CECO Environmental Corp. (CECO) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the CECO Environmental Corporation First Quarter 2022 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.
Steven Hooser: Thank you for joining us on the CECO Environmental first quarter 2022 earnings call. On the call with me today is Todd Gleason, Chief Executive Officer; and Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with that slide presentation, which is on our website at cecoenviro.com. Presentation materials can be accessed through the Investor Relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may 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 31, 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. With that, I'd now like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?
Todd Gleason: 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. We look forward to discussing our first quarter 2022 results in detail as well as reviewing our full year outlook, which was highlighted for the first time in our earnings release. We will also discuss this morning's announced $20 million share repurchase program and our recent acquisition of Compass Water Solutions, which we closed last week. We issued separate press releases regarding both of these earlier today, and we encourage you to read those releases as they do provide additional information. Let's talk about the first quarter. We are off to a great start in 2022, headlined by a few records. I'll start with our fantastic orders growth, which came in at $161 million, up 75% when compared to the first quarter of 2021. And don't forget, the first quarter of 2021 was up over 20% when compared to the first quarter of 2020. And that quarter in 2020 was only modestly impacted by COVID, so it wasn't a weak quarter. Now back to the Q1 2022 record orders of $161 million. That level is over $40 million higher than our previous record quarterly bookings. Additionally, our orders growth came in broadly across our portfolio. Matt will cover our backlog levels in detail, but the highlight is that Q1 orders created the largest backlog in company history as well. We are well positioned for future revenue growth as a result. Speaking of revenues, first quarter 2022 revenues were $92 million, up 29% year-over-year. We have been signaling that our revenue would start to grow in 2022 given we had strong double-digit orders growth throughout each quarter of 2021. We are pleased to deliver such strong organic growth as we kick off 2022 and are confident in our ability to drive this momentum throughout the year and beyond. Gross margins were just under 30%. We have seen new project orders coming in at higher margins than what we produced in the first quarter. So this will help us steadily improve gross margins. Of course, many companies have experienced declines in gross margins, given the challenges in global supply chains, logistics and inflation. We have strategically focused on this and are getting price across the board, especially in our shorter-cycle businesses. So again, gross margins throughout our backlog, including recent orders are at or above current gross margin levels. We will continue to focus on protecting margins by strategically focusing on driving price, performance, productivity and growth. Now regarding EBITDA. We are very pleased we produced $9.5 million in the first quarter of 2022. EBITDA was up over 50% versus the same period a year ago. So a great, great start to 2022, orders, backlog, revenue, EBITDA, all very strong. As I mentioned earlier, and you saw in our earnings release, we will be providing details on our full year 2022 outlook. Historically, we have provided certain frameworks for how investors can think about our yearly performance. But starting this quarter and moving forward, we felt it was important to provide a full year guidance range. The last section on this slide highlights capital allocation, which notes the actions we are taking to deploy capital across accretive M&A transactions and our just announced share repurchase program. Let's talk about each, so please turn to Slide #4. Today, we announced a $20 million share repurchase program. The authorization goes into effect immediately and is good for 3 years or until we complete the approved $20 million level. This is the largest share repurchase authorization in CECO's history and it builds on the $5 million stock buyback we did last year. It reflects the Board's confidence that we will continue to execute on organic growth, drive higher levels of profitability and deliver outstanding free cash flow. We hope investors appreciate that we see the same opportunity in our current share price and that this multiyear authorization gives management the opportunity to remain proactive in this area. Now on the right side of the slide, we highlight the acquisition of Compass Water Solutions. We identified Compass Water Solutions a number of months ago and began to evaluate their niche leadership position in the industrial water treatment market, which we believe is a mid- to high single-digit growth market. The business fits very well within our growing industrial water portfolio, and we are pleased that we closed the transaction last week. Compass produced $11 million in sales and double-digit EBITDA margins in 2021. And we believe we can accelerate growth by utilizing CECO's existing global footprint and adding our strategic resources. Compass expands our addressable water market by almost $0.25 billion and adds our third industrial water business to CECO in less than a year. We are pleased to welcome the great Compass employees and leadership team to CECO. 2022 represents a year in which we will pick up the pace a bit with respect to strategic acquisitions. As I mentioned, we've already closed multiple transactions. While CECO has a long history of making acquisitions, we only made a few transactions over the past few years as we wanted to navigate the challenges associated with COVID. The acquisition of EIS in 2020 has been a home run with significant sales growth and the maximization of their earnout associated with driving higher income. We aim to deliver exceptional returns on our acquisitions and believe we have a nice playbook to drive operational excellence. We have also maintained very consistent debt levels and balance sheet health over the past few years despite the acquisitions of EIS, GRC as well as share repurchases last year, and we intend to maintain appropriate debt levels. I will now hand it over to Matt, and he will walk you through more detail on our first quarter 2022 results. Matt?
