CECO Environmental Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2025

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the CECO Environmental Fourth Quarter twenty twenty four Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Steven Huser, Investor Relations.

Operator

Please proceed.

Speaker 1

Thank you, Carmen. Thank you, Carmen.

Speaker 2

And thank you for

Speaker 1

joining us on the CECO Environmental fourth quarter twenty twenty four earnings call. On the call with me today is Todd Gleeson, Chief Executive Officer and Peter Johansen, Chief Financial and Strategy 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 the website at secoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website.

Speaker 1

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 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 12/31/2024.

Speaker 1

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 are made 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 the comparable GAAP and non GAAP numbers in today's press release and provided non GAAP reconciliations in the supplemental tables

Speaker 3

in the back of the slide deck. And with that, I'd now like to turn the call over to Todd Gleeson, Chief Executive Officer. Todd? Thanks, Stephen. Good day, everyone, and thanks for your time today.

Speaker 3

Please turn to Slide number three, which summarizes today's earnings report. I'm going to hit on a few financial highlights as Peter will give more details in his financial review in just a few minutes. As we announced in our press release today, we closed 2024 in line with the revised outlook issued in mid January. Let's review some of the figures. Starting with full year revenue, we finished the year at $558,000,000 While this was a record year for CECO, our growth rate on a year over year and consolidated basis was up only 2%.

Speaker 3

The customer driven project delays that plagued us throughout much of 2024 did abate late in the year, but not in enough time for us to make up the shortfall to our original guidance. Adjusted EBITDA was also a full year record. We finished 2024 at 62,800,000 which was an increase of approximately 9% versus prior year and with adjusted EBITDA margins expanding approximately 70 basis points. Peter will elaborate more on this in his remarks, but we are pleased with our ongoing margin expansion and we expect EBITDA margins to rise in 2025 as we will continue to see the benefit from stronger volume and mix as well as advancements we continue to make with our operating excellence efforts. In fact, our gross margins expanded very nicely driven in large part by $10,000,000 of productivity savings in the year.

Speaker 3

Moving to the last two items in the upper right sections of the slide, I'm very pleased to report that full year and quarterly orders were both company records and it wasn't even close. The previous record for a quarter was approximately $165,000,000 So for us to deliver $219,000,000 in Q4 really demonstrates our market leadership and the strength of key verticals that we participate in. These eye popping fourth quarter orders produced growth of over 70% and our full year orders of $667,000,000 were up mid teens year over year. As a reminder, our orders turn to revenue in a staggered fashion depending on the type of project. Some orders turn to revenue rather quickly within thirty to ninety or one hundred days, while other orders have a profile that has a longer duration of revenue recognition, perhaps even nine to eighteen months.

Speaker 3

In either case, our orders rarely de book. Our de booking experience is less than 2% and in most years it can be less than 1%. We will highlight some of the strong markets that drove these record orders growth and we continue to see tremendous opportunities across various markets including power generation, natural gas infrastructure, industrial air and produced water end markets and other diversified industrials. In fact, so far in Q1 of twenty twenty five, we have maintained a very strong orders profile. So we expect continued robust levels.

Speaker 3

And these record orders helped us build a tremendous backlog, which closed at $541,000,000 an increase of 46% from previous year end. The increase reflects the strength of our pipeline that yielded nearly $400,000,000 worth of orders in the second half of twenty twenty four, including two large projects in power generation totaling around $100,000,000 The power generation market as a whole is just embarking on what we expect will be a multi year capital investment super cycle. This market coupled with how well we are positioned to benefit for broader macros of reshoring industrial manufacturing, electrification, global investments in infrastructure and data centers and growing needs for industrial air and water treatment solution helps to grow our sales pipeline to new heights. So in summary of this slide, we ended the year with lower than guided revenue and EBITDA, but we are extremely pleased with the bookings momentum in both Q3 and Q4. So this momentum has carried into 2025 and coupled with our recent acquisitions that we are integrating very well, we expect 2025 to be a banner year for CECO.

Speaker 3

Let's move to Slide number four. We have the chance pardon me, I've had the chance to spend significant portions of my career working with or around world class CEOs and leaders to transform companies into value creation machines. Each company had unique operating models and of course each CEO was different. But a common aspect was a multi year perspective, which incorporated a focused value creation strategy and of course the ability to maintain performance, even if one year wasn't quite as good as other years. What was always important was meaningful progress.

