Q4 2020 CECO Environmental Corp Earnings Call
Good morning, and welcome to the CECO Environmental Conference call, all participants will be on listen only mode.
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After todays presentation, there will be an opinion of the last questions.
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Oh now the teleconference over to Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.
Thank you for joining us on the CECO environmental fourth quarter 2020 conference call on the call today as part of <unk>, Chief Executive Officer, and myself and Matt Eckl Chief Financial Officer.
Before we begin I'd like to note that we have provided the slide presentation to help guide our discussion.
Call will be webcast, along with our earnings presentation on our website at CECO and viral dot com. The presentation materials can be accessed through the Investor Relations section of the website.
I'd also like the caution investors regarding forward looking statements any statements made in todays presentation that are not based on historical fact are forward looking statements such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties actual future results may vary materially from those expressed or.
<unk> by the forward looking statements. We encourage you to read the risks described in our SEC filings on form 10-K for the year ended December 31 2020.
Except for 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.
And 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've reconciled the comparable GAAP and non-GAAP numbers and today's press release as well as the supplemental tables and the back of the slide deck and with that I'll turn the call over to Tom.
Thanks, Matt.
Much of 2020, we started our earnings calls by taking our dedicated employees their families and our great customers and operating partners and it has been a challenging time as the entire world has been forced to navigate the global pandemic and adjust how we work and interact we are very pleased with her team CECO has come together to embrace new.
Technologies processes and adhere to rigorous COVID-19 policies to ensure health and safety and so.
And once again, thank you for all you do to ensure we deliver for our customers and drive value for all constituents.
As highlighted on slide three and in our press release. This morning, CECO delivered strong results in the fourth quarter of 2020.
Let's quickly review of the facts and figures and later, Matt will provide more color around some of these numbers.
Orders were up mid teen levels, both sequentially and year over year, as we booked $77 billion and the fourth quarter.
Getting back on the orders growth trajectory is always a positive, but even more important as we saw reductions and our backlog and.
We look to turn the quarter on this trend early in 2021 as we believe our orders growth will continue.
Sales were $83 million, which did reduce backlog because it was obviously higher the new orders for the fourth quarter sales results were down 7% versus the 2019, but they were up sequentially, 7% over Q3 2020 of.
Project teams continue to execute very well despite the challenges of Covid restrictions.
Gross margins came in at 31, 6%, which was a little higher than we originally expected because of the mix of projects that drove our fourth quarter sales growth gross margin rates have been steady throughout 2020, but year over year were down almost 200 basis points a year ago, we had a very attractive margin rates and our <unk>.
Backlog because of some large high margin projects and those jobs have been fully executed.
Unfortunately, replacing those higher margin projects with new orders with stifled and early to mid 2020 because of the COVID-19 related market softness as we enter 2021, we expect to see more higher margin project opportunities.
Adjusted EBITDA of almost $10 million produced margins of 12%. This was up approximately 70 basis points year over year.
So pause on that for just the second gross margins were down 200 basis points versus Q4, 2019, but EBITDA margins were up which means we have reduced SG&A as a percentage of sales by approximately 270 basis points on a period comparison basis now not every quarter.
So that level of year over year margin expansion, but it does demonstrate the amount of costs, we have reduced to better position CECO for strong margin conversion going forward a lot of great work has gone into our productivity. Thanks for the team for their focused efforts.
Non-GAAP earnings per share were down year over year, and certain tax benefits and Q4 2019 did not repeat in Q4 2020 EPS of <unk> 16 was up significantly quarter over quarter, which shows the steady improvement and our income from sales.
On the bottom half of slide three we provide some commentary around how we continue to position CECO for sustainable performance.
We have reduced cost and various functions and specific areas, but we have maintained key growth resources to take advantage of improving markets. We are seeing stronger bid proposals and engineering work and the majority of our end markets. So we expect continued growth in orders.
And as I've just articulated CECO is cost structure is more efficient as volumes come back we expect to reach new heights with respect to EBITDA margin rate levels.
Since my arrival and the second half of 2020, we've been evaluating our best growth strategies, we will be articulating our longer term strategic focus and the coming quarters, but we continue to make very good progress with our shorter term investments and new technologies and services to enable growth.
Lastly, as we announced a few months ago, we've commissioned and the internal group to pull together, our first sustainability report where you.
We're proud of the work, we do to serve our customers and communities to provide advanced environmental solutions. So that will be of great story to tell and we also have a very good internal risk management framework, including environmentally sustainable operations high social standards and strong governance controls and policies and we look forward to.
