CECO Environmental Corp (CECO) 2018 Q1 法說會逐字稿

Good morning, and welcome to the CECO Environmental Conference Call.

(Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Matt Eckl, CFO of CECO Environmental.

Please go ahead, sir.

Thank you for the joining us on the CECO Environmental First Quarter 2018 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 materials can be accessed through the Investor Relations section of the website.

I'd also like to caution investors regarding forward-looking statements.

Any statements made in today's presentation that are not based on historical facts are forward-looking statements.

Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.

Actual future results may vary materially from those expressed or implied by the forward-looking statements.

We encourage you to read the risks described in our SEC filings on Form 10-K for the year ended December 31, 2017.

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.

Good morning, and thank you for joining us.

I'll begin today's call with a summary of our first quarter results, which I am pleased to say shows that we're building momentum as a result both of market recovery and the traction gained from the implementation of our 4-3-3 Operating strategy.

I'll then highlight some specific actions we've undertaken or completed as we continue to transform CECO to become a market leader in air quality and fluid handling solutions.

I will then go into the first quarter financial details.

And I'll follow that with a wrap-up by offering some thoughts on the outlook of our end market and a couple of examples of our success in protecting the environment, while gaining share and creating value.

Turning to Slide 3. It's apparent that we're moving forward and building momentum in the first quarter.

And as you'll see, the numbers are beginning to reflect the actions we've taken.

Orders were $95 million, which is up 13% year-over-year and 4% sequentially.

I'd like to emphasize that it's the second consecutive quarter of both increasing bookings and a positive book-to-bill ratio after a series of quarters with a book-to-bill of less than 1 that dates back to Q1 of 2016.

So this is a key milestone in our turnaround strategy of the company.

You'll see that the refinery and fluid handling areas lead the way in our Q1 bookings growth.

Our gross margins were also favorable at 34.5%, which exceeded the 2017 total-year average.

Our team continues to demonstrate the value of the CECO brands and deliver projects with solid execution.

And our non-GAAP operating income and adjusted EBITDA improved versus the fourth quarter of 2017, based on our cost restructuring actions and rebounding refinery market.

We completed the sale of 2 non-core assets in Q1: Keystone Filter, which I touched upon during last quarter's call; and more significantly, Strobic, which we closed on the final day of the quarter.

Combined, these divestitures generate gross proceeds of approximately $35 million, enabling us to repay to $30 million of term debt in the quarter and support the growth investments within our 4-3-3 Operating Strategy.

Further, the sale of Keystone Filter and Strobic represent key steps towards aligning our business to better serve the Industrial Air Quality improvement and fluid handling markets.

At $74.1 million, revenue was down 20% year-over-year and flat versus the fourth quarter of 2017.

The reduced revenue reflects the tail-end of lower bookings that occurred last year in the wake of the down market demand in the power gen and refinery market segments.

Adjusted EBITDA was $5.6 million, down 60% from a year ago, but an improvement of 14% sequentially.

This is a modest improvement signaling the end of a 5-quarter slide.

And finally, our free cash flow was $3 million, solid and a positive indicator of our business model given the reduced net income on lower sales in the quarter.

Turning to Slide 4. I'd like to reiterate the clarity of purpose around which we are transforming CECO Environmental.

We're all about growth and, specifically, enabling our industrial customers to grow.

And we do so with clean, safe and more efficient solutions that protect our shared environment.

It's exciting to know that we can align our interest with our customers for growth and generate benefits to worker safety in the world in which we live.

It's been rewarding we hear from our associates that they're getting behind this purpose with a renewed sense of passion and commitment.

And as we outlined for many of you back in November and with an update on our Q4 call in March, we're aggressively implementing our 4-3-3 Operational Strategy to transform CECO Environmental in order to reach our full potential for growth by consistently winning share and creating shareholder value.

Slide 5 shows the components of our 4-3-3 Operational Strategy.

I'm amazed at the number of you who have approached me about my 4-3-3 soccer, or as we purest say, football analogy, with the support and understanding that we are on offense.

Not to mention hearing about some of your favorite offensive-minded 4-3-3 teams like Liverpool and Barcelona.

The long-term success of our 4-3-3 Operational Strategy is based on the implementation of 4 value creation enablers: outside-in leadership, portfolio management, simplification and innovation.

Outside-in leadership is all about an increased focus on listening to our customers, driving a positive cultural shift throughout the company and investing in the sales enablement and process excellence training as we build our brand.

