Q3 2022 CECO Environmental Corp Earnings Call
Good morning, and welcome. Thank you.
Third quarter 2022.
Two earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please take me like conference specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note. This event is being recorded I would now like to turn the conference over to Steven Hooser Investor Relations. Please go ahead.
Thank you Andrea and thank you for joining us on the CECO environmental third quarter 2022 earnings call on.
On the call with me today is Todd Gleason, Chief Executive Officer, Peter Johansen, Chief Financial and strategy Officer Andrew.
Holly Chief operating officer.
Before we begin I would like to note that we have provided a slide presentation to help guide our discussion.
Call will be webcast, along with the earnings presentation, which is on our website at CECO and viral dot com under the Investor Relations section.
I'd also like to caution investors regarding forward looking statements any statements made in today's presentation that are not based on historical facts are forward looking statements such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.
Actual future results may differ materially from those expressed or implied by the forward looking statements. We encourage you to read the risks described in the SEC filings included on Form 10-K for the year ended December 31, 2021, except to the extent required by applicable Securities law.
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.
<unk> presentation will also include represent 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 would now like to turn the call over to Chief Executive Officer, Todd Gleason.
Thanks, Steven and good day, everyone I'm going to start with slide number three of the presentation that Stephen mentioned, let's get going.
I'd like to begin with a note highlighted at the bottom of the slide effective as of today, our NASDAQ ticker symbol has officially changed to see E. C. O. Once that ticker symbol became available earlier. This year. We secured it is it always made sense for CECO environmental to be listed as such we are celebrating our 25th and.
<unk> as a NASDAQ listed company. So this is just a nice anniversary gift, but that's not the only bit of good news, we want to share today, let's discuss our financial results.
Outlook by reviewing the main points on the slide we believe these are the key takeaways from our presentation today.
We delivered another strong quarter I'd like to thank our global teams for navigating the market challenges and supply chain issues that have persisted we continued to deliver for our customers and our channel partners. In fact, we produced record third quarter revenue and EBITDA in our third quarter was the second highest revenue quarter in the company's history.
Additionally, this was our third consecutive quarter with new bookings above $100 million, our backlog remains close to all time highs as a result of another solid quarter of orders in <unk>.
Shortly as we will highlight in more detail on slide five we are getting broad based growth from across our enterprise all diversified companies like to flex their muscle of diversification and I would suggest CECO is doing exactly that in 2022, and frankly over the past 18 months herself.
We also remain focused on our capital allocation programs. This will continue to be a hallmark of our value creation in the quarter. We closed one acquisition the purchase of D. S 21, South Korea based industrial water leader. In addition, we continued our stock repurchases more on capital allocation and a few <unk>.
Right.
The final two bullet points on this slide point to our full year 2022 guidance and our full year 2023 outlook, we are raising our 2022 guidance and introducing our outlook for next year.
Bottom line is we expect to maintain strong growth and are committed to executing against our commitments.
So today is the first day for our NASDAQ ticker symbol as C E C O, but another quarter, where CECO delivers great results.
Let's move to slide number four.
This slide provides a summary snapshot of our third quarter and year to date financials.
Peter will dive into our financials in more detail, but here are some highlights.
On the left side of the slide we highlight key financial metrics for the third quarter and year over year percentages.
Three consecutive quarters with orders over $100 million, another quarter with double digit orders growth and up almost 40% year to date.
Sales in Q3 and year to date are up over 30% with 36% growth in the third quarter year over year.
165% growth in our adjusted EBITDA for Q3 and year to date EBITDA margins up 250 basis points year over year, So revenue and income growth continued to be really solid for CECO.
Free cash flow continues to be very good for the year and we expect to drive free cash flow as we go forward.
Overall, we're just very pleased with our third quarter performance now lets move to slide number five.
I refer to this slide when I was highlighting the key takeaways for the quarter and year to date performance. This slide provides a visual depiction of each of our eight platforms orders growth rates on a year to date basis.
And over the past 18 months.
All of our platforms have delivered double digit orders growth over the past 18 months, a truly balanced growth profile.
Obviously have some have demonstrated higher growth over the past year and a half such as industrial air.
But bottom line each have grown.
And from a year to date perspective, 75% of our platforms have delivered orders growth when compared to the first three quarters of 2021, I'm not going to read each of the platform growth figures, but you can see this as a balanced growth effort.
And the two platforms that are showing year to date declines have great opportunities in the fourth quarter to close that gap and perhaps drive full year growth themselves. The obvious point here is that our orders growth and near record backlog are not just the result of one or two big markets or one or two big projects.
But instead, a collection of great effort across our entire company.
I would also remind the audience that when we organized into these big platforms about a year and a half ago.
<unk> talked quite extensively about the goals and objectives of our focused platform organizational design. The objective was to drive more growth and a NIM or more nimble management approach to capturing opportunities in core or adjacent markets to have more accountability at the core level that interacts.
Directly with the customer and after 18 months of driving consistent growth and performance. We would submit that this platform organizational design has been and will continue to be a real differentiation point for CECO now let's move on.
Another somewhat unique slide is number six let's go there now.