Speaker 3

Well despite a year in which CECO didn't hit all of our stated performance metrics, our teams continue to ensure we are making the right progress in our value creation strategy. I hope our investors don't lose sight of the foundation we have been building and our transformational results. Now let's look at the details on this slide. As you can see, moving from the left side to the right, please note the five year progression of three key metrics. First, with orders.

Speaker 3

Our annual book to bill has exceeded one in every year and we expect this to continue in 2025. Our multi year orders growth has been a solid 23% CAGR. Some of you might remember that prior to 2021, the average quarterly orders level for CECO was around $90,000,000 In 2024, we booked over $90,000,000 in December. In that specific month, we didn't book a single order greater than $10,000,000 So I'm not cherry picking a month with one or two huge bookings. As we exited 2024, our sales pipeline was approximately $4,500,000,000 compared to approximately $1,500,000,000 as we exited 2021.

Speaker 3

I believe this is high performance and transformational. Moving to the second metric, revenue, we have grown our sales every year since 2021 with a three year CAGR of approximately 20%. We have been delivering consistent sequential growth, which has been a balance of executing our organic strategies to expand into new markets with solutions and services, as well as adding niche leadership businesses via our programmatic M and A model. We have added global diversity and our 2025 outlook reflects the momentum we have coming into the year with a record backlog and robust end markets. And finally, for adjusted EBITDA, it is another consistent and high performance growth story.

Speaker 3

For the past four years, we have grown adjusted EBITDA over 34% CAGR and we have experienced EBITDA margins growing over 300 basis points. And I believe we're just getting started on margin expansion as we advance our operating excellence programs and the benefits that will derive from improved business mix and the uplift from accretive acquisitions. I'm proud and grateful for my career experiences and my exposure to some incredible leaders. I would submit that what we are doing here at CECO should capture the attention of those same mentors and former colleagues given the sustainable and transformational value creation we continue to deliver. Importantly, this is a huge tribute to the great team members at CECO, who work tirelessly to deliver world class results by giving our customers best in class solutions.

Speaker 3

So thank you to TeamSeeco. Please turn to slide number five. We wanted to include this slide as well as the next one to simply highlight that our transformation isn't just financial results. We shared this material in many of our investor presentations and with certain internal meetings. The takeaway here is that we are a radically different company than four to five years ago.

Speaker 3

We have a balanced industrial air, industrial water and energy transition set of businesses that are each leaders in very important niche markets. And we are being recognized more and more each day for the tremendous work we do to support our global customers and to sustainably execute across complex industries. And if you turn to Slide six, we wanted to stress that while we are very diverse, we are also very focused. CECO is 100 focused on niche leadership in industrial markets with a myriad of diverse solutions and services. That diversity continues when you see the number of end markets we serve within those industrial sectors.

Speaker 3

Every day we work with leading industrial companies to solve some of their most complex industrial air, water and any energy contamination removal, treatment and emissions challenges. So while we are 100% focused on industrial, our diverse solutions offerings and diverse end markets are so vast it gives us tremendous balance. And we will continue to leverage this access to diverse markets providing a range of solutions while we maintain a nimble capability to move from industry to industry based on market dynamics. Our business leaders work very well together to ensure CECO maximizes our full potential to take advantage of growth opportunities. I will now hand it over to Peter, who will provide additional detail on various financial and operational items.

Speaker 3

Peter?

Speaker 4

Thank you, Todd. Good day, everyone, and thank you for attending our fourth quarter and twenty fourteen year end earnings call today. If you would please turn to Slide eight, I'll provide you with additional insights into CECO's financial results for the quarter and the full year. Starting with backlog. We closed the quarter with a record backlog of $541,000,000 up 46% versus prior year and 24% sequentially.

Speaker 4

Of the total, approximately $50,000,000 is related to the three acquisitions completed in 2024. Orders in the quarter and the year were also records. Fourth quarter orders of $219,000,000 represents a 71% increase versus prior year, also up sequentially by $57,000,000 or 35%. With a book to bill ratio of 1.4 in the quarter and 1.2 for the full year. Although the timing of 2024 bookings impacted our ability to recognize revenue on the P and L in the quarter and for the year, we are well positioned to realize this revenue in 2025 and into 2026.

