CECO Environmental Corp (CECO) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the CECO Environmental Corporation's fourth-quarter and full year 2014 earnings conference call. Just a reminder, today's call is being recorded.

For opening remarks and introductions, I will turn the call over to Shawn Severson with Blueshirt.

Thank you. Good morning, everyone. Thanks for joining us on CECO Environmental's conference call and webcast to discuss the financial results for the three months and 12 months ended December 31, 2014.

I would like to point out that we do have an earnings deck here in this presentation and it is available today. It can be accessed either directly through the link in the press release or on CECO's website, and I encourage you to use that as we move through the quarterly call today.

On the call with me are Jeff Lang, CEO and President, and Ed Prajzner, Chief Financial Officer. Jeff and Ed will be reviewing the financial results and will also provide an update on the Company's strategy and outlook.

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

Following our prepared remarks we will open the call for questions. This call is being webcast. The webcast can be accessed at CECO's website, 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 site for on-demand review over the next several months.

Before we begin I would like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by forward-looking statements.

We encourage you to read the risks described in our SEC filings including our annual report file Form 10-K for the year ended December 31, 2013. Except to the extent required by applicable security laws, we undertake no obligation to update or publicly revise any of these 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 measures in today's press release.

I would now like to turn the call over to Jeff to begin the discussion.

Thank you, Sean. Good morning, everybody. Thank you for joining the CECO Environmental earnings call for 2014.

I'm on page 5, please. Revenues for the quarter were $76 million, up 10% sequentially. Revenues for the year were roughly $263 million compared to $197 million in 2013. That was contributed by the acquisitions made during 2013 and 2014.

Bookings were on par for the year; $63 million was our run rate for 2014 and a little bit below our expectations as well. Year-to-date bookings for full year were $254 million -- $255 million, up 28% for the prior period. Essentially, revenue and bookings were essentially flat and organic bookings were down for the year. Slightly down.

We picked up some nice backlog in 2014, which was positive, but EPS was $0.94 for the year compared to $0.95 in 2013. That was -- we missed our $1 EPS aspiration for the year pretty much due to light revenues in Q4, a little bit of mix shift in 2004 as well with some large energy projects and some lower gross profit profile from some of the acquisitions in December -- November and December.

Turning to page 6, gross margin fell in Q4. Strategically in Q3 we pulled in some large energy orders for large natural gas turbine businesses, which really helped our energy business become a major player in the gas turbine power arena. Those businesses had a lower gross profit profile and we were expecting some of that to take place in Q1 and Q2 of 2015, but that did -- a lot of that did process through in November and December.

These businesses had a big impact on Aarding and Effox in 2014. Pulling in some of those businesses enabled us strategically to become one of the key players in the natural gas turbine energy business, so we are very pleased with that. And our energy sector had a record bookings in 2014.

At the same time, the strategic acquisitions of Emtrol and Zhongli, which we closed in Q4, carried a lower gross profit profile with the business, so that had an impact in our numbers. And as we go through 2015, we are going to be kind of reshaping our gross profit profile as those businesses become integrated and synergies extracted.

We ended the year pro forma around $48 million in EBITDA for 2014, which was up 41% from the previous year. $39 million of that was legacy businesses and $48 million in total was pro forma, so we have a nice platform to build on for 2015.

Turning to page 7, some of the highlights for 2014. Very pleased with the management team. The business is running well. We had a little bit of slide in margin as we strategically and deliberately expected in Q4.

We are positioned very well for scale in our leadership team to take on more and to continue growing. The fluid handling business saw some very nice -- the fluid handling filtration business saw some very nice margin expansion in 2014. That team did a very good job integrating our filtration businesses and expanding the margins nicely.

Also, our energy sector had a record bookings year and the air pollution control group finished strong in 2014. We did expect a little bit more from some of the air pollution control businesses and are very pleased with how they finished up with revenue and bookings in Q4.

Fourthly, we continue to grow our aftermarket and recurring revenue portfolio and we keep expanding that. The acquisitions also bolster the installed base to allow us to take on more.

CECO China now is in the $50 million to $55 million revenue range, which is pretty exciting, so we are delivering on our promise to build out China. I could remember a few years ago China represented about $10 million of revenue for CECO.

We successfully completed four strategic smart acquisitions. Two were very small, in the $5 million to $10 million range, and two were I call in the midsize, $30 million to $40 million.