The eight platforms on the previous slide fit into these three strategic focus areas for CECO industrial air which represents about 50% of our sales industrial water, which now represents about 25% and energy transition, which makes up the other 25%.
A few of our platforms such as separation infiltration have solutions that cut across multiple strategic focus areas. That's why for example, you see the Peerless brand listed across the board.
Compared to some platforms are brands that are resident in only one such as elas or addwest, which those brands are strictly within our industrial air platform. Whichever is the case, we have a number of well respected brands that solve key challenges for customers and industrial air industrial water and energy transition markets.
And on the right section of this slide you see a representative list of just some of our project wins.
Much like the diversity and balance of our orders growth. We are sharing the same diversity, we have been winning across these diverse markets and these projects again or just a small sample size of course.
You can read that within industrial Air we highlight a few semiconductor and electric vehicle wins for our various brands.
There have been significant investments in these areas and we believe these markets will continue to invest in expansion.
The same thing for chemical metallurgy, and food and beverage markets, whether it is a $7 million project win for an aluminum manufacturer that required leading air management solutions or a multi billion dollar semiconductor fabricator fabrication facility that needs advanced scrubber technology in this case a five.
All of our solution that we provided we believe CECO and our brands have a great position to serve these markets.
Over the past years, we've steadily developed a sustainable niche leadership position in various industrial water markets.
Our leadership position has been advanced through organic growth investments and the acquisitions, we have made throughout 2022 and.
In the industrial water markets, we provide highly engineered solutions that capture treat clean and offer reused produced water in heavy industry energy market applications oftentimes these require special certifications or being on rigorous approved vendor lists and ABL so to speak.
The process to achieving engineering solution or a V. L documentation can take years and in many cases these activities ensure.
And sure to our customers that our solutions are approved for them to maintain regulatory compliance while also confirming their processes are efficient and safe on the slide we highlight a $15 million produced water treatment solution that our separation filtration platforms Peerless brand is delivering to a middle east customer.
That required highly engineered water management solutions.
We also highlight some smaller industrial solutions with the example, shown regarding our <unk> branded or compass water wins around saltwater recirculation or potable water treatment in short our industrial water strategic focus continues to build sustainable leadership across targeted niche areas.
We believe we have every right to win and thus we will continue to invest more organic and inorganic growth and finally, the energy transition opportunities are vast we have a very strong position in legacy energy markets, such as natural gas power and various refining applications.
Now we are positioning CECO to simultaneously support those legacy customers and applications.
And also their needs to expand with purpose to new energy infrastructure investments associated with carbon capture hydrogen and other advanced gas solutions.
One recent win isn't the carbon capture space.
Almost $4 million separation in filtration solution for carbon capture within an ethanol facility.
<unk> carbon will ultimately be sequestered and therefore eliminate environmental exposure similar solutions might utilize the cars carbon as a commercial product and we are working on various projects, where this might be the end goal as carbon capture continues to receive investments in sequestration or commercialization our solution.
<unk> will be critical to aid in the development of large scale infrastructure or more point of capture solutions. We look forward to highlighting many more of these example, examples in the coming quarters now please turn to slide seven which highlights our capital allocation actions.
As the takeaway on the slide highlights over the past 18 months, we've deployed almost $60 million towards a combination of strategic accretive acquisitions and share buybacks.
Before acquisitions lifted on the excuse me listed on the left side of the slide.
Helping to advance our leadership position in industrial air or helping to build a leadership position in industrial water in.
In Q1, we closed on general rubber, which adds water infrastructure and process applications than in Q2, we closed on compass water, which ends membrane solutions specific to highly excuse me highly certified marine and naval applications and in Q3, we just closed on D. F 'twenty one.
<unk>, which advances seacoast East Asia market access and adds great relationships with leading Korean E. P. CS and also provides proven industrial water and energy.
Engineered solutions.
Each of these three acquisitions add niche leadership positions to industrial water solutions.
The Western Air acquisition in Q2 helps to advance our industrial air position with standard dust collectors and energy efficient control solutions.
Each acquisition is accretive.
Each ads niche leadership and focused arenas with very strong management teams.
So while the transactions may seem small on a relative basis, we believe and know they add critical resources, great market leadership geographic reach and will drive meaningful growth.
On the right side of the slide we provide an update to our share repurchases combined in Q2, and Q3, we repurchased about six and a half million dollars worth of stock.
This represented around 3% of our common stock at an average purchase price of around $7.69, a pretty nice discount to our current stock price.
These purchases when coupled with the $5 million worth of stock repurchased in 2021 represent a consistent utilization of cash to support shareholder value.
So while we just announced a three year $20 million authorization of stock repurchases in may.
We have already utilized about a third of that utilization in just six months no I would not suggest we are going to maintain this rate of stock buybacks, but the authorization gives us good flexibility and we will be very prudent with our capital allocation.
I will now hand, it over to Peter Johanson, who will go through our financial details and provide an update on our full year guidance Peter.
Thanks Todd.
Before I begin to discuss he goes third quarter financial performance I'm going to briefly.
Share with you some of my initial impressions of my now almost 90 official days and the chief financial and strategy officer role.
