CECO Environmental Corp (CECO) 2017 Q3 法說會逐字稿

Greetings, and welcome to the CECO Environmental Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Matt Eckl, Chief Financial Officer. Thank you. You may begin.

Thank you for joining us on the CECO Environmental Third Quarter 2017 Conference Call. On the call today is Dennis Sadlowski, Chief Executive Officer; and Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at cecoenviro.com. The presentation material can be accessed through the Investor Relations section of the website.

I would also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including our annual report on Form 10-K for the year ending December 31, 2016. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.

And now I'll turn the call over to Dennis.

Thanks, and good morning. We plan to take some time this morning to cover both the third quarter as well as our plans and actions aimed at transforming the company based on the strategic assessment we just wrapped up. Before we go into the financial details, I want to summarize our market conditions as we exit the third quarter and their impact on our results. Next, I'll have Matt provide come color and detail around the numbers, and then, I will share with all of you, our path forward to win, share and create value for our customers, employees and shareholders.

Turning to Page 3. Two of our important end markets in power generation in the niche refinery segment that we serve are experiencing increasingly steeper cyclical downturns. During the last quarter, the 2 top players in the power generation market, GE and Siemens, further downgraded their outlook. Both have acknowledged that an overbuild in thermal cut power generation has significantly dampened near-term demand. And our share gain efforts are just not able to offset the unexpected downturn, which GE is now forecasting to continue at least into 2018. Oil and gas refinery operations have increased their capacity utilization as the chart shows. That means that maintenance downtime is being deferred, leading to an historic decline in our year-over-year FCC cyclone orders. Maintenance can only be deferred for so long, and we are finally starting to see the bottom of this trough. Overall, general industrial is looking better than the other 2 markets. The U.S. market for air quality solutions is still characterized by uncertainty as customers prolong capital budget decisions in this area while demand for fluid handling has increased by double digits since 2016.

There's an absolute correlation between the unforeseen worsening of headwinds challenging 2 of our markets and CECO's third quarter financial performance that's summarized on Page 4. Matt will go into the details, but I'll note upfront, there are not many bright spots in the third quarter financial metrics. Orders were particularly disappointing at $71 million as a result of market conditions and a few delays due to the major weather events in Texas and Florida. A decline in revenue to $85 million in the quarter put pressure on most of our financial metrics. And we've been making adjustments to deal with the market headwinds, notably initiating a restructuring in Q4 to resize the organization to our current market outlook. And we've charted a new course, that we're both confident and excited about, to transform ourselves to better win share and create value. I'll be discussing the plan in depth, but will note now that we're professionalizing CECO for a new beginning and cleaning up past practices.

The strategic plan's success targets a new maturity for CECO Environmental, with major changes to produce a unified and aligned leadership team, disinclined and transparent financial processes and a focused and recognized suite of products and services. We've taken decisions that include portfolio adjustments, capital reallocation with an amended credit facility that provides us the flexibility to invest in targeted growth platforms.

As you might expect, some of the more significant actions, such as portfolio pruning and systems simplification will require taking a step or two backwards before forward momentum is realized. On the other hand, I expect that actions like investing in our growth platforms will yield increasingly positive results fairly quickly.

More on that after I turn the call over to Matt Eckl, our Chief Financial Officer.

Thanks, Dennis. As I walk through the financials, I'll highlight some of the finer points that'll include both GAAP and non-GAAP performance for the third quarter of 2017. As a reminder, our non-GAAP adjustments include, but are not limited to, expenses associated with executive transition, facility exits, acquisition and integration, earnouts, legacy design repairs and goodwill and intangible asset impairments. Our non-GAAP presentation is intended to provide trend analysis and assessment of our core business performance. A bridge of non-GAAP items is referenced in the appendix.

Starting with Page 6. I'll restate that Q3 results were below our targets and continue to be impacted by the markets we serve. Orders at $71 million were down 26% year-over-year and 19% sequentially, which breaks our streak of consecutive orders growth. We had anticipated a second-half rebound in our Energy markets, but refinery orders are being delayed and power generation markets are noticeably starker as earnings reports from GE, Siemens and Mitsubishi make clear. Revenue at $85 million was down 16% year-over-year and 9% sequentially due to reduced orders in our Energy businesses over the past few quarters, offset slightly by increases in our fluid handling segment. Our GAAP operating profit of $5.6 million was down 47% year-over-year, primarily on volume, although it favorably benefited from a further reduction in our expected 2017 Zhongli earnout liability. The China coal-fired power generation market is considerably lower as utilization has decreased and the government is making strides to curb air pollution. On the brighter side, we see regulatory action as a market benefit for our air quality businesses.

