CECO Environmental Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Steven Huser, Investor Relations. Please go ahead.

Speaker 1

Thank you. And thank you everyone for joining us on the CECO Environmental Second Quarter 2023 Earnings On the call with me today is Todd Gleason, Chief Executive Officer and Peter Johansen, Chief Financial and Strategy Officer. Before we begin, I would like to note that we have provided a slide presentation to help our discussion on our website. The call will also be webcast along with the earnings presentation, which is also on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of that website.

Speaker 1

I'd 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 differ materially from those expressed or implied by the forward looking statements. We encourage you to read the risks described in our SEC filings included in the Form 10 ks from the year ended December 31, 2022.

Speaker 1

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 provided the comparable GAAP and non GAAP numbers in today's press release and provided non GAAP reconciliations in the supplemental tables And with that, I'd now like to turn the call over to Chief Executive Officer, Todd Gleeson. Todd?

Speaker 2

Thanks, Stephen, and thank you for your continued support and interest in CECO. I'm going to start with slide number 3, which entitled Q2 2023 Earnings Highlights. As we highlighted in today's press release, CECO delivered multiple financial records during the second Quarter. Over the past several quarters, we have communicated that our sales pipeline was strong and growing. And throughout the Q2, we continue to add to our sales pipeline, Which is now well over $2,500,000,000 worth of global opportunities.

Speaker 2

The growth of our target markets is a positive result of the focused investment to produce outstanding growth in the Q2 as we reported the highest ever quarterly bookings in our company's history. We continue to have high confidence in our sales pipeline, which remains strong across our diversified industrial end markets. Bookings were the only record in the quarter. I am pleased to also highlight that our 2nd quarter revenues represented the highest quarterly sales in the company's history as well. And with our record backlog, we expect future sales growth to remain very robust.

Speaker 2

CECL also delivered the highest gross profit dollar level Benefiting from enhanced productivity, growth and product mix. We look forward to more record levels of profitability in the future. Expanding further on our sales pipeline, the strategic investments into each of our platforms and commercial capabilities Has done more than just build a large sales opportunity funnel. We have also been steadily transforming the overall CECO portfolio book of business. This transformation started approximately 3 years ago with a comprehensive redesign of our organizational structure and focus towards a more Diversified, micro aligned and balanced business mix with the purpose of driving sustainable financial results.

Speaker 2

And we are seeing the results of this shift in focus and strategy. Over the past 18 months, Which many of you already know, we have also added programmatic M and A to the transformation playbook. In the quarter, We closed on our most recent acquisition adding Transcend Solutions, which is a leader in liquid separation and filtration solutions for the energy transition. We shared some of the details of the Transcend acquisition when we announced Q1 earnings back in May and Peter will provide Some additional commentary around this acquisition in just a few minutes. We have now completed 2 acquisitions in 2023 We continue to look for strategic and accretive businesses that can advance our leadership in industrial air, industrial water And the energy transition and further enhance our business mix balance and earnings growth.

Speaker 2

When I started at CECO in mid-twenty 20, The company's financial results were much more cyclical and investors view the company as significantly tied to legacy oil and gas and power generation end markets. Well, some of those markets remain very important to CECO. We have built a better CECO where we are much more balanced with greater exposure To diverse industrial end markets, including more industrial air, industrial water solutions to our portfolio, which Both of those now represent a majority of our orders and revenues in 2023. But don't just take my word for it with respect to transforming our portfolio, I am also pleased to highlight that even with record sales in the quarter, we still drove a higher than 1.25 book to bill for the 3rd consecutive quarter. So with our growth investments and more balanced portfolio driving backlog gains to record levels at quarter end, we have high confidence And our future outlook.

Speaker 2

And this confidence in future outlook is why we are announcing an increase to our full year guidance, Which we have also shared in our earnings press release today. We will come back to this updated guidance a little later. But I want to point out Now that this is the 3rd time we have exceeded and increased our guidance since we introduced our full year 2023 outlook late last year. As the takeaway on the slide suggests, we have delivered a very solid first half of twenty twenty three and we remain optimistic that we will drive sustainable high performance In the second half of the year as well. Now please turn to Slide 4 and let's review our summary Q2 and trailing 12 months financials.

Speaker 2

Peter will cover many of these key financial figures and metrics in more detail in a few minutes. However, let me just focus on a few key areas. I will mostly stick to the left side of the slide, which covers 2nd quarter results. The panel on the right side of the slide provides a snapshot of CECO's trailing 12 month financials, all of which are very strong. CECO's orders $163,000,000 in the quarter represent the highest quarterly bookings level in our company history, just an outstanding result.

Speaker 2

When we announced Q1 results, we mentioned that a few orders had just missed booking in that quarter. And you can see from our record results that we secured many of these projects in Q2. This record quarterly bookings drove year over year growth of 43 percent. And on a trailing 12 month basis, orders are up 23%. As a reminder to our audience, we have been consistently growing orders Sales of $129,000,000 were a record for any quarter for CECO.

Speaker 2

And our sales growth of 23 in the second quarter reflects the great execution our global teams are driving to deliver solutions for our customers. Of this 23% growth, approximately 16 points was organic. Adjusted EBITDA of Almost $14,000,000 in the 2nd quarter was up 29% over the prior period. This result produced adjusted EBITDA margins of 10.6%, an increase of almost 55 basis points year over year. And while our investments in growth and operating excellence resources is up over the past year, we expect our SG and A to maintain steady levels going forward, Which will translate into higher EBITDA margins as we continue to experience top line growth.

Speaker 2

Our adjusted EPS in the quarter of $0.15 met our expectations. On a trailing 12 month basis, our adjusted EPS of $0.67 Is up significantly over the preceding 12 month period, which we believe is more indicative of long term value that we are creating. We will continue to manage debt and interest payments to deliver higher EPS. And as our guidance suggests, our expected higher EBITDA We'll also deliver bottom line growth. Finally, with respect to free cash flow, CECO rebounded nicely from a slower cash generation in the first quarter as we generated $10,000,000 of free cash flow in the 2nd quarter.

