Q2 2023 CECO Environmental Corp Earnings Call
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Good morning, and welcome to the CECO Environmental Conference call, all participants will be in listen only mode.
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I would now like to turn the conference over to Steven Hooser Investor Relations. Please go ahead.
Thank you and thank you everyone for joining us on the CECO environmental second quarter 2023 earnings call on the call with me today is Todd Cleveland, Chief Executive Officer, and Peter Johansen, Chief Financial and strategy Officer before we begin I would like to note that we have provided a slide presentation to help our discussion on our website.
Our call will also be webcast along with the earnings presentation, which is also on our website at CECO and viral dotcom.
Presentation materials can be accessed through the Investor Relations section of that website I'd also.
Like to caution investors regarding forward looking statements any statements made in today's presentations 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.
To read the risks described in our SEC filings put it in the Form 10-K from the year ended December 31st 2022.
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 have provided the comparable GAAP and non-GAAP numbers in today's press release and provided non-GAAP .
Filiation and supplemental tables in the back of the slide deck and with that I'd now like to turn the call over to Chief Executive Officer, Todd <unk> Todd.
Todd.
Thanks, Steven and thank you for your continued support and interest in CECO I'm.
As we highlighted in today's press release CECO delivered multiple financial records during the second quarter.
Over the past several quarters, we have communicated that our sales pipeline was strong and growing and throw out the second quarter. We continued to add to our sales pipeline, which is now well over two and a half a billion dollars worth of global opportunities the.
The growth of our target markets is a positive result of the focused investments, we strategically made to add sales and business development capabilities across our existing platforms.
And these investments continue to produce outstanding growth in the second quarter as we reported the highest ever quarterly bookings in our company's history.
We continue to have high confidence in our sales pipeline, which remains strong across our diversified industrial end markets.
But bookings worthy only record in the quarter I am pleased to also highlight that our second quarter revenues represented the highest quarterly sales in the company's history as well.
And with our record backlog, we expect future sales growth to remain very robust.
CECO also delivered the highest gross profit dollar level on our history benefiting from enhanced productivity growth and product mix, we look forward to more record levels of profitability in the future.
Expanding further on our sales pipeline the strategic investments into each of our platforms and commercial capabilities has done more than just build a large sales opportunity funnel.
This transformation started approximately three years ago with a comprehensive redesign of our organizational structure and focus towards a more.
Diversified micro aligned and balanced business mix with the purpose of driving sustainable financial results and we are seeing the results of this shift in focus and strategy.
Over the past 18 months, which many of you already know.
We have also added programmatic M&A to the transformation playbook.
In the quarter, we closed on our most recent acquisition, adding trend send solutions, which is a leader in liquid separation and filtration solutions for the energy transition.
We shared some of the details of the transcend acquisition, when we announced Q1 earnings back in May and Peter will provide some additional commentary around this acquisition in just a few minutes.
We have now completed two acquisitions in 2023, and we continue to look for strategic and accretive businesses that can advance our leadership in industrial air industrial water and the energy transition and further enhance our business mix balance and earnings growth.
When I started at CECO in mid 2020, the company's financial results were much more cyclical and investors view. The company is significantly tied to legacy oil and gas and power generation end markets well.
Well some of those markets remain very important to CECO, we have built a better CECO, where we are much more balanced with greater exposure to diverse industrial end markets, including more industrial air industrial water solutions to our portfolio, which both of those now represent a majority of our orders and revenues in 2023.
But don't just take my word for it with respect to transforming our portfolio I'm also pleased to highlight that even with record sales in the quarter, we still drove a higher than 1.25 book to bill for the third consecutive quarter.
So what's our growth investments and more balanced portfolio driving backlog gains to record levels at quarter end, we have high confidence in our future outlook.
This confidence in future outlook is why we are announcing an increase to our full year guidance.
We have also shared in our earnings press release today.
We will come back to this updated guidance a little later, but I want to point out now that this is the third time, we have exceeded and increased our guidance since we introduced our full year 2023 outlook late last year.
Is the takeaway on the slide suggests we have delivered a very solid first half of 2023, and we remain optimistic that we will drive sustainable high performance in the second half of the year as well.
Now please turn to slide four let's review, our summary, second quarter and trailing 12 months financials.
Peter will cover many of these key financial figures and metrics in more detail in a few minutes.
However, let me just focus on a few key areas I will mostly stick to the left side of the slide which covers our second quarter results.
Panel on the right side of this slide provides a snapshot of Cecos trailing 12 month financials, all of which are very strong.
Chico's orders of $163 million in the quarter represent the highest quarterly bookings level in our company history. Just an outstanding result, when we announced Q1 results. We mentioned that a few orders had just missed booking in that quarter and you can see from our record results that we secured.
Many of these projects in Q2.
This record quarterly bookings drove year over year growth of 43% and on a trailing 12 month basis orders are up 23%.
As a reminder to our audience, we have been consistently growing order steadily.
The second half of 2020. So this is definitely not just a 12 month phenomenon, but rather a relatively stable growth trajectory.
Sales of $129 million were a record for any quarter for CECO and our sales growth of 23% in the second quarter reflects the great execution of our global teams are driving to deliver solutions for our customers.
Of this 23% growth approximately 16 points was organic.
Adjusted EBITDA of almost $14 million in the second quarter was up 29% over the prior period.
This result produced adjusted EBITDA margins of 10, 6% an increase of almost 55 basis points year over year.
And while our investments in growth and operating excellence resources is up over the past year, we expect our SG&A to maintain steady levels going forward, which will translate into higher EBITDA margins as we continue to experience top line growth.
Our adjusted EPS in the quarter of 15 and met our expectations on a trailing 12 month basis, our adjusted EPS of <unk> 67 cents is up significantly over the preceding 12 month period, which we believe is more indicative of long term value that we're creating we will continue to manage debt and interest payments to deliver higher E.
