Q3 2021 CECO Environmental Corp Earnings Call
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Good morning, and welcome to CECO environmental.
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I would like to turn the conference over to Mr. Matt Eckl, Chief Financial Officer of legal environment. Please go ahead.
Thank you for joining us on the CECO Environmental third quarter 2021 conference call on the call today is Todd Gleason, Chief Executive Officer, and myself, Matt Eckl, Chief Financial Officer before we begin I'd like to note that we have provided a slide presentation to help guide our discussion the call will be webcast along with our earnings presentation, which is on our website at CECO and buy.
Dot com presentation materials can be accessed through the Investor Relations section of the website.
I'd also like to caution investors regarding forward looking statements any statements made in today's presentation that are not based on historical fact are forward looking statements such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties actual future results may differ materially from those expressed or implied.
By the forward looking statements. We encourage you to read the risks described in our SEC filings, including on Form 10-K for the year ended December 31, 2020, except to the extent required by applicable securities laws. We undertake no obligation to update or publicly revise any of the forward looking statements that we make here today whether.
As a result of new information future events or otherwise today's presentation will also include references to certain non-GAAP financial measures, we've reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.
And with that I'll turn the call over to Chief Executive Officer, Todd <unk> Todd.
Thanks, Matt and good morning, we're going to start with slide number three.
Before Matt and I dive into the numbers I would like to reiterate a few key points. We provided in this morning's earnings release.
That's my quote highlighted in the release CECO has a bit of a.
Tale of two C goes we are at a juxtaposition of sorts.
The one hand, you have sequel orders growth up 39% in the quarter and up 33% year to date, however, given the long cycle nature of our businesses orders don't turn into revenue for several quarters on average and sometimes even longer.
So despite great and real growth year to date on bookings our income statement has been waiting for that growth to show up in revenue and income.
I'll come.
We highlight forward looking outlook today, and we expect Q4 and 2022 to show higher revenue and income.
On the flip side, our revenue has been mostly flat throughout 2021, because orders had been down in 2020, which lowered our beginning of year 2021 backlog. So despite great orders growth. This year as I just mentioned, our Q3 revenue was essentially flat and our third quarter revenue.
Was mostly derived from orders booked last year, which had a lower margin profile because of the very competitive market conditions. In 2020, as we have mentioned numerous times, we suggested various quarters in 2021 would be sort of quote unquote, our real COVID-19.
Period, so while backlog protected some of our results last year in 2020, we have been working through the lower backlog and margin profile throughout this year 2021.
Unfortunately, other challenges hit our third quarter performance with unprecedented cost and project timing issues because of disruptions in global supply chains logistics inflation customer delays and labor shortages all in all a somewhat perfect storm hits CECO very early in the quarter July was pretty.
Haps, the worst month financially in over a decade, we started to recover somewhat in August and made solid progress in September but not enough to close the gaps on operating margins.
We expect fourth quarter and 2022 to demonstrate higher revenue and income results. We have maintained our focus and investments on driving for growth and also to enable strategic transformation. We will discuss some of those items, including the addition of a new board member and a successful stock buyback program during the balance of our <unk>.
Repaired remarks.
So the key takeaway from our release and we hope from today is that we have the backlog in orders momentum to start to sustain real topline growth and we expect much better margins going forward, which we will revisit and just a few minutes.
So now looking at the details on slide four you can see the numbers reflect the narrative I just outlined Q3 orders up 39% year over year very balanced across many of our platforms. Our sales funnel remains above $2 billion. So we continue to expect strong orders in the coming quarters too.
Sales were $80 million up a modest 3% year over year.
We estimate sales were limited by approximately $10 million in the third quarter because of lingering effects of COVID-19 restrictions customer delays and supply chain issues that impacted most of our end markets.
Third quarter gross margins EBITDA and EPS were all well below our historic levels and operational expectations. We typically average gross margins between 32 and 34%. So our third quarter gross margins of 28, 4% are really not acceptable.
We have actions in place to build margins back up our SG&A costs were essentially flat sequentially. So it was our lower gross margins that were the main driver in our lower EBITDA and EPS.
And those margins did improve each month throughout the third quarter. So we have started to execute better already.
Matt will provide additional color around the major cost impacts, but we just weren't able to pass along cost inflation fast enough or get certain customer change orders through the process in time to offset the costs that burdened our third quarter. Additionally, we would acknowledge that our execution was not optimal we hold ourselves accountable.
For performing at a higher level around project management, which could have added at least another point or two.
EBITDA margins in the quarter.
Certainly there are short term issues that many companies are dealing with but.
But we have turned the dials up on our execution. So we will be driving higher results.
The last figure on the slide is free cash flow, which came in around $6 million.
