Good morning and welcome to the CECO Environmental First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steven Hooser of Investor Relations. Please go ahead.

Thank you, Jason and thank you everyone for joining us on the CECO Environmental first quarter 2023 earnings call. On the call with me today is Todd Gleason Chief Executive Officer; Peter Johansson Chief Financial and Strategy Officer; and Ramesh Nuggihalli Chief Operating 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 the earnings presentation, which is 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 fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings included on Form 10-K for the year end December 31, 2022. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any forward-looking statements that we make here today whether as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We provided the comparable GAAP and non-GAAP numbers in today's press release and provide non-GAAP reconciliations in the supplemental tables in the back of the slide presentation. And with that, I'd now like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

Thanks, Steven and good day. A handful of weeks ago, we filed our annual report for the year 2022. My CEO letter highlighted the tremendous progress we made last year and our strong position as we entered 2023. In fact, the first sentence of the letter simply stated it is an exciting time at CECO Environmental. Well as we close the books on the first quarter of 2023, I will reiterate that statement once again. It remains an exciting time at CECO Environmental for our employees, our customers and our shareholders. Now let's dive into the details to support that statement. I'm going to start with slide number 3 which is entitled Q1 2023 earnings highlights. As we highlighted in today's press release CECO delivered record first quarter revenue levels. In addition to our record first quarter revenue levels, our bookings were so strong that we delivered a book-to-bill of 1.3 which produced yet another record for our backlog which supports our ongoing growth. Our platform teams continue to execute against a very large and growing pipeline of sales opportunities so we remain highly confident we can maintain continued strong bookings going forward. I also want to highlight that our operating excellence programs are really just getting starting and starting to roll out as Ramesh and his team have deployed several important improvement work streams. I believe margin expansion will continue on the gross margin line and those improvements in gross profit will flow through to EBITDA expanding margins as we move through 2023. I also want to highlight for you the two completed strategic and accretive acquisitions year-to-date, which brings our total number of deals to six in the past 15 months. As a result of the continued strength in our bookings, improvements in our operational execution and execution…

Thank you, Todd. I'm very pleased today to be able to present to all in attendance a set of solid financial results that confirms that CECO remains on track to deliver another strong year of operational and financial performance. Please turn to Slide number 9 with me. On Slide 9, we present a more detailed picture of first quarter results and Todd walked you through on Slide 4. Orders for the quarter at $146 million was the third highest for any quarter in company history and now represents orders over $500 million on a TTM basis. Revenues of $112.6 million set a record for revenue during any first quarter following on from our record third and fourth quarters respectively a nice run of three quarters in a row. We delivered gross profit margins of 31%, an increase of 240 basis points year-over-year. And more importantly, the gross profit dollar delivery of $35 million was the highest in our first quarter in company history and the second highest in recent memory following on from our fourth quarter of 2022 in which we delivered the highest gross profit dollar quarter in company history. Adjusted EBITDA for the quarter was up 2% year-over-year to $9.7 million, and this included the higher operating expenses from investments made in additional platform and functional resources to support CECO's recent and future growth. SG&A additions from acquired businesses and M&A expenses also were included in that $9.7 million figure. Adjusted EBITDA margin in the quarter was 8.6%, down 150 basis points from the year ago period, but up 50% when Q1 2022 results were adjusted for the previously mentioned one-time insurance settlement. While nicely positive both GAAP and adjusted EPS were down year-over-year. Excluding the settlement the benefit from the previously mentioned settlement Q1 2023 EPS would…

Thanks Peter. A lot of good information with respect to our financials and various insights into our performance. And before I look forward, I'm going to make a quick comment to thank our global teams for all the work they've done, specifically around six acquisitions in 15 months, significant growth to our bookings, significant growth to our sales and execution amidst a continued challenging market in many places around the world with still respect to travel, inflation, resource hiring, so whether it's finance, HR, legal, operations, platform leadership sales, all of our teams are working hard to row in the same direction to deliver the type of results and position ourselves for the balance of the year. I'll come back to that thank you again at the end, but it should be noted that after 15 to 18 months of significant growth and acquisitions those are some heavy lifts. Okay please turn to slide number 17, we'll talk about our outlook. Simply put, we're raising our guidance for the full year for both revenue and adjusted EBITDA. So let's go ahead and start with revenue. We now expect to deliver at least $485 million for the full year. This would be approximately 15% growth over 2022. We are not providing a range for either revenue or EBITDA at this point, but we might do so in the next quarter or so. The point is, we are very confident and expect our full year sales growth to exceed this level. Our previous revenue range had been $460 million to $485 million. So clearly, we're going to the top of our previous range and suggesting we expect to exceed that figure. With respect to adjusted EBITDA we now expect to produce at least $50 million for the full year. Similar to revenue,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we'll pause momentarily to assemble our roster. Our first question comes from Aaron Spychalla from Craig-Hallum. Please go ahead.