P S and as our guidance suggests.
Our expected higher EBITDA will also deliver bottom line growth.
Finally, with respect to free cash flow.
<unk> rebounded nicely from a slower cash generation in the first quarter as we generated $10 million of free cash flow in the second quarter we.
We had operating cash of approximately $11 $4 million and this could have been even better but not for a $9 million of customer payments that we received shortly after quarter end cutoff.
So with the strong start to Q3 collections and continued strong milestone achievements in billings, we expect cash flow to remain healthy in the foreseeable future.
With so many financial records in the quarter and year to date.
Once again stress how pleased I am with our operating and financial performance. Thanks to our global teams as they continue to deliver for our customers every day.
Now please turn to slide number five.
To reiterate a few things we have shared when we highlight the slide and investor presentations as well as when we showed it last quarter.
As the title of the Slide suggests CECO was more balanced and pursuing more opportunities than ever before.
Across everything we do.
Focus is to protect people.
Protect the environment and protect our customers industrial equipment in previous quarters, we've outlined how we are advancing our leadership position in industrial air and the three acquisitions highlighted in the middle column, which is entitled newly acquired brands are yielding great results towards helping us advance that Lee.
<unk> position in industrial Air.
We have also discussed how we are building our position in industrial water.
Before water focused acquisitions highlighted in the center column add important building blocks to our growing water niche leadership positions and finally, a single shifts that's commercial and customer focus to support the applications and opportunities presented by the energy transition the recent trends.
And acquisition positions CECO to provide new and enhanced solutions to improve the efficiency and lower the cost of gas and liquid separation infiltration and legacy natural gas liquids transport and hydrocarbon processing infrastructure and to benefit from new and emerging applications in renewable natural gas.
Yes.
Robin capture and other low carbon opportunities.
The transcend acquisition also opens additional doors to high margin opportunities and business models and engineering services equipment rental infield customer process diagnostics and emergency services.
Now staying with slide five we really like to share that this slide.
Excuse me, we really like to share it.
This slide as it highlights the diversity of CECO and what we're doing to grow leadership positions and add portfolio balance before.
Before we move on to the financial details for the second quarter I'd highlight I'd like to highlight a few operational items that actually arent included in the deck, but we think are important to mention as they speak to our growing capabilities and more balanced portfolio.
The first item I'm going to mention is that we just booked our largest ever aftermarket order totaling almost $9 million at very good gross margins.
This is significantly higher than any aftermarket or services order in our company history. This order is in the industrial water segment supporting a large customer in the middle East.
This win highlights a great example of why we have been investing in industrial water market capabilities.
Between industrial water and our growing separation in filtration solutions installed base, we look forward to many more of these large aftermarket orders in our future.
The second item is that we expect to end 2023 with approximately $100 million of revenue generation and high growth markets, which is comprised of the middle East, India, China, and southeast and East Asia. This is up more than two fold from just a few years ago and we are maintaining strong.
Loan growth, we continue to add resources throughout those regions with a particular focus on India to support global operational capabilities and also to support local projects and Indian related sales opportunities.
Finally, a third item I would also highlight.
Instead of the approximately half dozen acquisitions, we have completed since Q1 of last year. We expect at least four have or will double in size and their first 18 months to 24 months of ownership by CECO. This is a tremendous track record of us identifying growth businesses and properly <unk>.
Vesting in and Incentivising, great leadership teams.
Our other three acquisitions are definitely on track to hit or exceed their deal financials that underpinned our investment thesis.
I am very pleased with the results of our investments.
And our journey of advancement at CECO of course, not everything goes as planned and I can assure you we see opportunities to improve every day exclamation point.
But overall, we are very excited about our improving ability to deliver strong operating results.
I'm now going to hand, it over to Peter and he will walk you through more detail on our financials and some additional color on our strategic programs Peter.
Thank you Todd.
Very pleased today to be able to present to all in attendance.
Another set of solid financial results that confirm that FICO is still on track to deliver another strong year of performance.
I'd like you to turn to slide seven with me.
On this slide I present, a more detailed picture of the Q2 2023 results then Todd walked you through on slide four.
Orders in the quarter of $162 9 million were the highest for any quarter in company history.
As a result bring sickos order rate to over $560 million on a TTM basis.
And a record $310 million for the first half of 2023.
Revenues of $129 2 million was the highest for any quarter in company history, continuing a four quarter trend of record setting revenue delivery vetting benefiting from strong continued strong execution.
This result brings cecos TTM revenues to over $467 million and $242 million for the first half of 2023.
Gross profit margins in the quarter of 38, 8%.
Or an increase of 80 basis points year over year and gross profit dollar delivery of approximately $40 million was the highest in any quarter in company history.
Adjusted EBITDA for the quarter was up 29% year over year to $13 9 million inclusive of the higher operating expenses, we incurred from the investments made in platform and functional Resource addition, supporting <unk> current and future growth SG&A additions from acquired businesses.
And expenses from M&A.
Adjusted EBITDA margins in the quarter was 10, 6% up 60 basis points from the year ago period, and up 200 basis points sequentially.
You may recall that in the first quarter, when we discuss EBITDA margins Todd highlighted the investments that we made that had an impact to EBITDA margins in that period. We've now recovered and are benefiting from those investments and they will walk you through later in the deck.
Well nicely positive and aligned with our expectations, both GAAP and adjusted EPS were down year over year due to higher interest payments offset slightly by lower taxes.
I would also like to point out that both GAAP and non-GAAP operating income were up nicely in the quarter GAAP operating income was up over 50% in the year ago period, which we feel is a tremendous result.
I would like to ask you now to turn to slide eight.
Yeah.
