CECO Environmental Corp.

Good morning, and welcome to the SECO Environmental Second Quarter 2024 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star 1-1 on your touchtone phone. To withdraw your question, please press star 1-1. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Hooser, Investor Relations. Please go ahead.

Thank you, Gigi, and thank you for joining us for the SECO Environmental Second Quarter 2024 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer, and Peter Johanson, Chief Financial and Strategy Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussions. The call will be webcast along with our earnings presentation, which is on our website at secoinviro.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 statement. We encourage you to read the risk described in our SEC filings included on Form 10-Q for the quarter ended June 30, 2024. 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 provided a comparable GAAP and non-GAAP numbers in today's press release and provided non-GAAP reconciliations in the supplemental tables in the back of the slide deck. And with that, I'd now like to turn the call over to Chief Executive Officer Todd Gleason. Todd?

Thanks, Stephen. And to our audience, thank you for your interest and continued support. We are a little more than halfway through the year and are very pleased we continue to meet or exceed the needs of our customers while making a positive impact on our communities and creating above market shareholder value. As we outlined in today's press release, we delivered another strong quarter while maintaining our strategic investments to further advance our operating model as we pursue exciting growth opportunities across industrial air, industrial water, and the energy transition. In the quarter, we delivered several impressive financial records, including our highest second quarter sales, gross profit, adjusted EBITDA dollars, and excellent year-over-year margin expansion, all of which reflects the operating model we have developed and continue to advance to drive sustainable results. Now, please turn to slide number three, entitled Executive Summary, and I will highlight some key takeaways related to our second quarter performance. We delivered sales of $138 million in the quarter, a 6% improvement over last year, overcoming the impact of timing delays associated with a few customer-driven projects and the more drawn-out process finalizing bookings in large project opportunities. If you recall, we signaled this in our first quarter earnings call, and although we grew sales approximately 9% sequentially, We expect to grow sequentially in the third and we expect to grow sequentially in the third quarter. These timing issues had a modest impact on sales year to date. Gross profit of $49 million was an increase of 23% over Q2 last year and gross margins of almost 36% were up about 500 basis points year over year, further demonstrating the benefits we are realizing from our operational excellence efforts and our strong project execution. We expect that the benefits we are seeing from our sourcing and productivity initiatives will continue in subsequent quarters. Continuing with Q2 financial metrics, adjusted EBITDA of $16.1 million was up 18%. And EBITDA margins of 11.7% were up approximately 120 basis points year over year. Margin expansion was attributable to higher volumes, positive mix, and G and A efficiencies. Finally, adjusted EPS of 20 cents was up 33% year over year, benefiting from our continued improvements in operational performance and improving interest rates. So overall, very pleased with the financial records in the quarter and the balanced performance. Now please turn to slide number four. We will quickly review our first half of year results and how they set up SECO for a strong finish to 2024. Peter will add some commentary on these points as well. Let's start with orders and sales, the top line, so to speak. Orders for the first half were $286 million, which produced a positive book to bill of 1.08. But order volumes were down about 7% year over year. While we are pleased to have booked a bill of almost 1.1, we are disappointed that our first half 2024 orders were down. Our order pipeline has never been stronger. And we continue to do a great job winning and booking small to medium-sized projects. But we have witnessed a longer booking process associated with the large customer opportunities. In the first half of the year, excuse me in the first half of last year we were not seeing this long duration time in the notification to order process and we booked one large industrial air order and one large energy order each exceeding 25 million dollars we have similar opportunities in our current pipeline and had just one or two of these jobs booked this year our year-to-date orders would have been up double digits instead Those large pending orders remain in our pipeline, and although we are confident our second half orders will reflect some of these large orders, as we look at our pipeline over the next six to 18 months, we see significant number of large jobs, especially in the energy transition and power markets as the demands associated with electrification, data centers, and general power consumption continue to ramp. So we remain optimistic in our full year bookings outlook and confident that we are well positioned for some large, exciting project wins. Sales in the first half were $264 million, up 9% year over year, which is at or near the midpoint of our full year growth rate expectations. Additionally, if you look at our guidance for the full year, this first half sales level represents about 43% of that full year expectation. This is similar to previous year's run rate for the first half of