checkpoints to deliver on our integration commitments in the first half of 2015. Well done team.

Given that successful completion we are now 100% ready for the CECO PMFG integration process and I’m looking forward to working with the PMFG leadership team, and we have had many successful sessions together and discussions over the last several months.

Now I would like to take a minute to provide an update on CECO China as I am sure that the reason news regarding the China market has created a host of questions. For a perspective, China accounted for approximately 20% of our sales in the second quarter, which includes the well performing Zhongli acquisition.

Overall CECO China moderated in the quarter along with the broader China market. Although we sell into numerous industrial markets across the Asian region, the most notable sectors are large industrial chemical, petrochemical and the traditional power market. Zhongli has performed well and is on track with our plans.

With regard to the legacy CECO China business, we actually expected better revenues and operating income during the first half of 2015. And we do expect improvement in the second half of the year from CECO China.

It is difficult to say when the broader Chinese economy will improve, but we believe that we will still have meaningful growth opportunities in the current environment by integrating additional products into our CECO China sales network, driving more environmental energy revenues through the stronger design and engineering capabilities in the region, which could lead to additional market share gain.

We really need additional sales excellence, productivity, improved bookings and operating gains in the second half of 2015 from the CECO China team. We also learnt some best practices from the Zhongli operating model that will help us to optimize our CECO China business.

As we close on the PFMG, the new combined CECO Asian regional opportunity will be exciting, stronger, and will be positioned to deliver on our long-term China growth opportunity. Our mid-term goal is to reach $100 million in revenues over the next three years in the China region.

One, we have the peerless manufacturing China business, which services the energy, natural gas, industrial and nuclear sector. Two, we will have the Zhongli traditional china utility business.

Three, we will have our core CECO China business for large industrial, environmental and energy, and fourthly we will have the PFMG Singapore region, very exciting.

It will all be brought under a common leadership, sales strategies, manufacturing optimization, so we are very excited about our long-term growth in that region, and we’re very committed to the Asian region. Please move onto Slide 9, I would like to express how much of a strategic fit we recognized between CECO and PFMG.

We are poised to achieve solid sales and cost of synergy, and the acquisition will be a major step towards market leadership in A, global natural gas power, B, industrial silencer markets, C, the midstream pipeline sector and fourth and finally, the CCA environmental business will be additive to the OneCECO environmental solutions group.

Those are four fundamental reasons why we are very excited about bringing these two companies together.

Further, the CECO and PFMG combination will also result in significant main office SG&A and shop overhead synergies, increased scale, size and revenues to the 1.5 billion range, a combined installed base of $5 billion, integration of the peerless China manufacturing business to join our CECO Asian region, and lastly the stronger European sales channel footprint and leadership will also help our integration process.

The acquisition will provide us with access to additional attractive end markets to drive long-term growth and diversification, and enhance our global footprint particularly in China, Europe and the Middle East.

In addition, the acquisition brings a leading portfolio of highly engineered products, excellent brand names, and opportunities to grow reoccurring revenues. We are poised to benefit from a stronger, larger balanced portfolio with greater diversity in our end markets. We believe the CECO PFMG acquisition will close in September of this year.

Moving onto Slide 10, in May 4 we announced the PFMG acquisition and we communicated the strategies and the synergies, I would now like to illustrate why we believe the acquisition of PFMG will help create an industry leader in the natural gas turbine power markets and the environmental industrial silencer market.

As you can see, PFMG brings one of the leading selective catalytic reduction technologies to our portfolio, which is critical to the control of malicious emissions in both natural gas and industrial power generation facilities.

Our Aarding Effox division within CECO are leaders in the exhaust system, dampers, diverters, and silencing technology systems, a combination of the SCR technology within the Aarding Effox product portfolio is fundamental to globally becoming a complete solution provider for the natural gas turbine power market.

We now have an opportunity to evolve as a leader in this growing global sector.

The combination of both silencer brands Burgess Manning at PMFG and CECO will create a leading global provider within the noise reduction and abatement market segment for a full range of industrial applications, and expanded product alternatives and increased opportunities for reduction of sourcing costs and sales synergies.

Moving onto slide 12 please, Slide 12 reflects the combined Asian footprint our business will have. Our mid-term goal is that we are going after the Asian region and pursuing $100 million in revenues over the next three year timetable.

