CECO Environmental Corp (CECO) 2013 Q4 法說會逐字稿

Good morning. My name is Derica, and I will be your conference operator today. At this time, I would like to welcome everyone to the CECO Environmental Corporation fourth-quarter and full-year 2013 earnings call. (Operator Instructions). Thank you.

I will now turn the call over to your host, Mr. Shawn Severson of Blueshirt Group -- CECO investor relations firm. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us on CECO Environmental's conference call and webcast to discuss the financial results for the three months and full-year ended December 31, 2013. On the call with me today are Jeff Lang, President and CEO; Neal Murphy, Chief Financial Officer; and Ed Prajzner, our incoming CFO as announced in this morning's press release. Jeff and Neal will be reviewing the quarter and full-year results and will also provide an update on the Company's strategy and outlook.

Please note the new addition to traditional reported GAAP earnings. We provide non-GAAP financial measures in our press release today to enable a better assessment of the ongoing nature of CECO's core operations. Jeff Lang's comments will primarily focus on these non-GAAP financial measures, and Neal will address differences between GAAP and non-GAAP financial measures in his remarks.

Following our prepared remarks, we will open the call to questions. This call is being webcast and can be accessed at CECO's website at cecoenviro.com. The webcast will be posted on CECO's website for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review over the next several months.

Before we begin, I would like to caution investors about 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, including our annual report on Form 10-K for the year ended December 31, 2012.

Except to the extent required by applicable security laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today whether as a result of new information, future events, or otherwise.

Today's presentation will also include references to certain non-GAAP financial measures. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release.

And with that, I'd like to turn it over -- turn the call over to Jeff to begin the discussions.

Thank you, Sean, and good morning, everyone. We appreciate your continuing interest in CECO Environmental as we continue building a premier Company. I'll provide some financial review, and then Neal Murphy, our Chief Financial Officer, will discuss financial results in more detail. Also, Ed Prajzner, our new CFO, is joining us as well. I will then close with an update on the businesses and some other strategic highlights for the quarter, including the announcements of our exciting management changes.

Let's begin with a few financial highlights for the quarter. Revenue in the quarter increased $34 million to almost $70 million, or 100% better than the previous year. Recent acquisitions contributed to roughly $34 million to our quarter. All acquisitions are 100% fully integrated, and we are now operating as one CECO team.

Bookings were almost $67 million for the quarter versus $26 million in 2012, an increase of roughly 150%. Our backlog remains strong, reaching $98.5 million in the quarter, up from $60 million in 2012 and essentially flat with Q3 of $100 million.

Non-GAAP gross profit in fourth quarter increased $22 million from $11 million in the prior year. We basically doubled our gross profit dollars. Non-GAAP operating income increased to $9.4 million in the quarter, up from $4.5 million in the same period of 2012. And operating margins reached 13.6%, a new high for CECO as compared to 12.8% in 2012. And we are pretty excited about the 13.6% operating margins in the quarter. We think it symbolizes the Met-Pro CECO integration has been a success, and we are starting to see some of the benefits from that.

Non-GAAP net income increased to $6.8 million in the quarter compared to $3.1 million last year; and non-GAAP net income per diluted increased to $0.26 in 2013 compared to $0.18, a 44% increase.

In regard to the full-year highlights, revenues reached $197 million in 2013 versus $135 million in 2012. We continue to be very excited about building a larger, more profitable business, and we are trending in the right direction.

Total bookings in 2013 were $199 million versus $139.7 million in 2012, an increase of 42%. Note, full-year gross profit was up meaningfully, almost 50%, compared to last year, and we expect continued steady improvement in this key metric moving through 2014.

I also want to highlight some additional full-year financial metrics, as 2013 was a significant year in the evolution of our Company. We increased our revenue to $197 million, and we now have a stronger, better, larger platform that, organically, is -- could potentially reach the $300 million mark.

