Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . Please note today's event is being recorded. I would now like to turn the conference over to Steven Hooser. Please go ahead, sir.

Thank you, Steve, and thank you everyone for joining us on the CECO Environmental second quarter 2022 earnings call. On the call with me today is Todd Gleason, Chief Executive Officer; Ramesh Nuggihalli, Chief Operating Officer; and our recently announced and incoming Chief Financial Officer and Strategy Officer, Peter Johansson. 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, which is on our website at cecoenviro.com. The presentation materials can also 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 differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on Form 10-K for the year ended December 30, 2021. 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 reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck. Now, with that, I'd like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

Thanks, Steven, and good day, everyone. We're going to start with Slide #3 of the presentation that Steven mentioned to follow along with our prepared remarks today. We have a number of topics to cover as always and this slide provides a high-level summary of today's focus areas. First, today we announced two leadership changes. Matt Eckl who has been our CFO since early 2017 and Pamela Turay who has been our Head of Human Resources for about four years will be leaving CECO. I want to thank Matt and Pam for their contributions to our organization. We appreciate all the things they have done to help us advance as a company. We made the decision to hold today's call without Matt, as we both agreed to maintain focus on our excellent second quarter performance and outlook. Matt is working to ensure we have a smooth transition, which is well underway and I'm sure many of you will stay in touch with Matt. We wish both he and Pam much success. Our finance and HR teams are in great shape and working on transition items. I'm also pleased to announce that Peter Johansson will join CECO as our new Chief Financial and Strategy Officer. This is an expanded role and one that fits Peter's unique stripes and tremendous experience. We are driving our platform growth and enterprise-wide strategic development very aggressively. Peter will partner with me and our leadership team to tighten up these growth programs and ensure we have leading processes to identify and execute investible strategy. Peter brings over 30 years of experience in business development strategy, capital management programs and other business management analytics. His background includes diverse industrial leaders such as Accudyne, IDEX, ITT, Trane, and also AlliedSignal, Honeywell. I have a few of those names in my career profile too. Peter has been working with our leadership team as a consultant for about six months, as we've been building our M&A pipeline and evaluating market opportunities. While, Peter, will officially assume CFO duties next week, he is on the call with us today, although Ramesh and I will field today's questions. Let me pass it over to Peter to say hello. Peter? I think we might be having some technical difficulty on Peter's side of the phone here.

There we go. There we go.

Thank you. Go ahead, Peter.

All right. Good morning, everyone. This is Peter and I'm looking very much forward to being part of this wonderful journey that CECO is about to embark on, great challenges and great opportunities ahead of us.

Great. Thank you, Peter. We look forward to you joining us officially next week. We also mentioned that our General Counsel Lynn Watkins-Asiyanbi, will assume the newly created role of Chief Administrative and Legal Officer. In this role, Lynn, will drive our human resource and legal functions and partner with our business leaders to ensure we have nimble and effective programs in place to support growth, new operating models, and of course, maintain strong compliance and development. So I want to once again thank Matt and Pam for their service. And of course, welcome Peter and Lynn into their new roles. The other points on this slide will be more concise. We hope you take away that CECO delivered an outstanding Q2 and very strong year-to-date performance. We continue to deliver on our very transparent roadmap and we believe we are establishing programs to help drive real sustainable results. We will also discuss our full-year outlook, which we are increasing given our year-to-date performance and our confidence around what we see in our backlog and across our opportunity funnel. We hope you also take away that our capital allocation program is driving good utilization of cash, as we continue to identify and close accretive and strategic acquisitions and we are buying back our shares. More to come on all those points. So please turn to Slide #4. Our strong Q2 and year-to-date results are driven by many important factors. Of course, we have certain end markets that are growing and we are well-positioned in those markets. However, I would submit that we have fundamentally changed CECO and continue to advance our organization. As we state in the slides subtitle, we are now two years into a systematic program to reshape CECO and drive higher performance. I joined the company in…

Yes, thank you. We will now begin the question-and-answer session. . And this morning's first question comes from Jim Ricchiuti with Needham & Company.

Hi, good morning. First off, congratulations on the quarter.

Thank you. Appreciate it.

Couple of questions. Todd, first off you reference CECO's wins in the semiconductor market and I know some of this may not necessarily associate CECO with semi fabs, but yes, I noticed you were at the recent SEMICON West Show. And I guess my question is to what extent you think the company could benefit from the recent chips legislation?