Active portfolio management is essential for allocating capital to the highest yielding returns as well as bringing clarity to targeted and winnable end markets.

Simplification at CECO Environmental can unlock significant value to reducing the inefficient complexity within an organization.

As I mentioned in last quarter's call, our biggest target is to reduce the 64 legal entities and 13 ERP systems within CECO, which are not only inefficient, but also a barrier to productive interactions with our customers.

Finally, there's innovation.

This isn't a theme, but a necessary investment action.

Innovation, as an enabler of growth, will likely require the most time to gain traction and produce results until a pipeline of valuable ideas are fully quantified, but we've rekindled the creative juices across the company.

Next is the 3 compelling end markets that we've chosen to operate in: clean energy, industrial air pollution control and fluid handling.

We've identified competitive and winnable spaces in each of these end markets.

Combined, these 3 end markets represents a sizeable $6.2 billion market opportunity, in which we currently have only about 6% share.

So it's clear, there's plenty of opportunity to gain share.

In the clean energy market, we're a key part of helping meet the global demand for energy with products and services that support our customers with efficient solutions and technologies that keep the world clean and safe.

In industrial air pollution control, our aim is to address the growing need to protect the air we breathe and help our customers with their goals for sustainable upgrades beyond carbon footprint issues.

And in the fluid handling markets, we have unique pump and filtration solutions that maintains safe and clean operations even in the most corrosive environments.

Across-the-board, we'll continue our emphasis on aftermarket opportunities that protect and deepen our end-user relationships with long-term, high-value service contracts.

Finally, we have 3 growth platforms that are being built out to generate customer benefit and win market share.

Engineered equipment is our largest and most global platform.

We have blue-chip customers and superior products and applications that produce robust cash flows.

In the air quality improvement, we have best-in-class portfolio solutions, exceptional expertise and customer service to outperform against small fragmented competitors.

Finally, for specialty pumps, we have a niche and mission-critical specialty pumps, where timely delivery and high quality are necessities for customers in the end markets like petrochemicals and water desalinization.

Turning to Slide 6, I'll discuss the significant progress that's being made in implementing and executing our 4-3-3 Operational Strategy.

I'll begin with the value creation enablers and provide an example for each of them.

Our outside-in approach has shown its value already in the power gen market, which remains in what can only be called a micro-recession.

While the market has been down, our interaction is existing and potential customers has been up.

One recent win demonstrates how our visibility and capability are shining through in the down market.

While supporting the installation on 2 SCR units at a gas power site in New Jersey, our team was asked to help the customer understand and resolve a number of performance issues that are plaguing their older units, which employed a competitor's SCR units.

We promptly received an order for engineering analysis and some field work on their most problematic unit, with the potential to upgrade all 8 units with CECO Peerless technology.

Our outside-in approach aligned perfectly with this customer solutions mindset.

Through this type of intensified customer orientation, we're actually gaining market share.

What's attracting existing and new customers to us in power gen is both the strength of our high-caliber solutions and high-quality products, along with our staying power.

Our ability to endure the downturn and be a long-term player.

It turns out that customers want dependability, not just delivering today, but being there for tomorrow.

In terms of portfolio management, I've already mentioned that we've sold 2 non-core business units, which generate approximately $35 million in gross proceeds.

These sales make us leaner and more focused.

And the terms produced solid returns, which we applied to debt reduction for flexibility to invest in our growth strategy or driving out complexity in a number of fronts to unleash the productivity that results from focus and simplicity.

We made further progress in the first quarter by eliminating one more of the 2 ERPs targeted to be retired this year.

A clear benefit of this progress is that we continue to improve our operating efficiency and remove the barrier to productive interactions with customers.

Innovation is a key enabler of growth as part of our long-term commitment to invest in growth.

And we also made a small step forward with the creation of a tandem seal for our Dean RA pumps, which is a unique feature in air cool pumps.

The tandem seal eliminates the need for an external flush, providing for both improved safety and cost productivity.

Importantly, this small step demonstrates how value creation enablers can overlap, since it originated from an outside-in approach to dealing with customers.

We uncovered their need, designed the solution and delivered on it.

We've made deliberate decisions on the markets we serve.

And while we don't control the directions of the market, we do have to anticipate and adapt to changing conditions.

And we're pleased that over the last quarter, we've seen improvements in our end markets.

The refinery segment we serve with our Emtrol-Buell cyclones has literally snapped back with a wave of investments that are making up for lost time.