And more fully disclosing.
Let's turn to slide number four.
This is one of our regular earnings slides.
On the left side of the slide we highlight and markets that are predominantly related to certain energy markets and on the right side, we provide detail on our broad and diversified industrial markets, Let's review the details.
Walking down the left side of the slide you can see we had $9 million and order bookings associated with projects and oil and gas refining space.
While this level would typically be lower than average the 9 million is up well over 100% both year over year and sequentially versus Q3 2020, we.
We expect continued orders growth in this area as we have seen a very depressed refining environment for over a year. We are now seeing more capex dollars allocated to maintenance operations moves.
Moving on.
Midstream of $16 million is up double digits year over year, but we expect this market to remain somewhat choppy over the coming periods.
Next.
Power generation natural gas is steadily improving we are of very good and active pipeline of opportunities and our $18 million of orders is strong double digit growth versus Q4 of 2019 and represents over 70% growth sequentially.
And at the bottom of the left side is power generation solid fuel, which is our smallest market segment. We believe this market has bottomed and we should start to see orders rebound in 2021.
On the right side of the slide let's start of top with industrial solutions the.
The $22 million of orders provides nice growth versus 2019 and sequentially like much of power generation. We are seeing a very healthy pipeline of engineering and project opportunities. We've seen continued progress and general industrial segments for a few quarters and we expect this to continue especially.
With our pipeline visibility, which Matt will highlight more and just a minute and and our industrial fluid handling areas, we booked and $9 million of orders in the fourth quarter, which was flat year over year, but up 5% sequentially. We expect continued expansion in this area.
We have worked very hard to drive improvements and our on time delivery and continued quality of <unk> Dean and Seth co brands are well respected and we are investing and more growth resources to take advantage of opportunities and add new channel partners. Examples include the recent launch of Intel equip and online Dean pump.
Configuration tool for both pump sizing and order placement and the addition of new territory sales managers, including some strictly responsible for upgrading our national distribution channel, where we have not seen the results we should otherwise expect with the fantastic brand name like Dean pumps.
I will now hand, it over to Matt and then wrap up with some final comments and a bit Matt.
Thanks, Todd I'll start with slide six and orders and $77 million of orders and we are pleased that the all three segments growth sequentially and year over year, while we are still below our pre COVID-19 averages. We see markets are improving as power Gen and refinery market start spending on deferred capex and industrial customers seem less concerned.
And by the outcome of the U S election, and Covid December was a very strong orders month for CECO as competent factors grew amongst our customers doubling down on Todd's comments, our pipeline continues to expand and reached one $9 billion and new height and my for years, plus mostly driven by our push into new adjacent markets.
EV production and industrial wastewater.
And as you booked $46 million and Q4 up over 16% versus our trailing 12 month average, which we believe and inflection point as the economic pressures of Covid subside.
9 million came from our refinery based FCC cyclones, which were up triple digits, both year over year and sequentially, while the $9 million level is not yet back to our historical averages. We are pleased and we add year over year improvement and this category because for the full year were down 50%. We are growing more confident this will be and aerie.
For a strong orders growth and 2021.
Industrials and fluid both print and the second consecutive quarter of orders growth industrials and was a bit more per ounce at 11% growth sequentially and we're very encouraged by the progress of this team is making with wind and electric vehicle manufacturing and food and beverage and the quarter.
Fluids grew on par with its peers at 5% sequentially and 1% year over year wed like to try and coming out of Covid, but we won't be fully satisfied until orders of well above $10 million per quarter.
We are seeing our distributors starting to restock of positive sign our end markets, including oil and gas hospitality and Aqua culture are still cautious until mobility and tourism and curves.
On the right revenue grew 7% sequentially on energy backlog conversion and simply put and users of constructing plant in Asia and U S have started to gain momentum, while Europe and middle East jobs are still experiencing COVID-19 delays and pleased with the health and the execution of our backlog.
While covering revenue we wanted to take a minute to address the new metric we intend to report on a quarterly basis that we're highlighting as short cycle sales.
These sales of steadier, and typically higher margins and it turned from booked order to sale and less than four months, sometimes much much faster and <unk>.
Metric represents the combination of sales via aftermarket replacement parts recurring contracts for services and distribution based short type of sales.
And Q4 short cycle sales were $17 million and $71 million for the full year at approximately 23% of our total revenue.
