Q3 2019 Earnings Call
Pardon me, ladies and gentlemen, thank you for standing by the CECO Environmentals third quarter earnings Conference call will begin and just a few moments. Please continue to hold and thank you for your patience.
Good morning, and welcome to the CECO Environmentals third quarter earnings Conference call.
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After today's presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I'd now like to turn the conference over to Matt Apple Chief Financial Officer.
CECO environmental please go ahead.
Thank you for joining us on the CECO environmental third quarter 2019 conference call on the call today, as Dennis said Laski, Chief Executive Officer, and myself magical Chief Financial Officer before we begin I'd like to note. We provide a presentation to help guide her discussion.
I will be webcast, along with our earnings presentation on our website at CECO in Bahrain Dotcom.
Reengaging material can be accessed through the Investor Relations section of 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 estimate than expectation.
Objective number 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 FCC filings on Form 10-K for the year ended December 31st 2018, except to the extent required by applicable securities laws.
We undertake no obligation to update more popular nearby any of the forward looking statements that we make your today, whether as a result of new information future events or otherwise today's presentation will also be references to certain non-GAAP financial measures.
We've reconciled the comparable GAAP and non-GAAP numbers in today's press release I love the supplemental tables in the back of the slide deck, well that I've talked about however did I Miss.
Good morning, and thank you for joining us on this fall day for our third quarter call.
Off the top I'm excited to say that our market, leading execution drove them crescent bookings and strong profitability in the third quarter.
Our investments are paying off our management team continues to lead with Bacon discipline and focus and we anticipate continued trajectory toward our aggressive 2021, conoco target that will likely produce significant upside for our shareholders.
This morning, Matt and I will be emphasizing our disciplined execution because it's the cornerstone of implementing our poor three three operating strategy and responding to a low carbon economy, what's sustainable and clean solutions for our customers.
In other words.
This is one of the reasons that he goes team is able to go head to head and beat the competition and when high quality work in or end market.
You also be sent thing my confidence in enthusiasm about what lies ahead for CECO because the shape of our future can be seen in the record backlog we achieved during this past quarter.
It is our bookings and backlog better and the greatest predictor of the future and result in these two areas have been Scott.
Continued opportunities in our large and diverse end markets provide potential for our team.
And our healthy balance sheet offers us a flexibility to seize investment target that can improve our future.
As you know our backlog is based on customer wins and I'll highlight a couple of these this morning to illustrate ficos value proposition and market Differentiators.
Well now begin to see it goes performance customer wins for the third quarter as well as our near term market outlook.
I will cost about them after the financial detail.
Following met coal report out I'll recap, our path towards generating top tier returns for our shareholders and then I'll open the line for your question.
I'll start with light gray by quickly, noting that airport the operating strategy well actually almost two years ago guides, our priorities investments and execution.
Like simply it's been the blueprint for our market leading execution, that's been driving our impressive bookings in improving profitability.
Along with our broad portfolio competitive advantages and talented team. This is like CECO to increasingly being recognized as the go to resource for clean safe and more efficient solutions that protect our share environment.
Moving on to slide four I'll highlight our third quarter strong financial results.
We achieved what I consider to be an impressive 116 million of organic orders, which is an increase of 19% year over year and 12% sequentially.
It also reflects a very solid book to bill ratio of 1.36.
Strong bookings serve as a solid predictor of our future.
Our revenue increased modestly to 85 million, which is up 5% sequentially, but slightly off down 2% year over here.
Like last quarter, our revenue was being tempered by a shift toward longer cycle orders. This year reflective of the mix of strong orders across our energy segment.
Going forward I'm confident that our revenue will be positively influenced by a record backlog of 238 million.
I'll emphasize that are backlog is up 17% you every year and that we've added 84 million since the fourth grade three operating strategy was launched two years ago.
Our gross margin this quarter remained strong at 33.8% once again demonstrating value and execution.
Adjusted EBITDA was noticeably up sequentially 8.4 million and essentially flat year over year as backlog conversion to revenue was a bit slower than historical.
Finally, we had strong free cash flow at 8 million.
Our ongoing efforts to consistently generate positive cash flow are bearing fruit.
So we can do even better and more staying on top of this important financial performance metric.
Before moving on I also mentioned that our balance sheet is stronger than ever with our debt lowered by an additional 7 million during the quarter.
And I need to keep operating cash on hand has been further reduced by consolidation and simplification of our treasury activity and ERP.
He goes impressive bookings in strong profitability in the third quarter are the result of our team being able to perform at very high levels every day.
This is not something new we've been building momentum since the fourth grade three operating strategy was launched <unk>.
What we can and will do even better our entire team is committed to doing so.
I'm energized by the new opportunities added to our sales pipeline from our recent industrial segment Redeployments to Europe , India and China.
And our newest class of CECO leadership Academy graduates presented action learning projects that have the potential can materially improve the company.
Yes, we can and will do even better.
Slide five is next.
I show this side last quarter and want to quickly highlighted again, because it central to our competitor they had dinner increasing ability to win share and the growing low carbon economy.
Because it's producing solutions for a cleaner safer world with a broad portfolio of application specific products solutions that range from reduced emissions of chemicals in particular.
Productive fluid handling and process water treatment design.
Biggest target remains cleaner.
There are competitors in each of these areas, but we're in a leadership position in terms of being able to combine an attractive portfolio of products and services with world class capability.
Well, we're well positioned to seize opportunities and the growing low carbon economy.
This takes us to slide six and seven in the two market wins from our third quarter highlight reel, serving as a proxy for dozens of others that demonstrate the role we play in sustainability in the low carbon economy.