Certainly, the stability of oil prices helps a number of our end-market segments and supports investment by our customers.

The attractive fundamentals in air quality market haven't changed.

In fact, they've become more so.

The World Health Organization just released the results of a study showing that 7 million people die each year from air pollution.

(inaudible) industrial expansion is linked to air pollution, but governments, through environmental regulations and companies, is part of their increasing social responsibility, are becoming more aggressive in reducing emissions.

And the power gen segment remains at a significant slump.

But a rebound is inevitable, as natural gas remains a vital bridge fuel for the world's increasing dependence on renewable sources.

Even companies like Apple, who boast 96% renewables power, obtain almost half of its electricity from nonrenewable sources to operate their data centers with the required power system reliability.

The rest are traded credits that get them to 96%.

Unlike our end market, we do have control of our growth platforms, and we've been taking a range of actions oriented at improving our ability to win share by generating valuable customer benefits.

Here's a few examples.

In specialty pumps and air quality, we've approved $2 million in growth capital investments to make long overdue upgrades to our production equipment.

The payoff will be increased output and shorter lead time for our customers.

We've also begun cross-training members of our air quality sales team to improve their ability to present and sell a wider range of products.

This will create synergy in terms of efficiency, coverage and pull through, even before we increase the size of our sales team.

Clearly, we need to make every customer touch as productive as possible.

And finally, we held a technical symposium in Dubai on our products and services in the engineered equipment platform.

Awareness of our products and services is paramount if CECO is to be top-of-mind vendor for our customers.

I'll add that we have a great team in Dubai, serving a number of key customers in the Middle East and around the globe.

In summary, we've made steady and significant progress in implementing and executing our 4-3-3 Operational Strategy.

I'm pleased with the results that we've achieved thus far.

We have a long way to go and we are just scratching the surface in terms of what the 4-3-3 Operational Strategy has to offer us in terms of winning share and creating value.

With that, I'll turn it over to Matt, who will discuss the financial results in the quarter, before returning to close out the call with a few comments on our served markets.

Thanks, Dennis.

As I get into the financials, a quick remember that our non-GAAP adjustments include, but are not limited to, expenses associated with acquisitions, divestitures, executive transition, facility exists, earn-outs, legacy design repairs, restructuring and goodwill and intangible asset impairments.

Our non-GAAP presentation is intended to provide trend analysis and assessment of our core business performance.

Our bridge of non-GAAP items is referenced in the appendix.

Kicking off with Slide 8, I want to echo Dennis' remarks that Q1 results demonstrate a shift towards positive momentum.

This team understands the meaning of execution and delivered on many fronts in Q1, coupled with a rebound in our refinery markets.

Our orders were $95 million, which was up 13% year-over-year, as our Emtrol-Buell business booked $24 million of orders, more than all of 2017 combined.

The rebound in Emtrol-Buell has also helped to lift CECO orders sequentially by 4%.

Revenue at $74.1 million was down 20% year-over-year, primarily due to lower backlog within our long cycle businesses at the beginning of the quarter.

What is happening is that revenue has flattened out sequentially, and with orders up over the past couple of quarters, we're poised for growth.

Our GAAP operating profit was exceptional at $12.2 million due to the booked gain on sale of both Keystone and Strobic.

Cash flow from operations in the quarter were $3.2 million, which was not a banner performance due to depressed revenues.

However, I'm pleased with our conversion to EBITDA at 50-plus percent, which I'll touch on later.

Non-GAAP gross margins at 34.5% were still strong in the quarter, and exceed our 2017 average of 33.5%.

A good start to the year.

Q1 non-GAAP operating margin at 5.4% marks the turning point from prior period lows, as our cost restructuring actions are keeping SG&A in control.

It's good to see both operating income and adjusted EBITDA up double digits sequentially, even off a low base.

Concluding this slide, our non-GAAP diluted earnings per share was $0.05, up $0.10 from the prior quarter.

Before getting into segment results and further details on the financials, I would like everyone to understand that we have reorganized our segment reporting to align with the strategy and organizational responsibilities.

We have prepared a brief explanation of the changes on Slide 9, so let me take a moment to walk you through.

It all starts with our common purpose at CECO Environmental of enabling our customers growth, while helping to protect our shared environment.

This team is committed to being the leader in air quality and fluid handling solutions.

We have organized around our served end markets, and with the recent divestitures, we have also aligned external reporting going forward.