This was basically flat with last year's third quarter, Matt will cover more on cash and just a few minutes.
Now please turn to slide number five.
We provided a similar slide last quarter sequels orders have grown 33% year to date, which has helped to rebuild our backlog which stands at approximately $219 million.
So while we are navigating some short term execution and cost challenges we are in great position for the fourth quarter and full year 2020 to grow.
And if you turn to slide six you will see that our year to date orders growth has been balanced across our portfolio.
Industrial Air orders are up almost 80% year to date.
We continue to do very well on the aluminum beverage can facilities engineered wood manufacturing electric vehicle manufacturing and other end markets.
We expect the demand in industrial air will remain positive.
Year to date, our deck fabrication and installation business has experienced 28% orders growth. Thanks to good business in the construction industry.
And in our fluid handling business, which is comprised of pump and filtration solutions, our 17% year to date orders has been bolstered by strong automotive markets and we still believe there is growth ahead of us as desalination in oil and gas sectors start to really improve we are also advancing distribution and expect to invest.
More in this business for growth and as it as it is our largest short cycle revenue mixed business.
Our emissions management platform has the largest orders growth year to date up 118%.
Power generation market is starting to return to 2019 levels at least from a gigawatt perspective. So we anticipate continued growth here.
Our separation infiltration platform as the loan business with declining orders year to date, however, the midstream oil and gas market and the produced water markets are starting to show signs of improvement and we believe this business is set to grow in 2022 with orders as our pipeline improves.
And our thermal acoustics platform orders have been up 25% as the power generation business continues to steadily come back.
And finally, our fluid bed cyclone business is beginning to climb out of a very deep downturn in refining.
Others are up 61% year to date, and we expect strong orders in the coming quarters too.
I will now turn it over to Matt and then wrap up later with some additional comments on our outlook and a summary.
Yeah.
Thanks, Todd lets start with slide eight and orders on the left side.
We are pleased with the year over year and sequential growth, we posted with $93 million of orders sequentially. The growth was led by our engineered systems segment. Most positively we were awarded several jobs for our technical expertise, including an upgrade of SCR emissions equipment for a combined cycle power plant in Texas, and a required 96% Nox reduction.
And acoustical equipment project in Germany, and our market, leading FCC cyclone technology, when a large refinery expansion award in Bangalore, India as Todd just highlighted industrial Air continues to book strong order growth as automotive electric vehicle and general industrial markets continue to seek our leading air pollution control solutions.
Fluid handling, although down 13% sequentially grew year over year as MRO spend in the U S markets continue to rebound from the troughs associated with budget cuts during COVID-19.
As we look towards Q4, our orders expectations remained strong in the $85 million to $100 million range with a handful of very large awards that will determine the exact outcome. Our sales pipeline remains at or near record highs well above the $2 billion level, we continue to make investments in sales and marketing as opportunities continue to prove.
<unk> market growth in orders bookings and pipeline pursuits, we are starting to reinvest and tradeshows, adding sales reps investing in search engine optimization and other growth drivers to help sustain momentum.
Flipping to the right side Q3 revenue was flat year over year and sequentially as Todd mentioned, we believe we were negatively impacted by certain customer delays and supply chain factors that limited sales.
Sequential growth in industrial air was offset by supply chain challenges experienced in our fluid handling business.
Impediment to growth however was in our engineered systems segment, where we encountered delays across several platforms in Q3.
We believe around $10 million of revenue slipped out of Q3 into Q4 and early 2020 to continue.
Continued negative from the Covid environment.
To give specific examples we saw customers slowing progress on their site installation impacting our schedule, forcing CECO to delay our fabrication partners, we had customers prolonging technical drawing sign off which pushed out material purchases a major contributor to our revenue recognition and lastly, we're stalled on inbound materials receipt like steel and resin.
It didn't allow our plants or vendor partners to deliver on schedule.
For these reasons that volume was below our expectations and certain cost overruns impact on margins.
As we look into Q4, we expect to achieve at least double digit growth in Q4 versus Q3 and as Todd highlighted previously we expect meaningful growth for the full year 2022.
The issues associated with our supply chain remain choppy, but less so each week and month. So we are getting much of that behind us and price through as quickly as possible, we'll talk a little bit more about 2022 in more detail shortly.
Briefly on our short cycle metric, we reported $19 5 million in revenue up 10% year over year and 11% sequentially. We saw a nice increase in demand for dust collectors in industrials in our Peerless coalescing filters in the quarter.
The operating team continues to be focused on driving growth in short cycle sales as we know the margin profile and business mix is well above the CECO average.