I was very excited when Todd asked and I agreed to join his team on the journey to build a better bigger and stronger CECO.
And I'm very pleased to sit here before you today to say that after 33 months I'm, even more excited about the possibilities and the journey.
As I have gotten to learn more about our company our people and our customers.
And the vast potential that is in front of CECO.
We have only scratched the surface of tapping the full potential for this organization.
Yeah.
Additionally, since I began I've had the opportunity to meet and interact with a number of investors potential investors and our analysts and.
And in each encounter I have been struck by the enthusiasm about CECO and the interest shared and learning more about the company and our businesses.
I look forward to spending more time with you in the future.
Now, let us dive into third quarter financial results. Please turn to slide nine.
On page four earlier today, Todd has shared with you a few highlights from our third quarter financial results I will now take you deeper into the numbers and performance for the quarter.
On this slide is a summary of the Q3 2022 P&L performance.
A more detailed view is provided in the 10-Q filed earlier today.
A few items worth highlighting for you on this page.
Orders were greater than 100 million for the third consecutive quarter at $102 million up 10% year over year on.
On continued strength in our industrial air and industrial water areas of focus.
With the TTM orders, reaching a level of $467 million.
Sales performance in the quarter was even better.
At $108 million.
Up 36% year over year on.
Steady execution from our growing backlog.
Continuing our run of six consecutive quarters of increasing sales.
Third quarter gross profit margins of 30% were in line with expectations and improved 150 basis points from the year ago period, as our price actions and improved execution offset higher material and project costs.
This level of gross profit margin was in line with our 12 month average of 30%.
We expect to deliver improved gross margins in subsequent quarters trending back towards historic levels of 32% to 33% on a backlog that has higher margin profile improved material and project cost outlook and higher margins contributed from our completed acquisitions and.
To come.
A final metric that I would like to highlight that was not described on an earlier slide number four.
non-GAAP operating income.
Our non-GAAP operating income finished the quarter at $7 2 million.
Over 300% better than our results in the third quarter of 2021.
It's important to note. This performance would have been even better except for the impact of foreign exchange, which brought the number down by approximately $700000.
All of this hard work on the top of the income statement when combined with our share buyback program has delivered outstanding EPS growth in the quarter and have set FICO, but for an excellent full year result.
Please turn to slide 10.
Well I want to provide some additional data points on orders and revenue.
On an earlier slide Todd shared with you that the orders performance for CECO is widely distributed across our various businesses.
Our order strength has led to a nice run of seven consecutive quarters of average orders growth per quarter, and TTM orders growth, Iran. We continue expect to continue.
With the average in the third quarter, reaching $117 million on TTM orders of $467 million.
This is all of this figure has also set a record for orders and a three quarter period of $377 million.
Earlier on slide six Todd walked you through a selection of nice wins for CECO in the quarter, which contributed to our Q3 results and will convert to revenue in the future.
This ongoing strength of orders translates to strengthen revenue as we convert our backlog.
The series of seven quarters of orders growth has been married buy and even steadier and consistent revenue growth trajectory.
With average revenue per quarter in TTM revenue, reaching $100 million and 400 million respectively.
Third quarter revenue was 28 million greater than the year ago period and was the second highest revenue quarter in company history.
We're looking to break again in the near future.
As we flip to the next slide number 11, I'll provide some additional color on it goes back a lot.
What was the third consecutive quarter.
He goes backlog is at or near an all time high.
We finished the quarter.
With $280 million of backlog up 20%, 27% excuse me from the third quarter of 2021.
And 30% from the year end 2021 figure with a 2022 year to date book to Bill over one two times.
With an opportunity pipeline still in excess of $2 billion and with a good start to Q4 and with our October bookings. We're expecting continue the book to Bill performance of the past seven quarters through the end of the year.
Setting CECO up nicely for 2023.
Equally important is that our platform teams are very optimistic about growth and continue to see more opportunities to expand the current pipeline be on existing levels.
Now, let's turn to slide 12 to take a look at margins.
As showed on slide nine.
Our gross profit performance improvement year over year was substantial.
Third quarter gross profit dollars delivered were up 43% versus the year ago period and was the highest level for many quarters, while its gross profit margins increased by 150 basis points.
Pushing the 12 month average back to the 30% level.
While it feels good to be back at 30% our team feel that 30% is a floor for CECO gross profit margins and fully expect to improve from this level targeting the historic levels of 32% to 33%.
Through continued pricing actions and price discipline ongoing improvement in project execution.
Value engineering and supply chain management.
Third quarter adjusted EBITDA of $9 2 million was $5 7 million higher than the year ago period.
Do you think EBITDA margins of eight 5%.
A 420 basis point improvement over the third quarter of 2021.
Our TTM adjusted EBITDA of $38 5 million produced a margin for the 12 month period of nine 6%.
In the quarter, we had a true up for FX made investments in additional commercial resources in a number of our platforms and close the D. F. 'twenty one acquisition without the effect of these expenses adjusted EBITDA would have been greater than $10 million with our margins 90 to 100 basis points higher.
