Dennis Sadlowski - CEO Matt Eckl - CFO.

Kyle Dickie - William Blair Gerry Sweeney - ROTH Capital Partners Sean Hannan - Needham.

Greetings, and welcome to the CECO Environmental Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Mr. Matt Eckl, Chief Financial Officer for CECO. Thank you, Mr. Eckl. You may now begin..

Thank you for joining us on the CECO Environmental second quarter 2017 conference call. On the call today are Dennis Sadlowski, Chief Executive Officer; and myself Matt Eckl, Chief Financial Officer. Before we begin, I would 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 website at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the website. I would also like to caution investors regarding forward-looking statements.

Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements.

We encourage you to read the risks described in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2016.

Except to the extent required by applicable securities laws, we undertakes no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today’s presentation will also include references to certain non-GAAP financial measures.

We have reconciled the comparable GAAP and non-GAAP numbers in today’s press release as well as the supplemental tables in the back of the slide deck. And now, I'll turn the call over to Dennis..

Thank you, Matt, and good morning everyone. I'm extremely pleased to have been selected by the Board of CECO as the Company's full-time CEO and I'm excited about the Company's future potential because their products and technologies and especially our people are world-class.

I'm working closely with the Board and the senior leadership team to execute our strategic plans so that we maximize customer value and increase shareholder returns. This morning I want to discuss three areas of interest. I’ll begin with a summary of our second quarter financial performance, with Matt providing the details in a few minutes.

And I'll highlight several of the key actions that we've undertaken to transform how we do business and exploit our strengths in a fragmented marketplace. And finally, I’ll share some insights on the roadmap for sustainable growth that we're creating with the aim of a rollout before year ends. So let’s talk about the quarter starting with Page 3.

Given the softer marketplace in a few key segments we're operating in, and three specific items realized in the quarter, our second quarter 2017 financial performance didn't meet our desired results and remains below our future potential.

When I reflect on the quarter's results, bookings of $87 million and revenue of $94 million so on the one hand disappointing but in the context of the slowdown in some of our core markets and our improved win rates, I think we executed well in many corners of CECO.

The quarter began with the promise of a burgeoning pipeline in several businesses so we expected to do better but as the quarter continued more push-out often into Q4, dampen that optimism. Gross margins held relatively strong in spite of a few charges in the quarter for project overruns.

We outperformed last year in both GAAP and non-GAAP gross margins, even when we were not at our best. Going forward, the slowing market may bring additional pressure that our team is preparing to manage.

Finally, adjusted EBITDA of $11 million on reduced sales reflects some of the resilience of our asset like business model but here too we didn't fully demonstrate our potential. Turning to Page 4, it’s clear that our second quarter performance was influenced by softer market conditions.

Specifically half of our end markets are in a significant cyclical decline even while the long-term market prospects remain positive. Most notably the demand for new natural gas-fired power generating facilities has declined.

Both GE and Siemens the market leaders in gas turbines are experiencing a decline in the market demand by as much as 10% in 2017, and they're expecting the slowdown to continue into 2018. Further, the market for SEC cyclones is going through a 30-year bottoming. Oil refineries are operating at record high 91% utilization rate.

With oil prices and forecast still uncertain, delayed turnarounds and extended life efforts result in reduced CapEx spend coming our way. Our win rates remain at the top of our historical performance.

We have decent visibility into customer plans and expectations are that this market segment will begin returning to a traditional demand levels during 2018. Other end markets in the diversified industrial production marketplace however are showing some positive signals.

This is helping our short cycle business performance in fluid handling, and also providing opportunities for industrial air quality solutions across the environmental segment.

Our customers in these areas are seeking to grow and as they grow, we remain well-suited to help them with clean safe and more efficient solutions that protect people and safeguard the environment. Moving on to Page 5, there are clear signs that our increased customer focus and go-to-market efforts are gaining traction.

We've had four consecutive quarters of fluid handling and filtration orders growth and three consecutive quarters of energy segment orders growth. I'm also pleased that in the quarter we secured three first-time customer wins in energy.

A new Peerless SCR customer in the U.S., a new aarding gas turbine exhaust win from Asia, and a new geothermal separator win in Indonesia, all once again demonstrate the global reach in key mark across CECO. In many of our businesses, our win percentages are improving, most notably within Peerless and Emtrol Buell.

Taken together this suggests that we're gaining market share in a challenging environment and accompanied by the improved U.S. industrial outlook, is why we believe that our second quarter performance is not indicative of our future potential.

