Good morning, and welcome to the CECO Environmental conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.

Thank you for joining us on the CECO Environmental First Quarter 2020 Conference Call. On the call today is Dennis Sadlowski, Chief Executive Officer; and myself, Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we 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, 2019.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 reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.And with that, I'll turn the call over to Dennis.

Good morning, everyone, and thank you for joining our call. I hope that you and your loved ones have been in good health throughout the COVID-19 pandemic. And like all of you, I look forward to better times ahead.On this call, I'll take some time at the outset to discuss CECO's response and adjusted posture to successfully navigate the COVID-19 pandemic and its economic fallout. To use a generic sports analogy, we've strengthened our defense and refocused our offense. Next, I'll summarize our first quarter performance which, with our team's strong execution, delivered solid results despite the accelerating social and economic changes and challenges emerging from the pandemic. Following that, I'll touch on our end markets and what we're seeing in the midst of the world's effort to mitigate and contain the spread of the virus. Matt will then discuss our financial details, after which I'll share a couple of examples of the work our teams continue to drive ahead despite the global economic shutdown. That will lead us into the Q&A session, where we'll address your questions.As we jump in, I want to emphasize that CECO has already taken several decisive actions in response to these unprecedented times while maintaining our commitment to progress through superior execution. Let's begin with Slide 3, which shows our 4-3-3 Operating Strategy that successfully guided our execution since late 2017 and into much of the first quarter. The 4-3-3 Operating Strategy was a blueprint for transforming CECO Environmental into a vibrant growth company. In executing the blueprint, we built a solid foundation of strength and agility. That foundation gives us the confidence to pivot to an operating posture that allows us to proactively navigate through the COVID-19 health pandemic and its economic fallout. Quite simply, under the 4-3-3 strategy, we built the plan,…

Thanks, Dennis. Before starting, I want to say that I hope that you have all weathered the pandemic with a minimum of personal hardship and professional disruption. It's been a challenge for families dealing with stay-at-home orders and a test for businesses and it's certainly good to see some countries and U.S. states taking the initial steps to getting working again.In discussing CECO's financial results for the first quarter, I'll also provide some additional detail about our pivot to strengthen our defense and refocus our offense. I share Dennis's confidence that with our continued execution, the 4-4-2 formation we've pivoted to will drive healthy progress.Let's start with Slide 9, which shows that despite the accelerating spread of the COVID-19 virus, our sequential orders improved in all 3 segments. As the bar chart on the left-hand side shows, overall orders increased 12% sequentially and decreased 22% year-over-year. Energy orders were subdued, especially in the refinery area where capital expenditures stalled as the slump in oil prices slowed the award process. Orders in Industrial Solutions were solid, and while not matching last year's extraordinary first quarter, it did beat our historical range of $18 million to $22 million per quarter.Fluid handling bounced back on the strength of our pumps business, while our Mefiag filtration products are still weighed down by lower automotive demand. The bar chart on the right shows that revenue came in at $80.5 million, reflecting a decline of 10% sequentially and 6% year-over-year. Before COVID-19, this metric could have been measurably different as subcontractor shutdowns in Canada and Italy pushed approximately $5 million to $10 million in revenue out in the second quarter and second half.As for our CECO production facilities, all are up and running, serving customers today. Our pumps facility in Telford, Pennsylvania was temporarily shut down.…

Thank you, Matt. Before moving on to your questions, I want to highlight the great work being done by the CECO team in both executing projects in the field and railing in new wins during the pandemic's economic restrictions. In highlighting their great work, I'll focus on 2 projects: a nice win during the last week of the quarter and an essential customer project that we've been executing on-site throughout the quarter and into May.I'll start with the ongoing project, one of many we continue to execute, which is shown on Slide 16. CECO booked this project in late 2018 as part of a gas power plant output and efficiency increase. We had previously completed work on 2 of 3 turbines in 2019 at this Michigan power plant, with work on the third unit underway during the spring of this year. Increasing the plant's electric production meant that the emission control systems had to be upgraded to handle increased NOx and CO output. CECO was contracted to design, build and install the emission controls and reduction systems so that the generating plant would continue to meet regulatory requirements while producing higher levels of power.CECO's technology and teamwork, our competitive advantage, were demonstrated on this project as it involved complex design and installation issues under tight scheduling and a unique multi-pollutant catalyst product. Our expertise included a proprietary and patented system to handle the increased ammonia that the plant would have as part of its VOC reduction system. The plant upgrade, along with CECO's part of the project, was in the final stage when COVID-19 turned into a global pandemic. Not completing this work on schedule would mean that the plant wouldn't produce its obligated supply of electricity during the higher-demand summer months.As you know, Michigan was hard hit by the…

[Operator Instructions]And our first question will come from Chris Van Horn with B. Riley FBR. Please go ahead.

Good morning, everyone. Thanks for taking my call. And hope everyone is doing well. I was wondering if you could maybe update us on the real-time environment, how April is going with some of the states announcing restarts and some industrial end markets starting to ramp back up.

