CECO Environmental Corp. (NASDAQ:CECO) Q4 2022 Earnings Call Transcript

CECO Environmental Corp. (NASDAQ:CECO) Q4 2022 Earnings Call Transcript March 10, 2023

Operator: Good morning and welcome to the CECO Environmental Fourth Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Steven Hooser: 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?

Todd Gleason : 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 a lot of growth. And as a result of our tremendous orders growth and record backlog levels, we are raising our outlook for full year 2023, which we announced in our press release earlier today. We will discuss our updated and increased 2023 outlook later in this presentation. More to come on each of these key takeaways as we go through the presentation. We are proud of the results we delivered in 2022 and we are well positioned for 2023 and beyond.

Now please turn to Slide 4 and let's review our summary fourth quarter and full year 2022 financials. Peter will cover many of these key financial figures and metrics in a few minutes. Let me just focus on a few areas. Orders of $151 million, were up 66% in the fourth quarter year-over-year. The $151 million was the second largest quarterly orders level in the company's history. So we book into the year with tremendous orders growth. Sales growth of 24% in the fourth quarter reflects the great execution our global teams are driving to deliver solutions for our customers. For the full year, our sales grew 30%. Adjusted EBITDA of $13 million in the fourth quarter was up 38% over the prior year period. This produced margins of over 11% as we continue to prudently manage growth investments, while we are expanding margins year-over-year.

For the full year, we grew adjusted EBITDA 65% and delivered double digit EBITDA margins, up 210 basis points from full year 2021. As you can see on the slide and Peter will reiterate, our EPS growth and free cash flow were also very, very strong. I might suggest you could work for diversified industrial companies for decades like I have and rarely seeing such a balanced growth scorecard for a year and a fourth quarter. Our teams continue to do an incredible job navigating operational challenges and driving commercial success. We appreciate the trust our customers put on us every day and we are providing world-class solutions and high-performance financial results. Next I will highlight how balanced our orders and sales growth have been across our business platforms.

So with that, please turn to Slide #5. We shared a very similar version of this slide when we reviewed our third quarter 2022 earnings. What we are showing on this slide is our 8 business platforms full years orders growth, which is the left arrow above each platform and their respective full year revenue growth which is the right arrow. CECO's unique diversification and broad growth is highlighted across these platforms. 6 of our 8 platforms delivered year-over-year orders growth in 2022. Several of our platforms such as separation and filtration really crushed it with orders as we participated in strong markets and positioned our business for growth in new applications and new geographies. The two platforms that had orders declines in 2022 have done a great job building their pipeline for strong growth in the near future.

In fact, in our industrial duct fabrication and installation services business, we had a few orders booked in January of this year. And those particular orders booked in Q4, we likely would have had a seventh platform demonstrate year-over-year orders growth. Revenue grew year-over-year across all of our platforms in 2022. Now that is balanced. The nimble platform organizations and their excellent leadership teams are finding new ways to win and new markets to serve. So whether it is orders that produce future growth or sales which reflect the execution of our delivery for customers, our broad-based growth is delivering for our company and for our shareholders. Now let's turn to Slide #6. Today CECO is more balanced and pursuing more opportunities than ever before.

Across everything we do, our focus is to protect people. Our focus is to protect the environment and protect our customers' industrial equipment. Our largest market from a solutions perspective is the industrial air category. With over half a dozen leading brands serving a multitude of applications and end markets, we continue to advance our leadership position in this area. And I'm stressing advance because we have a real seat at the leadership table, helping our customers in a variety of unique and differentiated applications and end markets as shown on the right section of this slide. We have also been steadily building our position in industrial water, which has grown to represent approximately 25% of our company's sales. Within industrial water, we solve complex customer challenges in produced water treatment, oily water separation, industrial wastewater management, high purity water supply, desalination and other growing and strategically important applications.

2 of our acquisitions in 2022 help bolster niche leadership positions and we will continue to grow our industrial water business to likely secure a larger percent of overall CECO, which leads to the businesses within CECO that serve the energy transition. For many decades, CECO has built and maintained a strong position supporting core or legacy energy markets, from natural gas infrastructure to advanced refining technologies to emissions control and noise abatement, our brands are well recognized and respected. As energy markets continue transitioning to more sustainable sources and processes, CECO is in prime position to serve the sector as it shifts processes and builds new critical infrastructure. We highlight carbon capture and gas liquid separation, two areas that are seeing and will continue to see robust investment and robust growth.

We are winning key projects in these areas and we will continue to highlight unique wins and opportunities going forward. Now before I hand it over to Peter, let's quickly review our full year 2022 capital allocation. Please turn to Slide 7. The 4 acquisitions we closed in 2022 are listed on the left of the slide. In 2022, we spent approximately $45 million to acquire these businesses. Each business has significant growth opportunities and we are already winning. The management teams that came with these acquisitions are key leaders in our current and future success and our integration process is yielding new synergistic opportunities. Each transaction has brought something unique to CECO, but overall each has been accretive to our financial profile, and each is hitting or exceeding their financial models.