Speaker 4

Revenue in the quarter of $159,000,000 was an increase of 3% year over year and up sequentially by approximately $23,000,000 or 17%. Although we fell short of our expectations for fourth quarter revenue as we exited the third quarter, I am happy to see the step up sequentially, which represents approximately $640,000,000 of revenue on a run rate basis before the benefits of the Vrantis acquisition completed in late December and the Profire acquisition completed in early January. This performance supports our confidence in delivering on our 2025 outlook. For the full year, we recorded revenue of $558,000,000 also a record. A modest increase versus prior year as revenue recognition was impacted by the two main factors Todd mentioned previously, customer driven project delays and slower to realize timing of bookings in the first half of twenty twenty four.

Speaker 4

We delivered $19,100,000 of adjusted EBITDA in the fourth quarter, which was down slightly by approximately 2% year over year, but an improvement sequentially of approximately 34%. Gross profit margin was 35.8% in the quarter, up 120 basis points versus the same period in 2023 and two forty basis points sequentially as our material sourcing productivity and project execution initiatives continue to deliver benefits. We also realized the benefits and have improved portfolio and business mix in the period. Adjusted EBITDA margin of 12% was down 54 basis points versus the prior year period, driven mainly by the timing of investments in SEG and A in anticipation of revenues that I've mentioned were late to materialize. These additional expenses were partially offset by gross profit expansion in the quarter.

Speaker 4

On a sequential basis, our Q4 adjusted EBITDA margin was up approximately 150 basis points. From a full year perspective, we delivered adjusted EBITDA of $62,800,000 near the high end of our previous guidance with full year margins of approximately 11.3%. Both metrics are up versus prior year. Adjusted EBITDA grew $5,000,000 or 9% with margins expanding 70 basis points benefiting from business mix, M and A and overall expense management, which I will elaborate more on in the next page. For 2024, the delivered incremental adjusted EBITDA margins of 40% was a strong result given the softer than anticipated volume.

Speaker 4

Adjusted EPS was essentially flat year over year for both the quarter and the full year as moderate growth in adjusted EBITDA was more than offset by tax timing and select below the line items. Finally, moving to free cash flow. We were disappointed with how we ended the year, but have already seen a quick turnaround with respect to cash generation in 2025. Cash flow for the fourth quarter was an outflow of $4,000,000 due to working capital timing largely driven by collections scheduled to be received in the quarter that unfortunately hit our bank account in the first year first week of twenty twenty five. The delayed cash receipts amounted to approximately $15,000,000 On a full year basis, cash flow performance was somewhat destined to be under pressure, given the aforementioned customer driven project delays and the bookings that were postponed into the second half of the year, both of which hindered our ability to recover to a more consistent working capital delivery profile as our billings reflected the delayed timing of projects and bookings.

Speaker 4

When viewed as a group, I estimate that these factors negatively impacted full year free cash flow by approximately $30,000,000 On Slide 21 in the appendix, we have included details that provide additional color on this topic and help bridge those components and their impact to our 2024 free cash flow performance. We fully expect this delayed 2024 cash delivery will be recovered in 2025, just like we expect to fully capture the benefit of the delayed 2024 revenue. Please turn with me to Page nine now, where I will discuss gross profit and our gross profit margin performance. To orient you to the presentation on this slide, we are presenting CECO's gross profit performance by quarter since the fourth quarter of twenty twenty two on a TTM basis in order to normalize for quarter to quarter fluctuations. And I'm providing a look back of two years to the point where our sourcing and productivity initiatives were launched.

Speaker 4

Since the fourth quarter of twenty twenty two, we've expanded our gross profit margins by approximately 500 basis points with a gross profit dollar growth of approximately 53%. Over the past two years, a number of focused operational and portfolio actions have enabled this improvement. The impact attributable to our operations excellence efforts is an annualized savings of approximately $10,000,000 an increase in shorter cycle sales, improved project execution leading to realization of project contingencies and acquisitions with accretive gross profit margins have also contributed to our consistent and sequential improvement. I feel good about our team's performance and our ability to sustain the current profitability levels with modest improvements continuing in 2025. As we move through 2025, we will continue our cost savings pursuit through sourcing, functional productivity and improved project execution.