These profitability results demonstrate that even with the challenging operating environment in which we find ourselves today.
CECO are getting strong leverage on our increased volume.
For a moment consider if gross profit margins had been realized at Chico's historic 32% to 33% range.
EBITDA for the quarter would be in the 11 $5 million to $12 million range with margins of approximately 11%.
To get back to these margin levels, we remain focused on our initiatives to improve execution commercial outcomes and optimize our G&A expenses.
Continuing to selectively invest in growth and enabling capabilities.
But doing so at a pace that is consistent with delivering improved profitability.
Okay.
Now please turn to slide 13, where I want to briefly cover cash positioning and capital deployment.
Yes.
The main takeaway here is that we are delivering strong operating cash flow have ample investment capacity to fund our growth and value creation strategy and have been deploying capital aligned with that strategy.
Year to date, we have spent approximately $54 million on M&A share buybacks and capex to support organic growth.
Our strong performance has allowed us to execute on our programmatic M&A and share buybacks, while maintaining a healthy EBITDA leverage ratio of less than one eight times, yielding over $90 million of available capacity for further growth investments.
We believe we have additional opportunities for improving cash generation from working capital management and project execution through the end of 2022 and into 2023.
Please turn to slide 14, where I will walk you through our outlook for full year 2022.
Earlier this year Todd shared with you a FICO full year financial outlook for the first time as a company.
We increased the full year 2022 outlook when we presented our second quarter earnings results in August I am pleased to share that we are increasing our full year financial outlook again.
To reflect strong performance and confidence in growing and converting our backlog and our operational execution and here are the numbers.
We now expect full year 2022 orders to exceed $475 million.
This would represent a greater than 30% year over year increase.
And would be the second consecutive year that FICO has grown full year orders by 30% or more.
Our updated outlook for full year 2022 sales.
Is to exceed $410 million delivering over $100 million in revenue in the fourth quarter for a third consecutive quarter.
This would represent a 26% year over year increase for the full year.
We continue to expect full year gross.
Margins of 30%.
Which although down 100 basis points versus full year 2021.
Well allow us to exit the year with higher run rate than the first half of 2022.
We are also improving are improving our full year 2022 outlook for adjusted EBITDA and increasing our previously stated range from a low of 37 to a high of 40 with a view that CECO will now deliver or exceed adjusted EBITDA of $39 million for the full year, which.
Would be an increase of 50% versus 2021.
As you can see our full year 2022 guidance for orders revenue and adjusted EBITDA our target numbers.
Implying we expect to meet or potentially exceed these levels.
We continue to make important growth investments, while taking into consideration the supply chain and inflationary challenges.
So we remain cautious about setting expectations that are out of the range.
However, we believe these figures represent the best view, given our balanced across Chico's current strong execution.
Our investments and market challenges.
The takeaways thus far.
FICO is in a better position than ever for higher performance and our 2022 full year outlook is supportive of such a view.
I will now hand, it back over to Todd to talk about 2023 and beyond.
Thank you Peter.
Turn to slide number 16.
We shared this slide in August when we presented our Q2 earnings report, we outlined that along with our financial guidance, we intend to signal the consistent execution areas that will drive steady growth in <unk>.
Information.
Well, we modestly updated this slide for today's presentation. It remains largely the same in short we are saying, what we expect to do and we expect to execute on these points. We did a similar slide in mid 2021 and provided an update on our achievements in August of this year you can go.
Back and see that we checked the box on the key items over the past 12 months steady execution, that's our goal.
Our transformation will continue as we expect.
As we finished the year strong Peter.
Peter shared our financial outlook and mentioned growth investments.
Advancing our growth and operating excellence programs, we will have an above average chance of sustainable performance. It isn't one magic acquisition or one fancy new product line, but instead, a steady diet of incremental items and transactions.
As we head into 2023 and move into 2024 and beyond.
We expect to build upon the foundation, we have put in place over the past two years, we will advance our operating model and continue to deploy capital where it creates the highest economic returns.
You can see we outlined some longer term financial goals such as EBITDA in the mid teens in two to three years. This will come from our continued high performance culture that delivers as.
As well as a transformational journey to add more short cycle sales to our business mix over the past two years, we have already moved from only 20% short cycle sales to approximately 30% today.
We continue to expect our business mix to hit 50% short cycle sales and 50% long cycle sales in this time horizon that we present on this slide.
Now, let's turn to number 17, and lets review our preliminary 2023 financial outlook.
We are pleased to introduce 2023 financial outlook with this focus on CECO revenue adjusted EBITDA and free cash flow we.
We will provide more detail on orders and other P&L items. After we close 2022 and finalize any remaining 2023 budgetary items.
Our expected outlook for the full year 2023 revenue.
It's deliver sales in the range of $450 million to $475 million.
Up approximately 13% if you take this ranges midpoint and compare it to what our full year 2022 revenue guidance, yes.
We expect to have a strong backlog heading into 2023 and remain optimistic optimistic.
Can you to invest in growth initiatives as we expect to advance our growth in adjacent markets and the aforementioned higher mix of shorter cycle sales.
Our expected outlook for full year 2023 adjusted EBITDA.
