CECO Environmental Corp.

Good morning and welcome to Segal Environmental. Conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Matt Echol, Chief Financial Officer of Segal Environmental. Please go ahead.

Thank you for joining us on the SECO Environmental third quarter 2021 conference call. On the call today is Todd Gleason, Chief Executive Officer, and myself, Matt Echol, 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 our earnings presentation, which is on our website at secoenviro.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 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, 2020. 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 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. And with that, I'll turn the call over to Chief Executive Officer Todd Gleason. Todd?

Thanks, Matt, and good morning. We're going to start with slide number three. Before Matt and I dive into the numbers, I would like to reiterate a few key points we provided in this morning's earnings release. As my quote highlighted in the release, SECO has a bit of a tale of two SECOs. We are at a juxtaposition of sorts. On the one hand, you have SQL orders growth up 39% in the quarter and up 33% year to date. However, given the long cycle nature of our businesses, orders don't turn into revenue for several quarters on average, and sometimes even longer. So despite great and real growth year to date on bookings, our income statement has been waiting for that growth to show up in revenue and income. It will come. We highlight forward looking outlook today, and we expect Q4 and 2022 to show higher revenue and income. On the flip side, our revenue has been mostly flat throughout 2021 because orders had been down in 2020, which lowered our beginning of year 2021 backlog. So despite great orders growth this year, as I just mentioned, our Q3 revenue was essentially flat and our Third quarter revenue was mostly derived from orders booked last year, which had a lower margin profile because of the very competitive market conditions in 2020. As we have mentioned numerous times, we suggested various quarters in 2021 would be sort of quote unquote, our real COVID period. So while backlog protected some of our results last year in 2020, We have been working through the lower backlog and margin profile throughout this year, 2021. Unfortunately, other challenges hit our third quarter performance with unprecedented costs and project timing issues because of disruptions in global supply chains, logistics, inflation, customer delays, and labor shortages. All in all, a somewhat perfect storm hit SECO very early in the quarter. July was perhaps the worst month financially in over a decade. We started to recover somewhat in August and made solid progress in September, but not enough to close the gaps on operating margins. We expect fourth quarter in 2022 to demonstrate higher revenue and income results. We have maintained our focus and investments on driving for growth and also to enable strategic transformation. We will discuss some of those items, including the addition of a new board member and the successful stock buyback program during the balance of our prepared remarks. So the key takeaway from our release, and we hope from today, is that we have the backlog in orders momentum to start to sustain real top line growth. And we expect much better margins going forward, which we will revisit in just a few minutes. So now, looking at the details on slide four, you can see the numbers reflect the narrative I just outlined. Q3 orders up 39% year over year, very balanced across many of our platforms. Our sales funnel remains above $2 billion, so we continue to expect strong orders in the coming quarters too. Sales were $80 million, up a modest 3% year over year. We estimate sales were limited by approximately $10 million in the third quarter because of lingering effects of COVID restrictions, customer delays, and supply chain issues that impacted most of our end markets. Third quarter gross margins, EBITDA and EPS, were all well below our historic levels and operational expectations. We typically average gross margins between 32 and 34 percent. So, our third quarter gross margins of 28.4 percent are really not acceptable. We have actions in place to build margins back up. Our SG&A costs were essentially flat sequentially So it was our lower gross margins that were the main driver in our lower EBITDA and EPS. And those margins did improve each month throughout the third quarter, so we have started to execute better already. That will provide additional color around the major cost impacts, but we just weren't able to pass along cost inflation fast enough or get certain customer change orders through the process in time to offset the costs that burdened our third quarter. Additionally, we would acknowledge that our execution was not optimal. We hold ourselves accountable for performing at a higher level around project management, which could have added at least another point or two of EBITDA margins in the quarter. Certainly, there were short-term issues that many companies are dealing with. But we have turned the dials up on our execution, so we will be driving higher results. The last figure on the slide is free cash flow, which came in around $6 million. This was basically flat with last year's third quarter. Matt will cover more on cash in just a few minutes. Now please turn to slide number five. We provided a similar slide last quarter. Sequel's orders have grown 33% year to date, which has helped to rebuild our backlog, which stands at approximately $219 million. So while we are navigating some short-term execution and cost challenges, we are in great position for the fourth quarter and full year 2022 growth. And if you turn to slide six, you will see that our year to date orders growth has been balanced across our portfolio. Industrial air orders are up almost 80 percent year to date as we continue to do very well in aluminum beverage can facilities, engineered wood manufacturing, electric vehicle manufacturing and other end markets. We expect the demand in industrial air will remain positive. Year-to-date, our duct fabrication and installation business has experienced 28% orders growth thanks to good business in the construction industry. And in our fluid handling business, which is comprised of pump and filtration solutions, our 17% year-to-date orders has been bolstered by strong automotive markets, and we still believe there is growth ahead of us as desalination and oil and gas sectors start to really improve. We are also advancing distribution and expect to invest more in this business for growth as it is our largest short cycle revenue mixed business. Our emissions management platform has the largest orders growth year to date, up 118%. The power generation market is starting to return to 2019 levels, at least from a gigawatt perspective, so we anticipate continued growth here. Our separation and filtration platform is the lone business with declining orders year to date. However, the midstream oil and gas market and the produced water markets are starting to show signs of improvement. And we believe this business is set to grow in 2022 with orders as our pipeline improves. And our thermal acoustics platform orders have been up 25% as the power generation business continues to steadily come back. And finally, our fluid bed cyclone business is beginning to climb out of a very deep downturn and refining. Orders are up 61% year-to-date, and we expect strong orders in the coming quarters too. I will now turn it over to Matt and then wrap up later with some additional comments on our outlook and a summary. Matt? Thanks, Todd.