In combination with the substantial growth in revenue, we are also able to expand our non-GAAP operating margins for the full year to 13.1% versus 12.6% in 2012, and we grew non-GAAP operating income to $25 million. This also translated into roughly $0.98 in EPS for the year versus $0.65 in 2012.

The integration of Met-Pro has gone well. We have achieved over $9 million of synergies. We have sold non-core assets. We're also in the process of selling non-core real estate. We consolidated three manufacturing facilities already. We merged our two main offices. The Met-Pro main facility is under contract to be sold in 30 days. We streamlined duplicative functions. There were some reductions in force. And we continue to move to an asset-light manufacturing strategy with 50% internal and 50% external manufacturing to provide maximum flexibility and a much lower shop operating cost.

Overall, I'm very proud to say we have delivered and even exceeded our integration plan and processes -- that the Company is now aligned and operating as one business.

Operational excellence in the lean business model remained a key area of our competitive advantage. We have launched several key initiatives while maintaining our lean SG&A model, which is under 19% for the full-year 2013. Note that this SG&A level was achieved while integrating Met-Pro, which historically runs at a much higher SG&A level.

Despite modest global business conditions in the fourth quarter, we continue to show solid year-over-year progress in key financial metrics with a continued focus on positioning CECO for future global growth. And the team CECO has done a very good job in 2013, and we are very excited about 2014.

I'd also like to address some significant leadership changes at the CFO position. Neal Murphy joined CECO as our CFO in August of 2013, roughly seven months ago with the exciting transformative Met-Pro CECO merger. We truly thank Neal for his leadership during the important merger transition. He has been integral to the CECO Met-Pro merger and played a key role in the successful integration of the two companies that are now operating successfully as one CECO Company well ahead of schedule.

We have also made great strides in building out our senior leadership team to support growth and global expansion in our future. Our incoming CFO, Ed Prajzner, is clearly part of that foundation. Ed came to us as part of the Met-Pro merger and is one of several key individuals who have joined our leadership team from recent acquisitions. We are very excited to have Ed step into this very important executive leadership role. Actually, Ed was recruited into Met-Pro as the future CFO succession strategy two years ago. And we are very excited about his financial leadership capabilities. My compliments to Neal Murphy and Ray De Hont in recruiting Ed.

I will now turn the call over to Neal for a more detailed review of the financial results for the quarter.

Great. Thank you, Jeff. And good morning, everyone. As mentioned earlier, I will highlight both GAAP and non-GAAP performance for the quarter. Non-GAAP adjustments include acquisition and integration expenses; the impact of acquisition asset valuation adjustments on the income statement, which results in higher levels of depreciation and amortization; and earn-out payments to the principles awarding.

A $1 million legal reserve has also been established during the quarter with regard to legacy legal matters and has been excluded in calculating non-GAAP income. Our non-GAAP financial presentation is intended to provide better trend analysis and assessment of core business performance.

Let's now turn to Q4. Revenue in the quarter was [$68.7 million], a $34.4 million, or just over 100%, improvement from the same period last year. Recent acquisitions of Adwest, Aarding, and Met-Pro contributed $34.3 million of revenue for the quarter. Pro forma revenue for the third quarter, assuming Met-Pro had been acquired as of the beginning of that quarter, was $65 million. So our Q4 shows some nice quarter-over-quarter growth.

Gross margin was 31.3% versus 32.6% in Q4 this year. Non-GAAP gross margin adjusted for inventory valuation and property plant and equipment valuation costs was 32.4%, essentially flat with a very strong Q4 last year. Non-GAAP gross margin was up strongly from 30.8% in the third quarter of this year. And we expect that the upward trend that we saw in the fourth quarter will continue into 2014 as we have a full-year of Met-Pro results.

Selling and administrative expenses -- excluding deal costs, earn-outs, legal reserves, and other non-GAAP expenses set forth in our press release today -- increased $6.8 million to $13.1 million and decreased as a percentage of revenue to just under 19% compared to 19.5% last year. As Jeff mentioned earlier, this SG&A percentage reduction was achieved while integrating Met-Pro in Q4, and Met-Pro historically had a significantly higher SG&A model than CECO.

