11/7/2022

speaker
Operator
Conference Call Operator

Good morning and welcome to the SECO Environmental Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Stephen Hooser, Investor Relations. Please go ahead.

speaker
Stephen Hooser
Investor Relations

Thank you, Andrea, and thank you for joining us on the SECO Environmental Third Quarter 2022 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer, Peter Johansen, Chief Financial and Strategy Officer, and Ramesh Nugahalli, Chief Operating Officer. Before we begin, I would 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 secoenviro.com under the investor relations section. 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 the SEC filings included on Form 10-K for the year ended December 31st, 2021. Except to the extent required by applicable securities law, 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 would now like to turn the call over to Chief Executive Officer Todd Gleason.

speaker
Todd Gleason
Chief Executive Officer

Todd? Thanks, Stephen, and good day, everyone. I'm going to start with slide number three of the presentation that Stephen mentioned. Let's get going. I'd like to begin with the note highlighted at the bottom of the slide. Effective as of today, our NASDAQ ticker symbol has officially changed to CECO. Once that ticker symbol became available earlier this year, we secured it as it always made sense for Seco Environmental to be listed as such. We are celebrating our 25th anniversary as a NASDAQ-listed company, so this is just a nice anniversary gift. But that's not the only bit of good news we want to share today. Let's discuss our financial results and outlook by reviewing the main points on the slide. We believe these are the key takeaways from our presentation today. We delivered another strong quarter. I'd like to thank our global teams for navigating the market challenges and supply chain issues that have persisted. We continue to deliver for our customers and our channel partners. In fact, we produced record third quarter revenue in EBITDA, and our third quarter was the second highest revenue quarter in the company's history. Additionally, this was our third consecutive quarter with new bookings above $100 million. our backlog remains close to all-time highs as a result of another solid quarter of orders. Importantly, as we will highlight in more detail on slide five, we are getting broad-based growth from across our enterprise. All diversified companies like to flex their muscle of diversification, and I would suggest SECO is doing exactly that in 2022 and, frankly, over the past 18 months or so. We also remain focused on our capital allocation programs. This will continue to be a hallmark of our value creation. In the quarter, we closed one acquisition, the purchase of DS21, a South Korea-based industrial water leader. In addition, we continued our stock repurchases. More on capital allocations in a few slides. The final two bullet points on this slide point to our full year 2022 guidance and our full year 2023 outlook. We are raising our 2022 guidance and introducing our outlook for next year. Bottom line is we expect to maintain strong growth and are committed to executing against our commitments. So, today is the first day for our NASDAQ ticker symbol as CECO, but another quarter where SECO delivers great results. Let's move to slide number four. This slide provides a summary snapshot of our third quarter in year-to-date financials. Peter will dive into our financials in more detail, but here are some highlights. On the left side of the slide, we highlight key financial metrics for the third quarter and year-over-year percentages. Three consecutive quarters with orders over $100 million. Another quarter with double-digit orders growth and up almost 40% year-to-date. Sales in Q3 and year-to-date are up over 30%, with 36% growth in the third quarter year-over-year. 165% growth in our adjusted EBITDA for Q3, and year-to-date EBITDA margins up 250 basis points year-over-year. So revenue and income growth continue to be really solid for SECO. Free cash flow continues to be very good for the year, and we expect to drive free cash flow as we go forward. Overall, we're just very pleased with our third quarter performance. Now let's move to slide number five. I referred to this slide when I was highlighting the key takeaways for the quarter and year-to-date performance. This slide provides a visual depiction of each of our eight platforms' orders growth rates on a year-to-date basis and over the past 18 months. All of our platforms have delivered double-digit orders growth over the past 18 months, a truly balanced growth profile. Obviously, some have demonstrated higher growth over the past year and a half, such as industrial air, But bottom line, each have grown. And from a year-to-date perspective, 75% of our platforms have delivered orders growth when compared to the first three quarters of 2021. I'm not going to read each of the platform growth figures, but you can see this is a balanced growth effort. And the two platforms that are showing year-to-date declines have great opportunities in the fourth quarter to close that gap and perhaps drive full-year growth themselves. The obvious point here is that our orders growth and near record backlog are not just the result of one or two big markets or one or two big projects, but instead a collection of great effort across our entire company. I would also remind the audience that when we organized into these eight platforms about a year and a half ago, I talked quite extensively about the goals and objectives of our focused platform organizational design. The objective was to drive more growth and a more nimble management approach to capturing opportunities in core or adjacent markets, to have more accountability at the core level that interacts directly with the customer. And after 18 months of driving consistent growth and performance, we would submit that this platform organizational design has been and will continue to be a real differentiation point for SECO. Now let's move on. Another somewhat unique slide is number six. Let's go there now. The eight platforms on the previous slide fit into these three strategic focus areas for SECO. Industrial air, which represents about 50% of our sales, industrial water, which now represents about 25%, and energy transition, which makes up the other 25%. A few of