Good morning and welcome to the CECO Environmental Fourth Quarter 2022 Earnings Conference Call. [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, Rocco, and thank you for joining us on the CECO Environmental Fourth Quarter and Full Year 2022 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 guide our discussion. This 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 our 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 forward-looking statements. We encourage you to read the risks described in our SEC filings included on Form 10-K and for 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've provided a 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 presentation. With that, I would now like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

Thanks, Steven, and good day. I'm going to start with Slide 3 which is entitled Q4 2022 Earnings Summary. As we highlighted in today's press release, CECO had another fantastic quarter, which capstones an excellent full year 2022. A year where we set and met several growth and performance related records including exiting 2022 with a record backlog level. So we are well positioned for growth heading into 2023. We have a lot of good content to review with you this morning. And this summary slide highlights some of the key messages we hope you take away from our earnings presentation material. Our strong fourth quarter results across almost every financial metric really puts an exclamation point on our banner year. We are pleased to communicate robust top-line and bottom-line results, but even more pleased that we are consistently building a more resilient and sustainable business model. CECO is undergoing a steady transformation and our results showcase our progress. While we have steadily delivered top-line organic growth and bottom-line income and margin improvements, we have also deployed capital in a programmatic fashion. In 2022, we closed four strategic and accretive acquisitions, and we have continued our steady dealmaking program in 2023 with a transaction that we closed in January of this year. Each acquisition is already producing results at or above our expected growth model. We have deployed capital to repurchase $7 million worth of CECO stock. We will remain programmatic with our capital allocation in 2023 to add to our growth engine and drive additional shareholder value. I want to highlight that 2022 is the second consecutive year of tremendous orders growth. So this has not been an overnight phenomenon. Our full year 2021 orders growth came in at 29% and for 2022 we drove 46% orders growth. That's…

Thank you, Todd. Before I begin my remarks, I want to take the opportunity to reiterate my remarks from the third quarter call. CECO has only just begun to tap the full potential for its organization and the results I walk you through today, we believe, is just a start of a nice run of continued improving performance. Please turn to Slide 9, if you would. In Slide 9, we present a more detailed picture of fourth quarter results than Todd walked you through earlier on Slide 4. In addition to the highlights from Slide 4, I want to bring to your attention, gross profit, adjusted EBITDA and EPS for the quarter. We delivered gross profit margins of 32.4%, up 250 basis points sequentially, and 190 basis points year-over-year and the gross profit dollars of $37.7 million were the highest in a quarter in company history. Adjusted EBITDA margins for the quarter were 11.2%. And the adjusted EBITDA dollars delivered of $13 million represents the best performance in a quarter since the third quarter of 2016. We converted EBITDA to free cash flow at a 69% rate, yielding $9 million in the quarter and $27.2 million of free cash flow for the full year. Both GAAP and adjusted EPS showed nice improvement year-on-year with GAAP EPS of $0.21 from the $0.03 delivered in fourth quarter 2021. Please turn to Slide 10 where I will now walk you through a more detailed view of CECO's orders growth and progression. On this slide, you can see that CECO's order growth trajectory that began back in the fourth quarter of 2020 has accelerated through 2021 and 2022, with the 2 best quarters in company history posted in the first quarter and fourth quarter of 2022 respectively. But there is more to the story.…

Thanks, Peter. Good commentary on what you have personally seen over the past 6 months as our Chief Financial and Strategy Officer, but also how you helped shape key growth programs and strategies in the time prior to your appointment in that role. Indeed, CECO is on a transformational journey. I have seen and been part of transformation firsthand. In the early part of my career at AlliedSignal, which merged with Honeywell and continued as Honeywell, I saw how critical advancing operational excellence was to an already great portfolio. At other companies, I have seen how those firms needed to reshape their portfolio and then focus on operational excellence. We can all name companies that have transformed to create incredible value. These transformational journeys take time and each is unique. The point is, for CECO, it has been a steady focus on incremental improvement across a range of operational and strategic programs. It has also transformed the culture to believe that we can win in more markets and believe we can win with higher margins. It is transforming our shareholders to have confidence in our financial results and that our portfolio is becoming more resilient, more relevant and more sustainable. After putting foundational things in place in late 2020 and throughout 2021, we've really ramped up our game. Our growth has been incredible. That is a result of more organic growth programs in our nimble and highly accountable platform organizations increasing their markets, which, as Peter mentioned, Ramesh and his teams are doing an excellent job leading. Our profitability gains are a direct beneficiary of this growth, coupled with improving operational excellence. We continue to steadily transform our portfolio organically, but also through the half dozen acquisitions we have done since I joined CECO in mid-2020. We started our share…