Non-GAAP gross margins were 32.1%, and down 1.3 points year-over-year. While our fluid handling business continues to grow with favorable margins, it's not enough to offset the pricing pressure we're seeing in our power generation product lines creating a mix shift lower. Q3 non-GAAP operating income was $5.3 million, or 6% of sales, and is down 63% year-on-year or 8 points on a profitability basis.

As revenue declined, it's putting pressure on our fixed cost structure that we are addressing with a Q4 restructuring. Non-GAAP diluted earnings per share was $0.03 compared with $0.24 in Q3 of '16. Cash flow from operations was unsatisfactory in the quarter, with the use of cash totaling $2.8 million. Cash generation is core to our value creation tenants in CECO, and we're not at all pleased with these results. The primary driver for the decline is fewer orders, which has caused our project backlog to be consumed, which in turn reduces the benefit from milestone billings we collect up front in a project's life cycle. In addition, we are seeing continued delays in our China accounts receivable collections as the market is slowing down. To address this situation, we've deployed one of our most disciplined project leaders, Colin Whale, our EMEA Operations Director to China on special assignment to identify unutilized levers to improve processes and collect cash.

Next, I'll turn to Page 7, which summarizes our year-to-date financials. Through 3 quarters of 2017, orders are at $242 million and down 26% year-over-year, with revenue at $272 million and down 14% year-over-year. Both are driven by demand in our power generation and refinery end markets. Our Environmental segment orders are down 51% year-over-year and include 2 large ventilation projects, that we were awarded in the first half of '16, that did not repeat. Our non-GAAP gross margin has improved 1.6 points year-over-year to 33.1%, mostly on the improvement in our fluid handling business, coupled with project margin mix on favorable pricing on orders received earlier in the year. I sit on many of our deal reviews, and within the power gen space, not surprisingly, there is noticeable pricing competition, as there are fewer jobs to bid. Our team is working aggressively to rationalize our vendor base and qualify new vendors to give us a better cost position. I've also spoken with a few of our top customers and confirmed that brands like Aarding and Peerless are well regarded and our application expertise is helping us to maintain our market share. Even in a difficult market, customers need deep technical capability and proven reliable execution. Cash flow from operations was a use of $1 million year-to-date. However, it's important to note that due to an accounting convention, $7.8 million of earnouts are classified in our CFOA. Or normalized, we've generated $6.7 million from operations which, frankly, is still below our expectations, and working capital is getting a renewed focus across the company. Adjusted EBITDA was $29.7 million and is disappointingly down 33% year-to-date. Non-GAAP diluted earnings per share was $0.32 compared with $0.63 in the prior year.

In light of market conditions and our recent orders performance, we're taking actions in the fourth quarter to reduce our SG&A. Specifically, we plan to consolidate footprint, reduce the headcount and reposition CECO to win share and create value when the market rebounds. We anticipate the restructuring will cost $1 million to $2 million and will yield $5 million to $7 million in run rate annual savings.

Turning to Page 8. We outline our backlog, orders and revenue, which are all trending down. Decisive actions within our new strategy will drive share gains within our defined growth platforms. But we have a few tough quarters ahead as we reset the business.

Looking backwards, our book-to-bill ratio has been below one since Q1 of 2016, thus a need for a near-term restructuring and a transformation that Dennis will outline in a few minutes. While we had anticipated a better orders outcome for Q3, I'm still confident that we've not lost market share in our key large markets. I'm also confident in the fact that we're taking the right steps to transform CECO into a commercially-oriented organization.

On Page 9, we break out orders and revenue by segment and have specifically split out Emtrol-Buell refinery business to show the extent to which this market has impacted CECO.

As you can see from the orders performance, Emtrol-Buell is down $45 million year-to-date year-over-year, from a mark of $55 million last year to $10 million this year. This is a significant decline and a 30-year trough we are navigating through. As stated prior, our FCC cyclones are the #1 market leader globally. We see [nearly] like every opportunity. With that, we're seeing $15 million to $25 million of these opportunities being consistently delayed. International customers are trying to find financing in the wake of $50 barrel of oil, and North American customers are running at 90-plus percent utilization as they try to keep pace because they're flooded with shale feedstock.