As we look at the CECO portfolio today, our product set doesn't necessarily lend itself towards the high percentage of predictable recurring sales because many of our largest sales related areas come from our customers Capex budgets and.
Additionally, CECO as current technology solutions lots of very long time, and don't typically incorporate a lot of rotating equipment. So there are of lesser replacement parts of service needs. However, we are firm believers and if we start to measure our short cycle sales, we can steadily improve the dollar level and ultimately the mix of overall seat.
So sales and this will also be and area of interest as we explore acquisition targets.
As Tom will provide his update on strategy, we believe that of higher mix of the predictable revenue for project work will be of core initiatives of our capital allocation of the future and I look forward to updating you on this regularly.
On slide seven and our backlog sits at $183 million, which was down 3% sequentially and 15% year over year. Our book to Bill ratio was sub one again and Q4 of our project execution and revenue generation picked up speed, but as previously mentioned I am optimistic about 2021, and then look at our sales funnel, which should produce sop.
And would orders in the coming quarters. This is the first time and my tenure that our funnel is the clubs the $1 9 billion, which is up $500 million pre COVID-19 levels and 200 million over Q2 of 2019, which is the last peak at $1 7 billion from a qualitative standpoint, all quotes greater than $2 million come across my desk for approval and I'm happy to say.
And I haven't been the phasing of commercial activity and quite a while.
Moving on to slide eight and our key profitability measures and gross margins were at 31, 6% and the quarter, which is down 40 bps sequentially and two points year over year, primarily due to project mix and I'm actually pleased with the gross margins this quarter and they came in higher and we originally expected and we continued to see customer delays and our previously mentioned large double.
Asia Middle East and water separation project, we did start slipping into Q1 of 2021 gross margins mixed higher in Q4.
Non-GAAP operating income was $8 eight and Q4 growing primarily on volume and SG&A cuts.
Adjusted EBITDA of $10 million was up 34% sequentially and remarkably flat versus prior year, despite lower year over year revenue as our proactive cost measures provided benefit.
A 12% EBITDA and investors should right, we see and with our more efficient cost structure and some market tailwind the operating leverage that our business model provides will be very productive.
We firmly believe that as our backlog begins to grow and we continue to execute with our more efficient and streamline cost structure and we achieved full year EBITDA margin rates of greater than 13% and the next few years touching on operating expense.
Since April we've been ultra focused on our cost our Q4 SG&A reflects the benefit of these actions that total greater than $10 million of annualized structural savings. These savings included and approximately 20% reduction of our workforce three facility closures exiting loss businesses and pay freezes.
We don't take these actions lightly these had been aggressive cuts over the <unk>.
Must preserve our best talent and profitability and we will emerge stronger as markets turn in our favor and 2021.
The fourth quarter did have some likely nonrecurring cost reductions and lower health care costs and lower variable incentive pay accruals.
While we do expect some reinvestment and inflation heading into 2021, we see a normalized rate of $18 million per quarter with levers and contingencies if markets were to lose momentum.
On slide nine we summarize the quarter a few quick highlights first with.
And with revenue down, 7% and EBITDA down 2% year over year, our decremental EBITDA margins were strong at 200 basis points year over year.
Despite lower volume and gross margins are proactive operating expense reduction and improved EBITDA and a 12% margin looking at the sequentially volume growth flow through EBITDA and incremental margins of 51% further evidence of our great operating leverage.
GAAP earnings per share was <unk>, <unk> and the quarter and down 19.
Year over year, driven by a $1 2 million of earn out expense for the EIF acquisition and 900000 attributed to the noncash write down of and intangible and lower favorable benefits from stock compensation and tax credit that reversed in Q4 of each year.
On the non-GAAP basis, EPS was the 16th and down 11, and certain tax items were much lower and the fourth quarter of 2020, and we also had lower volume.
Slide 10 summarizes our full year, 2020 performance and I'm very proud of with orders down 27% year over year to $280 million, our backlog remains strong and we continue to execute well for our customers generating $316 million of revenue and a solid 33% margin.
<unk> restructuring furloughs and plant closures this team kept executing.
That persistent execution led to EBITDA of nearly 33 million and non-GAAP earnings per share of 56.
That's nearly flat for 2019, despite the significant reduction in orders and all and all I would say great job team CECO.
Flipping to slide 11, the era, we underperformed in 2020 was on working capital and free cash flow much of it is due to the reduced backlog and our energy business, our industrial solutions and fluid handling business performed well generating $19 million of free cash flow and improvement of $20 million year over year.
