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 Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead..

Thank you for joining us on the CECO Environmental fourth quarter 2020 conference call. On the call today is; Todd Gleason, Chief Executive Officer; and myself Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion.

The call will be webcast along with our earnings presentation 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 facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements.

We encourage you to read the risks described in our SEC filings on Form 10-K for the year ended December 31, 2020.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today whether as a result of new information, future events, or otherwise. Today's presentation will also include references to certain non-GAAP financial measures.

We reconcile the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck. And with that I'll turn the call over to Todd..

Thanks Matt. Throughout much of 2020 we started our earnings calls by thanking our dedicated employees, their families, and our great customers and operating partners. It has been a challenging time as the entire world has been forced to navigate the global pandemic and adjust how we work and interact.

We are very pleased with how Team CECO has come together to embrace new technologies, processes, and adhere to rigorous COVID policies to ensure health and safety. So once again thank you for all you do to ensure we deliver for our customers and drive value for all constituents.

As is highlighted on Slide 3 and in our press release this morning, CECO delivered strong results in the fourth quarter of 2020. Let's quickly review the facts and figures and later Matt will provide more color around some of these numbers.

Orders were up mid teen levels both sequentially and year-over-year as we booked $77 million in the fourth quarter. Getting back on the orders growth trajectory, it's always a positive but even more important as we saw reductions in our backlog. We look to turn the corner on this trend early in 2021 as we believe our orders growth will continue.

Sales were $83 million which did reduce backlog because it was obviously higher with new orders. The fourth quarter sales results were down 7% versus 2019 but they were up sequentially 7% over Q3 2020. Our project teams continued to execute very well despite the challenges of COVID restrictions.

Gross margins came in at 31.6% which is a little higher than we originally expected because of the mix of projects that drove our fourth quarter sales growth. Gross margin rates have been steady throughout 2020 but year-over-year we are down almost 200 basis points.

A year ago we had a very attractive margin rates in our backlog because of some large high margin projects and those jobs have been fully executed. Unfortunately replacing those higher margin projects with new orders was stifled in early to mid-2020 because of the COVID related market softness.

As we enter 2021, we expect to see more higher margin project opportunities. Adjusted EBITDA of almost $10 million produced margins of 12%. This was up approximately 70 basis points year-over-year. So pause on that for just a second.

Gross margins were down 200 basis points versus Q4 2019 but EBITDA margins were up, which means we have reduced SG&A as a percent of sales by approximately 270 basis points on a period comparison basis.

Now, not every quarter will show that level of year-over-year margin expansion, but it does demonstrate the amount of costs we have reduced to better position CECO for strong margin conversion going forward. A lot of great work has gone into our productivity thanks to the team for their focused efforts.

Non-GAAP earnings per share were down year-over-year as certain tax benefits in Q4 2019 did not repeat in Q4 2020. EPS of $0.16 was up significantly quarter-over-quarter, which shows a steady improvement in our income from sales.

On the bottom half of Slide 3 we provide some commentary around how we continue to position to go for sustainable performance. We have reduced costs in various functions and specific areas, but we have maintained key growth resources to take advantage of improving markets.

We are seeing stronger bid proposals in engineering work in a majority of our end markets. So we expect continued growth in orders. As I just articulated, CECO’s cost structure is more efficient. As volumes come back, we expect to reach new heights with respect to EBITDA margin rate levels.

Since my arrival in the second half of 2020, we have been evaluating our best growth strategies. We will be articulating our longer-term strategic focus in the coming quarters but we continue to make very good progress with our shorter-term investments in new technologies and service to enable growth.

Lastly, as we announced a few months ago, we have commissioned an internal group to pull together our first sustainability report. We're proud of the work we do to serve our customers and communities to provide advanced environmental solutions, so that will be a great story to tell.

And we also have a very good internal risk management framework, including environmentally sustainable operations, high social standards, and strong governance controls and policies that we look forward to more fully disclosing. Let's turn to Slide Number 4. This is one of our regular earnings slides.

On the left side of the slide, we highlight end markets that are predominantly related to certain energy markets. And on the right side, we provide detail on our broad and diversified industrial markets. Let's review the details.

Walking down the left side of the slide, you can see we had $9 million in order bookings associated with projects in oil and gas refining space. While this level would typically be lower than average, the $9 million is up well over 100% both year-over-year and sequentially versus Q3 2020.