One way to achieve that is that we will maximize our selling opportunities to our existing channels and markets as we currently do today. Additionally, utilizing each company’s existing sales channels, products and cross selling opportunities to customers across all the industries and geographies.

Both sales teams are centralized in the Shanghai region to enhance team communication, selling effort, strategies and common leadership.

Before I turn the call over to Ed, I would like to reiterate that we remain intensely focused on driving organic growth through our sales excellence initiative, our OneCECO initiative and we believe that the addition of PFMG will create even more opportunities to drive revenue growth.

We have an excellent team in place and we continue to grow stronger to execute on our plan. I will now turn the call over to Ed for a more detailed review of the financial results in the quarter..

Thank you, Jeff and good morning everyone. As mentioned earlier, I will highlight in a little more detail both our GAAP and non-GAAP performance for the quarter, and six month period, particularly regarding our segments.

As a reminder, our non-GAAP adjustments include acquisition and integration expenses, the impact of acquisition, asset valuation adjustments on the income statement, which results in higher levels of depreciation and amortization and earn-out expense.

Our non-GAAP financial presentation is intended to provide a better trend analysis and assessment of our underlying core business performance.

Please turn to Slide 14, where you will see revenue, as Jeff mentioned, increased sequentially in Q2 by 8% on an organic basis an increased 4.5% for the six-month period ended June 30 over the prior year period. We are very pleased with that result. Moving on to Slide 15, which shows our booking and backlog trends.

Although booking decreased in Q2 compared to Q1, we are pleased with our $168.5 million of bookings in 2015 year-to-date through the first six months and our backlog remains very strong at $140 million.

Continuing on to Slide 16, our gross margins and non-GAAP operating margins increased sequentially in Q2 over Q1 due to the strength of all three of our segments, which I will discuss in a moment. We also maintained very tight SG&A cost control as well as keeping our shop overhead cost down.

On Slide 16 we report our EBITDA and non-GAAP EPS trends, which again reflect the similar sequential improvement as our margins did resulting in a record quarterly non-GAAP EPS of $0.32 for the second quarter of 2015. Now moving on to our segment discussions, beginning with Slide 18.

Revenue in our environmental segment was $41.8 million, which is up 27% from $32.9 million in the prior year period. Bookings were $31 million driven primarily by our Emtrol-Buell global cyclone division business, as well as HEE Duall scrubbers and other environmental segment businesses.

On Slide 19, revenue in our energy segment was $27.3 million, which is up 62.5% from $16.8 million in the prior year period. This higher revenue was largely attributable to the Zhongli business. Bookings of 25 million remained robust, but were down slightly from the first quarter.

Continuing onto Slide 20, revenue in our fluid handling segment was $17.7 million, which is up 5.9% on a year-over-year basis and up 17% on a sequential basis. Bookings were also up 14.8% sequentially from the first quarter of 2015. This segment is on track and doing very well.

Turning to Slide 21, our balance sheet, cash and cash equivalents at the end of the quarter were $17.1 million versus $19.4 million at year end, a decrease of $2.3 million. Net debt to pro forma EBITDA was approximately 2x as of June 30, 2015.

Outstanding borrowings under our credit facilities and term loans were $111.7 million at June 30, 2015 compared to $112.4 million as December 31, 2014, a decrease of $0.3 million. Our effective tax rate in the quarter was approximately 46% compared to 29% during the same period last year.

This increase was attributable to a higher level of non-deductible expenses, which occurred in the current period from early deal costs and earn out versus the prior year period, as well as a higher portion of our income coming from higher tax jurisdictions. With that, I will turn the call back over to Jeff before we open it up to your questions..

Thanks Ed. We are pleased with CECO’s overall results in the quarter and year-to-date as we achieved record revenues and made significant progress on our operating performance in Q2 as compared to the prior quarter.

We are also optimistic about the remainder of the year, very focused on sales excellence given our solid backlog and operational excellence pathway. We continue to implement our strategic initiatives and build a great foundation to increase shareholder value in 2015 and beyond.

And the addition of PMFG is expected to play a critical role in that strategy. We have broader and stronger portfolio today than at any time in the history of the company, and I believe that we are very well positioned relative to our competitors around the world.

In conclusion, our focus remains on driving profitable growth and creating long-term shareholder value. I am very pleased with where our company is, our management team, and we continue to add key talented resources to our leadership team to help take us to the next level.