Also with the Emtrol-Buell-FKI merger we created a clear cyclone leader for energy -- for engineered cyclone technology. The Emtrol-Buell-FKI now becomes the gold standard for engineered cyclone technology and we are very excited about that.

We established a leadership position in our large natural gas power business, led by the Aarding and Effox organization. And we finished the year pro forma $327 million in revenue, roughly $47 million, $48 million in platform EBITDA to help us grow our business further.

Page 8. Business conditions and outlook are pretty much similar to where they were a quarter ago. Activity is strong. Quotation activity, or sales dashboards, are full. We are trying to apply our sales excellence techniques to capture more business, close more orders. It's a priority for the Company. We initiated sales excellence training initiative to help us get better and stronger.

The APC group is trending positively with the Q4 bookings and revenues. We still needed to do a better job in our contract service biz and our parts business. They didn't do as well in 2014 as we expected, but I'm seeing a slight improvement in some of those businesses and we are very focused on that.

The global energy business is really strong right now. We booked a lot of business in the first couple months. Domestically, the power business -- domestic traditional fluid handling -- domestic power business solid fuels is flat to slightly declining right now. So the Effox traditional utility businesses is developing sales and infrastructure in India, Asia, Korea, so we are doing a little bit better to make up for some of the flatness them domestically.

Fluid handling and filtration is on track. We have added resources there. We have a very good management team there so we are very excited about that business in 2015.

The Asian markets are solid across the board. The team is doing very well. We are a larger business now. We have an excellent sales management team there and a leadership team there, so we are really expecting nice performance and nice growth out of China this year for CECO. Brent Becker has done a really nice job transforming that business and so it's a big part of our growth strategy.

Again, we are ending the year around the $327 million mark and $47 million EBITDA, so we are very excited about growing our business in 2015 and 2016 and continuing that trend.

Page 9, we continue to want to grow our EBITDA. We've got a nice baseline number of EBITDA now of $48 million and a year or two ago it was around that $28 million range, so we are very excited about the opportunity to do that.

Organic growth remains a continued focus. We've got to do a better job in that area around sales excellence. Again, we want to leverage our China footprint. We are -- we will continue to resource and pull in a lot more natural gas power generation business. We are about halfway through the integration of Zhongli and Emtrol and those businesses are tracking well. We need to do a much better job growing our cyclone business given the investment in the Buell, the Emtrol-Buell-FKI opportunity and that's progressing very well.

Growing the aftermarket business -- and one of the things we promised about a year and a half ago was to do a bolt-on acquisition with our fluid handling business and we have done a lot of work around those areas. We have some in the pipeline. We need to do a better job finding a nice, smart bolt-on acquisition for that business, which is one of our higher-margin businesses.

But in a nutshell we are continuing -- we are furthering our strategy from 2014.

Page 10, we showed this slide in Q3 regarding Emtrol and Buell, which are progressing very well. These are businesses we worked on for three or four years to acquire. They are very good fits.

The purpose for remessaging this slide is to let you know the integration is going well; however, these businesses bring a lower gross profit profile to CECO. We also have a lower SG&A model, so the operating margin opportunity and upside is still very good. But at the same time, we are going to have to reshape our profile on the gross profit for the first half of 2015 as -- and that will be more reflective of what took place in Q4. So we wanted to mention that.

We also want to mention that these are very strategic and purposeful acquisitions to expand the CECO portfolio domestically and globally.

Page 11 just pretty much shows our trajectory on revenues from 2012, 2013, and 2014. We ended up 2013 $197 million. We ended up 2014 with the legacy business of $262 million; plus the recent acquisitions, we're now in that $327 million area -- $327 million, $328 million of revenue.

Scale is important to build out our footprint and our aspirations. We have a larger platform now and a larger installed base, and this is kind of how we are looking at going into 2015.

Building the -- page 12, please; building the platform to grow. We now have a larger business for future earnings power, which is exciting. We ended the year around $39 million of EBITDA, and if we add on the acquired businesses in 2014 that puts us in the $47 million, $48 million of EBITDA, which is pretty exciting.

We do want a larger business for scale for larger installed bases, expanding our technology across the globe, which gives us a more diverse and helps us perform better through various economic cycles. So there's -- a lot of this was strategic. A lot of this is to build a larger installed base so that we can harvest more recurring revenue, and also to expand our technology.

So we are very excited about finishing up the year in that $47 million, $48 million of EBITDA and very excited about 2015 and 2016 to keep expanding that.