Neither of these factors is favorable to short-term demand, but we are seeing quotation activity improve. 2017 orders will likely be a historical low, followed by a rebound in 2018.

Within our Environmental segment, excluding Emtrol, Q3 orders were slightly below our average $20 million per quarter. What we're noticing is an uncertainty and prolonged decision-making process amongst our customer base, despite strengthening in industrial markets. We're often hearing from customers, "We're revaluating our capital budgets for 2018." Our Q4 quote activity is high, but we are cautiously optimistic with the holidays approaching.

Regarding our fluid handling segment, our orders are up 4% in Q3 and 11% year-to-date year-over-year. Unfortunately, we broke a streak of sequential improvement, in part due to $1 million of reduced demand in Florida and Texas due to inclement weather. We're still optimistic about the ongoing up-cycle in this segment.

Page 10, trends our gross profit, operating income and adjusted EBITDA. We're not pleased with the trajectory of these metrics, and as outlined earlier, we've charted a new course. While we can't control the end markets, we can control our costs while making discreet measurable growth investments. Our gross margins are still in line with our full-year expectations of 32.5%, or flat year-over-year. Our asset-light business model and growth in our fluid handling segment has allowed us to offset the pricing pressure we're seeing in our Peerless, Aarding and China divisions. Operating EBITDA margins are primarily driven by volume compression. SG&A was relatively flat sequentially but has grown to 24% of sales year-to-date on declining revenue. Our restructuring efforts are concentrated within corporate and our Energy businesses, as we adapt to the changing market landscape. We will, however, continue to make prudent investments in our future, for which Dennis will discuss shortly.

On the left side of the Page 11, we've reconciled CFOA to adjusted net free cash flow to clearly show the impact of earnout payments year-to-date. On the right side is a trend of our internal working capital definition that all of our leaders are accountable to. While fewer project milestone billings is the main culprit for our performance, we have opportunity to improve in accounts receivable in China and inventory management in our fluid handling segment. Specifically, targeted additions of capital, systems and skilled people are being applied to improve customer lead times and improve inventory turns in our aftermarket and specialty pumps business.

Finally, on Page 12, I'll touch on our debt and liquidity. On the left, you'll see we've made considerable strides to reduce our debt load since the Peerless acquisition. We'll continue this effort going forward because we see each dollar of reduced debt as incremental value. In Q3, we elected to make only the minimum service payment as we reset our strategy. On the right side, we've outlined our bank-defined leverage ratio, recast it for our recent credit amendment signed October 31. Dennis will speak to the terms as part of our strategic plan, but I want to personally thank our lending partners, who've worked with us since mid-summer to construct an amendment that provides flexibility within our covenants needed to invest in important and significant resources to execute on our growth strategy.

In closing, Q3 was disappointing, and we have a lot of work ahead of us. I believe in our focused growth strategy, and I'm excited to execute down a new path.

With that, I'll turn the call back to Dennis.

Thanks, Matt. Turning to Page 14. I want to follow up on my comments from last quarter by focusing on the rollout of our strategic plan to transform CECO, with the aim of winning share and creating value.

As a reminder, one of the first priorities that we set upon my appointment as CEO in February was to invest in a comprehensive strategic assessment of the company. We dug in deep to assess our markets and trends, organizational structure and the business processes across the company. In parallel, I met with numerous customers across the globe, visited our CECO colleagues in over 15 locations, met and spoke with vendors and partners, spent time with our banking syndicate and boiled down a significant effort from our team into several intensive discussions with our Board on the future priorities and direction for the company.

I'll add that the deterioration in our key markets that led to the financial performance that Matt just summarized, has only made this effort more important, if not more challenging. One of the compelling outputs of our strategic assessment process has been the sharpened view of our winning value proposition. Specifically, that we enable our industrial customers' growth with clean, safe and more efficient solutions that help protect our shared environment. It's what we stand for, and it serves as a guidepost for transforming CECO to win market share and create value. It's all about growth. You'll be seeing that we've sharpened our focus to become the leader in 2 key applications, industrial air quality solutions and fluid handling. And as a side note, clean energy remains the primary market for our air quality improvement and fluid handling solutions.