Speaker 4

In addition, we expect to see benefits from our early deployments of lean in a number of our businesses and the synergies captured and to be captured from our recent acquisitions of WK, Verantis and Profire Energy. A possible modest headwind to 2025 gross profit margins could be the already booked and expected to book large to mega sized projects in a few markets where gross profits tend to be below the company average, but have above average EBITDA margins as these jobs have very little incremental costs below gross profit related expenses. So for these large jobs, the operating income is very attractive. Now I'd like to move from Slide nine to Slide 10 for a quick review of cash flow and liquidity. We'll start on the left side of the page with a free cash flow walk from net income on a year to date basis.

Speaker 4

For the full year, we delivered less free cash flow on a year to date basis due to working capital timing and higher capital expenditures. Working capital is lower by approximately $30,000,000 negatively impacted by customer payment timing. The large amount of second half bookings resulted in a significant increase in customer down payment receivables still open as of year end. These receivables create a cash tailwind for the company in the first half of twenty twenty five. CapEx investments were up approximately $9,000,000 year over year as we continue our investments in ERP migration and consolidations and we chose to invest in select machinery and facility upgrades to improve throughput, increase capacity, improve productivity and accommodate lean production model changes.

Speaker 4

Depreciation and amortization is up year over year to reflect the increases in capital spending in the prior years. On the right side of the slide, we're presenting a more streamlined bridge of the sources and uses driving the change in our debt position. We ended the fourth quarter with a gross debt of approximately $217,000,000 resulting in net debt of approximately $180,000,000 as we utilized the upsized credit agreement to execute on strategic M and A with leverage at the end of the period reaching approximately three times our bank EBITDA. In 2025, with the expected proceeds from the pending sale of our fluids business, plus the application of operating cash flow for debt repayment, we expect to reduce our outstanding borrowings on our revolver and lower our leverage ratio to a comfortable 2.2 times EBITDA, yielding approximately 100,000,000 of dry powder in the third quarter of twenty twenty five, a level more than sufficient to continue executing against our programmatic M and A strategy and to make incremental investments in organic growth. And with this slide, I conclude my summary on CECO's Q4 and FY 2024 results and will now hand back the presentation to Todd.

Speaker 4

Thanks, Peter. Please turn to Slide 12, which really helps to set up our discussion for 2025.

Speaker 3

We have steadily grown our backlog and ended 2024 at $540,000,000 This provides great visibility to full year 2025 revenue already in our backlog projects. Any discussion of a robust full year outlook should start with a highlight slide that resembles this one. I'm very proud of the sustainable growth we have shown and this slide reiterates that we have consistently grown our book to bill greater than 1.1 and even 1.2. That is strong confirmation that we have created a double digit growth organization and our sales CAGRs, which I highlighted back on Slide four reflect our strong orders growth. Moving to Slide 13, we felt this was another informative slide to add.

Speaker 3

We hope you find it helpful as it highlights how we produce revenue. On the left side of the slide, you can see our sales are fairly balanced across short, medium and longer cycles mix of business. Starting with the 30% of our sales was our shorter cycle or relatively consistent flow of sales from aftermarket, services and standard product shipments. As we have stated in prior calls, we continue to evolve the portfolio towards a greater shorter cycle mix of business with a goal to reach 50% in the next few years. A similar amount of revenue is generated from lightly configured engineered solutions.

Speaker 3

This is a mix of revenue that we often refer to as mid cycle because from booking to revenue generation these projects generally convert in six to nine months. And finally, the balance of our sales is from longer or larger projects. These are highly engineered and CECO has an outstanding reputation engineering and delivering these complex and custom built solutions. These projects start to turn to revenue anywhere between three to nine months and they last anywhere between twelve to eighteen months. On the right side of the slide is a fairly self explanatory sales pipeline visual with supporting information.

Speaker 3

As I mentioned earlier, we have built our sales pipeline from $1,500,000,000 in 2021 to over $4,500,000,000 as we exited 2024. This sales pipeline is a combination of replacement systems from our large installed base to our ability to enter new markets and support existing or new customers with their needs. Now let's turn to Slide 14. As we highlighted in today's press release, we are maintaining our 2025 guidance. We expect the full year to produce orders greater than revenues, thus implying another positive book to bill for 2025, which would expand our run of book to bill greater than one point zero to five years.