Speaker 2

We had operating cash of approximately $11,400,000 And this could have been even better, but not for a $9,000,000 of customer payments that we received shortly after quarter end cutoff. With so, with the strong start to Q3 collections and continued strong milestone achievements in billings, we expect Cash flow to remain healthy in the foreseeable future. With so many financial records in the quarter year to date, I would once again stress how pleased I am with our operating and financial performance. Thanks to our global teams as they continue to deliver for our customers every day. Now please turn to slide number 5.

Speaker 2

I'm going to reiterate a few things we have shared when we highlight this slide in investor presentations As well as when we showed it last quarter. As the title of the slide suggests, CECO is more balanced And pursuing more opportunities than ever before. Across everything we do, our focus is to protect people, Protect the environment and protect our customers' industrial equipment. In previous quarters, we have outlined how we are advancing Our leadership position in Industrial Air and the 3 acquisitions highlighted in the middle column, which is entitled newly acquired brands Are yielding great results towards helping us advance that leadership position in industrial air. We have also discussed We are building our position in industrial water.

Speaker 2

The 4 water focused acquisitions highlighted in the center column Add important building blocks to our growing water niche leadership positions. And finally, as CECO shifts its commercial and customer focus To support the applications and opportunities presented by the Energy Transition, the recent Transcend acquisition Position CECO to provide new and enhanced solutions to improve the efficiency and lower the cost of gas and liquid separation and filtration In legacy natural gas liquids transport and hydrocarbon processing infrastructure and to benefit from new and emerging applications in renewable natural gas, Carbon capture and other low carbon opportunities. The Transcend acquisition also opens additional doors to high margin opportunities And business models and engineering services, equipment rental, in field customer process diagnostics and emergency services. Now staying with Slide 5, we really like to share that this slide excuse me, we really like to share this slide as it highlights the diversity of CECO And what we are doing to grow leadership positions and add portfolio balance. Before we move on to the financial details for the Q2, I'd like to highlight a few operational items that actually aren't included in the deck, but we think are important to mention as they speak to our growing capabilities And more balanced portfolio.

Speaker 2

The first item I'm going to mention is that we just booked our largest ever aftermarket order, totaling almost $9,000,000 at very good gross margins. This is significantly higher than any aftermarket or services order in Our company history. This order is in the industrial water segment supporting a large customer in the Middle East. This Wynn highlights a great example of why we have been investing in industrial water market capabilities. Between industrial water And our growing separation and filtration solutions installed base, we look forward to many more of these large aftermarket orders in our future.

Speaker 2

The second item is that we expect to end 2023 with approximately $100,000,000 of revenue generation in high growth markets, Which is comprised of the Middle East, India, China and Southeast and East Asia. This is up more than twofold from just a few years ago And we are maintaining strong growth. We continue to add resources throughout those regions with a particular focus on India To support global operational capabilities and also to support local projects and Indian related sales opportunities. Finally, a third item I would also highlight that of the approximately half dozen acquisitions we have completed since Q1 of last year, We expect at least 4 have or will double in size in their 1st 18 to 24 months of ownership by CECO. This is a tremendous track record of us identifying growth businesses and properly investing In and incentivizing great leadership teams.

Speaker 2

Our other three acquisitions are definitely on track to hit or exceed their deal financials That underpinned our investment thesis. I am very pleased with the results of our investments and our journey of advancement at CECO. Of course, not everything goes as planned, and I can assure you we see opportunities to improve every day! But overall, we are very excited about our improving ability to deliver strong operating results. I'm now going to hand it over to Peter, He will walk you through more detail on our financials and some additional color on our strategic programs.

Speaker 2

Peter?

Speaker 3

Thank you, Todd. I'm very pleased today to be able to present to all in attendance another set of solid financial results Confirms that CECO is still on track to deliver another strong year of performance. I'd like you to turn to Slide 7 with me. On this slide, I present a more detailed picture of the Q2 2023 results than Todd walked you through on Slide 4. Orders in the quarter of $162,900,000 were the highest for any quarter in company history.

Speaker 3

This result brings CECO's order rate to over 5 $1,000,000 on a TTM basis and a record $310,000,000 for the first half of twenty twenty three. Revenues of $129,200,000 were the highest for any quarter in company history, continuing a 4 quarter trend of record setting revenue delivery benefiting from strong continued strong execution. This result brings CECO's TTM revenues to over $467,000,000 $242,000,000 for the first Gross profit margins in the quarter of 38.8% For an increase of 80 basis points year over year and gross profit dollar delivery of approximately $40,000,000 was the highest in any quarter in company Adjusted EBITDA for the quarter was up 29% year over year to 13,900,000 Inclusive of the higher operating expenses we incurred from the investments made in platform and functional resource additions supporting CECO's Current and future growth, SG and A additions from acquired businesses and expenses from M and A. Adjusted EBITDA margins in the quarter was 10.6%, up 60 basis points from the year ago period And up 200 basis points sequentially. You may recall that in the Q1 when we discussed EBITDA margins, Todd highlighted the investments that we made that had an impact to EBITDA margins in that period.

Speaker 3

We've now recovered and are benefiting from those investments and to walk you through later in the deck. While nicely positive and aligned with our expectations, both GAAP and adjusted EPS were down year over year due to higher interest payments Offset slightly by lower taxes. I would also like to point out that both GAAP and non GAAP operating income We're up nicely in the quarter. GAAP operating income was up over 50% in the year ago period, which we feel is a tremendous result. I would like to ask you now to turn to Slide 8.

Speaker 3

On this slide, You can see that CECO's order trajectory that Todd referred to earlier today began back in the Q4 of 2020 And has continued to accelerate through 2021 2022 and while maintaining that strength Into the Q2 of 2023. The last four the 4 best orders quarters in company history Have been posted across the past 6 quarters. All are greater than $100,000,000 level, delivering a 6 quarter average of approximately 140 dollars and a TTM order rate of $562,000,000 up 23% from the year ago period. On the strength of the $163,000,000 of orders booked in the Q2, CECO finished the quarter with a new record backlog level. We recognize that quarter to quarter orders can be lumpy due to timing.