Unfortunately, working capital and energy soaked up most of the benefit with an increase of $20 million as our backlog declined.
The orientation of our energy projects are typically upfront loaded as customers placed orders and they also pay us I had of doing the work with.
With energy orders down, 35%, we received fewer upfront payments negatively impacting our project with and as evidenced on the left chart.
As orders start to come in we expect project with the cycle back into a favorable position decreasing our working capital and increasing our cash flows isn't the typical cycle, we've seen repeat in the past and you can access our working capital metrics internally all of performing well. This is purely a function of timing and backlog and we fully anticipate that with <unk>.
In 2020, one and our asset light business model will generate substantial cash flows.
Briefly on slide 12, our balance sheet is healthy we paid down for.
$74 million our.
Our bank defined leverage ratio is relatively flat at one nine turns and our net leverage that the one was $60 million of capacity available.
Slide 13, summarizes 2020 and comparison to prior year's performance and.
And as stated previously despite the significant reduction in orders and the team continued to execute for customers and grow EBITDA profitably and setting a strong base for an eminent market rebound.
And hindsight the structural cost actions, coupled with previous Years' estimates to streamline and CECO has served us well setting the stage to scale CECO, well above our 13% EBITDA margin expectations.
I'll conclude on slide 14, wrapping up my take on 2020.
Decades from now as we look back on this period of time, we will be thankful for steady decisions made and an uneasy time I want to highlight a few people and wins that bolster my outlook on CECO is extremely optimistic.
I want to thank our previous CEO, Dennis Sadlowski for is unwavering leadership and CECO through two major down cycles and seamless transition. This year, thanks to our new CEO, Todd who I don't have to be for having the speed of mid of pandemic, but we all appreciate the speed and Tak and which he had made tough decisions.
I'd be remiss, if I Didnt mentioned, our board for their support as we navigate it the strict 2020.
Our HR team led by Pam Turay and demonstrated the perfect balance of the sincerity and humility for our employees with a bias for Swift action and we all thank you for ensuring a safe work environment navigating work from home protocols and flawlessly executing on our restructuring plans.
From an internal investment standpoint, I couldnt be more pleased with the actions taken to continue to advance the CECO and 2020 when I joined in 2016, we had many antiquated processes and business systems, we have come very far since <unk> and.
And 2020 alone all of our it team led by truck. The Ericsson closed five legacy ERP introduced Microsoft teams globally to support employee productivity and we work from home and added critical layers of cyber security protection during the systems infrastructure.
CECO is now and for ERP is down from 13 legacy and two acquisitions and are you a shared service center team led by Scott Christie persevered through the challenging year to implement several software tools, including Cooper that automates per requisition.
Expert AI to automate the cash collection and invoice pay day eliminates checks and generate the rebates for CECO its leadership and our commitment to continuous improvement that has allowed the CECO to reduce its cost per transaction by two thirds and financing cost by 37% year over year just remarkable.
And 2020, we also the integrated two strategic transactions EIF and mayor executing on synergies Onboarding employees and opening up new markets first acquisition to be sourced closed and integrated 100% remotely. We all look forward and the day when we can actually meet those teams and person.
Lastly, the call to action on cost so many of our business unit leaders contributed selflessly to preserve CECO balance sheet and profitability. Thank you to the amazing employees at CECO the tax by so much this year, we're stronger for it and ready for 2021 with that I'll turn it to Todd.
Thanks, Matt and I Echo.
Of helped CECO.
Navigate some challenging markets several times over the past for years.
And I've mentioned on both the earnings calls since my arrival, how capable and dedicated the CECO team is and that comes through and your assessment of the continued hard work.
Let's wrap up with the next few set of slides, please turn to number of <unk>.
The top section points to the 2020 review from and orders and backlog perspective as.
As we've already mentioned orders were down 27% for the year, we estimate the COVID-19 related market impacts drove at least 80% of that decline and the fact that orders were up in Q4, we think demonstrates that we are well positioned for market recovery.
Unfortunately, this order decline for full year 2020 means we enter 2021 with 15% less backlog or project revenue. This will put some pressure on the first two quarters, which is why we are stressing.
And margin conversion are key indicators of how well we are turning the corner as COVID-19 impacts start to subside, the Middlesex and reiterate a series of strengths. We have highlighted before with approximately 40% of our professional staff being engineers, where application specialists CECO is.