our platforms, such as separation and filtration, have solutions that cut across multiple strategic focus areas. That's why, for example, you see the peerless brand listed across the board. Compared to some platforms, our brands that are resident in only one, such as EIS or AdWest, those brands are strictly within our industrial air platform. Whichever is the case, we have a number of well-respected brands that solve key challenges for customers in industrial air, industrial water, and energy transition markets. And on the right section of this slide, you see a representative list of just some of our project wins. Much like the diversity and balance of our orders growth, we are sharing the same diversity we have been winning across these diverse markets. And these projects, again, are just a small sample size of course. You can read that within industrial air, we highlight a few semiconductor and electric vehicle wins for our various brands. There have been significant investments in these areas, and we believe these markets will continue to invest in expansion. The same thing for chemical, metallurgy, and food and beverage markets. Whether it is a $7 million project win for an aluminum manufacturer that required leading air management solutions, or a multi-billion dollar semiconductor fabrication facility that needs advanced scrubber technology, in this case, a $5 million solution that we provided, we believe Seco and our brands have a great position to serve these markets. Over the past years, we have steadily developed a sustainable niche leadership position in various industrial water markets. Our leadership position has been advanced through organic growth investments, and the acquisitions we have made throughout 2022. In the industrial water markets, we provide highly engineered solutions that capture, treat, clean, and offer reused produced water in heavy industry or energy market applications. Oftentimes, these require special certifications or being on rigorous approved vendor lists, an AVL, so to speak. The process to achieving engineering solution or AVL documentation can take years. And in many cases, these activities ensure to our customers that our solutions are approved for them to maintain regulatory compliance while also confirming their processes are efficient and safe. On the slide, we highlight a $15 million produced water treatment solution that our separation filtration platform's Peerless brand is delivering to a Middle East customer that required highly engineered water management solutions. We also highlight some smaller industrial solutions with the example shown regarding our FIBROC branded or Compass Water wins around saltwater recirculation or potable water treatment. In short, our industrial water strategic focus continues to build sustainable leadership across targeted niche areas that we believe we have every right to win, and thus we will continue to invest more organic and in organic growth. And finally, The energy transition opportunities are vast. We have a very strong position in legacy energy markets such as natural gas, power, and various refining applications. Now we are positioning SECO to simultaneously support those legacy customers and applications and also their needs to expand with purpose to new energy infrastructure investments associated with carbon capture, hydrogen, and other advanced gas solutions. One recent win is in the carbon capture space, an almost $4 million separation and filtration solution for carbon capture within an ethanol facility. This carbon will ultimately be sequestered and therefore eliminate environmental exposure. Similar solutions might utilize the carbon as a commercial product, and we are working on various projects where this might be the end goal. As carbon capture continues to receive investments in sequestration or commercialization, our solutions will be critical to aid in the development of large-scale infrastructure or more point-of-capture solutions. We look forward to highlighting many more of these examples in the coming quarters. Now, please turn to slide seven, which highlights our capital allocation actions. As the takeaway on the slide highlights, over the past 18 months, we have deployed almost $60 million towards the combination of strategic accretive acquisitions and share buybacks. The four acquisitions listed on the left side of the slide are helping to advance our leadership position in industrial air or helping to build a leadership position in industrial water. In Q1, we closed on general rubber, which adds water infrastructure and process applications. Then in Q2, We closed on Compass Water, which has membrane solutions specific to highly certified marine and naval applications. And in Q3, we just closed on DS21, which advances SECO's East Asia market access and adds great relationships with leading Korean EPCs and also provides proven industrial water engineered solutions. Each of these three acquisitions add niche leadership positions to industrial water solutions. The Western Air acquisition in Q2 helps to advance our industrial air position with standard dust collectors and energy efficient control solutions. Each acquisition is accretive. Each adds niche leadership in focused arenas with very strong management teams. While the transactions may seem small on a relative basis, we believe and know they add critical resources, great market leadership, geographic reach, and will drive meaningful growth. On the right side of the slide, we provide an update to our share repurchases. Combined in Q2 and Q3, we repurchased about $6.5 million worth of stock. This represented around 3% of our common stock and an average purchase price of around $7.69, a pretty nice discount to our current stock price. These purchases, when coupled with the $5 million worth of stock repurchased in 2021, represent a consistent utilization of cash to support shareholder value. So, while we just announced a three-year, $20 million authorization of stock repurchases in May, We have already utilized about a third of that utilization in just six months. Now, I would not suggest we are going to maintain this rate of stock buybacks, but the authorization gives us good flexibility, and we will be very prudent with our capital allocation. I will now hand it over to Peter Johanson, who will go through our financial details and provide an update on our full-year guidance. Peter?