We have the right platform, rigorously focused, and the team in place to build CECO into a world class industrial technology company. I would now like to open it up for any questions you may have..

Thank you. [Operator Instructions] We will take our first from Tim Mulrooney with William Blair..

Good morning..

Good morning Tim..

A couple of questions this morning.

First of all, the organic revenue being flat in the quarter, does that include the impact from foreign currency?.

Yes, that is on a constant FX basis, yes..

Okay, so excluding the impact of foreign currency, organic revenue would be up?.

We are normalizing the local currencies year-over-year with FX. So yes, the FX is an important element of that organic comparison on a year-over-year basis. Our organic revenue is up in real terms year-over-year..

Okay. Okay, I understand.

Thank you, and did you guys give the number as to how much acquisitions contributed into the quarter overall, like how many millions of dollars?.

Yes, that is in the – we did mention on the call. That is on the press release. Yes, the acquisitions did contribute about $21 million in the second quarter and about $41.7 million on a six month basis for the year coming from acquisitions..

Okay, thank you.

And last question on organic growth, I know environmental was up 27% and energy was up 63%, but if you pulled Emtrol and Zhongli and all those companies out, can you share with us the organic growth rates for those two segments, excluding the impact of the acquisition?.

We disclosed it on a consolidated basis the organic business, with all the acquisitions through the segments, we were disclosing that on a consolidated basis not by segment..

Okay, understood. Thank you.

And lastly, in your prepared remarks, did I hear you guys say that you expect improvements in CECO China in the second half of the year, and if so can you talk a little bit about what gives you confidence that you can grow in a difficult operating environment?.

Well, we have added resources. We are maturing as a business deep into the industrial sectors. We continue to be bullish on what Zhongli is doing in the utility sector, and our leadership team feels they can book more business in the second half than they did in the first half. So we remain very invested and very focused on growing the market.

Keep in mind we have very low share in Asia. So there is a lot of upside and there is thousands and thousands of clients we’re not engaged with, but moving closer to do business with. So we’re expecting a little bit better in the second half in Asia.

And we also redefined our energy strategy with the Effox Zhongli branding and sales strategy, and they were a little bit slow in the first half, so we expect more energy business in the second half and some additional cyclone business. So, we are counting on more business in the second half out of China..

Got it. Thank you..

Let us take our next question from Gerry Sweeney with ROTH Capital..

Good morning everybody..

Good morning Gerry. .

Good morning Gerry. .

Could you go through the margins a little bit, obviously it was a very good sequential quarter-over-quarter improvement, and maybe break down how much of that margin improvement was an increase in aftermarket sales, I know you also had a large natural gas project in Saudi Arabia.

It was working its way through the system and then it sounds like you have fully integrated all the acquisitions made in the second half of ’14.

If you could break those out to sort of see how much impacted the margins if possible?.

Yes, what I will do Gerry is we have studied that and there was probably three or four principal things that gave us the margin uplift, both in gross profit and operating margin. First off, our fluid handling business had additional revenue and margin expansion in Q2.

Number two, there were several businesses that had a higher mix of aftermarket versus equipment. Number three, the Effox Flextor business had a stronger Q2 over Q1 and then there was a couple of environmental businesses that also had a stronger Q2. So it is probably four fundamental reasons why the margins picked up over Q1..

Okay, is that large natural gas project that we talked about in 1Q, is that completed in the second quarter or does that come into the third quarter at all?.

Yes, a part of it is remaining for Q3..

Okay, and then just talking about aftermarket that you mentioned there, what percentage of sales is aftermarket?.

Right now Ed and I have been studying that with our team. We are still in that one third area roughly speaking, as the business gets larger through acquisitions and the total revenue we are chasing this year. We still believe the aftermarket services, retrofit and anything other than new equipment is in the one third range..

Okay, so what you are also sort of saying there is as revenue is starting to grow, you are maintaining your after-market as a percentage of sales in around that 33%. So you’re getting some growth in that aftermarket as well..

Correct..

Okay, and then you did mention APC aftermarket, that that has been an area of a little bit of focus, I think there was some fertile ground, how much is APC in terms of aftermarket?.

Roughly the same, roughly the same Gerry that, there is a lot of things we are doing to grow aftermarket. We have invested additional leadership principally to make sure the strategy is moving down the track properly.