Uniquely positioned as the leader in key environmental and industrial process of sectors. We will continue to build off. This expertise. We are also extremely asset light, which means we have a certain amount of flexibility when end markets ebb and flow both of these qualities allow us to invest for growth and a focused manner.
And we expect to generate strong free cash flow in 2021, so our already healthy balance sheet will be in great shape. They have the right pieces of our portfolio.
For the bottom of the slide we highlight the we are committed to delivering financial results that reflect our improved cost structure and recovering markets there may be a quarter or two and early 2021.
Where revenues are lower from our reduced starting backlog, but we expect to rebuild that backlog throughout the year and deliver.
We are close to finalizing our new enterprise strategy, we will have a strong focus on CECO, leading technology platforms that represent our best positioned for sustained growth within CECO. We of 10 to 12 platforms that spanned air filtration and quality management gas and liquid separation and industrial processes and flow.
Some of them certainly better positioned for organic investment and the markets will continue to provide sustainable growth. We will also focus on adding more short cycle revenue platforms to CECO overtime to add more balance to our portfolio.
A couple of examples of current organic investments would be our water treatment platform. We've recently introduced reverse osmosis, defendee and D salting technology, which rounds out our ability to serve our middle east customers produced and the oily water separation needs prior to this year the scope of work CECO Covid.
<unk> was limited to separation internals, only not a full customer solution.
And another would be our advanced analytical services and training team that we just launched based out of Houston, Texas. This group of experienced service engineers targets, our brownfield customers and comes of the rolodex of new service customers and their focus is repairing calibrating and testing analyze.
<unk> and.
And continuous emissions monitoring systems or <unk>.
And our installed in the field today listening to our customers. We understand capex is tight and we need to keep their current systems operational we expect the services team to rapidly become a multi million dollar business and the short period of time.
So we look forward to sharing our more comprehensive and new enterprise strategy and the near future. This will provide investors with the roadmap for how we will steadily elevate our position as an environmentally focused diversified industrial.
And you turn to slide 17, you may remember the slide image on the top left from our Q3 earnings presentation. We wanted to reiterate that as we navigate 2021, which again, we expect to show a solid orders and backlog growth. The CECO is much better positioned for strategic investments and higher margin results.
Bottom line.
Back in 2017, we saw a sudden decline and end markets, but CECO was not yet officially organized internally nor did we have a strong balance sheet at that time today, we have much more robust systems and processes and our balance sheet as an enabler not a detractor as we see market growth we will be.
Stronger and more agile.
Please turn to slide 18.
We remain committed to these financial targets, especially as markets recover and become more normalized revenue growth of at least 5% is something we believe our leading platforms can deliver we also believe we are closer to realizing 13% EBITDA margins, especially when we get our backlog back to 2019 levels. So these for the.
Targets are well within reach.
Finally, we expect to generate solid free cash flow and 2021 always a key goal of our organization.
Now, let's wrap up on slide 19.
It has been a unique 12 plus months our focus on delivering for our customers is always important and we remain committed to doing so while maintaining health and safety, we've been aggressive with cost management and improved our operational efficiencies as Matt highlighted this has been a steady focus for CECO and we are and better position.
And then ever we.
We saw nice momentum and the fourth quarter and key energy markets and we expect much of that to continue.
And we look forward to articulating more of our key initiatives and strategic priorities. This will help to focus CECO toward a more clear and executable growth program and our investors can track the progress.
We thank you for your support and interest and your time today with that we will open up the line for questions operator.
Yes. Thank you we will now begin the question and answer session.
Ask the question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to the try your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Jim Ricchiuti with Needham and company.
Hi, good morning, Jack of course.
And of that the short cycle business and the metric youre, providing and what I was curious for that is is that short cycle business.
More weighted toward maintenance related.
Revenue or is it.
More of the traditional.
Yeah, Hey.
Good morning, Jim talked here and now.
Start and then I'll hand, it over to Matt who has done a lot of work with his team on assembling the data and information behind it.
It does include maintenance and sort of repair, but it also is I guess I'll use your words sort of more of a classic are standard set of businesses as well.
Businesses debt.
When we book the potential order, we booked the yes the sales.
We produce and ship the product relatively quickly. So it does also include some of our product lines and businesses such as our pumps business et cetera. So it's a combination of three years or so things three or four things.
And its aftermarket repair parts.
The small area of our businesses, where we do have some recurring revenue.
And then are sort of short cycle book to ship business is like like our fluid handling.
Got it and you guys view this and.
Sure for.
For the business.
No.