As a quick refresher a low carbon economy, essentially requires industrial and commercial facilities of all types all over the world demeaning inherently challenging goal of simultaneously achieving higher output and lower environmental emissions.
Slide six shows the first showcase win from the third quarter, which involves the sweet spot for CECO.
Power generation plant associated with the Sabine pass LNG facility, that's under construction in Louisiana.
I say sweet spot because were successfully competing in both LNG and powergen applications and built a name for ourselves with Oems and facility operators.
Our customers facility will have a small power generation plant to convert natural gas into LNG acquiring five SCR systems to reduce C O a nox emissions.
People will deliver an install these systems over the next few years.
I think like to overwhelming advantages in capturing this job innovation and trust.
The former based on Ficos investment or the latter it's driven by our market leading execution.
First a reputation preceded us because CECO peerless is widely recognized for its SCR exhaust systems that utilize its patent it adds a aggie technology.
The innovative AG technology reduces the customers need for ammonia a key element used in the reaction to clean the exhaust stream of C O inox.
And the simple graphic shows the clean gas, it's being released into the atmosphere.
Second the gas turbine OEM for the power plant has a high level of trust and CECO perilous to meet demanding performance criteria and on time delivery.
Our history of consistent performance from project. The project produces a powerful intangible trust in our team and product.
Not only do FICO and our OEM customer would seek benefit but the environment will also benefit did the reduction of 350000 pounds of Knox every year.
And the LNG facility, operator increased safety and reduce downtime to the life of the plant.
Slide seven presents the second one which involved with cutting edge aerospace company in the Midwest.
This customer develops and manufactures advanced materials in composites into structures and assemblies for the aerospace industry.
There are an interesting company because their mindset is to do with others are either unwilling or unable to do.
I believe were good match for them.
Manufacturing composite materials involves the use of organic chemicals, which produced a wide range of potentially hazardous volatile organic carbons RV you'll see.
Chemicals can produce pungent older Dart plans and lead to shorter life span of important catalysts that are essential to their emissions controls.
Our customers expanding its facility and needs to manage emissions as efficiently and cost effectively a possible.
He goes adolescent Kirk and Bloom brand had several competitive advantages in capturing this win.
First our sales team executed impeccably in earning the customers' confidence and making it easy to do business with CECO.
I want to acknowledge the terrific work of our sales team, including Damian Adams, Andy let fever, Chris New and Romney Gorski, because they were vital and seek a winning share and setting the tone for solid long term customer relationships.
Second CECO offered a single source solution that allowed our customer to avoid having to manage multiple companies to complete this job.
Two years ago.
We would have struggled to do this effectively.
The benefit of a single source solution is the seamless execution between different teams with different areas of expertise.
And I'm really proud of our technical PMD everywhere for accepting this challenge and making it seemingly.
And finally, we offered our innovative technology called direct fired thermal oxidation, which is depicted on the right hand graphic that eliminates the odors bloom and chemicals by 99%.
Like most of our win the client also win because our technical solution will allow them to not only meet emission standards, but also save time money and human resources.
So those are two wins from Q3 that highlight our teams market, leading execution as well as the strong brands and ongoing innovation that contribute to our growing go to reputation.
These traits and capabilities or why we're so well positioned to seize opportunities and the growing low carbon economy on the way toward our 2021 target and top tier shareholder returns.
Next we'll turn to slide eight which covers our end market outlook.
To start our markets are large diversified and generally healthy.
The majority of our market show Green arrows with some slowing of Capex investment across the industrial sectors.
Let's begin in the lower right at the Pie chart with fluid handling and then move counterclockwise.
Industrial fluid handling had a somewhat challenging market environment and had another solid quarter with orders down 7% sequentially.
During the third quarter. The aquaculture segment showed some signs of improvement, but we expect demand generated from the oil and gas an auto sector do remain sluggish.
On a more overarching level, we don't see any compelling reason not to be remain optimistic but near term market will be a challenge.
Investments in our manufacturing infrastructure in process continue as we sharpened the market focus.
So we're ready to fully compete and win share.
Working counterclockwise industrial solutions is next.
This segment served the air quality improvement needs across a range of production environment.
After a strong early start to the year. The last two quarters have seen modest declines with the third quarter dipping by 5% sequentially.
We still like what we're seeing and hearing in this market and our project pipeline remains very positive.
Outside the U.S., our new sales additions are seeing solid demand for air quality improvement products, and they're contributing with new orders from Europe , India and China.
There is however, some softening in the market at this quarter's order show.
Because of delays in Capex decisions.
In sum, we have a growing pipeline, but slower closings.
This is part of the DNA of this market that there can be periods of lumpiness, even during growth phases.
I'll add that we're developing innovative products for the future, which will help us maintain or competitive edge and this attractive market.
Now at the top of the Pie the refinery segment outlook remains active and we had a solid third quarter in terms of orders.
Our technical payment cycle on designs are them, our market, leading and we remain number one in this segment.
Continuing counter clockwise our team in the midstream oil and gas market segment delivered big time once again in the third quarter with orders up 45% year over year.
And that was on the heels of an exceptional second quarter.
The midstream oil and gas market is proving to be a target rich environment in the areas of gas pipeline LNG process water and gas separation.
Global team continues to respond with clean safe and efficient solutions.
Moving along to our largest end market segment gas power Gen. We had a solid third quarter with orders increasing 59% from prior year.
This market is still coming out of its deep slump and there's opportunity to have emerged we're capitalizing.
I'm comfortable saying that the trend for this market is positive and it's really just a question as to how in canton smoother that trajectory will be.
Without a doubt it's become an intensely competitive area, but we're very capable and always ready.
Finally at the bottom of the chart. Our team continues to focus successfully supporting the installed base of the solid fuel power Gen market and had a strong quarter with 23% increase in order.