Yeah. Good morning. Thanks for taking the questions. The first for me…

Good morning, Aaron.

Good morning. You've mentioned in the past, that customers have been pushing to turn quotes into orders faster. Can you talk about is that something that you're still hearing, or how have those conversations been trending given some of the macro crosscurrents? And then, maybe just an early read on 2Q orders. Based on your commentary, it sounds like still pretty optimistic for continued strong order growth.

Yeah. Good questions. Kind of, two parts there. So I'll address them quickly, see if Ramesh or Peter have any additional comments. But simply put, look, yeah, customers, they are pushing for speed in terms of getting quotes through a process, I think a lot of that is the markets that we are investing to position ourselves in are growing markets. And so there's competition for resources in these growing markets. And I think they have approved the budgets. It's an area of strength. And again, when we see one market starting to slow down, we're much more nimble than years past and we move -- we shifted over to a market that is expanding. So by that, it just feels like we're entering into more rapid discussions around project opportunities. Everything else is fairly the same, I think in terms of if you look at the macro of our pipeline, it's not like we're seeing the pipeline move faster. I think we're just moving into markets that have a higher growth shorter-term growth trends. And so we know that there's more visibility to our upcoming 90, 180 days. And so speaking of that, I think, look, we're a month into the second quarter. And I would just say and we said so in our prepared remarks, we had some orders that drifted from Q1 into Q2, very common. We'll probably have orders to drift from Q2 into Q3. But had those orders booked in Q1, we may have achieved a new record bookings for the year, for the company for the year too, maybe, but certainly for the company. So I think we feel very good about where we're at in Q2, and our pipeline remains at, I don't know, if we would call it record levels of pipeline, it's just significant, well over $2 billion. And again, we feel really good about the second quarter and probably the second half of the year from a pipeline perspective.

All right. Thanks for that. And then maybe just one follow-up, you kind of talked about 15% plus EBITDA margin. Can you just talk a little bit about what gross margin level that might be? And just what some of the drivers are to get from where we are today to that level?

Yeah, there's really three things that I think we like to talk about pretty consistently, and we talked about 15% EBITDA margins. And in no particular order, I guess I'll start with gross margins. I think the fact is that we are getting good productivity. We're going to continue to do great productivity with the investments we've made in our making and our operating excellence programs. Those are specifically designed to influence gross margins to get up to at least our historic average of 33%. But frankly, we believe that with those investments, coupled with the acquisitions we've made, and we'll continue to look at making that have higher gross margins, you could say the first bucket is higher gross margins driven by productivity and higher gross margin acquisitions should get that up to 33% to 35% and that or more. And so when you look at gross margins there that's a heck of a nice jump from what we're currently at. The next bucket of items, I think is our volumes. I mean obviously, we're delivering very strong sales growth. We're investing heavily in the support of that sales growth because it's in front of us as much as it is with us. So we have to add resources to execute that record backlog. But we're also investing in the things that I just mentioned and we mentioned in our prepared remarks. So, but as we go forward that continued double-digit sales growth sort of sequentially and year-over-year, we'll just continue to provide really strong conversion to our bottom line. And so the combination of productivity, acquisitions and just volume conversion, we feel on balance will each give us the necessary building blocks to get from the 10-ish percent where we exited the year last year to the 15% where we expect to exit a few years from now.

All right. Thanks for the color. I'll turn it over.

Thanks, Aaron.

The next question comes from Rob Brown from Lake Street Capital Markets. Please go ahead.

Hi, good morning. Congratulations on all the progress.

Thanks.

Thank you, Brown.

Just wanted to get a little bit further color on your confidence in your order environment, what sort of the visibility? Has the visibility changed at all in the last three months, or are you seeing kind of continued pipeline activity and really no change there?

I would say, we were -- a year ago at the end of our first quarter, we voiced a fairly high confidence rate for the year and we started to not only introduce full year guidance for the first time, but we proceeded to sort of raise that guidance as a result in large part of the fact that we were executing on our pipeline and booking very strong record orders and record backlog, coupled with our programmatic M&A approach. So a year ago, I think for those of you that were paying attention to CECO, you felt the high confidence in our growth. I sit here today with a similar level of confidence.

