CECO - NASDAQ

Good morning and welcome to the CECO Environmental First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steven Hooser of Investor Relations. Please go ahead.

Thank you, Jason and thank you everyone for joining us on the CECO Environmental first quarter 2023 earnings call. On the call with me today is Todd Gleason Chief Executive Officer; Peter Johansson Chief Financial and Strategy Officer; and Ramesh Nuggihalli Chief Operating Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with the earnings presentation, which is on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings included on Form 10-K for the year end December 31, 2022. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any 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 provided the comparable GAAP and non-GAAP numbers in today's press release and provide non-GAAP reconciliations in the supplemental tables in the back of the slide presentation. And with that, I'd now like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

Thanks, Steven and good day. A handful of weeks ago, we filed our annual report for the year 2022. My CEO letter highlighted the tremendous progress we made last year and our strong position as we entered 2023. In fact, the first sentence of the letter simply stated it is an exciting time at CECO Environmental. Well as we close the books on the first quarter of 2023, I will reiterate that statement once again. It remains an exciting time at CECO Environmental for our employees, our customers and our shareholders. Now let's dive into the details to support that statement. I'm going to start with slide number 3 which is entitled Q1 2023 earnings highlights. As we highlighted in today's press release CECO delivered record first quarter revenue levels. In addition to our record first quarter revenue levels, our bookings were so strong that we delivered a book-to-bill of 1.3 which produced yet another record for our backlog which supports our ongoing growth. Our platform teams continue to execute against a very large and growing pipeline of sales opportunities so we remain highly confident we can maintain continued strong bookings going forward. I also want to highlight that our operating excellence programs are really just getting starting and starting to roll out as Ramesh and his team have deployed several important improvement work streams. I believe margin expansion will continue on the gross margin line and those improvements in gross profit will flow through to EBITDA expanding margins as we move through 2023. I also want to highlight for you the two completed strategic and accretive acquisitions year-to-date, which brings our total number of deals to six in the past 15 months. As a result of the continued strength in our bookings, improvements in our operational execution and execution on our programmatic M&A approach, we are raising our full year 2023 outlook for the second time since we introduced full year guidance back in November of last year. We will revisit our increased full year 2023 outlook in just a minute. A final highlight that I want to share with you is that we continue to be pleased with the progress we are making to transform CECO to ensure we maintain sustained growth and long-term shareholder value. More to come on each of these takeaways as we go through the presentation. Now please turn to slide 4 and let's review our first quarter and trailing 12-month financial summary. Peter will cover many of these key financial figures and metrics in a few minutes. Let me just focus on a few areas. I will mostly stick to the left side of the slide, which covers Q1 2023 results. The panel on the right side of the slide provides a snapshot of CECO's trailing 12-month or TTM financials all of which are very strong. We will provide additional color on past periods in Peter's remarks. Turning the focus to Q1 results. CECO's orders of $146 million in the quarter represents the third highest quarterly bookings level in our company history an outstanding result one which could have even been higher had two or more large projects closed in March. These jobs have now moved over into the second quarter and will be part of what we expect will be another strong bookings period. To the casual observer they might see that our bookings are down 9% year-over-year and think market demand might be slowing or leveling off. Actually nothing could be further from the truth for CECO. With bookings at this level, we generated a record backlog at quarter's end providing a direct line of sight to our future growth. Sales of approximately $113 million were a record for a first quarter and our sales growth of 22% in the first quarter, reflects the great execution CECO's global teams are driving to deliver solutions for our customers. Adjusted EBITDA of almost $10 million in the first quarter was up slightly over the prior period. This result produced adjusted EBITDA margins of 8.6%, which were below prior year period. In Q1 of last year, we had the benefit of a specific insurance settlement that we recognized. If you take into account this onetime item, our adjusted EBITDA margins expanded 50 basis points year-on-year. Additionally, we had higher operating expenses in the quarter, due in part to investments in new resources to execute our record backlog and to continue our solid commercial growth and also due to expenses related to programmatic M&A and integration activities. We expect the additions to our cost structure to stabilize. And with continued solid top line growth throughout the balance of 2023, we expect solid margin expansion in the coming quarters. We also want to point out that the first quarter is historically CECO's lowest revenue and earnings quarter and each subsequent quarter builds on the prior. Adjusted EPS of $0.10 was in line with our expectations. And again, if not for the onetime insurance settlement in Q1 of last year, we would have exceeded EPS year-over-year. Given the timing of accounts receivables and our need to build some inventory, our working capital growth, resulted in a use of cash in Q1. We expect cash receipts to be very strong in the coming quarters, delivering a very good total year free cash flow, reflecting the seasonal nature of project deliveries and