A few months back we highlight our startup advanced analytical services and training team that is focused on continuous emissions monitoring services. We have been building good sales momentum, especially in the Gulf Coast region, you can check them out at CECO MRO Dot Com Flash a S T, which showcases some updates to their expanded service offerings.
Also want to highlight a recent win for our customers by our emissions management platform last quarter, our customer had an emergency need for Nox compliance our team retrofitted and SCR system onto a mobile trailer and leased it to the customer in need of a low Nox burner solution.
The team euphemistically referred to this as the Green machine I like the name because what it does for the environment, but also the margins we.
We are evaluating whether there is an ample customer demand to facilitate a small rental fleet, but regardless. It is a great example of ingenuity to solve our customers' emissions challenges.
Sure Tycho remained approximately a quarter of our total sales. This is a focal point of our M&A capital allocation strategy moving forward higher margins and more recurring revenue and cash flows are the focus of Chico's transformational story.
On to slide nine our backlog is at $219 million growing for a third straight quarter. Our book to Bill ratio remained positive on a TTM basis and at 1.2 X year to date looking back. The last time, we achieved these levels of backlog was Q2 to Q3 of 19, which were record quarters for CECO and.
In addition, our 12 month pipeline remains above $2 billion and growing at a long cycle business. We are excited for 2022 and the outlook, we see in terms of demand.
On slide 10, our profitability measures underperformed in the quarter.
Gross margins of 28, 4% were well below our historical averages of 32% to 34% and were impacted by several challenges in the quarter.
Compared to the same quarter last year and Q2 of 'twenty. One our margins were down approximately 360 bps on a host of items that Todd had mentioned and I will also address.
Approximately a third of the sequential decline in margins was the impact of more revenue attributed to job booked and priced in late 2020, when slow market activity drove project bid pricing low.
This competitive pricing environment really impacted several platforms, including industrial air emissions management and acoustics as these jobs progressed in Q3 and pre COVID-19 jobs with richer margins started falling off despite the increased pressure on our consolidated margins.
The next third of our sequential decline was tied to inflation, both labor and materials, while we expeditiously work to reduce quote validity for customers on steel pricing and our past inflation onto our customers in several projects change orders were met with resistance in delays or even a few projects, where we couldn't pass on the rapid increases further.
Negotiated terms, we've been working to address our biggest project impacts first and working down the less to mitigate this risk in Q4 and 2022.
The remaining third of the margin decline is specific to supply chain challenges and our own execution.
And a handful of projects the stop and start up projects by our customers caused delays the availability of materials to deliver to the vendors frustrated at port or on site installation due to site preparedness had cost overruns.
Our operating team has significant experience and has executed many market environments, but this was unprecedented times.
We continue to deliver for our customers and rest assured we are correcting the root cause items that were amplified by this unique period, and we expect margins to improve sequentially.
As for non-GAAP operating income and adjusted EBITDA, both felt the effects of margin deterioration that could not be offset by volume. Despite such a large backlog on a year over year basis, EBITDA was down $3 8 million and $3 million sequentially.
SG&A contributed slightly to declines but increases are attributable mostly to growth in our backlog and funnel year over year increases are related to prior year furloughs wage cuts and other cost reduction measures affected during COVID-19 sequential increases are modest and related travel marketing spend and investments to grow our new AA S&P surfaces.
Business and bank bonds attributable to new orders booked in 2021, all of which are associated with growth.
As stated we are disappointed in the underperformance in Q3, but remain vigilant in our cost structure and committed to modest investment in growth. We believe EBITDA margins will continue to expand as volumes recover.
Slide 11 summarizes the quarter in total.
Highlights first 39% year over year orders growth is going to propel CECO into 2022 with a strong backlog to execute.
Revenue was muted as industrial air and fluid handling largely offset one another while engineered systems backlog grew much slower than expected, we believe $10 million of revenue delayed into Q4 and 2022.
GAAP NOI was down $1 $6 million year over year, primarily on lower gross margins offset by the non repeat of certain SG&A cost measures and restructuring expenses incurred in the prior year.
Third non-GAAP EPS was <unk> in the quarter down 10 cents year over year, and 8% sequentially, driven primarily by lower than expected sales and gross margins not offsetting SG&A increases in the quarter.
Turning to slide 12 trade working capital remains at elevated levels of 50 million plus in Q3, we estimate we have approximately $20 million tied up in project working capital that will turn to cash in the next few quarters as volume increases and milestones progress in the meantime, free cash flow remains choppy, but it did produce a positive $6 million source of cash in.
Quarter.
Project milestones that were slow last quarter progressed this quarter, creating a favorable Q3 results as always I reiterate we see no risk to our collections of AR. Its strictly the lumpiness of our project based business model, we intend to improve upon in Q3 success in Q4 with an emphasis on progress milestone collections.