Operating margin was 5.4% in the quarter, down from 12.8% in Q4 of last year. Non-GAAP operating margin, adjusted for the items mentioned in my comments regarding gross profit and SG&A, was 13.6%.

We will strive for continued incremental improvement in operating margins going forward, given our operational excellence and consolidation initiatives. The heavy lifting from a cost synergy perspective is essentially complete and reflected in our Q4 results.

Other income and expense was $0.8 million, or approximately $0.02 per diluted share for the fourth quarter and attributable to foreign-exchange gains. Net income per diluted share was $0.11 compared to $0.18 in 2012 Q4. Non-GAAP net income per diluted share, adjusted as previously noted, increased to $0.26 in 2013 compared to $0.18 in 2012, just over a 44% increase.

Let's now turn to full-year performance. In 2013, revenue increased $62.3 million, or just over 46%, to $197.3 million compared to $135.1 million in the prior year. Acquisitions contributed approximately $68 million in revenue in 2013. Net income was $6.6 million as compared to $10.9 million in 2012. Non-GAAP net income increased 84% to $20.4 million. Non-GAAP diluted earnings per share increased 15.8% to $0.98 compared with 65% -- $0.65 per diluted share in the prior-year period.

Let's now turn to the balance sheet and cash flows. Cash and cash equivalents at December 31, 2013 was $22.7 million, which is essentially the same as compared to December 31, 2012. The Company had outstanding borrowings under lines of credit and term loans of $88.9 million, which was primarily used for the acquisition of Met-Pro. And capital expenditures in the fourth quarter were minimal. Net debt decreased from $78 million at the beginning of the fourth quarter to $66.1 million at the end of the fourth quarter as we continued to make strides in reducing debt from the Met-Pro transaction.

A couple of comments for modeling purposes. Our pro forma 2013 revenue, including acquisitions and excluding the sale of a non-core business which was consummated at the very beginning of 2014, is approximately [$268 million], and this should be the baseline when modeling 2014 revenue growth. Our strong fourth quarter provides nice momentum heading into 2014. Our tax rate was unusually low in 2013 given -- driven primarily by research and developmental credits and is expected to return to historical levels in 2014.

I'd like to take a moment to introduce Ed Prajzner, our new CFO. Ed and I have worked very closely together for the last two years. I've been extremely impressed by his intellect, his leadership ability, and his technical skills. Ed is primed and ready to step into the CFO role of CECO, and I'm very excited for him, and the transition is going very smoothly. Ed will do a great job as your next CFO.

Thank you, Neal and Jeff. Good morning, everyone. I'm extremely pleased to become CECO's CFO. I have been with CECO through the transformative merger with Met-Pro over the past seven months now, and I am very excited about the future for CECO. I look forward to working with Jeff and the leadership team and the Board in the future. Thank you Jeff, Neal.

And with that, I'd like to turn the call back to Jeff before we open it up to questions.

Thank you, Neal and Ed. We are continuing to implement our strategic initiatives and build a great foundation to create more shareholder value in the future. We have an even broader, stronger portfolio today than we did a year ago, and I'm very impressed with the integration of our recent acquisitions. We still have significant opportunity in front of us to create more shareholder value, and I want to highlight some of the key initiatives for 2014 and beyond.

As we discussed in Q3, we have simplified and streamlined our organization of business into three core strategic technologies -- one, air pollution control; two, energy; and three, fluid handling and filtration. To facilitate the new structure, we have made a number of management and leadership enhancements as outlined in our press release. Ed Prajzner, Jerry D'Alterio, and Brent Becker are strong emerging talents -- strong emerging leadership talents within the CECO organization, which will be additive to our existing senior leadership team.

I'm very proud of what we accomplished in 2013 that we have successfully doubled the size of our business and our profitability but even more excited about our future in the next few years. We now have a substantial platform from which to take our business to even higher levels and reach our target aspiration of $100 million in EBITDA.