the year. We expect stronger year over year sales levels in the second half as our near record backlog produces more volume and project timing is more favorable. First half of year adjusted EBITDA of more than $29 million was up 26% over prior years, first half and margins were up over 150 basis points. We had very strong income generation on our sales growth, which demonstrates the benefits we are getting from improving mix and our productivity initiatives. Adjusted EPS of 32 cents is up 28% year over year, benefiting from improving operating leverage and the positive trends we're starting to see from lower interest rates. Free cash flow generation was up nicely when compared to last year, as we continue to benefit from higher margins, or excuse me, higher volumes, and our drive associated with working capital management improvements. And while we didn't deploy capital for acquisitions in the first half of 2024, we did maintain balance sheet health with low debt to EBITDA leverage ratio and repurchased $2 million of shares in the second quarter. Year to date, we have repurchased $5 million of our stock through opportunistic price targeting. We have approximately $8 million remaining on our multi-year stock buyback authorization. So, A solid first half of 2024 with a lot of great progress building our sales pipeline, executing on projects to deliver for our customers, and of course, the very strong margin expansion and EPS growth. Please turn to slide number five and let's review our full year outlook. Typically, companies save guidance commentary for the end of their earnings report, but we felt it was important to incorporate our key themes in this first section. We are pleased to raise our first, excuse me, our full year guidance for both revenue and adjusted EBITDA. This is the second time we are raising full year guidance since we first introduced our 2024 outlook. You can see the initial guidance range in the column on the left side and how we have increased the guidance range over the past six months. With respect to full year revenues, we now expect a range of 600 to $620 million, up about 12% at the midpoint. This compares to our previous sales range of 590 to $610 million. With respect to adjusted EBITDA, we now expect a range of 68 to $72 million, up about 21% at the midpoint. This compares to our previous adjusted EBITDA range of between 67 to $70 million. And we continue to see free cash flow of approximately 50% to 70% of EBITDA for the full year. Our updated guidance range incorporates a few key factors. As I already mentioned, we enter the second half with a near record backlog as well as a tremendous sales pipeline. These two top line factors give us visibility and confidence to deliver second half sales performance in line with this outlook. Our diverse and global sales pipeline includes meaningful project opportunities in a variety of energy-related sectors, as well as ongoing strength in general industrial markets. And with respect to adjusted EBITDA, we expect to continue to produce solid margin expansion driven by more gains associated with productivity and improving business mix. We are balancing these positive items with a clear-eyed focus on items that could be challenges such as ongoing timing delays associated with larger projects, and of course, some unknown economic and political factors. Net-net, we feel good about raising guidance for the full year and continuing to invest for future growth. In addition to the items I just mentioned, I want to touch on M&A. As many of you know, We have been programmatic with respect to acquisitions over the past few years. While we did not complete a deal in the first six months this year, we advanced several attractive business transactions that fit our strategic focus on acquiring niche leadership businesses with outsized growth potential. As we shared in our press release today, I am pleased to announce we completed an acquisition this week, which is incorporated in our outlook. While the business will have a small financial impact to our full year 2024, we are very excited with the opportunities the acquired business brings to our portfolio. And while this is the only transaction incorporated in our guidance, we continue to advance our M&A pipeline and remain committed to adding winning businesses to advance our leadership positions. Please turn to slide number six. Well, I will brief you on the recently acquired business of EnviroCare International. Yesterday, Monday, July 29th, we completed the acquisition of the California-based EnviroCare International. EnviroCare has annualized sales of approximately $13 million, and we believe, as does the EnviroCare leadership, that with focused investment and utilization of our established global sales and operations teams, we can significantly increase their growth and profitability. The company has an established industrial air niche leadership position in markets including chemicals, food, mining and metals, cement products, and municipal solid waste applications. As you can see on the slide, the business has 30% of sales in aftermarket, and we believe this is a growth opportunity within their installed base of over 1,000 systems. We also like the strong patent portfolio and decades of market and technical knowledge. In fact, we might suggest some of these smaller acquisitions could be considered or could be called aqua resources, where you are acquiring resources. We believe the financials and growth profiles are very attractive on their own, but the resources are very strong, and we look forward to working closely with the team. So with that, I'll hand it over to Peter, who will walk us through additional information on our financial performance for the quarter. Peter?