And driving productivity, while balancing investments for growth.
We are also balancing the economic uncertainty and continued supply chain challenges and these are reflected in our current thinking with respect to this 2023 outlook.
Finally, with free cash flow, we remain committed to generating strong free cash flow.
We believe that we can generate free cash flow in the range of 50% to 75% of EBITDA, which is the right target for CECO.
We thought it would be helpful to be transparent on our current view of 2023. This information coupled with the slide that Peter shared outlining our commitments on 2022 and the material we shared outlining our longer term commitments towards steady execution and transformation should provide good material for your continued as.
<unk> of CECO and our progress.
Now, let's wrap up with slide 18.
Okay.
Great results in Q3 and year to date across the board.
Our sales pipe our sales pipeline remains strong and our near record backlog gives us good visibility.
We are pleased to raise our 2022 full year outlook and provide an initial view of 2023, we hope you find this information helpful.
We remain committed to our capital allocation programs and steady transformation of CECO, we aim for higher performance.
And we expect to continue to drive great shareholder value.
With that I would like to thank team CECO for delivering for our customers being accountable for the results.
We'd like to thank everyone on this call for your interest today and with that I'll hand, it over to the operator, we'd be happy to answer any questions.
We will now begin the question and answer session.
I ask a question.
Press Star then one on your telephone keypad.
Speakerphone, please pick up the handset before pressing the keys.
Yes.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
[noise].
And our first question comes from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you good morning, everyone. I appreciate you taking my questions and congrats on the execution.
Uh huh.
And your own.
Just with respect to supply chain issues Doug.
Is that still preventing you know stronger performance potentially you know relative to sort of you know what is out there for you.
Yeah look I think.
First of all we've been all when I say all of it seems like every company I know is still.
Navigating the choppy supply chain markets I would say that we.
We have adjusted our teams are doing a great job working with our customers working with our suppliers.
And not every you know not every one of our platforms and projects are on or ahead of schedule. We're still navigating some choppiness. So I suppose in that way, we could suggest that things could have maybe even been a little you know a little bit better, but I feel great about our team's execution and I think that you know.
Some level were just so accustomed and now have over the last 18 months or so to you know to just having to deal with some choppiness it seems more.
Just for normal, but regardless, we look forward to a day when we're no you know when we have when we have a really I guess smooth supply chain.
Understood.
Just recent headlines around recession et cetera.
Many companies are easing.
You guys are.
How are you situated you know rather.
To do so maybe competition et cetera on that front.
How much of a risk is these days.
Developments.
To your outlook any color on you know.
It's just the macro environment relative to the outlook.
So thank you.
Good question and look we're as we mentioned in our prepared remarks today.
Putting a lot of thought we understand the dynamics that are out there the headlines.
And it's real I mean, we know that inflation in the supply chain that we just talked about continues to be.
Uncertain.
There are certainly you know.
Yeah.
<unk> you.
U S or international items that are <unk>.
What concerning if not a very unknown at this point for US. However, we as we stated number one we have a really balanced diverse growth profile.
Across our platforms and so in a very strong backlog a really good pipeline. So I'm just kind of punching through the headlines. If you will of the bullet points that we provided that does give us more visibility maybe some companies have.
I'd also suggest that.
For CECO and the investments we've made to really be more nimble to move from a market that might be kind of slowing down or even pulling back and move more quickly into another market that we think has a growth profile. For example, we all understand that there is a going to be a large investment.
Semiconductor space.
We're able to we feel put ourselves in good position for opportunities. There. For example, so you know I think the macro themes for us still look pretty positive there as you know a lot of investment and some of the markets that we mentioned, there's a lot of investment in infrastructure in the U S infrastructure in Europe .
A fair amount of re domestication or U S industrial revitalization.
And you know I think we're just in the very early innings of some of that but a really early adding in the energy transition. We have grown a lot of our business is by supporting legacy energy infrastructure and capabilities and I'm as excited about the next period of time for that transition to <unk>.
Carbon capture to hydrogen to other gas solutions I think CECO is in great position for those markets and so those markets don't feel like they're pulling back we feel like they are moving forward.
Thank you.
Just one last one for me you know on some of your margin improvement.
Efforts to have some of these steps already been.
<unk> implemented or are you starting to implement these just wanted to see another timeline.
To which these will start reflecting maybe in the financials.
Yeah.
I'm going to give you kind of a CEO math here I'd say, a third of our operating excellence programs have been have been.
Implemented or you know like for example, pricing actions and and certain execution actions that.
<unk> and the operating teams in the NBA up the project management teams I think we feel like that offensive game plan is moving the ball down the field very nicely and I want to thank our teams for that focus and what they've been doing to deliver steady margins because we really have protected our margins as a result another.
Third I would say is we have the programs in place. We're just kind of early days of really hitting those harder supply chain initiatives et cetera, and we're pretty early in some of our lean journey. Some of our operating excellence programs that I know <unk> also eager to share with the investment community and others as we as we started really.
Implement those investments that we're making now and we'll continue to make over the next 12 months to 24 months. So it's a little bit of a blend but the good news is we know how to we know how to do this stuff a lot of experience and we're making good progress.