Now turning to Page 15, I'd like to share a bit on our historical performance with 3 themes that led to stagnating earnings per share, stemming from organic sales declines.

First, over the past 20 years, our revenue growth was increasingly and then, entirely driven by acquisitions. Over this timeframe, more than a dozen acquisitions have been completed, many with strength, but a few poorly timed.

Second, while the acquisitions have, for the most part, included strong recognized brands, CECO never fully assimilated them into a cohesive and synergistic operation. As a result, there's currently a patchwork quilt of 24 brands functioning as standalone business units, sharing only financial consolidation services with otherwise limited coordination, communication or integration. The latter has led to inefficient operations and cultural silos that undermine our common purpose. In addition, the discreet business units increasingly pose barriers for our customers to do business with us and have become a drag on our competitiveness. For example, on a recent customer win with a multiproduct air quality improvement solution, we generated 5 separate invoices from multiple legal entities, and we struggled to deploy service techs from one unit to support customers of another business without significant administrative bureaucracy.

And third, while we've running with impressive operational discipline, it's been at the expense of a lack of strategic investment back into the business. This has led to reductions in the capability of our people, processes and systems, and our innovative and competitive edge.

Bottom line, our strategic assessment concluded that too many disparate acquisitions, followed by severe underinvestment and a predominantly inward focus left us with declining organic revenue. This performance history underscores why we absolutely need and are committed to, a new direction for the company.

Going forward, and turning to Page 16. The leadership team and Board are aligned on a strategic plan which focuses on 3 growth platforms along with high-leverage value-creation enablers aimed at winning share and rewarding shareholders. Our business is industrial air quality and fluid handling, which includes solutions for the sizable clean energy industry.

Page 17 summarizes why I'm both confident and excited about our long-term growth stemming from strong fundamental trends within our 3 targeted end markets. The clean energy market is particularly compelling, with a profound shift underway to renewable energy sources and increasing innovation that support efficient and clean sources of energy. Within this market, natural gas has become the bridge fuel of choice with its abundance and clean burning capability. To beyond the near-term headwinds discussed earlier, energy demand combined with energy efficiency will continue to underpin global economic development.

Our strategy is therefore straightforward. Win with natural gas today, while keeping an eye on the horizon for renewable solutions such as battery technologies. Outside of Southeast Asia and India, the use of coal as a generating fuel is clearly and quickly on the decline. So we've relegated our efforts for coal-fired generation facilities to servicing the aftermarket and have resized our business operations accordingly. And in the refinery market, we'll build on our global leadership position in FCC cyclones that continue to help customers with the highest efficiency catalyst recycling.

There is also a significant opportunity for CECO in the broader industrial air pollution market. I'll note that in developed countries, air quality standards and worker safety requirements are becoming more stringent, with many customers now actually trying to exceed regulatory requirements as part of their social commitment to the environment. So this market is being driven by a powerful combination of regulatory action and social commitment. Interestingly, CNBC recently reported that 1 in 6 deaths worldwide, 9 million in total, are caused by pollution. Certainly, that sobering statistic is one reason why the demand for air quality solutions is increasing in China and India, as they try to safeguard their people and the environment while achieving economic growth. CECO is positioned to compete and take the lead in this substantial market. Fluid handling remains an attractive market for CECO, where we already have a strong brand identity in the niche specialty pumps market. Our equipment is typically of a mission-critical nature, handling corrosive fluids under either or both high pressure and temperature.

Page 18 summarizes our 3 growth platforms: engineered equipment, air quality and specialty pumps. Strategic assessment identified the investments in operating efficiency, customer service, innovation in equipment and customer relationships, required for us to be a more aggressive competitor in these markets. I consider these investments to be an imperative for our future success. CECO holds a prominent position in the engineered equipment platform built on the strength of our technical capabilities, and the asset-light business model provides us with robust cash flows. We can win more share, especially as we improve our operating efficiency.

We've been realigning our sales organization with a strong regional focus, supported with an improving global teamwork, and adding key account managers that are top customers for both OE and aftermarket. We're working to leverage our size to consolidate our purchasing power and supply chain excellence, and we've reignited new product and application development by investing in people and tools.