Our second quarter results were also influenced by three specific items realized in the quarter as shown on Page 6. The three items were initiated to assure continued transparency. Again Matt will elaborate further on these but I want to highlight them upfront. First, we upgraded the standards we use for determining firm orders and backlog.

This resulted in the removal of dormant projects that didn't meet our new standard for active orders and along with a couple of coincident customer cancellations, we tolled $9.7 million in the de-bookings during the second quarter.

I’ll note that because many of these projects were dormant, the de-bookings have only a limited effect on our near term outlook. Second, we incurred a charge and increased our warranty reserve. We did so to reflect the performance issue discovered on our project with a unique bracket design from 2012 that is combined to a single customer.

I want to emphasize that this action represents more than a contractual requirement. It is also an important reminder to our customers of our brand integrity that we stand behind our products and performance commitments. And third, we reflected a fair value adjustment to ours only earn-out reflecting lower expected performance in 2017.

This change resulted in a 5.6 million non-cash gain on a GAAP basis. China is an important market and we remain committed to it for long-term. While the POWER-GEN investments slowdown underway and the shift away from coal, we're adapting much of our efforts in China to air quality improvement and export projects.

I’m calling attention to these three items to ensure we demonstrate our commitment to integrity and balance in our reporting. I can't say that I am satisfied with the outcomes because we can perform better. And certainly we’ll maintain transparency with the bar high.

Moving ahead to Page 7, we're taking sustained efforts to change the way we do business. There are a few of the more significant ones. The first is to ensure our investors that we're consistently transparent. The second quarter actions I just mentioned like realigning our backlog and increasing our warranty reserve are good examples of this posture.

We've adopted an outside end approach to customers to serve as a catalyst for organic growth engine. Our aim is to match our substantial reach and capability with a coordinated and sustained effort to achieve continual customer connectivity across all of our segments.

This is an effort that will take a while to penetrate the marketplace and has to be firmly entrenched in our culture. We are also addressing employee turnover which has been unacceptable and very costly to the company. In my mind, this situation was completely avoidable.

We're remaking CECO to be a place filled with engaged leaders shaping the industry. And while the turnover hasn't been completely brought to a satisfactory level, I’m confident that we're already turning the corner.

I say that because very talented employees like Bill Frank and Garrett Tobin in our Bush business are now back with us and we're speaking with others who are seeking to do the same. One of our biggest moves is to focus on our planting or harvesting approach to drive organic growth engine.

We must make parallel investments to secure our future in processes and equipment, as well as the development of innovative products. The pay-off from these is intended to maximize customer value and increase shareholder returns and we've already seen that.

An example of this is the investment we made to design a new portable natural gas separation system. These systems can be moved from site to site making them very attractive to operators as they reduce the need to invest capital and redundant treatment units.

With only a modest innovation investment, we're now in line for an additional $3 million to $5 million per year new revenue. You can read more about this innovation in the July 2017 edition of gas compression magazine where our expert Don Fisher's white paper made the front cover.

Recently we accelerated several aspects of our efforts to transform how we do business which are highlighted on Page 8. Our entire team is committed to this transformation. I'd like to highlight some actions that reflect this acceleration. Since I was confirmed as full-time CEO in June, I made several changes to our leadership team.

Two exits, two adds, and one redeployment. I have chosen to personally take on the leadership role as the president of our environmental technology segment will continue to do so for the foreseeable future.

This is a segment that has considerable untapped potential as we move from a fragmented approach to one leveraging our full suite of solutions, taking on this role to more quickly jump starter effort to become the undisputed front runner in air quality improvement.

Key amongst the team additions is Mike McCalley, who recently joined us as Vice President of Strategic Planning and Marketing which is a new position focused on exploiting our competitive advantages with the renewed intensity.

He has been tasked with coordinating and consolidating our brand billing efforts, to help us rise above the competition in our fragmented marketplace. Historically, we've achieved success by essentially responding to regulatory demand. We engaged our clients on the basis of discrete transactions within a specific operating segment.

In other words, we've been a fragmented player in a fragmented market. It's an operating mode that inherently restrains organic growth especially when some of our end markets are in a cyclical downturn. And so, we're no longer letting the market come to us instead we’re taking it an aggressive go-to-market approach.

Another key building block of this approach is to focus really focus on lifecycle engagements from new products and solutions to aftermarket services. We made some good progress on aftermarket under leadership of Steve Fritz and we're improving our OE team performance.