Thank you.
The next question comes from Rob Brown Lake Street Capital markets. Please go ahead.
Good morning.
Nice job on the router.
Thanks.
My first question is on the a and the businesses that were a little weaker than I think the fluid bed. The duct businesses you talked about the potential for an uptick there what's sort of driving the uptick there and and when do you sort of think you can see that.
Yeah, you know what.
Orders is a it's a very nice indicator of what they represent I mean, it's a you know it's a year over year look it's a growth look.
So I would say while it is a really important indicator orders can also be like a lot of other financials or statistics in life. They can they can they can be you know the timing of an order had we booked something in the third quarter versus the fourth quarter et cetera. So when youre looking at those two plants.
Forms that have shown year to date down we still feel their pipelines are great electric vehicle for example, and our duct fab business. We think is a really nice opportunity where little.
I guess I'd call. It like later cycle in some big projects there that we feel like we're going to be.
Well positioned for and then on the you know the.
The fluid bed side, you know the investments in refining have continued to be.
If there's if it's delayed or pause in refineries are running really hard and they're maximizing the markets that are in front of them today and so their capital investment for certain applications like a cyclonic technology have just sort of been pushed out and pushed out but regardless, we like both of those pipelines and we.
Maybe as early as the fourth quarter, but certainly as we head into next year their pipelines look really good.
Okay, Okay, Great and then maybe it falls on that but the energy transition activity you talked about those tend to be later cycle projects and is that is some of the confidence that you see for next year is some of those late cycle activity coming home.
Yes that pipeline is building.
Whether it's later cycle or.
Some of these projects take a fair amount of time to get all of their.
Their entire project scoped, and an approved and the investments all put together outside this is this is outside of our control. Obviously, so we may know that we're in good position for our piece of a project, but you know they have to get from Ada Z in the alphabet everything lined up and where we represent five letters of the alphabet in this case.
So, but yes look again, you know Ramesh and the team have done a great job of really turning the spotlight on opportunities there and the carbon capture job that we that we mentioned was just one example, where we've had a long term knowledge of that project coming but we just have to wait.
At least for that whole project to really come through to fruition and so that that's just one example, another would be.
There's a lot of companies that are talking about LNG and other investment in infrastructure. That's a that's really growing in terms of you know.
Support and we feel well positioned for that as well and that seems to have been either mid or late cycle and some of this energy investment.
Okay, great. Thank you I'll turn it over.
Our next question comes from Jim Ricchiuti of Needham and Cowen. Please go ahead.
Hi, Thank you good morning, Yeah, I just wanted to again pursue.
The decision.
To provide a guidance or an outlook preliminary for 'twenty three and the question.
It's more around the short cycle business I mean, obviously in the past she still has not been immune from economic cycles. So I'm trying to get a sense as to how what you're seeing in that short cycle business, whether it's just.
Healthy, which it sounds like it is or whether you're also potentially even taking some share in markets.
Well in some businesses, we feel really good about maintaining and.
And you know in our share for example in some of our fluid handling businesses, whether it's taking share maybe.
Might be but its we really really like our ability to you know our partner.
Partner and grow distribution, we think there's big opportunities there domestically internationally. Some of our recent acquisitions, we feel helped us bring through over the next six to 12 months, even more shorter cycle opportunities with our legacy or core CECO business, but also those acquisitions are really starting to we feel.
Hit their stride with respect to opening up some shorter cycle market opportunities for US and then of course, just the I'm going to go back to the answer we gave which is I think the industrial markets continued to be give us visibility at least two infrastructure to re domestication of U S industrials to large inverse.
<unk> in certain key end markets that we feel well positioned because there's only a handful of companies that are approved to provide industrial water and industrial Air solutions and then you know I think ESG is going to have some.
Ups and downs with respect to how people feel about it semantically, but nonetheless companies are still spending a lot of time and energy not just because of ESG from a topical perspective, but really from their committed they're committed to environmental solutions and it's not just regulatory and so again, we just lie.
The balance I would say, there's not one share moment or one silver bullet or one acquisition for US you know when we're lining up to the line of scrimmage, we'd like the playbook. We have we feel that defense is going to throw some things at us, but we're going to be able to navigate it.
Follow up question just on this $4 million order that you highlighted are related to carbon capture can you just talk about the use case, whether this is a new one.
Our existing customer and whether you're seeing increased interest from perhaps similar sized customers either.
Similar to our adjacent markets.
It's a new customer.
That said, we may have done work with them in the past, but this is a this is mostly a new relationship a new solution.
We with our with our legacy Peerless business, having a very strong position in separation filtration for natural gas infrastructure, just a really nice natural fit for us to build relationships now utilizing that brand in the carbon capture space. This one happens to be in an area that we have.
Having a focused investment.
For a number of quarters.
And you know.
We think that number there's two things I might add that I'm sure. We look forward to hopefully talking about is it number one this could be a customer in a market that has a series of very similar projects. I mean this is an industry.