Page 13, this quarter we wanted to share some internal CECO metrics that we look at with our CECO balance scorecard on a monthly and quarterly basis. Some of these you may track, some of these you may not, but we did show a nice uptick in our return on total assets from 2013 to 2014 of 300 basis points.

The team has done a very nice job bringing down working capital for the past few years. We ended full-year 2014 around 19% of revenue and working capital to drive cash, more cash flow and shareholder value. Net debt to equity was about 0.55. Net debt to EBITDA on the leverage side was at 2.0.

And we measure free cash flow and free cash flow conversion, or some of you may not measure that free cash flow conversion, but it's a point of interest for us. And throughout 2015 we're going to provide some more metrics around ROIC given the investments in acquisitions, so there's more visibility on the ROIC front. And Ed will share a little bit of this with you in some of his slides.

So thank you, I'll turn it over to Ed.

Thank you, Jeff, and good morning, everyone.

Turning your attention to slide 15 at this time. Again, this slide is our sequential trends of booking and backlog throughout the year. Again, and I will move on to the segment piece here and just kind of reiterate the consolidated pieces very quickly here.

But as Jeff mentioned, we hit a record backlog at end of the year of $140 million. Bookings were slower sequentially in Q4 versus Q3, but please recall we had the $20 million order booked in Q2, two large energy projects. Second-half bookings in 2014 were stronger than first half of 2014, so we've taken -- and that momentum has continued into the early part of 2015 as well on bookings.

Moving on to slide 16, again here you can see the consolidated revenue trend. Jeff mentioned the quarter is $76.1 million revenue, record revenue for the quarter, and Jeff mentioned $13 million of this came from acquisitions completed during 2014. Legacy revenue was a little weak in Q4, as Jeff mentioned, primarily it was the typical seasonality in Q4 was not evident this year as it had been in past years.

Continuing on to slide 17, this is the sequential comparisons of non-GAAP gross margin and non-GAAP operating margin. As Jeff explained in detail, we have seen some margin decline in Q4 sequentially and year-over-year attributable to mix.

Legacy business goes down, and as he mentioned, the two large energy projects were below the consolidated average margin. And we did have a disproportionately higher piece of revenue coming from the newer acquisitions in Q4, which again carry a lower-than-corporate average gross margin profile. But, again, also note that is pre-synergies as well of course.

Continuing on to slide 18 is the final consolidated slide. Here, again, you have adjusted EBITDA as well as non-GAAP EPS sequentially over the period. Again, as Jeff mentioned, we were disappointed with missing our aspiration of $1 per diluted share non-GAAP basis. Nevertheless, SG&A is up for the year. SG&A is holding very firmly at below 20%, actually below 19% and we intend to maintain that profile as has been our aspiration going forward.

Now moving on to the segment discussion beginning on page 19, beginning with the air pollution control segment. Again, as Jeff mentioned, APC had a very solid Q4 in terms of both bookings and revenue. Both up very, very, very significant sequentially.

Again, end-market is growing very strong for APC. They have been adding sales talent. Their pipeline is very full. They finished the year with backlog very strong, so we are very optimistic that the APC business is in fundamentally a very good spot going into 2015. Had a very solid 2014 and end of the year.

Moving on to the energy segment on page 20. Again, as Jeff said, energy had a very solid Q4, revenue up over $20 million. Record bookings year; $50 million for the full year. Again, Q3 is where we booked the two large energy projects which we are working down now through the P&L, so they are sequential. There was a sequential dip in bookings Q4 to Q3.

But again demand is very strong in the natural gas power market, very solid. Quotation activity is up strong globally. It's North America; it's Middle East; it's Asia. Very, very strong market for our energy power generation market.

And, finally, moving on to the fluid handling filtration segment on page 21. Again, this is our relative highest margin gross business. Small dip sequentially in bookings and revenue, but fundamentally solid business. Improved margins this year; very quick turn, book ship business.

They are also focusing on sales resources and they have also been expanding their product line into China in 2014 and going into 2015. So fundamentally very solid business and we are very excited about fluid handling filtration going forward.

Moving on to slide 22 on the balance sheet and cash flows. Jeff did mention some of this on the new metrics slide that we've introduced, which we will expand going forward. But we are maintaining our strong balance sheet, keeping prudent leverage. Intense, intense focus on working capital and free cash flows.