I would like to take a couple of minutes to outline some of the key initiatives we are focusing on in our three-year plan to create shareholder value, and then we'll open up for any questions you may have.

First, operational excellence. This is a never-ending, meticulous effort to enable increased margins over the next few years. We expect this will continue to drive margins, growth, and operational -- operating margins in the neighborhood of 15% and provide a structural, disciplined process as we run our business and grow revenues going forward.

Number two, sales excellence. We continue to make strides in our sales initiative, our end-user growth, and market coverage expansion. Simply put, we are focused on more organic sales growth, and that is the principal theme behind our 2014 and 2015 sales excellence initiative.

Number three, our One-CECO sales initiative. As we move ahead to build and grow the CECO platform, it is critical we create more value for our customers in market expansion, given the great best-available air pollution control technologies we now have to expand our customer base. We have consolidated our air pollution control products under a single One-CECO sales focus in order to become -- in order to provide a unified front-end solution provider to our customers. I believe this will provide us with a competitive advantage in the industry and a way for us to create market share, expand our margins -- and make no mistake, we do have the best available air pollution control technology in the market.

We measure the One-CECO sales initiative every week. Our team is tied to it from a growth and a compensation perspective. We've had a dozen One-CECO wins over the past few months, and the One-CECO sales dashboard is up to well over 150 new incremental proposals, RFQ's.

Number four, China. Although CECO China continues to evolve as an important factor in our future growth strategy, we continue to explore every avenue of growth in China. New products, sales excellence, sales resources, in-country sales partnerships and sales alliances, and we continue to study smart acquisitions. To ensure China is a pillar in our future growth, we've launched new products and we've added numerous sales engineers last year, and we've expanded our manufacturing facility twice.

And our team in China is growing. As mentioned in our organizational press release, we are excited that Brent Becker has joined the CECO leadership team, who is living in Shanghai, to lead, manage, and grow our CECO Asia business.

Number five, growing our reoccurring revenue base. We have well over $3 billion of installed engineered equipment running around the world. We will continue to target this opportunity and expand our presence. Today, around 1/3 of our business is reoccurring in nature, and over the next handful of years we want to grow that to 50%. Reoccurring revenue expands margins, improves predictability in our business, and generate high free cash flow.

And lastly, M&A. We continue to believe the acquisition market is fertile, attractive, and a key strategic opportunity for CECO. We have built a great platform on which to be an industry leader, and we will continue to look for attractive, accretive, smart, bolt-on acquisitions as one element of our long-term strategy.

The CECO team is becoming very efficient at successfully integrating acquisitions and managing those businesses into our platform and our successful processes. Our team has never been stronger as I enter my fifth year at the helm.

Please note the five or six core fundamental areas of focus should not be new to our employees, investors, or key stakeholders. We've been making headway on many of these for several years now with much more ahead.

I also want to provide some color around the outlook of our three core technology segments, which we shared with you in Q3. And as we move through 2014, we will be reporting out in these three segments. The air pollution control segment accounts for roughly 40% of our revenues and includes a diverse set of excellent technologies used in many large industrial plants. Chemical plants, petrochemical plants, utilities, refineries, large automotive, large municipalities, alternative energy, and metals. The broad drivers for end-market growth in these segments are generally large industrial activity levels. We expect the air pollution control market will grow globally at a higher rate than GDP as we read various industries industry indices.

Number two, our energy segment. The energy segment is roughly 30% of our revenues and includes a variety of products used primarily in the power generation markets. These include traditional, coal, and natural gas power facilities. The key end-market drivers for this segment include global natural gas and traditional utility plants.

And thirdly, fluid handling and filtration. This segment accounts for approximately 30% of our revenues and is comprised of a dozen key industries, as I mentioned above. Around the world with best-in-class brands, high-performance recognition, and severe-duty applications.

All three segments have significant runway to grow globally and meet our future margin expectations and growth strategies.