Speaker 3

To provide a view that smooths out the lumpiness And more closely matches our revenue realization, I would point you to the TTM and average orders per quarter rose We've provided above the graphic.

Speaker 4

For a

Speaker 3

more detailed view of revenue, please turn to 9. On this slide, you can see that CECO's revenue trajectory growth Began in the Q1 of 2021 and it showed steady improvement sequentially and versus prior period throughout the last 12 quarters. With the acceleration of this improvement in 2022 continuing into Q2 2023 As we continue to convert our growing backlog into our 5th consecutive quarter of revenue greater than 100,000,000 Average revenue per quarter for an average revenue per quarter of $114,000,000 In the Q2 of 2023, we printed the best revenue quarter in company history, putting a strong exclamation point on a run of record quarterly revenues And the highest first, second, third and fourth quarters for revenue in company history. We're very proud of this accomplishment. Our trailing 12 month revenue $467,000,000 is 26% greater than the year ago period and represents a quarterly average $117,000,000 of revenue per quarter.

Speaker 3

Our teams delivered this outstanding result as they overcame and navigated late deliveries from Some of our suppliers and delays in customer approvals that impacted revenue recognition in the quarter. As I finish up on this slide, I also want to point out that consistent with the prior slide, we have included TTM revenue and average revenue per quarter trends for an easy comparison to the trailing 12 month data provided for orders. Let's transition to slide 10 now for a quick review of backlog and backlog trends. CECO finished Q2 2023 with a new record backlog of $391,000,000 Representing a 35% increase year over year and a 25% increase above year end 2,002 levels. The book gross margin in the backlog are higher than the year ago period, which is a strong leading indicator for improved margin realization in the coming quarters.

Speaker 3

Sequential organic growth from Q1 2023 levels was $33,000,000 with another $2,000,000 added The acquisition of Transcend. Book to bill was greater than 1.25 for the 3rd consecutive quarter and has 1.2 A book to bill of 1.2 for the TTM period. Again, there were no cancellations in the quarter Consistent with past quarters. With a very strong opportunity pipeline, CECO expects to maintain a book to bill rate Greater than 1 for the total year 2023, a positive leading indicator for continued future growth. Please move to Slide 11 with me now, and I will walk you through gross profit and EBITDA for the quarter.

Speaker 3

Starting on the left hand side of the page, I want to highlight that gross profit for the 2nd quarter was a record $39,800,000 Reflecting a 30.8% margin and a 31% increase year over year. This is the 3rd consecutive quarter with a 31% or greater year over year improvement. Whilst margin rate is down 20 bps sequentially, The $40,000,000 approximately $40,000,000 gross profit result is the best dollar delivery for a quarter in company history And represents a margin rate increase of 70 basis points versus the year ago period. TTM gross profit is approximately $145,000,000 reflecting a 32% greater gross profit dollar delivery than the prior TTM period And reflects 150 basis point margin expansion to approximately 31%. It is this additional gross profit That is allowing CECO to continue to fund our investments in our operating model in higher growth and expanded capabilities in our high growth regions.

Speaker 3

We expect continue to realize improved margins from better pricing on projects booked in Q4 twenty twenty two and the first half of twenty twenty three, And we are starting to see the positive impact on margins of our recently completed acquisitions. These acquisitions in aggregate are delivering Gross profit margins of nearly 40%. On the right hand side of the page, The last nine quarters of adjusted EBITDA performance are provided. Q2 2023 delivered a near record 13 $700,000 of adjusted EBITDA and a 10.6 percent EBITDA margin. On the TTM basis, CECO has delivered 45 $500,000 of adjusted EBITDA, a nearly 40% increase over the prior TTM period, Delivering an EBITDA margin of 9.8%, up 100 basis points over that prior period.

Speaker 3

I am pleased with this quarterly result as the investments in people, systems and processes CECO has made in prior periods Are starting to yield the expected benefits and position CECO well to execute on its growing backlog and to drive higher growth and performance through the remainder 2023. Please now turn to Slide 12, where I'll provide you with a little more color on our most recent acquisitions And other capital deployments in the quarter. On the left hand side of the page, you will see some additional information about our Wake Acoustics and Transcend Solutions acquisitions. Both deals are consistent with prior acquisitions we have closed In terms of scope, size, complexity, risk and strategic intent, both deals met our criteria for screening, fit and future potential. And most importantly, the management teams for both businesses have joined CECO.

Speaker 3

We are very bullish on the growth prospects For both businesses and we are already seeing strong evidence of their ability to double their size in the next 2 plus years. I would also like to share with you that the functional and commercial integrations are well underway and progressing nicely. Each company that we have acquired is a knee specialist with unique technical and applications differentiation It yields a strong margin profile and defensible competitive position, and both are already beginning to realize the benefits Of being part of a larger organization with greater resources and a global reach. To highlight the benefits each is realizing within CECO, I want to give you a little color on a specific investment we are making in each business to realize these benefits. In the Q2, we greenlit an investment in Wakefield Acoustics, which will allow the business to expand its capacity Like 2x to capture a fantastic growth opportunity in the data center backup power segment, initially in the U.

Speaker 3

K. And Ireland And then in Mainland Europe. We identified this opportunity during our due diligence and it has materialized even faster than expected. Under prior ownership, Wakefield would have struggled to access the required growth capital. But as part of CECO, this opportunity will be fully funded And the business greatly expanded profitably.

Speaker 3

For Transcend, we identified The acquisition of the specialized machinery is underway and once received later in the Q3 We'll support our plans to double the business with supply to new customers in the Middle East and Southeast Asia via CECO's existing company sales locations And in addition to improving service levels with existing and new customers in the USA and Canada. On the right hand side of the page, as with past presentations, we provide a summary of our recent share repurchase and growth investments. There is little to report on the share repurchase topic this quarter, so I'll provide a few highlights from our investments made in the first half of twenty twenty three to support continued growth. Our CapEx spend rate in the quarter was in line with past spending levels after a higher than trend increase in Q1, Which will be the high point for 2023 from a CapEx spending perspective. In addition to the investments described previously made in each of our acquired businesses, We have made additional investments in the Q2 for updates to our IT and data security infrastructure, investments to Further expand our location in Pune, India and new tooling and fixtures to support process improvements, Margin enhancement and growth in our Fluid Handling businesses in the USA and the Netherlands.