And as Jeff also mentioned, the dividend has increased. Our Board of Directors showing confidence in CECO going forward did increase the dividend 10%, the quarterly dividend 10%. Again, as a result of their confidence in our prudent balance sheet and growth prospects going forward.

With that, that ends the prepared presentation. At this time we will turn it back over to the operator to take your questions.

(Operator Instructions) Sean Hannan, Needham & Company.

Good morning and thanks for taking my question here. The first question I have here is on margins.

Now, you folks have traditionally done a pretty good job at improving the acquired company's margins in the past. So just trying to get a better sense of how long we think that this should take based on the recent acquisitions you talked about today in getting back to a corporate profile target. Or is there anything that could be overhanging here that would prevent you from being able to reach that type of an aspiration? Thanks.

Thanks, Sean. We have been talking about that for quite a while, and also thanks for mentioning we have not forgotten how to drive operational excellence and margin expansion. That's what we do, so thanks. And that's part of our DNA.

Having said that, Emtrol and Zhongli and then our large natural gas energy turbine business is a very good business and it represents $90 million a year. And if we keep growing it, $100 million and $110 million. So we have a nice piece of business that is below our corporate average margin expectation.

However, we feel the first half of the year we are going to have to digest some of that. It will probably reflect -- the first half of 2015 will probably reflect more like Q4 of 2014, so if I can give you that benchmark. And then we are thinking the second half we will see some nice uptick. That's kind of how we are thinking about it.

And then -- but our long-term aspirations of being a great industrial technology business and 15% or 16% is that we are not losing sight of that. That will be more of a long-term view.

Okay, that's very helpful. And then in terms of the quote activity, Jeff, that you commented on, it sounds like you were pretty optimistic there. It seems like you are feeling it's fairly strong and that your team is flat out.

Also, conditions seeming the same as you entered fourth quarter, but at the same time you had some pull-in in the fourth quarter organically and bookings were a little bit soft. So I'm just trying to reconcile this.

Is there a way to detail a little bit more of how we should interpret that, whether there perhaps have been any order push outs? Are there any delayed signings of contracts perhaps that it spiked? A little bit more detail around this would be helpful, thanks.

Good question; we talk about that a lot. Our quotation activity is very, very solid. It's probably equal to Q4, maybe slightly up.

Asia is strong. The domestic downstream activity in refineries and petrochemical is strong, given the low oil prices. So that's driving activity for us.

The global and domestic natural gas turbine power business is strong. Domestic utility business is flat. We are on high alert to pull in more business with our sales excellence training initiative that we have going on.

And then our Q1 bookings trend is better than Q4, so if we look at quarter-to-date right now, it's tracking better than Q4 and Q3 of last year. So that is kind of how I would look at that.

The second part of your question, Sean, in Q4 there was some revenue we didn't pull in. Contract services is probably $1 million or $2 million light. They had a couple push outs. The parts group, which is performing better; I think there's $1 million missed there in the last three, four, five months so that impacted Q4.

China was a little light in revenue and gross profit in Q4, nothing foundational. They are on track, but we expected more in China. And Emtrol-Buell is performing well. FKI underperformed in Q1.

And then the fluid handling filtration business, which had a very good year, they are probably $1.5 million light in Q4. So I hope -- the bookings side is on track. The activity is solid, but we had a couple things we didn't pull in in Q4, so I hope that helps you.

That does. It sounds like your aspirations for fourth-quarter revenues were a good bit higher.

Correct. No question.

Okay. Last question here and then I will jump back in the queue, and I think some of this relates to the bookings.

When you look then at your total backlog, when we pull out the acquisitions, we are actually down 8% year-over-year. So if the organic bookings aren't keeping pace, is there anything special that we have within the acquisitions where the rate of their bookings perhaps are consistently in a growth trajectory? So we don't end up in a path, say, a few months out where total backlog then starts moving against us and starts coming down year-over-year. Is there any detail you can provide around that?

I don't think that's going to take place. I think our bookings and revenue are going to do better this year than last year. And I think the acquisition of Emtrol and Zhongli is going to be very solid. We are 2.5 months into it, but everything we see is pretty solid, and I think the Emtrol-Buell combination has actually generated some nice bookings in the last 60 days.

And Zhongli is on track. It's a journey converting a very nice, privately-held China company to CECO China, but that's on track. I think the big focus is I think the 2015/2016 outlook is similar. I think you are going to probably have to reshape the gross profit profile of how you look at CECO for the next 12 to 24 months would be my take away.