speaker
Peter Johansen
Chief Financial and Strategy Officer

Thanks, Todd. Before I begin to discuss SECO's third quarter financial performance, I'm going to briefly share with you some of my initial impressions of my now almost 90 official days in the Chief Financial and Strategy Officer role. I was very excited when Todd asked, and I agreed to join his team on the journey to build a better, bigger, and stronger SECO. And I'm very pleased to sit here before you today to say that after three months, I'm even more excited about the possibilities and the journey as I have gotten to learn more about our company, our people, and our customers, and the vast potential that is in front of Seco. We have only scratched the surface of tapping the full potential for this organization. Additionally, since I began, I have had the opportunity to meet and interact with a number of investors, potential investors, and our analysts. And in each encounter, I have been struck by the enthusiasm about SECO and the interest shared in learning more about the company and our businesses. I look forward to spending more time with you in the future. Now let us dive into third quarter financial results. Please turn to slide nine. On page four, earlier today, Todd has shared with you a few highlights from our third quarter financial results. I will now take you deeper into the numbers and performance for the quarter. On this slide is a summary of the Q3 2022 P&L performance. A more detailed view is provided in the 10Q filed earlier today. A few items are worth highlighting for you on this page. Orders were greater than $100 million for a third consecutive quarter at $102 million, up 10% year over year, on continued strength in our industrial air and industrial water areas of focus, with the TTM orders reaching a level of $467 million. Sales performance in the quarter was even better at $108 million, up 36% year-over-year on steady execution from our growing backlog, continuing our run of six consecutive quarters of increasing sales. Third quarter gross profit margins of 30% were in line with expectations and improved 150 basis points from the year-ago period as our price actions and improved execution offset higher material and project costs. This level of gross profit margin was in line with our 12-month average of 30%. We expect to deliver improved gross margins in subsequent quarters, trending back towards historic levels of 32% to 33% on a backlog that has higher margin profile, improved material and project cost outlook, and higher margins contributed from our completed acquisitions and those to come. A final metric that I would like to highlight that was not described on an earlier slide, number four, is non-GAAP operating income. Our non-GAAP operating income finished the quarter at $7.2 million, over 300% better than our result in the third quarter of 2021. It's important to note this performance would have been even better except for the impact of foreign exchange which brought the number down by approximately $700,000. All this hard work on the top of the income statement when combined with our shared buyback program has delivered outstanding EPS growth in the quarter and has set CEQA up for an excellent full year result. Please turn to slide 10 where I want to provide some additional data points on orders and revenue. On an earlier slide, Todd shared with you that the orders performance for SECO is widely distributed across our various businesses. Our order strength has led to a nice run of seven consecutive quarters of average orders growth per quarter and TTM orders growth, a run we expect to continue. With the average in the third quarter reaching 117 million, on TTM orders of $467 million. This figure has also set a record for orders in a three-quarter period of $377 million. Earlier on slide six, Todd walked you through a selection of nice wins for SECO in the quarter, which contributed to our Q3 results and will convert to revenue in the future. This ongoing strength of orders translates to strengthened revenue as we convert our backlog. The series of seven quarters of orders growth has been mirrored by an even steadier and consistent revenue growth trajectory with average revenue per quarter and TTM revenue reaching $100 million and $400 million respectively. Third quarter revenue was $28 million greater than the year-ago period and was the second highest revenue quarter in company history, a mark we are looking to break again in the near future. As we flip to the next slide, number 11, I'll provide some additional color on SECO's backlog. For the third consecutive quarter, SECO's backlog is at or near an all-time high. We finished the quarter with 280 million of backlog, up 20%, 27%, excuse me, from the third quarter of 2021, and 30% from the year-end 2021 figure, with a 2022 year-to-date book-to-bill over 1.2 times. With an opportunity pipeline still in excess of $2 billion, and with a good start to Q4 and with our October bookings, We are expecting to continue the book-to-bill performance of the past seven quarters to the end of the year, setting SECO up nicely for 2023. Equally important is that our platform teams are very optimistic about growth and continue to see more opportunities to expand the current pipeline beyond existing levels. Now let's turn to slide 12 to take a look at margins. As showed on slide 9, our gross profit performance improvement year-over-year was substantial. Third quarter gross profit dollars delivered were up 43% versus the year-ago period and was the highest level for many quarters, whilst gross profit margins increased by 150 basis points, pushing the 12-month average back to the 30% level. While it feels good to be back at 30%, our team feels that 30% is a floor for SECO's gross profit margins and fully expect to improve from this level, targeting the historic levels of 32% to 33% through continued pricing actions and price discipline, ongoing improvement in project execution, value engineering, and supply chain management. Third quarter adjusted EBITDA of $9.2 million was $5.7 million higher than the year-ago period, producing EBITDA margins of 8.5%, a 420 basis point improvement over the third quarter of 2021. Our TTM adjusted EBITDA of $38.5 million produced a margin for the 12-month period of 9.6%. In the quarter, we had a true up for FX, made investments in additional commercial resources in a number of our platforms, and closed the DS21 acquisition. Without the effect of these expenses, adjusted EBITDA would have been greater than $10 million, with our margins 90 to 100 basis points higher. These profitability results demonstrate that even with the challenging operating environment in which we find ourselves today, Seco are getting strong leverage on our increased volumes. For a moment, consider if gross profit margins had been realized at SECO's historic 32 to 33% range. EBITDA for the quarter would be in the 11.5 to 12 million range with margins of approximately 11%. To get back to these margin levels, we remain focused on our initiatives to improve execution, commercial outcomes, and optimize our G&A expenses. continuing to selectively invest in growth and enabling capabilities, but doing so at a pace that is consistent with delivering improved profitability. Now please turn to slide 13 where I want to briefly cover cash positioning and capital deployment. The main takeaway here is that we are delivering strong operating cash flow. have ample investment capacity to fund our growth and value creation strategy, and have been deploying capital aligned with that strategy. Year to date, we have spent approximately $54 million on M&A, share buybacks, and CapEx to support organic growth. Our strong performance has allowed us to execute on our programmatic M&A and share buybacks, while maintaining a healthy EBITDA leverage ratio of less than 1.8 times, yielding over $90 million of available capacity for further growth investments. We believe we have additional opportunities for improving cash generation from working capital management and project execution through the end of 2022 and into 2023. Please turn to slide 14 where I'll walk you through our outlook for full year 2022. Earlier this year, Todd shared with you a SECO full year financial outlook for the first time as a company. We increased the full year 2022 outlook when we presented our second quarter earnings results in August. I am pleased to share that we are increasing our full year financial outlook again to reflect strong performance and confidence in growing and converting our backlog and our operational execution. Here are the numbers. We now expect full-year 2022 orders to exceed $475 million. This would represent a greater than 30% year-over-year increase and would be the second consecutive year that SECO has grown full-year orders by 30% or more. Our updated outlook for full-year 2022 sales is to exceed $410 million, delivering over $100 million in revenue in the fourth quarter for a third consecutive quarter. This would represent a 26% year-over-year increase for the full year. We continue to expect full-year gross profit margins of 30%, which although down 100 basis points versus full year 2021, will allow us to exit the year with higher run rate than the first half of 2022. We are also improving our full year 2022 outlook for adjusted EBITDA and increasing our previously stated range from a low of 37 to a high of 40 with a view that CEQA will now deliver or exceed adjusted EBITDA of 39 million for the full year, which would be an increase of 50% versus 2021. As you can see, our full year 2022 guidance for orders, revenue, and adjusted EBITDA are target numbers, implying we expect to meet or potentially exceed these levels. We continue to make important growth investments while taking into consideration the supply chain and inflationary challenges. So we remain cautious about setting expectations that are out of a range. However, we believe these figures represent the best view given our balance across FICO's current strong execution, our investments, and market challenges. The takeaway is thus. FICO is in a better position than ever for higher performance and our 2022 full-year outlook is supportive of such a view. I will now hand it back over to Todd to talk about 2023 and beyond. Thank you, Peter.