So bringing both together for full lifecycle support will enhance the value we bring to customers. All of these actions accelerating the way we do business will require focus, time and effort to succeed in realizing our future potential.

Having said that, it's clear to me that the CECO organization appreciates their importance and is embracing our strategy. And speaking about strategy while turning to Page 9, we are in the home stretch to create an actionable roadmap for sustainable growth over the long-term.

While the roadmap is clearly forward-looking, it's anchored to the strong operating foundation that the company is built over the last few years.

I don't want to get too specific right now because there's still some work on finalizing the strategic plan but I want to wrap up my comments today by highlighting the clarity and strength of the roadmap and our path forward. The roadmap will be owned by our business leaders.

It means that it's both actionable and achievable with milestones and accountability across the company that aligns, enables and empowers us to deliver on our prioritize investments. The process has been structured to support a business that's responsive and flexible in anticipation of market conditions so that we stay ahead of the curve.

In looking forward, our roadmap addresses key market drivers with both national and global significance. These drivers are based on change that is almost certain to happen, the variables, our timing and magnitude. Here is a couple of examples.

The first driver is the undeniable enduring relationship between industrial expansion and economic growth and increase production and potential release of unwanted emissions. Our air quality products, services and solutions help enable economic growth and industrial expansion while protecting people and the environment.

And so our role in air quality improvement is fully aligned to supporting our industrial customers' growth. We also believe that air quality improvement is more than a regulatory requirement and has also become our customer's corporate commitment. It's a key area of sustainability beyond carbon footprint reporting in effects.

Second driver is the recognition that the energy markets are undergoing a transformation, away from fossil fuels to renewable sources of energy. Undeniably natural gas will continue to be the bridge fuel to support that transformation.

This is why we continue to invest in natural gas solutions by having already resized our coal business to focus exclusively on the aftermarket.

Our energy segment does not currently serves the renewables market directly in a significant way but other segments are increasing the focus on solutions that support the growth of industrial manufacturing companies that do serve renewable energy solutions directly.

Our industrial cyclones are essential in delivering the purity of polycrystalline silicon for the rapidly expanding photovoltaic solar production. And our air quality improvement technologies show the safe clean production of lead acid and lithium-ion batteries that are playing an important role in this energy transformation.

In summary, I believe that while our second quarter results did not meet our targets, they are not indicative of our future potential. In our efforts to transform how we do business and exploit our strength in a fragmented marketplace are gaining traction across our brands.

I look forward later this year to sharing with you the output of our strategic roadmap for sustained growth. I’ll now turn the call over to Matt Eckl, our Chief Financial Officer.

Matt?.

Thank you, Dennis. I'll now discuss highlights of our recent performance adding color as we walk through slides. Detail will include both GAAP and non-GAAP performance for the second quarter and six months of 2017 for our consolidated CECO results and three individual segments. As a reminder, a bridge of non-GAAP items is referenced in the appendix.

Starting with Page 10, I'll cover 2Q '17 stated on a GAAP and non-GAAP basis. We had lower than desired overall results but as Dennis said, we don't believe the second quarter is indicative of our future potential.

Orders were up modestly for the third straight quarter at $87.2 million but down 20% or $22 million year-over-year of which 19.5 is driven by our Emtrol-Buell refinery base business that is experiencing a severe market trough.

Revenue at $93.9 million was down 16% year-over-year due to reduced backlog primarily from a few large service contracts executed in Q2 of the prior-year. Revenue improved slightly on a sequential basis due to growth in our short cycle business.

Non-GAAP gross margins were 32.4% and up 2.1 point year-over-year on project mix and structural cost reduction initiated in second half of 2016. Q2 non-GAAP operating income was $9.4 million or 10% of sales which is down $3.6 million or 1.6 points year-on-year.

Revenue decline of $18 million year-over-year impacted operating income by $6 million offset by $3 million of structural cost reductions. Non-GAAP diluted earnings per share was $0.08 compared with $0.21 in Q2 '16. Cash flow from operations was unsatisfactory in the quarter with the use of cash totaling $3 million.

It is important to note that 4.4 of 11.8 paid in Q2 for the 2016 Zhongli earn-out is recorded in CFOA. Included in our GAAP operating income was a $5.6 million gain from a fair value adjustment of our 2017 Zhongli net liability. We're seeing a slowdown in the China market due to overcapacity negatively impacting our near-term projections.