[Operator Instructions] Today's first question comes from Aaron Spychalla with Craig-Hallum.

Maybe first on gross margins. Can you just kind of talk about the outlook and cadence there for 2023? And then maybe walk us through some of the areas you're focused on with kind of lean and operational excellence. And just what can margins look like longer term as short cycle continues to grow as a part of the business?

Yes. Good question. And I appreciate the -- that gross margins have steadily rebounded as we suggested they would, we hoped they would, and they did. Obviously exiting the year in the fourth quarter back in our historic range of around 32% as we've always said that somewhere in the 31%, 32% to 34% has been our historic range. So we feel good about the progress we made throughout the year. That progress was a combination of just higher-margin jobs in our backlog and then just good supply chain, pricing and productivity. We continue to invest in our lean and operational excellence programs that we believe would continue to steadily yield higher gross margins over time. Our goal would be to get above our historic range of 32%, 33%, 34%. But for right now, I would remind everyone that it's still sort of a choppy time, certain quarters will ebb and flow. While we think that the days are mostly behind us, if not completely behind us, to be where we were in 2021, we can see a few more quarters where gross margins sort of stay at or around these levels in the low 30s. But our goal is to steadily move higher with the programs that I mentioned as well as with acquisitions that typically are bringing higher gross margins as well. So as we execute against those, we expect to get gross margins higher.

And then maybe second, can you just talk a little bit about reshoring? Has that driven much of the growth to date and just maybe when you expect to start seeing the benefit from that and what that could mean to the business in the coming years?

Yes. I'll start. This is Todd, and I'll start with and then will get Peter's perspective here as well. Look, I think it's being a diversified industrial company with all the investment that seems to be going on within organizations in North America, reshoring, rebuilding a lot of industrial production, that has certainly added to our performance and other companies as well. We also think that we're just doing a really nice job of being nimble. A year or so ago, we identified certain markets like globally and including a lot in Europe around aluminum bev can, for example. And we really did a great job with strong double-digit orders growth in that market. And that is that market slowed down, we moved more quickly to -- back to metals or to electric vehicles or to other markets in the industrial space that we knew were going to receive more capital. And I think, for us right now, that reshoring, not just in North America, but other places around the world, we think a lot of investment in infrastructure. There are certain markets like semiconductors, with the chip stack that are going to get some short-term or medium-term expansion. So our goal is to constantly be moving to where we think the capital is going to be deployed and then make sure that we have focus on those markets. Peter?

Aaron, thank you for joining us today. There are multiple tailwinds that are just beginning to strengthen. Reshoring is only one. Think about the U.S. government programs that are being put in place where funds are just now beginning to be in the hands of spenders from infrastructure development, semiconductor research and production, clean tech and the transition that we're all seeing around energy and transportation, recovery in aerospace, all require lightweight metals produced in new facilities with cleaner environments. These are all very, very positive leading indicators for CECO and our growth. And that's just talking about the United States and Canada because Canada has some very similar programs. Globally, we're seeing very distinct and positive tailwinds that are peculiar to their local regions and priorities. I'd call out what India is doing, what Korea is doing and frankly in the United Arab Emirates.

So we have got a lot going on.

And our next question today comes from James Ricchiuti at Needham & Company.

So I'm looking at Slide 5. And clearly you have some tough comparisons in a number of these product areas. But it does sound like you're anticipating a pretty reasonable order flow again in '23. And I wonder if you could elaborate on the areas of the business that you see perhaps have a decent pipeline, good line of sight.