speaker
Todd Gleason
Chief Executive Officer

Let's turn to slide number 16. We shared this slide in August when we presented our Q2 earnings report. We outlined that, along with our financial guidance, we intend to signal the consistent execution areas that will drive steady growth and transformation. While we modestly updated this slide for today's presentation, it remains largely the same. In short, we are saying what we expect to do and we expect to execute on these points. We did a similar slide in mid-2021 and provided an update on our achievements in August of this year. You can go back and see that we checked the box on the key items over the past 12 months. Steady execution, that's our goal. Our transformation will continue as we expect as we finish the year strong. Peter shared our financial outlook and mentioned growth investments. By advancing our growth and operating excellence programs, we will have an above-average chance of sustainable performance. It isn't one magic acquisition or one fancy new product line, but instead a steady diet of incremental items and transactions. As we head into 2023 and move into 2024 and beyond, we expect to build upon the foundation we have put in place over the past two years. We will advance our operating model and continue to deploy capital where it creates the highest economic returns. You can see we outlined some longer-term financial goals such as EBITDA in the mid-teens in two to three years. This will come from a continued high-performance culture that delivers as well as a transformational journey to add more short cycle sales to our business mix. Over the past two years, we have already moved from only 20% short cycle sales to approximately 30% today. We continue to expect our business mix to hit 50% short cycle sales and 50% long cycle sales in this time horizon that we present on this slide. Now let's turn to number 17 and let's review our preliminary 2023 financial outlook. We are pleased to introduce 2023 financial outlook with this focus on SECO revenue, adjusted EBITDA, and free cash flow. We will provide more detail on orders and other P&L items after we close 2022 and finalize any remaining 2023 budgetary items. Our expected outlook for the full year 2023 revenue is to deliver sales in the range of $450,000 to $475 million, up approximately 13% if you take this range as midpoint and compare it to what our full year 2022 revenue guidance is. We expect to have a strong backlog heading into 2023 and remain optimistic. Continue to invest in growth initiatives as we expect to advance our growth in adjacent markets and the aforementioned higher mix of shorter cycle sales. Our expected outlook for full year 2023 adjusted EBITDA and driving productivity while balancing investments for growth. We are also balancing the economic uncertainty and continued supply chain challenges, and these are reflected in our current thinking with respect to this 2023 outlook. Finally, with free cash flow, we remain committed to generating strong free cash flow. We believe that we can generate free cash flow in the range of 50% to 75% of EBITDA, which is the right target for SECO. We thought it would be helpful to be transparent on our current view of 2023. This information coupled with the slide that Peter shared outlining our commitments on 2022 and the material we shared outlining our longer-term commitments towards steady execution and transformation should provide good material for your continued assessment of SECO and our progress. Now let's wrap up with slide 18. Great results in Q3 and year-to-date across the board. Our sales pipeline remains strong. and our near record backlog gives us good visibility. We are pleased to raise our 2022 full year outlook and provide an initial view of 2023. We hope you find this information helpful. We remain committed to our capital allocation programs and steady transformation of SECO. We aim for higher performance and we expect to continue to drive great shareholder value. With that, I would like to thank Team SECO for delivering for our customers being accountable for their results. We would like to thank everyone on this call for your interest today. And with that, I'll hand it over to the operator as we'd be happy to answer any questions.

speaker
Operator
Conference Call Operator

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Amit Dayal of HC Wainwright. Please go ahead.

speaker
Amit Dayal
Analyst, HC Wainwright

Thank you. Good morning, everyone. I appreciate you taking my questions. And congrats on the execution and the, you know, raise in your outlook. Just with respect to supply chain issues, Todd, is that still preventing, you know, stronger performance potentially, you know, relative to sort of, you know, what is out there for you?