Yes. So first off, throughout the period, our operations have all remained active, with the offset of a brief shutdown in one of our pump's facilities that was down for about a week. So from the standpoint of executing backlog, most things are progressing. We're seeing some signs also in Europe that things, even in the most affected countries, are starting to come back.From the point of view of market and activity, there's a mixed bag there. On the one hand, the very long-cycle larger projects seemed to be progressing. Where our content is part of a major investment in critical infrastructure, we see activity progressing there. On the short cycle, we still see some decent demand in pockets that I mentioned on the call, albeit with a very murky outlook. And in the middle there, in the mid-cycle, April was probably, as we anticipated, are going to be part of the rougher part of the period in that things were accelerating towards various shutdowns into March and starting to then pick back up here as hopefully as we come into May.

Okay, got it. And you mentioned in the shift to the 4-4-2 strategy, market share seems to be on the offensive side here. So in some of our conversations, we're hearing that some smaller competitors are being more challenged than maybe others. And so do you see that as an opportunity in terms of taking share from your competitors as well as is there any M&A opportunity that you see in the pipeline?

So Chris thanks for the question. Number one, we remain committed to growth. And while the overall environment is filled with various headwinds, we also have defined part of that growth that's 2x the market. And we can only accomplish growth ahead of the market by taking market share. And so we continue to focus on the active pockets. We stand tall. We're competing with strength. A number of the areas that you know about, with our backlog, our team, our global reach, our distributed workforce give us those kinds of differentiated strengths.I - we haven't seen anything of the smaller guys, so to speak, fall by the wayside. But it's pretty early. And if you recall back with the middle of the power gen downturn, we did lose to a couple of competitors that we'd regularly see on gas turbine exhaust systems and related type project activity. So time will tell, but we feel good about our position, strength of the balance sheet, the activity of the sales team and the continued adds to our sales pipeline. And on balance, they balance that out with. A lot of that pipeline is still stretching out as customers and people become much more deliberate about the timing of how they see some of those investments going forward.

Okay, got it. And then lastly for me, I imagine you're seeing a lot of deferrals and possible cancellations of projects and awards. Is there timing? I imagine there's a timing difference between some of those deferrals. And is there any visibility that you can give us from your customers of what they're thinking about as we head through 2020?

So I'll just say, start with, we - through the end of Q1, no material cancellations. We continued to monitor projects throughout, have had projects put on temporary hold or slowed down as a result of other things that customers can't get done in this current environment. As far as visibility beyond that, it really is a mixed bag. Even in the refinery segment, we see some customers starting to talk about, hey; our output is relatively low right now. Maybe now is the time to pull some major maintenance brownfield project forward and get things done while we can. Some of the pure plays make real good money on the spreads that have widened right now. And then on the other hand, as you know and as would anticipate, a lot of companies are sitting and trying to delay their projects in order to conserve their own view and understanding of what happens next.

The next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you. Good morning, guys. And appreciate you are taking my question. So with respect to the 2Q '20 outlook for the immediate near term, market is calling for 20% to 30% GDP decline in the quarter. So in that environment, how should we expect it to fare? And what would result, at a high level, potentially look like sequentially?

Yes. So we have not - never provided short-term guidance. And with the amount of uncertainty out in the world, I think it would be the most intelligent thing to say. Yes, Q2 has a lot of uncertainty and for that, I probably can be accurate. At the same time, you should note that we entered the second quarter with $209 million of backlog, very healthy. All of our operations are active. We have a cost saving furlough of 2 weeks for all of our U.S. associates underway. Revenue continues through our operations, which will lead to operating income and the like, and progress probably similarly to what we're seeing in Q1 with speed bumps that we have to navigate. So it's an environment in Q2 that we're very fortunate we come into as we did at the beginning of the year, with a variety of strength and good backlog, good team, good focus from external to internal. And more than that, it's still been something that we navigate on a daily basis.

Understood. On the cost-cutting side, are any of these costs you have eliminated for the near term, are they going to be permanent changes? Or will you potentially sort of ramp those back as the market opens?

Yes, the way I'd divide that up would be a mix of onetime temporary and run rate savings. So of the $3.5 million we spoke to in the prepared remarks, $2 million is specific to Q2, that would be tied to the furlough and $1.5 million is run rate savings. So some of that would be temporary, the wage cuts until we get past the COVID-19 crisis and the Board cost cuts that took place as well. $1.5 million on a run rate basis is - annualized would be $6 million. So those are the breakdown between what's Q2 and what's run rate savings.

I would add specific to what Matt's saying is, these are actions which we think are still proactive, proactive actions that give us the headroom and flexibility to continue to sense what's happening in the market and then adjust and adapt and continue to take appropriate action going forward.

Our next question comes from Mike Cikos with Needham & Company. Please go ahead.

Hey, good morning, guys. Thanks for taking the time with the questions here. First question I had for you was around your gross margin strength. I understand you guys are selling the value here. But I just wanted to know, was there anything onetime that benefited this quarter? I know that the gross margins put up this quarter were above what you guys have historically been doing. Just trying to gauge the sustainability of this 35% gross margin target you have here now.

