Good morning and welcome to the CECO Environmental Third Quarter 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 third 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 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, 2018.

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 turn the call over to Dennis..

Good morning and thank you for joining us on this fall day for our third quarter call. Off the top, I'm excited to say that our market leading execution drove impressive bookings and strong profitability in the third quarter.

Our investments are paying off, our management team continues to lead with vision, discipline and focus and we anticipate a continued trajectory towards our aggressive 2021 financial targets that will likely produce significant upside for our shareholders.

This morning, Matt and I will be emphasizing our disciplined execution because it's the cornerstone of implementing our 4-3-3 operating strategy, and responding to a low carbon economy with sustainable and clean solutions for our customers.

In other words, this is one of the reasons that CECO's team is able to go head-to-head and beat the competition and win high quality work in our end markets. You'll also be sensing my confidence and enthusiasm about what lies ahead for CECO, because the shape of our future can be seen in the record backlog we achieved during this past quarter.

It is our bookings and backlog that are the greatest predictor of the future and our results in these two areas have been strong. Continued opportunities in our large and diverse end markets provide potential for our team. And our healthy balance sheet offers us the flexibility to seize investment targets that can improve our future.

As you know, our backlog is based on customer wins and I'll highlight a couple of these this morning to illustrate CECO's value proposition and market differentiators. I’ll now begin the CECO's performance customer wins for the third quarter as well as our near term market outlook, and then I'll toss the ball to Matt for the financial details.

Following Matt’'s full report out or recap our path toward generating top tier returns for our shareholders, and then I'll open the line for your questions. I'll start with Slide 3 by quickly noting that are 4-3-3 operating strategy launched almost two years ago guides our priorities, investments and execution.

By simply, it's been the blueprint for our market leading execution that's been driving our impressive bookings and improving profitability.

Along with our broad portfolio, competitive advantages and talented team, this has held CECO to increasingly being recognized as a go to resource for clean, safe and more efficient solutions that protect our shared environment. Moving on to Slide 4, I’ll highlight our third quarter strong financial results.

We achieved what I consider to be an impressive 116 million of organic orders, which is an increase of 19% year-over-year and 12% sequentially. It also reflects a very solid book-to-bill ratio of 1.36. The strong bookings service a solid predictor of our future.

Our revenue increased modestly to $85 million, which is up 5% sequentially but slightly off down 2% year-over-year. Like last quarter, our revenue is being tempered by a shift to a longer cycle orders this year, reflective of the mix of strong orders across our energy segment.

Going forward, I'm confident that our revenue will be positively influenced by our record backlog of $238 million. I'll emphasize that our backlog is up 17% year-over-year, and that we've added $84 million since the 4-3-3 operating strategy was launched two years ago.

Our gross margin this quarter remains strong at 33.8%, once again demonstrating value and execution. Adjusted EBITDA was noticeably up sequentially to $8.4 million and essentially flat year-over-year as backlog conversion revenue was a bit slower than historical. Finally, we had strong free cash flow at $8 million.

Our ongoing efforts to consistently generate positive cash flow are bearing fruit, still we can do even better and we're staying on top of this important financial performance metric. Before moving on, I’ll also mention that our balance sheet is stronger than ever, with our debt lowered by an additional $7 million during the quarter.

And our need to keep operating cash on hand has been further reduced by consolidation and simplification of our Treasury activity and ERP. CECO's impressive bookings and strong profitability in the third quarter was the results of our team being able to perform at very high levels every day. This is not something new.

We've been building momentum since the 4-3-3 operating strategy was launched. But we can and will do even better. Our entire team is committed to doing so. I'm energized by the new opportunities added to our sales pipeline from our recent industrial segment redeployment to Europe, India and China.

And our newest class of CECO Leadership Academy graduates presented action learning projects that have the potential to materially improve the company. Yes, we can and will do even better. Slide 5 is next.

As shown this slide last quarter and want to quickly highlight it again because it's central to our competitive edge and our increasing ability to win share in the growing low carbon economy.

CECO is producing solutions for a cleaner, safer world, with a broad portfolio of applications specific product solutions that range from reduced emissions of chemicals and particularly productive fluid handling and process water treatment designs, a biggest target remains clean air.

There are competitors in each of these areas but we're in a leadership position in terms of being able to combine an attractive portfolio of products and services with world class capability. So we're well positioned to seize opportunities in the growing low carbon economy.

This takes us to Slide 6 and 7 and the two market wins from our third quarter highlight reel, serving as a proxy for dozens of others that demonstrate the role we play in sustainability and the low carbon economy.

As a quick refresher, a low carbon economy essentially requires industrial and commercial facilities of all types all over the world to meet an inherently challenging goal of simultaneously achieving higher output and lower environmental emissions. Slide 6 shows the first showcase win from the third quarter which involves a sweet spot for CECO.

Power generation plants associated with the Sabine Pass LNG facility that's under construction in Louisiana. I say sweet spot because we're successfully competing in both LNG and Power Gen applications and have built a name for ourselves with OEMs and facility operators.

Our customers facility will have a small power generation plant to convert natural gas into LNG requiring five SCR Systems to a reduce CO and NOx emissions. CECO will deliver and install these systems over the next few years. CECO had two overwhelming advantages in capturing this job, innovation and trust.