We expect continued orders growth in this area, as we have seen a very depressed refining environment for over a year. We are now seeing more CAPEX dollars allocated to maintenance operations. Moving on, midstream of $16 million is up double-digits year-over-year. But we expect this market to remain somewhat choppy over the coming periods.

Next, power generation and natural gas is steadily improving. We have a very good and active pipeline of opportunities and our $18 million of orders is strong double-digit growth versus Q4 of 2019 and represents over 70% growth sequentially. And at the bottom of the left side is power generation solid fuel, which is our smallest market segment.

We believe this market has bottomed and we should start to see orders rebound in 2021. On the right side of the slide, let's start up top with industrial solutions. The $22 million of orders provides nice growth versus 2019 and sequentially. Like much of power generation, we are seeing a very healthy pipeline of engineering and project opportunities.

We have seen continued progress in general and industrial segments for a few quarters, and we expect this to continue, especially with our pipeline visibility, which Matt will highlight more in just a minute.

And in our industrial fluid handling areas, we booked $9 million of orders in the fourth quarter, which was flat year-over-year, but up 5% sequentially. We expect continued expansion in this area. We have worked very hard to drive improvements in our On-Time Delivery and continued quality.

Our Fybroc, Dean, and Sethco brands are well respected and we are investing in more growth resources to take advantage of opportunities and add new channel partners.

Examples include the recent launch of Intel equipment, an online Dean pump configuration tool for both pump sizing and order placement and the addition of new territory sales managers, including some strictly responsible for upgrading our international distribution channel where we have not seen the results we should otherwise expect with a fantastic brand name like Dean Pumps.

I will now hand it over to Matt and then wrap up with some final comments in a bit. Matt..

Thanks, Todd, I'll start with Slide 6 and orders. At 77 million of orders we are pleased to see all three segments grow sequentially and year-over-year. While we are still below our pre-COVID averages, we see markets are improving as Power Gen and refinery markets start spending on deferred CAPEX.

Industrial customers seem less concerned by the outcome of the U.S. election and COVID. December was a very strong orders month at CECO as confidence factors grew amongst our customers.

Doubling down on Todd's comments, our pipeline continues to expand and reached $1.9 billion, a new high in my four years plus, mostly driven by our push into new adjacent markets like EV production and industrial wastewater.

Energy booked 46 million in Q4, up over 16% versus our trailing 12-month average, which we believe is an inflection point as the economic pressures of COVID subside. 9 million came from our refinery based FCC [ph] cyclones, which were up triple-digit both year-over-year and sequentially.

While the $9 million level is not yet back to our historical averages, we are pleased that we had year-over-year improvement in this category because for the full year we were down 50%. We are growing more confident this will be an area of strong orders growth in 2021.

Industrials and fluid, both printed their second consecutive quarter of orders growth. Industrials was a bit more pronounced at 11% growth sequentially. We're very encouraged by the progress this team is making with wind and electric vehicle manufacturing and food and beverage in the quarter.

Fluid’s grew on par with its peers at 5% sequential and 1% year-over-year. We like the trend coming out of COVID, but we won't be fully satisfied until orders are well above $10 million per quarter.

While we are seeing our distributors start to restock, a positive sign, our end markets, including oil and gas, hospitality, and aquaculture, are still cautious until mobility and tourism improves. On the right, revenue grew 7% sequentially on energy backlog conversion. Simply put, end users constructing plants in Asia and the U.S.

have started to gain momentum, while Europe and Middle East jobs are still experiencing COVID delays. I am pleased with the health and the execution of our backlog. While covering revenue, we want to take a minute to address a new metric, we intend to report on a quarterly basis that we're highlighting as short cycle sales.

Details are steadier and typically higher margins. They turn from booked order to sale in less than four months, sometimes much, much faster. This metric represents the combination of sales via aftermarket replacement parts, recurring contracts and services, and distribution based short cycle sales.

In Q4, short cycle sales were $17 million and $71 million for the full year. That's approximately 23% of our total revenue.

If you look at the CECO portfolio today, our product that doesn't necessarily lend itself toward a high percentage of predictable recurring sales because many of our largest sales related areas comes from our customer’s CAPEX budgets.

Additionally, CECO's current technology solutions lasts a very long time and don't typically incorporate a lot of rotating equipment. So there are lots of replacement parts or service needs.