On this slide you can see that CECO is order trajectory that Todd referred to earlier today began back in the fourth quarter of 2020, and it has continued to accelerate through 2021, and 2022 and while maintaining that strength into the second.
Quarter of 2023.
For the four best orders quarters in company history had been posted across the past six quarters, all our greater than $100 million level, delivering a six quarter average of approximately $140 million.
TTM order rate of $562 million up 23% from the year ago period.
On the strength of the $163 million of orders booked in the second quarter FICO finished the quarter with a new record backlog level.
We recognize that quarter to quarter orders can be lumpy due to timing.
<unk> view that Smoothes out the Lumpiness and more closely matches, our revenue realization I would point you to the TTM and average orders per quarter Roes that we've provided above the graphic.
For a more detailed view of revenue please turn to slide nine.
On this slide you can see that Chico's revenue trajectory growth began in the first quarter of 2021, and it showed steady improvement sequentially and versus prior period throughout the last 12 quarters.
With the acceleration of this improvement in 2022, continuing into Q2 2023, as we continued to convert our growing backlog into our fifth consecutive quarter of revenue greater than $100 million.
Average revenue per quarter for an average revenue per quarter of $114 million.
In the second quarter of 2023, we also printed the best revenue quarter in company history, putting a strong exclamation point on a run of record.
Quarterly revenues.
And the highest first second third and fourth quarters for revenue in company history, We're very proud of this accomplishment our.
Our trailing 12 month revenue of $467 million is 26% greater than the year ago period, and represents a quarterly average of $117 million of revenue per quarter.
Our teams delivered this outstanding result, as they overcame and navigated late deliveries from some of our suppliers and delays in company with customer approvals that impacted revenue recognition in the quarter.
As I finish up on this slide I also wanted to point out that consistent with the prior slide we have included TTM revenue and average revenue per quarter trends for an easy comparison to the trailing 12 months data provided for orders.
Let's transition to slide 10, now for a quick review of backlog and backlog trends.
Veeco finished.
Q2, 2023, with a new record backlog of $391 million, representing a 35% increase year over year, and a 25% increase above year end 2002 levels.
Book gross margin in the backlog there are higher than the year ago period, which is a strong leading indicator for improved margin realization in the coming quarters.
Sequential organic growth from Q1, 2023 levels was $33 million with another 2 million added from the acquisition of transcend book.
Book to Bill was greater than 125 for the third consecutive quarter and has is one two book to Bill of one two for the TTM period.
Again, there were no cancellations in the quarter consistent with past quarters with a very strong opportunity pipeline CECO expects to maintain a book to bill rate greater than one for the total year 2023.
Positive leading indicator for continued future growth.
Please move to slide 11 with me now I don't know I will walk you through gross profit and EBITDA for the quarter.
Starting on the left hand side of the page I want to highlight the gross profit for the second quarter was a record $39 $8 million, reflecting a 38% margin and a 31% increase year over year.
This is the third consecutive quarter with a 31% or greater year over year improvement.
While its margin rate is down 20 bps sequentially, the $40 million approximately $40 million. Gross profit result is the best dollar delivery for a quarter in company history and represents a margin rate increase of 70 basis points versus the year ago period.
<unk> gross profit is approximately $145 million, reflecting a 32% greater gross profit dollar delivery than the prior TTM period and reflects the 150 basis point margin expansion to approximately 31%.
It is this additional gross profit that is allowing <unk> to continue to fund our investments in our operating model in.
Higher growth and expanded capabilities in our high growth regions. We expect to continue to realize improved margins from better pricing on projects booked in Q4 2022, and the first half of 2023, and we are starting to see the positive impact on margins of our recently completed acquisition.
These acquisitions in aggregate are delivering gross profit margins of nearly 40%.
On the right hand side of the page the last nine quarters of adjusted EBITDA performance are provided.
Q2, 2023 delivered a near record $13 7 million of adjusted EBITDA, and a 10, 6% EBITDA margin.
On the TTM basis, CECO has delivered $45 5 million of adjusted EBITDA and nearly 40% increase over the prior TTM period.
Delivering an EBITDA margin of nine 8% up 100 basis points over the prior period.
I am pleased with this quarterly result, as the investments in people systems and processes. CECO has made in prior periods are starting to yield the expected benefits and positions <unk> well to execute on its growing backlog and to drive higher growth and performance through the remainder of 2023.
Please now turn to slide 12, where I'll provide you with a little more color on our most recent acquisitions and other capital deployments in the quarter.
On the left hand side of the page you will see some additional information about our Wakefield acoustics and transcend solutions acquisition.
Both deals are consistent with prior acquisitions, we have closed in terms of scope size complexity risk and strategic and Kent.
Both deals met our criteria for screening fit and future potential and most importantly, the management teams for both businesses have joined CECO.
We are very bullish on the growth prospects for both businesses and we are already seeing strong evidence of their ability to double their size in the next two plus years.
I would also like to share with you that the functional and commercial integrations are well underway and progressing nicely.
Each company that we have acquired is a niche specialist with unique technical and applications differentiation that yields a strong margin profile and defensible competitive position.
And both are already beginning to realize the benefits of being part of a larger organization with greater resources and a global reach.
I'll highlight the benefits each is realizing within CECO I don't want to give you a little color on a specific investment we are making in each business to realize these benefits.
In the second quarter, we green lit and investment in Wakefield acoustics, which will allow the business to expand its capacity by <unk> to capture a fantastic growth opportunity in the data center backup power segment initially in the UK and Ireland and then in mainland Europe .
We identified this opportunity during our due diligence and it has materialized even faster than expected.
Under prior ownership Wakefield would have struggled to access the required growth capital, but as part of CCAR. This opportunity will be fully funded and the business greatly expanded profitably.
For transcend we identified the opportunity to accelerate growth and improve deliveries quality and profitability by in sourcing the manufacturing of a component critical to filter element production and infield performance.