Speaker 3

Please turn to Slide 13 with me for a quick review of our cash position and liquidity before I turn the stage back over to Todd. PECO finished the 2nd quarter with $48,600,000 in cash, which was an increase of $6,400,000 from the quarter end Q1 And $2,000,000 from year end 2002. Cash from operations in the quarter was $11,400,000 and is slightly negative on a first half 2023 aggregate basis. Net borrowings in the quarter on a revolver was $32,000,000 supporting growth investments in working capital, M and A and CapEx. Approximately $20,000,000 was spent in the quarter on acquisitions and related expenses And $1,400,000 for capital investments.

Speaker 3

Interest expense in the quarter was $3,750,000 compared to $1,100,000 in the quarter of 2022 due to higher interest rates and a higher debt balance. Gross debt at quarter end was 136 $900,000 a decrease of $4,300,000 from quarterend Q1. Quarter end net debt finished at $88,300,000 A decrease of $10,700,000 from quarterend Q1 resulting in a comfortable leverage ratio of 1.9 turns, Approximately 1 half turn lower excuse me, 1 half turn increase from year end levels, But yet well below our credit facility leverage cap. At current debt levels before planned debt repayments in Q3 from continued improvement in collections and cash generation, CECO's available capacity is in the $40,000,000 plus range. That concludes my summary of CECO's Q2 2023 financial results, a quarter in which The company and our teams delivered a very solid set of results that position CECO for a strong second half of twenty twenty three.

Speaker 3

I will now turn the microphone back over to Todd to take you through our full year 2023 outlook and his concluding remarks. Back to you, Todd.

Speaker 2

Thanks, Peter. A lot of good details with respect to our financials and various insights into our performance. Let's go to slide number 15. Peter mentioned I'm going to highlight our outlook for the balance of the year. And as we mentioned earlier, we are raising our guidance for the full year for both revenue and adjusted EBITDA.

Speaker 2

Let's start with revenue. We now expect to deliver between $500,000,000 $525,000,000 for the full year. This would be approximately 21% growth Over full year 2022, if you use the midpoint of that range. Our previous revenue guide Had been to exceed $485,000,000 With our record backlog and large opportunity pipeline, we are confident In our ability to achieve our new revenue range. With respect to adjusted EBITDA, we now expect to produce $50,000,000 $55,000,000 for the full year.

Speaker 2

Our previous outlook suggested at least $50,000,000 for the full year, But with the increase in revenue, we are aligning our ranges to reflect growth to adjusted EBITDA as well. The year over year growth would be approximately 25% if you use that midpoint of the range. We expect to deliver 50% to 70% of free cash flow in the full year. This free cash flow range has not changed and we believe represents our normalized cash flow generation. On the bottom half of the slide, I want to highlight the macro environment.

Speaker 2

While headwinds like inflation and concerns around financial tightening linger, We are directly benefiting from a host of important and durable growth drivers. I won't read all the tailwinds, but no doubt The reshoring and renewing of industrial strategic investments in North America is a positive for CECO. Additionally, increased investment in global infrastructure, to continue our elevated order and revenue growth. I would also like to highlight that our growth has not directly benefited or at least Not benefited very much yet from the funds flowing from the large Chips and Science Act and Infrastructure Act spending bills in the United States. When these funds do in fact begin to flow into the market, we believe CECO will benefit from this 0.5 in growth resources and in operating excellence programs.

Speaker 2

We are just starting to see the expected benefits And we expect the real impact to our bottom line will be significant. We have added key resources to help drive gross margin improvements through supply chain excellence And lean enterprise. We continue to launch more new products in multiple platforms and those new products are gaining traction. In India, we have almost tripled the size of our workforce in under 3 years, which provides for local company support and highly skilled global engineering, project management and financial administrative resources at very competitive rates. I am very pleased to provide our updated and increased guidance for the full year and even more pleased to share that we have positioned CECO very well for key macro growth trends and also for long term sustainable performance.

Speaker 2

Now please turn to Slide 16, which is our final slide. In conclusion, we delivered an outstanding quarter, great growth with many records and our highest backlog in company's history. We are pleased to show improving margins and remain committed to our longer term goal of mid teen EBITDA margins. The investments we are making today will continue to bolster our profitability. We are also pleased to increase our revenue and EBITDA guidance for the year.

Speaker 2

We have high confidence in our forecast given our large backlog, strong growth pipeline, solid track record with our acquisitions and of course Various market conditions that are in our favor. Importantly, we are most excited to maintain our transformational progress and demonstrate The tremendous diversity of CECO's portfolio. We have a lot of opportunities to drive continual organic growth for our customers, our communities and for each other. By doing these things, we believe we will continue to deliver meaningful results for all of our constituents. And with that, we are now happy to open it up for any questions.

Speaker 2

Operator?

Operator

Thank you. The first question we have is from Rob Brown of Lake Street Capital

Speaker 2

Just want to get a little bit

Speaker 4

more into the order environment, which is what you've said is obviously very strong. How sort of broad based is it and where are you seeing growth coming from? And I think it's interesting you talked about some of the incremental growth drivers and let's get some color on when you think those Follow through as well.

Speaker 2

Yes. Good question, Rob. It's interesting. About a year ago, we introduced a slide where we showed all 8 platforms and we felt at the time it was just helpful to give people visibility to the diversity of our portfolio a little differently. Probably could have been something we could have shown again this quarter, just to show that balanced growth across most of our platforms as well, and we may introduce that slide in the near future.