Thank you, Todd, and good morning, everyone. Thank you for attending earnings call today. Let's turn to slide eight, where I'll cover orders and backlog. Orders for the quarter of $141 million, while still significant and reflecting a book-to-bill ratio greater than one, are down year-over-year approximately 13% on a tough comp impacted by two significant orders, one in industrial air and one in energy transition, worth over $70 million in aggregate that did not repeat. The result of the absence of such orders was that year-over-year TTM orders were flat and sequential TTM orders declined from the first quarter of 2024. Our commercial teams are pursuing a number of large projects, that we expect to realize in the second half of 2024. And as we have communicated in our prior calls, we do not measure SECO bookings on a quarter-by-quarter basis because they can be lumpy. And we prefer to use the trailing TTM metric and active pipeline size as KPIs, both which are trending positive. Shifting to the right-hand side of the slide, Backlog has remained steady at near record levels of $391 million, similar to prior year and prior quarter, with a book-to-bill ratio in the quarter of approximately 1.1, and strong as-booked margins underpinning our confidence for continued strong gross profit performance in the second half of the year. We also expect that a large share of this backlog will be realized as revenue in the second half of the year, including a fair portion of the two very large jobs that Todd previously mentioned that booked last year in the second quarter. Now let's talk about sales as we turn to slide nine. Sales for the quarter of $138 million is a new second quarter sales record of 6% year over year and up approximately 10% sequentially. While we are pleased with our sales performance in the quarter, the results could have been even stronger. had we not experienced certain order booking delays as customers are taking longer to move from notification to formal purchase order placement and select delays in revenue recognition on projects currently underway. With our sales performance in the second quarter and for the first half of 2024, SECO's TTM sales are up $100 million from the year-ago period, approximately 22%. With $264 million of first half sales, we have delivered approximately 47% of our total year results, which is in line with our 2022 and 2023 performance. I am very pleased with the strong double digit TTM growth we have experienced, and it is certainly a great way to enter the second half of the year. Now please turn to page 10, where I will cover earnings and margins, which is a story of continuous and steady improvements, keeping SECO on track for our mid-teens EBITDA margins target, which we have signaled we will achieve in the 2025-2026 timeframe. Starting with gross profit, margins in the quarter were 35.6%, a record level for any second quarter, continuing a trend of mid-30s margins started in the fourth quarter of 2023, which reinforces that we are on the right path. The improvement year over year has been largely the result of improved project execution, improved book margins, and the early benefits of our sourcing and operational efficiency initiatives. Also in the second quarter and the first half periods are short cycle brands and recent acquisitions, both which tend to have higher margins, are contributing higher volumes and a greater share of revenues. Sequentially, gross profit is increased approximately $4 million to $49 million on 12 million of additional sales, realizing an incremental margin rate of 33% and a 9% improvement on a dollar basis. Year over year, gross profit increased approximately $9 million on 9 million of incremental sales for a fantastic conversion result of nearly 100%. On a TTM basis, gross profit of $190 million is an increase of approximately $46 million delivered on 100 million of additional sales for incremental conversion margins of 46% and a 32% increase on a dollar basis, resulting in a margin increase of 260 basis points to 33.6%. A number which is quite near our historical highs. And as you will recall from our first quarter conversation and fourth quarter results, that that's where we expected to get back to a level in this year. Moving to adjusted EBITDA, second quarter 2024 delivered $16.1 million, a record for any second quarter benefiting from our record sales in the quarter and strong operational performance. This resulted in margins expanding by 120 basis points to 11.7%. The incremental conversion in the period was approximately 24% sequentially and 28% year-over-year respectively. Our EBITDA conversion on higher sales was partially offset by continued investment in our sales, engineering, and project resources necessary to drive growth and operating excellence resources and information systems to drive back office efficiencies and productivity and to allow us to accelerate the integration of our acquisitions. Also, I'd like to bring to your attention that in the second quarter, SECO's annual merit adjustments become active providing a little upward pressure on G&A expense. On a TTM basis, adjusted EBITDA of $64 million is an increase of approximately 40% or $18.2 million, which resulted in an 18.2% incremental margin rate, certainly on trend to achieve the 20% margin target on incremental sales. that we are targeting as we start to see accelerated benefits from our investments in our G&A processes, business system upgrades, and functional resources from prior periods. The resulting TTM margin of 11.2% is an increase of about 140 basis points year over year and 20 basis points sequentially. Now moving to slide 11, we'll quickly review our cash position and liquidity. SECO finished the quarter with gross debt of $125 million, lower by $8 million from year end 2023, with net borrowings in the quarter of approximately $8 million. Net debt was $83 million at quarter end, higher by $10 million from year end 2023, and flat year over year, with SECO's leverage ratio moving up a tenth of a turn to a modest 1.5 times from year end 2023, as our bank EBITDA metric adjusted slightly downwards in the quarter. Leverage moved down by four-tenths of a turn year over year, with our capacity increasing slightly on a sequential basis to $120 million, a level which fully covers our planned capital deployments for the balance of the year, including M&A and capital investment. SECO finished the quarter with $37 million of global cash, reflecting a decrease of approximately $18 million from year end 2023 and a decrease of $12 million year over year. The lower balance was the result of accelerated debt repayments in the quarter and the aforementioned stock buybacks we executed in the first half. In the quarter, we implemented our international cash pooling structure, which reduces structurally the amount of net cash that we believe we need to hold to support operations and meet our liquidity needs. This frees up cash for other corporate uses. Cash generated from operations was $8 million for the quarter and up approximately $9 million year over year, benefiting from improvements in working capital management. In the quarter, we funded CapEx investments of approximately $4 million to support continued growth, IT system upgrades, and cyber upgrades. Cash taxes and cash interest paid in the first half totaled $10.4 million versus $13 million in the year-ago period. That concludes my summary of SECO's second quarter 2024 financial results. The results in the quarter and the first half give me high confidence that we will sustain and improve on this level of performance sequentially throughout the remainder of 2024 on higher revenue generation and order rates, delivering on our commitments and the improved full-year outlook. And now I'd like to turn the stage back over to Todd for his concluding remarks. Thanks, Peter.