Finally on slide 13, our balance sheet remains in great shape, we paid down $3 million of debt in the quarter to $67 million, our bank defined leverage ratio sits at $2 two and our net leverage sits at 1.2 X with $45 million of capacity available.
We're now in the third year of our credit facility and we are revisiting our agreement with a great banking partners the opportunity exist to take advantage of favorable credit market increase our capacity to execute on our M&A strategy I look forward to updating you on our progress in Q4.
Lastly, I'd like to highlight the share buyback we executed since last earnings call in the third quarter, we bought back approximately $3 7 million worth of stock and over the past month or so we completed our share repurchase authorization. Since early August. So you guys bought back and retired approximately 700000 shares at an average price of $7 15.
Meeting our commitment target of $5 million.
This buyback effectively offset five years of dilution associated with stock compensation aligns CECO with our shareholders.
With that I'll turn it back over to Todd Todd.
Thanks, Matt.
Please turn to slide number 15.
We haven't historically given guidance or details around quarterly or annual financial outlook. However, given the lower than normal gross margin and EBITDA results in the third quarter. We thought it would be helpful to highlight why this past quarter is more of an anomaly than a future trend on.
On the left side of this slide we reiterate the average of our 2021 quarterly bookings, which has been approximately $90 million a quarter up 33% or up $70 million in real dollars. As we have repeatedly stated given the long cycle nature of our projects. It takes a few quarters for bookings to turn to <unk>.
Revenue as a result year to date average quarterly revenue has been only $75 million. So bookings are way up in the year, but revenue has been mostly flat year over year as we entered 2021 with depressed backlog and we are still working off those lower volumes from last year's book.
Kings.
Moving to the middle of the slide you can see our backlog has grown from $183 million.
As we entered Q1 of 2000 $21 million to $219 million as we now enter the fourth quarter that is up 20% a really good sign for future growth.
So how do we think about translating that to the next four quarters or so the right side of the slide is a very simple approach to model out how we expect our backlog and performance to unfold over an annualized basis so to speak.
Since we are averaging $90 million of quarters that will be reflected in future sales roughly speaking so $90 million times four quarters would drive approximately $350 million to $370 million in sales. There are always some puts and takes with projects and short cycle orders, but generally speaking this is the range.
Moving down the slide to discuss how this would turn into profit you can see we firmly expect to rebound to our historic gross margins, which are above 30% and likely between 30% and 33%.
Finally, we remain comfortable with quarterly SG&A levels of between $18 5 million and $19 $5 million.
Which would produce approximately 10% EBITDA margins with our current profile.
The simple model should help you better understand the growth we expect to deliver on the topline and subsequently the bottomline.
Could there be more upside of course, we're certainly pursuing more growth.
Investing in more growth resources and markets working hard to increase prices to deliver even higher margins and evaluating costs, which may be decreased where appropriate.
We can't predict all levels of inflation or project mix. So these are activities that help offset future cost pressures or potentially deliver meaningful upside.
We hope this slide and the simple model gives you a helpful way to think about CECO as we enter Q4 and head into 2022.
Let's wrap up with slide number 16, I will be brief.
Right orders year to date will generate great sales as we go forward.
And our sales funnel remains at or near record levels over $2 billion.
We are not pleased with our third quarter margin rates and we understand what we need to do to improve our execution regardless of market disruptions.
We said, we would complete the $5 billion share buyback before the end of the year and we have done so.
We look forward to transforming our portfolio with programmatic M&A activity and we have a good funnel associated with that and.
And finally, while not on this slide but in our release. This morning, I would like to welcome Richard woman to our board of directors.
Richard has vast experience as an executive for leading companies throughout his career, which culminated in his role as chief financial officer for Allied signal and Honeywell.
Richard has been a longstanding member of several companies' boards that have transformed our portfolio in very meaningful ways, including Roper technologies, we look forward to his participation on our board.
And with that Matt and I will be very happy to answer any questions you have.
Operator.
Well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, you're using a speakerphone. Please pick up your handset before pressing the keys withdraw your question. Please.
<unk>.
That's fine, we'll pause momentarily to assemble our roster.
First question.
Jim Ricchiuti Needham <unk> company. Please go ahead.
Hi, Good morning, I'm, just trying to understand a little bit more about the dynamics are.
That you are facing with respect to some of the cost pressures.
<unk> pressures.
And the backlog I mean, I assume theres, a loot you know there's a bit of a lag factor in.
When you start to see the benefits of some of the price increases that you pass along how should we think about.
The existing backlog and the profit profile of that backlog just given the ongoing cost pressures.
Yes, Jim this is tod ill see if Matt wants to add to this.