Thanks, Jim. Good question. We were at the show. We're excited about our relationships we have in this space, has been a -- an investment of ours and somewhat in anticipation of what could be a healthy market here in semiconductor manufacturing. There's certainly some interesting roles that we can play in their overall processes, especially as you can imagine around industrial layer solutions and others. So, I mean, simple answer is, you look, it's in our pipeline. There's some really great opportunities for us in the second half of the year. We hope to be talking about that in the next quarter, in the quarter after that as well and maybe perhaps beyond. But we feel we're well-positioned for that investment in that industry. We're excited about what that legislation represents. Not only for us, of course, but I think ultimately in longer-term for the health of our overall industrial economy and our ability from a supply chain perspective to have a little bit more control domestically of our destiny in this area. So anything that CECO can do to be part of that, we look forward to it.

Got it. And wondering if there was anything unusual in the Q2 revenue strength, because your guidance at the mid-point of your full-year guide, you suggest some deceleration in the second half. And is that just conservatism or I'm wondering is it timing or are you seeing anything in the business that that might give you a pause?

No. Thanks, Jim. Good question there too. So I think I'd say this. We do not see any changes, if you will, to our business profile, et cetera, other than the continued choppiness of the supply chain markets. And less so probably Jim and into our audience here for us don't get me wrong, we're working through challenges like everybody else, but we want to be appropriately thinking about challenges that could happen to our customers and have happened to them. And that's influential on some of our larger projects. So while we have an opportunity to potentially do certainly better than the mid-point of our guidance range. We also just want to be thoughtful that some of our customers are having to wait for other parts of their supply chain before they can accept let's say installation and delivery. So at this point, we think it's appropriate to just sort of manage everyone's expectations a little bit on until we sort of work our way through these supply chain challenges.

It's helpful. Last question, I'll jump back in the queue. The M&A activity is clearly picked up a bit and in recent quarters, and I'm wondering how you would you might characterize the pipeline going forward.

Yes. Look, we have had a series of really strategic and good acquisitions. We love the technology and the adjacent markets that it gives us access to, great management teams, good cultural fits. We continue to look for organizations that have, I think a similar profile, strong management teams that that help us expand where we're at and where we're going. Organizations that want to be part of we think a growing enterprise that that is focused on industrial layer, industrial water and the energy transition. And one that does so I think that with increased investment for growth, there will be more. We expect the timing of acquisitions is always kind of tricky. So we'll obviously announce those as they come, but for us, we have a great pipeline of opportunities that we're evaluating. And with that, look, we're going to continue to generate strong free cash flows and deploy the capital as we've discussed.

Thank you. And the next question is from Rob Brown with Lake Street Capital Markets. Please go ahead. Mr. Brown your line is live.

Hi, good morning. Congratulations as well in a nice quarter

Thanks.

Thanks Rob.

My question on the gross margin, you've had a nice uptick. How do you sort of see that trending is the backlog kind of support and pricing support, getting back to that 32%, 33% range or -- and sort of how's your view on how I'm going to take?

Yes. We'd love to get there tomorrow, Rob. As I mentioned in the -- in sort of our prepared remarks this morning, if we were at 32%, 33%, it just falls right down to our EBITDA margins and we would've been at 12%, 13% as opposed to 10%. And so, operationally, we're very proud of that sort of that opportunity that's in front of us, but also just proud of our accomplishment, because we've been talking about that as a company, probably for years, getting up into the double-digit EBIDA margin rate potentially getting into the team. So to go back to the gross margin question, yes, our backlog profile has in a more attractive gross margin rate associated with it. Of course, there are big and small projects that depending on the quarter can influence those margins. But we have a confidence that our sequential improvements could certainly continue. And our goals and objectives are that as we exit this year we're at a higher rate than we just delivered in the quarter. We'd like to be at 31%, 32% as we're exiting the year, so that we can enter 2023 at back to the gross margin levels that we've historically enjoyed. And then with our acquisitions, this year and going forward, of course, our goals are to continue to take those higher. And but in the short-term, it's really about inflation, it's about our ability to get strategic pricing, of course, productivity and supply chain management. I think our teams are doing a great job of all of that, and we're going to continue to focus on it. Good question.

Okay, great. Thank you. And then second question really on the sales funnel, you talked about it being quite diverse, just some color on how that's developing. Are there areas where you're seeing sort of strength or weakness or do you sort of feel it's across the Board strength in your major market just some color on the sales funnel?