Yes, Jim, thanks for the question. I appreciate the interest in this topic. So look, we have a very good pipeline, and we've been pretty consistent in talking about that. Now, of course, look, at some point, you get to tougher comparables, right. Now that said, in 2021, we had orders growth of 29% to be exact. And then -- so we had a fairly tough comparable in some businesses. And across the board, we did a nice job of growing. Look, we give full year outlook for a reason because our quarters can be -- can ebb and flow a bit. In fact, if you look at our third quarter, orders were, if you want to say, only about $102 million, $101 million or so and that seems low compared to the first quarter and the fourth quarter. The timing of orders can be difficult to manage because that's really up to the customers to when they want to book jobs. What we know is that we continue to bid on a high level of orders. And our goal is to continue to grow our orders year-over-year, mostly organically, but obviously, sometimes with the addition of some of these smaller acquisitions that add to our order book. So again, we'll caution people to not look at quarterly because, again, that can be difficult to always manage the quarterly timing. And of course, we have a really tough comparable in the first quarter, but I would say we feel really good about the pipeline that we have and our growth metrics all feel like they're so robust.

And you may have mentioned it, I apologize if you did. Did you say what your organic order growth rate was in the quarter?

We didn't. But if you look at the $150 million, it would have been easily 90% of that being organic, give or take. So somewhere around in that percentage. So it's again, mostly, you look at the acquisitions we made, three of the four really didn't come on to our books until about halfway through the year anyway. DS21 was completed at the end of the third quarter. It was really just the GRC acquisition, which we completed in March that was here for 75% of the year. So for the most part, our orders growth last year and in the fourth quarter was largely organic.

And that actually segues, Todd, into the next question. My follow-up is just on the M&A pipeline. How active is it? You've done, I guess, roughly the same number of acquisitions in recent years in industrial water, industrial air. Where do you see the opportunity to build out the platform? Is it going to be in one area more than another?

We like balance. We think that we're advancing our leadership position in industrial air. And so if there are opportunities, technical areas or geographic and market areas, our goal is to move into adjacent markets or adjacent geographies organically. And if we can't do it organically, we'll do it inorganically. And so for industrial air, we're advancing our leadership position. There are certainly opportunities for us there that we look at. Industrial water, we're still building our niche leadership. So as we're building, same thing, we want to find ways to add and bolster our niche leadership in the areas that we talked about. And then in the energy transition, where we haven't necessarily done a deal yet, there are certainly opportunities for us to continue to transition our leadership along with where energy is heading. So we're going to remain programmatic. We like the pipeline that we have in terms of opportunities that we're looking at. And I think we've got a pretty good playbook at the moment.

And our next question today comes from Rob Brown with Lake Street Capital Markets.

Nice quarter as well. I think you talked about industrial water becoming a bigger percentage of your business. Could you give us a sense on where you see that 3 to 5 years coming out and how that matures?

I don't know that we've set an actual -- I mean, look, I have a number that I believe that at the end of the day, we certainly -- if you index everything at a similar growth rate somehow over the next few years and our strategic plans and activities play out the way they could maybe, and strategic being organic and inorganic, maybe we wake up in a few years and all 3; air, water and energy transition are somewhere around 1/3 of our company because we expect to get really good growth in each, again, organically and inorganically. So in that case, you could see a slightly higher investment in industrial water potentially. But the acquisitions we've made in industrial water and the growth opportunities in that space are really large, we feel. And so we're excited about that. But again, if it just so happens that air and energy, the growth rates there exceed, maybe our expectations and maybe we don't end up at quite that balance. We're not in a race to grow one more than the other. We look at strategic and accretive acquisitions. And we look at the same thing from our portfolio for organic growth. We have a certain amount of capital we're going to deploy for people, process, markets, marketing, business development, and we're going to go -- we're economic machine. We're going to go after where we're going to get the best bang for our buck. And so we'll spend the money in any of our businesses and segments that we believe is going to yield the best short, mid and long-term results.