However, we are firm believers that if we start to measure our short cycle sales, we can steadily improve the dollar level and ultimately the mix of overall CECO sales. This will also be an area of interest as we explore acquisition targets.

As Todd provides his update on strategy, we believe that a higher mix of predictable revenue for project work will be a core initiative of our capital allocation in the future and I look forward to updating you on this regularly. On Slide 7, our backlog sits at 183 million, which is down 3% sequentially and 15% year-over-year.

Our book-to-bill ratio was sub 1 again in Q4 as our project execution and revenue generation picked up speed but as previously mentioned, I'm optimistic about 2021 as I look at our sales funnel which should produce solid orders in the coming quarters.

This is the first time in my tenure that our funnel is 1.9 billion, which is up 500 million pre-COVID levels and 200 million over Q2 of 2019, which is the last peak at 1.7 billion.

From a qualitative standpoint, all quotes greater than $2 million come across my desk for approval and I'm happy to say I haven't been this busy with commercial activity in quite a while.

Moving on to Slide 8 and our key profitability measures, our gross margins were at 31.6% in the quarter, which is down 40 bps sequentially and 2 points year-over-year, primarily due to project mix. I'm actually pleased with the gross margins this quarter as they came in higher than we originally expected.

We continue to see customer delays in our previously mentioned large double-digit Middle Eastern Water Separation Project. It is slipping into Q1 of 2021, gross margins mix is higher in Q4. Non-GAAP operating income was 8.8 in Q4, growing primarily on volume and SG&A cost.

Adjusted EBITDA at 10 million was up 34% sequentially and remarkably flat versus prior year, despite lower year-over-year revenue, as our productive cost measures provide a benefit.

At 12% EBITDA investors should rightly see that with our more efficient cost structure and some market tailwind, the operating leverage that our business model provides will be very productive.

We firmly believe that as our backlog begins to grow and we continue to execute with our more efficient and streamlined cost structure, that we will achieve full year EBITDA margin rate of greater than 13% in the next two years. Touching on operating expense, since April we will also focus on our cost.

Our Q4 SG&A reflects the benefit of these actions that totaled greater than 10 million of annualized structural savings. These savings included an approximate 20% reduction in our workforce, three facility closures, and getting lost businesses and pay for reviews. We don't take these actions lightly.

These have been aggressive cuts, but we must preserve our best talent and profitability and we will emerge stronger as markets turn in our favor in 2021. The fourth quarter did have some likely non-recurring cost reductions in lower healthcare costs, in lower variable incentive accruals.

While we do expect some reinvestment and inflation heading into 2021, we see a normalized rate of 18 million per quarter with levers and contingencies if markets were to lose momentum. On Slide 9 we summarize the quarter, a few quick highlights.

First, with revenue down 7% and EBITDA down 2% year-over-year, our decremental EBITDA margins were strong at 200 basis points year-over-year. Despite lower volume and gross margins, our proactive operating expense reduction improved EBITDA to 12% margin.

Looking at this sequentially, volume growth flowed through EBITDA in incremental margins of 51%, further evidence of our great operating leverage.

Second, GAAP earnings per share was $0.05 in the quarter and down $0.19 year-over-year driven by 1.2 million of earn out expense for the EIS acquisition, 900,000 attributed to non-cash write down of an intangible, and lower favorable benefits from stock compensation and tax credits that reversed in Q4 of each year.

On a non-GAAP basis, EPS was at $0.15 and down $0.11 as certain tax items were much lower in the fourth quarter 2020 and we also had lower volume. Slide 10 summarizes our full year 2020 performance that I'm very proud of.

With orders down 27% year-over-year to 280 million our backlog remains strong and we continue to execute well for our customers, generating 316 million of revenue and a solid 33% margin. Despite restructuring, furloughs, and plant closures, the team kept executing.

That persistent execution with EBITDA of nearly 33 million and non-GAAP earnings per share of $0.56 that's nearly flat to 2019, despite the significant reduction in orders. All in all, I would say great job Team CECO. Looking to Slide 11, the area we underperformed in 2020 was our working capital and free cash flow.

Much of it is due to the reduced backlog in our energy business. Our industrial solutions and fluid handling business performed well generating $19 million of free cash flow, an improvement of $20 million year-over-year. Unfortunately, working capital and energy soaked up most of this benefit with an increase of 20 million as our backlog declined.