We have probably added a dozen aftermarket resources this year in our business both inside sales versus external sales for the IT organization to ensure that we have the right installed base data in every business. So we know where to chase existing customers or a drifted customer or a customer that has slowed or those that are expanding.

And five, we have upgraded the compensation strategy and we now view the business as – each business leader has an engineered equipment growth strategy globally and separately and aftermarket reoccurring revenue strategy. So there is a lot of things we are doing that is very exciting around aftermarket..

Okay, I appreciate it. I will jump back in line..

Thank you..

We will take our next question from John Quealy with Canaccord Genuity..

Hi, good morning folks and nice job on the quarter. So first Jeff can we go back to China for a moment, I mean, all the macro indicators that many of us see are suggesting China very slow industrial from a macro perspective, can you give us a little bit more granularity about how you feel comfortable and confident that you will do better than that.

I realized you are a microcosm of the Chinese economy, but several data points suggest that China is really going to slow industrial for the next several quarters, and I have a follow-up. Thanks..

Lastly it slowed in the first half, and it is going to continue slowing in the second half. But I think from a larger context we view the opportunity to grow the Asian market has one of our top three growth initiatives.

We have got a lot of good businesses in there and with the PFMG business we will have more products to sell, more opportunities to build products at a lower cost, and leverage the sales channel. Thirdly, there is probably more manufacturing plants in that region than there are anywhere else in the world and we have very low share.

So the opportunity is a lot of upside for us to sell the CECO Environmental products into those plants. We have been there a decade. It has been principally organic growth other than last year with Zhongli and SATTi and now with the PFMG expansion. There is just a lot of upside for us to grow.

We pick up a new customer here, a new customer there and then the fifth piece is there is a lot of – besides chasing the in-country China national customer, which we see a lot of upside to grow, there is a lot of multinational companies that are stationed there and set up camp there to buy equipment for China and around the Asian Rim.

So there is a host of reasons for us to be there and we are very committed to growing that and I could remember when we did a few million dollars in China. Now I think within a few years we can get to $100 million. So there is a lot of upside for us..

And I guess maybe the lengths that you are looking at is 12 months plus to achieve some of those things that you outlined, right, rather than close PFMG September, and then by December we see out performance vis-à-vis the Chinese economy, is that the way you interpret what you are saying?.

Well, we are viewing the Asian strategy as a long-term growth strategy. That is how we view that. The investments we have made in sales, resources, leadership, plant manufacturing is long term. Yes, we had a bit of a cool down in the first half and it is probably going to be a little cool down in the second half.

But there is still a lot of opportunities for us to grow. I’m looking out three years and I am thinking we should be able to pull $100 million of revenue from the Asian region just because of our low market share and the opportunities we have with our products, the vast manufacturing footprint there and what we’re going to do with PFMG.

So I’m thinking out many years from now, but we are expecting betterment in the second half, and ’16 and ’17 as well. So we’re viewing this as a long term investment regardless of what the economy is doing this year..

Okay, and then lastly just on the environmental segment, it looks like you got a nice chunky order in Q3, so far in the US refinery, can you comment on was that delayed previously with the falloff in oil or can you just give us some context, is that market perhaps a little bit more robust for you guys moving forward just some context there? Thanks guys..

Yes, sure. The global refinery sector is doing very well. It is probably one of our top three growing markets this year. So the global refinery sector is doing very well, and that was a very nice order, the Emtrol-Buell team did and the collaborative efforts. So my congratulations to the team there.

And yes, we were hoping that we would have pulled that in June and that would have helped us achieve our growth objectives for the quarter. But either way it was an excellent order and we continue to see more upside from the Emtrol-Buell cyclone division for the remainder of the year and next year.

So yes, thanks for mentioning that, but yes it would have been nice to pull that in June, but we’re happy in Q3 that we got it..

[Operator Instructions] We will take our next from Scott Graham with Jefferies..

Hi, good morning..

Hi Scott..

I just wanted to revisit the first question on the organic growth, because I was pretty sure I either read or heard you guys say – I read actually constant currency organic revenue, constant currency which would imply that that is – that excludes FX, in other words, that is organic, then I thought I heard you say something different on this call..

Yes, we computed the organic revenue growth on a constant currency basis. So we just normalize the FX rate year-over-year in order to compute the actual variance year-to-year on an apples-to-apples basis. So we are disclosing organic revenue growth on a constant currency basis year-over-year..

So in other words flat that is what you are saying?.