speaker
Todd Gleason
Chief Executive Officer

Yeah, you know, look, I think, first of all, we've been all – when I say all, it seems like every company I know – is still navigating the choppy supply chain markets. I would say that we have adjusted. Our teams are doing a great job working with our customers, working with our suppliers. And not every, you know, not every one of our platforms and projects are on or ahead of schedule. We're still navigating some choppiness. So I suppose in that way we could suggest that things could have maybe even been a little, you know, a little bit better. But I feel great about our team's execution, and I think that, you know, at some level we're just so accustomed now over the last 18 months or so to working you know, to just having to deal with some choppiness. It seems more, you know, just more normal. But regardless, we look forward to a day when we're no – you know, when we have a really, I guess, smooth supply chain.

speaker
Amit Dayal
Analyst, HC Wainwright

Understood. And, you know, just recent headlines around recession, et cetera, you know, not many companies are raising like you guys are. How – Are you situated, you know, relative to some maybe competition, et cetera, on that front? And how much of a risk is, you know, these type, you know, developments to your outlook? Any color on, you know, just the macro environment relative to the outlook would be helpful. Thank you.

speaker
Todd Gleason
Chief Executive Officer

It's a good question. And, look, as we mentioned in our prepared remarks today, you know, we're putting a lot of thought. We understand the dynamics that are out there, the headlines, the And it's real. I mean, we know that inflation and the supply chain that we just talked about continues to be uncertain. There are certainly various U.S. or international items that are somewhat concerning, if not very unknown at this point. For us, however, we, as we stated, number one, we have a really balanced, diverse growth profile across our platforms. And so in a very strong backlog, a really good pipeline. So, you know, I'm just kind of punching through the headlines, if you will, or the bullet points that we provided that does give us more visibility than maybe some companies have. I would also suggest that, you know, for SECO and the investments we've made to really be more nimble to move from a market that might be kind of slowing down or even pulling back and move more quickly into another market that we think has a growth profile. For example, we all understand that there's going to be a large investment in the semiconductor space. we're able to, we feel, put ourselves in good position for opportunities there, for example. So I think the macro themes for us still look pretty positive. There's a lot of investment in some of the markets that we mentioned. There's a lot of investment in infrastructure in the U.S., infrastructure in Europe, a fair amount of re-domestication or U.S. industrial revitalization. And, you know, I think we're just in the very early endings of some of that, but a really early ending in the energy transition. You know, we have grown a lot of our businesses by supporting legacy energy infrastructure and capabilities, and I'm as excited about the next period of time for that transition, you know, to carbon capture, to hydrogen, to other gas solutions. I think SECO is in great position for those markets. And so those markets don't feel like they're pulling back. We feel like they're moving forward.

speaker
Amit Dayal
Analyst, HC Wainwright

Thank you. This one, last one for me, Todd. You know, on some of your margin improvement efforts, have some of these steps already been implemented or are you starting to implement these? Just wanted to see, you know, the timeline for through which these will start reflecting maybe in the financials.

speaker
Todd Gleason
Chief Executive Officer

Yeah. I'm going to give you kind of a CEO math here. I'd say a third of our operating excellence programs have been – implemented or, you know, like, for example, pricing actions and certain execution actions that Ramesh and the operating teams and the project management teams, I think we feel like the offense game plan is moving the ball down the field very nicely, and I want to thank our teams for that focus and what they've been doing to deliver steady margins because we really have protected our margins as a result. Another third, I would say, is we have the programs in place. We're just kind of early days of really hitting those harder, supply chain initiatives, et cetera. And we're pretty early in some of our lean journey, some of our operating excellence programs that I know Ramesh is also eager to share with the investment community and others as we sort of really implement those investments that we're making now and will continue to make over the next 12 to 24 months. So, You know, it's a little bit of a blend, but the good news is we know how to do this stuff, a lot of experience, and we're making good progress.

speaker
Bill DeZellum
Analyst, Tietan Capital

Thank you.

speaker
Operator
Conference Call Operator

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

speaker
Rob Brown
Analyst, Lake Street Capital Markets

Good morning. Hey, Rob. Thanks. My first question is on the businesses that were a little weaker, I think the fluid-banded duct businesses. You talked about the potential for an uptick there. What's sort of driving the uptick there, and when do you sort of think you can see that?

speaker
Todd Gleason
Chief Executive Officer

Yeah, you know, orders is a very nice indicator of what they represent. I mean, it's a year-over-year look. It's a growth look. So I would say while it is a really important indicator, orders can also be, like a lot of other financials or statistics in life, they can be the timing of an order. Had we booked something in the third quarter versus the fourth quarter, et cetera. So when you're looking at those two platforms that have shown year-to-date down, we still feel their pipelines look great. electric vehicle, for example, in our duck fab business, we think is a really nice opportunity. We're a little, you know, I guess I'd call it like later cycle in some big projects there that we feel like we're going to be in well position for. And then on the, you know, the fluid bed side, you know, the investments in refining have continued to be You know, if it's delayed or paused, you know, refineries are running really hard, and they're maximizing the markets that are in front of them today. And so their capital investment for certain applications like a cyclonic technology have just sort of been pushed out and pushed out. But regardless, we like both of those pipelines, and we think that, you know, maybe as early as the fourth quarter, but certainly as we head into next year, their pipelines look really good.