Keep in mind, Sean, as well, the fluid handling filtration business carries very little backlog. That's much more of a book-ship business, so backlog is not entirely an indicator of the business.

We stay within -- we try to stay north of a 1 book-to-bill ratio. It floats, though. Any given quarter it dipped down to a 0.8 up to a 1.2. It can vary there, so backlog isn't a pure indicator of that forward look. And, again, we do track it daily and try to keep it at the 1.0 or better ratio, but it does slip.

But keep in mind a big piece of the business now really is not appreciably addressed in the backlog because it moves much quicker than that book-ship basis, so it's only of limited applicability for that forward look. The backlog, that being.

Sure, that's helpful color. Thanks, folks.

Tim Mulrooney, William Blair.

Morning, gentlemen. Just a couple questions here. First of all, on gross margin in the fourth quarter, I know you have talked a lot about it already, but can you kind of rank order the items that impacted your gross margin? For example, how much did these large energy projects negatively impact your gross margin relative to your recently acquired businesses?

I would say -- I mean we could provide a little more color, but I would say there's three rocks in the road to your question. One, we probably had $6 million, $7 million, $8 million, $9 million of less organic revenue, which impacted that at a legacy CECO gross profit mix.

Number two, we were processing some very large energy projects at a lower gross profit well below our average. That will continue for the next six months on a couple large projects.

But these were strategic resume contract that since we've booked those orders we've probably booked an additional five or six nice orders as a result of that. So very strategic, very deliberate. These were not -- these were expected, Tim.

And thirdly the Emtrol Zhongli represented $10 million, $12 million of revenue in the quarter at a lower gross profit. So those are the three pieces of it that went into the Q4 mix and gross profit answer.

Okay. Thank you, Jeff. Then on organic growth, our model says organic growth was flat or maybe down just slightly in 2014. Just stepping back and looking at the big picture here, what were the main items that maybe fell short relative to your expectations in 2014? And can you talk about what your expectation is for organic growth in 2015?

Thanks, Tim. You're right; we are not satisfied with our organic growth. The management team, the general managers, the sales managers -- we are not satisfied. However, there were quite a few of the businesses that performed very well last year. There was just a handful that underperformed.

Contract services was probably a little bit light last year. Our parts group, which we have counted on for years and years to deliver high revenue and high gross margin, had a tough -- had a challenging year. Some new competitive landscape gave us a hard time for a little while there, but we are back on track.

The Fisher Klosterman domestic industrial gas cyclone business underperformed. These are very good businesses that we think a lot of, so they need to do a better job in their sales excellence, in their marketing excellence. And fluid handling filtration business, which really had a very good year with integration, plant consolidation, and margin expansion to a world-class level, revenues were flat. So that business needs to kind of reinvent itself with sales and marketing excellence, additional distribution.

We have added regional sales management to that business and so we are thinking we are going to see better organic growth. But there's a few things that cause some of that lack of organic growth and we are not pleased with that. We are not satisfied with that, and the team knows that, so we have got to fix that.

But you and Brad know our business quite well. I'm sorry; you and Brian know our business quite well, so we want at least above-average market growth. We are trying to kind of govern our outlook, but we have always said we want organic growth and we want inorganic growth year over year to be a great company. So you know those numbers.

Thank you for all that great detail and good luck this year.

Bhupender Bohra, Jefferies.

Good morning, guys. Just wanted to speak about the aftermarket business. You guys have been saying that you need to grow that business to a larger portion of the overall revenue. If you can give us some color; how did that business do actually for 2014 as a percentage of total revenue, and how -- what you are thinking about going into 2015 on that business?

Thank you for that question. We talk about that all the time at our management business reviews.

All the general managers and sales managers are very focused on that. I think we had a pretty solid year with margin and some nice uptick, but probably not to what we needed.

The air pollution and control business did a little bit better in -- I think Flex-Kleen, Duall, and some of those businesses did very well with aftermarket. I think the KB Duct business was kind of -- did not meet our aspirations last year and contract services same. So we've got to do a better job on the growth side of that.

The fluid handling and filtration business did very well with aftermarket. Just one business alone is trying to reach $1 million a month in aftermarket at 50% gross profit. So that's just a little sliver of what one division looks for.

We do have -- we have added numerous aftermarket champions in most of the divisions. It is a very important metric for us that we grow our aftermarket business at a better rate. We did a pretty good job last year, but we didn't meet our aspiration in terms of total growth.