A lot of good details with respect to our financials and other insights into our performance. We're going to go to the final section and then also our final summary slide. Please turn to slide number 13. Overall, our second quarter and year-to-date results produced the sustainable top line and bottom line growth we have been delivering for a number of quarters. and also signaling in our guidance. We have navigated some delays in bookings and project deliveries. We continue to produce record financial results, and we are really demonstrating strong margin expansion, which is a major focus for our leadership teams. We feel great about our sales pipeline. There are tremendous opportunities in energy markets associated with what is proving to be a power super cycle, which is still on the horizon, but we're definitely closer to many of the jobs in our pipeline. And we have large project opportunities in industrial water and industrial air. We look forward to sharing more in the coming months and quarters as we believe the timing on these jobs is imminent. We are pleased to share the recent acquisition of EnviroCare and we are excited how our M&A pipeline is advancing. We believe we have a proven track record of acquiring strategic growth businesses at accretive prices and then accelerating the growth and profitability of these acquired businesses. We look forward to investing in EnviroCare, working with their leadership team and maximizing its full potential. As a result of these factors, coupled with our view of the markets, we are pleased to have raised guidance for the second time this year, and we believe our revenue range of between $600 to $620 million, or up 12% at the midpoint, and our full-year adjusted EBITDA range of between $68 to $72 million, up 21% at the midpoint, each reflect our commitment to strong performance while we invest for future growth. And a special thank you to all our SECO team members around the world that are working hard to deliver for our customers and providing solutions that protect people, protect the environment, and protect industrial equipment. And with that, we are now happy to open it up to any questions. I'll hand it back over to the operator, and then I will conclude with a few remarks.

We will now begin the question and answer session. To ask a question, you may press star 1-1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 1-1. At this time, we will pause momentarily to assemble our roster. Our first question comes from the line of Aaron Spikala from Craig Hallam Capital Group.