On the right, we provide a summary of our share buyback levels. In 2021 we completed our first share buyback and repurchased $5 million worth of stock at attractive prices. Additionally, in 2022, we repurchased $7 million worth of shares at an average price of $6.80 per share. I would say that as a great use of capital. We have roughly $13 million remaining on our multiyear stock buyback authorization. Our businesses don't require a lot of new CapEx or maintenance capital given the nature of our operating model, which is project based and relies on a global network of fabrication and supply chain partners. As we grow our shorter cycle businesses, we will see modest incremental growth in CapEx budgets, but nothing material. We continue to make important investments to drive productivity, quality and safety as well as invest in new technologies to enhance our fulfillment and business processes.

The final bullet point in that section is important to highlight. In a little over a year, we have more than doubled our resources in India and we expect to grow even more. These resources support regional growth, but also provide high-level engineering talent to our organization for around the clock design, engineering studies and other various application engineering and project management work. So overall a very forward looking and strategic capital deployment program that will continue to drive growth and we believe long-term shareholder value. I will now hand it over to Peter to review our financial performance in more detail. Peter?

Rawpixel.com/Shutterstock.com

Peter Johansson : 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. CECO booked orders greater than $100 million in each quarter of 2022, a company first, and completed the full year with $527 million in net orders, a company record. I want you now to look to the TTM and average per quarter rows above the bar chart. For each of these metrics, you will note the steady sequential growth. By looking at orders in this way, we are able to smooth out cumulative order flow, which more closely matches our revenue realization and takes out the effects of order timing. And speaking of revenue, please turn to Slide 11, where I will walk you through a more detailed view of CECO's revenue growth progression. On this slide you can see that CECO's revenue growth trajectory, which began in Q1 of 2021 and it showed steady improvement sequentially and over prior period throughout 2021, accelerated this improvement in 2022 as we began to convert our growing backlog, culminating in CECO delivering 3 consecutive quarters of greater than $100 million in revenue, and the best third and fourth quarters for revenue in company history.

I also want to highlight that the fourth quarter of 2022 revenues were the highest for any single quarter in company history. An outstanding result considering that there was still some choppiness in our supply chains that our teams had to overcome. On this slide, we have also included TTM and average per quarter data above the bar chart as an easy comparison to the similar data provided for our orders. Now moving on to Slide 12 for a quick review of backlog. CECO concluded 2022 with a record backlog level of $312 million, representing a 46% increase over year-end 2021. And a book-to-bill ratio for the full year of 1.25x, which is an outstanding result and sets up CECO for revenue growth in 2023. 2022 followed the year with a very -- also with a very strong book-to-bill results of 1.13x that supported our 2022 revenue delivery and growth.

With a very strong opportunity pipeline, CECO expects to maintain a book-to-bill rate greater than 1x in 2023, which is a positive leading indicator for future growth beyond 2023. One interesting item I would like to point out is that in Q4, of the $151 million in orders, CECO experienced only one, a single order that was canceled and de-booked for $2.5 million for a coal to gas power plant conversion project in Italy. This was less than 2% of our orders for the quarter. And in fact, today, our customers are pushing us harder than in 2022 to turn quotes and spec reviews faster so that they can get orders in place with us. Now moving on to Slide 13, and I'll walk you through margins for the quarter and the full year. On the left side of the page, you will see the $37.7 million gross profit result for Q4 and associated margin.

This is a 32% year-over-year improvement and 16% better sequentially. Our operating teams really nailed execution in the quarter, and we are starting to realize the improved margins from better pricing and commercial focus on projects booked in late 2021 and in 2022. On the right side of the page, I want to call your attention to the $13 million adjusted EBITDA result for the fourth quarter and the associated margins. This is a 40% year-over-year improvement and 41% better sequentially. I am particularly pleased with this result as we also made investments in the range of $1.1 million to $1.2 million in the quarter in people, organic growth and systems to better position CECO to drive higher growth and performance in 2023 and beyond, investments which we will continue to make to strengthen and better position CECO.

And finally, please turn to Slide 14 for a discussion of our cash position and available capital. CECO finished 2022 with $46.6 million in cash, up $14.6 million year-over-year. Cash from operations delivered a robust $29.6 million, approximately 7% of revenue and net borrowings on our revolver were $47.4 million in the year. Following the balanced capital deployment approach underpinning our value creation strategy, just shy of $45 million was spent on acquisitions, $7 million was used to repurchase CECO shares and $3.4 million was deployed against capital investments. Gross debt. Moving to the right side of the page, gross debt at the end of 2022 was $104.9 million, an increase of $39.4 million from year-end 2021. Net debt for the -- for year-end 2022 came in at $58.3 million, resulting in a comfortable leverage ratio of 1.37x, an improvement sequentially from Q3 2022 levels and well below our credit facility leverage cap.