We have excluded this non-cash gain from our non-GAAP results. The next Page 11 summarizes our year-to-date financials. First half '17 orders were $171.2 million and down 25% or $58 million year-over-year. $33 million of the decline is from our refinery products and $20 million of the decline is from our power generation end markets.

These are significant market declines year-over-year and we're fortunate that our asset life model provided us some protection. Our improving win rates and sequential improvement in energy bookings however are not enough to offset market softness.

To add some color, I recently met with two of our exhaust emissions equipment customers in Louisville and Houston. Both described the natural gas turbine market as temporarily saturated with mega voltage driven by cold and net gas conversion that took place between 2015 and 2016.

Both reaffirmed their belief that nat-gas will take the lion's share of the power generation consumption mix in the future and that CECO is aarding Emtrol-Buell brands with strong players. Revenue of $186.5 million through the first half was down 13% year-over-year.

The decline similar to orders is distributed to refinery and power generation products. Non-GAAP gross profit was $62.7 million or 33.6% which is up three points year-over-year driven by structural cost actions taken last year and project mix.

Non-GAAP operating income was $19.5 million or 10.5% which is down 60 bps year-over-year primarily on lower volume. Non-GAAP diluted earnings per share was $0.29 compared with $0.39 year-to-date 2016. Cash flow from operations on a year-to-date basis was a $1.7 million source of cash.

It's important to note that $6.6 million of the 14 million paid year-to-date for the 2015 and 2016 Zhongli earn-outs are recorded in CFOA. Turning to Page 12, you'll see that our ending backlog stands at $168 million. During the quarter we placed the final land over our backlog evaluating each projects level of activity and substantiation for booking.

Through this process, we have internally raised the bar which constitutes a firm order. The result was removal of $9.7 million of vital backlog. Most of these de-bookings were not firm cancellation but dormant until financing could be arranged by our customer. It's our endeavor to always be clear about the health of our backlog.

We've already spent time on bookings performance and several larger markets are experiencing cyclical softness, so we still have much to do. While I'm confident in is the fact that we're taking the right steps to transform CECO into a commercially oriented organization.

Touching on our revenue trend on Page 13, you can see we're down year-on-year on reduced backlog and flat sequentially. In the quarter, aftermarket was 28% of revenue. On a year-to-date basis, aftermarket is 30% of our revenue. Looking at Page 14, Q2 gross margin of 32.4% were solid but below our potential.

Within Q2 our energy segment incurred $1.3 million of cost overruns on a complex and remote location project eroding non-GAAP margins by 1.4 points. During this work, the team identified an engineer bracket that had cracked under operational stress and required replacement.

After an extensive technical evaluation, it was concluded that the bracket was unique 2012 designed specific to a single customer on a limited number of sites. The bracket design had been discontinued.

At the conclusion of Q2, we assessed the extent of our exposure and based on best information available, we reserved $1.8 million to repair this legacy bracket issue. Within our non-GAAP measures we get exclude this bracket issue.

We have historically had limited issues with respect to field rework, but we do stand by on our commitments to maintain customer loyalty. Non-GAAP operating margins were 10% of sales which were down 1.6 points year-over-year and 100 bps sequentially.

Margin rates are lower primarily due to volume with the benefit of prior year cost actions more than offsetting the energy project overrun I just mentioned. Turning to Page 15, we achieved $11 million of adjusted EBITDA or 11.7% of sales. Compared to Q2 of '16 we were down $4.5 million or 2.1 points which is primarily related to volume compression.

Sequentially, our EBITDA is down $700,000 or 90 bps on lower gross margins. Non-GAAP SG&A of $21 million is flat year-to-year and improved $1.2 million sequentially from Q1s performance. We believe we have opportunities to improve on SG&A by rationalizing our 13 ERPs and 60 plus legal entities.

This is an investment and simplification we'll make coming out of the strategy with fresh process. Moving on to our segment discussion beginning on Page 16, energy bookings of $47.7 million are up 16% year-over-year and 17% sequentially.

While three consecutive quarters of growth is the right trajectory, our optimism remains cautious based on where our POWER-GEN customers are in their cycle. Continued sequential growth will require that we continue our share gain trend.

Our pressure products division that serves the midstream oil and gas market has been encouraging as we're seeing our Middle East opportunities growing. Revenue in our energy segment was $37.4 million down 29% versus strong Q2 in 2016.