In the industrial air quality platform, we continue to have unmatched capability to deliver a breadth of solutions to a wide range of customers. So it's time for us to leverage this strength with improved customer benefits. Interviews with customers confirm they need both upfront and ongoing technical expertise in air quality to support their rising expectation for clean and safe operations. This platform requires that we transform ourselves from responding to individual product RFQs to being trusted advisors, supporting customer targets for growth and efficiency.

Specialty pumps remains an attractive platform for us because of our ability to provide equipment that can reliably operate in harsh conditions with strong product differentiation. Customers are looking for higher efficiency smart pumps with reduced leak and downtimes, and we can meet these demands much better than our competitors, which in turn translates to strong operating margins. After years of harvesting, we must invest in our facilities to update and upgrade them. It's time to modernize to more effectively deliver the specialized customer needs with consistently [timed] and higher quality.

Finally, a concentrated aftermarket effort cutting across all 3 platforms represents a significant growth opportunity that we intend to seize. There's 2 significant goals here. Obviously, the first is to retain our customers for the life of their facility, which typically require repair, replacement and upgrading as they age. Second, is to attract new customers that we don't serve today. Because loyalty can be overcome through more responsive and high-quality service and products. With aftermarket, it's all about speed and technical capability. Loyalty can be lost if calls are not answered or cannot be handled effectively. We'll be enhancing our dedicated sales team, adding to our service footprint and expanding 24/7 technical support capabilities. We're already being proactive with assessments, leading with a service mindset and offering valuable solutions.

Turning to Page 19. We're implementing clear and compelling CECO-wide initiatives to drive value creation and cultural change. For our portfolio management and simplification, we have a game plan that's already underway. Active portfolio management is about continual renewal within our offering. This includes acquiring and investing in key businesses as well as assessing where we may not be the best owner or where a particular business asset may no longer fit within CECO Environmental. We've established business criteria to guide our future portfolio management that include differentiation, strong cash flows and sticky customer relationships, characterized by an attractive aftermarket.

We're actively evaluating a few units where we may not be the best owner and as appropriate, will seek to find a better match for them, so they can thrive in the years ahead. Resulting capital will be focused on debt reduction and reinvestment. We'll also be simplifying our operations to complement the restructuring mentioned earlier. This will involve rationalizing our numerous discrete business units into 3 innovative divisions organized to support our growth platforms and aftermarket services.

Our simplification process will also include steps to make CECO easier to do business with. This too is a substantial undertaking, because it will involve moving sales teams to where the clients are and reducing more than 60 legal entities operating within CECO and their more than 130 bank accounts. Outside-in leadership is about focusing and aligning to market trends. This will require some time to fully indoctrinate into the fabric of CECO's culture, and we're pressing ahead. I'll mention here that we're also making some upgrades to our leadership team. We've invested in internal development programs and will be supplementing that with market-oriented leaders to drive the transformation.

And finally, innovation. We've fallen behind in this area by becoming dependent on acquisitions to gain an innovative edge. Right now, we rely on freelance tinkering to make incremental improvements instead of structured programs to drive significant advancement. Clearly, we need to be aggressive in leveraging digital technologies that customers are attracted to.

Turning to Page 20. There are several financial actions underway to jump-start our transformation. First, we've recently amended our credit facility with our lenders. We initiated discussions with our lenders in early in the summer, and it was immediately clear they had an appreciation for our business and an understanding of our need for reinvestment. The amended agreement clarifies and refines the financial definitions to provide us with far more investment flexibility, and our leverage ratios have been adjusted to 3.75x, with a step down to 3.5x out into the second quarter of 2019.

Second, as I've mentioned, our commitment to invest in our people, processes as well as products and services is long overdue. As a result, we've decided to suspend our quarterly dividend. This will save the company $10 million in annual cash outlays, and allow us to redeploy that capital to investments that will help us win share and create value for all stakeholders. We'll also get contributions from the restructuring actions noted earlier as well as additional capital to reduce debt and invest back into the business from our noncore assets realization.

And finally, as the markets rebound, we'll be prudently investing up to $30 million over the next 3 years in growth CapEx and growth initiatives into areas such as innovation, new markets, operating simplification and facility capability.