In summary, I would like to say that we are all very excited about our team, our Company's current platform, and our future opportunities to create shareholder value. We will continue to focus on our mid- to long-term goal of building a $100 million EBITDA business within our core business and related technologies, and we believe we have established a solid, strategic pathway to achieve our goals.

We look forward to talking with you and answering any questions you may have. So operator, please open up for any questions.

(Operator Instructions). Rob Stone, Cowen.

Congratulations on getting so much done. My first question, Jeff is with respect to the operating margin goal, II think going from 13.6% to 15% in future years. Do you expect that to come principally from higher gross margins or further operating synergies? And how should we think about that for this year, for instance? Thanks.

Well, growing operating margins is something we are all very focused on and, quite honestly, the general managers are compensated on. But the answer is -- the first part of that would be the One-CECO air pollution control technology growth, I think, has a lot of value creation over the next couple of years. We've got a long way to go to create -- to sell more products and to combine the solution of the various technologies. We've made a lot of headway there, but we're not even 50% of where we need to be in terms of growing the One-CECO.

I do think there's a little bit of synergies left, a little bit of streamlining, but I also think we'll see some uptick in gross profit. And with the sales excellence driving global revenue, we should see a little bit of operating leverage on the P&L. So, those three or four things would probably be the drivers of achieving our operating margin aspirations, Rob.

Okay. My second question is with respect to bookings and the backlog, you know, relatively flat Q3 versus Q4. But you mentioned that trends have been improving. Can you provide any more color on how bookings are proceeding this quarter and from which industries or geographies? Thanks.

You know, we are starting the year pretty solid -- pretty solid with bookings. We picked up some nice momentum in Q4. Q4 bookings were up both with the acquisition bookings and legacy CECO bookings. So we are pretty pleased with Q4 bookings, and that carries forward into Q1 of this year.

China, we picked up some nice bookings in China. Our parts activity and our contract services business picked up some nice business. And our quotation activities today are slightly stronger than they were in Q4. But I would say that activity is in contract services, our cyclone business in China. But I'm pretty encouraged by all segments, Rob.

Great. Thank you. I'm going to jump back in the queue.

Sean Hannan, Needham and Company.

So I have a number of questions here. I'm going to ask something quickly for Neal Neal as well as then for Jeff. Neal, I'm sorry, you had mentioned a few factors to consider where we should start our baseline as we think about revenues for 2014. Can you repeat that for us?

And then Jeff, on an aggregate level, I don't think that we saw organic growth in terms of revenues. You obviously targeted that in your key initiatives. But can you perhaps call out at a business level what may have had organic growth in the quarter versus what contracted and maybe any additional commentary for puts and takes of that? And then I've got a follow-up to that. Thanks.

Sure, go ahead, Neal.

Sure, so let me start, Sean. The baseline -- if you looked at our pro forma 2013 revenues carving out a non-core water treatment chemicals business that we sold at the very beginning of 2014, the pro forma revenue would be $260 million. So that's sort of the 12-month baseline for 2013. And as I mentioned, we've got some nice momentum with just under $69 million of Q4 sales. But for modeling purposes, the $260 million is a good baseline number.

Okay. Thanks. And then Jeff, I don't know if you have any comments around that organic question.

Yes, I think the Q4 was quite strong for us. We're pretty pleased with Q4. I think have a -- we're pretty excited about 2014. But regarding the quarter, our energy sector, EFFOX and Aarding, had a very good quarter. Principally, EFFOX had a record year. Our cyclone technology group which is FisherKlosterman and Buhl, had a great quarter and a very good year. So they had a big pickup in Q4. And our parts ducting business did quite nicely in Q4. And then China, China had a strong Q4 as well. So those are the things that, from an uptick in Q4, carried us.

Okay. And then as you had identified this in the key initiatives, can you elaborate a little bit more for us for how you expect to drive your organic growth? Is this really in capturing what may materialize in broader growth within the environment? Or in the absence of what we should see as a broader pickup in that environment, is there really more of a share capture and better penetration that you expect or anticipate? Any color around that would be helpful.