Speaker 3

For revenue, we are reiterating our outlook for a range of between $700,000,000 to $750,000,000 which is a 30% growth rate year over year if you take the midpoint of that range. About half of our growth is organic and half is from the acquisitions we have already completed and started to integrate. For adjusted EBITDA, we reiterate the expectation between $90,000,000 to $100,000,000 an increase of 50% versus 2024 at the midpoint. Margins are expected to continue a nice improvement as well. And with respect to free cash flow, we are introducing a range of 60 to 75% of full year adjusted EBITDA.

Speaker 3

This is higher about 10 percentage points when compared to our standard free cash flow guidance as we have significant receivables that slid into 2025 and which Peter already outlined. On the right side of this slide, we highlight a few dynamics we think are important to track as we navigate the year. I will categorize them in two areas tailwinds because we already have good visibility to this momentum and monitoring because there is general uncertainty in some areas. For tailwinds, we highlight our record backlog entering the year, our orders momentum in strong markets and the fact that we continue to increase our market opportunities, which is reflected in the $4,500,000,000 sales pipeline. We will continue to monitor the potential impacts from tariffs and other legislative or administrative items.

Speaker 3

There is just a lot of interest, but also a lot of uncertainty in these topics. And of course interest rates and inflation are also important to monitor. Each year we encounter positive and negative surprises, so we will focus on what we can control and what we have the ability, we will pull various levers to maximize our upside and of course work to offset any downside factors. Finally, we have the acquisition of Profire in the late Q1 divestiture of Fluid Handling already incorporated in our full year outlook. Now let's turn to Slide 15, which is our summary slide.

Speaker 3

In summary, we are pleased with our ongoing transformation even with the mixed results in 2024. There were a number of important records, but also some shortfalls versus our 2024 guidance. We have a very good track record identifying, acquiring, integrating and growing very strategic and accretive businesses through our programmatic M and A and we expect to continue this successful approach. I am pleased with our sales pipeline and margin expansion progress and we have a lot of opportunities with each. And more importantly, we have created a significant amount of shareholder value over the past three, four years and remain very committed and aligned with shareholder value creation.

Speaker 3

And I want to thank Team SECO once again for delivering for our customers and navigating complicated and challenging markets. You inspire me and our entire team every day. With that, we will open it up for questions. Operator?

Operator

Thank you so much. Our first question is from Rob Brown with Lake Street Capital Markets. Please proceed.

Speaker 5

Good morning.

Speaker 3

Hey, Rob.

Speaker 5

You talked about seeing some order momentum pipeline or sorry, order pipeline momentum into 2025. Just wanted to get a sense of kind of where you're seeing the strength, what you're seeing there thus far in this year?

Speaker 3

I think it's sustained strength, Rob. And I guess obviously we are being somewhat redundant with comments that the power generation markets reshoring of industrial infrastructure, not just natural gas infrastructure, but infrastructure overall. You can there's certainly a number of areas of uncertainty as we kind of enter 2025. But for us, the momentum that we saw in third and fourth quarter orders continues to feel very strong. So I'll leave it at that.

Speaker 3

I would just say as we're halfway through the first quarter, we have seen just a good vibrant orders market for us and we hope that that continues and we expect it to given the advanced stages we're at with a lot of our pipeline discussions.

Speaker 5

Okay, great. And then maybe on Profire, now that you've had a couple of months here, what are you seeing in terms of opportunities there? Where do you see growth? I think it's how is the integration going?

Speaker 3

Yes. Look, we were always excited to bring the incredible team of and the market leading solutions of Profire into the CECO portfolio. And in seven or eight weeks that has been that has just continued to expand in terms of our excitement. Both the Profire leadership as well as different businesses within CECO continue to engage on significant opportunities, whether it be in the energy market, helping Profire identify industrial markets or just working with our industrial teams on penetrating market opportunities more efficiently. We've started really rich dialogue on how Profire can grow internationally with our already established market positions in The Middle East and in other international markets.

Speaker 3

So, I'd say really hit the ground running, frankly. For us, it is the largest acquisition we've made in my since I joined CECO, not the largest acquisition I've made and not the largest that CECO has made in its history, but the largest in the five years since I've been CEO. But it might prove to be a very efficient integration just given the Profire was already a publicly traded company. So while a little bit larger, a lot of the integration programs that we do are fairly efficient and fast because they already had established processes that resemble many of ours. So from an integration perspective, we feel good.