And then on the kind of the segment or the platform growth, are the duct business and the Fluid Bed Cyclone business, are those maybe lagging and maybe you'll see more order growth in '23? How do you sort of see those coming along? Or how are they at this point?

We believe we will see good orders growth in 2023.

Our next question today comes from Amit Dayal with H.C. Wainwright.

Congrats on the execution. Just one question on sort of the backlog and the revenue outlook. Is there any higher sort of weight on any of the segments from a margin or revenue perspective in this outlook?

Yes. I mean -- so what, I mean, if you look at our backlog, we would -- we feel good about the margin profile in our backlog. A couple -- whether this was all in your question, let me just make a couple of comments on our backlog. First of all, the way we see backlog sort of executing throughout the year is sort of similar to some of the profile that we've shown in previous years, where the first quarter, there's less project management days. There's less days in the quarter. And projects usually have a little bit of a slower start in the beginning of the year. So I think in the first quarter, we're expecting a profile that looks like our historic profile where Q1 from a project backlog execution perspective is probably the smallest of the quarters. Margins we feel good about in terms of keeping a good run rate, so to speak, but then ramping up in the second quarter, third quarter, fourth quarter. So if you think about that from a profile. In terms of the segments, I think we feel like we're in a pretty good rhythm right now in terms of the balance across our businesses.

And then M&A continues to be sort of an important part of the strategy. Are you now potentially looking at slightly bigger size opportunities than what you did last year?

Well, we always look at bigger opportunities. And then we make decisions based on our ability to fund, execute and drive value. And so the deals that we've done in the 2 years since we started to do transactions, but especially in the last 12 months are the right deals. And if that means that a larger transaction is the right deal for our company and our shareholders and how we can execute for our customers, then we'll do a larger deal. But right now, the transactions we've done have been the right size and I think the right value for our shareholders. And so we have a balanced pipeline of transactions that look like what we've done. We have other things we could look at. And I think you can expect that we'll continue to put the right focus on driving shareholder value.

Just one last one with respect to China. How much of an impact would China have in terms of things opening up over there for your supply chain and for your revenue side of things. And any color on that would be helpful.

We're not huge in China from a revenue perspective. It's -- look, it's an incredible country with a tremendous amount of historic growth, future growth and opportunity. For us, maybe the second part of your comment or question around supply chain, opening up, being more reliable, that's a good thing for everyone. And we serve everyone, if you want to call it that, and from a diversified perspective. So we're probably more focused on where China, the stability of the supply chain and the reinvestment, if you will, can be a result of that. We're probably more focused on that than we are specifically in China for China, there are jobs and there are opportunities that we want to serve. And we're -- and we have a good operation in China that serves the local markets. And so, Peter, do you want to add anything about the China commentary?

Yes. I think you're maybe queuing off of our question mark on Page 18 around pace of recovery. There are both direct and indirect implications. If China, let's say, opens and closes quickly, and begins to consume global resources in that recovery, we could see a spike in materials, pricing and impact on availability. So we're very cautious in watching that. So that's kind of an adverse impact because there's inflationary and availability issues. The positive side of China recovering is their demand for liquefied natural gas and other materials that are provided and actually imported into the country as processed goods benefit CECO. So we look at it from both sides. And today, it's kind of in balance. China is still a buyer of exported gas, but not nearly as much now that Europe has stepped into that role. And Todd's earlier point that most of our business in China is China for China. We export very little now. We are actively resetting our supply chain to shorten the length, shorten the time, localize more and build in country of customer destination for our projects. That's why we have developed and continued to advance our global network of fabrication partners.

And our next question today comes from Bill Dezellem with Tieton Capital.

Would you please quantify the pipeline of potential orders at the end of December versus 12/31/'21?