The 3 new reporting segments going forward will be named Industrial Solutions, Energy Solutions and Fluid Handling Solutions.

We expect this will also help simplify the overall CECO story as it sharpens our focus.

In our new reporting structure, we've moved our Emtrol-Buell cyclone business, which serves the refinery market, from the former environmental technology segment into our Energy Solutions segment, where we have commonalities in our supply chain and commercial synergies in our strategic account management approach.

Within our new Industrial Solutions segment, previously known as environmental technologies, we now have a broad suite of air pollution control offerings which serves a diversified set of industrial customers.

Finally, our Fluid Handling Solutions segment includes our specialty pumps and fluid filtration brands.

I will note that both Keystone Filter and Strobic were previously part of the fluid handling and filtration segment.

With the sale of these 2 units, the leadership team has a renewed sense of focus on growing while we have a competitive advantage.

Moving forward to Slide 10, our orders and sales trend by segment are displayed.

For transparency purposes, we've specifically broken out results associated with our divested business units and our Emtrol-Buell business, which, going forward, will be part of Energy Solutions.

A close look at Emtrol-Buell shows that we generated $36 million in new bookings over the last 2 quarters.

I think it's clear that last year's slowdown, or the cyclical slump, and the results support our hypotheses that there was pent-up demand as refinery maintenance CapEx had been deferred.

Activity from the larger players in refining suggests that we are likely to get back to historical levels of demand.

And on another positive note, fluid handling on an organic basis grew orders 14% sequentially and 7% versus Q1 of 2017.

Within the rest of energy, the team continues to execute well.

Our midstream oil and gas businesses are seeing modest growth on improved oil prices.

At the same time, further wins have not been enough to offset the micro-recession being experienced in power generation.

Recent news on power gen market is still murky, with new gas turbine placements expected to be flat to down 10% in 2018 versus 2017.

All of the major market players are making adjustments based on the near-term outlook.

Despite the competitive situation, Dennis and I are actively engaging with our sales team and there's still a lot of business to be awarded for those companies that are financial stable, have deep technical expertise and can sell the solutions versus products.

Industrial solution at $21 million of orders in Q1 was below our potential, as we feel that we have much untapped capability.

When Dennis talks about commercial process excellence and strategic account management, air quality has the most to gain from the coordinated CECO sales and marketing focus that we are building.

I would characterize air quality results as middle of the road on recent performance and sky is the limit potential as we execute in the future.

Briefly turning to slide 11.

We outlined CECO's total backlog orders and revenue.

It's refreshing to report a second consecutive quarter of growing backlog.

Excluding the performance of divested units in Q1, our book-to-bill ratio eclipsed 1.3 turns and grew 4% compared to Q1 of '17 on a like-for-like basis.

CECO's 4-3-3 Operational Strategy is gaining traction.

And one year later, the CECO organic growth engine is revving up.

Slide 12 shows the trend of our gross profit, operating income and adjusted EBITDA.

As volume is flat, and you can see an inflection point in our bottom line, driven primarily by the benefits of cost restructuring, partially offset by seasonal SG&A expenses and growth investments.

As we progress throughout '18 with an improving top line, we expect to see improved operating leverage on our SG&A.

Despite intense competitive pressures in our power generation markets, I'm pleased with our non-GAAP gross margins of 34.5%.

Our focus on aftermarket, which grew as a percentage of sales in Q1, and the richness of our pumps business, drove our margin to exceed 2017's average gross margin.

With the divestitures coming on Q2, we don't anticipate a material impact on our overall CECO gross margins.

On Slide 13, we continue to improve our free cash flow conversion rate, which specifically measures how well we turn EBITDA into cash flow.

This is a key financial metric that we're in the process of operationalizing deep within the organization: translating earnings to cash is a core capability of the CECO business model, and we're starting to make strides.

On the right side of this page, we've highlighted trade working capital and broken up project mix, because it tells an interesting story.

Prior to 2017, our project businesses generally operated as a negative working capital business.

With the downturn in volume through 2017, we've seen project grow as a percentage of sales, a trend that we are committed to reversing.

Our longer-cycled businesses often have maintained favorable front-end-loaded terms; and our team is committed to driving improvement in the gray bar as backlog grows.

As for the blue bar, Q1 saw modest improvement, primarily on fluid handling inventory turns and accounts receivable in China.

We see untapped value in squeezing the blue bar, thus reducing our working capital through simplification and automation of our processes.