At current debt levels, CECO's available capacity to support continued investment in growth and value creation while maintaining a comfortable cash buffer is in the $74 million range. Now it is time to turn the microphone back over to our CEO. But first, I want to bring you to Slide 15, to transition from the numbers to the journey that CECO was on to build a stronger, sustainable growth and value creation engine. The journey began in 2020 with Todd joining CECO during the pandemic, a bit of an inauspicious time to do so. It was coming out of 2020 that Todd set the transformation vision. In 2021, early building blocks of the new vision and corresponding strategy and operating model were put in place, including the creation of the platform structure and the creation of the COO role, which brought Ramesh Nuggihalli to the leadership team and leading high-performance platforms.

It was in Q3 of 2021 that I began my association with CECO as an external advisor and began to observe and feel the changes that were taking place and the impact on the people and the results. These changes accelerated in 2022 as the platform structure and new operating model began to solidify and programmatic M&A started to realize success. I am excited to be part of this journey, one of which we are in the early stage and of which much has been accomplished and much remains to be done. And now back to Todd to take you through the myriad of accomplishments in 2022, highlighted on Slide 15, and to walk you through our view of 2023 and beyond for CECO 2.0.

Todd Gleason : 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 buyback program in the second half of 2021 and continue to buy shares in 2022, and we greatly improved our ESG score and published our inaugural ESG report last year. By introducing annual guidance last year and continuing that practice going forward, we provide more transparency to how we see our performance shaping up in the future. Our executive team better reflects the high-performance company we have built and continue to advance, and I am blessed to be surrounded by great diverse leaders on our senior team as well as in our functions and throughout our businesses.

Our Board of Directors has also added breadth, new expertise and diversity, and they push us to think in new ways and expand our capabilities. Ultimately the value we create for our shareholders is a direct beneficiary of these items and much, much more. We hope and expect to continue to be a company that delivers steady shareholder value. Finally, we are investing in our culture. Our focus is on the right values and behaviors to really solidify a high-growth, high-performance company. A company that our talent wants to stay and work for, for many years, and new employees are excited that they joined. We look forward to many more years of high performance, and we will continue to transform CECO, as Peter mentioned, there is much more work to do.

So with that summary of the important milestones and accomplishments that have shaped our performance over the past year or 2, let's look forward and review how we plan to keep driving growth and value. Let's go ahead and turn to Slide 17. We have shared this slide several times throughout the last year. To provide some color and a simple visual on some of the priorities we expect to drive in 2023 with an eye to 2025 to maintain even more acceleration of our performance. Companies that go through a sustainable transformation don't build their success on just one or two operating principles. If simply having a robust M&A pipeline was all it took, then maybe everyone would generate double-digit growth. But I think most of us realize there must be more balanced and thoughtful programs in place to deliver sustainable financial results while building a growth culture to ensure these results are resilient.

Internally we discussed how we must deliver our quarterly and annual performance by focusing on the customer and making sure we are taking care of the urgent aspects of our plans and business model. While at the same time, the right people need to also balance their focus on the important items, which is focusing on our long-term strategy and how we are shaping or reshaping our portfolio. I could present dozens of slides on our strategic plans, but for now, this slide summarizes that balanced approach. So now that we have closed the book on 2022 and highlighted how we focus on short, mid and long-term growth and performance, let's take a look at our current view of full year 2023. Please turn to Slide 18. I'm just going to take a few minutes to comment on a few things, so we can then wrap up and get to Q&A.

We are increasing our full year 2023 revenue outlook to $460 million to $485 million. Our previous range was about $10 million lower on each side of that range. A record backlog heading into 2023 really gives us more visibility to additional growth, and we continue to believe our pipeline of future orders remain strong. We are also increasing the high end of our adjusted EBITDA range to $50 million. So our new adjusted EBITDA range is $45 million to $50 million. Similar to our confidence in growth, we continue to balance critical investments in our businesses, processes and systems to strengthen our ability to deliver outstanding bottom line results. With respect to free cash flow, we expect to generate between 50% to 70% of EBITDA into available cash, and we will use that cash to fund our previously mentioned capital deployment programs.

The slide also highlights a number of items that could prove to provide upside to our ranges as well as certain challenges that we're monitoring or potentially already navigating through. We look forward to continuing to provide any updates to our full year outlook. Now let's wrap up. Please turn to Slide #20. In summary, the just outstanding performance, both operationally and financially, 2022 really was a key step in our transformational journey. We continue to be programmatic with our M&A and are very excited about the performance of each of our new businesses and how well they were operating, and we're really pleased with the leadership teams that have joined CECO as a result of those acquisitions. We wouldn't be able to generate record backlogs and incredible revenue and income growth without the incredible people that worked at CECO and our global partners.

Thanks to them for all they do. Our customers know they can rely on CECO. With that, we're now happy to open it up to any questions. Operator?

See also 15 Companies that Just Started Paying Dividends and Motley Fool's High Growth Stock Picks.

To continue reading the Q&A session, please click here.