Speaker 2

But regardless, what you would see if you saw The growth across almost all of our platforms is that broad balance that we're talking about. It's not just 1 or 2 platforms that is up Significantly, it is fairly balanced between air businesses, water businesses and our energy and energy Transition businesses. And that's probably the thing that we're most excited about is, it feels very balanced. I mean, Peter and I could probably dive into just A long list of exciting opportunities, whether it's in battery and electric vehicle manufacturing or in just general industrial across the board, and of course, in the energy, whether it's power markets or energy transition markets, I'd say we're in a pretty good sweet spot right now and it's reflecting in our order bookings.

Speaker 3

Rob, just to give you a sample, we've booked large orders and Backup and load stabilization power for the largest solar plant being built in the United States. We've booked orders for the largest aluminum mill to be built in the United States in 30 years. We've booked orders in EV battery plants and EV battery recycling plants. We have bookings in a new LNG liquefaction export Going into South Texas, we booked orders in India, China, Korea, the Middle East and in Europe across swath of water resource conservation treatment and reuse. And almost very excitingly, We've begun to start seeing orders in, say, more traditional manufacturing environments return.

Speaker 3

So that's good for our dust collector And Todd and I just reviewed one this morning for a garbage gasification facility where they hit Where they essentially turn very with very high temperature garbage into molecules that they capture Then turn into something that can be used as a fuel. So that's at least 8, maybe 9 segments there we're seeing orders. It's just that broad.

Speaker 2

And Rob, not to add, I mean, it's a simple question. We're giving you a long answer. First of all, one man's garbage is another man's fuel. I think as the saying goes. But I would even suggest, Rob, that the order I mentioned in our prepared remarks, the largest market order of $9,000,000 in industrial water.

Speaker 2

We actually just booked that. And while I said that, I think it's important to maybe highlight that That's actually a 3rd quarter booking, not a 2nd quarter booking. And so that just gives you another example of an order that we've been investing to position the company To grow our shorter cycle aftermarket services business for, as you know, Rob, for many quarters and probably a few years. Again, I feel like we're just starting to see some of those benefits. So pretty exciting stuff and obviously we're sharing some of our energy on the question.

Speaker 4

Great. Well, thank you for all the color. And then in the aftermarket business, that's one of the questions I had about How do you sort of where is that at and sort of as a percentage of the business today? And I know those investments are starting to mature. Where do you see that going over the next couple of years?

Speaker 2

Yes. Look, we still believe that over the next few years, our goals haven't changed. We want to get to 50% mid to long cycle, 50% short cycle. We think that big orders like the $9,000,000 aftermarket Services order is a great example of how we're going to get there. We're still probably around 30% Of our portfolio being short cycle and I would say even though we're growing that very solidly double digits, our long cycle and mid cycle businesses are also growing Fairly rapidly.

Speaker 2

So look, the reason we haven't, if you want to call it, close the gap even further It's because just across the board, our company is growing solid double digits. So look, it's hard to become 50% short cycle when mid and long cycle to grow at the rate that it is. But most of our acquisitions are mid- to short cycle acquisitions. Those are going to continue as those businesses we expect to double. We have a again, we have a model that gets us there.

Speaker 2

We're still committed to getting there in the next few years. We believe that balance is going to be critical for a host of important And again to remind the audience, 3 years ago, we were 80% long cycle, 20% short cycle, And now we're 70% long and mid cycle and 30% short cycle. And the reason I stress long and mid cycle is We have a lot more revenue that turns in 3 to 6 months versus before it would turn in 6 to 12 months. So again, we just continue to sort of tighten up Our business mix favorably. And again, we feel very confident in our ability to get to that more balanced business mix over the next few years.

Speaker 4

Great. Thank you. I'll turn it over.

Speaker 2

Thanks, Rob.

Operator

The next question we have is from Aaron Spakula of Craig Hallum. Please go ahead.

Speaker 4

Good morning, Todd and Peter. Thanks for taking the questions.

Speaker 2

Yes. Good morning, Aaron.

Speaker 4

Good morning. First for me, can you just talk a little bit about the margins that you're seeing in backlog today? And then just On the operational excellence programs for margin expansion, can you give some details on some of the initiatives there starting in the second half? And Just areas you see of margin progression towards that 15% plus goal over time for each margin? Yes.

Speaker 2

I'll give sort of a high level answer and I'll see if Peter wants to add More depth to this. Margins and backlog continue to trend higher. We would and we're showing that as it comes through. Again, we continue to make investments in both our ability to drive lean and operating excellence and Obviously, in SG and A to support growth and global expansion. So some of our margin progress It's still being kept a little bit through our investments.

Speaker 2

But in fact, in our emerging markets, they're seeing the highest Gross margins and backlog finally getting up above 30% gross margins whereas before they were in the mid-20s and if not high-20s About a year ago. So we're seeing 200 to 300 basis points of higher margins in our high growth regions markets from just a year ago. Again, we still expect That our gross margins, which are reflected in our backlog as we exit the year, are 100 basis points to 150 basis points higher than they're currently at. We'd like to Exit the year at 32%, 33% gross margins on that run rate. So that continues to be our goal.

Speaker 2

And then try to sustain that and improve upon those Gross margins, as we head into next year, when we provide that outlook, we'll be clear on what we think those margins and EBITDA margins look like as well. And then I'll let Peter talk about some of the specifics maybe with respect to some of the programs and operating excellence.

Speaker 3

Yes. That 100 basis points to 150 basis points higher than prior quarters is a good number. It varies by platform, but in aggregate that's what we're seeing as we book and then begin to execute on projects. One other thing we're beginning to see, Aaron, that's a positive is we bid every job with a contingency. A contingency is to accept things that were unforeseen at the beginning of a project, and that's generally in the neighborhood of 3% to 5% of project Cost value.

Speaker 3

We're seeing more and more of our projects now either release that contingency without it being utilized or only a small portion of it being utilized. So we're realizing higher than bid gross margins as well, which is a real Testament to our teams improving on their project and customer management expertise. On the Operating investment operating improvement investment side, we're really focused on The operations in our fabrication partners outside of the organization, as we've discussed, well over 50% What we deliver to customers is produced by a partner, a fabrication partner or a supplier. And what we're finding is our resources, our teams are spending a lot of time helping them find savings, Improved capacity, improved flow and throughput to continue to support our growth. And that's yielding benefits standpoint of being able to maintain an existing relationship with an existing customer who knows us, knows our products, Delivers at higher quality and lower cost.