Speaker 3

From a growth and collaboration perspective, we feel great. And we'll stand behind the fact that we think that with investment and leadership that Profire could be another one of our acquisitions that we believe we can double in three or so years. And certainly the synergies that we expect to get from Profire, we feel continue to feel great about. And we look forward to just getting that integration further along in the year, providing you with some updates and then investing for growth.

Speaker 5

Great. Thank you. I'll turn it over.

Operator

Thank you. Our next question comes from Aaron Spichela with Craig Hallum Capital Group. Please proceed.

Speaker 5

Yes. Good morning, Todd and Peter. Thanks for taking the questions. First, on the backlog entering the year, can you just kind of talk about visibility that provides into guidance, maybe how that compares to past years? And then just confidence that project timing, how that's incorporated into your 2025 guidance?

Speaker 3

Yes. I think we get better visibility as we go each year, Aaron, and it's a good question. Look, as I mentioned in one of my final slides, it's hard to have the confidence of having a 30% top line revenue projection without having that backlog that we have, right? So to have a backlog that is 40% or so higher than it was a year ago coming into the year, I would say gives us a lot of confidence and momentum entering 2025. And look, we work with all of our businesses to understand what of that backlog is in shorter cycle businesses, so we have more visibility to the first two to three or four months of the year, what of it is still in mid cycle and where are those projects at in their duration and then what's in longer cycle.

Speaker 3

Last year, we had visibility entering 2024, but we didn't have as rich a backlog coming into 2024. We sort of probably needed a stronger start to the year in bookings than we got. And then we obviously had certain key projects push out. This year, I would say we're starting a little bit more all cylinders firing. We just completed a handful of acquisitions, so we have a lot of strength and momentum from those transactions where there's growth opportunities across the board.

Speaker 3

Our bookings in the fourth quarter, which included very little benefit from those acquisitions of $219,000,000 just gives us a lot of visibility to the healthy end markets that are out there. And so for us, I think there's a more visibility to $25,000,000 as we enter the year for the full year than we had coming into '24 And the fact that we're already seeing strong orders in the first part of the first quarter, that just gives us more confidence that we're going to continue to see a strong revenue for the year.

Speaker 5

Great. Thanks. And then maybe second, just on margins, Peter, you touched on it, but nice progress there. Can you just maybe give a little bit more detail on how you're thinking those progress as we move through 2025? And then talked a little bit about tariffs, but just maybe the latest thoughts there, given I know it's an evolving situation, but just how you're thinking about that with the business as we move forward?

Speaker 4

Gross margins, we believe, still have a little more room to expand, but the rate of expansion will moderate. We'll continue to see the efforts in lean and operating excellence in sourcing allow us to offset any headwinds that might arise from tariffs, which today is uncertain and quite frankly, almost a fool's errand to try and predict. So we're just running our business and are going to be nimble and flexible. The margins at the EBITDA line will begin to start seeing accelerated improvement with the ability to see the benefits of functional productivity, the systems we're investing in and frankly scale on the existing fixed cost. With a $750,000,000 business with essentially similar fixed costs, we'll see that flow through nicely.

Speaker 4

If we were to talk about tariffs in any specific way, we'd be here for hours. So maybe we'll take care of that later.

Speaker 3

Yes, we've done a lot. I will say, this is Todd, we've certainly rolled up our sleeves and done a lot of work on our exposure to regions, countries where tariffs could be applied. And so we understand what analytically what it could mean and we have a lot of confidence given our dynamics with our projects and contracts that there we could be a price pass through on that type of whatever you want to call it, that kind of inflationary result from tariffs. So we could, like Peter said, go around and around on what it could mean quantitatively. I would say qualitatively or the thing that I'm more interested in, and I think most maybe CEOs are is, will this uncertainty create some unnecessary market dynamic that doesn't seem like it wants to or needs to exist right now that there could be significant pauses as everyone sort of gets their head in their arms around what the impacts are?

Speaker 3

We're not seeing that. I think that we're seeing questions and we're all a little uncertain. To me that would be the most the impact financially of the tariffs seem to me to be less impactful than what could be some sort of a market pause that hasn't occurred and we hope and don't expect it to occur. But that's what I would say about tariffs is that the financial impact for SECO will be minimal we believe and managed because of how we have our business relationships and contracts set up. But the economic uncertainty is a little TBD and but we haven't seen any impact of it to date and we look forward to that continuing.

Speaker 5

All right. That makes sense. Appreciate the color. I'll turn it over.