The orientation of our energy projects are typically up front loaded. As customers place orders they also pay us ahead of doing the work. With energy orders down 35%, we received fewer upfront payments, negatively impacting our Project WIP as evidenced on the left chart.

As orders start to come in, we expect Project WIP to circle back into a favorable position, decreasing our working capital and increasing our cash flows. This is a typical cycle we've seen repeat in the past as we assess our working capital metrics internally all are performing well. This is purely a function of timing and background.

We fully anticipate that with growth in 2021, our asset light business model will generate substantial cash flows. Briefly on Slide 12, our balance sheet is healthy. We paid down $4 million of debt in the quarter and ended the year with the balance of 74 million.

Our bank defined leverage ratio is relatively flat at 1.9 turns and our net leverage sits at 1 with 60 million of capacity available. Slide 13 summarizes 2020 in comparison to prior year’s performance.

As stated previously, despite the significant reduction in orders, the team continued to execute for customers and grow EBITDA profitability, setting a strong base for an imminent market rebound. In hindsight, the structural cost actions coupled with previous years estimates to streamline CECO has served us well.

Setting the stage to scale CECO well above our 13% EBITDA margin expectations. I conclude on Slide 14, wrapping up my take on 2020. A decade from now, as we look back on this period of time, we will be thankful for steady decisions made in an uneasy time. I want to highlight a few people and wins that bolster my outlook on CECO as extremely optimistic.

I want to thank our previous CEO, Dennis Sadlowski for his unwavering leadership at CECO through two major down cycles and seamless transition this year. Thanks to our new CEO, Todd, who I don't envy for having to come up to speed amid a pandemic. But we all appreciate the speed and tact at which he has made tough decisions.

I'd be remiss if I didn't mention our Board for their support as we navigated this tricky 2020. Our HR team, led by Pam Turay has demonstrated the perfect balance of sincerity and humility for our employees with a bias for swift action.

We all thank you for ensuring a safe work environment, navigating work from home protocols, and flawlessly executing on a restructuring plan. From an internal investment standpoint, I couldn't be more pleased with the actions taken to continue to advance CECO in 2020. When I joined in 2016 we had many in equated processes and business systems.

We have come very far since. In 2020 alone our IT team led by Teressa Erickson, closed five Legacy ERPs, introduced Microsoft teams globally to support employee productivity as we work from home and added critical layers of cybersecurity protection systems infrastructure. CECO is now four ERP down from 13 legacy and two acquisitions and our U.S.

shared service center team, led by Scott Christy, persevered through the challenging year to implement several software tools, including Coopa that automates PR requisition expert AI, automates cash collection and voice eliminates checks and generates rebates for CECO.

Its leadership and a commitment to continuous improvement that has allowed CECO to reduce its cost per transaction by two thirds and financing the IT cost by 37% year-over-year, just remarkable. In 2020, we also integrated two strategic transactions EIF and mayor executing on synergies, onboarding employees, and opening up new markets.

First, acquisition to sourced, closed, and integrated 100% remotely. We all look forward to the day when we can actually meet those teams in person. Lastly, the call to action on cost, so many of our business unit leaders contributed selflessly to preserve CECO’s balance sheet and profitability.

Thank you to the amazing employees at CECO that sacrificed so much this year. We are stronger for it and ready for 2021. With that I'll turn to Todd..

Thanks Matt, and I echo your remarks and appreciate your perspective after you have helped CECO navigate some challenging markets several times over the past four years. I have mentioned on both earnings call since my arrival how capable and dedicated the CECO team is and that comes through in your assessment of the continued hard work.

Let's wrap up with the next few set of slides, please turn to Number 16. The top section points to the 2020 review from an orders and backlog perspective. As we've already mentioned, orders were down 27% for the year. We estimate that COVID related market impacts drove at least 80% of that decline.

And the fact that orders were up in Q4, we think demonstrates that we are well-positioned for market recovery. Unfortunately, this order declined for full year 2020 means we enter 2021 with 15% less backlog or project revenue.

This will put some pressure on the first two quarters, which is why we are stressing that orders growth, cash flow generation, and margin conversion are key indicators of how well we are turning the corner as COVID impacts start to subside. The middle section reiterates a series of strengths we have highlighted before.

With approximately 40% of our professional staff being engineers or application specialists CECO is uniquely positioned as a leader in key environmental and industrial process sectors. We will continue to build off this expertise. We are also extremely asset light, which means we have a certain amount of flexibility when end markets ebb and flow.