Starting with the United States, we've initiated a shared service model in Cincinnati to drive working capital productivity.

To lead the charge, we've hired Scott Christy, Shared Service Manager to architect and execute the center of excellence.

Scott comes to us with extensive shared experience at Dover Corporation and J.M. Smucker.

Today, in the U.S. alone, we operate 6 ERPs, 30-plus legal entities and 100-plus bank accounts.

Scott has his work cut out for him, but with only a few months under his belt, I'm quite pleased with the progress we're making in value stream mapping, building operating metrics and early execution.

Real value will be measured by free cash flow and customer loyalty over time.

On Page 14, I'm pleased to report our improved balance sheet with the extinguishment of 1/4 of our debt, which now stands at $87 million.

The divestiture of 2 non-core assets sharpened our strategic focus and, at very attractive multiple yields, yielded approximately $35 million in gross proceeds.

That predominantly went to paying down our debt.

On the right side of page, you'll see a market change in our leverage ratio, affording us the opportunity to invest in our organic growth strategy.

I want to personally thank our fluid handling team, led by Chris Brown, Segment President, for executing divestitures ahead of our internal schedule, while delivering another quarter of orders growth in Q1.

This team, based primarily in Telford, Pennsylvania and Indianapolis, Indiana, understands the meaning of execution, and I'm very proud of their teamwork.

Wrapping up with Slide 15, we have largely completed our internal reorganization for growth, execute restructuring to align with challenged energy markets and pared down our portfolio to focus on air quality and fluid handling solutions.

With the new baseline and sharpened strategy, we'll be working the next 90 days to confirm our 2020 targets and roadmap to share with investors.

In closing, it's been a tough trailing 12 months in the face of challenging end markets.

But as Dennis likes to say, it's time to get on the front foot and start playing offense.

The good news is that this CECO team has a strong defense and a lot of goalscorers as well.

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

Thanks, Matt.

As you've heard, we're building some positive momentum.

Our 4-3-3 Operational Strategy has kicked off with early wins and positive results to show already.

The strategy will require more time to fully gain traction and capitalize on the attractive end markets that we've chosen to operate in.

It's all about execution, and we're up for the challenge.

Before moving to your questions, I want to share some quick thoughts on the outlook of our end markets and offer a couple of examples of projects where CECO is protecting our shared environment while gaining share and creating value.

Slide 17 shows that with the exception of power generation, all of our served markets are trending up.

Let me offer some color, beginning with our energy solutions end markets.

We anticipated that the refinery segment that we serve and demand for our market share leading FCC Cyclones would return as maintenance could no longer be deferred.

And with oil prices stabilized, CECO and our highly responsive team remain well positioned to capitalize on increasing demand.

The midstream oil and gas market segment also continues to be positive, with activity picking up in the Middle East, in particular.

Power generation is still down and likely to stay down throughout 2018 based on projections of the largest players in the space.

However, we have significant opportunities to gain share and we are pursuing those aggressively in the area of exhaust decks, silencers and SCR emission controls.

CECO's reputation, including strong brands such as Aarding and Peerless, based on capabilities and staying power, make us particularly attractive in a down market where owners need partners to ensure the success of long-cycle power plant assets.

In the coal power gen segment, we validated our efforts to servicing our large installed base with aftermarket support, and have resized our business operations accordingly.

This impacts both China and the U.S. results.

Inherent need for improved air quality will continue to drive the Industrial Solutions segment, and the outlook remains positive, both domestically and internationally.

And finally, the same can be said about fluid handling: It's a growing market that we're well positioned in.

In summary, outside of the continued depressed demand for power gen, our markets are strong.

And going forward, our performance should not be hindered by headwinds.

Our markets offers no excuses going forward.

Now turning to Slide 18, I wanted to highlight 3 examples of successes in protecting the environment while gaining share and creating value.

First involves a lithium battery Gigafactory expansion of one of the leading producers of electric vehicles.

When it's complete, this production facility is anticipated to be the biggest building in the world, and producing batteries for this manufacturer's electric vehicles and backup power that supplements intermittent renewable energy.

CECO's Dean pumps solve this company's high-temperature fluid handling needs by offering the highest safety with the highest reliability.

Both parameters are essential for lowering the cost and increasing the production of lithium-ion batteries.

We've have had 2 orders in the past 12 months, as this factory construction and expansion continues.

We also won a major project in support of a refinery coking system at a large facility in Kawasaki, Japan.