Maybe yes, I think thats and Thats, a good way to look at it. So one of the reasons, we want to put a spotlight is is for is for the following a number of number one I think historically, we as an organization of talked about.
And maybe almost even sort of consistently but never really provided any real metrics around things like recurring revenue and work, we're going to grow our recurring and our services revenue, but we never really put specific numbers to it and then a spotlight on it and and even the same thing somewhat true internally. If you want to say that from a holding ourselves responsible for focusing on improving and driving.
Results in that area. So we're starting now right. We wanted to point of real number out there that we expect to talk about and and potentially even provide more color and advance our quarter over quarter and year over year and.
And it is an indicator for sure of I would say sort of the the general industry.
So to speak I, you know, especially in our industrial businesses.
We do have a little bit more of our short cycle space and Jim I was just add one thing the majority of our business is capex.
And with our customers, so pumps and filters duct work and services with the customer repaired all higher margin business that are deemed shorts are cycle. So thats whats all inclusive and that and last comment not to continue to pile onto the answer, but we highlighted a new services team.
<unk> that we're launching this year and we're excited about that.
I think our ability to not only show of the metric and talk about how we are driving those results, but then really add very specific even if they are somewhat small initiatives that we're doing within our businesses.
And I think it provides more clarity to our investors, where we're taking organic investment to start and potentially down the road. Some other investments to continue to grow while we do want to find more sustainable revenue profile of the organization.
Got it that makes sense and just a question on.
The backlog I mean, yes.
I'm curious if you could give any perspective in terms of the margin profile of the backlog.
Also in light of the comments you made about the fact that you'll be building backlog Betsy is going to be some pressure it sounds like and the first couple of quarters of the year.
And we look at backlog margins right now Jim they are reflective of our Q4 margin rates, maybe a little bit pressured.
Just because of the last two or three quarters as some of the bookings and the energy side to come and we've seen some pricing pressure there, but for the most part we're executing through cost measures and executing for our customers to increase those margins as we deliver them.
Yes.
Got it thanks, I'll jump back in the queue.
Thanks, Jim.
Thank you and the next question comes from Amit Dayal with H C. Wainwright.
Thank you good morning good.
Good morning, and thank you.
With respect to this analytics services business and as a part of maybe or of the Guardian revenue efforts is this product and ready to go or does it need some more development.
Non of product into the services team.
And it's an expansion to really a lot of all of the relationships, we already have with existing brownfield customers. So and these are existing facilities that and in the.
Predominantly in the energy space.
And with the regional focus we believe that the that the focus area that we are we're hiring and that we are leveraging our relationships as well as the service technicians. If you want to call of that for the specific space and we predict.
We specifically called out continuous emission monitoring that's a pretty broad category, but a very important category. There is a lot of.
The data analytics a lot of.
And the part the components to it as well so it's not a product offering as much of this is the technical service offerings and we're ready to go and we're just going to be building out that team as we continue to prove out the momentum.
And then we already have the test equipment, the trucks and the men.
Understood and then roughly do you have an estimate of how big this opportunity is within the existing customer of this.
Well, it's a fairly large opportunity and.
And and other companies that are in the space.
We've shown a propensity to be able to grow relatively steadily obviously, we're starting here. So in the year. It's a relatively small number we believe though that this could easily be.
And the next few years of solid double digit millions of dollars of revenue as we continue to invest and grow.
And just maybe one last one for me.
As the economy comes back maybe of backlog starts building up again.
Do you expect some of the cost you took out of the business to come back and again.
The group's needs going forward.
So in 2021, we will absolutely see some increases just because of the variable pay health care costs, you can't take Q4, and just annualize that out but I think the coordinated on the color and my remarks that we think its around $18 million per quarter, which is well below the $21 22 per quarter. We had previously no we don't.
Expect to have to increase our cost structure. Our aim is the 13% of greater EBITDA margins and we need to get net growth.
We're tracking utilizations of all of our application engineers and our project management team and we will increase and the backlog grows but we're going to maintain our margin rate and in that sense. So I don't see and having to grow too much and make of kind of investment and Matt.
Thank you.
That's all and thank you so much.
For asking thank you.
Thank you and the next question comes from the wrong with Titan capital.
Thank you and a couple of questions first of all.
You had mentioned that you have the highest pipeline.
And that year and had in several years.
Is that due to the market.
Expanding or is that really CECO specific initiatives is leading to that.
Yeah.