Alright leader and dampers, an expansion joints and are extending our successes in two other harsh industry segments such as mining.
This is a big aftermarket opportunity and we're performing well.
In closing.
We're striving to achieve our target the two times the growth of the market and I'm confident we will.
Specific market segments may fluctuate in the competition will always be tough, but our team remained steadfast in achieving that target.
And with that I'll turn things over to Matt that take it away.
Thanks, Dennis lets jump into the details starting with slide 10, which breaks down orders and revenue looking at orders, we exceeded triple digits by hitting an exceptional 115.7 million absolutely. The case last quarter orders are fueled by the strength of our energy solutions segment energy orders were up 20% sequentially up 38%.
Year over year as the team is winning share in a recovering powergen segment and vigorous midstream oil and gas segment.
Industrial orders came in at 19 million, which is all 5% sequentially and down 18% year over year industrials was principally muted by delays in customer Capex decisions have returned back to our typical quarterly range of 18 to 22 million. The good news is that the pipeline remains healthy also add that are industrial segment contributed nicely.
Q3, with 27 million revenue, an increase of 23% year over year, and 34% sequentially driven by strong backlog execution.
The fluid handling segment orders declined for the second straight quarter at 7% sequentially and 12% year over year, Dennis already touched on the continued market softness in the oil and gas in auto segment and a brighter outlook in 2020 for agriculture markets.
Our third quarter revenue increased to 85.3 million, an uptick a 5%, albeit down 2% year over year through much of 2019, our mix of incoming order is tending to be longer cycle, especially in refinery, which tempered our sequential revenue growth.
I remain confident that our revenue trajectory will be positive for several reasons first our bookings have been strong second our backlog is that a new all time high and actively converting as we progress on customer milestones and our internal operating metrics are meeting or exceeding our expectations and finally with our asset light business model.
We have substantial capacity to execute projects.
And with that perfect segue I'll turn to slide 11, which shows our backlog at 237.89.
Audits on this substantial backlog points to improving revenue, adding color I'd point out that our book to Bill has been strong at 1.25 Act year to date as we've taken market share in energy that equates to 55 million of bank future revenue.
Well they make the board has been longer cycle. All project activity is moving forward on time and on budget.
Before moving on I mentioned here as I did during last quarter's call that our triple digit orders and robust backlog are all reasons. We remain convinced that we're on track to meet 2021 financial targets that deliver top tier shareholder returns.
Now I'll turn to slide 12, which show that we delivered strong profitability on the modest revenue growth, but I just discussed.
Our gross margins remained healthy at 33.8% on strong project execution that Dennis and I. Both emphasized it's been a hallmark actually go for years.
Our non-GAAP operating income was up a substantial 59% sequentially and 8% year over year on both volume and improved project margins in adjusted EBITDA was also up sequentially by 40%.
Essentially flat year over year on volume margins and lower SGN.
Turning to slide 13, our detailed financials reflect our third quarter solid profitability I've already touched on most of these headline metrics, but there's a few areas I'd like to add some color.
On a GAAP basis, both operating income and earnings per share were up 14.5 million and 41 cents, respectively with a large part of improvement due to their Q3 2018 right now a young Li assets out of the subsequent divestiture in October of 2018.
On a non-GAAP basis earnings per share grew 16% year over year on improved project margins lower S. You know as was lower interest and tax expenses.
One final note for the full year, we still anticipate an estimated tax rate of 25%.
Slide 14 shows on the left that we modestly reduced our working capital by 5 million sequentially and some of the last quarter. We further improved our HR and milestone collections. Our simplification efforts are key to making further improvements in working capital and we continue to make progress when we launched the fourth redo operating strategy. We started was 64 legalized in 13 ERP.
It's important to note that many of these ERP is were unsupported versions that we're approaching obsolescence in short they weren't enterprise tools. They were accounting matters today I'm pleased to announce we are fixed ERP and 43 legal entity a significant reduction from two years ago in the process, we're transforming our information technology group from.
Utility provider to profits exports and leading transformative change within the businesses.
As an example in Q4, we are going live on two New York, Pete first as Microsoft Cloud based eatery 65 platform in our pump business that will provide a dance costing inventory management capability and eventually E. Commerce all of which are on supported the current version of our ERP.
Customers expect basic online ordering or lead time visibility, which is unavailable in today's environment.
Second we're upgrading our energy segment, Capricor, Ken which will automate our PRC revpar process and improved project management tools for engineering.
Our current version dates back to 2008 and does not support the needs of our customer expectations today or in the future.
In short, we're driving procedural and systemic change that will enable improved cash, earning and working capital, we're making step changes at CECO and I'm excited to keep you updated on our progress.
Volume into the right, we generated 8.2 million a free cash flow in Q3, driven by 10.7 million of operating cash flow during the quarter a significant improvement over the past few quarters offset with 2.5 million of Capex investments primarily in our pump business.
Capex in the quarter was slightly higher as a few larger long lead items were delivered and commission in the quarter.
To add perspective, we're halfway through a three year 5 million dollar investment program to upgrade 10 machine that individually had 80 plus years in production with modern high speed CNC equipment. We underwrote this investment will reduce costs higher productivity in faster lead times to the fourth PMT is your operational in Q3 with the remaining two being.
Commissioned by mid 2020.
I'm pleased with the progress made and happy to report that in the near term previously highlighted bottlenecks have been eliminated I want to take this opportunity to thanks, Dan Berryman, our new operations director in Indianapolis for his leadership and introduction a lean principles over the last six months with his efforts our internal operating metrics are trending favorable.
Turning to slide 15 highlights our ongoing effort to substantially reduce and manage our debt to a comfortable range.