So we obviously have visibility to our backlog in terms of book to margins and then and then how we're executing against that booked margin as we entered the third quarter. We knew that we knew that margins were going to be lower than they've historically been which is in the low 30% range, 31% to 30.
4%, we knew they were going to be slightly lower than that and then obviously, we had some execution issues associated with a whole list of items that we don't need to revisit here from supply chain to inflation et cetera, and thats really what impacted us our ability to get change orders in the third quarter to push additional prices.
Through where surcharges through just we weren't able to do that facet of for two reasons one the ability to do it fast enough as we were seeing things is just sometimes hard to do in any business model.
You have to get customers RBC distributors et cetera to accept things your supply chain has to accept your own price pressures back down through the channel. So just the speed at which we were able to get price in the third quarter. We were behind in let's just say that and then and then the other component, which is a little probably a bit more.
Well again business model.
Yes.
You sort of situation is it because we are long cycle, even if we do get price. We then have to wait for that percent of complete on our project to go through the process. So we may have gotten price in the third quarter and we did but we now have to wait for a few quarters for that good pricing to show up. So so we got kind of caught in the third quarter a little bit more then.
We probably historically have with with all the noise in the in the chain right. The supply chain the execution of labor costs et cetera. So I'll just state that we believe starting in the fourth quarter you start to see gross margins steadily improve we saw that throughout the intra quarter from <unk>.
Ally through September and we believe we're going to continue to see that and then as we're able to reflect the good moves we've made in pricing heading into next year, especially we have a lot of confidence in our ability to get back up to the mid to higher end of our gross margin range that we have historically been at Matt when we look at our bid margins right now that sit in backlog is sitting around the <unk>.
<unk> at 30% right now Jim and so I agree with Todd that will step back up there was compounding effects of supply chain blows that occurred in the quarter that impacted the margins more than just our bid margins, but the margins are stepping back up so I would say low 30%.
And then.
Some of the more meaningful benefit of.
Some of the pricing actions is that something we should anticipate more towards second half of next year.
Youre going to see.
And in the first half of next year, you'll start to see that come back it depends on price elasticity, depending upon each of our platform businesses. Some have a greater correlation to demand than others I would tell you that businesses like our industrial air business.
Where demand is growing youre going to have a greater elasticity. So youre going to have a tighter correlation therefore pricing is going to climb faster our short cycle businesses like pumps. That's a perfect example, where demand youre seeing across the market is high and we're getting price in those business instantaneously and showing up in the P&L, but it's more in the long cycle businesses that are impacted by refinery in power Gen.
Where there is still growth, but they are larger singular jobs and they're highly competitive so I'm going to tell you that because of the long cycle nature of those businesses you won't see that until Q1 Q2 of next year.
Okay.
And Jim actually just to add on to that point and I think maybe another way you're asking the question was could we see a future quarter that has slightly higher than historical average margins right like could we see it in a way a snapback quarter and look I think management coming off.
A quarter, where we know we.
We underperformed our historic averages we'd be reluctant to make a bold statement per se. However, I would acknowledge that potentially yes, right I mean at the end of the day.
We are pushing change orders through for example, so customer a may not have we may not have been able to get a change order approved in a particular period, but but that same customer is going to approve that change order. If those things show up in a quarter, where youre also starting to see these price actions come through et cetera. Those are those are.
I'll now artificial because they are real but they artificially drive your margin up a little bit higher in one quarter.
But artificial I mean, it's real but it's just not sustainable right. So could we see a snapback early Q1 or two of 2022 potentially right.
We'd rather say, what Matt said, which is we hope to just sort of steadily build our back way.
Gross margins back up and then hold them.
Thanks, a lot.
Thank you. Our next question comes from Amit Dayal H C. Wainwright. Please go ahead.
Thank you. Good morning, guys appreciate all the visibility and color on the in the presentation.
Todd you mentioned, some execution issues around supply chain logistical aspects et cetera impacting CPU performance.
Internal or external issues that you have added.
We live in.
Resolved.
<unk> in June.
Yes.
Submit we appreciate the comments as well.
So it was in so yeah as you well know and as we've articulated over the last few quarters. We have are our sort of our platforms are separate into seven or eight platforms. It was it was about it was about half of the platforms are really early in Q3 were the ones that got got quickly sort of behind it.
Do you want to call it that on their ability to deliver or get prices and change orders through quickly.
Taking a look at our duct fabrication business. For example, you can imagine steel costs hit them pretty quickly throughout the later part of Q2 early part of Q3.
We had other execution in terms of supply chain lag.
Labor shortages et cetera, all the all the headlines that you've heard across most industries hit two or three of our platforms hardest.
Our emissions business.