Yeah, good morning, Todd and Peter. Thanks for taking the question. You know, maybe first for me, just on the pipeline expansion to $4 billion, you know, up 40% year over year, can you talk about any areas in particular, you know, driving that strength? Sounds like there's still some large energy transition opportunities out there. And then just maybe a little bit more detail on some of the order delays and kind of confidence in some of those converting to orders here in the back half of the year.

Yeah, good question, Aaron. You know, look, for us, we talk about it each quarter pretty consistently that, you know, certainly the quarterly performance of bookings is important and a, you know, and a focus of our organization. But us growing our pursuits and our sales pipeline in our minds is really the best factor for us to drive that future growth. Look, I would say the largest... the largest opportunity set for us in the next six to 18 months no doubt in terms of the big projects are in the energy and energy transition space doesn't mean that there aren't extremely important and large industrial water and industrial air opportunities of you know between 15 to 30 million dollars each but those are fewer large jobs and but attractive but in the energy space We have been mentioning now for the last quarter, maybe quarter and a half, that we are seeing many larger multiples of what we have had seen in 2021, 2022, and 2023. of, again, mostly power-related opportunities, whether it be in natural gas or other power sources. And I would also say the reason we continue to refer to it as a super cycle, potentially, is that we're not seeing a slowdown in investments in renewables or in opportunities that could be down the pipeline like geothermal or nuclear. We would say everything's on the table to satisfy the demands of power globally. But for gas turbine power, we are in constant dialogue with our end customers with respect to jobs that they are booking, announcing, or already been receiving but haven't yet announced. These are jobs that generally go on months and months of analysis, discussion, negotiation, and review. So those are the areas where in our $4 billion of sales pipeline, we would suggest probably have the largest big project impact for us.

All right. Thank you for the color there. And then, you know, another solid quarter of gross margin. You know, anything particular to note there, you know, one time, and then can you maybe talk about just the split between, you know, project execution, some of the initiatives that you're early in, and just the short cycle mix there, and then how you're thinking about margin kind of cadence over the next few quarters as you execute on some of those larger projects you kind of talked about too.

Yeah, I'll make a couple comments, and Peter will provide certainly more color. So we're pleased, and we've been, again, signaling our investment in operating excellence, project management, and, of course, both acquisitions and organic acquisitions. better positioning our portfolio for higher gross margins and EBITDA margin results as just a core part of our portfolio. So all of those things are starting to really now produce great quarterly gross margins and EBITDA margins. we expect certainly to be expanding our EBITDA margins consistently on our path to mid-teen EBITDA margins. And that's the most important of the margin discussion topics for us and we think for the investment community. That doesn't mean the gross margins, you know, we expect them to have a huge drop-off, but as revenue goes higher and the business mix of our gross margins in that revenue increases, We certainly expect gross margins will come down a little bit, but still produce a very attractive year-over-year EBITDA margin expansion because of our ability to leverage the volumes and the G&A that those volumes can absorb. So for us, again, having higher gross margins year-over-year is a great driver of growth. bottom-line performance and we're going to continue to keep the focus on productivity and business mix but as our sales go higher in the second half of the year we do expect gross margins will will come down a bit versus the first half but will continue to drive good EBITDA margin expansion Aaron what we historically see is the very large projects

book with lower aggregate or lower average excuse me gross gross profit margins but come with very little fixed cost addition and so they have a powerful volume component in terms of delivery margin enhancement you know we we do track gross profit margins actually we talk more about contribution margins internally because that is to a great degree what our project teams are seeing as they roll up their numbers, because that takes all their project costs into consideration. And that's where we're seeing the operational efficiencies from buying better and executing faster, where and when our customers are allowing us to move as fast as we would like to. And we're seeing those contribution margins typically, and across most of our regions, expand sequentially and year over year.

Right. Okay. That makes sense. Thank you for the caller and for taking the questions. I'll turn it over.

Yeah. But mix is a powerful driver for us, Aaron, when we talk about large versus typical projects and short versus long. And it's that mix that converts to revenue that in these last two periods has been a tailwind for us.

Thank you. Our next question comes from the line of Rob Brown from Lake Street Capital Markets. Good morning.

Hey, Rob.