Operator

Thank you. Our next question is from Bobby Brooks with Northland Capital Markets. Please proceed.

Speaker 2

Hey, good morning guys. Thank you for taking the question. So kind of want to piggyback on Aaron's question a bit about the backlog. But so 2024 was sort of a transitional year for you guys as your backlog began to consist of larger and more complex projects than you historically had worked on. And given that maybe the forecasting tools you previously were using weren't kind of weren't the right fit for those new bigger projects, could you just discuss what maybe new tools the team has implemented or process of that has been implemented to better forecast and track projects sitting into your backlog, which then should help give more confidence of heading guide this year?

Speaker 3

Yes. There's a lot there and some of that is certainly worth unwrapping because we work on our processes and our tools consistently. Even if last year had been a initial guidance that we met or exceeded, I think we have a lot of work to do like most companies do on the complexities associated with a project based revenue model, which is greater than 50% of our revenue as I already outlined. So, look, we are consolidating more businesses into a standard ERP that gives us more visibility to how their cost structure is associated with those projects. We have spent deliberate time and energy getting people on a much more consistent percent of complete revenue recognition model that allows us to have more standardization across our businesses.

Speaker 3

These large projects have actually we have a tremendous amount of experience with them. That's probably the only comment you made Bobby that I would probably try to correct is that these projects might be a little larger, but some of that has to do with just the time I might say. We've done $40,000,000 50 million dollars projects before and our forecasting has never really been the issue. It is the dynamics that occurred last year are a little unique and I think we're learning from those dynamics. And so if I would, I think we learned I personally would say heading into 2024, we were more vulnerable to if there were some project delays in terms of bookings or there were project delays in our backlog.

Speaker 3

Because as we exited 2023, I know I'm asking you to go back a ways, our third and fourth quarter bookings weren't as strong. And then as we entered '24, we thought those bookings were going to happen earlier in the year and they didn't. And I would just say it kind of came a little bit of a domino effect that we learned from. So it's maybe a little bit less of systems and processes, which we continue to improve and a little bit more of the dynamics as we exit a year and enter a year with either momentum or your fingers are crossed that you're going to find momentum that I'd say this year, as you can see from our second half bookings, the fact that we've completed now a handful of acquisitions rather than those acquisitions being in front of us to complete. I think for the full year, look, we would always say, we don't give quarterly guidance for a reason because our numbers can move around a little bit based on swings in certain projects and dynamics.

Speaker 3

But as we head into 2025, I would say this feels exactly like when we headed into 2022, where heading into 2022 and 2023, we had a lot of visibility to our guidance and our performance. And I would say we feel like that heading into full year 2025.

Speaker 2

I appreciate the clarity on that and that makes a lot of sense. And then just I believe with your Profire acquisition, you guys might you guys gained some manufacturing capabilities within The U. S. I was just curious if tariffs were to kind of boil up, is that an asset you could leverage for other pieces of the business or should we think of that as strictly for Profire related revenues?

Speaker 3

For Profire, it's strictly for Profire, I would submit. Now look, we're as creative as the next person. So, if there's a way for us to leverage manufacturing domestically for various cost purposes, including tariffs avoidance or maximization of our domestic footprint. Varantis might be a better example of that to some extent, given their Ohio and Cleveland based capabilities that we might be able to look at for industrial air. We have other manufacturing that we might be able to evaluate and utilize, including in various other states in, let's say, our industrial air ducting business, etcetera, that we could look at leveraging.

Speaker 3

I think that's a little bit of a longer term play. We're well positioned in Texas with our Denton facility if we wanted to add supply chain capabilities through that. But Bobby, right now I'd say that feels like CapEx we don't need to spend until we better understand what would be the long term benefit of that economically. However, yes, look, it's a fair question and I think companies are going to continue to be strategic with the footprint that exists. And I think look for Profire, the balance of their footprint between Canada and The U.

Speaker 3

S. Is very attractive to us. And I think we could toggle things in our businesses if I guess some economics demand it.

Speaker 2

It's perfect sense. I'll jump back in the queue. Thanks guys.

Operator

And thank you. Our next question is from Jim Ricchiuti with Needham. Please proceed.

Speaker 6

Hi, good morning. This is Chris Screnga on for Jim. Thank you for taking the questions.

Speaker 3

Hey, Chris.