Some parts of industrial air deliver two to larger projects all of those sort of started the quarter a little bit more behind and then really did a great job of picking up the pace in executing but not able to quite catch up as you can see in our gross margin results, whether it be price so they weren't able to quite put through in the quarter or change orders.
<unk>, but I would say now that we're entering the fourth quarters.
We have fewer issues, if you want to call them that from an execution perspective.
Look no one wants to.
Have a July or in August sort of kind of started slow and wobbly as we saw in some ways, but it does put the spotlight on it and we've worked through a lot of those issues now and feel like we're going to have a stronger gross margin performance in the fourth Matt, Yes, I would tell you that.
When I think about the platforms that were impacted most duck fab, which Todd mentioned to you, which is heavily tied to steel pricing and also its labor intensive where individuals have to go off the site.
Not able to emerge as quickly emissions management industrial air where they operated outsource production. So we don't have plans per se, we got caught in between managing our fabricators, who are filled up and managing our customers that have demand requirements and getting projects. There on site I think that we've moved some projects around and we're starting to see.
A steady step up so if I were to look at July.
July August and September a steady step up in gross margins.
And we expect that to fall through into Q4, so you'll see a step up from Q3, but I would say, we've largely identified and gone after the root causes of our execution issues.
Okay. Thank you and just maybe one more from me. This 19 million revenue run rate do you see that.
Utilizing for you in <unk> itself or maybe a little later.
I think we feel as we as we sort of articulated that the that the roughly $90 million of revenue that would be essentially reflects the average of our bookings year to date, yes, we would expect that to start.
In the fourth quarter heading into next year for that for at least the early first half of next year in a relatively consistent basis. So yeah, I'd say again, we don't like to give specific guidance, we wanted to be helpful. Though.
The the tale of two she goes as I said in my quote. The fact that we are growing we're growing nicely. Unfortunately, because we are long cycle that growth doesn't find its way up in the P&L for a few quarters that will start in the fourth quarter.
Okay. That's my last one I think you're going to take another.
Other questions Okay.
Thank you next question comes from Tate Sullivan of Maxim Group. Please go ahead.
Thank you you talked about in the quarter I mean the.
The issues in July with some of the project timing supply chain, but just can you talk about backlog and any adjustments you have to make the backlog in the quarter as well were those related to some of the temporary projects and are can you just talk a little about that any cancelations or what else in that backlog. Please.
Yes, we always have minor cancellations nothing significant otherwise we call it out in the quarter, we always have anywhere from $1 million to $3 million of small projects that come in and out so that wasn't a big deal shuffling the backlog what is the issue.
Biggest issue was customers were moving faster slowing down depending upon where they are around the world and our project managers have to manage through all that manage the logistics of getting.
<unk> out to our sub contractors on time.
Subcontract, he is slow down or speed up.
If the customer says don't do anything you have to call your subcontract and ask them to put things at a halt and obviously that can come at a premium because they have to run their own business. We're not fully dedicated to them. So I would say if I think about our business model.
Our business model when there is consistent growth.
Potential operating leverage on the bottom line. It appeared that we saw in Q3 in the industrial World fall in Q3, where supply chains are challenged at the ports in long Beach, Miami, Norfolk to trying to get steel into the country trying to move rather than around it was extreme challenge for us and so that impact us I think the backlog is extremely strong.
We don't feel any weakness in there we don't see anything in our cash flows that seems weak we feel very good about our customer set so I'm just going to point to growth in the next quarter and into 2022. So it's a onetime blip they'll love it, but we're pretty confident about our ability to execute the $210 million of backlog, we have right now.
Okay, Great. That's all I'll take it offline after thank you. Thanks.
Thanks, a lot.
Again, if you have a question. Please press Star then one.
Thank you. Our next question comes from Bill doubled and tightening capital. Please go ahead.
Thank you our.
First question is relative to the logistics issues, what changed versus the second quarter.
So.
Two things I think well maybe maybe.
<unk> III logistics costs, just went up right. Obviously I think we'd say most companies have seen just the delivery whether it be expedited freights that needed to occur because things were stuck in ports and you said you had access still to getting components, but you needed to pay for that expedited freight from from certain certain logistical areas.
So any costs or expedition definitely hit us more in the third quarter than it has historically.
And then we're bundling some of this because our goal here isn't to call out any customer for sure, but we already articulated that we had $5 million to $10 million of revenue that we're just sort of delayed in.
In the third quarter, Bill and Thats some of that was logistics too and by that I mean, we may have had our solution quote unquote at the gates ready to be delivered but they were waiting for electronics or they were waiting for.