The acquisition of the specialized machinery is underway and once received later in the third quarter, we will support our plans to double the business was supply to new customers in the middle East and Southeast Asia by a chico's existing company sales locations in this and in addition to improving service levels with existing and new customers.
In the USA and Canada.
On the right hand side of the page as with past presentations. We've provided a summary of our recent share repurchase and growth investments. There is little to report on the share repurchase topic. This quarter. So I'll provide a few highlights from our investments made in the first half of 2023 to support continued growth.
Our capex spend rate in the quarter was in line with past spending levels. After a higher than trend increase in Q1, which will be the high point for 2023 from a capex spending perspective. In addition to the investments described previously made in each of our acquired businesses. We've made additional investments in the second.
Quarter for updates to our it and data security infrastructure investments to further expand our location in Pune, India, and new tooling and fixtures to support process improvement margin enhancement and growth in our fluid handling businesses in the USA in the Netherlands.
Please turn to slide 13 was made for a quick review of our cash position and liquidity before I turn the stage back over to Todd.
<unk> finished the second quarter with $48 6 million in cash, which was an increase of $6 4 million from the quarter and Q1 and $2 million from year end 2002 cash from operations in the quarter was $11 4 million and slightly negative on a first half 'twenty.
23.
Aggregate basis.
Net borrowings in the quarter on a revolver with $32 million supporting growth investments and working capital M&A and capex approximate $20 million of expense in the quarter on acquisitions and related expenses and $1 4 million for capital investments.
Interest expense in the quarter was $3 $75 million compared to $1 1 million in the second quarter of 2022 due to higher interest rates and a higher debt balance.
Gross debt at quarter end was $136 9 million a decrease of $4 3 million from quarter end Q1.
Quarter end net debt finished at $88 3 million a decrease of $10 7 million from quarter end Q1, resulting in a comfortable leverage ratio of one nine turns.
Ultimately one five turn.
Lower.
Excuse me one five turn increase from year end levels, but yet well below our credit facility leverage cap.
At current debt levels before planned debt repayments in Q3 from continued improvement in collections and operating cash generation Chico's available capacity is in the $40 million plus range.
That concludes my summary of <unk> second quarter 2020 through financial results a quarter in which the company and our teams delivered a very solid set of results that position CECO for a strong second half of 2023, I will now turn the microphone back over to Todd to take you through our full year two.
'twenty three outlook in his concluding remarks back to you Todd.
Thanks, Peter a lot of good details with respect to our financials and various insights into our performance.
Let's go to slide number 15.
As Peter mentioned I'm going to highlight our outlook for the balance of the year.
And as we mentioned earlier, we are raising our guidance for the full year for both revenue and adjusted EBITDA, let's start with revenue.
We now expect to deliver between 500 $525 million for the full year.
This would be approximately 21% growth over full year 2022, if you use the midpoint of that range.
Our previous revenue guide had been to exceed.
That exceed $485 million.
With a record backlog and larger opportunity pipeline, we are confident in our ability to achieve our new revenue range.
With respect to adjusted EBITDA, we now expect to produce between 50% and $55 million for the full year.
Our previous outlook suggested at least $50 million for the full year, but with the increase in revenue we are aligning our ranges to reflect growth to adjusted EBITDA as well.
The year over year growth would be approximately 25% if you use that midpoint of the range.
We expect to deliver 50% to 70% of free cash flow in the full year.
This free cash flow range has not changed and we believe represents a more normalized cash flow generation.
On the bottom half of the slide I want to highlight the macro environment, while headwinds like inflation and concerns around financial tightening linger. We are directly benefiting from a host of important and durable growth drivers I won't read all the tailwind, but no doubt the re shoring and renewing of industrial strategic investments in North America is a positive.
For CECO.
Additionally, increased investment in global infrastructure Green investments in the energy transition and specific industries that are building manufacturing supply capacity are all opportunities for CECO to continue our elevated order and revenue growth.
I would also like to highlight that our growth is not directly benefited or at least not benefited very much yet from the funds flowing from the large chips and Science Act and infrastructure spending bills in the United States.
When these funds do in fact begin to flow into the market. We believe <unk> will benefit from this half trillion dollar investment.
And as mentioned on prior charts I want to repeat that CECO has invested and will continue to invest in growth resources and in operating excellence programs. We are just starting to see the expected benefits and we expect a real impact to our bottom line will be significant we have added key resources.
To help drive gross margin improvements through supply chain excellence and lean enterprise, we continue to launch more new products in multiple platforms and those new products are gaining traction.
In India, we have almost tripled the size of our workforce in under three years, which provides for local company support and highly skilled global Engineering project management and financial administrative resources at very competitive rates.
I am very pleased to provide our updated and increased guidance for the full year and even more pleased to share that we have positioned CECO very well for key macro growth trends and also for long term sustainable performance.
Now please turn to slide 16, which is our final slide.
In conclusion, we delivered an outstanding quarter, great growth with many records and our highest backlog in company's history.
We are pleased to show improving margins and remain committed to our longer term goal of mid teen EBITDA margins.
The investments we are making today will continue to bolster our profitability.
We're also pleased to increase our revenue and EBITDA guidance for the year, we have high confidence in our forecast given our large backlog strong growth pipeline solid track record with our acquisitions and of course various market conditions that are in our favor importantly, we are most excited to maintain our transformational progress in them.
Constraint the tremendous diversity of <unk> portfolio.
We have a lot of opportunities to drive continual organic growth and even more opportunities and our M&A pipeline as well.
I'd like to thank our incredible and dedicated employees that worked tirelessly for our customers our communities and for each other by doing these things. We believe we will continue to deliver meaningful results for all of our constituents.
That we are now happy to open it up for any questions operator.