Matthew Eckl: Thanks, Todd. Let's dive into Slide #6 and our Q1 performance. Todd suggested orders were up over 75% year-over-year as well as sequentially. This was a balanced effort across CECO as customers continue to invest in sustainability and place their trust in our air quality and water treatment solutions. Sales came in slightly better than expected at $92 million, which was up nearly 30% year-over-year and flat sequentially as the teams executed for customers in the month of March and following unfreezing of our backlog. Gross margins remain compressed versus historical averages as we continue to navigate supply chain challenges, inflation and continue to execute on long-cycle projects booked during peak of COVID. We continue to execute price discipline in markets where elasticity exists. In our short-cycle businesses, we are seeing price increases stick with customers. There are margins improving as we look ahead. More to come here. Reported operating income and EBITDA metrics each improved 50-plus percent year-over-year on improved volume, lower project margins and lower operating expenses, aided by a onetime insurance settlement of $2.5 million. Excluding this benefit, EBITDA was up 12% year-over-year in the quarter. Adjusted EPS was a clean story at $0.14, up $0.05 year-over-year, predominantly on operations with no FX impact. To summarize, this is a very good quarter for CECO. Now let's move to Slide #7. Coming out of the gate, Q1 was a fantastic start to 2022. Market demand was strong across all end markets. Platforms that serve air quality such as emissions management, thermal acoustics and industrial air were exceptionally strong as customers came to us for their sustainability needs. Each of these platforms saw 100-plus percent growth year-over-year. New double-digit headline orders demonstrate our leadership in air, water and energy transition. First was a Peerless emission control system for our 500-megawatt utility provider that is converting from coal to clean burning natural gas and solar power. Second, EIS booked a large multiunit RTO for a leading can manufacturer that is expanding coding line and wants to protect their employees and the environment from toxic DOCs. Put EIS into context, we acquired it in June of 2020 with a backlog of $8 million. Today, the backlog is nearly 3x in size. We exceeded our first 2 years investment case considerably and believe that sustainable beverage can manufacturing market shows no signs of slowing down. Todd highlighted, while we haven't integrated many acquisitions in a few years, this is a nice proof point of CECO driving value via M&A. Other platforms such as separation and filtration saw a 50-plus percent growth on water treatment orders and our shorter cycle platforms like Fluid Handling, Ductfab and expansion joints also enjoyed high single-digit growth year-over-year on infrastructure spend. In total, $161 million of orders marked an all-time high for CECO by a margin of greater than $40 million. Regarding revenue, our backlog continues to turn and nearly all platforms grew with the exception of separation filtration that just started to grow their backlog in Q1. No single platform stood out in the quarter as all grew relatively proportionate to their size. Our short-cycle sales continue to grow with $22 million in the quarter, up 24% year-over-year. With the acquisitions of GRC and Compass, short-cycle sales will top out at nearly $100 million or approximately 30% of total CECO sales. We continue to make progress on our transformational journey. Please turn to Slide #8, and our backlog. $283 million, this is a record for CECO with the previous one to market $228 million in Q1 of 2016. Most impressive is that 60% is weighted towards broad industrial markets as opposed to 70% weighted towards power generation in 2016. This demonstrates the healthy diversification we've taken at CECO over the last few years. Slide 9. Gross margins remain pressured down nearly 2 points sequentially and 5 points year-over-year. We feel very good about our project execution, but still see supply chain challenges in material receipts, subcontractor logistics and on-site commissioning. We keep a close watch on executed project margins versus as-sold margins. And since Q3 of last year have seen noticeable improvement in our performance. Continues to weigh most on our gross margins is the inflationary cost of materials and executing on a backlog that was priced in prior years. Today, we see our backlog margins improving and expect them to trend up in the second half. Nearly all platforms we are pushing price where elasticity exists. As an example, our pumps business has initiated second price increase this year and orders have not slowed. In fact, they've actually increased. In our larger project businesses, we continue to push our price and are winning in select end markets like bev can and automotive, but less or so in energy-oriented end markets. We anticipate an improvement in margins in late second half and into 2023, but continue to monitor ISM data and the mix of our backlog. As for EBITDA, CECO delivered $9.5 million in the quarter. Year-over-year volume increases were able to overcome lower project margins and deliver significant EBITDA dollar increases year-over-year. First quarter SG&A on an adjusted basis was approximately $20 million, which was essentially flat year-over-year and up modestly versus the fourth quarter on seasonal expenses. SG&A costs were up approximately $1.9 million year-over-year on increased headcount to support growth, higher salaries and higher management incentive compensation. These increases were offset by an insurance settlement that we booked in the first quarter after many quarters of hard work by our legal team to resolve. All in, we are pleased with our operating results for Q1. Turning to the balance sheet on Slide 10. We had a $1 million use of free cash flow in the