This is a significant change, because as shown on the left side of Page 21, historically, the net effects of debt sources and servicing are equal over the period, leaving cash flow from operations to be essentially used exclusively to fund acquisitions. And proceeds from asset sales over the period were correlated with cash paid out in dividends, leaving little to no funds for reinvestment. On the near term, we have no intention for overpaying on the elevated market multiples for deals. So we will focus on organic investment with solid internal returns. And going forward, expect us to be more selective on acquisitions that we do consider.

We'll be holding ourselves accountable for the success of this transformation. Key metrics, shown on the right side of the page, include organic growth, EBITDA, free cash flow and ROIC improvement. We're in the process of establishing midterm performance targets for 2020 that we intend to publish and achieve. We first have to work our way through some of the more significant changes that'll flow their way through the financials while we continue to generate market successes in the growth platforms.

In closing, I'll turn to Page 22 to highlight again our repositioning and transformation to lead in air quality and fluid handling solutions. Since our last quarterly call, we've made some tough choices, assured that the Board of Directors and management are in complete alignment, and initiated decisive actions.

The transformation at CECO won't occur overnight, and we'll have to navigate through the tough power gen end markets into 2018. But we're operating in attractive long-term markets, with improving platforms to win share and create value. And that's why I'm both confident and excited about our future. I'm looking forward to keeping you informed as to our progress and success in the future quarterly calls.

And with that, I'll open the call up for questions. Operator?

(Operator Instructions) Our first question is coming from Sean Hannan of Needham & Company.

Questions, actually I have many. So the first thing, Dennis and Matt, that I'd ask here is, if we were to reverse course maybe 9 to 12 months ago, I think there were some viewpoints that the internal operations and execution under the prior management team probably could've been a little bit stronger in terms of capturing bookings and revenue growth. Since you folks have been in your seats, what it appears like is that, as you've been trying to address a number of the internal, whether process changes, cultural changes, et cetera, that we've had, it looks like some material weakening within some of your end markets, really being quite incremental over the course of the last couple of months to quarters. Is that fair? Or is there perhaps something that may not have been previously recognized 9 to 12 months ago as -- that there actually was a bit more weakness fundamentally within those markets than what was previously appreciated?

Sean, thanks for the question. I think you have captured that correctly. When we first came -- when I first came off of the Board and into the business, we were aware that within the refinery, Emtrol-Buell business, that we would see a dip this year. We have pretty good visibility there into the medium and longer term of what's happening with a lot of early dialogue with customers all over the globe. I knew that would be a bit of a tough point on new bookings for this year. We're fortunate to come into the year with solid backlog against our #1 global market share position. But in the Energy power gen space, that's a cloud that formed and came in like some of the storms that hit the country in the last quarter. There was some modest slowing down perhaps, but I think, both GE & Siemens, the 2 big dogs in this space, were very surprised by the steepness and the quickness of the downturn. Both of them are out making major restructuring in their own businesses, and there's nothing we could do to completely offset that steepening and accelerating market downturn. So that put about 50% of the company into its own little micro recession as we worked through our internal process, as we worked through our execution path and as we built the strategy going forward.

Okay. And so there's some pretty tough challenges we have here with where the bookings and the backlog are. Certainly appreciate some of the commentary around how you folks are looking to address the business. But as we step back and we look at the results from this quarter as well as our models, it seems like we probably, just based on timing lags, going from order bookings and really kind of getting into then that revenue generation, we might have another 2 sequential revenue declines here in December and March before some of these other efforts to simulate the top line could really take effect. Is that logic something that holds water? Or what commentary would you provide around that? Just trying to understand, when we can think about an inflection point given what's been communicated today?

Yes. So I'll say something about the market and the bookings and let Matt also comment on your question about timing and history and backlog. Bookings-wise, again, it's been a challenging market environment, and not without a great deal of effort. One of the things I'm pleased with is the strength of leadership across our energy and engineered equipment businesses that do give me confidence that, in spite off a very challenging market outlook, that we have leaders that are leaning into the market and establishing and maintaining our strength of brand, to make sure that we're getting more than our historical share. And I think we're going to see that in the refinery space, with our Emtrol-Buell business. A lot of the delays that Matt spoke about what we think are finally going to start translating into new wins based on the accelerating activity and discussions that we're having in a number of those markets. So that will pick up. I think we are pretty optimistic with the quarter we are in now. We have some early wins and a good start to the month of October. But you're right. In some cases, and I'll let Matt add some color, a portion of our future revenues are based on prior period's bookings. That's the way it is with the long-cycle nature of some of our units. Matt?