During the third quarter free cash flows contributed to another $7 million of debt reduction to 69 nine.
As it stands our current bank to find leverage ratio sit at 1.8 turns and from an external perspective on a net basis. We are levered at a comfortable 1.1 turns.
As part of our four through three operating strategy, we continue to make improvements in our treasury operation and I wanted to highlight three big wins.
First within the U.S., we moved all disbursements to a third party provider can manage vendor enrollment improve our rebate and reduce paper checks.
Second we consolidated for U.S. credit card programs down to one improving our purchasing power and reducing bank fees and third CECO is now managing 100% of the worldwide travel spend on concur, giving us greater visibility to manage these costs.
There are more efficiencies that Tom which includes lockbox consolidation optical character recognition in E Commerce, which will eventually lead to greater velocity of cash I'm quite pleased with the action I wanted to highlight Marci casner head of internal audit and Lindsay tank rent shared services business leader for their execution in Q3.
Wrapping up my comments today, I'll turn to slide 16, which addresses our progress towards exceeding our 2021 financial targets, our market, leading execution growth and record backlog are testament to our commitment to an evidence of our progress towards delivering top tier returns.
Starting in the upper left quadrant, our goal is to organically grow our markets to actually overtime driven by a outside and leadership, we continue to decisively out rural markets in orders.
Do you have orders a 5% growth is also performing within the targeted green zone. Despite the tempered performance. The last two quarters again, we have a record backlog that will favorably come into play with this target.
Healthy end markets and investments in innovative products are all positive drivers of revenue going forward.
Moving to the right our EBITDA rate is largely driven by revenue in the operating leverage achieved on growth.
With revenue ticking upward, our EBITDA rate improved to 9.8%.
Record backlog and healthy market have make event in our ability to move up into the target range of 12% to 14%.
Next is achieving a superior return on tangible capital, which continues to reflect our asset light operating model with working capital going down and earnings improving we have improved ROTC for a fifth consecutive quarter and now up into the target zone, and 51% staying there or preferably improving is our challenge and our teams are.
Ladies and focus on delivering cash earnings on a low asset base.
Finally on the lower left hand side is our free cash flow conversion rate, which significantly improved this past quarter and we can sell do better.
To be clear, our cash flow can be lumpy and while 40% on a TTM basis isn't terrible, we expect data with the affirmation shift to longer cycle orders from our energy segment. The attention will be on project whip as a driver further cash flow improvement.
To wrap up I'm really pleased with the organization market, leading execution, that's helped drive our impressive bookings and strong profitability of the past quarter and it should go without saying that I'm excited about a record backlog in influence that will have on our revenue trajectory going forward. Finally, I want to note again, the strong foundation that we've built and are continuing.
To strengthen with all of that I'll hand things back over to Dennis.
Thanks, Matt nice job, telling a good story.
Before opening up the call your questions I wanted to turn to slide 17 and offer some thoughts on the drivers for delivering top tier shareholder returns.
We now have two full years under our belt implementing in executing our for 23 operating strategy.
It's proven to be a well design blueprint for transforming how CECO does business and focusing the organization on winning share and creating value.
In assessing our successful third quarter, it's easy to see a direct link between the fourth grade three operating strategy and the results of our key performance metrics.
Quite simply the operating strategy has made us more agile inefficient and winning share against our competitors and resilient in dealing with everyday market forces.
As I've said before it's positioned us well in the marketplace.
The fourth grade to the operating strategy remains our blueprint and will adapt our plans is needed to address and respond to changes in the scope and scale of the opportunities ahead of us.
Our end markets remained strong in healthy but to growth engines.
First is the classic one of industrial expansion, which is subject to the influences of economic cycles.
The second is a developing low carbon economy, which is driven by the constantly increasing social and regulatory imperative for industrial and commercial customers to seek sustainable clean safe and efficient solutions.
Product innovation has strengthened our organic capabilities and sharpen our competitive edge as evidenced by the two customer wins I discussed earlier.
We know that constant innovation is important and that's why we've reinvigorated our innovation effort with new leadership and reinforced our China Dubai in India design engineering hubs.
And weve rate committed to new product development.
But we now have more than a dozen product concepts with allocated R&D dollars to explore and develop.
Going forward.
We see innovation focus more on the connectedness of our products like digital solutions in the so called Internet of things.
Innovation efforts have long lead time and the good news is that we're now at this stage where market traction is being realized.
I'll also mention here that our fourth rates the operating strategy identified the need to make long overdue infrastructure investments to keep pace with our complication and even get ahead of market trends and customer needs.
We've done that and if completed the lions share of planned upgrades for our pump manufacturing facility in Indianapolis.
The blueprint for becoming more agile inefficient included rooting out and eliminating complexity.
We have become much more streamlined interconnected and efficient organization.
Legal entity ERP is in bank accounts have all been significantly reduced and the cash required for working capital has decreased.
Because of all that we're executing with increased speed and more precision.
And finally.
We're much better prepared to seats high value opportunities that can compound our progress through targeted M&A.
As previously mentioned that we have a more stringent strategic process that aligns to any such actions.
Acquisitions, we'll have to be a direct complement to both our mission value proposition and enhance the long term financial targets.
And when I started this morning.
We're excited about our strong third quarter and determined to do better.
And remain confident that we're on track to achieve our 2021 target or top tier shareholder returns.
Now, let's open up the called your questions.
Operator.
Thank you.
Well now begin the question and answer session to ask a question you May Press Star then one on your touched on Fad.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
And at this time, we will pause for a moment to us some borrow roster.
My first question today will come from Chris Van Horn of B. Riley FBR. Please go ahead.