cash flow generation. So overall, I'm very pleased with our first quarter results. Our continued dedication to operational excellence, as part of our transformation have driven record sales growth, record backlog and our orders pipeline that continues to yield very strong book-to-bill results. Next, I will highlight the two acquisitions we have completed year-to-date, so please turn to slide number 5. On the right side of the slide, we highlight Wakefield Acoustics, which we acquired in January of 2023. Wakefield adds critical solutions for noise abatement in the industrial air market. It helps to broaden our product range and acoustic solution set and provides business mix for our Thermal Acoustics platform by adding smaller, quicker turn projects for many industrial end markets. This is the third acquisition we have made in the industrial air market since mid-2020. On the left side of the slide, we highlight Tanscend, which is our most recent deal we closed in early April. This is our first acquisition in direct support of our energy transition strategy. Transcend's technical and market knowledge within separation and filtration solutions is world-class. CECO's Peerless brand team has worked with Transcend for many years and they have long been a key supplier and partner to CECO. Combined, Transcend and CECO, now have a tremendous opportunity to grow in new energy transition applications and to expand internationally. Again, each of these acquisitions, as well as the transactions we closed in 2022 are accretive to CECO and we expect each to beat their acquisition financial models. Now, let's turn to slide number 6. As we have discussed in previous quarters, CECO is more balanced and pursuing more opportunities than ever before. Across everything we do, our focus is to protect people. Our focus is to protect the environment and our focus is to protect our customers' industrial equipment. In previous quarters, we have outlined how we are advancing our leadership position in industrial air and the three acquisitions highlighted in the middle column under newly acquired brands are yielding great results towards helping us advance this leadership. We have also discussed how we were building our position in industrial water. The four water applications -- excuse me, acquisitions highlighted in the center column add important building blocks to our growing water niche leadership positions. And finally, as CECO shifts to support the energy transition, the Transcend acquisition puts us in great position to provide new and enhanced solutions to improve the efficiency and lower the cost of gas and liquid separation and filtration and legacy, natural gas and natural gas liquids transport and hydrocarbon processing infrastructure and to position CECO for new and emerging applications in renewable natural gas, carbon capture and other low-carbon opportunities. The Transcend acquisition will also open even more doors to higher-margin opportunities and business models in engineering, field support and emergency services. Now, before I hand it over to Peter, let's look at a slide that highlights how we are creating both short-term and long-term value. So please turn to slide 7. To maintain momentum on our transformational journey, it is critical we must drive short-term performance while continuing to invest to ensure longer-term sustained success. This slide is a very simple depiction of how CECO operating model is being constructed to create and deliver value. On the top half of the slide, we show how we are driving short-term success. And on the bottom half of the slide, we show how we will build upon these short-term successes, to deliver sustained long-term performance. With respect to growth, in the short-term, we have steadily been adding to our record backlog and pursuing a larger pipeline of sales opportunities. In addition to continuing to win more in our core markets, our platform teams continue to find new geographic and market adjacencies where our solutions and services are in high demand. The ability to be nimble and expand accessible market opportunities is really key to delivering sustained double-digit organic growth. Over the past 15 to 18 months, we have been executing on our programmatic M&A approach to add key pieces to our portfolio, to add business diversity, to expand addressable market, to improve business mix and margins, and to strengthen our niche leadership positions. Combined these two growth mechanisms support strong core and adjacency growth. And longer-term, as highlighted on the slide, we will maintain strong organic growth through business development investments and maintain a programmatic approach to M&A. Now to drive more bottom line growth, we have a similarly balanced approach with respect to driving the things we can control, like ensuring we are driving productivity and higher gross margins with good conversion on our investments and improved project execution, along with incorporating new operating excellence programs around lean enterprise and executing higher-margin acquisitions. The balanced approach of driving short- and long-term strategies has already yielded significant returns. We believe the levers we are pulling across our business platforms when combined with the positive results from our programmatic M&A approach will propel CECO into a $600 million-plus company with 15% or greater EBITDA margins in the next few years. We expect to have a more balanced portfolio of short and long-cycle businesses with leadership positions and industry-leading brands in industrial air, industrial water and the energy transition. And it is our belief that this strategy will deliver sustained double-digit top line growth, increased margins, higher cash flow conversion and a greater portfolio resilience, all supportive of the mid-teens EBITDA margins and mid-teen EBITDA multiples, a truly meaningful shareholder value company has. Each week we strive to make Mondays matter to ensure we are hitting our short-term goals and objectives, while taking the appropriate amount of time to also invest for next year, the next two years and beyond. I'll now hand it over to Peter, who will dive into our financials in more detail, and then I will help close our prepared remarks. Peter?