Specifically, this Japanese oil company turned to CECO's Emtrol-Buell team to provide technical expertise and solutions to reduce corrosion in their burner cyclones, which was causing premature failure of equipment and excessive maintenance cost.

The company engineers and operations' people told us that they value CECO's ability to meet their specific needs, including full fabrication of equipment, thereby assuring proper field fit up and alignment.

And one final win that tells me we're making solid progress as an organization, was awarded from a power-producing customer for a retrofit work at one of their combined cycle gas plants.

I highlight this win because it demonstrates the coordination and teamwork across CECO segments.

Specifically, CECO Peerless and CECO Kirk & Blum successfully teamed up to upgrade the ammonia injection grid and catalyst cleaning system to maximize NOx reduction at a combined cycle power plant.

The customer was attracted to us because of our technical expertise and seamless installation capability.

This is a performance trait that we successfully demonstrated, again, across business units and segments to show the full value of CECO to this customer.

I hope it's valuable to our investor community to understand some of the great things we do in support of our customers growth and our commitment to protecting people and the environment.

In closing, and turning to Slide 19, we take pride in our purpose and have confidence in our operating strategy.

There's much to do in transforming the company and winning share and creating value, but we're off to a good start in 2018 and our focus is to keep building on the momentum.

And now we'd like to welcome your questions.

Operator?

(Operator Instructions) And the first question comes from [Julius Sanders] from Investor.

You guys definitely turned the company around and going in the right direction.

I have one question.

With the stock trading at an all-time low, is there any reason why we are not taking advantage of a stock buyback and purchase at such a low price?

Yes.

Thanks, Julius.

So what you've seen with the proceeds that we generated and the free cash flow that we have, we have had a commitment to our banking agreement to use the first $25 million from proceeds and target that towards debt reduction as a part of our overall banking agreement, and we think that is also prudent in the context of looking at growth investments in the business.

So as we look forward, we certainly, in the future, would consider those kind of things, especially, as you noted, where we find our current share price.

But I think the business, right now, is focused on the best long-term returns and we think there's a number of areas where we're reinvesting into growth programs that will generate those kind of returns.

And the next question comes from Gerry Sweeney from Roth Capital.

I apologize.

I'm multitasking a couple calls this morning, so this may or may not been covered.

But I did hear you talk a little bit about Keystone and Strobic, the divestiture and the impact on it -- the positive impact you had on the balance sheet.

Could you walk me through maybe some of the -- what that does to the income statement?

How much orders were there?

Maybe the margin profile of those 2 businesses in comparison to the, I guess, the fluid handling segment, in general?

Yes.

Thanks, Gerry.

In both cases, what we agreed upon with the buyers was that we would not disclose the specific details.

However, both our statutory reporting and as well, some of the key metrics we did release with the individual releases in both of those transactions.

And so I'll let Matt comment a bit on how that really comes out and why we think we both sold a good business to a good future owner, but also why we think we got a good value for our shareholders and the like.

What I would tell you, first, before I let Matt comment on the specifics around the details there is that, in both cases, our strategic assessment last year said, our target customer base is heavy industrial and that's the community that we think we can help.

We can help with their growth programs, their expansions and with helping them run efficient operations.

And in both of these, the target end-markets of both Strobic, which was largely commercial and institutional, good business, but less of an overlapping fit.

And Keystone, which had a residential component to it as well and somewhat of a consumer-oriented component, were just the reasons that we said, hey, we're probably not the best long-term owners.

Matt, you want to update what we can on the financials of the transaction?

Sure.

If you take a look at our 8-K filing for the Strobic transaction that was published, you'll see that the Strobic operating income was $1.6 million and revenue was roughly $18 million.

And we published the Keystone revenues as well, roughly was a little bit under $4 million for last year, Gerry.

And I would just say that, as far as operating income goes, directionally in line with Strobic.

And then, your second question was, for fluid handling, how does the margin profile look.

What I'd say is, it's -- both those businesses were below the operating -- or the -- sorry, the gross margin profile of the fluid handling segment.

And then, last thing I'd say is, while not the best metric, we did disclose revenues on a sales multiple basis.

The 2 businesses generated 1.6x sales, which is more than twice CECO's recent valuations.

So I'd say we've generated a return significantly above CECO's recent valuation.

Okay, that's helpful, actually.

Got it.

And again, apologize if it was covered, but you had been looking at divestitures.