The cement person to come in towards the foundation for our for our solution et cetera. So so when we were saying logistics both from a cost perspective in the quarter, but it also cost us to sit around and wait times right and how do you call that is it customer delays, maybe but it's not their fault that they are waiting for other.
Vendors or other suppliers are other installers to come.
Rarely are we rarely are we just a single solution that we plug into the wall per se right. We are waiting or the customers. We're a part of a larger project. So if some of their parts of the project got delayed I would say some of that was logistics. It might've been outside of our control one item I'd just throw out there Bill as an example is we actually had to airfreight some.
<unk> to our customer in order to avoid liquidated damages, we didn't see that in Q2 whatsoever.
So that's one specific example, I also tell you that we had some profitable job that rolled off in Q2 that didn't exist in Q3. So now your backlog is tied more to jobs that were bid and awarded back in let's call. It Q4 of last year and the Covid period. So then we saw the pricing period of Q4 roll into Q3 of this year, which we didn't have in Q2 sequentially.
So I would tell you those are two examples of things that happened in Q3 that didn't happen in Q2.
That's helpful and then.
Let me move to the broad environmental topic.
I think last week and weekend that the Cop 26, environmental summit took place in Glasgow to what degree.
Are you all a solution to the problems that are better.
Top of mind today.
In the environmental corners.
Yeah, So look bill.
There is no shortage of emissions.
That occur whether it be methane <unk>.
Yeah.
Hydrogen we think is an interesting one for the future natural gas continues to be a bridge fuel whether it be this winter are many winters in the future.
Our ability we believe in industrial Air we are the leader or certainly in many categories of eliminating Nox.
And so you know look I think we're excited when we look at not only industrial growth.
That has been coming back and all of our industrial business remains strong.
I rarely get to say all but almost all of our industrial business is really do continue to remain strong from a double digit growth perspective, and look as companies focus more on ESG as countries around the world step up and.
And have to put in solutions that they otherwise may be historically wouldn't have.
We know the countries that are some of the larger polluters.
Go from not being as competitive in those countries to being very competitive in those countries because our solutions are proven and as western country companies are in those countries and want those proven solutions. We feel good about it I think we like our order profile as a result of not only what has been going on in general industrial but more demand on environmental absolutely is.
The benefit to CECO, we're making investments to take a look at how we can impact cotr methane if you've ever been in Los Angeles about 30 years ago, you can barely see across the street because of the smog and that was driven by power plants coal and Nat gas burning power plants that admitted Nox when the clean Air Act came out and they said we need to be able to reduce the amount of emissions.
We were part of that solution 30 years ago, CECO did that and today Knox's a fragment of what it was 30 years ago. The next thing that they are going to tackle as co two of methane and CECO is preparing to be a part of that solution Bill.
And thank you for that so relative to the Cotwo and methane do you have those solutions today or when you say that you are prepared to tackle those.
That's all part of your acquisition strategy, it's part of our acquisition strategy I don't think anybody has a way to solve for them just yet on a commercial scale, whether it's direct air capture pre combustion post combustion fact of the matter is that nobody is doing in a big wages. Yet there is some element of methane and if you saw with EPA just posted last week big opportunity there our teams are.
At how we could take our VIP destruction process and apply it for methane in <unk> today.
Out there just yet, but we are investing dollars and resources to do just that and two other quick comments one of the reasons. We're not there today, it's because there hasnt been a commitment from industry to be there right. So how hard you know it's difficult for us to if you want to say invest big dollars in in certain.
Certain areas of innovation when Youre not sure that the industry is ready for that innovation is going to adopt it at a commercial scale. So so let's just be clear that we think that as the industry start to adopt it again, whether its because it becomes a cost advantage for them and ESG advantage or it becomes regulated and mandated and theres going to be methane solution.
So I'm just going to stick on methane for a second we're excited about that our application engineers can absolutely design solutions for methane, so whether or not we have an innovative product or we just have a proven and in reliable design of a solution for us they're interchangeable those are ubiquitous for us whether we make a product that we engineer.
Our design and install a product we can do that.
Alright, im going to stick on this topic, one more and then.
Yes.
Pardon me.
Go ahead, I'm, sorry about that okay. So.
Relative to industry.
Is it your sense that the industry is now focused on on these two items the methane cotwo or are we still.
Are we still at that point, where industry is trying to figure out if they're interested.
We believe that industry is interested there is demand for the competitive set is going to be different bill. So the folks that were traditionally up against are not those that are solving for that those moms and pops that we go up against traditionally are not after that this is different types of the recession dozens industries.
Oil and gas is going to lead in the methane space, because they're closest to it and theyre going to deregulate it against that Youre going to see people like Exxon that are a part of the energy transition people like chart.