Okay. Great. Great. Good to hear. And then on the M&A environment, you do a couple of deals recently. What's sort of the pipeline of M&A activity look like? And how should that play out over the next sort of 18 months?

I'll let Peter expand on this, but we have -- that doesn't mean our playbook couldn't change. We know how to have different plays in the playbook. But we have -- we're executing well on the approach that we're taking. Our pipeline has been fairly consistent. Things come in, we evaluate them. Things go out because we pass or they're not for us or the timing doesn't work or maybe the -- we believe that the growth of the returns are going to be there for our shareholders and for our portfolio. And then we focus in on the handful of deals that we think make the most sense for our transformation, the most sense for our financial health and stability. And we obviously look at what's going on with our balance sheet and interest rates and the expenses associated with that. So we maintained a really steady pipeline. I don't think much has changed in terms of that regard. There are some bigger deals that we look at, and there are some smaller deals that we look at. But overall, our playbook is we feel very comfortable with our playbook. Peter?

We continue to identify very interesting small tuck-in or bolt-on deals to improve the positioning of our platforms, deliver access to customer, market, technology we would like to add that is -- is important to the business but may not necessarily come from a product development effort. Transcend is a very good example of those three, market, customer and technology, all wrapped up in one package. And as we, so we're seeing a good steady flow and frankly more than a week at action if we wanted to. What's also happened Rob, and I think this wouldn't come as a surprise, you I don't believe, since we have been acquisitive. We have more sellers approaching us as a potential buyer on a private or proprietary basis, because they've seen how the last six transactions have fared both for sellers as well as those management teams and that's positioned CECO very favorably in their eyes. So we're not only seeing the traditional flow that comes from an investment adviser or a bank flows from of ideas coming from our platform teams, we're actually getting inbounds from owners asking, if we'd like to talk to them about a possible combination or a strategic alternative.

Great. Well, thanks for all the color. I'll turn it over.

The next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi, thank you. Good morning. I may have missed it, but did you give the organic sales growth number for the quarter?

We didn't -- I can get back to you with that, Jim? Yes, it'd be -- yes, it's probably 15, 16 points. Yes. It's 75% of our -- it's roughly 75% of our top line sales growth.

Yes.

So, however, that shakes out, it's about 15% 16%. But we'll get the exact number.

Okay. Okay. Got it. So, if I look at the revised outlook for 2023, let's assume this $45 million, $50 million of EBITDA, you're a little north of 10% EBITDA margins. And I'm just wondering, when you look at the year, where do you see the most potential for upside to EBITDA, EBITDA margins? Is it going to be driven by top line? You talked about some -- you sound pretty optimistic about gross margins. And I'm wondering where we could see the upside coming from?

I think the upside would come from volume. We have doesn't take too much for somebody to look at our trailing 12 months historically, when you look at bookings and then the next fast-forward nine months, and you look at a corresponding revenue level. So, I think we feel that the investments we're making now to support the execution of that backlog, would point to potential upside in revenues, which would flow through on the conversion side, because our investments are in large part in place, it doesn't mean that we don't have to sort of flex certain costs as we go up with volume. But the upside specifically would come from more organic growth as it pertains to the backlog that we have. Now, if getting significantly higher than 10% to 11% EBITDA margins is our only goal in life and it's one of them, if we didn't see upside to 485. But we felt that that goal we’ll likely to be achieved this year. We have costs and that we've brought into our organization that are important, that are yielding results, that are dedicated employees and dedicated cost programs, et cetera but we can flex those. And so, I would want you to know that we have the other lever, which we understand and we do not expect to have to go to that lever, because of the pipeline we see, the backlog we have and the excitement we have around executing on the initiatives that we have put in place. Ramesh, do you agree with that those two levers?

Absolutely. Just to add to that, we are seeing a gradual trend of improving margin on the project businesses that we've been bidding. We monitor this on a 12-month basis, and we have done well when it comes to margin. Those things are going to flow down to the bottom line. And some of the productivity programs that we've introduced, they all are going to start to kick-in at least in the second half of the year, whether it be the material or some of the labor productivity, and the M&A targets that we have brought in. Those margins are not only accretive. They're higher than our traditional businesses. And when you add them all up, that gives us the confidence on improving the EBITDA margin. Thank you.

Got it. And just a final question. Just so, from the standpoint of the ability to convert over this backlog, you feel pretty comfortable about the operational structure of the business, your headcount, your labor. The other question, I had just regarding inflationary pressures has that begun? Are you seeing any signs of that subsiding, or have you been able to just offset it as a lot of companies have by just passing on pricing?