Speaker 6

How would you compare the level of activity you're seeing in the short cycle business versus the longer cycle parts of industrial air and industrial water?

Speaker 3

Pretty stable, pretty stable in terms of the shorter cycle. So look in industrial air and industrial water or in energy as well, a good percentage of that is some aftermarket replacement parts and filters and services and things of that nature. So that's steady for sure and continues to grow because of our installed base. We don't sell a lot into distribution and frankly. And so, even in our shorter cycle business, we don't have a lot of stocking.

Speaker 3

And so, unlike some companies that might be making a comment with respect to inventory through their channel, we don't have that. And so, that's both a good thing because we're not nervous about the fact that we've put too much inventory into a channel. We don't have to there's not going to be a correction there. And at the same time, certainly we would like to have a little bit more business where we have that dynamic because it's a good dynamic to have, it's a good balance to have. So, but I think there's for you and for Jim and how you're thinking about the short cycle, I think we feel good about short cycle.

Speaker 3

In fact, for us in 2024, our short cycle sales continues to continue to be just fine and that was one of the areas of consistency in 2024. We expect that to continue this year.

Speaker 6

Great. Could you talk about what you're seeing and maybe what your outlook is for in terms of the LNG vertical or LNG end market? Has there been any incremental change in interest or urgency from customers in that space?

Speaker 4

There has. We discussed this in the fourth quarter and we're still seeing the increase in the dialogue. I'll go back a couple of months. Literally after the election announced, the results were announced, our two largest customers in LNG plant development, both based in Houston, call us and said, come to Houston, we're going to start getting next year plan because these projects that have been deferred by the Biden pause are going to turn back on. We've rebid those projects, we've updated quotes and lead times and we're seeing order activity begin both in Louisiana and Texas as well as some international project work.

Speaker 4

So I think 2025 and 2026 are going to yield some very robust project work, projects that have all their permits and were put on pause and those which will now get permits and will proceed. And they're large. It's a very positive conversation. Dare I say the world needs more of it and you can either buy it from us or you can get it from the Qataris. I suspect many would rather get it

Speaker 3

from us, meaning The U. S, not CECO. And I know this wasn't your question, Chris, but if I could expand it a little bit just from LNG, which is a really good focus by the way for a number of companies and I think CECO is well positioned for that. We also could say you look at the amount of power that we're hearing and I know that there's been some new some introduction of some new topics like DeepSeq into the conversation where maybe that's going to reduce the amount of power needed. I think regardless of the dynamic of AI etcetera that I read an article that we need to generate like the amount of power that would be equivalent to a new Japan in the next three years.

Speaker 3

And we need to do that multiple times in the next ten years. And there was another article that talked about multiple trillions of dollars that need to be spent on potentially on reshoring industrial manufacturing, not just to The U. S, but to other reshoring within North America, writ large, Europe, etcetera. So a lot of movement in the world. I think over the next five to ten years, we feel well positioned for that.

Speaker 3

And the reason we call it an energy super cycle isn't just because of power or LNG, it's because it's one of the few times where you might see meaningful investment in almost every energy bucket from wind and solar to gas and infrastructure associated with power as well as gas infrastructure movement, including LNG. There's very and nuclear, we've reviewed several nuclear projects recently, which is much more activity than we were seeing a year ago even. So we're seeing every sector of energy with a higher investment thesis in 2025, '20 '20 '6 and 2027. That's what makes it a super cycle. It's not just the demand for power, although the demand for power including natural gas power is we think at this point pretty tremendous.

Speaker 6

Thank you very much. It's really helpful.

Operator

Thank you. And this concludes our Q and A session for today. I will turn it back to Todd Gleeson for final comments.

Speaker 3

Okay. Thank you. Thanks for your question and interest today. Also once again, thanks to our global teams for delivering incredible value to our customers as we continue to protect people, protect the environment and protect our customers' investments in their industrial equipment. We'll continue to be active meeting with investors, including presenting at the Ross Conference in Dana Point, California in March, meeting with investors and other meetings in March as well.

Speaker 3

If you'd like to chat and meet, please contact your representative at conferences. Lastly, we look forward to speaking with you when we release our first quarter results in late April. So have a great rest of your day. And for many of you, we'll talk to you later. Thank you.

Operator

And thank you all for participating and you may now disconnect.

Powered by Quartr
Earnings Conference Call
CECO Environmental Q4 2024
00:00 / 00:00