This is Todd good morning, Bill and then I'll hand, it over to Matt who again as he and his team have done a tremendous amount of work with our businesses on analyzing the historical perspective as well as how we model out this pipeline and we're getting better at it every day.
It's our largest pipeline and so you know I mean.
And I think it is indicative of a couple of things number one.
We feel that we continue to maintain our performance and our position in market and.
And that's attributable to how we continue to invest in those markets internationally. So we're expanding into adjacent markets.
<unk> and it provides more market scope for us I think to add into the backlog or excuse me into the pipeline number one number two.
We saw a fair amount of deferrals and opportunities over the last especially 12 to 18 months, some of which economic really related associated with Covid.
If you think about where our historic backlog are up excuse me pipeline had been and its previous peak of call. It $1 7 billion, you know I might say at least half of the new record getting from one seven to one nine is that natural increase associated with higher levels of deferment from the previous periods.
Covid of you being a unique environment I don't know that we were tracking this level of the pipeline because we didn't own all of these businesses you know 10, plus years ago and the financial crisis hit.
And then the other is our expansion into adjacent markets and our investment into being a leader.
Great. Thanks, guys.
And mathematics, noting that I hit the answer so we're good with that.
Okay. Thank you then.
How do you see or believe that the bite and administrations.
<unk> approach to all things environmental.
Enhances your air and the water business just can you talk through that.
Either headwind or tailwind that you believe this administration is is setting up.
Yeah. We're learning are obviously pretty quickly here and what some opportunities could look like we think we're interested in.
And in areas of environmental and water as you mentioned bill So certainly keen to learn more of what our customers are asked to do and want to do and this space I think infrastructure investment is going to be it could be interesting for.
For for the economy and for industrial companies like ours, where we're positioned.
Look we really like.
We really like across most of our end markets the feel of confidence.
Like we said the large pipeline of opportunity, we think that as much as anything.
Internationally domestically the.
And the confidence of businesses that we're moving past the pandemic constraints potentially coupled with some new investments coming in and.
And infrastructure and and environmental regulation, those could be positives and again I think our pipeline shows that that we have some unique opportunities.
And then lastly.
And what additional insights would you like to share about your refinery customers either of their behaviors for signals.
And the turnaround plans and just out there.
How you would characterize them today versus what would be normal and if we had not gone through the COVID-19 related oil price downturn.
We do a lot of feed studies for all of the independent refiners and some of the big integrated all over the globe and I will say that the feeds are driving more leads and and our pipeline higher.
I would say internationally is where we're seeing the majority of the India is a market that right now and <unk> is and I think it's the IOC all I forget the other one debt are both moving forward. Some large projects in the U S. If you read what the independence of printing Capex budgets are down 30% to 40 per.
Percentage year over year as they continue to cut because of.
Mobility data of transportation Covid still is the pressure on them, but what we are seeing is in those capex budget Bill there is a shift from new plants and the conversion from renewable diesel.
Over to maintenance so all of the Capex that the deferred last year and starting to come back as we've said multiple times over <unk> of our business.
And you can't defer it forever and the equipment will breakdown. So we believe that those leading indicators are all positive for US obviously, if you watch what's happening with crack spreads from April till today. They continue to rise there are in the band of the last five year average, which is good outside of that means theyre, making no money whatsoever theyre, making.
Cash of reinvesting back into the business. So several leading indicators for us that refinery is is headed back up and we're excited about that obviously.
Net taking your comment one step further are you sensing net U and at least in 2021 will have a larger share.
And that's it.
Capex budget.
We believe that there will be a larger share of the capex budget for all refineries, we don't comment on the share of our wins of those.
Orders that are placed yes, but bill we've talked I think before on.
And it certainly we've tried to explain the last year 2020, obviously the balloon of Capex. If you want to say got smaller and we feel that the gist.
And just to play out that that example of the air and the balloon so to speak which pushed more of a one side of the capex maintenance that maybe didn't the.
And we didn't benefit from and this year that are and the balloon and they've got larger but even if it didn't and we believe it is but even if it isn't and so to speak of that air is being pushed over to our side of the of the maintenance Capex Arena for 2021, and we're already feel like we're seeing that.
And of that opportunity set.
Great. Thank you both.
Thank you Bill Thanks Bill.
Thank you and the next question comes from Tate Sullivan with Maxim Group.
Hi, Thank you good morning, Hey, Scott you mentioned, a couple of times electric vehicle production.
And your comments.
Where are you and the sales process with this opportunity are you already doing projects and is it of global opportunity of your U S right now.