Both of these qualities allow us to invest for growth in a focused manner. And we expect to generate strong free cash flow in 2021. So our already healthy balance sheet will be in great shape, they have the right pieces of our portfolio.

For the bottom of the slide, we highlight that we are committed to delivering financial results that reflect our improved cost structure and recovering markets. There may be a quarter or two in early 2021 where revenues are lower from our reduced starting backlog but we expect to rebuild that backlog throughout the year and deliver.

We are close to finalizing our new enterprise strategy. We will have a strong focus on CECO's leading technology platforms that represent our best position for sustained growth. Within CECO we have 10 to 12 platforms that span air filtration and quality management, gas and liquid separation, and industrial processes and flow.

So most certainly better positioned for organic investment and their markets will continue to provide sustainable growth. We will also focus on adding more short cycle revenue platforms to CECO over time to add more balance to our portfolio.

A couple of examples of current organic investments would be our water treatment platform we recently introduced reverse osmosis, de-sanding and desalting technology, which rounds out our ability to serve our Middle East customers produced in oily water separation needs.

Prior to this year, the scope of work CECO could bid on was limited to separation internals only not a full customer solution. Another would be our advanced analytical services and training team that we just launched based out of Houston, Texas.

This group of experienced service engineers targets our Brownfield customers and comes with a Rolodex of new service customers. Their focus is repairing, calibrating, and testing analyzers and continuous emissions monitoring systems, or SEMS that are installed in the field today.

Listening to our customers we understand CAPEX is tight in the need to keep their current systems operational. We expect the services team to rapidly become a multi-million dollar business in a short period of time. So we look forward to sharing our more comprehensive and new enterprise strategy in the near future.

This will provide investors with a roadmap for how we will steadily elevate our position as an environmentally focused, diversified industrial. You turn to Slide 17 you may remember the slide image on the top left from our Q3 earnings presentation.

We wanted to reiterate that as we navigate 2021 which again, we expect to show solid orders and backlog growth, that CECO is much better positioned for strategic investments, and higher margin results.

Bottom line, back in 2017 we saw a sudden decline in end markets, but CECO was not yet officially organized internally nor did we have a strong balance sheet at that time. Today we have much more robust systems and processes in our balance sheet as an enabler, not a detractor. As we see market growth, we will be stronger and more agile.

Please turn to Slide 18. We remain committed to these financial targets, especially as markets recover and become more normalized. Revenue growth of at least 5% is something we believe our leading platforms can deliver. We also believe we are closer to realizing 13% EBITDA margins, especially when we get our backlog back to 2019 levels.

So these financial targets are well within reach. Finally, we expect to generate solid free cash flow in 2021, always a key goal of our organization. Now let's wrap up on Slide 19. It has been a unique 12 plus months. Our focus on delivering for our customers is always important and we remain committed to doing so while maintaining health and safety.

We have been aggressive with cost management and improved our operational efficiencies. As Matt highlighted, this has been a steady focus for CECO and we are in better position than ever. We saw nice momentum in the fourth quarter in key energy markets and we expect much of that to continue.

And we look forward to articulating more of our key initiatives and strategic priorities. This will help to focus CECO towards a more clear and executable growth program, and our investors can track the progress. We thank you for your support, interest, and your time today. With that, we will open up the line for questions. Operator..

[Operator Instructions]. And the first question comes from Jim Ricchiuti with Needham & Company..

Hi, good morning. Just had a question about the short cycle business and the metric you're providing.

And what I was curious about is, is that short cycle business more weighted toward maintenance related revenue or is it more the traditional business?.

Yeah. Hey, good morning Jim, Todd here. I'll now start and then hand it over to Matt who's done a lot of work with his team on assembling the data and information behind it. It does include maintenance and sort of repair. But, it also is I guess, I'll use your word sort of more of a classic or standard set of businesses as well.

Businesses that when we book the potential order, we book the sale, we produce and ship the product relatively quickly. So it does also include some of our product lines and businesses such as our pumps business, etc. So it's a combination of three or so things, three or four things, it's aftermarket repair parts.

The small area of our businesses where we do have some recurring revenue and then our sort of short cycle book to ship businesses like our fluid handling..

Got it, do you guys use this as something of a leading indicator for the business?.