Yes. On the revenue side, Sean, with a book-to-bill less than 1, your inclination towards sequential decline in revenue is correct. I think we have tough end markets for the next 2 quarters ahead of us.

Okay. And then last question here. It's going to be multi-point, and then I'll hop back into the queue. Can you -- I'm sorry if I'd missed this. Can you talk about the timing of the restructuring actions in terms of cash outlay? When we'd see the benefits materialize them in full ramp? And then, part 2 to that really is, I think if I interpret your slide deck correctly, your bank defined leverage is nearly 2x at this point, and if I remember correctly, the leverage requirement you guys drop to this year is at about 3x. So I just want to validate if that's correct, and try to understand your perspective around any risk around tripping covenants penalties and what we're looking at on that front?

Sure, so Sean. I'll start by saying thanks for sticking with us. There's been a -- we had about 6 analysts covering us, we now have 3, with 3 of them leaving recently for other positions outside of their firms, and they're looking to backfill. So I appreciate all of your questions. If you have more, you're free after this to ask a couple more. But I want to go back to your first, and then I'll answer the second one. The timing of restructuring. So the majority of the actions have or will take place in Q4, with full quarter benefits being recognized by Q1, and the actions are quantifiable and our leadership team is accountable to delivering those benefits. We will still need to make some discreet investments in simplification in our growth platforms, and we also have accountability to make sure that those yield future benefits. Thus the total SG&A reductions may be less than transparent in the full P&L. But rest assured, we have a clear delineation between restructuring and investing, and we'll see a majority of those $5 million to $7 million in savings in Q1. As far as the cost associated with those, we're still working through the final details of the program here in Q4, but right now, we anticipate it to be about $1 million to $2 million of severance and exit costs associated with our footprint. So more details of that will be rolled out here in Q4, as we finalize that in the current Q4 quarter. Your second question about the leverage ratio, I think it was -- we're currently sitting at under 3, we're at roughly around 2.6 turns and our new covenant allows for a leverage ratio of 3.75 through second quarter of '19. That gives us 2 things: one, it gives us the ability to invest, which is sorely needed in sales, engineering, service, talent, all the items that Dennis spoke about in the growth strategy. It also helps to shield us through the trough of the power gen market that we're seeing here for the next, let's call it, 12 months that we ensue. And there's a lot of other items in the finer details of our credit agreement that our lending team has helped us to include the definition of EBITDA and reclarify that, so that we have some flexibility for the future, and I'm appreciative of their support. So at this point, where we're seeing right now, I don't feel nervous about, as you called it, tripping any covenants at this point.

(Operator Instructions) Our next question is coming from Gerry Sweeney of Roth Capital.

I wanted to take -- talk a little bit about, I guess, the strategic initiatives going on, and pardon me because there's a lot here and we're still working through it a little bit and reading, just actually going through the slide deck. But it seems to me we have a few [different] things going on, and I just wanted to get your thoughts on this. It seems like headwinds are created by -- you have a few high-profile brands that are hitting some headwinds i.e., the Emtrol-Buell and the energy business. And they've really taken a hit on the top line there and hurting profitability. And then, on the other side of that, you're looking at a bunch of smaller, probably, brands and businesses that aren't impacting the top line, and may actually be a drag on the profitability side. And it seems like the perfect world would be keeping the Emtrol-Buells, keeping energy business, keeping those higher profile businesses, but adding on additional areas to probably alleviate some of that, we'll say, revenue concentration. Is that a fair sort of assessment of what's going on here at the top line?

Well, thanks, Gerry, for the question. If I understood it, you accurately described a couple of things. One, we have, as you outlined, as we discussed, some serious headwinds in a couple of our key end markets going on. As I mentioned, the refinery re-leases. At the beginning of this year, we saw we were headed for a trough, it was going to be deep, and it was going to kind of take the lion's share of '17 before we started to see new bookings in that business. Power gen kind of hit a cloud that turned into a major storm and, again, I mentioned that as well with our biggest market customers there all in serious and major restructuring right now as we speak. That said, those are real. We're dealing with them. I think Emtrol will come out earlier and we'll start to get very favorable comparisons as we go into '18. I think power gen will be tough. What we like in our portfolio, and what we've decided with going forward, with the concentrated 3 growth platforms is, we very much are going to be about competitive differentiation units that have good, strong cash flow generation, and developing and harnessing sticky customer relationships with our aftermarket efforts. So those are things that you will find within the focused areas of our growth platforms, and into what are some pretty compelling long-term markets. It is, what we think, makes a difference as we go forward and transform the company for the future. That's what I have great confidence in, that we will succeed in winning share and ultimately creating value for our shareholders.