Thank you we will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the star keys.
To withdraw your question. Please press Star then two.
We will pause.
Not materially to assemble our roster.
The first question, we have is from Rob Brown of Lake Street Capital markets. Please go ahead.
Okay.
Good morning, talking Peter and nice job on the quarter. Thanks.
Thanks, Ralph good morning.
I just wanted to get a little bit more into the order environment, which is what you've said is obviously very strong.
How how sort of broad based is it and where you're seeing growth coming from and I think it's interesting you talked about some of the incremental growth drivers and let's get some color on when you think they'll start to flow through as well.
Yeah. Good question Rob.
It's interesting.
About a year ago, we introduced a slide where we showed all eight platforms and we felt at the time. It was it was just helpful to give people visibility to the diversity of our portfolio a little differently.
Probably would probably could've been something we could've shown again this quarter just to show that balanced growth across most of our platforms as well and we may introduce that slide again in the near future, but regardless.
See if you saw the that the growth across almost all of our platforms is that broad balance that we're talking about it's not just one or two platforms that is up significantly it is fairly balanced between air businesses water businesses, and our energy and energy transition.
<unk> businesses and Thats, probably the thing that we're most excited about is it feels very balanced I mean, Peter and I can probably dive into just a a.
A long list of exciting opportunities whether it's in.
Battery and electric vehicle manufacturing capacity or in just general industrial across the board and of course in the energy, whether it's power markets or energy transition markets I'd say, we're I'd say, we're in a pretty good sweet spot right now and its reflecting in our order bookings.
Just to give you a sample we booked large orders and.
Backup and load stabilization power for.
The largest solar plant being built in United States.
We booked.
Orders for the largest aluminum metals will be built in the United States in 30 years, we've booked orders and EV battery plants and EV battery recycling plants.
We have bookings in that new LNG liquefaction export facility going in in South Texas.
We booked orders.
In India, China Korea, the middle East and in Europe across the swathes of water resource conservation treatment and reuse.
And almost very Excitingly, we've begun to start seeing orders in say more traditional manufacturing environments return. So that's good for our dust collector and our cyclone businesses and Todd and I just reviewed one this morning for a.
Garbage gasification facility, where they hit they where they essentially turn very it was very high temperature garbage into molecules that they capture and then turned into something that can be used as a fuel.
So that's at least eight maybe nine segments there were seeing orders.
It's just that broad and Rob not to add I mean, it is a simple question, we're giving you a long answer first of all one man's garbage is another man's fuel.
Saying goes.
But I would even suggest Rob that the order I mentioned in our prepared remarks, the largest aftermarket order of $9 million in industrial water, we actually just book that and while I said that I.
I think it's important to maybe highlight that that's actually a third quarter book being not a second quarter booking and so that just gives you. Another example of of an order that we've been investing to position the company to grow our shorter cycle aftermarket services business for as you know Rob for for many quarters and probably a few years and again I feel.
Like we're just starting to see some of those benefits so pretty exciting stuff and obviously, we're sharing some of our energy on the question.
Okay, great. Thank you.
All the color and then in the aftermarket business.
One of the questions I had about.
How do you sort of where does that sort of as a percentage of the business today and I know those investments are starting to mature.
Where do you see that kind of going over the next couple of years, Yes look we're still we still believe that over the next few years our goals haven't changed.
We want to get to 50%.
Mid to long cycle, 50% short cycle, we think the big orders like the $9 million aftermarket services order is a great example of how we're going to get there.
We're still probably around 30% of our portfolio being short cycle and I would say, even though we're growing that very solidly double digits, our long cycle and mid cycle businesses are also growing fairly rapidly. So so look.
The reason, we haven't if you want to call. It close the gap even further is because just across the board our company's growing solid double digits. So look it's hard to it's hard to become 50% surcharge cycle when mid and long cycle continues to grow at the rate that it is but most of our acquisitions are mid to short cycle acquisitions those are going.
Continue as those businesses, we expect to double we have.
We have a model that gets us there we're still committed to getting there in the next few years, we believe that balance is going to be critical for a host of important operating reasons and again to remind the audience of three years ago, we were 80% long cycle, 20% short cycle and now, we're 70% long and mid cycle and 20% 30%.
Short cycle and the reason I stress long and mid cycle is that we have a lot more revenue that turns in three to six months versus before it would turn in six to 12 months. So again, we just continue to sort of tighten up our business mix favorably and again, we feel very confident in our ability to get to that more balanced.
Business mix over the next few years.
Great. Thank you I'll turn it over thanks.
Thanks, Rob.
The next question, we have is from Aaron <unk> of Craig Hallum. Please go ahead.
Good morning, Peter and thanks for taking the questions.
Good morning, Eric.
First for me can you just talk a little bit about the margins that youre seeing in backlog today and then just on the operational excellence programs for margin expansion can you give some details on some of the initiatives there starting in the second half and just areas you see margin progression towards that 15% plus goal overtime for yeah.
Margin I'll give sort of a high level answer and I'll save Peter wants to add some more depth to this margins and backlog continue to trend higher.
We would and we're showing that as it comes through again, we continue to make investments in both our ability to drive lean and operating excellence and obviously in SG&A to support growth and.
And global expansion, so so some of our margin.
Progress is still being capped a little bit through our investments.
But in fact in our emerging markets. They are seeing the highest gross margins in backlog are finally getting up above 30% gross margins, whereas before they were in the mid twenty's that if not high twenties about a year ago. So we're seeing two to 300 basis points of higher margins in our high growth regions are marked.
From just a year ago again, we still expect that our gross margins, which are reflected in our backlog as we exit the year, Alright, 100 to 150 basis points higher than they're currently at we'd like to exit the year at $32, 33% gross margins.