Okay. And the next question a follow-on for Ed. During your commentary, you mentioned the gross margin basically -- the SG&A rate, which you mentioned that you will be able to maintain at the current level of 18%. I don't know what conference -- what are the points which gives you more confidence to maintain that 18% SG&A rate going forward.

What confidence? We've got, at that level throughout the year, again with revenue dipping up and down throughout the quarters of 2014, we've drifted above that number in one of the quarters but that's a full run rate now. We've got G&A locked down at this point in terms of expense control.

We are willing to invest on the sales side obviously to grow the S part of SG&A, but we've maintained that in that level throughout 2014. And we believe we have the footprint built here to absorb and grow with the acquisitions completed at the end of 2014. So that is at a fairly loaded run rates at the current time in Q4 of 2014 and expect to maintain that level going into 2015.

Okay. The last -- on the M&A pipeline, if you give us some color on M&A pipeline going into 2015. Which segments are you looking into and where the opportunities globally and domestically.

Thank you. Ed and I and the Board study M&A quite diligently.

Number one, we have two midsized acquisitions, Zhongli and Emtrol, that are about 50% through the integration process that are tracking very well and the CECO management team does a good job with that. So I'm very pleased with how that accelerates.

Having said that, we certainly have -- we would like to acquire a fluid handling and filtration business to bolster our fluid handling filtration sector. So those type of profiles would be in our [M&A Q]. I would say that would be a priority for the first half of the year, but those don't come around too often. We've looked at five or six fluid handling filtration companies in the -- we haven't quite found the one we wanted.

And we have a very acquisitive and inquisitive organization. If there are other accretive opportunities that would help bolster our portfolio and our global footprint and help our reoccurring revenue, we would look into those. But that would be my comment on that right now.

Okay, that's all I had. Thank you very much.

Larry Schnurmacher, Morgan Stanley.

Just a question on order announcements. What is the corporate policy on announcing orders that you land? And are you guys seeing any fallout from the drop in oil prices: the energy companies cutting back on CapEx, stuff like that? Thanks.

No, actually we do not participate in the upstream and midstream aspect of the energy sector. However, we do quite a bit in the downstream: refinery, petrochemical, chemical. That's a core market for us that we've been in for decades. And those industries are doing quite well with the lower feedstock of nat gas and the lower oil prices. We are very busy right now in the downstream side of our equation.

Regarding announcing orders, we are doing less and less of that. But typically, when we receive significant amounts of large orders, over a two- or three-month periods, large above-average size orders, we like to send a note out just to communicate that. That is kind of roughly how we look at that. And we are doing less and less of that; we have done less and less of that over the past year.

Great, thanks.

Jeff Osborne, Cowen and Company.

Great, good morning. I just had a couple quick questions.

One on the -- you mentioned, Jeff, the seasonality impacted the fourth quarter. You went through the different end-markets and product lines that saw a $1 million or $2 million short. But can you just touch on which -- what normal seasonality is in the fourth quarter and in particular which segment that you thought that that would benefit that didn't come through?

Good morning, Jeff. Normally we see a pop in Q4; I will just say that. Normally, domestically we see a nice pop in Q4 with three or four of our businesses from turnarounds, end-of-the-year projects, CapEx conclusions within plants. That has usually been a very nice uptick for us, at least in most of the industrial businesses I've worked with in the past five years here. And we didn't see that this year.

Any sense on why? Lost market share or just constrained CapEx budgets, financing availability?

I just think customers didn't see that end-of-the-year CapEx closeout. Actually we had a couple customers push things out 30, 60 days. I don't think there was one specific reason for that, Jeff, but lots of small things were delayed that we expected. Another $4 million, $5 million, $6 million, $7 million of revenue. But not one glaring foundational answer.

Okay, that's helpful. One is -- another question I just wanted to better understand is the quotation activity you have been -- following up on a previous question I think from Sean. You have been highlighting the quotation activity has been robust for several quarters now, yet the organic growth hasn't been coming through.

I'm just trying to get a sense of is there delayed closings or potential market share losses. Again, sort of the similar question line to the seasonality is just maybe the funnel itself needs to be reassessed on how you are feeding things in and then what the conversion is or how you handicap those.

That's a good question and we do that. We do that through our sales excellence process.

The second half of bookings were better than the first half, so that was a positive. We picked up about $134 million of bookings in the second half, which was significantly up versus the first half. So that's a good indicator.