Speaker 3

It's allowing them to be more responsive To us when we have a requirement that might change during a project. And more importantly, it's allowing us to yield savings. Another area our teams are focused on is buying raw materials. Historically, we didn't aggregate The materials across multiple businesses, we have that opportunity now that we look at our spend in 3 categories across The CECO, it's in metals principally, but also in freight and logistics And things at all of our locations or businesses by. And we're beginning to start to see those benefits trickle This is new for us.

Speaker 3

This company operated very, I would say, very segregated manner in sourcing and in procurement. We're beginning to operate as one company now more consistently. In fact, I just approved an order for I think it was 3 30,000 tons of stainless steel that will be consumed by at least 3 businesses over the next quarter By their fabricators where we're purchasing the material and supplying it to the fabricator rather than the fabricator purchasing on their own. And that yields benefits to us as well. We should be able to provide better insights into the I'll call it Rather than anecdotal, but actual evidence of the improvement in coming quarters.

Speaker 4

Great. Thanks for the color there. And then just maybe second on M and A. Can you kind of talk about the pipeline there, what you're seeing from valuation and activity? I know you've been busy there, but Should we just expect to continue programmatic M and A going forward and the potential for any kind of larger deals as we look out?

Speaker 2

No larger deals, we don't think. There's doesn't look, I would say we have a good track record And a lot of energy and, I believe capabilities of how we're doing what we're doing at the moment. We're going to continue to look at opportunities to advance leadership in air, continue to build out a really solid leadership position in industrial water And add components and capabilities associated with the energy transition. And I think the size of deals that we've been doing, they could go up A little bit, I suppose. But for the most part, we believe that we continue to find great businesses with great leadership teams at the right price.

Speaker 2

And if we can't find that combination, then it's not a deal for us.

Speaker 4

Makes sense. Thanks. I'll turn it over.

Speaker 2

Thanks.

Operator

The next question we have is from Jim Ricchiuti of Needham and Company. Please go ahead.

Speaker 4

Hi, good morning. So you've already covered a lot of ground here. I wanted to go back to this Aftermarket order you highlighted that came in the current quarter. Maybe put a little context around this. What was the largest Previous aftermarket order.

Speaker 4

And is this in the Peerless area?

Speaker 2

This is industrial water? Yes, it is. It's industrial water. It's a project that we helped provide an industrial water package system, a very large system That we probably highlighted in previous quarters and we had been negotiating all along to be the supplier of their aftermarket needs as well and we secured that A number of quarters ago, but we weren't able to book the order until it was obviously let by the customer. So we're excited about that.

Speaker 2

I got to tell you, Jim, I mean, the largest previous aftermarket order, I I don't know, maybe there was something a dozen years ago or something that would be profoundly large. I can't imagine what that would look like. But it was less than $1,000,000 I can assure you of that. We certainly may have booked some pass Through some membrane filtration or something, but I'm not aware of anything that's anywhere close to greater than $1,000,000 in our company Unless Peter has ever heard of something and I just don't think that we've come anywhere close to that. By the way, Jim, this is a multi year aftermarket.

Speaker 2

Like I think this is I think this one serves a 3 year contract associated with this.

Speaker 3

This is the 1st year of a multi year support agreement. Give you a little color without disclosing customer. It's a Middle Eastern National Oil Company With a Korean contractor, with the National Power Company of that organization Consuming the gas that's produced in the facility. And it's a facility that has both water treatment and it has some gas sweetening as well. So it was 2 parts of Peerless Working in conjunction.

Speaker 3

This is one of those opportunities That takes a lot of work for multiple people in an organization to pull together. Project team, commercial team, Our regional general manager, on-site field service engineers, all building relationships that got these customers comfortable We were the appropriate supplier of the materials and the service. Now that that is and this is also we believe a very important reference case We can now use to promote these capabilities to other customers in the Gulf region.

Speaker 4

Got it. And a follow-up just on some of the investments that you're making And the newer acquisitions, Wakefield and Transcend, can you Help us with the timing around these investments and the capacity increases and the timeline that you expect.

Speaker 2

Yes. Thank you.

Speaker 3

Yes. So the investment in machinery at Transcend has already the initial investment Down payment was made in the 2nd quarter. The machinery will be received in the 3rd quarter commissioned and up and running. And so our final payment will be made in the Q3. This is a machine that makes filter element cores Critical to the type of filtration designs that the Transcend business utilizes.

Speaker 3

So that one will be concluded within our existing CapEx budget schedules that we've laid out in the next quarter. The Wakefield investment will be made over the next three quarters. There is an investment at its current location To increase the capacity of painting and the quality of painting, our next investment will be to expand on the current site into an additional 22,000 square feet for layout space and for Preliminary assembly of components that will feed the final assembly line. Think of it as a fishbone with line running down and cells where sub assembly work is completed that then gets bolted into a package that then gets moved out of the Chop into a paint bay. That's on the current site.

Speaker 3

Then we've also make an investment in both a new lease And some temporary facilities in an adjacent space about 2 kilometers from the existing facility where we can do final fit out of a completed enclosure and acoustic package, which will triple the capacity for completions Of this business. These individual packages were anywhere depending on how they're fit out $250,000 to $1,000,000 a piece. So they're not small little widgets. They look like containers. And they're highly engineered packages that deliver Emergency backup powered at data centers and can also be deployed to banks, healthcare centers, other critical infrastructure.

Speaker 2

And Jim, if I could bring it sort of back up a couple of levels. Every transaction Peter and I, the Board, the company, our platform leaders look at, it's all about growth, right? So we're during due diligence, we're pushing the leadership teams of these acquisitions to come and explain to us how they can double their Right. We believe we're paying the right multiple for the previous owners and the leadership teams, but we believe that we're paying the right multiple infrastructure, our global teams, our brands, our balance sheets, things that are already inherently in place at CECO, Then the return on investment is even stronger. If the forward multiple of our deals Ends up being 3, 4 times future EBITDA and the future EBITDA is 18 to 24 months in the future.