Good morning, everyone. Thanks for taking my call congrats on the quarter.
Thanks, Chris Good morning, one Chris So I just wonder.
Jumping to the backlog, if we can and get a sense of the timing of of some of the new awards and where the backlog stands today and maybe maybe if you don't mind.
Do you see the margin profile shifting dramatically on some of these new awards and wasn't the backlog right now.
Hey, Chris Thanks for some great question, when we look at the mix of orders they have shifted to be more long cycle in nature.
If you look at the market outlook page. The all Pie chart that Dennis mentioned, specifically refinery midstream oil and gas over the last two quarters, we've seen a lot of growth.
And so they often have a little bit longer revenue recognition cycle than we would typically how.
The project driven business growth in backlog dictate future revenue and what the sequential improvement in bookings that you saw in last two quarters.
One should expect their revenue growth in Q4 would be on par with Q3 sequential growth.
And we should see that to continue to grow into 2020.
As a side note that customer project delays that we noted in Q2 that you probably hinted on are progressing on time and on budget, we feel really good about execution, but still have pay slower than we would prefer I've been gener I'd tell you. The pipeline is really strong backlog is healthy and the margins are in line with our historical averages.
Okay, Great and then you're obviously seeing really good good award wins here.
Well, maybe could you comment on the on the competitive landscape are you seeing your small competitors exit is it your differentiated product is there a price component is it all the above in any detail you could provide there.
Yes, so yes, we have competition in nearly every part of our field and it's a mix of small agile competitors with a localized approach along with a few larger players who have similar reach to what we have we don't think there's anybody.
Really pulls together the full package and so when I think about our competitive landscape I mentioned in my remarks refinery. We are a clear number one we get recognized for that we get called in early we work closely with all the refiners all over the globe, it's a great position to be end.
Around powergen. She is our largest end market segment I think I mentioned in the last few calls that the fact that we were seeing the green shoots that they bring back new gigawatts into the market signs from GE and Siemens and the big players that there are beginning to see.
Some incremental a unit demand and those things started to materialize in the quarter, where our competitive positioning has been exceptionally strong and we have seen or at least one competitor fall by the way side in North America, So our strength our longevity our technical capability.
It is still shining through in that market, even you know it with it.
Down overall segment and competitive nature.
I think about industrial it's really about us pulling together the value proposition of being a solution provider with a number of different types of.
Air quality improvement, a air pollution remediation opportunities and being able to put those together in a way in front of a customer that demonstrates the value that deflation that is executed on time and on budget. So we like where we're at teams executing well and I'm optimistic they'll continue to do.
So.
Okay got it thanks for the time I'll hop back in the Q.
Thanks, Chris.
Our next question today will come from Jim Ricchiuti of Needham and company. Please go ahead.
Thank you good morning.
Just pursue this this longer term cycle of and orders and backlog and you're talking about.
Can you define that a little more in terms of what how you were just fine.
This this longer cycle order.
And you're seeing.
Yeah, Jim Thanks for the question and I'll, Let me acknowledge first off that historically, we would.
We expect to see a faster conversion of orders and backlog to revenue. If you take a somewhat of a historical mix. However, as we mentioned in 19 here, we've seen much stronger orders in the last few quarters that have a longer cycle nature now I think we've communicated.
With fairly transparently and when you think about our three reporting segment fluid handling filtration, a shorter cycle kind of a 30 day you know order to full revenue type cycle 30 to 45.
Industrial segment, a more mid cycle. So six to nine months from order to full revenue and those are averages things can can go up or down from there and our energy segment and has always been though no longer cycle, usually 12 to 15 months.
From an order date to full revenue when I say full revenue.
Times, we can begin to see revenue you know the month after about water receipt.
So as you look at the mix of more energy orders. This year. That's one of the larger contributors to just a shifting out in terms of conversion of orders and backlog into revenue.
And that's the most natural part of what we're seeing.
A little bit of what I would call maybe unnatural was in a refinery segment, we message mentioned last quarter as well we have a couple of projects larger projects that combined would it would have had five to 7 million of revenue at the time, we anticipated.
Additional revenue through the end of September that had been pushed out into the fourth quarter and.
Towards the middle of next year based on the customer being late with design changes Rethinking a few things on their process and those then adding back to it to us to make changes before we could get everything released the fabrication. So again, we're executing all of our project on.
Time on budget and at the same time, you're seeing a slower conversion of orders to revenue.
Okay. That's helpful down it's actually that you answered. The next question I had about these project delays. So these are these delays you see part of that being.
Beginning to be resolved in Q4, and then the balance in the early reported 2020.
Yeah, and the one I mentioned had two large milestones one milestone originally was for October of this year and the other milestone with September of next year, and they've decided to take both shipment in the latter part of next year as a result of those needs and they rebound.
Their sites schedule.
For that so in that case, you see a sizable shift toward the you know spread out through the latter part of next year on several million of backlog and future revenue.
Okay. That's helpful Final question for me is just.
In light of some of the concerns folks have had about.
Slowing macro, particularly as it relates to the industrial markets I'm wondering if you could maybe talk a little bit about that you alluded to some of it in the fluid handling portion of the business, but just looking at the industrial markets, where are you seeing some signs of possible softness.
Yeah. So I I you know in the third quarter beginning in the third quarter, you see a mix messaging coming from a lot of the industrial customers.
Including those who have been reporting.
You know this this call last quarters earnings as well.
With signs that make them a little bit uneasy about do we plow ahead with all of our growth investments our growth capital and a lot of times were tied to investments in expansion and growth capital et cetera.
And sell it in that area, where we've seen continued visibility on projects.
Our sales pipeline actually continues to go up which is a positive sign but we've seen delays in people pulling the trigger and making those decisions a bit based on their own our customers view of you know certain uncertainties out in front of them.