Can't provide that.
Yeah, I'll sort of start by maybe saying, yes to all of the above I mean, we're actively bidding on new opportunities, it's a growing space.
And there is expansion in the space internationally domestically we've won some projects recently.
And and domestic areas, we're very close we think to some attractive projects internationally as well.
So I think this is an area that we look forward to highlighting.
As we sort of.
As we sort of continue to move along and then look for our space as well like a lot of industrial providers of solutions, we look at not only new builds but we look at conversion and in automotive and other industries plant conversions right. So as those plants start to really now convert from one.
The class a vehicle to and EV manufacturing space, they really have a fairly large capex build.
Build out and we're benefiting from that as well.
And you as a follow up can you give an example, what type of equipment.
But can you provide to the industrial customers.
And I imagine, it's not Nox emissions is it.
For the have an environmental and will or can you provide an example.
The <unk> dust collectors, so think of <unk> and.
And think of dust collectors as two really good examples there where we are cleaning the air.
And at the same time, obviously, eliminating the volatile organic compounds that.
And are generated and those and those environments.
Great. Thanks, and then.
For one for me I saw in the K the percentage of revenue from outside the U S, 35% and 2020 of it should people going forward, especially as you are.
The growing International company do you are you mentioned growth.
And the least opportunities as well or can you just frame that discussion. Please yes.
Yes, the ebbs and flows I think if you were to go back two years ago is close to $50 50, our energy business drives a lot of that.
Here and you're out of international So if you of a bunch of refinery of power Gen orders that happen to be in Europe at the time.
And the sales of golf for example is one of our largest customers are GE and Siemens and depending upon where that.
Have ended explanation sales for so it ebbs and flows with our energy business. So no reflection of the future of we do believe though that international is strong right now.
Thank you Bob.
Thanks Nate.
Thank you and once again. Please press Star then one if you would like to asking the question.
And the next question is the fall from Jim Ricchiuti with Needham and company.
Alright, just as it relates to the last question and I know the business ebbs and flows between domestic and international but is there any any.
Additional color as to where Youre seeing some recovery and markets is it are you have you noticed more.
Of the recovery more strength in for instance, and the U S market in Q4 or is it still.
Tougher to tell because it depends on various projects that youre targeting.
So in Q4, I would say and the energy sector. We did see India increase we saw China increase as well and our industrial sector I'd say North America is the strongest we are seeing opportunities across Europe, and we recently added a international.
Sales manager over there to continue to grow our industrial and fluid handling capabilities and so that's opened some of the pipeline, Jim but in energy and North America.
As Todd used and the remarks kind of choppy right now.
Got it and and.
And again I know the the market is still fairly unsettled.
As we are and this great gradual recovery, but I'm wondering how you're looking at inorganic.
Growth opportunities.
Yes.
Now active.
Is the are the activities right now is the pipeline build.
Building are you looking actively or is it still something that you're being a little bit more cautious on and this current environment.
Yes, I think.
And we're certainly building.
We think of very focused funnel.
For our for analysis, there are certainly opportunities out there that are as we advance our strategy and our strategic thinking both organically as well as how we think about our portfolio going forward, we want to make sure that we have.
The appropriate funnel of opportunities that really match up well with where we think the markets are going where we think we have our best opportunity to to expand leadership positions and especially continue to balance out like I said sort of our business our revenue profile to more repeat.
<unk> sustainable sort of short cycle.
Businesses, So look I would say Jim.
We're not.
We're not transacting anything right now right, we're very focused on our strategy on our organic opportunities, but yes. We are building a funnel and we're starting to feel really good about our strategic plan is coming together so that when we're ready to execute it is very clear internally and externally what we're focusing on and why we're doing it.
Got it thank you.
Thank you.
So session I would like to turn the conference back over to Chuck Wilson for any closing remarks.
Yes, Thank you well look <unk>.
Great your time and interest today.
Let me double down on comments that we made of thinking team CECO and all of our customers and partners.
And we navigated a very challenging year.
Proud of our results, but more importantly, I'm really proud of the of.
And the commitment that our employees and everyone. That's associated with our organization showed is we there was no playbook of 12 months ago, when we embarked on the tough decisions and the the challenges that we all faced and so.
We appreciate all of those efforts, we hope everyone continues to stay focused healthy and safe. We look forward to speaking with everybody soon and with that we'll say enjoy the day, we will talk to you soon.
Thank you for the conference has now concluded. Thank you for attending today's presentation you may now disconnect.