I think a lot of the natural gas business has closed quite nicely, as planned. I think it was nice to see the air pollution control group collectively drive the One CECO better and better. So that was a nice signal in Q4 that the air pollution control group had a very nice bookings. The last half was better than the first half.

And there are some projects that as we assessed our funnel and dashboard that we quote and we track that are still there, that haven't closed. That haven't closed there --.

And then just, in all candidness, there has been a couple of competitors this year that probably gave us a little more challenge than they have in the past. One being in the FKI cyclone business and one being in our KB Duct parts business. They wrestled with some competitors they haven't in the past and that caused a little bit of a lack of organic to your point, Jeff.

Okay. With the acquisitions closing here late in the year, how should we think about the tax rate assumptions for next year, just as the geographic mix changes? Is there any meaningful impact on the tax assumption for the model?

No, Jeff, should be fairly similar. This was domestic and China acquisitions, so on average the blend here should be very similar to what you have seen, particularly in the past. Again, R&D credit aside, you will be in that low 30 range going forward as we've seen before. Again, barring the R&D credit coming in.

So the mix will be about the same because it was global acquisitions, so blended (inaudible) rate will be very similar going forward.

Got you. And the last one I had is just on the potential acquisition that you mentioned around fluid handling. How should we think about your ability to lever up the balance sheet? On the small, medium, large spectrum that you highlighted before, doing two small and two mediums, what types of size would fluid handling be and again how would you pay for it?

We have quite a few things in the M&A pipeline; I just want to make that broad statement. We are doing a really good job integrating the two midsized ones from Q4.

We just -- I mentioned fluid handling because over the past 18 months, since the merger of CECO and Met-Pro, we've said we wanted to bolster our fluid handling filtration business organically and through M&A, and we haven't done that. We haven't done a bolt-on with the fluid handling and filtration business and we would like to do that. I just wanted to respond to that and bring a little more color around that.

Regarding the balance sheet, we are at a 2 times leverage ratio now. We have a pretty conservative balance sheet outlook from the Board, but if it were the right high margin, high growth rate business, we would -- money is pretty cheap right now. We would go up a little bit on the leverage ratio to do that and we would have to see how that would play out.

I wouldn't want to say we would go to a 2 to a 3k, etc., but it would depend on the target, the EBITDA generation, and the growth profile and how all that would come together to drive EPS. So there's a lot of variables that would go into that question, Jeff.

Understand. Appreciate all the detail, thanks much.

(Operator Instructions) Sean Hannan, Needham & Company.

Thanks for taking my follow-up here. If I were to look at the growth in China, it sounded like you're pretty optimistic there, can you detail for us a little bit more what are you seeing explicitly in terms of the growth of what you may characterize as legacy for CECO? What are you seeing for growth in China related to the acquisitions, and to what degree would you say that there is any acceleration perhaps within the bookings side of the business there? Thanks.

I would look at CECO legacy China roughly -- if we look at $50 million to $55 million outlook, probably half of that should come through the legacy CECO business. And when I say that, that would also incorporate the Emtrol-Buell. So we have the legacy CECO, the Emtrol-Buell-FKI, which is a big part of our Asian activity, and then we have the Zhongli, which is in the $25 million, $30 million business.

So if you think of $50 million to $55 million to $60 million over the next couple years, legacy Emtrol-Buell and then Zhongli. And Zhongli being the bigger piece for in-country utilities, refineries, and so forth. So I kind of look at it in thirds.

We are excited about what we are doing in China. We can't grow fast enough. It has been nice margins for us. It has been a very low tax rate. We are pretty excited about what we have in China and what we are going to do over there in the next few years.

The reason I'm asking, Jeff, it's just unclear to me to what degree, for the three pieces of the business as you had just laid them out, the natural rate that they are actually growing. So outside of the context of China for you as a geography and it's growing and a large part of that is acquisition, I am trying to understand, as we kind of break that down, how much of those businesses really growing on their own merits and the rate of that. Thanks.

We will have to give you some -- publish some data on that, but I would say CECO China probably had the best organic growth rate of CECO last year. Then the Emtrol-Buell cyclone business would come in second to that. And then the Zhongli we just acquired and that has been a $25 million, $30 million business. I think they have been in the 5% to 10% range.

But we will have to give you a little more color on that and circle back.

Okay, thanks very much for taking the questions.