Yes. Look, it's certainly not all across the Board strength. I mean I wish that, in our world that balloons only went up and up and up and we grabbed onto all of them, but turns out that, that doesn't always happen in the industrial landscape. I wouldn't say we have a huge flare being shot in the air by any of our platforms on significant weakness. We've seen some distributor inventory levels sort of flatten back out in terms of whether it be fluid handling or some of our other businesses. So look, we have -- we of course are just sort of paying attention to some areas that are slowing down or restocking their inventory going forward. And we're -- but I wouldn't say other than a couple of end markets like maybe automotive, certainly in the quarter took a little bit of a pause in terms of some of the orders. But again it's maintained a good level of strength there. Overall, we feel like it's a pretty diverse and strong pipeline. The focus of our platforms really helps us have visibility. If one of their end markets is slowing a little bit, another one seems to be picking up and I use the word nimble, probably at least a dozen times -- I -- maybe a joke, but at least three or four times. And I use that word because they're moving quickly to go after those other opportunities. Of note, we would say some of the energy markets that we participate in both in terms of the energy transition areas that we think are going to continue to have sustained investment in areas around biogases and whatnot, but also just sort of back to let's say LNG, I could use the acronym LNG, LNG, LNG, over again in terms of market opportunities we're seeing. And so that's just one area that I would highlight. I think other companies are as well. And we like that space and certainly there's other investment in our core energy business that we think looks -- what looks pretty good for us in the next few quarters. Good question.

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

Thank you. Good morning, everyone. With respect to sort of the margin side of the story, could you provide any granularity on you're seeing some softness, I guess on the gross margin side, but operating margins continue to hold up and improve. What are the drivers that are helping you achieve sort of improving operating margins? Any color on that would be helpful. Thank you.

Yes. Yes. So obviously, we sort of spent a fair amount of time on gross margins. So let's just sort of for a second here leave that alone. We're not alone. I'm glad we're not alone in the sense that our gross margins have been impacted by the inflationary environment and some of the supply chain challenges. So what's driving our EBITDA margins higher is really our ability to convert the volume that we've delivered in the first half of the year. It's scaled. At the end of the day I'm not going to say it's all about volume for companies like ours that have a relatively fixed SG&A rate. We have invested more in SG&A, that's a combination of more people to support growth and activity, of course, increases like merit increases and incentive compensation and all those costs that are associated with those great people. But if you look at our SG&A as a percent of revenue, even though the dollars have gone up, the percent of revenue has gone down and so that contraction, if you will, in a good way of SG&A as a percent of revenue is, at this point, more than offsetting the other negative contraction of gross margin rate, so and that ultimately what you want is to get back to the gross margins that we've historically enjoyed, and nothing has fundamentally changed about our business, I would submit to those of you that are listening today. It is just the market conditions that we're navigating and we're navigating well, but nonetheless, that's the condition that we're in. So, gross margins are down, but our operating conversion on our volumes is up. And if we're able to get our gross margins back up I think you're going to see even -- you're going to see even stronger EBITDA margins as a result. We look forward to hopefully delivering those.

Thank you. Thank you for that. The CFO change, Todd, I mean, is that signaling larger M&A targets, like, how can we think about this change in terms of M&A as a part of your future growth?

Yes. We're not trying to signal anything there, per se. I think, look companies and organizations and people evolve, and they look at new opportunities to continue to bring new perspectives, new processes. Certainly, Peter has a strong background as do I, Ramesh, our whole lead Lynn, our whole leadership team with large organizations that have done large complex transactions. If that was my focus, I could have made this change or on that night, I could have agreed to go in different direction from an M&A team perspective. But -- so it's not about signaling the change in our M&A strategy. It's about continuing to evolve as an organization, towards new programs, new processes, new operating models, and I think the right time for everyone involved in this, and so look it's a healthy change and we look forward to bringing Peter on board, so you could all meet him and get to learn about his strong background.

. And the next question comes from Bill Dezellem with Tieton Capital.

Thank you. My first question is relative to pricing. When do you anticipate the pricing moves that you have made already will be fully rolled into the results?

Yes. So on the 30% of our company approximately, Bill, that is shorter cycle, those are -- have already either found their way or will be relatively quickly, kind of, quarter-by-quarter. So think of at least 30% of our price actions which have been received well by our customers, our distributors, channel partners, et cetera, those are reflected not fully, but let's say, 70 or so percent, maybe more reflected in our results in the quarter. Our longer-term projects were -- we certainly do call it price, but it's really about protecting our gross margins and how we're bidding jobs. So we're increasing our prices equivalent or more so in some cases versus the cost that have been increased in our supply chain. Those are why we're saying our second half looks richer from a gross margin percentage than our first half. The combination of us working off of lower margin jobs in our backlog over the last 12, 18 months that were booked a while ago at lower margins, therefore lower prices, now, we're working off of or we're starting to work off of higher margin jobs as a result of better pricing and maybe just better mix. So for us together, so 60%, 70% of our business is going to readout a little bit more in the second half of this year.

And so, would you say, by the end of the fourth quarter, that the long cycle pricing actions you've taken will fully be reflected or will it be into 2023 before that's fully reflected?