I just want to touch a little bit more on the project delays. I guess, are you seeing kind of any sort of secular activity that's causing the delay, or is this just the particulars of each project and the timing relative to maybe what you'd hope?

So we understand, and I think it's confirmed by the fact that small, and when we say small, we're talking still over a million dollar projects, and medium would be in the three to five, maybe six million dollar range. We're not seeing a slowdown in those. We're seeing a pipeline growing. We're seeing those moving through the bid review, the notification, and then the purchase order issuance very much at the same pace and a brisk good pace as before. And these are big customers that are doing important expansions, that are doing even new builds, very similar to what we were seeing last year. And so we would say, economically speaking, we're not seeing a lot or anything in the general industrial markets that would signal a sea change or a change or a different view of the type of investment that businesses are taking to support global and, of course, reshoring and other ongoing thematic industrial expansion. However, in larger projects, I think what we're hearing and seeing And fortunately for us, we have a very good resource plan. And while keeping people and recruiting people is a challenge, we're ready to go. However, that's not always the case for some of these larger projects, EPC firms, big customers, lots of suppliers. getting their resources in, you know, I guess in their camps ready to go for these larger projects is what we're hearing is creating a little bit of the delays is that these large projects are, you know, waiting for all of their suppliers, maybe even including themselves, to be ready to be deployed to go and install and do the heavy work associated with these projects. So if there's one area that I guess we would say, and I think we've been saying this now for, you know, several months, maybe, you know, certainly this year, is that certain resource delays in availability are causing a little pause in these larger projects. know that probably means that there's going to be a quarter where there's an oversized bookings for a number of companies and potentially including ours um and you know time will tell because we still have a very good visibility to these large projects like i said this year and as we head into 2025 um we um you know we see you know a number of of jobs that we feel well positioned to win So, look, we don't think there's a lot of economic change. In fact, maybe there could even be a pause associated with people waiting to see what happens on the regulatory front associated with the election. Could be a pause related to interest rates coming down and commodity costs coming down. So, you know, I think you bring all those things into the mix. And these large projects are just taking, they're more complicated, and they're taking the right amount of time to get everything organized.

Okay, that makes sense. Thank you.

And then I think you've talked before about sort of the size range of these projects. Could you remind us sort of what the sizes are of sort of these projects in a range, I guess, and how do those flow through over what period of time? Does that drive revenue for you?

Rob, we're seeing in our pipeline now the size of large jobs growing. We used to think $20 to $30 million was large. We're now talking about opportunities in the $60 to $100 million range. The scope and scale of a lot of what we're beginning to talk about with energy customers and coal to gas conversions, data center projects, backup power supply build-out, hydrogen supply opportunities, supporting electrolyzer plants are just becoming eye-wateringly large. And so I'd say the median is moving up on us quarter over quarter as we think about what large means. But the impact has historically been, you know, book a nice project, runs for anywhere from, you know, four, six, sometimes eight quarters, depending on how quickly the plant gets commissioned and is running. And we recognize revenue consistently and generate cash consistently over a multi-quarter period. These projects generally follow a similar milestone progression, and we manage them with our teams across regions.

Okay, thank you. Great. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from the line of Jerry Sweeney from Roth.

Good morning, Todd, Peter, Stephen. Thanks for taking my call. Hey, I'm just going to stick with power since everybody else is, but slightly different question. Just curious as to maybe how many projects are out there and maybe it would be good to even understand what really differentiates you. And then finally, not surprised there's probably some resource delays there, et cetera. But are you seeing an actual margin opportunity since there are so many projects out there, maybe you can start ratcheting up the margins on these projects?