I think the passing on pricing has been with us too and I feel good about that. And I think but now I might suggest we're sort of back to what is a stable feeling, there's more stabilization going on at the moment, which we don't need – we don't need there to be huge decreases in costs. We don't need them to be huge – I think most leadership teams would say give me a stable market and we can price around that. We can execute around that. The labor markets are still a little tricky. It is not easy. Getting the right people in the right places and keeping them. But we're working hard at that. And we feel like there's not a lot of constraints in our ability to execute at the moment. But it's an ongoing focus. And again, I want to thank our individual members as well as our groups and teams around the world that step up because we are still wearing multiple hats a lot of us. And we are still having to go a little bit more travel when you're not used to it potentially because there's more global projects now. So it's a big sense of gratitude that we have for our teams executing because it's still tough out there.

Okay, thanks. Thanks for all the information.

Thanks, Jim.

[Operator Instructions] Our next question comes from Sameer Joshi from H.C. Wainwright. Please go ahead.

Yes. Good morning, thanks and congrats, Todd, Peter, Ramesh for the good execution. I just had a question on conversion of pipeline to backlog. Are you seeing an improvement in that and as a result of which you are seeing higher backlog, or is it that your pipeline has increased?

I guess I'll just say our pipeline has increased. I think we would say our conversion of backlog feels in line with our – the muscle we've been building to execute upon it and adding process and resource and operational excellence programs. So just the execution of our backlog is good. The backlog growing I think is a direct benefit of our platform organizations that see more market adjacent opportunities, feel supported and invested to go after those and frankly to use the analogy where we have more at bets. I mean I think our win rate has been really solid. And maybe certainly in certain platforms some product categories improved, over the last few years, but it's about finding more market opportunities and going after them and not being afraid to swing in this a little bit because we're going to support that growth mindset.

Understood. Thanks for that. And then just sticking to backlog. On Slide 12, you have nicely shown your like yearly averages of 211, 290. Is that jump in 1Q, which we have seen in 1Q 2023 then stabilize over the next four quarters in terms of the backlog. In other words, should we expect the book-to-bill ratio for the next quarters to be nearer to 1% than to 1.3% or so?

Yes. Look, I'll say this. Well, first of all I'll start with a reminder that orders can be just choppy. Our book-to-bill could have been 1.4% potentially. It could have been 1.2. I'm certainly not going to sit here today and try to give a forecast of book-to-bill. I will say this. We believe that the average over the next three quarters will be greater than one. And that's I think what we're striving for is that whether it's one, 1.2, 1.3, we want to continue to add backlog for future growth to give ourselves the confidence around the investments we've made and will continue to make. And of course, since we're talking with investors here today, give our investors the confidence that we have probably more visibility than the average bar out there in terms of the companies that yes. And by the way I think we have more visibility than historically as a company. You go back five, 10 years where CECO was really first coming together as an organization and our processes were not mature yet and we still have a long way to go. We're never done with this baseball game. But I think we have a lot more visibility to the next three four quarters. And I want to thank again our leadership team for making that visibility in front of myself and Peter and Ramesh because we can now we can make some important decisions based on that visibility.

Understood. Just one last one if I may. To place that the yes. The Engineered Systems revenue has shown a higher year-over-year growth rate almost closer to 30% or thereabout related to the industrial process solutions. Has that also played into the gross margins that we have seen year-over-year?

Perhaps. I think it goes back to the point Ramesh was making in that we are -- we were doing at least two things well in Engineered Systems, but also across the organization where the market has allowed for us to if you will things improving stabilizing and cost structures. We feel good about the jobs we're booking have slightly higher margins sequentially and have we feel for a little bit of time. Therefore our backlogs across the board just have slightly higher gross margins. And some of that's also the benefit of our ability to get price and to strategically focus on price, especially in our short-cycle businesses our fluid handling and our filtration products categories, where we have raised price relatively consistently over the last 24 months coming out of COVID. So yeah, I mean I think gross margin is just pretty balanced across our organization. We don't look at it -- I mean we look at it by platform. We look at it by "reportable segments". But there's no, it's the same playbook we're running across our entire enterprise.

Thanks for that color and once again congrats and good luck.

Great thank you.

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

Okay. Great. Thank you, Jason. Well thanks again everybody for your questions your interest in our information today. We've said it multiple times, but a significant amount of appreciation for our global teams that are delivering incredible value to our customers. As we continue to protect people, protect the environment, protect our customers' investment in their industrial equipment. A great start to the year for us we feel, we look forward to speaking with many of you soon and providing you with our Q2 update in early August. So with that have a great day and talk to you soon. Thank you.

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