Obviously, you had Strobic and Keystone.

I think you're always sort of maybe looking at some other pieces of the company, and I know it's a public forum, et cetera, and there could be employees listening, but any other opportunities internally, you think?

Are you done with the process?

And -- or are there maybe small tagalongs or something larger still out there?

I think that when we think about 2018, we're largely complete with the shaping of the portfolio.

The growth platforms are now really what's in focus to get on the front foot to make the necessary investments to continue to lean into what are mostly good markets.

There are a few areas that we said are not part of what we think are investing -- are areas of the company that we're investing, like coal and nuclear component of the business.

But we're largely aligned with what we think we can drive forward and grow the business.

And as I said, get back to gaining market share.

Okay.

Switching gears a little bit over to maybe some of the end market stuff, midstream oil and gas.

I mean, obviously upstream is performing very, very well, I think, if you listen to the Halliburtons and Schlumbergers of the world, they're even talking about money originally earmarked for international investments coming to North America because it's short-cycle oil and it's just easier and quicker to market and a heck of a lot less risk than large offshore fields, et cetera.

How much activity are you seeing in midstream?

How big was this in the last peak?

Any shape, any sort of -- provide any shape around that context, if you could?

Yes.

Well, I'll just say, first, that when you think about our midstream oil and gas segment that we have on our Page 17 of the deck that we released, we're a lot more gas-oriented than oil.

And so a lot of what we're doing throughout the world, both North America, Asia, Middle East, is a lot more around gas separation.

Although, we do have some areas to make sure that we can do separation of water from oil, which is an important component in the process.

There's LNG activity, a lot of which has been earmarked and is moving, but there does appear to be a wave still in front of us.

I don't know if we have data here to talk about [last] peaks and valleys.

But there's a decent amount of activity and it's not just shifting to North America, it is in the balance right now with oil prices well above what people are using for their investment hurdle.

It's just making some of those decisions that our customers have deferred more attractive than they would have been at, say, $50.

Got it, that's helpful.

And then, do you have a targeted sort of leverage ratio where -- I mean, obviously, lower is better.

But at some point, just from a financial standpoint, you want some balance.

What are you targeting, if you can discuss that?

Sure.

So you obviously know that we operate in cyclical end markets, so setting a specific target is challenging.

But we would prefer that our leverage ratio not exceed 2.5x at the trough of a downturn, right?

And we want to be ahead of the downturn to execute to that level.

Obviously, we're in a downturn.

We think we're coming out of that downturn.

And this guideline provides ample capacity in the future to invest, so the upturn when our competitors may struggle.

So we want to make sure that we have ample cushion into the future, and that'll be our kind of target range for that foreseeable future.

Got it.

And then, final question.

I mean, if there's one area that you're most excited for in 2018, is it the rebound and, I think, the SCR catalyst or is it just the broad portfolio?

I'm excited across the board.

The momentum that we're starting to build into the market, the teams' excitement to go out and execute has me excited across the board.

It's been amazing even to our own guys, who are very close and connected in the refinery segment, the amount of business that's been pulled forward and the success we had in the first quarter alone on new orders off of Emtrol-Buell, which was really a drag on bookings in the last 12 months.

So that's exciting.

We got a great team.

We got a great business, a great franchise.

We told most of our team understood that.

I think we told most of the investment community that we had a good business, and when the market pulls back, we'll demonstrate it.

And I think they are demonstrating the strength of what they built -- what we built over a number of years.

So I'm excited across the board.

When I think a little longer term, the amount of room to continue to step up and lead in industrial air quality improvement in North America, in Asia and -- are big opportunities for us in the longer term where we're inching our way forward to really creating the platform that has customers want and need and expect.

(Operator Instructions) Seeing that there are no further questions, this concludes our question-and-answer session.

I would like to turn the call back to Mr. Dennis Sadlowski for any concluding remarks.

All right.

Thank you, and thanks, again, for joining us on our call this morning for our first quarter earnings release.

I'd like to just close by repeating that it's clear that we're gaining traction with our 4-3-3 Operating Strategy, and the focus that brings to our team and approach.

There's momentum that's building.

It's modest in terms of the bottom line results, but I believe that, that's showing that we're getting traction in the market.

And our markets appear to be rebounding and are relatively solid.

Outside of the power gen space, no excuses.

So going forward, we're pretty bullish.

We like what we're doing and we look forward to speaking with you again in 90 days.

Thank you.

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