At the same time, you know you look good I S. M. A weight in the manufacturing PMI indicator, which dipped below 50, a month ago and then again below 50 is a sign of a little bit refer a period and industrial manufacturing in the U.S. and that broadly stated is our.
Target customer zone, and so while we are getting visibility, while we are seeing opportunities. While our sales pipeline is actually growing we have seen those things mute a little bit of the decision making on projects.
In the last.
45 days or so and think that environment will continue to be challenging which is why we're stepping up our efforts to make sure that we win share even in a bit of a slowing market.
Fluid handling we have three very focused niche target segment and one is beginning to show good times again with some larger project activity in aquaculture.
One is is has a lot of end market tie to automotive which is.
No passed the peak of the investment cycle and the other it says around oil and gas and that's been somewhat muted.
That from other people in this space as well with pumps.
That's helpful. Thank you.
Our next question today will come from a mid scale H.C. Wainwright. Please go ahead.
Thank you a good morning, Matt Good morning, Dennis.
Just going back and maybe you know matts comments earlier did you indicated Q4 would be relatively flat to Q3.
No we were I communicate christine's question earlier that I think that you should look at what the our Q3 to Q2 sequential growth wasn't a probably on par for Q4, okay understood. Thank you for this.
This back.
But you're seeing is it mostly domestic or international.
It's pretty global what we're saying lots of activity all over the globe, especially if you notice the up ramp in the last two orders and backlog, mostly been an energy where global business, we have operations in Dubai, India Singapore.
And we see pretty much all refinery in power Gen work all over the globe. So a very good mix as of late.
Understood and do you foresee sort of this trend in sort of wind GE in midstream remaining stronger relative to backlog mix going forward in the next few quarters.
Yeah. It would appear to continue to be active our pipeline of activity, So, which we really cut off in major over the rolling 12 month outlook has continued to be healthy.
At the same time, it's not evident that the projects that will want to close in the fourth quarter, well, we'll generate sequential bookings growth on what we just reported.
But but I do see a pretty active in healthy market out there. Our team has continued to gain share we're getting good traction in the process water arena of the end market as well, which is something that a you know we dusted off our technology and have begun to demonstrate some good wins there as well.
So.
Optimism a little lumpy.
Fourth quarter, you know will be difficult I'd love that the team to better what we just reported on orders I'm not sure that the number of closings will support that.
Understood.
Just maybe one last one from me.
Many related discussions Oh, one truly a big part of these gross bookings for the last few quarters you highlighted this again this time.
Is there something in immuno.
Terms or will you mean look for M&A is it more services oriented with regarding how many types of.
Solutions or is it more product type of opportunities you're looking at.
So I I would say that as we've improved the operating metrics as we've been getting traction in growth as we're getting comfortable with the execution in the consistency.
And as we generate free cash flow they've been very active in assessing what's out there and timing and trying to action.
Target.
Those key targets would likely improve our environmental mission.
So a clean safe industrial production.
You know more efficient solutions and there's a host of things that go with that from more technology oriented to services and products.
And so we've been active in assessing what's out there you know and I think we'll continue to be looking at enhancing the company's position through targeted investments.
Having said that.
We've communicated our.
2021 financial targets.
And those metrics.
Growth.
EBITDA margins return on tangible capital free cash flows will also be important elements of any screen, but when we look at targeted future investment.
Understood.
That's all I have thank you so much.
Summit.
And our next question today will come from Jerry Sweeney of Roth Capital. Please go ahead.
Good morning benefit Matt.
Joining Gary.
I wanted to focus a little bit more on natural gas, obviously very good orders, but I was just curious as to maybe how the sales pipeline looks.
Obviously, I think GE Mitsubishi payments or are applying.
Improving market are we going from green shoots to maybe more sustained growth.
Yeah, well I think what you what we see and have seen you know throughout the year was more of those green shoots and Scotty activity coming in developing and then a lot of things pop in the third quarter and so we had.
At a nice bookings quarter and we just finished.
It does tend to be a little lumpy in the context of especially new gigawatt.
And so there's an outlook that that continues to look as if it's modestly growing over they mid term horizon.
And that's what I think we are trying to represent within within our.
Slide here on market outlook, that's what our pipeline chose it's always a little lumpy in terms of exact execution you know what will we see in any one specific quarter, but overall, we see some demand improving Matt did you have anything to add there yeah. If you take a lot of Jesus.
Announced recently, we track them Demons will report here in the next few days.
It should be she's not fully out just yet with Q2 results you saw this big jump in Q2 on number of large gas turbines that went into the market. I think we won some of those jobs. When you look at Q3, they claim that their orders were down 30% year over year, and they said that timing on a lot of orders coming through their modeling for 25 to 30 gig.
Walk per year, which is at a four year trough.
And flat year over year, that's worldwide capacity of new Gigawatts added so.
Nobody is giving a sign that the market is taking off but I think green shoots have been seen and we're hopeful that that start to sprout, even further but nobody in the big players OEM bucket has come out and sad thing.
Things are going to be rosy from here are now.
So we're cautiously optimistic.
Got it and then taken a little bit of a step back when I look at the power segment.
Sort of margins are better than they have been I mean, especially from a couple of years ago.
Is this pricing, maybe some competition, leaving or just more bundled.
Services or maybe even I know some businesses have shifted some to industrial side as well, but just curious as to what we're saying.
The margin front.
What was your question about you said the power segment did you mean, our energy segment or are you talking about energy I'm sorry I.
Hi, Matt energy and whole I, just in my mind power, So I apologize yeah well.
On any given you know period the margins are reflective of largely two or three key drivers number one.