Gerry Sweeney, ROTH Capital.

Good morning, Jeff. Good morning, Ed. I want to circle back on the organic growth side. I know there's been a few questions, but as you look at organic growth going forward as (inaudible) sales [excellence], there's certainly a code that you have to crack to get some sort of CAGR.

Is it -- when you've looked at it, is it adding more salespeople? Is it selling higher into an organization? Are some of the end-markets are really fragmented so it's more relationship-driven than you anticipated, harder to get in there? As you are looking at these opportunities, do you have to shift your strategy?

Maybe give some detail as to how you maybe crack that code, per se, and start driving the organic side.

Sure. We discussed this quite a bit. Given we haven't met our organic growth aspirations, you can imagine we talk about it frequently.

I think the first thing we have to make sure is we have the right --. We are developing a better sales excellence training process on a monthly basis for our team to boost productivity, close rate, sales technique. We have added additional resources in these businesses, so we need to make sure we are pulling business -- we are extracting more business.

I would say in my five years with CECO last year we saw a couple, two or three more competitive pressures than we have seen in the previous five years. So there's a few players giving us a little bit harder of a time that probably didn't help organic growth piece. So there's a few elements to that and I think Ed wanted to say something.

Let me just clarify one point there, Gerry. Specifically, cracking the code as you phrased your question. Well, that's about proving it. As we know, CECO has decade-long brand names out there that have been tried-and-true and that is how really you win your way in.

So we will put a piece of demo equipment out there to prove it to them. That is really what it is. They have empirical data of our product working for decades now. They want to see that, so it's about showing them; getting a piece of demo equipment.

The reason we chased the large energy job was to have a landmark hallmark piece of equipment in the field in that first natural gas turbine buildout to show we can do it. We have done it; we did do it; there it is; it's out there on the field.

So that's really what it is to crack that code. It's prove it to me, show it to me. That's how we get sold indoor and that's where the brand names we have and the legacy of what CECO is all about is what recurs and offers the optimism we have for the future. And it's simply that.

You have to go out and performance and show what our equipment can do and has done globally, and that's a big part of what these acquisitions are. They are right in our backyard. They are tied into what we do as our core competencies. That is how you crack the code here.

It's simply you have to prove it and show it to the customer, and we have demonstrated that. That our equivalent does the job, serves it up as delivered each time, and will for decades going forward with the aftermarket installed base we have. That is the magic and that is how you crack that code.

That's helpful, I appreciate that. And speaking of those energy projects, it sounded like they were lower gross margin. How much does that gross margin on that energy side was that you being aggressive to get those landmark projects, and how much of it was maybe larger projects maybe just naturally carry a little bit lower gross margin? Is there a permanent shift in that gross margin, or was this a one-time get our foot in the door, get that landmark; prove it, show me?

Yes, good question. The large natural gas energy business is very attractive to us. There was major league OEMs and we really like doing business with them. And end-users, too, the power plants.

The typical gross profit is pretty solid. It's not quite the high end of CECO Environmental gross profit aspiration, but it's below that. But a couple of jobs we pulled in -- and I have to give credit to the energy group. Aarding and Effox did a very good job pulling in some very nice orders in June and July for CECO. They did a very nice job.

A couple few of them were at a below-average gross profit. We knew that going in. We were very excited to capture that business with the end-markets and the OEMs, but that was not going to be a steady diet of that gross profit level.

Since then it is coming up, but we do have six months of those projects that we are optimizing, and we are going to be proud of servicing that customer just as a much lower gross profit. Going forward we expect it to be better than that.

That's helpful. Also, one last question. You'd mentioned maybe you got some competitive pushback. Is CECO sort of emerging from maybe a smaller size, a little less -- let's say, you're becoming bigger, you're gain the attention of some of your competitors and maybe they are fighting back a little bit more.

Perhaps, perhaps. I think a little bit of that. I also think there's been a couple small new players trying to track the code and enter the market that we haven't seen in the past. They are causing a little bit of heartburn, but we are managing through that and we are figuring that out.

But I can't -- I have to disclose the facts. We have had some competitive pressures last year that disrupted our organic growth. We are getting through that and we have got to do a better job in 2015.

Okay. Appreciate it, guys. I appreciate the time and the questions. Thank you.

Gentlemen, with no other questions in queue, I will turn it back to you for closing remarks.

Thank you very much for joining the CECO Environmental earnings call. We appreciate it. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.