And theres going to be a big a lot of players out of EMEA and so we're looking at those individuals who we can acquire also how we can attack that.
And so it can be different competitive set.
All right.
Thank you both.
Thanks Bill.
Thank you next question Gerry Sweeney of Roth Capital. Please go ahead, hey, good.
Morning, Todd and Matt Thanks for taking my call.
Good morning.
I get.
Obviously, a lot of issues in the quarter you know they just start cascading down.
With your customer suppliers et cetera.
A higher level question a lot of your business asset light I think outsource some of the working specifically on fabricators and a lot of talk about changing supply chains.
Does this potentially change some of that strategy.
Because it's an extra layer of management.
Malvern <unk> supply chain.
Yeah, Yeah, So we would say.
It doesn't necessarily change our strategy Jerry I think it's a good question I think we would knowledge that in quarters like we just had that.
Rapid change.
That we.
We cant control all of right. If you want to call. It that that we are we have fabricators. So we've outsourced it can make when costs escalate as rapidly as they have done unprecedented I'm not the only CEO to use that word.
Unprecedented change in many areas of logistics and manufacturing costs et cetera, not being able to control our own destiny, Yes, I would say, we're a little bit to asset light at times right and if I could go back in time, maybe we wouldn't have quite pushed out as much historically to fabricators and we're going to look into areas, where we can.
Bring in a few.
Areas within our within our manufacturing and assembly footprint, but it's not going to change our strategy I think we feel like this too shall pass and we like our design across the board for the most part again I think that this is an unprecedented time, we don't expect this to continue you look back at 2000.
Five four and five and six so 15 years ago.
I was in it than steel.
Steel copper aluminum they went up dramatically in every industrial company, which I was at one of them struggled in that period to pass on prices.
Fast enough and then they all got good at it and we've been good at a 15 years again this hit us all pretty fast and that coupled with all the other noise, that's still going on from labor shortages to COVID-19 restrictions around travel et.
Et cetera, that's really what caught us a little bit in the period, we're going to work through this we're already working through things have been improving intra quarter. We expect that to continue doesn't change our strategy, but it's a good question, Jerry and I would acknowledge that yes, we could have a slightly different asset light mix, we probably would have that.
Okay.
I suspected that was the answer I was just curious and I know some of it is.
It was a sudden shock right.
And again Cascades.
Other question is Mr.
Mr. Wilmott, just joined he's from Honeywell and you even called out broker.
Robert transformed a lot, especially in computers and technology et cetera.
This is <unk>.
Does this how does this impact the acquisition strategy, where are we on that front.
And.
Again, it goes back to it doesn't change a little bit or does he have its own visions and maybe an update on that front.
Yes.
Look we're excited to have Richard joined our board. He brings a tremendous amount of experience Ive also having a known Richard.
For a few decades.
Always appreciate his sound input and guidance and understands where we're where we're at as an organization and much like the balance of our board. They are all committed to.
The strategy that we have in front of us our M&A pipeline looks good. We've always said, we wanted to get through our sort of COVID-19 periods here, which we are putting in the rearview mirror more and more every day every week every month third quarter was.
And unfortunate.
But still an important step in the right direction to put that behind us more now as we move forward into the fourth quarter and into next year Youre going to I believe you're going to start to see a steady.
Sensible programmatic approach to to M&A and Richard understands our views of building a stronger bigger CECO, adding businesses that are short cycle different industrial mix over time, we'll take a look at other ways to enhance our margin profile and our steady results of <unk>.
EPS to drive shareholder value and Richard just brings a tremendous amount of experience not only in his professional life, but also in his board as you mentioned Roper and Charles River Labs, and others, but he's been a part of where he has seen a variety of companies in different places in their maturity different 0.8 to point B and beyond and our board along with new.
Addition of Richard is very committed to what we're what we're planning to do from an execution perspective.
Got it.
Helpful. I appreciate it that's it for me thank you.
Thank you.
Is there any other questions operator are we through the queue.
That concludes our question and answer session and I will go back to Mr. Gleason for closing remarks. Thank you.
Okay, great. Thank you and we look we we understand it was.
Q3, we own that.
And we are.
We will continue to be very excited about the growth that we're putting in our backlog and what will start to transpire into P&L growth starting in Q4 and as we head into 2022.
Like to thank all of the CECO associates around the world. It is still a challenging environment and our team stepped up every day to deliver for our customers for each other and and again, we feel very confident in our abilities.
As we as we execute against the growth that we have been booking all year long, we believe our pipeline remains extremely strong and again, we appreciate everyone's support the great questions on today's call and we look forward to following up in future periods with up with more.
Thank you everyone.
This concludes today's conference. Thank you for attending today's presentation you may now disconnect.
Yeah.