speaker
Rob Brown
Analyst, Lake Street Capital Markets

Okay, great. And then maybe this falls on that, but the energy transition activity you talked about, do those tend to be later cycle projects, and is that some of the confidence that you see for next year is some of those late cycle activity coming on?

speaker
Todd Gleason
Chief Executive Officer

Yeah, that pipeline's building. Whether it's a later cycle or, you know, some of these projects take a fair amount of time to get all of their – their entire project scoped and approved and the investments all put together. This is outside of our control, obviously. So we may know that we're in good position for our piece of a project, but they have to get from A to Z in the alphabet, everything lined up. And we represent five letters of the alphabet in this case. So, but yeah, look again, you know, Ramesh and the team have done a great job of really turning the spotlight on opportunities there and the carbon capture job that we that we mentioned was just one example where we've had a long-term knowledge of that project coming, but we just had to wait really for that whole project to really come through to fruition. And so that's just one example. Another would be I think there's a lot of companies that are talking about LNG and other investment and infrastructure that's really growing and in terms of, you know, support. And we feel well positioned for that as well. And that seems to have been either mid or late cycle in some of this energy investment.

speaker
Rob Brown
Analyst, Lake Street Capital Markets

Okay, great. Thank you. I'll turn it over.

speaker
Operator
Conference Call Operator

The next question comes from Jim Ritucci of Needham & Co. Please go ahead.

speaker
Jim Ritucci
Analyst, Needham & Co.

All right. Thank you. Good morning. Yeah, I just wanted to, again, pursue the decision to provide guidance or an outlook preliminary for 23. And the question, Todd, is more around the short cycle business. I mean, obviously, in the past, CECO has not been immune from economic cycles. So I'm trying to get a sense as to how what you're seeing in that short cycle business, whether it's just healthy, which it sounds like it is, or whether you're also potentially even taking some share in markets.

speaker
Todd Gleason
Chief Executive Officer

Well, in some businesses, we feel really good about maintaining and and, you know, in our share, for example, in some of our fluid handling businesses. Whether it's taking share, it might be, but we really like our ability to, you know, partner and grow distribution. We think there's big opportunities there domestically, even internationally. Some of our recent acquisitions we feel help us bring through over the next, you know, six to 12 months even more shorter cycle opportunities with our legacy or core SECO business. but also those acquisitions are really starting to, we feel, hit their stride with respect to opening up some shorter cycle market opportunities for us. And then, of course, just the – I'm going to go back to the answer we gave, which is I think the industrial markets continue to be – give us visibility at least to infrastructure, to re-domestication of U.S. industrials, to large investments in certain key end markets that we feel well-positioned because there's only a handful of companies that are approved to provide industrial water and industrial air solutions. And then I think ESG is going to have some – you know, ups and downs with respect to how people feel about it thematically. But nonetheless, companies are still spending a lot of time and energy, not just because of ESG from a topical perspective, but really from, you know, they're committed. They're committed to environmental solutions, and it's not just regulatory. And so, again, we just like the balance. I would say there's not one share moment or one silver bullet or one acquisition that For us, when we're lining up to the line of scrimmage, we like the playbook we have. We feel the defense is going to throw some things at us, but we're going to be able to navigate it.

speaker
Jim Ritucci
Analyst, Needham & Co.

We follow a question just on this $4 million order that you highlighted related to carbon capture. Can you talk about the use case, whether this is a new or existing customer, and whether you're seeing increased interest from perhaps similar-sized customers, either in similar or adjacent markets?

speaker
Todd Gleason
Chief Executive Officer

Yeah, it's a new customer. I mean, that said, we may have done work with them in the past, but this is mostly a new relationship, a new solution. You know, with our legacy peerless business having a very strong position in separation filtration for natural gas infrastructure, just a really nice natural fit for us to build relationships now, utilizing that brand in the carbon capture space. This one happens to be in an area that we have a focused investment for a number of quarters. And we think that there's two things I might add that I'm sure we look forward to hopefully talking about is that, number one, this could be a customer and a market that has a series of very similar projects. I mean, this is an industry that, you know, when one solution gets rolled out, it's kind of adopted by other companies in the space. So we're, you know, optimistic that that could be an opportunity. And then Ramesh and the team are really looking at migrating a solution like this across a range of other industries. You can look where a similar type of carbon capture could be, whether it's food and beverage, cement, other industrial areas where we really feel like our relationships and relationships of our channel partners can open up a lot for us. You can feel the enthusiasm in my voice because I'm just reflecting the hard work of our great teams out there that are sharing the pipeline in these areas. And I can tell you that, you know, we hope to be talking about more of these energy transition projects throughout 2023. Got it.

speaker
Jim Ritucci
Analyst, Needham & Co.