You know maybe yes, I think that's a good way to look at it. So, one of the reasons we want to put a spotlight is for the following. Number one, I think historically, we, as an organization have talked about and maybe almost even sort of consistently but never really provided any real metrics around things like recurring revenue.

We are going to grow our recurring and our services revenue, but we never really put specific numbers to it, and then a spotlight on it. And even the same thing somewhat true internally, if you want to say that from a holding ourselves responsible for focusing on improving and driving results in that area. So we're starting now, right.

We wanted to put a real number out there that we expect to talk about and potentially even provide more color in advance, quarter-over-quarter and year-over-year. And I -- it is an indicator for sure of, I would say sort of the general industry, so to speak.

I -- especially in our industrial businesses, where we do have a little bit more of a short cycle space. .

Jim, I would just add one thing, the majority of our business is CAPEX spend. And we really want to drive maintenance spend with our customers. So pumps, filters, ductwork, services with the customer, repairs, all higher margin business that are deemed short circuit cycle. So that's what's all-inclusive in that. .

And last comment, not to continue to pile on to the answer. But, we highlighted a new services team offering that we're launching this year, and we're excited about that.

I think our ability to not only show the metric and talk about how we're driving those results, but then really add very specific even if they are somewhat small initiatives that we're doing within our businesses.

It -- I think it provides more clarity to our investors where we're taking organic investment to start and potentially down the road some other investments to continue to grow. But we do want to find more sustainable revenue profile of our organization. .

Got it, that makes sense.

And just a question on the backlog, I mean, curious if you could give any perspective in terms of the margin profile of the backlog, just also in light of the comments you made about the fact that you'll be building backlog but there's going to be some pressure, it sounds like in the first couple of quarters of the year?.

Yeah, as we look at backlog margins right now, Jim, they're reflective of our Q4 margin rate, maybe a little bit pressured. Just because in the last two or three quarters as some of the bookings on the energy side have come in, we've seen some pricing pressure there.

But for the most part, we're executing through cost measures, and executing for our customers to increase those margins as we deliver them..

Got it, thanks. I will step back in the queue..

Thanks, Jim..

Thank you. And the next question comes from Amit Dayal with H.C. Wainwright. .

Thank you. And good morning Amit. .

Good morning and thank you.

With respect to this analytic services business, as a part of maybe your recurring revenue effort, is this product ready to go or does it need some more development?.

Not a product, it's a services team. It is an expansion to really a lot of the relationships we already have with existing Brownfield customers. So these are existing facilities that in the predominantly in the energy space, we're starting with a regional focus.

We believe that the focus area that we are hiring and that we're leveraging our relationships, as well as the service technicians if you want to call it that for this specific space, and we predicted -- we specifically call that continuous emission monitoring. That's a pretty broad category, but a very important category.

There's a lot of data analytics, a lot of part components to it as well. So it's not a product offering as much as it's a technical service offering and we're ready to go and we're just going to be building out that team as we continue to prove out the momentum. .

And then we already have the test equipment, the trucks and the men. .

Yup, understood.

And then roughly, do you have an estimate of how big this opportunity is within the existing customer base?.

Well, it's a fairly large opportunity. In other companies that are in this space have shown a propensity to be able to grow relatively steadily. Obviously, we're starting here. So in the year, it's a relatively small number.

We believe, though, that this could easily be in the next few years a solid double-digit millions of dollars of revenue as we continue to invest and grow..

Just a last one from me, as the economy comes back, maybe your backlog starts building up again, do you expect some of the costs you took out of the business to come back in again based on the group's needs going forward?.

So in 2021, we will absolutely see some increases just because of variable pay health care costs. You can't take Q4 and just annualize that out. But I think I did coordinate on the color in my remarks that we think it's around 18 million per quarter, which is well below the 21 to 22 per quarter we had previously.

No, we don't expect to have to increase our cost structure. Our aim is at 13% or greater EBITDA margins we need to get that growth. We're tracking utilizations of our application engineers and our project management team. And we'll increase as the backlog grows, but we're going to maintain our margin ranges in that sense.

So I don't see it having to grow too much and make a ton of investment Amit..

That's all I have guys, thank you so much..

Thanks for asking. .

Thank you..

Thank you. And the next question comes from Bill Rosalo [ph] with Titan Capital..

Thank you, a couple of questions. First of all, you'd mentioned that you have the highest pipeline that you've had in several years.

Is that due to the market expanding or is that really CECO specific initiatives that is leading to that?.