Yes. We had a really good quarter, most of it tied to project execution. We did see some productivity in our plant from the investments we made in fluid handling. We still believe 32% to 34% of the appropriate for modeling based on historical average, we did outperform in this quarter. It wasn't one time. All 3 segments did really good in the quarter.

Okay. And then the follow-up I had for you guys. I know that there were some comments in the prepared remarks as well as far as management's experience during the prior micro-recession. But if we were using that, let's say as a template, understanding we're in uncharted territories here, can you give us an idea of what markets came back first? Or I guess what we should be watching as a potential indication of things maybe improving for CECO's end markets?

The two end markets that occurred in the micro-recession were the power gen market. We're still in the fourth year of that downturn as new nat gas gigawatt is just not returned. At the same exact time, we had a 30-year downturn in refinery utilization hit 90% in the U.S., and nobody was making turnarounds or investments in refinery CapEx. Refinery turned back within about 5 quarters quickly and almost violently, where we went from $10 million bookings over a 10-month period to $20 million over a $3 million period - or sorry, a 3-month period. So it turned back fairly quickly and that was a 30-year dip.This occasion, as far as COVID-19, what I'd tell you, Mike, is it all markets that we play in that are likely impacted by the pandemic. And to say that one is going to respond quickly, there's lots of research out there as to who thinks that what's going to return faster, and I don't have a good perspective on that just yet. It's quite uncertain. But Dennis maybe has a comment on outlook that he'd like to add.

Well, just the one thing, whether return is always going to be an interesting question because we have a very diverse set of end markets that we cover that there are quite a few critical infrastructure and key industries that are still active today. And I mentioned a few of those on the prepared remarks earlier here this morning, places like food and beverage. The food supply, you see a lot of people actually having to pick up and step up their demand. The semiconductor manufacturers and with tech being strong and all of us still working from home, demand there is likely strong as well. We anticipate the investments will likely continue.So there's a variety of these areas that are strong as we speak, relatively speaking. There's movement. There's activity. We're actually being called out to do even some site walk-throughs to assess new project activity in some of these areas. So it isn't just what comes back first but some things that are still active today and we like our positioning there.

The next question will come from Tate Sullivan with Maxim. Please go ahead.

Hi. Thank you. Good morning. Following up that comment on refining and cyclone specifically, Dennis. Are the cyclones - well, first on refining, I mean, if worst-case scenario, we come out of this and oil prices stay low. What is - can you remind me of the replacement cycle for cyclones for existing refineries, please? And I mean, is it totally dependent on the output levels, too?

So our key product into the refinery market is cyclones in the catalytic cracking process. And what we are doing is recycling a fine powder catalyst back into the system, very high-value, high-efficiency cyclones. They vary in size from large to very, very large. We have, by all means, the leading global market share, strongest technical team. And so replacement isn't necessarily that much driven by localized output but it is by conditions because you're circulating a product that has an erosion effect. And so whether there's an input feedstock change or there's some wearing out as a cycle. But our product is a 10-year design life, probably has a 20-year full life with a variety of aftermarket opportunities within that period. And right now, we do see activity that's progressing from the planning stage up and over to the - into more order stage as we see right now.

Okay. And the cyclone specs, is it a completely different type of cyclone because it doesn’t have the catalyst for food and beverage end market? And are there other industrial end markets for cyclones, if you can...

Yes. So we also have a substantial array under our Fisher-Klosterman brand of industrial cyclones that do everything from high-purity polysilicon for the solar industry, clean room type stuff for pharma as well as a lot in any other industry where you see a high degree of dust or related activity from wood, from corn, et cetera. And that's a big part - a key piece often of an overall industrial air quality system.

Okay. Matt, can you - on the slide on the leverage covenants in the existing credit facility and just is the key metric to focus on, but then you have meaningful cushion over that, the bank-defined leverage ratio.

Yes, we actually published it. And I think the - let me pull up the exact slide. But on the debt page of our - we actually published with the gross leverage ratio. We have a fixed charge covenant as well, but we're being asset-light so far away from that. And it's really just the gross leverage. I think our current - we're sitting at 1.5 and that goes all the way up right now to 3.5 is our covenant currently.

To 3.5. Okay, that's what I got. Okay, just wanted to confirm.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dennis Sadlowski, Chief Executive Officer of CECO Environmental.

Yes. Guys, thank you again for joining our call. I just want to reinforce that even in this challenging period for the world, challenging period for the company, the leadership team at CECO is committed to healthy progress through superior execution. And I think through the first quarter and into today, we're demonstrating that fairly well.This morning on the way in, I heard one of the lead analysts on CNBC talk about what are the winners who are going to come out of this segment. Those are going to be the companies with strong balance sheet, positive cash flows and a good management team. And I'd like to think that we'll be one of those winners because we absolutely come into this with a strong balance sheet, we continue to demonstrate positive cash flows, and I like the team around me and how they're executing. So thanks again for joining the call. We'll talk again in 90 days.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.