You know when when one solution gets rolled out its kind of adopted by other companies in this space. So we're optimistic that that could be an opportunity and then ramesh and the team are really looking at migrating a solution like this across a range of other industries you can look there.
Similar type of carbon capture could be whether it's food and beverage cement.
Other industrial areas, where we really feel like our relationships and relationships of our channel partners can open up a lot for US you can feel the enthusiasm in my voice because I'm, just reflecting the hard work of our great teams out there that are sharing the pipeline in these areas and I can tell you that we hope to be talking about more of these energy.
Transmission projects throughout 2023.
Got it thanks, congratulations by the way.
Thanks, Jim.
Once again, if you would like to ask a question. Please press Star then one.
And our next question comes from Aaron <unk> of Craig Hallum. Please go ahead.
Good morning, Thanks for taking the questions.
Hey.
Right.
Good morning, maybe first on the recent acquisitions I know, it's early but can you just talk about some some of the synergies and early impressions. There just how the reception for your industrial water offering has been in the market as we think about the pipeline and how you've expanded that and just areas you might be looking to fill as we move forward.
What is early days no.
At the same time, we've we've built a nice little organic position in industrial water and produced water in certain areas and again I've I've been using an analogy like this or are we really felt and we know we have a seat at the table to solve industrial water solution. So for us whether it's compass water.
Adding a really attractive niche leadership position.
That is we believe going well we've done some good work with our operations internally.
And in the combination of what we do in marine and naval coupled with what they do we believe there is some really great growth synergies and then the <unk> 21 acquisition that we just closed in the third quarter boy. They have just a really attractive not only.
Manufacturing and assembly positioning in Korea, South Korea, but just fantastic relationships with Korean based <unk> that we that we look forward to.
Really advancing and expanding so all of these things we think opens up geographic adjacencies market Adjacencies more short cycle. They each bring an opportunity with the 50% business mix, let's say with you know.
Replacement membranes and higher margin products. So just early days, Aaron but again really excited about what they.
How they are all hitting their numbers already against our acquisition model and then we think more growth opportunities as we roll into next year.
Alright, Thanks, and then you touched on it a little bit just on the margins you know obviously confident in a return to historical levels can you just talk a little bit about you know kind of what you're assuming in that 'twenty 'twenty. Three guide and then just on supply chain materials costs. You know talk about some of the initiatives that are ongoing there and as we look for improvement.
Yeah, we're going to we're going to.
Try to be a little bit more when we get into 2023, we're going to.
We're gonna, where we aim to we expect to be a little bit more I guess instructive with our view of gross margin levels for the year.
We just want to get through 2022, first and and really see what's in our backlog really see whats in our project management offering.
We feel very confident in our ability to get back up to those historic margins, but right. Now. We just you know we're kind of just sticking with the high level numbers of of revenue high.
The high level numbers of EBITDA and will be will provide a little bit more visibility to the more I guess the more full P&L when we get into 2023 I can assure you, though that our goals and objectives are aligned with what Peter shared how we expect to exit the year. There's just a lot of moving pieces and parts as others have asked on the call.
All around economic uncertainty et cetera, you know look we feel great about our pricing actions, we feel great about the early innings of our lean manufacturing journey, we feel great about our operational excellence programs to deliver and execute but there is a lot of uncertainty still around inflation could be coming up could be going down a lot.
Uncertainty still around utilization of labor rates et cetera. So you can hear what I'm, saying is that we're just trying to be a little bit thoughtful about when we give all of our financial outlook numbers, but again, we're committed to execute against the numbers we provided.
Understood. Thanks for the color I'll pass it on thanks.
Okay.
The next question comes from Bill does sell them off.
Please go ahead.
Thank you group of questions let me.
Ill begin with the fourth quarter order strength.
You referenced that you have already seen this quarter would you walked through.
Yes, there's some details of that please since you gave us a bit of a preview.
Yeah energy transition.
I would say that that area of that market, we feel really good about in terms of the fourth quarter.
To date, some really some really nice opportunities in single cycle power for example, some nice opportunities still across our separation filtration platform.
We highlighted that we think that our fluid bed business could have a turnaround in the fourth quarter. So I would suggest that again in terms of global refining Capex, we think that that's an opportunity for us to support.
And you know so.
When Peter shared that our quarter to date orders gives us confidence to we expect to deliver another quarter of greater than $100 million in orders that would be great for quarters in a row of that would be certainly a nice indicator of our balanced throughout the year and our balanced strength to give us another really solid backlog level as we head into 2023.
Turning to our expectations, otherwise, we wouldn't have shared them.
So it's not again, it's not just one platform.
We expect all of our platforms to be strong, including our ductwork business, which also has some great customer relationships that they've been cultivating for a number of quarters in a row that we think could hit in the fourth quarter. So.
A lot there bill is an answer and that's because there's a lot of opportunity.
Note that as that is helpful and specific to the fourth quarter are you anticipating customers will have a budget flush.
Or is that really not a component to it.
Uh huh.
Q4 orders.
I mean, it could be at times I think you'd have to go.
You'd have to go through.
The different customers into different markets and there are some where yes, you know that the capex is going to be spent in the fourth quarter. Because you know that's just the way the world where to spend it use it or lose it is that what they say bill.