The former based on CECO's investment of a later is driven by a market leading execution. First, a reputation preceded us because CECO Peerless is widely recognized for its SCR exhaust systems that utilize its patented EDGE AIG Technology.

The innovative AIG Technology reduces the customer need for ammonia, a key element used in the reaction to clean the exhaust stream of CO and NOx. And the simple graphic shows the clean gases being released into the atmosphere.

Second, the gas turbine OEM or the power plant has a high level of trust than CECO Peerless to meet demanding performance criteria and on time delivery. Our history of consistent performance from project to project produces a powerful and tangible trust in our team and products.

Not only do CECO and our OEM customer receive benefits, but the environment will also benefit to the reduction of 350,000 pounds of NOx every year. And the LNG facility operator increased safety and reduced downtime to the life of the plant. Slide 7 presents the second win, which involved the cutting edge aerospace company in the Midwest.

This customer develops and manufactures advanced materials and composites into structures and assemblies for the aerospace industry. They're an interesting company, because their mindset is to do what others are either unwilling or unable to do. We believe we're a good match for them.

Manufacturing composite materials involves the use of organic chemicals which produce a wide range of potentially hazardous volatile organic carbons or VOCs. Chemicals can produce pungent odor, dark plumes and lead to shorter life span of important catalysts that are essential to their emissions controls.

Our customer is expanding its facility and needs to manage emissions as efficiently and cost effectively as possible. Because Adwest and Kirk & Blum brands had several competitive advantages in capturing this win. First our sales team executed impeccably in earning the customers confidence and making it easy to do business with CECO.

I want to acknowledge the terrific work of our sales team including [Damien Adams, Andy Lefever, Chris New and Rob Nigorski] because they were vital in CECO winning share and setting the tone for solid long-term customer relationships.

Second, CECO offered a single source solution that allowed our customer to avoid having to manage multiple companies to complete this job. Two years ago, we would have struggled to do this effectively. The benefit of a single source solution is a seamless execution between different teams with different areas of expertise.

And I'm really proud of our technical teams everywhere for accepting this challenge, and making it seem easy. And finally, we offered our innovative technology called direct fired thermal oxidation, which is depicted on the right hand graphic that eliminates the odors, fumes and chemicals by 99%.

Like most of our wins, the client also wins because our technical solution will allow them to not only meet emission standards, but also save time, money and human resources.

Those are two wins from Q3 that highlight our team's market leading execution, as well as the strong brands and ongoing innovation that contribute to our growing go to reputation.

These traits and capabilities are why we're so well positioned to seize opportunities in the growing low carbon economy on the way toward our 2021 targets and top tier shareholder returns. Next, we'll turn to slide eight which covers our end market outlook. To start our markets are large, diversified and generally healthy.

The majority of our market show green arrows with some slowing of CapEx investment across the industrial sectors. Let's begin in the lower right of the pie chart with fluid handling and then move counterclockwise. Industrial fluid handling had a somewhat challenging market environment and had another soft quarter with orders down 7% sequentially.

During the third quarter, the aquaculture segment showed some signs of improvement. But we expect demand generated from the oil and gas and auto sector to remain sluggish. On a more overarching level, we don't see any compelling reason not to remain optimistic. But near term, the market will be a challenge.

Investments in our manufacturing infrastructure and process continues as we sharpen the market focus, so we're ready to fully compete to win share. Working counterclockwise industrial solutions is next. This segment serves the air quality improvement needs across a range of production environment.

After a strong early start to the year, the last few quarters have seen modest declines with the third quarter dipping by 5% sequentially. We still like what we're seeing and hearing in this market. And our project pipeline remains very positive. Outside the U.S. are new sales additions are seeing solid demand for air quality improvement products.

And they're contributing with new orders from Europe, India and China. There is however, some softening in the market at this quarters order show, because of delays in CapEx decisions. In sum, we have a growing pipeline, but slower closings. This is part of the D&A of this market but there can be periods of lumpiness, even during growth phases.

I'll add that we're developing innovative products for the future, which will help us maintain our competitive edge in this attractive market. Next, at the top of the pie, the refinery segment outlook remains active and we had a solid third quarter in terms of orders.

Our technical team and cyclone designs are the market leading and we remain number one in this segment. Continuing counterclockwise, our team in the midstream oil and gas money market segment delivered big time once again in the third quarter with orders up 45% year-over-year. And that was on the heels of an exceptional second quarter.

The midstream oil and gas market is proving to be a target rich environment in the areas of gas pipeline, LNG process water, and gas separation and our global team continues to respond with clean, safe and efficient solutions.

Moving along to our largest end market segment Gas Power Gen, we had a solid third quarter with orders increasing 59% from prior year. This market is still coming out of its deep slump. And as opportunities have emerged or capitalizing I'm comfortable saying that the trend for this market is positive.

And it's really just a question as to how intense and smooth that trajectory will be. Without a doubt it's become an intensely competitive area, but we're very capable and always ready.

Finally, at the bottom of the chart, our team continues to focus successfully supporting the install base of the solid fuel Power Gen market, and had a strong quarter with 23% increase in orders. We are leader in dampers and expansion joints, and are extending our successes into other harsh industry segments such as mining.

This is a big aftermarket opportunity, and we're performing well. In closing, we're striving to achieve our target of two times the growth of the market and I'm confident we will. Specific market segments may fluctuate and the competition will always be tough, but our team remains steadfast in achieving that target.