Flat for the second quarter, yes..

Right, okay. Thank you.

The other question I have is can you guys provide us the income from operations from the three segments, I didn’t see that anywhere?.

That will be out shortly. The 10-Q will be filed if not later today first thing tomorrow. That will be in the 10-Q, you will see the full segment disclosures..

Okay, got you, last question.

I know you indicated Jeff that China sales moderated, did China sales decline?.

I think they are probably close to last year’s level, maybe a little bit below, but they did not meet our expectations for what we budgeted for in the first half. So we did not meet our revenue and operating income targets for legacy CECO China. However, the Zhongli business outperformed the revenue and operating income from a year ago.

So Zhongli is over-performing and CECO China has – is a little bit slow right now. And it is principally in two areas, but we think we are going to rebound a little bit in the second half within the energy sector and some of the cyclone activity, but yes, make no mistake, CECO China did not meet our expectations in the first half..

Right, I expected that.

Is China for you in total a lower or higher gross margin market than the corporate average?.

About the same..

About the same.

So the decline in gross margin was then – on a year-over-year basis was simply a function of acquisitions or I know that acquisition had an impact last quarter, again this quarter yes?.

I’m sorry Shawn. I didn’t hear that last part. There was some breakup in the phone..

Yes. Hi. I was just – this is Scott Graham.

So I was just asking the gross margin on a year-over-year basis, I believe was down and was that because of acquisitions?.

The operating margin if you look at Zhongli and CECO China in what we’re doing I would say the operating margins are pretty solid combined because Zhongli over-performed and CECO China did not have the revenue mix we were expecting.

But there was a decline in CECO China rev and gross profit in the first half compared to the previous year and compared to what our expectations were for the business..

Right.

Okay, so I’m just trying to understand what you’re saying, so the declining gross margin was a function of – more of a function of the weakness in the legacy china business, not acquisitions?.

Correct..

Right because last quarter, if I remember it correctly, your gross margin was way down, and it was largely blamed on acquisitions.

So if that is the case what happened from last quarter to this quarter because that would have been obviously quite an improvement or was that seasonal, what happened with the acquisitions where they were not dilutive to the gross margin this quarter?.

Well, first off, regarding the China acquisitions, Zhongli, which was the principal acquisition they performed well in Q1 and they performed well in Q2. Regarding – there was a small acquisition called SATTi, roughly a $5 million, $6 million dollar business. They performed better in Q2 than Q1. But it was a very small business generally speaking.

Thirdly, pretty much China has been low in revenue and low on gross profit for the first half both in Q1 and Q2..

Understood. Okay. Thank you..

Thank you..

We will take our next question from Jeff Osborne with Cowen and Co..

Good morning guys.

Most of the question have been answered, but, I just wanted to focus on OpEx, how should we think about the trajectory there in the second half with all the integration going on, any comments there would certainly be helpful from a modeling perspective, and then for Ed is there any one-time charges here in the third quarter that we should be thinking about from GAAP perspective or any cash charges through the integration?.

I think the Q3 numbers are going to be pretty close to where they were in Q2. On an SG&A perspective given some of our investments in sales and resources and growth talent, we probably could pick up half a point of SG&A in Q3 and potentially half a point of SG&A in Q4 for the CECO business.

Regarding PFMG, that will pick – the integration will take place in September. So we will probably pull in a month of PFMG into our Q3 numbers and we are going to have to communicate those once we close.

But that will have an impact on our Q3 numbers, but regarding the consensus that is being published on CECO, we believe those – we feel pretty comfortable around those numbers Jeff. Regarding your question on one-time expenses, there might be a couple..

Yes, you will see obviously a deal closing. You will see a significant amount of investment banker [et cetera] fees hitting in the Q3 upon consummation and closing. There was a modest amount of acquisition expenses here in Q2 of just under a million dollars as you will see in the P&L.

There will be significantly more in Q3 upon consummation and closing, which will clearly delineate them from the recurring OpEx SG&A run rate basis will clearly delineate the pieces that will be triggered by the deal itself..

Got you, and there is no facility closures or any cash charges at the time of close?.

Not right now..

No..

Got you. Thanks much..

Thank you..

And there are no further questions. I would like to turn it back to our speakers for any additional or closing remarks..

Thank you very much for your participation today, and we look forward to talking with you in the future..

That concludes our conference for today. Thank you for your participation..