On that run rate so that continues to be our goal and then try to sustain that and improve upon those gross margins as we head into next year. When we provide that outlook will be clear on what we think those margins and EBITDA margins look like as well.
And then I'll, let Peter talk about some of the specifics maybe with respect to some of the programs and operating excellence.
Yeah.
100 to 150 basis points higher than prior quarters as a good number.
It varies by platform, but in aggregate that that's what we're seeing is as we as we book and then begin to execute on projects.
One other thing we're beginning to see Aaron Thats, a positive as we bid every job with a contingency.
Contingency is to accept things that were unforeseen at the beginning of a project and Thats generally in the neighborhood of 3% to 5% of project cost value.
We're seeing more and more of our projects now either release that contingency without it being utilized or only a small portion of it being utilized. So we are realizing higher than bid gross margins as well, which is a real testament to our team's improving on their project and customer management.
Ah experts.
The expertise.
Amit.
Operating investments.
Operating improvement investment side.
We're really focused on the operations in our fabrication partners outside of the organization.
As we've discussed well over 50% of what we deliver to customers is produced by our partner fabrication partner or a supplier.
And what we're finding is our resources our teams are spending a lot of time help.
Helping them find.
Savings improved capacity improve flow and throughput to continue to support our growth.
And that's yielding benefits from the standpoint of <unk>.
Being able to maintain an existing relationship with an existing customer who knows us and knows our products delivers at higher quality and lower cost.
It's allowing them to be more responsive.
To us when we have a requirement that might change during a project and more importantly, it's allowing us to yield savings.
Another area. Our teams are focused on is buying raw materials.
Historically, we didn't aggregate materials across multiple businesses.
We have that opportunity now that we look at her spend in three categories across the CECO.
It's in metals, principally but also in freight and logistics.
And things that all of our locations are businesses buy and we're beginning to start to see those benefits trick.
Trickle in.
This is new for us.
This company operated very let's say very segregated manner and that in sourcing and procurement we're.
We're beginning to operate as one company now more consistently.
In fact, I just approved in order for I think it was three.
Another 30000 tons of stainless steel that'll be consumed by at least three businesses over the next quarter.
Their fabricators, where we're purchasing the material and supplying it to the fabricator rather than the fabricator purchasing on their own and that yield benefits to us as well.
We should be able to provide better insights into the cause.
Rather than anecdotal that actual evidence of the improvement in coming quarters.
Great. Thanks for the color there and then just maybe second on M&A can you kind of talk about the pipeline there what youre seeing from a valuation and activity I know you've been been busy there, but should we just expect to continue programmatic M&A going forward and the potential for any kind of larger deals as we look out no law.
Roger deals we don't think.
It doesn't look I would say, we we have a good track record.
I believe capabilities of how we're doing what we're doing at the moment.
We're going to continue to look at opportunities to advance leadership and are continuing to build out a really solid leadership position in industrial water and add components and capabilities associated with the energy transition and I think the size of deals that we've been doing that could go up a little bit I suppose but for the most part.
We believe that we continue to find great businesses with great leadership teams at the right price and if we can't find that combination then it's not ideal for us.
Makes sense, thanks, I'll turn it over.
Thanks.
The next question, we have is from Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Hi, good morning.
Covered a lot of ground here.
Wanted to go back to this.
Aftermarket orders that came in in the current quarter, maybe put a little context around this was the largest.
Previous aftermarket order and is this in the Peerless area.
This is the industrial awarded it is this industrial water, it's a project that we.
We help provide industrial water package system, a very large system.
Then we'd probably be highlighted in previous quarters, and we had been negotiating all along to be the supplier of their aftermarket needs as well and we secured debt.
A number of quarters ago, but we weren't able to book the order until it was obviously led by the customer. So we're excited about that I got to tell you Jim I mean the.
The largest previous aftermarket order.
I don't know, maybe there was something a dozen years ago or something that would be profoundly large I can't imagine what that would look like.
But it was less than $1 million I can assure you of that.
We certainly may have booked some.
Pass through some membrane filtration or something but I'm not aware of anything thats anywhere close to greater than a $1 million in our company history, unless Peter has ever heard of something and I. Just don't think that we've we've come anywhere close to that.
By the way Jim This is a multi year aftermarket like I think this is I think this one is service a three year.
Contract associated with us.
The first year of a multi year support agreement is give you a little color without disclosing customer, it's a middle eastern National oil company.
With the Korean contractor.
With the National power company of that organization consuming the gas that's produced in the facility.
And it's a facility that has both water treatment and it has some gas sweetening as well. So there was two parts of peerless working in conjunction.
This is one of those opportunities.
That takes a lot of work for multiple people in an organization to pull together project team commercial team.
Our regional General manager onsite field service Engineers, all building relationships they've got these customers comfortable that we were the appropriate supplier of the materials and the service.
Now that that this is also we believe a very important reference case, but we can now use to promote these capabilities to other customers in the Gulf region.
Got it.
And.
Follow up just on.
Some of the investments that you're making.
And the newer acquisitions Wakefield transcend.
Can you.
US with the.
The timing around these investments and the capacity increases.
The time line.
Yeah. Thank you.
So the investment in machinery it transcend has already.
Missile investment down payment was made in the second quarter. The machinery will be received in the third quarter commissioned and up and running and sort of final payment. We made in the third in the third quarter.
This is a machine that makes filter element cores critical to the type of filtration designs.
The transcend business utilizes.
So that one will be concluded within our existing capex budget schedules that we've laid out.
In the next quarter.
The Wakefield investment will be made over the next three quarters.
<unk> at its current location.
Increase the capacity of painting.
And the quality of painting.
Our next investment will be to expand on the current site into an additional 22000 square feet for lay out space and for preliminary assembly of components that will feed the final Assembly line think of it as the Fishbone with Assembly line running down and cells, whereas sub assembly.