Our ability to be in front of a customer and demonstrate value.
It is an intensely competitive marketplace.
And in spite of that our team has done a very good job of demonstrating the capability the value.
Staying with some of the longer cycle projects in orders and being able to execute those number two is in project execution.
As some of these are longer cycle projects executing them well getting the vendor base aligned getting support from our vendor base has also been Keith.
And then it's mix you know across the board on any given period, we have good mix of aftermarket brownfield.
New projects that come from EGPC their Oems.
Can tend to be a little more competitive and as well orders from end users, where they really understand the value that we can bring and have preference.
So it's really a mix of executing well in the market that is helping us generate the overall margin mix that we've seen.
In the last several quarters.
Got it Ivan just finally on that front.
If you do see see some additional growth maybe specifically maybe in the power side is there an opportunity just for better leverage.
Our margins just feel leverage maybe unabsorbed overhead et cetera.
I'm actually not sure. If that's included in the gross margin side or more just on Opex.
On that front.
Yeah, I think that what you've seen before and what we would expect.
Is that we do get operating leverage on our edge DNA.
And why we eat out some gionee, we have reinvested quite a bit in sales and marketing and as well raise more recently in innovation and product development related.
Spend that we think well also both you know.
The good for long term health of the company.
And so that is where we get and how we get into the targeted margin range of EBITDA that we've communicated for 2021, yes, because we don't have plants Jerry in that market. You know your gross margins are Iraq or a.
Good reflection of our pricing and value proposition or the customer and our ability to execute those during third party fires. So when you mentioned absorption we don't have a plan to manage absorption instead, what we're doing is trying to get leverage on our SDMA, which is where engineered than our project managers that.
Got it I appreciate it.
I'll jump back in queue you.
You bet you.
Our next question today will come from Tate Sullivan of Maxim Group. Please go ahead.
Hi, Thanks, just a couple of quick follow ups from me for I mean, the 40 million Nat gas order and you gave great context on that and I think that's the highest quarterly number and at least the last two years can you comment on the domestic versus international mix and that number.
Let me give that some thought here for a minute Tate, but thanks for calling that out.
Last year. It was an interesting year in that the market was particularly muted and there were really were very few new new I'll call them Gigawatts being added to the market.
And so the wins that we got or largely brownfield upgrade.
Efficiency upgrade emission standards upgrades in the like and the team really killed it last year on on a very soft market and so.
This year I'd been signaling and we've seen in got quite a few closings in the more than new gigawatts market. The things that we mentioned that come through with the likes of the GE Mitsubishi Siemens wins that Dave previously announced.
All right domestic too.
International.
It really moves widely from period to period.
Fine that to work through my brain, you know, maybe 50 50 North America.
I'm not positive if that's the number or not because of the just the nature of.
The movement, we don't pay as close attention to that because most of our energy market is very global and its representation and Ken the products is similar throughout the world You're right 50, 50 is probably a good representation Europe and America.
Being where they ended up being commissioned installed Asia has yet to come they don't have not attainment dogs as much regulation on been OXXO gas turbines.
And effectively use as much there are more powered by coal therefore steam turbines are being used and while we do serve though not as frequently as much. So it's been more 50 50, you slash a U.S. as of late payment.
Okay. Okay. Thank you for that and then last from me just fall on Capex 2.5 million in the quarter, Matt I think you've mentioned a three year capex expectation before or can you is that still in place or can you comment on that plan.
Absolutely, yes, so we've spent.
3.7 million year to date, and you noted two and a half million in Q3.
And then we spent about 3 million in 2018, so we're well down the path of our three years graduates.
Caught seven of the.
10 million over the three years that we mentioned.
The majority of that being in our fluid handling segment I mentioned this in the prepared remarks that you heard earlier, we are revitalizing our Indianapolis and Telford plantings will make a major investment our pump business. We think we have a great product, we just need to serve our customers faster reduce our lead times and improve our quality.
And we are right now the heart of that right now, but I would tell you that have that $7 million that we've spent so far.
Well over 4 million of that is tied specifically to fluid handling the pumps business.
Okay. Thank you have a good rest of the day.
You bet. Thanks day.
Our next question today will come from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
I wanted to thank you and your more than Dennis and Matt.
Well now one of Eldridge legit, congratulations to you and you're taking further.
Fine job, you're done and the progress you've made over the last couple of years since you implemented your.
Your new strategies and programs.
Very noticeable.
Thank you.
Dennis you mentioned.
So for a minute ago and I didnt.
A lot if you can offer more color you mentioned.
You're seeing more activity and I believe you said process water market.
I'm not sure I got that first where exactly right, but in the water markets.
And you're getting some traction I think you indicated with some new products I just.
Was wondering if you could talk little bit about.
The.
Parallel potential that market than it was at a meaningful market and exactly what you're doing there too to gain traction that you're talking about.
Yeah sure avail.
And I'll characterize this.
With a little bit of history here, we have some key products, including a offering that sold under the scheme of X.
Market brand that guys.
Oil and water separation.
And we've also got the expertise to handle a different types of process water seepage water separation, you know in and around the oil and gas markets.
Last quarter, we included in our call and and had a specific announcement on a large seepage water treatment facility order that we received in the middle East. It was called out because you know a it was a very sizable win and so a nice reference for the company to be back in the water.
Market. It was also called out specifically because it was one of those it has a long cycle nature and won't have much revenue until 2020.
Having said that weve lean into into those wins, adding some people in a few key markets in China and in Dubai to make sure that we lean into the wins that we've gotten to continue to develop and desktop the technology that we have a managed a few.
Were slowly rebuilding our positioning in their through historical Peerless technology and.