Thank you, Todd. I'm very pleased today to be able to present to all in attendance a set of solid financial results that confirms that CECO remains on track to deliver another strong year of operational and financial performance. Please turn to Slide number 9 with me. On Slide 9, we present a more detailed picture of first quarter results and Todd walked you through on Slide 4. Orders for the quarter at $146 million was the third highest for any quarter in company history and now represents orders over $500 million on a TTM basis. Revenues of $112.6 million set a record for revenue during any first quarter following on from our record third and fourth quarters respectively a nice run of three quarters in a row. We delivered gross profit margins of 31%, an increase of 240 basis points year-over-year. And more importantly, the gross profit dollar delivery of $35 million was the highest in our first quarter in company history and the second highest in recent memory following on from our fourth quarter of 2022 in which we delivered the highest gross profit dollar quarter in company history. Adjusted EBITDA for the quarter was up 2% year-over-year to $9.7 million, and this included the higher operating expenses from investments made in additional platform and functional resources to support CECO's recent and future growth. SG&A additions from acquired businesses and M&A expenses also were included in that $9.7 million figure. Adjusted EBITDA margin in the quarter was 8.6%, down 150 basis points from the year ago period, but up 50% when Q1 2022 results were adjusted for the previously mentioned one-time insurance settlement. While nicely positive both GAAP and adjusted EPS were down year-over-year. Excluding the settlement the benefit from the previously mentioned settlement Q1 2023 EPS would have increased over the prior period. Now I'd like you to please turn to Slide number 10, where I'll walk you through a more detailed view of our CECO orders progression. On this slide, you can see that CECO's order growth trajectory that began in Q4 of 2020 and accelerated through 2021 and 2022 has maintained strength into our first quarter with a book-to-bill of 1.3. The three best orders quarters in company history have posted across the past 5 quarters with a five-quarter average of $135 million per quarter, which when annualized would deliver a $540 million per year bookings rate higher than both total year 2022 results and the current trailing 12-month actuals, it's a nice place to be. On the strength of the $146 million of orders we posted in Q1, CECO finished the quarter with a record $356 million in backlog. We recognize that the orders picture can be lumpy - to provide a view that smooths out the lumps, I refer to the TTM and average orders per quarter rose above the bar chart. By looking at orders this way, we are able to smooth out our cumulative order flow and deliver a picture which more closely matches our revenue realization. And speaking of revenue, please turn to Slide number 11, where I will walk you through a more detailed view of our current revenue growth progression. On this slide you can see that CECO's revenue growth trajectory which began in Q1 of 2021 and has showed steady improvement sequentially and period-over-period throughout the 2021 and 2021 period and accelerating of this improvement in 2022 continuing into 2023 with strength as we convert our growing backlog into four consecutive quarters of $100 million or greater revenue print. And we have delivered the best first, third and fourth quarters for revenue in company history in consecutive quarters. The trailing 12-month trend for revenue is 5% ahead of trailing total year 2022 and 28% ahead of the same metric in Q1 of 2022. I also want to highlight that Q1 2023 revenues were the second highest for any single quarter in company history, an outstanding result considering that there is still some choppiness in our supply chains and delays in customer approvals that our teams had to overcome in the quarter. Finally on top of the slide, on the top of the slide, above the bar chart. We have also included the TTM revenue and average revenue per quarter run rate trends for an easy comparison to similar TTM data provided for orders. In this way you can see how orders convert to revenue in subsequent periods. Now let's move on to Slide number 12 for a quick review of backlog and backlog trends. As previously mentioned, CECO concluded the first quarter of 2023 with a new record for backlog of $356 million, representing a 26% increase over the backlog exiting Q1 2022 and 14% over our already record 2022 year-end levels. The organic growth in backlog was $33 million with another $11 million booked from acquisitions. Book-to-bill in the quarter was 1.3 for the second consecutive quarter and was approximately 1.2% for the TTM period both very solid results. I'd like to point out, there were no cancellations in the quarter and the only recent cancellation of significance which occurred in the fourth quarter of 2022 is now back in our pipeline for a potential second half 2023 booking. With a very strong opportunity pipeline, underpinned by a number of secular and durable macro trends, we will highlight further on Page 17. CECO expect to maintain a book-to-bill rate greater than 1.0 for the total year 2023, a very positive leading indicator for our future growth. Please move with me now to Slide 13, and I will walk you through our gross profit and EBITDA margins for the quarter. On the left-hand side of the page, you will see the $34.9 million gross profit results for the first quarter and the associated margin of 31%. This is the second consecutive quarter with 32% year-over-year improvement while down 7% sequentially on slightly lower sales. The $35 million gross profit result is the best for any first quarter in company history and the third highest quarter in company history and represents a margin that is 240 basis points higher than the year ago period. Additionally, TTM gross profit is $137 million, reflecting a 120 basis point expansion to an average over the period of 31%, which is 3% greater in gross profit delivery than any prior TTM period in customer history – in company history, excuse me. We are truly accelerating our performance. It is this additional gross profit that is allowing CECO to continue to fund our investments in our operating model, expanded capabilities and growth. We continue to realize improved margins from better pricing on projects booked in 2022 and are starting to see the positive impact on margins of recently completed acquisitions. Both are trends we expect to see continuing throughout 2023. On the right-hand side of the page, the last eight quarters of EBITDA performance are shown. The Q1, 2023, $9.7 million of adjusted EBITDA, for an 8.6% margin, while down quarter-over-quarter slightly on margin is up on dollars. On a TTM basis, CECO has delivered $42.5 million of adjusted EBITDA, a 48% increase over a comparable prior period and for an aggregate margin of 9.6%. I'm particularly pleased with this quarterly result at CECO also made additional investments in people, systems and processes and M&A in the quarter. These investments were made to enable CECO to execute on its growing backlog and continued to drive higher growth and performance in 2023 and beyond. These are investments, which we will continue to make to strengthen and better position CECO. I'd like to now turn to slide 14 and I'll provide you with a little more color on our most recent two acquisitions and other capital deployments. On the left-hand side of the page, you will see some additional information about our Wakefield Acoustics and Transcend Solutions acquisitions. Both deals are consistent with the strategic parameters of prior acquisitions we have concluded in terms of scope, size, complexity, risk and strategic intent. Those deals checked all our boxes in terms of screening and future potential. And more importantly, the management teams for both businesses have joined CECO and are already beginning to realize the benefits of being part of a larger and global organization. We are very bullish on the growth prospects of both businesses and their ability to double their size in a few years. Each company is a niche specialist with unique technical and applications differentiation that yields a strong margin profile. On the right-hand side of the page as in past presentations, I will discuss a summary of our recent share repurchase and growth investments. There is little to report on the share repurchase topic this quarter, so I will provide a few highlights from our investments made in Q1 to support growth. Our CapEx spend rate in the quarter was higher than in previous quarters and is likely to be the high point for CapEx spending for the year. Key investments in the quarter were for machine centers in our pump business and automated welding equipment in two of our platforms. Upgrades were made to our IT and data security infrastructure to support growth and improve our ability to handle data safely and effectively. Safety updates were made across our network of facilities and very importantly our expansion in India continues to pace with a very large addition to both staff and facility in Pune. Now I'd like you to turn to slide 15 where I'll finish my remarks with a discussion on our cash position and liquidity. We feel very good about our balance sheet and our ability to continue investing for growth. CECO finished the first quarter with $42.2 million in cash, down slightly from year-end, but up over almost $12 million from the same period in 2022. Cash from operations was negative $12 million in the quarter and net borrowings on our revolver facility were $34 million. Following the balanced capital deployment approach, underpinning our value creation strategy, $24 million was spent on acquisitions and $2.5 million was used on capital or growth investments. Gross debt at quarter end was $141 million, an increase of approximately $36 million from year-end 2022. Net debt of $99 million results in a comfortable leverage ratio of 2.4 times, a single turn increase from year-end levels and we get well-below our credit facility leverage cap. At current debt levels before planned repayments in second quarter from a catch-up in collections and improved cash generation, CECO's available capacity to support continued investment in growth and value creation while holding a comfortable cash buffer is in the $40 million range. That concludes my summary of CECO's first quarter 2023 financial performance, a quarter of which I am very pleased and set the table for a very successful 2023 year. I will now turn the microphone back over to Todd to take you through our full year outlook and concluding remarks. Back to you Todd.

Thanks Peter. A lot of good information with respect to our financials and various insights into our performance. And before I look forward, I'm going to make a quick comment to thank our global teams for all the work they've done, specifically around six acquisitions in 15 months, significant growth to our bookings, significant growth to our sales and execution amidst a continued challenging market in many places around the world with still respect to travel, inflation, resource hiring, so whether it's finance, HR, legal, operations, platform leadership sales, all of our teams are working hard to row in the same direction to deliver the type of results and position ourselves for the balance of the year. I'll come back to that thank you again at the end, but it should be noted that after 15 to 18 months of significant growth and acquisitions those are some heavy lifts. Okay please turn to slide number 17, we'll talk about our outlook. Simply put, we're raising our guidance for the full year for both revenue and adjusted EBITDA. So let's go ahead and start with revenue. We now expect to deliver at least $485 million for the full year. This would be approximately 15% growth over 2022. We are not providing a range for either revenue or EBITDA at this point, but we might do so in the next quarter or so. The point is, we are very confident and expect our full year sales growth to exceed this level. Our previous revenue range had been $460 million to $485 million. So clearly, we're going to the top of our previous range and suggesting we expect to exceed that figure. With respect to adjusted EBITDA we now expect to produce at least $50 million for the full year. Similar to revenue, we went to the high-end of our previous guidance range which was, $45 million to $50 million. The year-over-year growth would be approximately 18% or higher. And even after the use of cash in Q1, we expect to deliver 50% to 70% of free cash flow from EBITDA in the full year. This range has not changed, and we believe represents our normalized cash flow generation. On the bottom half of the slide, I want to highlight the macro tailwinds we continue to ride. While headwinds like inflation and concerns around financial tightening linger, we are directly benefiting from a host of important growth drivers. And it speaks to the transformation at CECO that might not have pointed to these growth drivers in years past. I won't read all the tailwinds, but no doubt, the reshoring and renewing of industrial strategic investments in North America is a positive, for CECO. Additionally, the increased investment in global infrastructure, green investments in energy transition and specific industries that are building capacity and are all opportunities for CECO to continue to have high order levels and solid revenue growth. And as mentioned in our prior charts, I want to repeat that CECO has invested and will continue to invest in growth resources and operating excellence programs. We are just starting to see the expected benefits and the 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 products in multiple platforms and those new products are really gaining traction. And in India, we have almost tripled the size of our workforce in just three years, which provides for local, company, support but also, global engineering and global project management at a very competitive rate. I'm 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 sustainable performance. Now please turn to slide 18, which is our final slide. Q1 2023 has positioned CECO for another great year. We delivered outstanding top line growth and exited Q1 with a new record backlog. Our gross margins continue to make nice improvements and our programmatic M&A has helped better position CECO, for the future. We have increased confidence in the year, which is reflected in our updated and increased full year guidance. And we continue to steadily transform CECO Environmental to be a more balanced company with sustainable high-performance. We believe we have a great strategic playbook and we continue to execute it very well. Again, I'd like to thank our incredible and dedicated employees that work tirelessly for our customers or tirelessly for our communities and for each other. And by doing so, things we believe we will continue -- the things we are doing, we believe will continue to deliver meaningful results for all of our constituents. We're now happy to open it up for questions. So with that, operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we'll pause momentarily to assemble our roster. Our first question comes from Aaron Spychalla from Craig-Hallum. Please go ahead.

Yeah. Good morning. Thanks for taking the questions. The first for me…

Good morning, Aaron.

Good morning. You've mentioned in the past, that customers have been pushing to turn quotes into orders faster. Can you talk about is that something that you're still hearing, or how have those conversations been trending given some of the macro crosscurrents? And then, maybe just an early read on 2Q orders. Based on your commentary, it sounds like still pretty optimistic for continued strong order growth.

Yeah. Good questions. Kind of, two parts there. So I'll address them quickly, see if Ramesh or Peter have any additional comments. But simply put, look, yeah, customers, they are pushing for speed in terms of getting quotes through a process, I think a lot of that is the markets that we are investing to position ourselves in are growing markets. And so there's competition for resources in these growing markets. And I think they have approved the budgets. It's an area of strength. And again, when we see one market starting to slow down, we're much more nimble than years past and we move -- we shifted over to a market that is expanding. So by that, it just feels like we're entering into more rapid discussions around project opportunities. Everything else is fairly the same, I think in terms of if you look at the macro of our pipeline, it's not like we're seeing the pipeline move faster. I think we're just moving into markets that have a higher growth shorter-term growth trends. And so we know that there's more visibility to our upcoming 90, 180 days. And so speaking of that, I think, look, we're a month into the second quarter. And I would just say and we said so in our prepared remarks, we had some orders that drifted from Q1 into Q2, very common. We'll probably have orders to drift from Q2 into Q3. But had those orders booked in Q1, we may have achieved a new record bookings for the year, for the company for the year too, maybe, but certainly for the company. So I think we feel very good about where we're at in Q2, and our pipeline remains at, I don't know, if we would call it record levels of pipeline, it's just significant, well over $2 billion. And again, we feel really good about the second quarter and probably the second half of the year from a pipeline perspective.

All right. Thanks for that. And then maybe just one follow-up, you kind of talked about 15% plus EBITDA margin. Can you just talk a little bit about what gross margin level that might be? And just what some of the drivers are to get from where we are today to that level?

Yeah, there's really three things that I think we like to talk about pretty consistently, and we talked about 15% EBITDA margins. And in no particular order, I guess I'll start with gross margins. I think the fact is that we are getting good productivity. We're going to continue to do great productivity with the investments we've made in our making and our operating excellence programs. Those are specifically designed to influence gross margins to get up to at least our historic average of 33%. But frankly, we believe that with those investments, coupled with the acquisitions we've made, and we'll continue to look at making that have higher gross margins, you could say the first bucket is higher gross margins driven by productivity and higher gross margin acquisitions should get that up to 33% to 35% and that or more. And so when you look at gross margins there that's a heck of a nice jump from what we're currently at. The next bucket of items, I think is our volumes. I mean obviously, we're delivering very strong sales growth. We're investing heavily in the support of that sales growth because it's in front of us as much as it is with us. So we have to add resources to execute that record backlog. But we're also investing in the things that I just mentioned and we mentioned in our prepared remarks. So, but as we go forward that continued double-digit sales growth sort of sequentially and year-over-year, we'll just continue to provide really strong conversion to our bottom line. And so the combination of productivity, acquisitions and just volume conversion, we feel on balance will each give us the necessary building blocks to get from the 10-ish percent where we exited the year last year to the 15% where we expect to exit a few years from now.

All right. Thanks for the color. I'll turn it over.

Thanks, Aaron.

The next question comes from Rob Brown from Lake Street Capital Markets. Please go ahead.

Hi, good morning. Congratulations on all the progress.

Thanks.

Thank you, Brown.

Just wanted to get a little bit further color on your confidence in your order environment, what sort of the visibility? Has the visibility changed at all in the last three months, or are you seeing kind of continued pipeline activity and really no change there?

I would say, we were -- a year ago at the end of our first quarter, we voiced a fairly high confidence rate for the year and we started to not only introduce full year guidance for the first time, but we proceeded to sort of raise that guidance as a result in large part of the fact that we were executing on our pipeline and booking very strong record orders and record backlog, coupled with our programmatic M&A approach. So a year ago, I think for those of you that were paying attention to CECO, you felt the high confidence in our growth. I sit here today with a similar level of confidence.

Okay. Great. Great. Good to hear. And then on the M&A environment, you do a couple of deals recently. What's sort of the pipeline of M&A activity look like? And how should that play out over the next sort of 18 months?

I'll let Peter expand on this, but we have -- that doesn't mean our playbook couldn't change. We know how to have different plays in the playbook. But we have -- we're executing well on the approach that we're taking. Our pipeline has been fairly consistent. Things come in, we evaluate them. Things go out because we pass or they're not for us or the timing doesn't work or maybe the -- we believe that the growth of the returns are going to be there for our shareholders and for our portfolio. And then we focus in on the handful of deals that we think make the most sense for our transformation, the most sense for our financial health and stability. And we obviously look at what's going on with our balance sheet and interest rates and the expenses associated with that. So we maintained a really steady pipeline. I don't think much has changed in terms of that regard. There are some bigger deals that we look at, and there are some smaller deals that we look at. But overall, our playbook is we feel very comfortable with our playbook. Peter?

We continue to identify very interesting small tuck-in or bolt-on deals to improve the positioning of our platforms, deliver access to customer, market, technology we would like to add that is -- is important to the business but may not necessarily come from a product development effort. Transcend is a very good example of those three, market, customer and technology, all wrapped up in one package. And as we, so we're seeing a good steady flow and frankly more than a week at action if we wanted to. What's also happened Rob, and I think this wouldn't come as a surprise, you I don't believe, since we have been acquisitive. We have more sellers approaching us as a potential buyer on a private or proprietary basis, because they've seen how the last six transactions have fared both for sellers as well as those management teams and that's positioned CECO very favorably in their eyes. So we're not only seeing the traditional flow that comes from an investment adviser or a bank flows from of ideas coming from our platform teams, we're actually getting inbounds from owners asking, if we'd like to talk to them about a possible combination or a strategic alternative.

Great. Well, thanks for all the color. I'll turn it over.

The next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi, thank you. Good morning. I may have missed it, but did you give the organic sales growth number for the quarter?

We didn't -- I can get back to you with that, Jim? Yes, it'd be -- yes, it's probably 15, 16 points. Yes. It's 75% of our -- it's roughly 75% of our top line sales growth.

Yes.

So, however, that shakes out, it's about 15% 16%. But we'll get the exact number.

Okay. Okay. Got it. So, if I look at the revised outlook for 2023, let's assume this $45 million, $50 million of EBITDA, you're a little north of 10% EBITDA margins. And I'm just wondering, when you look at the year, where do you see the most potential for upside to EBITDA, EBITDA margins? Is it going to be driven by top line? You talked about some -- you sound pretty optimistic about gross margins. And I'm wondering where we could see the upside coming from?

I think the upside would come from volume. We have doesn't take too much for somebody to look at our trailing 12 months historically, when you look at bookings and then the next fast-forward nine months, and you look at a corresponding revenue level. So, I think we feel that the investments we're making now to support the execution of that backlog, would point to potential upside in revenues, which would flow through on the conversion side, because our investments are in large part in place, it doesn't mean that we don't have to sort of flex certain costs as we go up with volume. But the upside specifically would come from more organic growth as it pertains to the backlog that we have. Now, if getting significantly higher than 10% to 11% EBITDA margins is our only goal in life and it's one of them, if we didn't see upside to 485. But we felt that that goal we’ll likely to be achieved this year. We have costs and that we've brought into our organization that are important, that are yielding results, that are dedicated employees and dedicated cost programs, et cetera but we can flex those. And so, I would want you to know that we have the other lever, which we understand and we do not expect to have to go to that lever, because of the pipeline we see, the backlog we have and the excitement we have around executing on the initiatives that we have put in place. Ramesh, do you agree with that those two levers?

Absolutely. Just to add to that, we are seeing a gradual trend of improving margin on the project businesses that we've been bidding. We monitor this on a 12-month basis, and we have done well when it comes to margin. Those things are going to flow down to the bottom line. And some of the productivity programs that we've introduced, they all are going to start to kick-in at least in the second half of the year, whether it be the material or some of the labor productivity, and the M&A targets that we have brought in. Those margins are not only accretive. They're higher than our traditional businesses. And when you add them all up, that gives us the confidence on improving the EBITDA margin. Thank you.

Got it. And just a final question. Just so, from the standpoint of the ability to convert over this backlog, you feel pretty comfortable about the operational structure of the business, your headcount, your labor. The other question, I had just regarding inflationary pressures has that begun? Are you seeing any signs of that subsiding, or have you been able to just offset it as a lot of companies have by just passing on pricing?

I think the passing on pricing has been with us too and I feel good about that. And I think but now I might suggest we're sort of back to what is a stable feeling, there's more stabilization going on at the moment, which we don't need – we don't need there to be huge decreases in costs. We don't need them to be huge – I think most leadership teams would say give me a stable market and we can price around that. We can execute around that. The labor markets are still a little tricky. It is not easy. Getting the right people in the right places and keeping them. But we're working hard at that. And we feel like there's not a lot of constraints in our ability to execute at the moment. But it's an ongoing focus. And again, I want to thank our individual members as well as our groups and teams around the world that step up because we are still wearing multiple hats a lot of us. And we are still having to go a little bit more travel when you're not used to it potentially because there's more global projects now. So it's a big sense of gratitude that we have for our teams executing because it's still tough out there.

Okay, thanks. Thanks for all the information.

Thanks, Jim.

[Operator Instructions] Our next question comes from Sameer Joshi from H.C. Wainwright. Please go ahead.

Yes. Good morning, thanks and congrats, Todd, Peter, Ramesh for the good execution. I just had a question on conversion of pipeline to backlog. Are you seeing an improvement in that and as a result of which you are seeing higher backlog, or is it that your pipeline has increased?

I guess I'll just say our pipeline has increased. I think we would say our conversion of backlog feels in line with our – the muscle we've been building to execute upon it and adding process and resource and operational excellence programs. So just the execution of our backlog is good. The backlog growing I think is a direct benefit of our platform organizations that see more market adjacent opportunities, feel supported and invested to go after those and frankly to use the analogy where we have more at bets. I mean I think our win rate has been really solid. And maybe certainly in certain platforms some product categories improved, over the last few years, but it's about finding more market opportunities and going after them and not being afraid to swing in this a little bit because we're going to support that growth mindset.

Understood. Thanks for that. And then just sticking to backlog. On Slide 12, you have nicely shown your like yearly averages of 211, 290. Is that jump in 1Q, which we have seen in 1Q 2023 then stabilize over the next four quarters in terms of the backlog. In other words, should we expect the book-to-bill ratio for the next quarters to be nearer to 1% than to 1.3% or so?

Yes. Look, I'll say this. Well, first of all I'll start with a reminder that orders can be just choppy. Our book-to-bill could have been 1.4% potentially. It could have been 1.2. I'm certainly not going to sit here today and try to give a forecast of book-to-bill. I will say this. We believe that the average over the next three quarters will be greater than one. And that's I think what we're striving for is that whether it's one, 1.2, 1.3, we want to continue to add backlog for future growth to give ourselves the confidence around the investments we've made and will continue to make. And of course, since we're talking with investors here today, give our investors the confidence that we have probably more visibility than the average bar out there in terms of the companies that yes. And by the way I think we have more visibility than historically as a company. You go back five, 10 years where CECO was really first coming together as an organization and our processes were not mature yet and we still have a long way to go. We're never done with this baseball game. But I think we have a lot more visibility to the next three four quarters. And I want to thank again our leadership team for making that visibility in front of myself and Peter and Ramesh because we can now we can make some important decisions based on that visibility.

Understood. Just one last one if I may. To place that the yes. The Engineered Systems revenue has shown a higher year-over-year growth rate almost closer to 30% or thereabout related to the industrial process solutions. Has that also played into the gross margins that we have seen year-over-year?

Perhaps. I think it goes back to the point Ramesh was making in that we are -- we were doing at least two things well in Engineered Systems, but also across the organization where the market has allowed for us to if you will things improving stabilizing and cost structures. We feel good about the jobs we're booking have slightly higher margins sequentially and have we feel for a little bit of time. Therefore our backlogs across the board just have slightly higher gross margins. And some of that's also the benefit of our ability to get price and to strategically focus on price, especially in our short-cycle businesses our fluid handling and our filtration products categories, where we have raised price relatively consistently over the last 24 months coming out of COVID. So yeah, I mean I think gross margin is just pretty balanced across our organization. We don't look at it -- I mean we look at it by platform. We look at it by "reportable segments". But there's no, it's the same playbook we're running across our entire enterprise.

Thanks for that color and once again congrats and good luck.

Great thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Gleason for any closing remarks.

Okay. Great. Thank you, Jason. Well thanks again everybody for your questions your interest in our information today. We've said it multiple times, but a significant amount of appreciation for our global teams that are delivering incredible value to our customers. As we continue to protect people, protect the environment, protect our customers' investment in their industrial equipment. A great start to the year for us we feel, we look forward to speaking with many of you soon and providing you with our Q2 update in early August. So with that have a great day and talk to you soon. Thank you.