The work is completed that then gets bolted into a package that then gets moved out of the shop into a paint Bay.
That's on the current site then we are also making investment in both new lease and some temporary facilities and it.
And adjacent space about two kilometers from the existing facility, where we can do final fit out of a completed and closure.
And.
<unk> package, which will triple the capacity for completions.
Of this business.
As individual packages went anywhere depending on how their fit out quarter million dollars to a $1 million of pace. So they're not small little widgets, they looked like containers and they're highly engineered packages that deliver.
Emergency backup power to data centers and can also be deployed to banks health care centers other critical infrastructure.
And Jim if I, if I could bring it back up a couple of levels every transaction that Peter and I and the board the company our platform leaders will look at.
It's it's all about growth right. So.
During due diligence, we're pushing the leadership teams of these acquisitions to come and explain to us how they can double their businesses right.
We've we're paying the right multiple for the previous owners and the leadership teams, but we believe that we're paying the right multiple for us and our investors.
And the key is if we can significantly grow these businesses with modest investment and leveraging our core infrastructure. Our global teams our brands our balance sheets things that are already inherently in place at CECO than the return on investment is even stronger if the full.
<unk> multiple of our deals ends up being three four times future EBITDA in the future Ebitdas 18 to 24 months in the future. That's a tremendous win for our shareholders. It's already accretive at seven or so times EBITDA, which has been the average that we paid for the seven or so acquisitions. We've made over the last two years, but if we can.
On a forward looking basis reduced that to three to four and then beyond that continue to grow and stabilize our business mix and our free cash flow generation than it is a home home homerun for our investors and so these are these are really important detailed investments that Peter just outlined but things that we've been looking at through due diligence. None of these are surprises. This is why we're doing these.
Deals.
Got it and Peter you May have given it and I may have missed it what's the capex for the year.
And.
Congrats by the way on a quarter.
We think we'll finish capex should be between $6 $6 5 million.
Thank you Dan we remain to be a very asset intensive business with respect to our ability to not have to deploy a lot of capex against our core operating that said, we believe that there is great opportunities to invest in automation.
Grades on capabilities machining facilities, just to continue to improve our ability to support growth.
Great. Thank you.
Thanks, Jim.
The next question, we have is from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you good morning, guys.
Let me talk about sales and marketing efforts you commented that you are not expecting SG&A to trend too much higher.
Just wondering what is driving.
Some of these.
I guess this type of positioning.
Are you seeing more sales from existing customers or are the synergies that are coming into play for you.
So when we speak of marketing I think it's important to point out.
We don't do much marketing.
Our marketing is through generally through direct sales relationships, our commercial teams have with engineering companies existing customers.
Right.
Consulting engineers.
And service companies.
So we have a website we have some brochures and we have some really good technical sales and business development teams.
What youll see grow and it grows with our top line is our investment in selling resources.
And then the project and engineering resources to support the business they bring in winter.
When Todd speaks to SG&A, not growing that G&A aspect.
Accounting HR Corp.
Corporate expenses corporate overhead insurance all of us.
That don't scale with growth.
In fact, those are areas, where we're beginning to focus very extensively on how do we refine and improve those costs get more out of each dollar spent.
Okay.
Yes, no I think thats.
Nailed it.
This.
I guess I don't know of many industrial companies that I've had I've had the pleasure of working for several incredible industrial companies with tremendous leadership positions in my career.
And.
When they're experiencing.
My previous lives when we're experiencing growth it has a whole a whole host of reasons can be new technologies. We're doing the same thing here at CECO, we're launching some new products.
Finding new global markets for our existing <unk>.
<unk> services brands et cetera, we're doing that here at CECO.
When it comes to doubling the size of your high growth regions right that comes with investing in project management sales and business development in places like India East Asia, We're doing that here at CECO acquisitions that we're making and then we're adding some sales capabilities to those businesses and our core CECO legacy regions or adding new salespeople.
To those new acquisitions, so that they can cross sell our products into their customers into there we're doing that here at CECO. So really admit it's a playbook, that's pretty proven where there's no one big touchdown Hail Mary pass, it's a bunch of small plays that we're running across the board.
So it's not a significant investment in one or two big things, it's some thoughtful modest investments across the board.
Thank you guys.
My other questions have already been addressed so I'll step out of the queue. Thank you, yes. Thanks, Amit I appreciate your support.
Thank you and then the last question. We have is from the discipline of Titan capital. Please go ahead.
Alright, Thank you relative to your comment that you've had a number of acquisitions and doubled their revenues in the first 18 months with the company.
What degree is that a revenue synergy that you identified with.
With the CECO or is it really them on a standalone basis being purchased at an inflection point in there.
And in the company's history.
Invest in Wakefield, and we're able to bring some.
<unk> scale to the business outside of just its core operations I feel like that's a decent example, and it's just good timing and a great team at Wakefield that.
Needed expansion, but is doing it really with it with its customer relationships now we're going to help expand its geographic footprint and the Wakefield business, but that's one where they they really have a great market.
You look at some of our other acquisitions could be could be <unk> 21.
We're able to bring some of the other things to the table that are that are outside of that when we made that acquisition about a year ago or you look at an acquisition like lets say, even transcend which we just recently completed that's going to be one where we're able to leverage the existing CECO global resources to bring.
It through and other regions that it otherwise wouldn't have so it's a little bit of a blend we believe that all of our acquisitions.
Have an opportunity just within their core markets to grow significantly, but doubling that take sides are a little bit of market timing that we feel we positioned with a few or we knew that we had the resources in regions that they didn't.
And we were able to invest in those businesses.
Okay. That's helpful and then.
One of the things I wanted to slide highlighted the EBIT.
Margin.
And.
And at this point, it's really been hovering around 10, 5% plus or minus.
What's what's holding up to this point, what's holding that EBIT margin in that.