Thus far the teams executed fairly well you know in it so part of why we are still optimistic and seeing a growing pipeline.
And our and our sales pipeline.
Thank you very much good luck in.
Interestingly enough you know some of that also like the rest of our business can generate a pretty good aftermarket.
You know aftermarkets an area that we continue to haven't focus we spend time on we have dedicated people I think the mix of aftermarket this year as a little lower than what we had seen a that's based on some of the sizable project wins.
But we are seeing follow on that that come about as a result of the larger project wins as well.
That or add ons to some of the existing wins that we've gotten in the last year and a half.
And again, if he would like to ask a question. Please press star and then one.
Our next question will come from Tom rather not core partners. Please go ahead.
Hey, guys. Good morning, and thanks for taking my questions I'd said, a few follow ups one specifically on the guidance for the fourth quarter just wanted to make sure I understand.
When you said sequent to sequentially sort of the same trends as we saw in the third quarter did you mean in terms of absolute dollars for in terms of Ah Ah quarter over quarter growth rates.
So I'll start by saying, we don't provide guidance, but I will go back to tell you. What we did quote earlier and we did state that on a percentage basis, you should expect that Q4's revenue should increase in line.
Really with what you saw Q2 to Q3.
Got it that's very helpful. Thank you and then.
Just remind us in the fourth quarter is there any seasonality if that would impact your gross margins for it but the margins either positively or negatively versus a prior quarters typically.
Yeah that Tom there's no real seasonality that I would describe.
That effects quite frankly orders directly or margins, but but with the project nature of the business. There is a mix effect on any given period of which jobs are moving faster, which product lines are moving better how much aftermarket is coming through the city.
And that's why you know we've had a range of gross margin or anything of 32 to 34 that we think is a reasonable.
Target for our team.
And one that you know we see as the range of expectation when we think about our planning.
Got it and just to make sure I understand on page on page seven of the presentation to second a large when I sort of MS thought I apologize if you're already mentioned, but did that impact from a from an order perspective did not impact youre powergen natural gas business or was it right.
I go somewhere else.
That's a or what we referred to as a thermal oxidizer as well as some some custom ducting and those product lines are within our industrial segment reporting.
The Dod Andrew on.
The gas turbine exhaust system.
On page six.
That was is big going to be installed on an LNG facility that so part of our energy segment.
Got it got to go and so when I looked at the at the down they'd seen.
Order number in the quarter under industrial solutions.
That's that's net of the about new one.
Yeah, Yeah that wins included and again.
You see is lumpy h. market, we operate in a range of kinda 18 to 22 million had a breakout first quarter continuing to kind of fell back into this 18 to 22 range of bookings some of that again, even while the pipeline building.
I mentioned some of the market you know decision, making slowing down.
Got it and then last question I'm just curious if we can compare and contrast for US I think you already gave some color, but an incremental color would be helpful. Compare and contrast, the competitive dynamics within the refinery business versus midstream oil and gas versus the power Gen natural gas business just curious.
Obviously, specifically within the natural gas business, there's been some pressure curious if most of your competitors are still around and if they're being irrational rational and how that compares to some of these other segments, but that seems to be doing better and sort of a related question is what I'm going to throw it in.
As you know, it's very nice to see some of these very large wins. When you look when you look at your pipeline of a of potentially a future work.
Like are you seeing anything that's about as sort of similar size, which we sort of think of this is more of a.
Onetime in nature type of Orderbook. Thank you again.
Yeah, so as a few questions in there and I'll try and start by characterizing again, the competitive arena that we work in and maybe focus it on energy, which is I think where your question was.
In the refinery market, we are a very strong number one player in psych loans in the fluid catalytic cracking process.
Quite frankly, where the guy people come to US we do have a few other competitors. They are good competitors, they're tough competitors, but but we are very strong we see most of the projects. We have good technical people brand support if you are out on a refinery.
People tend to referred to us by name as Emtrol as fuel or Emtrol Buell.
And so you know it's a narrow ish segment and we are very strong within that narrow ish part of the market that we perform in the rest of the market that we referred to is very large.
And and there are pockets, where we have great strength, and then pockets, where we have great opportunity in terms of a share and command for the market oil and gas midstream has a variety of applications and there's a large untapped opportunity, even where we are very strong.
We have good recognition are on the approved vendor list for most of the major producers most of the major pipeline players all around the world.
And in Powergen again.
Competitive arena market has come down a lot since the the high.
In late 16 and in the early 17 before the market dropped precipitous Lee.
And so the competitive landscape. It's tough you know the customers are tough and at the same time, we really are the ones that stand tall in that market in the context of technology in the context of execution and we have seen as I believe I mentioned earlier, you know one player in North America fault.
The way side.
In in serving that market, so I'm still tough market, we serve competitors, but but you know our positioning continues to be stronger overtime through longevity in the technical capability of our team.
I think that was your question you asked a little bit about.
Hi, guys. The 116 million, you know where does that fit in the world and I also believe that what I communicated earlier and what we're seeing our overall sales pipeline, which is in the outlook for.
12 month closing so anything that they are sales team anticipates closing over the next 12 months.
Has continued to grow.
That's a positive signal, it's not so evident that the timing of where those things land will have.
Gross.
On the exceptional orders value that we had in Q3 I'm not sure we'll see growth on that in the fourth quarter.
Got it thank you again.
Okay.
Thanks, Tom.
And ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Dennis Sadlowski, Chief Executive Officer for any closing remarks.
Okay, well I want to thank you all for joining us on the call here, our CECO environmental third quarter call.
As we talked about we continue to execute on our 433 operating strategy and delivered another clean quarter with sequential improvement on all of our key performance metrics. Thanks, again and have a great day bye.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.