Thanks. Congratulations, by the way.

speaker
Todd Gleason
Chief Executive Officer

Thanks, Jim.

speaker
Operator
Conference Call Operator

Once again, if you would like to ask a question, please press star, then one. And our next question comes from Aaron Bichala of Craig Hallam. Please go ahead.

speaker
Aaron Bichala
Analyst, Craig Hallam

Good morning. Thanks for taking the questions. Hey, morning. Morning. Maybe first on the recent acquisitions, I know it's early, but can you just talk about some of the synergies and early impressions there, just how the reception for your industrial water offering has been in the market as we think about the pipeline and how you've expanded that and just areas you might be looking to fill as we move forward?

speaker
Todd Gleason
Chief Executive Officer

What is early days? At the same time, we've built a nice little organic position in industrial water and produced water in certain areas. Again, I've been using an analogy like this where we really felt and we know we have a seat at the table to solve industrial water solution. So, you know, for us, whether it's Compass Water, adding a really attractive niche leadership position, that is, we believe, going well. We've done some good work with our operations internally, and the combination of what we do in marine and naval, coupled with what they do, we believe there's some really great growth synergies. And then the DS21 acquisition that we just closed in the third quarter is Boy, they have just a really attractive, not only manufacturing and assembly position in Korea, South Korea, but just fantastic relationships with Korean-based EPCs that we look forward to really advancing and expanding. So all of these things we think opens up geographic adjacencies, market adjacencies, more short cycle. They each bring an opportunity with, you know, 50% business mix, let's say, with, you know, replacement membranes and higher margin products. So just early days, Aaron, but, again, really excited about what they, you know, how they're all hitting their numbers already against our acquisition model. And then we think more growth opportunities as we roll into next year.

speaker
Aaron Bichala
Analyst, Craig Hallam

All right, thanks. And then you touched on it a little bit, just on the margins. It's, you know, obviously confident in the return to historical levels. Can you just talk a little bit about, you know, kind of what you're assuming in that 2023 guide? And then just on supply chain, materials costs, you know, talk about some of the initiatives that are ongoing there and as we look for improvement.

speaker
Todd Gleason
Chief Executive Officer

Yeah, we're going to we're going to. try to be a little bit more, when we get into 2023, we're gonna, we aim to, we expect to be a little bit more, I guess, instructive with our view of gross margin levels for the year. We just wanna get through 2022 first and really see what's in our backlog, really see what's in our project management offering. Again, we feel very confident in our ability to get back up to those historic margins But right now, we just, you know, we're kind of just sticking with the high-level numbers of revenue, high-level numbers of EBITDA. And, you know, we'll provide a little bit more visibility to the more, I guess, the more full P&L when we get into 2023. I can assure you, though, that, you know, our goals and objectives are aligned with what Peter shared, you know, how we expect to exit the year. There's just a lot of moving pieces and parts. As others have asked on the call around economic uncertainty, et cetera, look, we feel great about our pricing actions. We feel great about the early innings of our lean manufacturing journey. We feel great about our operational excellence programs to deliver and execute. But there is a lot of uncertainty still around inflation. It could be coming up. It could be going down. A lot of uncertainty still around, you know, utilization of labor rates, et cetera. So, you know, you can hear what I'm saying is that we're just trying to be a little bit thoughtful about when we give all of our financial outlook numbers. But, again, we're committed to execute against the numbers we provided.

speaker
Aaron Bichala
Analyst, Craig Hallam

Understood. Thanks for the caller. I'll pass it on.

speaker
Todd Gleason
Chief Executive Officer

Thanks.

speaker
Operator
Conference Call Operator

The next question comes from Bill DeZellum of Tietan Capital. Please go ahead.

speaker
Bill DeZellum
Analyst, Tietan Capital

Thank you. A group of questions. Let me begin with the fourth quarter order strength you referenced that you have already seen this quarter. Would you walk through some details of that, please, since you gave us a bit of a preview?

speaker
Todd Gleason
Chief Executive Officer

Yeah, energy transition, I would say that area, that market, we feel really good about in terms of the fourth quarter to date. Some really nice opportunities in single cycle power, for example, some nice opportunities. still across our separation filtration platform. You know, we highlighted that we think that our fluid bed business could have a turnaround in the fourth quarter. So I would suggest that, again, in terms of global refining, CapEx, we think that that's an opportunity for us to support. And, you know, so, you know, when Peter shared that our quarter-to-date orders are gives us confidence to we expect to deliver another quarter of greater than $100 million in orders. That would be great. Four quarters in a row of that would be certainly a nice indicator of our balance. throughout the year on our balance strength and give us another really solid backlog level as we head into 2023. Those are in our expectations. Otherwise, we wouldn't have shared them. So, again, it's not just one platform. We expect all of our platforms to be strong, including our ductwork business, which also has some great customer relationships that they've been cultivating for a number of quarters in a row that we think could hit in the fourth quarter. So, you know, a lot there, Bill, as an answer, and that's because there's a lot of opportunities.

speaker
Bill DeZellum
Analyst, Tietan Capital

That is helpful. And specific to the fourth quarter, are you anticipating customers will have a budget flush, or is that really not a component of Q4 orders?

speaker
Todd Gleason
Chief Executive Officer

I mean, it could be at times. I think you'd have to go through the different customers and the different markets, and there are some where, yeah, you know the CapEx is going to be Spent in the fourth quarter because, you know, that's just the way the world works. Spend it, use it or lose it. Is that what they say, Bill? And so, you know, we've also been waiting for some things like the Department of Defense budget, which flips in October 1st, end of September, beginning of October. We think that could open up some interesting opportunities. naval projects where we have a unique position to – and you've seen some of those applications when you came and visited our Denton facility. And so, you know, again, we feel that the fourth quarter could have some unique attributes associated with, you know, just the timing of some of those budgetary items. It's sometimes a bigger moment for us than other times. I don't feel like this quarter we're not holding our breath for, you know, cycles like that.