Yes, sure. Growing our organic growth is probably our top priority. We spent a few years doing some pretty good things on the operational excellence side. Right now, sales excellence is a priority across the organization. So every sales leader, general manager, and the hundreds of sales engineers we have are very focused on pulling in more business organically. We have sales dashboard set up each week to go through them to make sure the organization is doing all they can to capture good business globally. We've added sales capacity and some sales leadership. So that's a top priority.

As part of that, part of sales excellence is this whole One-CECO sales initiative we launched with the acquisition and merger. We have a dozen excellent air pollution control technologies that were being sold independently over their life. Now we are bringing those together under one focus, one roof if you will, and that's created a whole host of activity for us.

As I mentioned, over the past few months we've created well over 150 new RFQ's just on that One-CECO air pollution control technology initiative. And we've closed probably a dozen or more One-CECO air pollution control projects. And this is incremental given the CECO Met-Pro merger. So that's a very important focus in the organization in growing organically. And I could -- I can share with you some of the dashboard and some of the metrics we use if you need that.

Okay. That's something perhaps I can follow-up on. Last question for the moment and I'll jump back in the queue. You had some pushes or some order delays that you had talked about from your third quarter, and I also believe some of that may have happened a little bit in the fourth quarter, at least earlier on. Can you characterize or quantify how much of that has now been realized now that we are kind of through two months of the first quarter now in 2014? And what are the expectations for how some of that actually either comes through if there is anything remaining? Thanks.

Yes, sure, Sean. We had a rock-solid Q4. The business has performed very well both in bookings and in project execution and in gross profit. And we did message, there was three or four important jobs in Q3 that got pushed into Q4, and those took place. So, we finished up Q4 quite well. We pulled in a few jobs from Q3, and now we turn the page into 2014 and we start our bookings and billings and our sales excellence.

So, yes, there was a few jobs that carried into Q4, but we are now finished with that. And with $100 million in backlog, we're pretty excited of getting that process equal to or better margins than we booked it with. And we're pretty excited about our first couple of months of bookings.

Okay, great. Thanks for all the color.

(Operator Instructions). [Jerry] Clayton, [Boenning].

Congratulations. It looks like you're starting -- you're executing very well on the integration side. A couple of quick questions specifically about the Met-Pro side, revenue coming in at about $23 million. I was curious as to how you felt about that revenue. And it seems maybe flat to down a little bit. I know it sounds like you also divested of a business line in there. Curious as to how you can get some of that business jump-started up and running a little bit more. Any thoughts on that?

Well, I'll say a couple of comments, and I'm sure Neal will add in. But that was Met-Pro's best quarter of the year. We're pretty excited about how they performed. Right now, we are blending the businesses together as One-CECO. We don't talk too much about Met-Pro or Aarding because the businesses are feathered together. Some of the Met-Pro businesses are integrated with the legacy CECO businesses and so forth and so on. They are part of the sales excellence; we have a good team on the field, and we're pretty excited about what we are quoting and we are booking right now.

Prior to this week we measured all of the businesses' RFQ's in Q1 versus Q4. And, probably, you know three quarters out of three quarters of them show an uptick in RFQ activity. So we're pretty excited about 2014, and I think Met-Pro is going to be a huge part of that.

Okay. Then --

Okay. (Inaudible) I would just add, Jerry, that it's good, solid revenue, profitable revenue, and really a lot of, call it, just singles and doubles. The big events didn't occur. But a lot of the just the day-to-day business was very solid.

I've got it. I understand that well. Okay. And then on the M&A front, any area that is going to be of particular interest of the three new I guess the APC and fluid handling, et cetera?

You know, Jerry, we are a big believer in all three of those segments. The air pollution control technology globally, the energy sector, and the fluid handling. All three of those businesses have nice runway, excellent margin expansion capabilities -- and so we're looking at all three of those. We have eight or nine -- the Board has eight or nine strict criteria for what we acquire in terms of how it fits, the accretiveness, how we can run the business, and the platform. So the pipeline is full but we have some pretty strict requirements.