quarter, predominantly driven by a healthy build of $20 million in receivables. Outsized orders growth means an increase in customer milestone billings, and we anticipate improved cash flows in the coming quarters. Following the GRC acquisition, our balance sheet stands at 2x leverage and in great shape to support growth. Slide 11 outlines how we think about recent capital allocation decisions. First priority beyond organic investments is M&A. Compass Water is a great bolt-on acquisition that adds reverse osmosis technology to our industrial water platform, improves our short-cycle sales metric and with similar economics to GRC is accretive to CECO shareholders. We will continue to target small bolt-on acquisitions, size USD2 million to USD5 million in EBITDA with favorable valuations and a focus on strengthening our industrial air and water platforms. To add to our capital allocation program, we've announced a 3-year $20 million share repurchase authorization. With a $2 billion sales pipeline, record backlog and anticipated improved cash flows, we believe a healthy balance of M&A and stock buybacks will reward shareholders appropriately. The buyback is the largest in CECO's history and meaningful enough to offset annual dilution and shrink our share count over time. We make these decisions based on the confidence we have in our team and the position our products have in a growing market. With that confidence, we've introduced guidance for 2022 on Slide 13. So here's how we're thinking the year plays out. With a robust pipeline and a great start in Q1, we are providing full year's order guidance of USD410 million to USD430 million. At the midpoint, this would be up around 17% versus 2021, which was up 29% in orders versus 2020. For revenue, we are introducing a range of USD360 million to USD380 million. We expect to see our backlog turn and supply chain constraints stabilize as we navigate 2022. And we hope to deliver at the upper end of our range or better. But this is our current outlook. Acquisitions will be an additional benefit, of course. Q1 gross margins are currently at the bottom end of our guided range. And while we expect the second half left on improved backlog margins, pricing and slowing inflation, we are cautiously optimistic to achieve the midpoint of 30% by year-end. We see upside in sales volume as a conservative option on our gross margins. So by assuming 30% full year gross margins, $20 million of run rate non-GAAP SG&A and layering in modest incremental investments, we organically arrive at the midpoint of $35 million of EBITDA. Acquisitions likely push us to the higher end of our range, but also provide an option for project margins and backlog timing, 2 key variables in our guidance framework. Todd, would you like to elaborate further on our guidance for 2022 and take us into Q&A.
Todd Gleason: Thanks, Matt. Yes, let me expand on a few areas around our guidance, and then we'll wrap up our prepared remarks and take questions. As the slide highlights, we are making more investments to advance CECO. These are investments in people, process, systems, and of course, acquisitions and business development. We're excited to share how far CECO has come over the past few years with respect to our more balanced portfolio that can deliver strong growth across many industrial and energy transition markets. These investments are important to develop the sustainable business results we aim to achieve in the long term. So our guidance reflects these costs. As with any guidance or opportunities to exceed but also unforeseen challenges, none of us think we are out of the woods with respect to inflation and certain supply chain and logistics challenges, but we have a lot of good momentum. We hope you find this guidance helpful. Let's go to our last slide, please turn to Slide #14. As we have repeatedly said today, CECO is off to a fast and strong start to 2022. With our large backlog and pipeline of over $2 billion in opportunities we are pursuing, we expect to continue to gain traction around growth. We are pleased to announce our new share repurchase program, which we believe is a great use of capital for shareholders. And in just a week or 2, we will announce our inaugural ESG report. This is the culmination of a lot of hard work by a cross-functional team, and we look forward to sharing our ESG story with you this month. None of this would be possible without our incredible team. I want to thank all of our CECO associates for everything that you do to deliver excellence for our customers and to assure our communities benefit as well. And with that, I'd like to open the line to questions. Operator?
Operator: [Operator Instructions]. The first question comes from Amit Dayal with H.C. Wainwright.
Operator: The next question comes from Rob Brown with Lake Street Capital Markets.
Operator: Next question comes from Gerry Sweeney with ROTH Capital.
Operator: [Operator Instructions]. The next question comes from Bill Dezellem with Titan Capital.
Operator: The next question comes from Thomas [indiscernible] with Graham Partners.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Todd Gleason, CEO, for any closing remarks.
Todd Gleason: Thank you for the questions and for everyone's interest. We look forward to continuing today to connect with our investors and analysts to answer questions and to be helpful. I'd also like to once again acknowledge our appreciation for the great associates around the world at CECO, delivering for our customers every day, working hard to make sure that we are at the right place at the right time for all of our stakeholders, staying safe and healthy as always. And so look, we're excited about the year. We feel great about the start to the year as we've already articulated multiple times. And with that, we hope to speak with you soon. See you soon at an event and best of luck out there.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