Speaker 2

That's a tremendous win for our shareholders. It's already accretive At 7 or so times EBITDA, which has been the average that we've paid for the 7 or so acquisitions we've made over the last 2 years. If we can, on a forward looking basis, reduce that to 3% to 4%, and then beyond that continue to grow and stabilize our business mix And our free cash flow generation, then it's a home, home, home run for our investors. And so these are really important detailed investments that Peter just outlined, things that we've been looking at through due diligence, none of these are surprises. This is why we're doing these deals.

Speaker 4

Got it. And Peter, you may have given it, I may What's the CapEx for the year? And congrats by the way on the quarter.

Speaker 3

Yes, we think we'll finish CapEx should be between $6,000,000 $6,500,000

Speaker 2

Thank you. We remain to be a very asset business with respect to our ability to not have to deploy a lot of CapEx against our core operating. That said, we believe that there's great opportunities to invest in automation, upgrades on capabilities, machining, facilities, just to continue to improve our ability to support growth.

Speaker 4

Great. Thank you.

Speaker 2

Thanks, Jim.

Operator

The next question we have is from Amit Dayal of H. C. Wainwright. Please go ahead.

Speaker 5

Thank you. Good morning, guys.

Speaker 2

When you

Speaker 5

talk about sales and marketing efforts, you commented that you are not expecting SG and A to trend too much Just wondering what is driving some of these, I guess, This type of positioning, are you seeing more sales from existing customers? Or are there other synergies that are coming into play for you?

Speaker 3

When we speak of marketing, I think it's important to point out, we don't do much marketing. Our marketing is through generally through direct sales relationships our commercial teams have with engineering companies, Existing customers, consulting engineers and service companies. So we have a website, we have some brochures and we have some really good technical sales and business development teams. What you'll see grow and it grows with our top line is our investment in selling resources and then the project and engineering resources To support the business they bring in. When Todd speaks to SG and A not growing, that's the G and A aspect.

Speaker 3

Accounting, HR, IT, corporate expenses, corporate overhead, insurance, all those that don't scale with growth. In fact, those are areas we're beginning to focus very extensively on how do we refine and improve those costs and get more out of each dollar spent.

Speaker 2

Todd, yes. No, look, I think that's you nailed it. I guess, I don't know of many industrial companies that I've had. I've had the pleasure of working for several Incredible industrial companies with tremendous leadership positions in my career. And When they're experiencing in my previous lives, when we're experiencing growth, it has A whole host of reasons can be new technologies.

Speaker 2

We're doing the same thing here at CECO. We're launching some new products. It's Finding new global markets for our existing products, services, brands, etcetera, we're doing that here at CECO. When it comes to doubling the size of your high growth regions, right, that comes with investing in project management, sales and business development in places like India, East Asia. We're doing that here at CECO.

Speaker 2

Acquisitions that we're making and then we're adding some sales capability to those businesses in our core CECO legacy regions or adding new salespeople to those new acquisitions so that they can cross sell our products into their customers, Into there, we're doing that here at CECO. So really, Amit, it's a playbook that's pretty proven where there's no one big Touchdown Hail Mary pass. It's a bunch of small plays that we're running across the board. So it's not a significant investment in 1 or 2 big things. It's some thoughtful, modest investments across the

Speaker 5

board. Thank you, guys. My other questions have already been addressed. So

Operator

The last question we have is from Bill Dezellem of Tieton Capital. Please go ahead.

Speaker 6

Thank you. Relative to your that you've had a number of acquisitions that have doubled their revenues in the 1st 18 months with the company. To what degree is that revenue synergy that you identified with CECO? Or is it really them on a standalone basis being purchased at an inflection point in their in the company's history?

Speaker 2

It's kind of a combination, I'd say, Bill. Like you look at the Wakefield acquisition and obviously we've only had Wakefield since the beginning of the year, But we like the trajectory it's on. So that would be one example of an acquisition where we feel that trajectory is easily going to meet that forecast of 2x. And while we do invest in Wakefield and we're able to bring some scale to the business outside of just core operations. I feel like that's a decent example.

Speaker 2

It's just good timing and a great team at Wakefield That needed expansion, but is doing it really with its customer relationships. Now we're going to help expand its geographic footprint in the Wakefield business, but that's one where they really have a great market. You look at some of our other acquisitions could be DS-twenty 1, where we're able to bring some other things to the table that are outside of that. And we made that acquisition about a year ago or you look at an acquisition like, let's say, even Transcend, which we just recently completed, that's be one where we're able to leverage the existing CECO global resources to bring it through in other regions that it otherwise wouldn't have. So it's a little bit of a blend.

Speaker 2

We believe that all of our acquisitions have an opportunity just within their core markets to grow significantly, But doubling that takes either a little bit of market timing that we feel we position with a few or We knew that we had the resources and regions that they didn't, and we were able to invest in those businesses.

Speaker 6

That's helpful. And then One of the slides highlighted the EBITDA margin. And up to this point, it's really been hovering around 10.5% plus or minus. What's holding up To this point, what's holding that EBITDA margin in that range rather than allowing it to break out?

Speaker 2

Yes. Look, I think we've tried to be consistent in the last couple of quarters. We remain confident in both gross margins and EBITDA margins. I'll use your phrase sort of breaking out of those ranges that they're currently at, which is 30% to 31% on the gross margin and Let's just say around 10% on the EBITDA margin. And if they're being held back, I'm confident That we're holding them back by investing in resources for when we do start to expand margins, It's a sustainable expansion.

Speaker 2

I'm not saying nothing is more frustrating than a company that goes from, let's say, 10% to 12% Then a year later, it's back to 9%, 10%. I'd love to get to 12% tomorrow, Bill, don't get me wrong. But what I'd really like is to get to 11%, 12%, Find that as our new floor and then go from 11%, 12%. You start asking me why that's been stuck for a couple of quarters and then we break out again and we get to 12%, 13%, 14% And then we sort of settle in there for a couple of quarters and then we get from 12%, 13%, 14% to 13%, 14%, 15%. And that's really what we're trying to do here.