If you have to use the word fully reflected, I'd say we're heading into 2023 probably because by the way we continue to, we think, work on pricing in our short and long cycle businesses even in the last quarter and in this quarter. So, but by extension of that comment, Bill, that's going into backlog and hasn't yet hit our P&L. And we're certainly not for like dropping prices at this point on anything. We're usually certainly not the, the low margin dinner on a project anyway, so we're continuing to hold firm in our market leader position where we have strengthened and where our products are unique and we stand behind our quality delivery and our expertise. So I think for us it's, I'd say, mostly are going to be baked-in in the second half of this year, but we expect that there's still opportunities we go-forward into our backlog rolling into next year. It's really the word fully -- it's really the word fully, that I'd say, we're not fully -- we're not going to fully execute or recognize it this year that is more fully, as we head into next year.

No, that that's really helpful. And I want to take this line of thinking, one step further. Are you satisfied with the current pricing that you are bidding at today or should we anticipate that there will be additional price increases still to come?

I think, we're -- look, you're asking a CEO or CFO if they're satisfied with pricing and financial results is, sort of, like, asking a kid if he wants another cookie. I mean, at the end of the day, I think we want more, and so we'll think about how -- where we're at in the marketplace, in our cost structure. Here's what I'd say. I think we consistently look at what's going on with our cost and our supply chain and to the extent, we feel, and there has been a -- maybe there was a capitulation in terms of certain things, in terms of a higher cost before. There are certainly some components, some metal, some other commodities, et cetera, that continue to bounce around. So one, work is never done on pricing. But I'd say we feel really good about where we're at with pricing right now. I don't want to sit here and signal that there's a bunch of additional price increases coming out in our brands and in our products. We appreciate that this has been a challenging environment for a lot of consumers, a lot of companies, and for all of us, both individually and collectively. It'll be nice when we're maybe not all talking about inflation.

Right. Okay. If I may, I'd like to move to order growth, which I believe was up 33% in the quarter. Where did you see that strength?

Again, pretty balanced, but specifically our separation filtration platform, as I mentioned, both in terms of a lot of their, sort of, produced water and water filtration, also, their natural gas pipeline, just a really great strong quarter for separation filtration. For those of you that have been paying really super close attention to CECO last year across our eight business platforms, we have nine, because one's our emerging markets platform, so we have nine platforms, but across our eight business or product line platforms, I think it was only separation filtration that didn't grow last year. The other seven did in terms of their order book. So it's excellent that we had a very strong first half of the year in that business. And I want to thank all of our platforms, of course, David Taylor and the team are really doing a great job of positioning not only for their historic pursuits that they've done in, whether it'd be midstream pipeline or various applications, even associated with the Navy and the Department of Defense. But really getting after some unique opportunities in the energy transition and we look forward to talking about some of those carbon capture solutions, et cetera, as we go-forward into some of the future quarters. So, that's really a platform that I've a highlight as -- is a really strong platform in the quarter. Industrial air has just been cruising at a very steady pace for well over a year and we continue to do so. And again, Chris Tsourides and the great team in Industrial Air are doing a fantastic job, finding new opportunities in their diversified end markets. And I'll highlight those two. If you allowed me, I feel like I could go on and on, but those are two that I would definitely say are doing a fantastic job versus their original plans of the year.

Great. And I'm actually going to have one follow-up question to that. The separation filtration business is that strength a function of something that that you all are doing specifically or is it this natural movement that takes place where they had poor orders last year. So almost naturally they end up having a rebound this year?

Yes. Bill, look easy comps are always nice when you're starting to talk about orders growth. So let's acknowledge that that the team has some lower comparables maybe versus some of our other platforms, but it's both. Look, our Peerless branded solutions in separation filtration are leaders in the space. They're -- they exceeded the table, so to speak on many important applications for the customer. And so look, those opportunities are now coming to us and we feel good about our position to win the right jobs at the right price. And again we're expanding into other areas that we maybe historically our legacy Peerless products didn't necessarily pursue. As I mentioned, some industrial water areas, some emerging energy transition areas, we'll be talking a lot about those we expect in the next few quarters Bill, but it's a combination.

Great. That's -- that's helpful. And thank you for taking all the questions.

Yes. Thank you, Bill. Operator, I don't know if we have any more questions, but let me know.

No sir. This does conclude the question-and-answer session. So I would like to turn the conference back over to Todd Gleason for any closing comments.

Great. Thank you, again. Thanks for everyone's interest today and participation not only in listening to our prepared remarks, but diving in and asking some great questions. We look forward to speaking with many of you not only today as we go through some of our scheduled or upcoming just sort of ad hoc investor calls and other calls. But hopefully, seeing many of you this week at the Jefferies Industrials Conference and this month at the Three-Part Advisors IDEAS Conference. And so with that, I would just once again thank team CECO for delivering these results and thank our leadership team and everyone for the focus that we have on continuing to execute and being accountable for our performance. And so with that, we'll end today's call and look forward to speaking and meeting with you all soon.

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