And with that, I'll turn things over to Matt. Matt, take it away..

Thanks Dennis. Let's jump into the details. Starting with Slide 10 which breaks down orders and revenue. Looking at orders we exceeded triple digits by hitting an exceptional 115.7 million as was the case last quarter our orders are fueled by the strength of our Energy Solutions segment.

Energy orders were up 20% sequentially and 38% year-over-year, as a team is winning sharing and recovering Power Gen segment, and vigorous midstream oil and gas segment. Industrial orders came in at 19 million, which was up 5% sequentially, and down 18% year-over-year.

Industrial’s was principally muted by delays in customer CapEx decisions have returned us back to our typical quarterly range of 18 million to 22 million. The good news is that the pipeline remains healthy.

I also add that our industrial segment contributed nicely in Q3 with 27 million in revenue and increase of 23% year-over-year and 34% sequentially driven by strong backlog execution. The Fluid Handling segment orders declined for the second straight quarter at 7% sequentially and 12% year-over-year.

Dennis already touched on the continued market softness in the oil and gas and auto segment and a brighter outlook in 2020 aquaculture markets. Our third quarter revenue increased to 85.3 million and uptick of 5% albeit down 2% year-over-year.

Three months in 2019, our mix of incoming orders is tending to be longer cycle, especially in refinery, which tempered our sequential revenue growth. I remain confident that our revenue trajectory will be positive for several reasons. First, our bookings have been strong.

Second, our backlog is at a new all time high, and actively converting as we progress on customer milestones, and our internal operating metrics are meeting or exceeding our expectations. And finally, with our asset-light business model, we have substantial capacity to execute projects.

And with that perfect segue I'll turn to Slide 11, which shows our backlog at 237.8 million. On its own this substantial backlog points to improving revenue, adding color. I point out that a book-to-bill has been strong at 1.25X year-to-date, as we have taken market share and energy that equates to 55 million of bank future revenue.

While the mix of orders have been longer cycle all projects activity is moving forward on time and on budget.

Before moving on, I mentioned here as I did during last quarter’s call that our triple digit orders and robust backlog are all reasons we remain committed that we're on track to meet 2021 financial targets that deliver top tier shareholder returns.

Now I’ll turn to Slide 12, which shows that we delivered strong profitability on the modest revenue group that I just discussed. Our gross margin remains healthy at 33.8% on strong project execution that Dennis and I have both emphasized. It's been a hallmark for CECO for years.

Our non GAAP operating income was up substantial 59% sequentially and 8% year-over-year on both volume and improved project margins. And adjusted EBITDA was also up sequentially by 40% but essentially flat year-over-year on volume margins and lower SG&A. Turning to Slide 13 our details financials reflect our third quarter solid profitability.

I've already touched on most of these headline metrics, but there's a few areas I like to add some color.

On a GAAP basis, both operating income and earnings per share were up $14.5 million and $0.41 respectively, with a large part of the improvement due to the Q3 2018 write-down of jointly assets ahead of the subsequent divestiture in October of 2018.

On a non-GAAP basis, earnings per share grew 16% year-over-year on improved project margins, lower SG&A, as well as lower interest and tax expenses. One final note, for the full year we still anticipate an estimated tax rate of 25%.

Slide 14 shows on the left that we modestly reduced our working capital by $5 million sequentially and similar to last quarter, we further improved our AR and milestone collections. Our simplification efforts are key to making further improvements in working capital and we continue to make progress.

When we launched the 4-3-3 operating strategy, we started with 64 legal entities, and 13 ERPs and it's important to note that many of these ERPs were unsupported versions that were approaching obsolescence. In short, our enterprise tools, they were accounting managers.

Today I'm pleased to announce that we 60 ERPs and 43 legal entities, a significant reduction from two years ago. In the process, we are transforming our Information Technology Group from utility provider to process experts, and leading transformative change within the businesses. As an example, in Q4, we are going live on to new ERPs.

First is Microsoft cloud-based d365 platform in our pump business that will provide advanced costing, inventory management capability, and eventually e-commerce, all of which are unsupported in the current version of our ERP. Customers expect basic online ordering or lead time visibility, which is unavailable in today's environment.

Second, we're upgrading our energy segment to Epicor 10, which will automate our [POC RevRac] process and improve project management tools for engineering. Our current version date back to 2008 and does not support the needs of our customer expectations today or in the future.

In short, we're driving procedural and systemic change that will enable improve cash earnings and working capital. We are making step changes at CECO and I'm excited to keep you updated on our progress. Buying to the right, we generate 8.2 million of free cash flow in Q3 driven by 10.7 million of operating cash flow during the quarter.

A significant improvement over the past few quarters offset with 2.5 million of CapEx investments primarily in our pump business. FX in the quarter was slightly higher as a few larger long lead items were delivered and commissioned in the corner.

To add perspective, we're halfway through a three year $5 million investment program to upgrade 10 machines that individually had 80 plus years in production with modern high speed CMC equipment.

We've underwrote this investment on reduce costs, higher productivity and faster lead times two of the four CMCs were operational in Q3 with the remaining two being commissioned by mid 2020. I'm pleased with the progress made and happy to report that in the near term previously highlighted bottlenecks have been eliminated.

I want to take this opportunity to thank Dan Berryman, our new Operations Director in Indianapolis for his leadership and introduction of Lean principles over the last six months, with his efforts our internal operating metrics are trending favorable.

Turning to Slide 15 highlights our ongoing effort to substantially reduce and manage our debt to a comfortable range. During the third quarter free cash flows contributed to another $7 million dollars of debt reduction to 69 million.

As it stands, our current bank defined leverage ratio sit at 1.8 turns, and from an external perspective on a net basis, we are levered at a comfortable 1.1 turns. As part of our 433 operating strategy we continue to make improvements in our Treasury operations, and I wanted to highlight three big wins. First within the U.S.

we moved all disbursements to a third-party provider to manage vendor enrollment, improve our rebate and reduce paper checks. Second we consolidate four U.S. credit card programs down to one, improving our purchasing power and reducing bank fees.

And third CECO is now managing 100% of the worldwide travel spent on Concur giving us greater visibility to manage these costs. There are more efficiencies to come which includes lock box consolidation, optical character recognition and e-commerce, which will eventually lead to greater velocity of cash.

I'm quite pleased with the action and wanted to highlight Marci Kastner, Head of Internal Audit and Lindsay Takman Shared Services Business Leader for their execution in Q3. Wrapping up my comments today I'll turn to Slide 16, which addresses our progress towards exceeding our 2021 financial targets.

Our market leading execution growth and record backlog are testament to our commitment to an evidence of our progress towards delivering top tier returns. Starting in the upper left quadrant, our goal is to organically grow our markets to actually over time. Driven by outside and leadership, we continue to decisively outgrow our markets and orders.

TTM orders of 5% growth is also performing within the targeted green Zone, despite the temporary performance of the last two quarters. Again, we have a record backlog that will favorably come into play with this target. Healthy end markets and investment in innovative products are all positive drivers of revenue going forward.

Moving to the right, our EBITDA rate is largely driven by revenue and the operating leverage achieved on growth. With revenue kicking upward, our EBITDA rate improved in 9.8%. Our record backlog and healthy market have been convinced in our ability to move up into the target range of 12% to 14%.

Next is achieving a superior return on tangible capital, which continues to reflect our asset like operating model.

With working capital going down and earnings improving, we have improved ROTC for a fifth consecutive quarter and now up into the target zone of 51%, staying there or preferably improving is our challenge and our teams are staying laser focused on delivering cash earning on a lower asset base.

Finally, on the lower left-hand side is our free cash flow conversion rate, which significantly improved this past quarter, and we can still do better. To be clear, our cash flow can be lumpy, and while 40% on a TTM basis isn't terrible, we expect better.

With the affirmation shift to longer cycle orders from our energy segment, the attention will be on project whip as a driver further cash flow improvement. To wrap up, I'm really pleased with the organizations market leading execution that helped drive our impressive bookings and strong profitability of the past quarter.

And it should go without saying that I'm excited about our record backlog and the influence that will have on our revenue trajectory going forward. Finally, I want to note again, the strong foundation that we built and are continuing to strengthen. With all of that, I'll hand things back over to Dennis..

Thanks Matt. Nice job, telling a good story. Before opening up the call to your questions, I want to turn to Slide 17 and offer some thoughts on the drivers for delivering top gear shareholder returns.

We now have two full years under our belt implementing and executing our 4-3-3 operating strategy proven to be a well-designed blueprint for transforming how CECO does business and focusing the organization on winning share and creating value.

In assessing our successful third quarter, it's easy to see a direct link between the 4-3-3 operating strategy and the results of our key performance metrics. Quite simply, the operating strategy has made us more agile and efficient in winning share against our competitors and resilient in dealing with everyday market forces.

As I said before, it's positioned as well in the marketplace. The 4-3-3 operating strategy remains our blueprint and will adapt our plans as needed to address and respond to changes in the scope and scale of the opportunities ahead of us. Our end markets remain strong and healthy with two growth engines.

The first is the classic one of industrial expansion, which is subject to the influences of economic cycles. The second is the developing low carbon economy, which is driven by the constantly increasing social and regulatory imperative for industrial and commercial customers to seek sustainable, clean, safe and efficient solutions.

Product innovation has strengthened our organic capabilities and sharpened our competitive edge, as evidenced by the two customer wins I discussed earlier. We know that constant innovation is important. And that's why we reinvigorated our innovation effort with new leadership and reinforced our China, Dubai and India design engineering hubs.

And we recommitted a new product development but we now have more than a dozen product concepts with allocated R&D dollars to explore and develop. Going forward, we see innovation focus more on the connectedness of our products via digital solutions and the so called Internet-of-Things. Innovation efforts have long wait times.

And the good news is that we're now at the stage where market traction is being realized. I also mentioned here that our 4-3-3 operating strategy identified the need to make long overdue infrastructure investments to keep pace with our complication, and even get ahead of market trends and customer needs.

We've done that and have completed the lion's share of planned upgrades for our pump manufacturing facility in Indianapolis. The blueprint for becoming more agile and efficient included routing out and eliminating complexity would become much more streamlined, interconnected and efficient organization.

Legal entities, ERPS, and bank accounts have all been significantly reduced and the cash required for working capital has decreased. Because of all that, we're executing with increased speed and more precision. And finally, a much better prepared to see high value opportunity that can compound our progress through targeted M&A.

I have previously mentioned that we have a more stringent strategic process that aligns to any such actions. Acquisitions will have to be a direct complement to both the mission, value proposition and enhance the long-term financial targets. So our end work started this morning, we're excited about our strong third quarter and determined to do better.

We remain confident that we're on track to achieve our 2021 targets or top tier shareholder returns. Now let's open up the call to your questions.

Operator?.

[Operator Instructions] Our first question today will come from Chris Van Horn of B. Riley FBR. Please go ahead..

So I just want to jump into the backlog if we can and get a sense of the timing of some of the new awards and where the backlog stands today.

And maybe if you don't mind, do you see the margin profile shifting dramatically on some of these new awards and what's in the backlog right now?.

Chris, thanks for asking great question. When we look at the mix of orders, they have shifted to be more long cycle in nature. If you look at the market outlook page or pie chart that Dennis mentioned its specifically in refinery and midstream oil and gas in the last two quarters, we've seen a lot of growth.

And so they often have a little bit longer revenue recognition cycle than we would typically have. As a project driven business growth and backlog dictate future revenue. And with the sequential improvement in bookings that you saw on last two quarters, one should expect that revenue growth in Q4 will be on par with Q3 sequential growth.

And we should see that to continue to grow in 2020. You know, as a side note, that customer project delays that we noted in Q2 that you probably hinted on are progressing on time and on budget, we feel really good about execution. But still I pay slower than we would prefer. In general, I'll tell you the pipeline is really strong.

The backlog is healthy and the margins are in line with our historical averages..

And then you're obviously seeing really good award wins here.

Maybe could you comment on the competitive landscape? Are you seeing your smaller competitors exit? Is it your differentiated product? Is there a price component? Is it all of the above and any detail you could provide there?.

Yes, so yes we have competition in nearly every part of our field. And it's a mix of small agile competitors with a localized approach, along with a few larger players who have similar reach to what we have, we don't think there's anybody who really pulls together the full package.

And so when I think about our competitive landscape, I mentioned in my remark, refinery - we are clear number one, we get recognized for that, we get called in early, we work closely with all the refiners all over the globe, it's a great position to be in around. Power Gen is our largest and market segment.

I think I mentioned in the last few calls, that the fact that we were seeing the green shoots that bring back new gigawatts into the market, signs from GE and Siemens and the big players that there are beginning to see some incremental unit demand and those things started to materialize in the quarter for our competitive positioning has been exceptionally strong.

And we have seen at least one competitor fall by the wayside in North America. So, our strength, our longevity, our technical capabilities is still shining through in that market. Even with it down, overall segment and competitive nature. I think about industrials.

It's really about pulling together the value proposition of being a solution provider with a number of different types of air quality improvement, air pollution remediation opportunities and being able to put those together in a way in front of a customer that demonstrates value, the deficient that is executed on time and on budget.

So we like where we're at, teams executing well and my optimistic they'll continue to do so..

Our next question today will come from Jim Ricchiuti of Needham & Company. Please go ahead..

Why don't I just pursue this longer-term cycle in ordering and backlog that you're talking about.

Can you define that a little more in terms of what how you would define this longer cycle order that you're seeing?.

Yes, Jim, thanks for the question and I'll - let me acknowledge, first off that historically we would expect to see a faster conversion of orders and backlog to revenue if you take somewhat of a historical mix. However, as we mentioned in '19 here, we've seen much stronger orders in the last few quarters that have a longer cycle nature.

Now I think we've communicated with fairly transparently that when you think about our three reporting segments, fluid handling and filtration, it's a shorter cycle, kind of a 30-day order to full revenue type cycle, 30 to 45 the industrial segment and more mid-cycle, so six to nine months from order to full revenue. And those are averages.

Things can go up or down from there. And our energy segment has always been the longest cycle, usually 12 to 15 months from an order date to full revenue. And when I say full revenue, at times we can begin to see revenue the month after order receipt.

So as you look at the mix of more energy orders this year, that's one of the larger contributors to just the shifting out in terms of conversion of orders and backlog into revenue. And that's the most natural part of what we're seeing. A little bit of what I would call maybe unnatural was in the refinery segment we mentioned last quarter as well.

We have a couple of projects, larger projects that combined would have had a $5 million to $7 million of revenue at the time we anticipated additional revenue through the end of September that had been pushed out into the fourth quarter and towards the middle of next year based on the customer being late with design changes, we thinking a few things on their process, and those then adding back to us to make changes before we could get everything released to fabrics.

So again, we're executing all of our projects on time, on budget, and at the same time you're seeing a slower conversion of orders to revenue..

Okay. That's helpful, Dennis. And actually you answered the next question I had about these project delays. So these delays you see part of that being - beginning to be resolved in Q4 and then the balance in the early part of 2020..

Yes. And the one I mentioned had two large milestones. One milestone originally was for October of this year and the other milestone was September of next year. And they've decided to take both shipments in the latter part of next year as a result of those needs. And they rebalance their site schedule for that.

So in that case, you see a sizable shift towards spread out through the latter part of next year on several million of backlog and future revenue..

Okay. That's helpful. The final question for me is just in light of some of the concerns folks have had about slowing macro, particularly as it relates to the industrial markets. I'm wondering if you could maybe talk a little bit about that.

You alluded to some of that in the fluid handling portion of the business, but just looking at the industrial markets, where are you seeing some signs of possible softness?.

Yes, in the third quarter - beginning of the third quarter, you see a mixed messaging coming from a lot of the industrial customers including those who have been reporting, this last quarter earnings as well.

With signs that, you know makes them a little bit uneasy about do we plough ahead with all of our growth investments, our growth capital and a lot of times we're tied to investments and expansion and growth, capital et cetera. And so it's in that area where we've seen continued visibility on projects.

Our sales pipeline actually continues to go up which is a positive side. But we've seen delays and people pulling the trigger and making those decisions a bit based on their own our customers view of you know, certain uncertainties out in front of them.

At the same time, you look at ISM with the manufacturing PMI indicator, which dipped below 50 a month ago and then again below 50 is a sign of a little bit rougher period, in industrial manufacturing in the US, and that broadly stated, is our target customer zone.

And so while we are getting visibility while we are seeing opportunities while our sales pipeline is actually growing, we have seen those things mute a little bit of the decision making on projects in the last 45 days or so.

And think that environment will continue to be challenging, which is why we're stepping up our efforts to make sure that we win here even in a bit of a slowing market. Food handling, we have three very focused niche target segments, and one is beginning to show good signs again with some larger project activity and aquaculture.

One - has a lot of end market tie to automotive which is - past the peak of the investment cycle, and the other it says around oil and gas and it's been somewhat muted. You see that from other people in the space as well with pumps..

Our next question today will come from Amit Dayal of H.C. Wainwright. Please go ahead..

Just going back to maybe you know Matt's comments earlier did you indicate Q4 would be relatively flat to Q3?.

No, we were - I communicated Chris' question earlier that I think that you should look at what the Q3 to Q2 sequential growth was and it probably on par for Q4..

Okay understood, thank you for that.

This backlog build that you're seeing is it mostly domestic or international?.

It's pretty global, what we're seeing lots of activity all over the globe, especially if you notice the up ramp in last two orders in backlog, mostly been in a newer global business. We have operations in Dubai, India, Singapore. And we see pretty much all refinery and power-gen work all over the globe. So a very good mix as of late.

Understood and do you foresee sort of this trend in sort of O&G and midstream remaining stronger relative to, your backlog mix going forward in the next few quarters?.

Yes, it would appear to continue to be active our pipeline of activity so - which we can really cut off and measure over the rolling 12 months outlook has continued to be healthy.

At the same time, it's not evident that the projects that we want to close in the fourth quarter will generate sequential bookings growth on what we just reported, but I do see a pretty accurate and healthy market out there.

Our team has continued to gain share, we're getting good traction in the process water arena of the end market as well which is something that - we dusted off our technology and have begun to demonstrate some good wins there as well. So optimism, little lumpy fourth quarter, will be difficult.

I'd love the team to better what we just reported on orders. I'm not sure that the number of closings will support that..

Understood, just maybe one last one from me, M&A related discussions, weren't really a big part of these calls, at least for the last few quarters.

You've highlighted this again, this time, is there something in there and you know in terms of where you may look for M&A is it more services oriented with recurring revenue types of solutions or is it more product type of opportunities you're looking at?.

So I would say that, as we've improved the operating metrics as we've been getting traction and growth as we're getting comfortable with the execution and the consistency. And as we generate free cash flow. We've been very active in assessing what's out there and timing and kind of action, key target.

Those key targets would likely, improve our environmental mission. So clean, safe industrial production, more efficient solutions and there's a host of things that go with that from more technology oriented to services and products.

And so, we've been active in assessing what's out there, and I think we'll continue to be looking at enhancing the company's position, through targeted investments.

Having said that, we've communicated our 2021 financial targets and those metrics growth, EBITDA margin return on tangible capital, free cash flows will also be important elements of any screen when we look at our targeted future investment..

And our next question today will come from Gerry Sweeney of Roth Capital. Please go ahead. .

I wanted to focus a little bit more on natural gas, obviously very good orders, but I was just curious as to maybe how the sales pipeline looks, obviously I think GE, Mitsubishi, I think Siemens are applying and improving market.

Are we going from green-shoots to maybe more sustained growth?.

Yes well, I think what we see and have seen, throughout the year was more of those green shoots, and saw the activity coming and developing. And then a lot of things popped in the third quarter. And so you know, we had a nice bookings quarter, and we just finished. It does tend to be a little lumpy in the context of especially new gigawatts.

And so, there is an outlook that that continues to look as if it's modestly growing over the midterm horizon. And that's what I think we are trying to represent within our slides here on market outlook that's what our pipeline shows. It's always a little lumpy in terms of exact execution.

What will we see in any one specific quarter, but overall we see some demand improving.

Matt, did you have anything to add there?.

Yes, just take a look GE just announced recently. We track down Siemens will report here in the next few days. Mitsubishi is not fully out just yet with keeping results. You saw the big jump in Q2 on number of large gas turbines that went into the market. And I think we want some of those jobs.

When you look at Q3, they claim that their orders were down 30% year-over-year and they said that you know, its timing on a lot of orders coming through. They are modeling for 25 to 30 gigawatts per year, which is at a four year trough and flat year-over-year that's why capacity of new gigawatts added.

So nobody's giving a sign that the market is taking off. But I think green shoots have been seen. And we're hopeful that that starts to sprout even further. But nobody in the big players OEM bucket has come out and said, things are going to be rosy from here on now. So we're cautiously optimistic..

And then taken a little bit of a step back when I look at the power segment sort of margins are better than they have been. I mean, especially from a couple years ago. Is this pricing, maybe some competition leaving or just more bundled services or maybe even I know some businesses have shifted some to industrial side as well.

But just curious as to what we're seeing on the margin front?.

Was your question - you said the power segment, did you mean our energy segment or you’re talking….

I meant energy in whole, I just - in monocle power, so I apologize..

Yes well, on any given period, the margin are reflective of largely two or three key drivers number one, our ability to be in front of a customer and demonstrate value. It is an intensely competitive marketplace.

And in spite of that, our team has done a very good job of demonstrating the capabilities of value, staying with some of the longer cycle projects in order and being able to execute those. Number two is in project execution.

As some of these are longer cycle projects, executing them well, getting the vendor base aligned, getting support from our vendor base is also been key. And then its mix across the board on any given period, we have a good mix of aftermarket Brownfield new projects that come from EPCs or OEMs that contend to be a little more competitive.

And as well order from end users, where they really understand the value that we can bring and have preference. And so it's really a mix of executing well in the market that is helping us generate the overall margin mix that we've seen in the last several quarters..

Then just finally on that front, if you do see me I mean to some additional growth, maybe - specifically maybe in the power side. Is there an opportunity just for better leverage or margin just to be leverage may be unabsorbed overhead et cetera.

And I'm actually not sure if that's including the gross margin side or more just on the OpEx, but just curious on that front?.

Yes, I think that what you've seen before and what we would expect is that we do get operating leverage on our SG&A.

And while we've used out some G&A, we have reinvested quite a bit in sales and marketing and as well - more recently in innovation and product development related spend, that we think will also will be good for the long-term health of the company.

And so that is where we get and how we get into the targeted margin range of EBITDA that we've communicated for 2021..

Dennis Sadlowski:.

- :.

Our next question today will come from Tate Sullivan of Maxim Group. Please go ahead..

Just a couple quick follow ups for me - I mean the $40 million nat gas order and you gave great context on that. And I think that's the highest quarterly number in at least the last two years.

Can you comment on the domestic versus international mix in that number?.

Let me give that some thought here for a minute Tate, but thanks for calling that out. Last year, it was an interesting year in that the market was particularly muted. And there were really were very few new call them gigawatts being added to the market.

And so the wins that we got were largely Brownfield upgrades, efficiency upgrades, mission standards upgrades and the like, and the team really killed it last year on a very soft market. And so this year, I've been signaling and we teamed and got quite a few closings in the more than new gigawatts market.

The things that we mentioned that come through with the likes of the GE, Mitsubishi, Siemens, wins that they previously announced. As far as domestic to international it really moves widely from period-to-period I am trying to work through my brain, you know maybe 50-50 in North America..

- :.

You're right 50-50 is probably a good representation Europe and America is being where they ended up being commissioned and installed. Asia had yet, because they don't have non-attainment zones, as much regulation on De-NOx and gas turbine aren't effectively used as much.

They're more powered by coal, therefore steam turbines are being used and while we do serve those not as frequently as much. So it's been more 50-50 EU/U.S. as a white tape..

Okay, thank you for that. And then last from me, just on CapEx 2.5 million in the quarter.

And Matt, I think you've mentioned a three year CapEx expectation before or can you, is that still in place or can you comment on that plan?.

Absolutely yes so we've spent a $3.7 million year-to-date and you noted $2.5 million in Q3. And then we spent about $3 million in 2018. So we're well down the path of our three year strategies that caused seven of the $10 million over the three years that we've mentioned the majority of that being in our fluid handling segment.

I mentioned this in the prepared remarks that you heard earlier. We are revitalizing our Indianapolis and Telford plants as we make a major investment in our pumps business. We think we have a great product. We just need to serve our customers faster, reduce our lead times and improve our quality. And we are right in the heart of that right now.

But that would tell you that of that $7 million that we've spent so far well, over $4 million of that is tied specifically to the fluid handling and laying the pumps business..

Our next question today will come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead..

Congratulate to you and your team for the fine job you've done and the progress you've made over the last couple of years since you implemented your new strategies and programs, very noticeable?.

Thank you..

Bill Baldwin:.

- :.

Yes, sure. Bill and I'll characterize this with a little bit of history here. We have some key products including an offering that sold under the [indiscernible] a market brand that does, oil and water separation. And we've also got the expertise to handle different types of process, water seepage, water separation in around the oil and gas markets.

Last quarter, we included in our call and had a specific announcement on a large seepage water treatment facility order that we received in the Middle East. It was called out because, A) it was a very sizable win and so a nice reference for the company to be back in the water market.

It was also called out specifically because it was one of those that has a long cycle nature and won't have much revenue until 2020.

Having said that, we've leaned into those wins adding some people in a few key markets in China and in Dubai to make sure that we lean into the wins that we've gotten to continue to develop and dust off the technology that we have managed a few partnerships along the way this year as well. So yeah, it's a sizable market.

We're slowly rebuilding our positioning in there through historical peerless technology and as far as the teams executed fairly well, and it's a part of why we are still optimistic and seeing a growing pipeline in our sales pipeline..

Thank you very much. Good luck..

Interestingly enough, some of that also like the rest of our business can generate a pretty good aftermarket, aftermarkets in area that we continue to have in focus, we spend time on, we have dedicated people. I think the mix of aftermarket this year is a little lower than what we had seen.

That's based on some of the sizable project wins, but we are seeing follow on that come about as a result of the larger project wins as well that are add-ons to some of the existing wins that we've gotten in the last year and a half..

[Operator Instructions] Our next question will come from Tom Radionov of Corre Partners. Please go ahead..

I just had a few follow-ups. One specifically on the guidance for the fourth quarter.

Just wanted to make sure I understand, when you said sequentially, sort of the same trends as we saw in the third quarter, did you mean in terms of absolute dollars or in terms of quarter-over-quarter growth rates?.

So I'll start by saying we don't provide guidance. But I will go back to tell you what we - I did quote earlier and we did state that on a percentage basis you should expect that, you know, Q4 revenue should increase in line ideally with what you saw Q2 to Q3..

And then just remind us in the fourth quarter, is there any seasonality that would impact your gross margins or EBITDA margins either positively or negatively versus prior quarters typically?.

Yes, Tom there's no real seasonality that I would describe that affects quite frankly orders directly or margins but with the project nature of the business, there is a mix effect on any given period of which jobs are moving faster, which product lines are moving better, how much aftermarket is coming through the system.

And that's why we've had a range of gross margin, I think 32 to 34 that we think is a reasonable target for our team. And one that, we see as the range of expectation when we think about our planning..

And just to make sure I understand on Page 7 of the presentation, the second large win, I sort of missed that, I apologize if you already mentioned, but did that impact from an order perspective, did that impact your Power Gen natural gas business or was it reflected somewhere else.

That's a - what we referred to as a thermal oxidizer as well as some custom ducting and those product lines are within our industrial segment reporting. And based on the gas turbine exhaust system on Page 6 that was, it's been going to be installed on an LNG facility. That's a part of our energy segment..

And so when I look at the down 18 order number in the quarter under industrial solutions, that's net of that new one..

Yes that win is included. And again what you see is a lumpish market. We've operated in a range of kind of $18 million to $22 million had a breakout first quarter, continued to kind of fell back into this 18 to 22 range of bookings, some of that again even while the pipeline building. I mentioned some of the market decision making, slowing down..

And then last question, I'm just curious if you can compare and contrast for us, and I think you already gave some color, but incremental color would be helpful. Compare and contrast the competitive dynamics within the refinery business versus midstream oil and gas versus the Power Gen natural gas business.

Just curious, obviously specifically within the natural gas business, there has been some pressure, curious if most of your competitors are still around and if they're being irrational or rational and how that compares to some of these other segments that that seemed to be doing better.

And sort of a related question as well I'm going to throw it in, it's very nice to see some of these very large wins. When you look at your pipeline of potentially future work, like, are you seeing anything that's sort of a similar size or should we sort of think of this is more of one time in nature type of order book. Thank you again..

So as a few questions in there, and I'll try and start by characterizing, again the competitive arena that we work in, and maybe focus it on energy, which is I think, where your question was.

You know, in the refinery market, we are very strong number one player in cyclones and the fluidic catalytic cracking process, quite frankly, where the guy people come to us, we do have a few other competitors. They are good competitors. They are tough competitors, but we are very strong. We see most of the projects.

We have good technical people brand support. If you are out on a refinery, people tend to refer to us by name [indiscernible] and so it's a narrowish segment and we are very strong within that narrowish part of the market that we're performing.

The rest of the market that we refer to is very large and there are pockets where we have great strength and then pockets where we have great opportunity in terms of share and command for the market.

Oil and Gas midstream has a variety of applications and there's a large untapped opportunity even where we are very strong have good recognition are on the approved vendor list or most of the major producers, most of the major pipeline players all around the world.

And in Power Gen again, competitive arena market has come down a lot since the highs in late '16 and in the early '17 before the market dropped precipitously. And so the competitive landscape is tough. You know, the customers are tough.

And at the same time, we really are the ones that stand tall in that market in the context of technology, in the context of execution. And we have seen as I believe I mentioned earlier, one player in North America fall to the wayside in serving that market.

So, still tough market, we still have competitors, but our positioning continues to be stronger over time to longevity and the technical capability of our team. I think that was your question.

You asked a little bit about, you know, does the $116 million, where does that fit in the world and I also believe that what I communicated earlier and what we're seeing, our overall sales pipeline, which is an outlook for 12-month closing, so anything that our sales team anticipates closing over the next 12 months has continued to grow at the positive signal, it's not so evident that the timing of where those things land will have growth on the exceptional orders value that we had in Q3.

I'm not sure we'll see growth on that in the fourth quarter..

And ladies and gentlemen, this will conclude our question-and-answer session. At this time I'd like to turn the conference back over to Dennis Sadlowski, Chief Executive Officer for any closing remarks..

Okay, I want to thank you all for joining us on the call here, our CECO Environmental third quarter call. As we talked about, we continue to execute on our 4-3-3 operating strategy and delivered another clean quarter with sequential improvement on all of our key performance metrics. Thanks again and have a great day. Bye, bye..

The conference is now concluded. We thank you for attending today's presentation, and you may now disconnect your lines..