Speaker 2

More sustainable productivity, put very longer term efficiency programs in place around lean, putting in great sales and business development Support our growth so that we're not just contracting this stuff out and then losing it. So we have a higher level of investment today, But we're also growing significantly. We're going to see those margins expand.

Speaker 6

So really the right way to think about it is maybe a little less breakout as much as it will be stair step And moving up in that function, is that what we're hearing you say?

Speaker 2

If we break out, I sure hope it's going to just continue to be a stair step, But I think you're onto it, Bill. Our goal is steady margin expansion that we can sustain.

Speaker 6

Okay. And that is a great lead into my final question, which in the press release, you made the comment That you're just getting started with more sustained growth and margin expansion. And I'm going And to the question that I just asked that might help us have more clarity On that margin expansion and more sustained growth, I guess more of what we want to see?

Speaker 2

Yes. Look, I guess the color I'd add is that in previous periods we have shared our Current longer term view that in the next 24 months, we believe that we'll have doubled the size, revenue of the company from when I started was around $325,000,000 $350,000,000 We believe that if we just sort of say in the next few years, We'll have doubled that from where we started to where we'll be at that point and it will have taken margins from mid single digit or excuse me, high single digit EBITDA To mid teens, 14%, 15%, 16% EBITDA margins, we believe that that if we can stay or step it up to that, I think if you look at our trailing 12 month orders, you're going to see trailing 12 months orders in the mid-500s. We just gave an updated revenue guidance to be in the low-500s. So our revenue guidance is still below our trailing 12 month future looking revenue, if you will. And so you can start Look at our mathematical equation associated with where trailing 12 months is and was and where revenue is and is heading, right, Those are pretty good indicators for us as how we think about next year.

Speaker 2

And I think that the margin expansion is going to also come along with that, especially As Peter really reiterated, our G and A investments remain relatively stable. Yes, Our investments in sales, marketing, business development might go up a little bit, but not higher than sales growth goes up. So if we're able to stabilize G and A, which we expect to get higher gross margins, which we expect to and continue to see double digit sales growth in the foreseeable future, We like our ability to hit those longer term targets, and then we'll reset future longer term targets from there.

Speaker 6

And Todd, did I just hear you say that you would anticipate being there in a couple of years?

Speaker 2

We have been pretty consistent, yes, that we sort of call it approximately 2025, whether that's For the full year or just in that year, that's our goals and objectives is that we'll continue

Speaker 3

our growth

Speaker 2

to get to those levels. That's right.

Speaker 6

Right. Okay. So essentially the way to think about this is that you've been putting The muscle in place and that has led to some expenses that now you won't have to do as much. And it has, not to say it hasn't since you've gone from high single digits to 10 plus percent EBITDA margin, but going from 10% plus to 15%, that's a very meaningful swing from that point or from this point forward then.

Speaker 2

Yes. And I'm not trying to change the subject here, Bill, for margins. But let's just talk about dollars for a second because I kind of like dollars. I think we all like currency. We like profitability.

Speaker 2

We'll have Taken if we just talk about our guidance, if you take the midpoint, Bill, of our guidance for the full year At $52,500,000 that's 100% from where we finished 2021, Okay. That's great growth in revenue. That's phenomenal growth in EBITDA dollars. And some of that comes with investment in infrastructure to support that type of growth. A doubling of the company's EBITDA dollars In a doubling of the company's revenue, if we do so, from 2020 to 2025 or so, comes With not doubling the size of the company's expenses or corporate headquarters or anything like that, but so I'm not suggesting that I'm not looking at margins, we are every We want to deliver bottom line profitability dollars, and I believe that we're going to get there with margins and productivity and growth rates that are sustainable.

Speaker 2

But right now, we really are really proud of what we're delivering, we believe, to our customers, to our shareholders in terms of Capabilities and services and solutions, but also it's translating into dollars, which is our goal.

Operator

Ladies and gentlemen, that concludes our question and answer session. Would like to turn the conference back over to Todd Clisson for any closing remarks.

Speaker 2

Thank you very much. Thanks for the questions And your interest in our information today. As always, we get great questions from our analysts and investors. I'd also like to thank our global teams that are delivering incredible value to our as we continue to protect people, protect the environment and protect our customers' investments in their industrial equipment. Finally, we're going to be hosting a number of 1 on 1 meetings and presenting at the 3 parts Ideas Investor Conference in Chicago this month.

Speaker 2

We're going to be active in other conferences as we head into September. We look forward to meeting many of our investors when we're out on the road in the next couple of months, including at those conferences. We hope to see you soon. If you have any follow-up questions, you can reach out to us. We'd be happy to address them.

Speaker 2

And again, thanks everyone for your interest and have a great day.

Operator

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

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Key Takeaways

  • CECO delivered record quarterly bookings of $163 million (up 43% y/y) and record backlog of $391 million, supported by a sales pipeline exceeding $2.5 billion and a book-to-bill over 1.25x for the third straight quarter.
  • Q2 revenues were a company high of $129 million (up 23% y/y, 16% organic), driving record gross profit dollars and gross margins of 31% (80 bps y/y improvement).
  • Adjusted EBITDA reached $13.9 million with a 10.6% margin (up 60 bps y/y), while free cash flow rebounded to $10 million for the quarter.
  • The company raised 2023 guidance, now targeting $500–525 million in revenue (+21% y/y) and $50–55 million in Adjusted EBITDA (+25% y/y), with 50–70% free cash flow conversion.
  • Continuing strategic expansion, CECO closed two acquisitions in H1 2023—including Transcend Solutions for liquid separation/filtration—and is transforming its portfolio toward more balanced exposure in industrial air, water, and energy transition markets.
AI Generated. May Contain Errors.
Earnings Conference Call
CECO Environmental Q2 2023
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