Yeah, this is Todd. Good morning Bill and then I'll hand it over to Matt, who again, he and his team have done a tremendous amount of work with our businesses on analyzing the historical perspective, as well as how we model out this pipeline. We're getting better at it every day.

It's our largest pipeline and so, I mean, I think it's indicative of a couple things. Number one, we feel that we continue to maintain our performance and our position in markets, and that's attributable to how we continue to invest in those markets internationally. So we're expanding into adjacent markets consistently.

It provides more market scope for us, I think, to add into the backlog or excuse me into the pipeline, number one. Number two, we saw a fair amount of deferrals and opportunities over the last especially 12 to 18 months, some of which economic relief related associated with COVID.

So, if you think about where our historic backlogs are, excuse me, pipeline had been at its previous peak of call it 1.7 billion, I might say, at least half of the new record, getting from 1.7 to 1.9 is that natural increase associated with higher levels of deferment from the previous periods.

COVID being a unique environment, I don't know that we were tracking this level of pipeline because we didn't own all these businesses 10 plus years ago when the financial crisis hit. And then the other is our expansion into adjacent markets and our investment into being a leader..

Great, thanks..

And Matt is nodding that I hit the answer, so we are good with that. .

Okay, thank you.

And how do you see or believe that the Biden administration's approach to all things environmental enhances your air and the water business, just can you talk through that either headwind or tailwind that you believe this administration is setting up?.

Yeah, we're learning, obviously, pretty quickly here what some opportunities could look like. We think we're interested in areas of environmental and water as you mentioned, Bill. So certainly keen to learn more of what our customers are asked to do and want to do in this space.

I think infrastructure investment is going to be -- could be interesting for the economy, and for industrial companies like ours, where we're positioned. Look, we really like -- we really like across most of our end markets, the feel of confidence like we said, the large pipeline of opportunity.

We think that as much as anything, internationally, domestically, the competence of businesses that were moving past the pandemic constraints, potentially coupled with some new investments coming in infrastructure and in environmental regulation, those could be positives.

And again, I think our pipeline shows that, that we have some unique opportunities..

And then lastly, what additional insights would you like to share about your refinery customers, either their behaviors or signals and their turnaround plans, and just how they're -- how you would characterize them today versus what would be normal if we had not gone through the COVID related oil price downturn?.

We do a lot of feed studies for all the independent refiners and some of the big integrated all over the globe. And I will say that the feeds are driving more leads and our pipeline higher. I would say internationally is where we're seeing the majority of it.

India is a market that right now HPCL is I think it's IOCL, I forget the other ones, that are both moving forward some large projects. In the U.S., if you read what the independents are printing, CAPEX budgets are down 30% to 40% year-over-year as they continue to cut because of mobility data, transportation, COVID still is a pressure on them.

But what we are seeing is in those CAPEX budgets bill, there's a shift from new plants, and this conversion from renewable diesel over to maintenance, to all the CAPEX that they deferred last year starting to come back. As we've said multiple times over, our business you can't defer it forever. Your equipment will break down.

So we believe that those leading indicators are all positive for us. Obviously, if you watch what's happening with crack spreads from April till today, they continue to rise. They're in the band of last five-year average, which is good. Outside, that means they're making no money whatsoever. They're making cash or reinvesting back into the business.

So several leading indicators for us that refinery is headed back up. And we're excited about that obviously..

Matt taking your comment one step further, are you sensing that you at least in 2021, will have a larger share of the CAPEX budget?.

We believe that there will be a larger share of the CAPEX budget for all refineries. We don't comment on the share of our wins of those orders that are placed..

Yeah, but Bill we've talked I think before on or certainly we've tried to explain that last year 2020, obviously, the balloon of CAPEX if you want to say got smaller, and we feel that just to play out that example, the air in the balloon so to speak was pushed more to one side of the CAPEX maintenance that maybe didn't -- that we didn’t benefit from and this year that air in the balloon may have got larger, but even if it didn't, and we believe it is, but even if it didn’t, so to speak, that air is being pushed over to our side of the maintenance CAPEX arena for 2021.

And we already feel like we're seeing that sort of that opportunity set..

Thank you both. .

Thank you Bill..

Thank you. And the next question comes from Tate Sullivan from Maxim Group..