Yes. Much bigger, I guess, is what I would say. Look, these are -- we typically reference a very standard sort of $2 billion level, but let me kind of provide some more color here, Bill. I would say, if you were to be consistent with comparatives, when we joined -- when I joined in mid-2020, we were -- our pipeline of pursuits, if you index it, and therefore, you remove the noise associated with COVID for a second here. We were really pursuing about $1.4 billion of pipeline opportunities would be the number that we would use. And by the end of 2021, we were pursuing between $1.8 billion and $2 billion of orders. So we had grown about 15% to 20%, give or take, maybe a little bit more, of pipeline pursuits. By the end of '22, that number was certainly consistently above $2 billion, $2.1 billion to $2.4 billion. In fact, we mentioned in November of 2022 that we were bidding on more jobs than we had ever in a moment. In that month, we were bidding on more dollar level of jobs than we had ever bid on before at a specific point in time. So that was only 90 days ago, right, 120 days ago. It's not like we've seen this major change. So we like the pipeline. It's certainly up 10%, 15% the last -- each year, the last couple of years, maybe a little bit more in terms of that. And I would say, look, it's the right thing for us to do. We want to use a baseball analogy. We want to have more swings at the plate even if that means maybe we weren't getting as many hits. Every time we're at the plate, if you're getting more swings at the plate, you're actually getting more hits overall.

Todd, with orders up 10% to 15%, pardon me, pipeline up 10% to 15% and orders up significantly greater than that. Does that imply that your win rate is improving? Or is it just the type of -- the mix of the pipeline just happens to fit better with your business?

I think in certain businesses, our win rate has improved. We've done a really nice job with marketing, and I want to call out the great work that our teams are doing in our platforms and our sort of corporate functional, Ramesh's organization that drives real focus and clarity around customer pursuits. We review jobs of a certain size and profile, and we move very fast to get our businesses working together to increase the size of those pursuits so that we have multiple platforms instead of going after $3 million or $4 million worth of content, we might go after $5 million, $6 million, $7 million because platforms are partnering together to go win jobs in coordinated fashion. So these are all the plays in our playbook where we have people working together much better. And I think -- and we have a lot more to do. I mean we're still in the early days. But overall, it drives a higher win rate probably. But overall, I also would say it just gives us more opportunities to go after.

And Bill, there's -- in the cultural shift the company is undergoing, this is a subtle, but important move we're seeing. We are seeing our commercial teams pursue more and playing to win more. The level of confidence that they will, if they win the job, get the investment and resource necessary to execute the job is very, very high because they know that if they bring the business to the company, the company will support them and it will get delivered. In the past, what I've learned is that, that wasn't necessarily the case. Our teams almost put a constraint on themselves. They put a governor on their commercial performance because they felt that they brought something big and interesting to the business, they had struggled to get it resourced. That's not the case today. Our commercial teams with their marketing efforts and their targeting efforts are going after very good pieces of business, well, in some cases, larger than we historically would have pursued and they're winning and getting resourced. And that combines with the pipeline being bigger and playing to win more aggressively leads to the results you're seeing.

And our next question today comes from Gerry Sweeney of ROTH Capital.

Just a couple of quick follow-up questions. Just curious, I'm not sure if you broke it out, but -- or if you do break it out, but revenue short versus long cycle currently?

Yes. So when I joined, we were 80% long cycle, very cyclical business profile. And again, some of that had to do with the COVID situation, but -- and only 20% short cycle. Where we've increased our percentage to 30% short cycle, our goal ultimately -- and, well, like I said, we haven't yet gotten the full benefit of the 4 acquisitions, now the fifth acquisition that we made, most of which have higher percent of short cycle deals in our pipeline if we choose to do them, likely have a higher percent of short cycle as well. Our goal would be to blend our business model to be more 50-50 over time. Now our growth rates in the mid-cycle and long-cycle projects could make that challenging, and that's a good reason that we might not quite get there in the next few years. But I think we're making good steady progress. Our organic growth in short cycle has been very strong. So it has a long cycle. So that's been a challenge to close the gap on that. But Wayne Denny and his team in the fluid handling business, for example, doing a great job launching new products, getting more distributors, improving their win rates and their delivery time and the quality. And so I'm very confident and optimistic that we're going to continue to organically and inorganically close that gap because ultimately it just gives us a better business mix for consistent financial profile.