And in that range, rather than allowing it to break out.
Yeah look I think.
We've tried to be consistent in the last couple of quarters, we remain confident in both gross margins and EBITDA margins I'll use your phrase sort of breaking out of those ranges. They're currently at which is 30% to 31% on the gross margin and.
Let's just say around 10% on the EBITDA margin.
And if they are being held back.
I'm confident that we're holding them back by investing in resources for when we do start to expand margins, it's a sustainable.
It's a sustainable expansion.
I'm not saying nothing is more frustrating that accompany that goes from let's say, 10% to 12% and then a year later, it's back to nine and 10%.
That I'd love to get to 12% Tomorrow, Bill don't get me wrong, but what I'd really like to get to 11, 12%.
That is our new floor and then go from 11% to 12% you start asking me why that's been stuck for a couple of quarters and then we break out again, and we get the 12% to 13%, 14% and then we sort of settle in there for a couple of quarters and then we get from 12 to 13, 14% to 13, 14, and 15% and that's really what we're trying to do here by adding resources now.
Now in SG&A and some of our operating excellence programs, we're just going to get better productivity more sustainable productivity put very longer term efficiency programs in place around lean putting in great sales and business development people to support our growth. So that we're not just contracting this stuff out and then losing it.
So we have a higher level of investment today, but we're also growing significantly we're going to see those margins expand.
Excellent. So so really the right way to think about it is maybe a little less break out as much as it'll be stair step and moving up in that function is that what we're hearing you saying.
If we break out I sure hope it is going to just continue to be a stair step, but I think you're onto it bill. Our goal is steady margin expansion that we can sustain.
Okay and that is a great lead into my to my final question.
Which in the press release, you made the comment.
That you are just getting started with more sustained growth and margin expansion.
And.
And I'm going to guess.
Hope that you'll have some additional commentary beyond what you had on the <unk>.
The answer to other questions and to the question that I just asked it might help us have more clarity.
On that.
On that margin expansion and yet and more sustained growth.
Yes more of more of what we want to see.
Yeah look I guess, the Colorado to add is that in previous periods, we have shared our key.
Current a longer term view that.
In the next 24 months, we believe it will have we will have doubled the size the revenue of the company from when I started was around 325.
$350 million, we believe that.
We just have a say in the next few years, we'll have doubled that from where we started to where we'll be at that point and then we will have taken margins from mid single digit or excuse me high single digit EBITDA to mid teens.
$14 $15, 16% EBITDA margins, we believe that that if we can stare step it up to that I think if you look at our trailing 12 months orders you know youre going to see trailing 12 months orders in the mid five hundreds. We just gave an updated revenue guidance to be in the low five hundreds.
So our revenue guidance is still below our trailing 12 month future looking revenue. If you will and so you can start to look at our mathematical equation associated with we're trailing 12 months is and was and where revenue is and is heading right that those are pretty good indicators for us is how we think about next year.
And I think that the margin expansion is going to also come along with that especially as Peter really accenture.
Reiterated our G&A investments remained relatively stable yeah, our investments in sales marketing business development might go up a little bit, but not higher than sales growth goes up. So if we're able to stabilize G&A, which we expect to get higher gross margins, which we expect to continue to see double digit sales growth in the <unk>.
Receivable future, we like our ability to hit those longer term targets.
And then we'll reset future longer term targets from there.
And Todd did I just hear you say that you would anticipate.
Being here in a couple of years.
We have been pretty consistent yes that we we sort of call. It approximately 2025, whether that's.
For the full year or just in that year, that's our goals and objectives as it will we'll continue our growth to get to those levels that's right.
Alright, okay.
So essentially the way to think about this is is that.
<unk> been putting putting D. The muscle in place.
And that is Lee has led to some expenses.
That now you won't have to do as much so the future.
Order and revenue growth will flow through to the bottom line.
More rapidly than it has not to say it hasn't since you've gone from high single digits to 10 plus percent.
EBITA margin, but going from 10 plus 215%.
Very meaningful swing from that point or from this point forward then.
And I'm not trying to change the subject here bill for margins, but let's just talk about dollars for a second.
Because I kind of like dollars.
I think we all like currency, we like profitability.
We will have.
Taken with.
If we just talk about our guidance and you take the midpoint of our guidance for the full year at $52 5 million that's up 100%.
From where we finished 2021 okay.
Okay.
That's great growth in revenue.
That's a phenomenal growth in EBITDA.
And some of that comes with investment in infrastructure to support that type of growth you know a.
A doubling of the company's EBITDA dollars.
A doubling of the company's revenue if we do so from 2022 2025, or so comes with not doubling the size of the Companys expenses, our corporate headquarters or anything like that but so I'm not suggesting that I'm not looking at margins. We are every day, we want to deliver bottom line profitability dollars.
And I believe that we're going to get there with margins and productivity and growth rates that are sustainable but right. Now we really are really proud of what we are delivering we believe to our customers to our shareholders in terms of capabilities and services and solutions, but also it's translating into dollars, which is which is our goal.
Ladies and gentlemen that concludes our question and answer session I would like to turn the conference back over to Chuck <unk> for any closing remarks.
Thank you very much thanks for the questions Andrew.
And your interest in our information today as always we get great questions from our analysts and investors I'd also like to thank our global teams that are delivering incredible value to our customers as we continue to protect people protecting environment and protect our customers' investments in their industrial equipment.
Finally, we're going to be hosting a number of one on one meetings and presenting at the three parts.
Ideas Investor Conference in Chicago. This month, we're going to be active in other conferences as we head into the September we look forward to meeting many of our investors and we're out on the road in the next couple of months, including at those conferences. We hope to see you. Soon if you have any follow up questions. You can reach out to us we'd be happy to address them and again, thanks, everyone for your interest and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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