Hi, thank you. Good morning. Hey, you mentioned a couple times electric vehicle production during your comments. I mean where are you in the sales process with this opportunity, are you already doing projects, and is it a global opportunity or U.S. right now? Please, if you can provide that..

Yeah, I'll sort of start by maybe saying yes, to all the above. I mean, we're actively bidding on new opportunities, it's a growing space. There's expansion in this space internationally. Domestically, we've won some projects recently in domestic areas. We're very close, we think, to some attractive projects internationally as well.

So I think this is an area that we look forward to highlighting as we sort of -- as we sort of continue to move along and then look for our space as well, like a lot of other industrial providers of solutions. We look at not only new builds, but we look at conversions in automotive, in other industries, plant conversions, right.

So, as those plants start to really now convert from one class of vehicle to an EV manufacturing space, they really have a fairly large CAPEX build out and we're benefiting from that as well..

Can you -- as a follow-up can you give an example what type of equipment do you provide to the EV industrial customers, I mean, I imagine not NOx emissions, is it, do they have an environmental angle and can you provide an example?.

VOC’s dust collector, so think of RTOs and think of dust collectors as two really good examples there. We're cleaning the air and at the same time, obviously eliminating the volatile organic compounds that are generated in those environments..

Thanks. Separate one from me. I saw in your K that percent of revenue from outside the U.S.

is 35% in 2020, I think should people going forward associate you as a growing international company, you mentioned Middle East opportunities as well can you just frame that discussion, please?.

Yeah, ebbs and flows. I think if you were to go back two years ago, it was close to 50:50. Our energy business drives a lot of that year in, year out of international.

So if you have a bunch of refinery or paragon [ph] orders that happened to be in Europe at the time, then the sales [indiscernible] example is one of our largest customers are GE and Siemens. And depending upon where that power plant is on the globe, that's where we'll have ended destination sales for so it.

So it ebbs and flows with our energy business. So no reflection of the future. We do believe though, that international is strong right now..

Thank you both..

Thanks Tate..

Thank you. [Operator Instructions]. And the next question is a follow-up from Jim Ricchiuti with Needham & Company..

Hi, just as it relates to the last question, I know that the business ebbs and flows between domestic and international, but is there any additional color as to where you're seeing some recovery in market, is it -- are you -- have you noticed more of a recovery, more strengthening for instance in the U.S.

market in Q4 or is it still tougher to tell because it depends on various projects that you're targeting?.

So in Q4, I would say in the energy sector we did the India increase, we saw China increase as well. In our industrial sector, I'd say North America is the strongest. We are seeing opportunities across Europe. We recently added a international sales manager over there to continue to grow our industrial and fluid handling capabilities.

And so that's opened some of the pipeline, Jim, but in energy in North America as Todd used in the remarks kind of choppy right now..

Got it.

And again, I know that the market is still fairly unsettled as we're in this gradual recovery, but I'm wondering how you're looking at inorganic growth opportunities, how active is the -- are the activities right now? Is the pipeline building, are you looking actively or is it still something that you're being a little bit more cautious on in this current environment?.

Yeah, I think we're certainly building we think a very focused funnel for our analysis.

There are certainly opportunities out there that are, as we advance our strategy and our strategic thinking both organically as well as how we think about our portfolio going forward, we want to make sure that we have the appropriate funnel of opportunities that really match up well with where we think the markets are going, where we think we have a best opportunity to expand leadership positions, and especially continue to balance out, like I said, sort of our business or revenue profile, to more repeatable, sustainable sort of short cycle businesses.

So look, I would say, Jim, we're not -- we're not transacting anything right now, right. We're very focused on our strategy, on our organic opportunities.

But yeah, we're building a funnel and we're starting to feel really good about our strategic plans coming together so that when we're ready to execute, it's very clear, internally and externally what we're focusing on and why we're doing it..

Got it, thank you. .

Thank you. .

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

Yeah, thank you. Well look, I appreciate your time and interest today. Let me double down on comments that we made thanking Team CECO, all of our customers and partners.

We navigated a very challenging year, proud of our results but more importantly, I'm really proud of the commitment that our employees and everyone that's associated with our organization showed as we -- there was no playbook 12 months ago when we embarked on the tough decisions and the challenges that we all faced.

And so we appreciate all those efforts. We hope everyone continues to stay focused, healthy, and safe. We look forward to speaking with everybody soon. And with that, we'll say enjoy the day. We'll talk to you soon..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..