Okay. And then, I mean, talking about some of the businesses you may exit. I mean, do you have a sort of rough estimate of how much revenue that may be? And sort of what that does to profitability -- I'm not sure if -- does that become a positive net profitability, because they're just more of a drag than anything?

So I think what I mentioned there is that we're pretty advanced in our assessment of that, and we do believe that we may have a few business units where we might not be the best owner. They're good operating units, they're vibrant, they generate good cash flows and the like, but when you make trade-offs of, "Can we invest equally across the board to make sure that we drive the best long-term value?" That's where we're in the discussion and looking at how do we sharpen around these 3 growth platforms. So as we make progress there, we'll certainly be able to share that, but there's nothing that I could share today that would be definitive. Yes, and we appreciate your continued coverage. As Matt mentioned, we lost 3 of your colleagues to new roles at different firms. I think they are looking at backfilling coverage, and there is a lot to digest today as we conclude and move forward on our strategic plan.

Our next question is coming from Sean Hannan of Needham & Company.

Just wanted to see if I can also go back into some of the commentary and the slides you have around some of this refocused strategy here. If I look at your -- in your slide deck, in Slide 18, we call out a few growth platforms. For example, engineered equipment. Trying to get a better sense of, as you folks identify these themes, can you talk to us in a little bit more detail in terms of what you feel that you're holding there as market share? How you size this? How you really see some of this developing? And the reason I ask that is -- for example, when we look in the engineered equipment, we have cyclones, and we know you folks have done a lot of cyclones business into various submarkets for a long period of time. But as a grouping, that's down pretty good right now. And so as we're looking at this slide, calling it out into clean energy, is this simply pivoting existing technology into a bigger focus and push? How present are you? Just trying to really get a better understanding, you know? What is this opportunity here? Where can we see that's a little bit more tangible? How you size this? How do you grow this?

So I think a portion of your question is also delineated on Page 17, where we talk more about our markets. And we talk about clean energy because, essentially, a lot of what we do and where we're putting our growth investments are in and around clean energy production, right. I talked about coal being on the decline -- serious decline all over the world, and that's why we've, I'll say, collapsed that for serving the aftermarket in a profitable fashion, but don't see much reinvestment going there, because there is not a market that we would anticipate comes back any time soon. That said, even there, we have some interesting discussions underway with the core technology that we've developed and how to apply that in the future for benefits for the company. But we are very much in and around the gas market, both gas production, gas distribution. LNG build that is underway in this country and looking to be exported around the world with the shale gas findings all over the country. We're all about the gas-fired power gen market, and that's where a big portion of the current mix is in our engineered equipment space. We still see that fairly as a fragmented overall market, especially in solutions that are more around distribution and separation of gas. And so that's why we still see a lot of opportunities there to continue to consolidate to use differentiation, where we have strength in silencers, we have strength in separation, we have strength in SCR's, we have strength in FCC cyclones, and to continue to use that differentiation and our strong project capability to generate cash flows for the business. These units have done well with favorable cash generation, particularly as we're growing the businesses. And frankly, in the current market conditions, they put not only some strain on growth, but some strain on our working capital as well, because the nature of us to work out ahead with customers. The other 2, industrial air pollution, fluid handling, similarly, we have a pretty broad market in a fragmented space. Still see room to be a consolidator, but first things first is we want to bring in the focus to making the internal investments that we're confident will generate pretty near-term paybacks as well.

(Operator Instructions) Gentlemen, I'm showing no further questions in queue. Do you have any additional or closing comments?

Yes. Thank you, operator. And thanks to all of you, again, for joining us today. Before I close the call, I'll just leave you with a final confirmation that we are accelerating our transformation to win share and create value. We're focused on -- focusing our efforts on 3 attractive end markets with targeted investments and redeployment of resources into the 3 growth platforms that I covered. Much has been accomplished in recent months, and we still have a great deal to do. So I'm looking forward to sharing our progress with all of you in the future. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.