Moving to environmental, bookings of $21.5 million in the quarter are far less than to be desired and down 59% year-over-year and 18% sequentially. We thought it would be prudent to break out the Emtrol-Buell SEC cyclone business on Page 17 to demonstrate the magnitude of the refinery market trend.

We recently held a deep dive with our Emtrol-Buell team. The leadership team has 150 plus years in the industry led by Tony Schmitz, a former owner with 35 years experience himself. He knows the industry front to back, we know the market participants and we know we see all RFPs globally.

We are certain we have a commanding market position but in a very difficult stretch. Tony would tell you we're in a trough not seen since the 1980s oil crisis. He would also tell you his optimistic of opportunities in 2018 and 2019 as refinery turnarounds will increase.

Encouragingly, Valero Energy, a refinery powerhouse in the recent 10-Q anticipates to increase CapEx of approximately 30% next year. Our final segment is fluid handling and filtration represented on Page 18. Bookings at $18 million were up 22% year-over-year and 5% sequentially.

I'm pleased to report a fourth consecutive quarter of bookings improvement in this segment. This business has been through a challenging few years and I'm happy that this team is seeing success with favorable end markets.

The margin in fluid handling are the highest of our three segments and we believe our pumps business is one that deserves greater attention or reinvestment for the future. On Page 19, we illustrate our continued focus on debt reduction. In Q2, we paid down $5 million of debt and 2x our minimum required payment.

In addition, we proactively worked with our lenders to amend our credit agreement. We clarified definitions that both improved bank defined EBITDA and reduce debt to better align how the banks view our business. These changes contributed to the improvement in our Q2 leverage ratio to 2.3x.

In addition we extended our 3.25x leverage ratio of ceiling through Q1 of 2019. I want to reiterate that we have a strong partnership with our banking team and still have flexibility if conditions ever warranted.

Touching on cash flow presented on Page 20, we reconciled CFOA to adjusted net free cash flow to clearly show the impact of earn-out payments associated with Zhongli and Aarding that were made in Q2 and first half of 2017. Our final Page 21 is a view of our condensed balance sheet.

We've called out trade working capital as important metric that are teams are internally measured on. As of Q2, our trade working capital is $54 million or 14.5% of sales and below our capabilities.

While you’ve seen improvement in our inventory turns with our fluid handling business picking up, our second half '17 will be focused on timing of project milestone billings, and an intense focus on our China accounts receivables. In closing, Q2 was a mix of good news and bad news. It's clear we have work to do but we know what to do and how to do it.

I’m excited because of the many opportunities I had, I look forward to updating you on our progress in Q3. With that, I’ll turn the call back to Dennis for closing remarks. Thanks Matt.

Before I open the call up for questions, let me wrap up by saying that together with Matt and the rest of the CECO management team, we believe in the company's potential. I remain confident that through our intense efforts to deliver customer value will also create strong shareholder returns.

We’re managing through some softer than anticipated end markets but continue to raise the bar of expectation for a bigger, stronger, more impactful CECO in the future. And with that, I'd now like to turn the call over to the operator to take your questions..

[Operator Instructions] Our first question is from Kyle Dickie of William Blair. Please go ahead..

For the $9.7 million in orders that were taken out of backlog.

Can you just provide a little more detail on that how dormant were those orders, what end markets where they in and did you say that to the customers as - they need financing in order for you to come back or just little more detail there?.

For the $9.7 million approximately $3 million of the de-bookings were related to cancellations, a portion related to change in project specifications that required by customer to revisit the project, and the remainder is driven by a changes in market assumptions.

To answer your other question, I think you asked around the de-bookings was, how long have they been dormant and I’d say that, they are beyond our 18 month timeline from an activity level standpoint.

We do believe that some of those and a large chunk of those could come back into backlog once the customer is able to raise the financing for that project..

I know you talked a little bit about kind of from a employee turnover issues you’ve had.

Is that being kind of at all levels of the organization and do you think that’s impacted topline growth at all?.

So, the issue that I spoke to around turnover does have a fairly lengthy tail to it.

So, right at the outset, one of the things we’ve been addressing is really rebuilding the organization in a way to focus outside in to get people energized about solutions that help customers and using that to really build and motivate people, who care about the industry, who can impact the industry and those are kind of guys we have in all levels of the company.