speaker
Bill DeZellum
Analyst, Tietan Capital

That is helpful. And lastly, relative to the economic uncertainty that has been referenced here on the call and ever-present in the press, what has that done or not done in terms of affecting potential sellers in your M&A strategy, affecting the potential sellers' mindset?

speaker
Todd Gleason
Chief Executive Officer

Yeah, you know... I think it's a very important data point for them. I think that companies see being part of a larger, financially stable, diversified organization. It helps. I think when there's uncertainty in the headlines, there's a good You know, there's a good dialogue that goes on on the financial model as a result, right? You know, sometimes it's a seller's market, sometimes it's a buyer's market. We're a win-win organization. We like to find relationships, product categories, niche leadership. We want to keep the leadership teams engaged. Every one of our acquisitions, we've done a fantastic job of doing that. And in my time with the organization, we don't buy and rip out costs and, you know, fire a bunch of people. We cultivate, we invest, we grow. These are homegrown relationships that we don't just jump into an auction process at the last minute and bid and negotiate because the headlines look bad. And I think that any deals that we do in the future are going to be accretive from a price perspective and deliver the type of value from a long term because we're going to maintain those relationships.

speaker
Bill DeZellum
Analyst, Tietan Capital

Thank you. I want to push on this just a little bit more. Have you seen pricing soften recently? as sellers are becoming nervous?

speaker
Todd Gleason
Chief Executive Officer

Prices aren't going up. That's for sure. You say they are not going up? Prices are not going up on transactions. But, you know, look, there's still money out there. People need to put their capital to use. We're, you know, we have a good balance sheet. We have good cash. We've got good liquidity, as Peter showed. And, you know, we're being thoughtful about our capital allocation and I don't think prices are going higher at the moment.

speaker
Bill DeZellum
Analyst, Tietan Capital

Great. Thank you for taking all the questions, and congratulations on a great quarter. Thanks, Bill.

speaker
Operator
Conference Call Operator

Once again, if you have a question, please press star, then 1. And our next question will come from Thomas Claugus of GMT Capital. Please go ahead.

speaker
Thomas Claugus
Analyst, GMT Capital

Yeah, hi, Todd. I guess I change companies all the time. Can you remind me, I keep hoping that Peerless is going to get some business over in Europe. So the EMEA deal that you got looks like it's a Peerless deal. Is that correct? And then is there any further progress? Because, you know, it looks like there's going to be a lot of natural gas projects in Europe. So I keep hoping that I know there's not a lot of Peerless over there, but I'm hoping that there's some strategy or some movement into getting those products. more in Europe, and then what's the overall European or EMEA exposure of the company again? I think it's 20%. Can you remind me?

speaker
Todd Gleason
Chief Executive Officer

Yeah, it is about 20%, give or take. Look, good question. Peerless has an opportunity in Europe. It's doing really well in the Middle East, doing really well in other international markets. Our Arding product line has a fantastic position in Europe. That's more on the noise management silencer. We are developing more sales channels throughout Europe with Peerless and other product lines. You know, not just our energy transition and our legacy energy applications, but industrial air opens up more opportunities for us as we develop more sales capabilities and business development. So, you know, look, I think it's a fair question. We'll try to, you know, be a little bit more whatever, you know, I think, you know, more opportunities are there for natural gas. And I think that, you know, we have a great relationship with U.S.-based, you know, energy companies. And as they open up more natural gas solutions throughout Europe, we feel like we're well positioned there. You know, that said, they're growing. You know, we're growing nicely. And at some point it's a capacity issue a little bit, you know, a crawl, walk, run. And there's only so many places you can run and other places you have to walk. And some places you have to kind of just – You know, pick your battles, and we don't want to take on too much at times. I'm not suggesting that we're just turning down jobs, but the fact of the matter is I think our orders growth has been pretty solid, and I think there's opportunities for us. Okay, thanks. Yeah, thank you.

speaker
Operator
Conference Call Operator

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

speaker
Todd Gleason
Chief Executive Officer

Thank you. I'll close with just a few comments. Number one, great questions. Appreciate the questions. A lot of interest and always happy to address the comments and the questions. Also, really pleased that our ticker symbol is now CECO, and it's nice to have that association going forward. I'd also once again like to thank our global teams at Seco. Without their commitment to the customers, our channel partners, and navigating the challenges, we wouldn't have the year-to-date performance, the last year and a half, two years' performance that we've had. So thank you, all of you, for doing what you do for our customers and for each other every day. And last but not least, you know, our leadership team, you know, with the last 90 days or so of adding Lynn and adding Peter, Ramesh and I have been here for a little bit longer, but still really coming together. We, you know, we really feel great about our opportunities and our strategies. And so I just also want to thank our leadership team for jumping in to the new CCO quickly and helping to ensure that we have a good, strong end of the year and well positioned for 2023. And so with that, we'll thank everybody for your time today. We look forward to speaking with you over the next few days. And we're going to be at some conferences coming up, investor conferences like the Southwest Ideas Conference in Dallas and some other events. So, again, we look forward to seeing and meeting with many of you at those events. We'll talk to you soon. Thank you.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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