And then SG&A as a percentage of revenue, that's been ticking down. I'm just curious if there's some more room there or how do we look at that?

Yes. It's -- again, in the quarters, it's going to ebb and flow a little bit from an adjusted SG&A perspective, and if we go and dive through the numbers. Obviously when you make acquisitions too, you have to rationalize a little bit how you're -- we like to keep the leadership team. So it's not like we're not buying these businesses for cost synergies, et cetera. So we have to think about what's the investment needed to really maximize growth. Ultimately we want to grow our investment in the S part of G&A is going to continue; sales, marketing, business development and ultimately, and we hope and believe that the G&A part of SG&A is stable and that our resources that support our businesses from a functional perspective, around our HR and finance and legal and operations, those -- that talent is able to support more business, and then we'll add to that as we need. So I believe, ideally, we're going to continue to really leverage SG&A and help us expand margins.

Our next question today comes from -- is a follow-up from Jim Ricchiuti at Needham & Company.

Just a question with respect to some of the inflationary pressures you've been experiencing, to what extent that had an impact in Q4? And I'm also wondering along those same lines, I think you guys have talked about pricing and whether that becomes potentially more of a tailwind in '23 as you get the full benefit of that.

Yes. Inflation has been a longstanding challenge for most companies, especially industrial companies. So it can be, whether it's materials, whether it's people, logistics. I think in the fourth quarter, our pricing overall had really kind of caught up because we booked jobs in backlog, 1/3 of our backlog is shorter term, 1/3 of its more midterm, 6-9 months revenue, and then 1/3 of our backlog is some are starting between 6 months turning into revenue and could go up to 18 to 24 months of getting all that revenue. So if we put better pricing in place, it takes a little bit of time to get it to our P&L to offset the cost that's necessary to deliver on some of our projects. And obviously we're hiring people as we go. So yes, I think the fourth quarter was a better balance for us and which is why gross margins were back up above 32%. There's room to go still on productivity and pricing, and we hope that a stable inflationary environment, which is, I think, how we're feeling things look right now. No doubt that there's interest rates are going up or have been going up and there's going to continue to be a bouncing ball on some inflationary costs, but it feels more stable than it was 6, 9, 12, 18 months ago.

One very quick follow-up. You guys had an interesting win, I think it was in Q3, in the carbon capture space, I think it was for separation, filtration solution. I'm just curious, are you seeing any follow through in this area of the business?

Yes. We highlighted that win. It was roughly $4 million project, carbon capture and ethanol. Look, there's 100 ethanol facilities around the country, a little more than that. We believe this -- they oftentimes like to find standard solutions for tax and credits and for commercial product and obviously, for their ESG programs, et cetera. So we're working on other opportunities in that space. We're working on other opportunities in separation, filtration and other industries. Look, I think carbon capture has room to go.

There's two very large projects in the Gulf Coast; one in Louisiana, one in East -- Southeast Texas that we're actively working today with EPCs on the feed study programs. And generally the results are positive and the adaptation of our technology is clear, principally Peerless technology. CO2 is an interesting molecule. It's easy to capture it from an ethanol plant, a little less easy out of a hydrocarbon processing facility. So there's some core development that they have to do in the capture side. But in terms of processing and then transporting the CO2, it feels similar to moving methane, a little tougher to compress, but we have the applications to support it.

Ladies and gentlemen, this concludes our Question-and-Answer Session. I'd like to turn the conference back over to Todd Gleason for any closing remarks.

Yes. Thank you, and thanks, everyone, for your questions and your interest in our information today. Obviously once again, we really appreciate and thank our global teams that are delivering these incredible results, value to our customers. We will continue to maintain our focus on protecting people, protecting the environment and protecting our customers' investment in their industrial equipment. As we've already highlighted, we're going to be active today and this week catching up with many of you and answering additional questions. So we look forward to those conversations. And we are also, as you saw in the press release, participating in the upcoming ROTH Conference, and Peter will be there in California for that and looking forward to seeing a lot of folks at that conference as well. So we'll end it here, and have a great day, and talk soon.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.