The fact is that, we had some turnover that we would otherwise call regrettable and it probably did impact some of our potential in the past. Its why put a great attention on air. It’s why I am pretty optimistic that we’re turning the corner there.

And I think some of the changes of why we’re seeing people trying to find their way back to the company, some of our former talented guys..

And then just last one from me.

Can you talk about your aftermarket connectivity? What level is it kind of currently at or how high could it get and how long do you think it will take to get there?.

So, I mentioned on the call that aftermarket, the percentage of revenue was 28% in the quarter, 30% versus last year. On our first half basis, 30% of our total revenue was aftermarket.

Does that answer your question or are you asking what target we’d like to get to?.

Correct.

Yes, just kind of what target, do you think you can get to and what point, how long do you think it takes get there?.

I think what we spoke to in past quarters was that we activity - connectivity by actually kind of order in the last 12 month on some of our $5 billion of installed base was in the neighborhood of 10%, you know a low teens, and we think that best-in-class could get into the 30s perhaps a little higher than that.

And so, that's why we continue to be optimistic while we continue to employ people, while we continue to look at engineering solutions that enhance the customer's investment and are making good progress there..

Thanks. That’s it for me..

There is a real benefit as well Kyle that I would add of course with our aftermarket and then it builds the stickiness with our customer relationships and brings us a lot closer to the end users.

Lot of our sales end up going through an OE intermediary, perhaps an engineered construct intermediary and so, our aftermarket effort also rebuilds that stickiness where the installed base is, where the ultimate users are of our products..

[Operator Instructions] And our next question is from Gerry Sweeney of ROTH Capital Partners. Please go ahead..

Thanks for all the detail. I apologize I was jumping around a little bit, but I’m not sure if you covered it this exactly.

But taking a look back over the years, CECO has always been a little bit more challenging on the organic growth side of the equation and obviously I think this is something that you’ve been talking about addressing, in particular, what the outside and mantra.

And I assume that also assumes connecting better communications with your clients and also moving more from a product sale to a solution based sale and to help achieve better sales et cetera.

What do we need to get there? Do you need more boots on the ground, do you need more internal? Are we going to look at maybe some lower gross margins on a go forward basis as you build out some of these organic sales initiatives? I'm not sure if you're exactly at that point where you can discuss it, but I want to see what you can give us at this point..

So, first off, I’d say you’re correct. Organic growth has been a big part of the focus this year. And when I think about the results as I talked about, they didn't meet the targets that we set for ourselves and they’re still below what I believe our future potential is.

That said, the first thing that we need is probably a little better market conditions in some of our business.

33 million coming from our Emtrol-Buell business alone that we highlighted year-to-date on bookings, they're big number and that's in a market where we believe we’re the leading market share player, have a great business, see most of the worldwide demand and our hit rates are up.

So I can't do too much about that outside of continue to support a strong business and get us through this trough as it gets back.

The other items that we're doing and we’re seeing some traction from and give us the reason why we have optimism is that we do have much better global teamwork and energy attacking global projects with strong technical capability. That's driving our hit rates up.

We have continued to add slices of technical capability particularly when we think about our Peerless pressure products and new applications and separation for projects going on in the Middle East even with the moderated oil prices. And in air quality, I talked about it.

A big part of the potential that I see, that our team sees is reorienting from the fragmented approach we’ve taken in the past due to really stepping up as a leader in air quality.

As we think about being a leader in air quality, industrial air quality, it is about approaching customers with that and applying a variety of the different solutions we have depending on the type of problems that they need us to help remediate as they grow. And those things are part of the solution that we’re seeing.

This gives us optimism because we’re seeing that in our hit rates..

And then on the fluid handling, obviously, I mean excellent margins always. I haven’t seen the Q this quarter, but historically, very good margins. And there was a little bit of a push in that business to move into Europe.

Is that move part of the benefit in the uptick in backlog and bookings for that business?.

Yes, fluid handling, we're seeing good execution and better market conditions both. So we’re pretty pleased there. And you're right. In terms of how it affects our overall margin mix, fluid handling has been a contributor to the margin mix for the overall company. So it’s a good thing.

We do have efforts, specifically with Jerry D'Alterio, focusing on the global growth there of the business, and we saw a good traction in the first quarter. We’re seeing good activity continuing in the second quarter. So I expect that that will continue. It is from a relatively small base though, Gerry. You probably know that.

So the growth numbers are actually pretty substantial when you look at them on a relative basis. On an absolute basis, it’s still a fairly small number for us..