And so we've also been waiting for some things like the department of defense budget, which flips flipped in <unk>.
Tober first end of September beginning of October we think that could open up some interesting.
Naval projects.
Projects, where we have a unique position to.
And you've seen some of those applications. When you came and visited our Denton facility and so you know again, we we feel that the fourth quarter could have some unique attributes associated with just the timing of some of those budgetary items, it's sometimes a bigger moment for us than other times I don't feel like this quarter, we're not holding our breath for.
Cycles like that.
That is helpful and lastly relative to the economic uncertainty that might arise.
It's been referenced here on the call.
And ever present in the press.
What has that done or not done in terms of affecting potential sellers.
And your M&A.
Our strategy affecting the potential sellers' mindset.
Yeah.
I think it's a I think it's a very important data point for them.
Think that companies see being part of a oh.
A larger financially stable diversified organization.
It helps I think when there's uncertainty in the headlines.
They don't you know Theres a good.
There's a good dialogue that goes on in the financial model as a result right.
Sometimes it's a sellers' market, sometimes it's a buyer's market. We are a win win organization wed like to find relationships product categories niche leadership, we want to keep the leadership teams engaged every one of our acquisitions, we've done a fantastic job of doing that and in my time with the organization, we don't buy and rip out costs and fire a bunch.
Are people, we cultivate we invest we grow these are homegrown relationships that we don't just jump into.
In an auction process at the last minute and bid and negotiate because the headlines look bad and.
I think that any deals that we do in the future are going to go.
To be accretive from a from a price perspective and deliver the type of value from a long term because we're going to maintain those relationships.
Thank you and just I don't want to push on this just a little bit more have you seen pricing soften.
Sellers are becoming nervous.
Prices aren't going up.
That's for sure.
Okay, and you are not not theyre not growing prices are not going up on on transactions.
You know there is still money out there.
Need to put their capital to use where you know we have a good balance sheet. We have good cash we've got good liquidity as Pieter showed and we're being thoughtful about our capital allocation and I don't think prices are going higher at the moment.
Great. Thank you for taking all the questions and congratulations on a great quarter. Thanks.
Thanks Bill.
Once again, if you have a question. Please press Star then one.
And our next question will come from Thomas Clogger G.
GMT capital. Please go ahead.
Yeah, Hi, Todd I guess that change companies all the time.
Can you remind me I keep hoping that peerless is going to get some business over in Europe . So the EMEA deal.
But you've got it looks like it's a peerless deal is that correct and then is there any further progress because you know it looks like there's going be a lot of natural gas projects in Europe . So I keep hoping that I know theres not a lot of peerless over there, but I'm, hoping that there's some strategy or some movement into getting those products more in Europe and then what's the.
The overall European or EMEA exposure of the company again I think it's 20% can you can you remind me.
Yeah, It is about 20% give or take that.
We look good question Peerless Hasnt opportunity in Europe , it's doing really well in the middle East are doing really well and other international markets.
Our <unk> product line has a fantastic position in Europe .
That's more on the noise management silencer, we're developing more sales channels throughout Europe with Peerless in other product lines.
Not just our energy transition in our legacy energy applications, but industrial air opens up more opportunities for us as we develop more sales capabilities and business development. So you know look I think it's a fair question, we will try to be a little bit more whatever you know if you want to call. It update people on on how Peerless is doing in Europe .
I think more opportunities are there for natural gas and I think that you know.
We have a great relationship with U S base.
Energy companies and as they open up more natural gas solutions throughout Europe , we we feel like we're well positioned there.
That said they are growing.
We're growing nicely and at some point, it's a capacity issue a little bit you know.
Call walk run and there's only so many places you can run in other places you have to work in some places you have to kind of just you know pick your battles and we don't want to take on too much at times I am not suggesting that we're just turning down jobs.
But the fact of the matter is I think our orders growth has been pretty solid and I think there's opportunities for us.
Okay. Thanks.
Yes. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Todd Cleveland for any closing remarks.
Thank you I'll close with just a few comments number one great questions. I appreciate the questions a lot of interest and always always happy to address the comments and the questions.
Also.
Really pleased that our ticker symbol is now see ECL.
And it's nice to to have that association going forward.
I'd also once again like to thank our global teams at CECO without their commitment to the customers our channel partners and navigating the challenges we wouldn't have the year to date performance the last year and a half two years performance that we've had so thank you all of you for doing what you do for our customer.
And for each other every day and last but not least our leadership team.
The last 90 days or so of adding Lynn.
And adding Peter Ramesh and I have been here for a little bit longer, but still really coming together.
What we really feel great about our opportunities and our strategies and so I just want to thank our leadership team for jumping in too.
The new CECO quickly and in helping to ensure that we have a good strong end of the year and well positioned for 2023, and so with that we'll thank everybody for your time today, we look forward to speaking with you over the next few days and we're going to be at some conferences coming up investor conferences like the big.
Southwest ideas conference in Dallas, and some other some other events. So again, we look forward to seeing and meeting with many of you at those events. We will talk to you soon thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].
Okay.