But the short answer is we are very committed to all three sectors, both organic growth, sales excellence, and then bolt-on accretive acquisitions.

Got it. All right, I appreciate it. Thank you.

Rob Crystal, Goldman Sachs.

I have two questions. One, I guess was hoping you could update us if you are ahead of target or you are above your synergy target would be the first one. And then the second one would be -- I didn't quite follow the question about the baseline revenue for 2014. Was that $260 million before organic growth and/or contraction? Thanks.

We believe we are well ahead of our synergy target. Obviously, we are very streamlined and very synergy focused on all acquisitions, and we hope to pick up more throughout 2014. But the bulk of it is complete.

And one of the things to remember -- I know we closed on the acquisition on August 31, but in reality, when we announced the merger in April the team spent several months preparing. So we are well ahead of the synergies.

Regarding your other question, given what -- given the divestiture -- the divesting of a certain business, we are coming up with a run rate of about $260 million before organic growth.

Thanks. That was very helpful.

We said differently if all the businesses had been part of CECO from January 1 and if our Pristine business, which is the business -- the non-core business which we sold had been excluded, the 2013 revenues would've been $260 million. And, again, we have just had a stronger second half and had a particularly strong fourth quarter.

Thank you, Jeff. Thank you, Neal.

(Operator Instructions). William Bremer, Maxim Group.

Good morning, Jeff. Nicely done.

Thank you. Good morning, Bill.

Maybe just give us a little bit of a recap what you are seeing globally on the political front in terms of some of the regulations that may impact your business long-term.

Sure. We are seeing some very nice ministry changes in China. So we are very excited about our opportunity there. That's why we keep expanding our footprint and expanding our facility and adding products into the China market. So the China EPA ministry has enacted some significant things that will help us and help their country.

We are seeing a little bit in India. Europe has always been very stringent, but I would say Asia would be number one. And we are always excited about the continuation of the regulations here in the United States as well.

Okay, great. Thank you. That's all I have.

Rob Stone, Cowen.

Jeff, just a follow-up on your comment about recurring revenue, about 1/3 targeting 60%. Can you say in which of the three segments, the way you will report the business now, you have the most opportunity to grow? Or how much recurring revenue is in the three segments today? Thanks.

Yes. I would say the contract services and the component parts business and the fabrics -- the engineered ducting business is principally our highest reoccurring revenue business with the opportunity to grow. That is separate from our OEM business. So contract and our parts business is one we continue to invest in which drives the reoccurring revenue for us and will help us achieve our 50% aspiration. And separately, we have the divisions, the OEMs, that provide the parts and services to the 3 billion-plus installed base. I would say the OEM side of it is a growth opportunity for us. But I would say the parts -- the component parts and the contract services and the ducting business can grow at a faster rate. And if you blend those two together over the next few years, both the organic and potential inorganic activities, that's how we'll achieve our 50%.

But it is an important metric for the team, and it's very important to our long-term strategy to reach that kind of reoccurring level.

I know you're not carving out Met-Pro as a stand-alone entity anymore, but can you say roughly how much of Met-Pro's business historically was recurring revenue?

It actually was pretty close to CECO's from a pure OEM parts and service perspective. They were in that 30% range. We -- CECO had the contract services in a separate component parts ducting business that provided that reoccurring revenue stream. But from an OEM basis, OEM versus aftermarket, they were roughly 70%-30%, not too far from the CECO model.

Great. And my final question is with respect to the debt that you took on for the acquisition. Any update on how long you think it might take to extinguish that?

Well, I will say we are on track for what we aspired -- what we messaged in August and potentially before that. We'd like to be -- have a debt to EBITDA ratio of about a 1X by the end of the year. And that's our aspiration. I think we are on track to do that.

Great. Thank you, Jeff.

(Operator Instructions). Sean Hannan, Needham and Company.

Just taking a follow-up. Just a follow-up on some of the key initiatives here. So China -- what is your viewpoint today in terms of having the right product or offering there? How do you feel you need to expand or build that? Is there anything you can elaborate on for that overall approach as you identified it as a key initiative? Thanks.

Sure. Great question. Something we talk about frequently. First off, we sell filters -- two types of filter technology -- two types of cyclone technology and dampers and diverters in China. Those are our core business, and we are gearing up to sell more and more of those deeper into the China markets.

What we've also done in the last quarter is we've launched the Met-Pro dust collector technology and the Met-Pro Duall scrubber technology into China. So we can sell it, market it, fabricate it, and administrate it all in China. That's our primary focus.

But there are a few things with Rotary -- RTO oxidizer technologies. There are some dust collector technologies that we are forming strategic alliances with a few companies. So right now we have a few sales alliance agreements between CECO and some Chinese -- a couple of Chinese companies that will help us sell more and gain channel and gain more access to end-users.

We're also looking at some other damper technologies to support our EFFOX business. We are looking at a host of filter technologies that we'd like to either form strategic alliances or potentially a small bolt-on. And the more we do that with alliances and adding resources, we gain deeper access into channels.

Some of the markets are wide open to us and we are doing well. Some of the markets you have to go through design institutes which we are slowly and surely penetrating. But those are little bit more challenging; those are little more controlled industries. We keep hiring tier 1 sales engineers and adding rep agents.

But there's a host of products we'd like to add to our portfolio in China, just for the China market. But at the same time, there's a few products that -- a few world-class products Met-Pro has that are now -- we now just launched into China. So we are looking for some nice organic growth from that.

Okay. That's actually very helpful. And then, last question here. We've heard a lot about the synergies that you've been reaching that we are getting as a consequence of the Met-Pro deal. You've also made some comments, Jeff, that you are well ahead on the synergy targets. Just want to see if we can get a little bit more clarification from a cost standpoint as well as from a revenue standpoint. Are there more costs synergies that may come and materialize here in 2014 is a consequence? What have we realized thus far -- I know you've commented we've exceeded that $9 million target.

And then, on the revenue front, is there a way we can perhaps elaborate on that as well? We are hearing that they are advancing. Is this in terms of business to bid on? Is this clearly materializing in actual bookings? Or are we talking about that we are actually getting some revenue contribution from that in some of the specific businesses at this point in time? Thanks.

Well, first off, our aspirations for organic revenue growth are above average. That's part of our sales excellence team. That's part of our annual operating plan. So we are looking for significant, significant growth.

Secondarily, regarding the synergy piece, I would use -- in your modeling, I would use 19%. I would use slightly less than 19% in your SG&A modeling for 2014. That's a good number. If you look at where the businesses -- the two businesses were in 2012 and you calculate that, that total SG&A number, we are basically at that synergy number if you add on the Adwest and Aarding. So I would use that 19% for modeling purposes.

If we have -- there's a couple of plants -- continuing plant consolidations that will bring us a little bit of cost out, but I wouldn't put some big points on the board for that. But there is some stranded cost we'll see. We're in the process of selling three or four facilities. So that would be some stranded operating costs for that, but not a whole lot. But we continue to meticulously look for ways of running leaner, smarter, and faster because that's what our shareholders expect of us.

And I think we are in real good shape now. Now the organization is focused on sales excellence and the One-CECO. I do think the One-CECO sales initiative for the air pollution control business is a way to drive revenue, provide a broader solution to the end-users. And if we do that right, we should see a little bit of pickup in margin as we go through 2014. I hope that helps you, Sean.

That does. Thanks very much, Jeff.

We have cleared the queue. (Operator Instructions). There are no callers in queue at this time. I would now like to turn the call back to Mr. Jeff Lang for any closing remarks.

Thank you for joining our call today. We look forward to talking with you in the future. Thank you.

This concludes today's conference call. You may now disconnect.