Yes, I mean that business has always been very niche so there's always an opportunity to expand it and there's probably a big opportunity to expand globally in that business not only I think geographically but I would assume also into some other additional end markets adjacent end markets..

Yes, we've added people in both Europe and the Middle East to do just that..

And then Matt, this is probably more for you, this is just a quickie easy question.

On the debt updates that you gave us, any costs associated with that or was that just a standard move by the banks or allowed to do without charging normal like that they like to do sometimes?.

Yes, it’s noted in our Q that will be published later today but it was not material..

[Operator Instructions] And the next question is from Sean Hannan of Needham. Please go ahead..

I apologize some of this might be a little repetitive and perhaps I miss this now. Your bookings are picking up slightly for the second consecutive quarter here so that’s good sign. We’ve been pulling out of backlog of course.

So just trying to get a better understanding of how we should think about the revenue trends from the second quarter here as we go into third and fourth quarter directionally at this point?.

Yes, so first thing I would say is yes, we have three consecutive quarters of improved bookings overall in this case pretty modest from our first quarter results. And the good news is four consecutive quarters of growing bookings and fluid handling and filtration, similarly three in energy.

And those are good signs especially considering some of the market conditions that I noted in gas turbine placements. That said we have been below 90 million I think for three quarters as well and so the second half outlook will certainly be taking that into account..

So should we interrupt that as second half outlook will be weaker than the first?.

So, what we were thinking most recently Sean and that is, as you know we don't give guidance, but what we were thinking that the year would continue to progress on a bookings level kind of quarter-over-quarter, I still think that potential is in front of us even with some of the push-out and some of the headwinds that we have based on our ability to execute in the market and continue with the improved hits rates and wins rates exactly how that translates to the second half sales from our starting point is going to also be a challenge.

So you’re well aware that we have a lot of our business on POC revenue recognition and that tends to smoothen out some of the history as well..

On the OpEx front and Matt perhaps this is for you, so could you size or give us some perspective around any incremental optimizing you could implement within the model or within the business in pulling out some costs say versus the level of investments you might be making in turning this around.

Just trying to understand some of the puts and takes for what contributes to the progress of SG&A from here?.

So SG&A as of Q2 was 23% of sales it's - we recognize that, but we see this more of a topline issue versus cost issue but I think to your point what we’re focused on shifting our cost from G&A to selling and being BD or business development. And I think Dennis touched on this earlier, we need to be more customer oriented.

Simplification comes into practice here. I mentioned on the call, we have 13 ERPs of which six of those are in the United States alone. So you can imagine the amount of cost structure that goes into administering those systems. So we think there is a benefit that comes along with reducing those and we think there is an investment need to be made.

We’re sizing how big that investment is right now. And I like to take that cost and pump it back into the selling side and our BD side of the business..

And then last question here. There’s certainly been some mentioning around the hit rates. Is there a way, Dennis, if you could share with us, or Matt as well, something to characterize the outreach or bid activity versus prior quarters. And where do you feel your win rates or hit rates are today and how they’re moving..

So, it’s very difficult, John, to aggregate kind of the information we have in a way that is perfectly meaningful for you guys because of the nature of the different units and how they impact our outlook.

Emtrol's hit rate we'll just say are always very, very good historically and they are getting better in the current market that's translated to a 33 million year-over-year decline in bookings for the first half. Not much I can do about that.

What we’re seeing again, the activity - and the way we measure our hit rates in the like are projects that are active and bid that either have been awarded to us or to a competitor, that's our win rate. Some of those might be abandoned. And in the most recent quarter, we have a lot of things pushed out as delays. So those don't go into the calculation.

We’re just looking on close projects. Because there's also some timing issues on feedback, perhaps a delay, perhaps an abandoned project, that either didn't pass funding or somebody decided on certain of the risk factors that maybe will push this out and started over again, it is a little harder for to translate that perfectly for you guys.

It's one of the goals we have so that we could help you understand what we're seeing as well..

[Operator Instructions] It appears we have no further questions in the queue at this time. I would like to turn the conference back over to management for closing comments..

Okay. Well, thank you and thanks all of you for joining us. I’ll say again that the results in the second quarter did not meet our targets, but we think we’re well below our future potential. We are transforming how we do business to exploit our strengths and making good progress on our strategic roadmap.

So all of this is intensely focused on maximizing customer value and increasing shareholder returns. I thank you all for your participation this morning..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation..