CECO - NASDAQ

Good morning, and welcome to the CECO Environmental Conference 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, 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 Gleason, Chief Executive Officer; and Peter Johansson, 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. The call will also be webcasted along with the earnings presentation, which is also on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of that website. I’d also I’d like to caution investors regarding forward-looking statements. Any statements made in today’s presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings included in the Form 10-K from the year ended December 31, 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 provided the comparable GAAP and non-GAAP numbers in today’s press release and provided non-GAAP reconciliations in the 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 Gleason. Todd?

Thanks, Steven, and thank you for your continued support and interest in CECO. I’m going to start with Slide number 3, which is entitled Q2 2023 Earnings Highlights. 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 throughout the second quarter, we continue to add to our sales pipeline, which is now well over $2.5 billion worth of global opportunities. The growth of our target markets is a positive result of the focused investment we strategically made to add sales and business development capabilities across our existing platforms, and these investments continued 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. Bookings weren’t the 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 in 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. We have also been steadily transforming the overall CECO portfolio book of business. This transformation started approximately 3 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 Transcend 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 as significantly tied to legacy oil and gas and power generation end markets. While 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 am 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 with our growth investments and more balanced portfolio driving backlog gains to record levels at quarter end, we have high confidence in our future outlook. And this confidence in future outlook is why we are announcing an increase to our full year guidance, which 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. As the takeaway on this 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 4, and 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 second quarter results. The panel on the right side of the slide provides a snapshot of CECO’s trailing 12-month financials, all of which are very strong. CECO’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 orders steadily since 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 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 $0.15 met our expectations. On a trailing 12-month basis, our adjusted EPS of $0.67 is up significantly over the preceding 12-month period, which we believe is more indicative of long-term value that we are creating. We will continue to manage debt and interest payments to deliver higher EPS and as our guidance suggests, our expected higher EBITDA will also deliver bottom line growth. Finally, with respect to free cash flow, CECO 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 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. With 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, I would 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 5. I’m going to reiterate a few things we have shared when we highlight the slide in investor presentations as well as when we showed it last quarter. As the title of the slide suggests CECO was more balanced in pursuing more opportunities than ever before. Across everything we do, our focus is to protect people, protect the environment, and 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, which is entitled newly acquired brands, are yielding great results towards helping us advance that leadership position in industrial air. We have also discussed how we are building our position in industrial water. The four water-focused acquisitions highlighted in the center column, add important building blocks to our growing water niche leadership positions. And finally, as CECO shifts its commercial and customer focus to support the applications and opportunities presented by the energy transition, the recent Transcend acquisition positions CECO 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 liquids transport and hydrocarbon processing infrastructure, and to benefit from new and emerging applications in renewable natural gas, carbon 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 5. We really like to share that this slide we really like to share this slide as it highlights the diversity of CECO and what we are doing to grow leadership positions and add portfolio balance. Before we move on to the financial details for the second quarter, I’d like to highlight a few operational items that actually aren’t 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 and 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 in high-growth markets, which is comprised of the Middle East, India, China, and Southeast and East Asia. This is up more than twofold from just a few years ago, and we are maintaining strong 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 in Indian related sales opportunities. Finally, a third item I would also highlight that 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 in their first 18 to 24 months of ownership by CECO. This is a tremendous track record of us identifying growth businesses and properly investing in and incentivizing great leadership teams. Our other three acquisitions are definitely on track to hit or exceed their deal financials that underpin 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. I’m very pleased today to be able to present to all attendants another set of solid financial results that confirm that CECO is still on track to deliver another strong year of performance. I’d like you to turn to Slide 7 with me. On this slide, I present a more detailed picture of the Q2 2023 results, that Todd walked you through on Slide 4. Orders in the quarter of $162.9 million were the highest for any quarter in company history. This result brings CECO’s 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 were the highest for any quarter in company history, continuing a 4-quarter trend of record-setting revenue delivery benefiting from continued strong execution. This result brings CECO’s TTM revenues to over $467 million and $242 million for the first half of 2023. Gross profit margins in the quarter of 38.8% were 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 additions supporting CECO’s 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 discussed 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 I’ll walk you through later in the deck. While 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 8. On this slide, you can see that CECO’s order trajectory that Todd referred to earlier today began back in the fourth quarter of 2020 and has continued to accelerate through 2021 and 2022 and while maintaining that strength into the second quarter of 2023. The four best orders quarter in company history have been posted across the past six quarters. All are greater than $100 million level, delivering a 6-quarter average of approximately $140 million and a 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, CECO finished the quarter with a new record backlog level. We recognize that quarter-to-quarter orders can be lumpy due to timing. To provide a view that smooths out the lumpiness and more closely matches our revenue realization, I would point you to the TTM and average orders per quarter rose that we’ve provided above the graphic. For a more detailed view of revenue, please turn to Slide 9. On this slide, you can see that CECO’s revenue trajectory growth began in the first quarter of 2021 and has showed steady improvement sequentially in versus prior period throughout the last 12 quarters. With the acceleration of this improvement in 2022 continuing into Q2 2023, as we continue to convert our growing backlog into our fifth consecutive quarter of revenue greater than $100 million 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-off record quarterly revenues and the highest first, second, third, and fourth quarters for revenue and company history. We’re very proud of this accomplishment. 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 customer approvals that impacted revenue recognition in the quarter. As I finish up on this slide, I also want to point out that consistent with the prior slide, we have included TTM revenue and average revenue per quarter trend for an easy comparison to the trailing 12-month data provided for orders. Let’s transition to Slide 10 now for a quick review of backlog and backlog trends. CECO 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. The book gross margin in the backlog is 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-to-bill was greater than 1.25 for the third consecutive quarter and is 1.2 book-to-bill of 1.2 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 1 for the total year 2023, a positive leading indicator for continued future growth. Please move to Slide 11 with me now, then 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 that gross profit for the second quarter was a record $39.8 million, reflecting a 30.8% margin and a 31% increase year-over-year. This is the third consecutive quarter with a 31% or greater year-over-year improvement. Whilst margin rate is down 20 bps sequentially, the 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. TTM gross profit is approximately $145 million, reflecting a 32% greater gross profit dollar delivery than the prior TTM period and reflects a 150-basis point margin expansion to approximately 31%. It is this additional gross profit that is allowing CECO 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 acquisitions. These acquisitions in aggregate are delivering gross profit margins of nearly 40%. On the right-hand side of the page, the last 9 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 a TTM basis, CECO has delivered $45.5 million of adjusted EBITDA, a nearly 40% increase over the prior TTM period, delivering an EBITDA margin of 9.8%, up 100 basis points over the prior period. I am pleased with these quarterly results as the investments in people, systems and processes CECO has made in prior periods are starting to yield the expected benefits and position CECO 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 acquisitions. Both deals are consistent with prior acquisitions we have closed in terms of scope, size, complexity, risk, and strategic intent. 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 2-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. To highlight the benefits each is realizing within CECO, I 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 greenlit an investment in Wakefield Acoustics, which will allow the business to expand its capacity by 2x to capture a fantastic growth opportunity in the data center backup power segment, initially in the U.K. 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 CECO, 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, will support our plans to double the business with supply to new customers in the Middle East and Southeast Asia via CECO’s existing company sales locations and in addition to improving service levels with existing and new customers in the U.S. and Canada. On the right-hand side of the page, as with past presentations, we provide 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 have 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 improvements, margin enhancement, and growth in our fluid handling businesses in the U.S.A. and the Netherlands. Please turn to Slide 13 with me for a quick review of our cash position and liquidity before I turn the stage back over to Todd. CECO finished the second quarter with $48.6 million in cash, which was an increase of $6.4 million from the quarter end Q1 and $2 million from year-end 2002. Cash from operations in the quarter was $11.4 million and is slightly negative on the first half 2023 aggregate basis. Net borrowings in the quarter on our revolver was $32 million, supporting growth investments in working capital, M&A, and CapEx. Approximately $20 million was spent 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 1.9 turns. Approximately 1.5 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, CECO’s available capacity is in the $40 million-plus range. That concludes my summary of CECO’s second quarter 2023 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 us through our full year 2023 outlook and 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. 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 million and $525 million for the full year. This would be approximately a 21% growth over full year 2022 if you use the midpoint of that range. Our previous revenue guide had been to exceed $485 million. With our record backlog and large 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 million 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 our 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 tailwinds, but no doubt the reshoring 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 has not directly benefited or at least not benefited very much yet from the funds flowing from the large CHIPS and Science Act and Infrastructure Act spending bills in the United States. When these funds do, in fact, begin to flow into the market, we believe CECO will benefit from this $0.5 trillion 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 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 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 3 years, which provides for local company support and highly skilled global engineering, project management, and financial and 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 are 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 and demonstrate the tremendous diversity of CECO’s portfolio. We have a lot of opportunities to drive continual organic growth and even more opportunities in our M&A pipeline as well. I’d like to thank our incredible and dedicated employees that work 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. And with that, we are now happy to open it up for any questions. Operator?

Thank you. We will now question-and-session. [Operator Instructions] The first question we have is from Rob Brown of Lake Street Capital Markets. Please go ahead.

Good morning, Todd and Peter, and nice job in the quarter.

Thanks, Rob. Good morning.

Just want to get a little bit more into the order environment, which is what you’ve said is obviously very strong. How sort of broad-based is it? And where are you seeing growth coming from? And I think it’s interesting you talked about some of the incremental growth drivers, and I’d like to get some color on when you think those start to flow through as well.

Yes. Good question, Rob. It’s interesting. We – about a year ago, we introduced a slide where we showed all eight platforms, and we felt at the time, it was just helpful to give people visibility to the diversity of our portfolio, a little differently. Probably could have been something we would – we could have 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, what you would see if you saw 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 businesses. And that’s probably the thing that we’re most excited about is it feels very balanced. I mean, Peter and I could probably dive into just a long list of exciting opportunities, whether it’s in battery and electric vehicle manufacturing capacity or energy transition markets. I’d say we’re in a pretty good sweet spot right now, and it’s reflecting in our order bookings.

Rob, just to give you a sample, we’ve booked large orders and backup and load stabilization power for the largest solar plant being built in the United States. We booked orders for the largest aluminum mill to be built in the United States in 30 years. We booked orders in EV battery plants and EV battery recycling plants. We have bookings in new LNG liquefaction export facility going into South Texas. We booked orders in India, China, Korea, the Middle East, and in Europe across the swath 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 – where they essentially turn with very high temperature garbage into molecules that they capture and then turn into something that can be used as a fuel. So that’s at least eight, maybe nine segments there we’re seeing orders. It’s just that broad.

And Rob, not to add. I mean, it’s a simple question. We’re giving you a long answer. First of all, one man’s garbage is another man’s fuel. I think as the 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 booked that. And while I said that, I think it’s important to maybe highlight that that’s actually a third quarter booking, not a second quarter booking. And so that just gives you another example 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 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.

Great. Thank you for all the color. And then in the aftermarket business, that’s one of the questions I had about how do you sort of – where is that at 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 that 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 look, the reason we have, if you want to call it, close the gap even further is because just across the board, our company is growing solid double digits. So look, it’s hard to become 50% short cycle when mid- and long cycle continues to grow at the rate bit it is but most of our acquisitions are mid- to short-cycle acquisitions. Those are going to continue as those businesses we expect to double. We have – again, 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, 3 years ago, we were 80% long cycle, 20% short cycle. – and now we’re 70% long and mid-cycle, and 30% short cycle. And the reason I stress long and mid-cycle is that we have a lot more revenue that turns in 3 to 6 months versus before it would turn in 6 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 things. I’ll turn it right over.

Thanks, Rob.

The next question we have is from Aaron Spychalla of Craig-Hallum. Please go ahead.

Good morning, Todd and Peter. Thanks for taking the questions.

Yes, good morning, Aaron.

Good morning. First for me, can you just talk a little bit about the margins that you’re 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 a margin progression towards that 15% plus goal over time for EBITDA margin?

I’ll give a sort of a high-level answer, and I’ll see if Peter wants to add some more depth to this. Margins in 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 global expansion. So some of our margin progress is still being kept a little bit through our investments. But in fact, in our emerging markets, they’re seeing the highest gross margins and backlog, finally getting up above 30% gross margins, whereas before they were in the mid-20s, if not high 20s, about a year ago. So we’re seeing 200 to 300 basis points of higher margins in our high-growth regions markets from just a year ago. Again, we still expect that our gross margins, which are reflected in our backlog as we exit the year or 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, we’ll 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.

That 100 to 150 basis points higher than prior quarters is a good number. It varies by platform but in aggregate, that’s what we’re seeing as we book and then begin to execute on projects. One other thing we’re beginning to see, Aaron, that’s a positive is we bid every job with the contingency. Contingency is to accept things that were unforeseen at the beginning of a project, and that’s 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’re realizing higher-than-bid gross margins as well, which is a real testament to our teams, improving on their project and customer management expertise. On the operating investments, operating improvement investment side, we’re really focused on the operations and our fabrication partners outside of the organization. As we’ve discussed, well over 50% of what we deliver to customers is produced by a partner, a fabrication partner or a supplier. And what we’re finding is our resources, our teams are spending a lot of time helping them find savings, improve capacity, improve flow and throughput to continue to support our growth. And that’s yielding benefits from the standpoint of 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 our 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 or businesses buy. And we’re beginning to start to see those benefits trickle in. This is new for us. This company operated very – I won’t say a very segregated manner in sourcing and in procurement. We’re beginning to operate as one company now more consistently. In fact, I just approved in order for I think it was 30,000 tons of stainless steel that will be consumed by at least three businesses over the next quarter by their fabricators where we’re purchasing the material and supplying it to the fabricator rather than the fabricator purchasing on their own. And that yields benefits to us as well. We should be able to provide better insights into the, I’ll call it, the rather than anecdotal, but 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 you’re seeing from valuation and activity? I know you’ve 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 larger deals, we don’t think. There’s – doesn’t – look, I would say we have a good track record and a lot of energy and I believe, capabilities of how we’re doing, what we’re doing at the moment. And there continue 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, they could go up a little bit, I suppose but for the most part, we’re – 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 a deal for us.

Makes sense. Thanks. I’ll turn it over.

Thanks.

The next question we have is from Jim Ricchiuti of Needham & Company. Please go ahead.

Hi, good morning. So you’ve already covered a lot of ground here. I wanted to go back to this aftermarket order you highlighted that came in, in the current quarter. Maybe put a little context around this. What was the largest previous aftermarket order? And is this in the Peerless area – this is industrial water?

It is. It’s industrial water. It’s a project that we help provide an industrial water package system, a very large system that we probably highlighted in previous quarters. And we had been negotiating all along to be the supplier of their aftermarket needs as well, and we secured that 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 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 that. We certainly may have booked some pass through some membrane filtration or something, but I’m not aware of anything that’s anywhere close to greater than $1 million in our company history, unless Peter has ever heard of something, and I just don’t think that we’ve come anywhere close to that. This is – by the way, Jim, this is a multiyear aftermarket. Like I think this is – I think this one serves a 3-year contract associated with this different...

This is the first year of a multiyear support agreement. I’ll give you a little color without disclosing customer, it’s a Middle Eastern national oil company with a 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 had some gas sweetening as well. So it 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 on-site field service engineers, all building relationships that 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 that we can now use to promote these capabilities to other customers in the Gulf region.

Got it. And a follow-up just on some of the investments that you’re making in the newer acquisitions, Wakefield and Transcend. Can you help us with the timing around these investments and the capacity increases and the time line that you expect? Yes. Thank you.

Yes. So the investment in machinery at Transcend has already – the initial investment down payment was made in the second quarter. The machinery will be received in the third quarter, commissioned and up and running. And so a final payment will be made in the third quarter. This is a machine that makes filter element cores critical to the type of filtration designs that 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. There is an investment at its current location to increase the capacity of painting and the quality of painting, and next investment will be to expand on the current site into an additional 22,000 square feet for layout space and for preliminary assembly of components that will feed the final assembly line. Think of it as a fish bone with assembly lines running down and cells where subassembly 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’ve also make investment in both a new lease and some temporary facilities in an adjacent space, about two kilometers from the existing facility where we can do final fit-out of a completed enclosure and acoustic package, which will triple the capacity for completions of this business. These individual packages were anywhere, depending on how they fit out $0.25 million to $1 million apiece. So they’re not small, little widgets, they look 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 could bring it sort of back up a couple of levels, every transaction that Peter and I, the Board, the company, our platform leaders look at. It’s all about growth, right? So we’re – 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 believe 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, then the return on investment is even stronger. If the forward multiple of our deals ends up being 3x, 4x future EBITDA and the future EBITDA is 18 to 24 months in the future, that’s a tremendous win for our shareholders. It’s already accretive at 7x or so x EBITDA, which has been the average that we’ve paid for the 7x or so acquisitions we’ve made over the last 2 years. But if we can, on a forward-looking basis, reduce that to 3x to 4x and then beyond that, continue to grow and stabilize our business mix and our free cash flow generation, then it’s a home, home, home run for our investors. And so 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, I may have missed it. What’s the CapEx for the year and congrats, by the way, on the quarter.

Yes. We think we’ll finish the CapEx to be between $6 million and $6.5 million.

Thank you.

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’s great opportunities to invest in automation, upgrades 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. Wainright. Please go ahead.

Thank you. Good morning, guys. Can you 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 there other synergies that are coming into play for you?

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, 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 you’ll 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. When Todd speaks to SG&A not growing, that’s the G&A aspect – accounting, HR, IT, corporate expenses, corporate overhead, insurance, all those that don’t scale with growth. In fact, those are areas we’re beginning to focus very extensively on how do we refine and improve those costs and get more out of each dollar spent. Todd?

Yes. No, look, I think that’s – you 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 in my previous lives, when we’re experiencing growth, it has a whole host of reasons can be new technologies. We’re doing the same thing here at CECO. We’re launching some new products. It’s finding new global markets for our existing products, services, brands, et cetera. We’re doing that here at CECO. And 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 in 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 their – we’re doing that here at CECO. So really, Amit, it’s a playbook that’s pretty proven where there’s no one big touch down 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.

Thanks, Amit. Appreciate your support.

Thank you. The last question we have is from Bill Dezellem of Tieton Capital. Please go ahead.

Thank you. Relative to your comment that you’ve had a number of acquisitions that have doubled their revenues in the first 18 months with the company. To what degree is that revenue synergy that you identified with CECO or is it really them on a stand-alone basis being purchased at an inflection point in the company’s history?

It’s kind of a combination, I’d say, Bill. Like you look at the Wakefield acquisition, and obviously, we’ve only had Wakefield since the beginning of the year, but we like the trajectory it’s on. So that would be one example of an acquisition where we feel that trajectory is easily going to meet that forecast of 2x. And while we do invest in Wakefield and we’re able to bring some scale to the business outside of just its core operations, I feel like that’s a decent example, at just good timing and a great team at Wakefield that needed expansion but is doing it really with its customer relationships. Now we’re going to help expand its geographic footprint in the Wakefield business but that’s one where they really have a great market. You look at some of our other acquisitions could be DS21, where we’re able to bring some other things to the table that are outside of that, and we made that acquisition about a year ago or you look at an acquisition like let’s 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 in 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 takes either a little bit of market timing that we feel we positioned with a few or we knew that we had the resources and regions that they didn’t, and we were able to invest in those businesses.

That’s helpful. And then on the – one of the slides highlighted the EBITDA margin. And up to this point, it’s really been hovering around 10.5% plus or minus. What’s holding, up to this point, what’s holding that EBITDA margin in that range rather than allowing it to break out?

Yes. 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 that 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’re being held back, I’ve been confident that we’re holding them back by investing in resources for – when we do start to expand margins, it’s a sustainable expansion. I’m not saying nothing is more frustrating than a company that goes from, let’s say, 10% to 12%, and then a year later, it’s back to 9%, 10%. That’s – I’d love to get to 12% tomorrow. Bill, don’t get me wrong. But what I’d really like is to get to 11%, 12% find that as our new floor and then go from 11%, 12%, you start asking me why that’s been stuck for a couple of quarters. And then we break out again, we get to 12%, 13%, 14%. And then we sort of settle in there for a couple of quarters. And then we get from 12%, 13%, 14% to 13%, 14%, 15%. And that’s really what we’re trying to do here. By adding resources now in SG&A in 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 really, the right way to think about it is maybe a little less breakout as much as it will be stair step and moving up in that function. Is that what we’re hearing you say?

If we break out, I sure hope it’s going to just continue to be a stair step, but I think you’re on to it, Bill. Our goal is steady margin expansion that we can sustain.

Okay. And that is a great lead in to my final question, which in the press release, you made the comment that you’re just getting started with more sustained growth and margin expansion. And I’m going to, I guess, hope that you’ll have some additional commentary beyond what you had on the answer to other questions and to the question that I just asked that might help us have more clarity on that on that margin expansion and more sustained growth, I guess, more of what we want to see.

Yes. Look, I guess the color I’d add is that in previous periods, we have shared our current longer-term view that in the next 24 months, we believe that we’ll have doubled the size of the revenue of the company from when I started, it was around $325 million, $350 million. We believe that if we just want to say in the next few years, we’ll have doubled that from where we started to where we’ll be at that point, and it 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 stay or step it up to that. I think if you look at our trailing 12-month orders you’re going to see trailing 12-months orders in the mid-500s. We just gave an updated revenue guidance to be in the low 500s. 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 where trailing 12-months is and was and where revenue is and is heading, right? 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 reiterated, our G&A investments remain relatively stable. Yes, 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 and continue to see double-digit sales growth in the foreseeable 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 there in a couple of years?

We have been pretty consistent, yes, that 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 is that we’ll continue our growth to get to those levels. That’s right.

Right. Okay. So essentially, the way to think about this is that you’ve been putting the muscle in place and that 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 EBITDA margin. But going from 10 plus to a 15%, that’s a very meaningful swing from that point or from this point forward then.

Yes. 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’ll have taken – if we just talk about our guidance, if you take the midpoint, Bill, of our guidance for the full year at $52.5 million. That’s 100% dollars from where we finished 2021, okay? That’s great growth in revenue. That’s phenomenal growth in EBITDA dollars, and some of that comes with investment in infrastructure to support that type of growth. A doubling of the company’s EBITDA dollars and a doubling of the company’s revenue, if we do so from 2020 to 2025 or so comes with not doubling the size of the company’s expenses or 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’re 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 our goal.

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

Thank you very much. Thanks for the questions 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, protect the 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 it to three parts and IDEAS Investor Conference in Chicago this month. We’re going to be active in other conferences as we head into September. We look forward to meeting many of their investors, and we’re out on the road in the next couple of months and 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.