Yeah, a couple questions there. We'll start, I'll start with the, yeah, no, that's great. We, it's all, we get it. We'll start, I guess, with the volume of projects, and then we'll kind of maybe try to blend in the answer associated with, do we feel that there's maybe some pricing or margin opportunity, which, of course, you know, any company would want to make sure that we're taking advantage of our leadership position and defend our pricing and maximize our ability to utilize productivity as we go through this. So, look, I think over the last few years, our energy-related projects with respect to power have been good. They have grown, and we have benefited from those healthy markets. But over the last few years, we would maybe typically look at you know, three to four project opportunities of large size and pursue those and, you know, and be rewarded. the appropriate number for us as a well-positioned provider of the types of emissions or separation filtration solutions or acoustic silencing noise management solutions that we and only a few competitors can provide for these very large, complicated, important power projects. We would probably say now we could be looking at, over the next 12 months, dozen jobs that are we would consider large so you know three to four times the number and like I said we're seeing more activity not less in other areas like nuclear and geothermal where you need very specific certifications and experience, reference sites. Not many nuclear facilities are looking for unproven suppliers. They're looking for the relationships that they've already had for decades that have proven pieces of equipment, service models, solutions, and of course, you know, the resources to do those types of work. So, you know, we're again, and specifically in power, the magnitude of it has gone up multiples in terms of the pipeline. And that looks to be a multi-year sustainable level. I think that others in the power space are talking about it a fair amount. GE, Vernova, Siemens Energy, et cetera, are certainly indicating their well-positioned portfolio as the power investments are coming online. And then our acquisition of Wakefield a year and a half ago or so has also extended and expanded our position in providing industrial solutions for data centers and for other power-related, backup power, acoustic management solutions. And that's a business that we have more than doubled in 18 months, expect to and are optimistic that we have tremendous growth and opportunities associated with our ability to expand its footprint with a smart investment with respect to capital and hiring resources. And we see opportunities in other international regions with that business now that we wouldn't have seen a year and a half ago. So, you know, I would say, you know, we're seeing multiples of the market versus a year ago or two years ago. And, yeah, look, I think will pricing and will gross margins be vastly different than before? I think they'll be healthy. i don't think that we you know i have an opportunity here we're not certainly planning to try to have an opportunity where price is our focus uh we want to be a great partner with our customers we want to uh be in uh the right projects for us where our uh expertise is valued and we can uh price accordingly and then uh but we do think that as we get these large projects ability to leverage that scale to do very good areas around project management execution productivity sourcing logistics management you know we can get productivity if we know the jobs are ours and we can start to position for it so I think for our customers are going to see similar pricing which is always appropriate for us and for them but for our ability to execute and deliver additional margin expansion versus maybe you know years past We're just, I think, a better, more efficient operating organization, and we expect to generate some benefits through our own productivity initiatives.

Gotcha. And, Jerry, one area that Todd didn't include in his summary of the project pipeline is the addition of numerous nuclear opportunities. Nuclear has rebounded or recovered, shall I say, in the last three to four quarters where it's now on many companies in many countries radar screens as they're looking to tap all potential sources of of electricity to support electrification goals decarbonization goals and support you know reindustrialization got it um todd you mentioned earlier you know when you're talking about pipeline i think specifically around power

You know, the size grew from maybe 20 to 30 million to now 60 to 100 million in terms of what your definition of a large project is. Is that project size, the size of the project getting larger, or is that more of a function of maybe some recent acquisitions, bolt-ons, that you're able to gain more wall chair or chair the project size?

It's scope of project. They're just bigger. Bigger machines, more of them. producing more gigawatts. It's all, I said it last quarter, I'll say it every quarter until I'm probably the end of the decade. It's all about the electrons.

All about the electrons.

All about the electrons, however they're being produced.

It's a bumper sticker waiting to happen. But we're confident. Look, you know, we do think as we have invested and grown our resources, India as we've invested and grown our resources in the Middle East a great teams great leadership very dedicated employees as we now have capabilities in Korea and East Asia and Southeast Asia that we never had before as we continue to add Wakefield's and more European Western European capabilities and so we've always been well positioned in a few of those markets especially North America US power etc and So, yep, acquisitions do expand our overall pipeline. But for these big jobs, these jobs that used to be 40 million, 50 million would have been their max. Now they're 60 to 100 million. It's really the scope of the job. It is converting coal fired to natural gas, but then expanding that to also have solar and wind and other, you know, backup power and peaker power and other applications that might not have been in a singularly focused power application. Now they're doing sort of multifaceted. These are bigger, more complicated jobs. And look, there's a need for it. Data centers and, you know, and digitization and, of course, just more need for comfort, air conditioning, heating, et cetera. It's a tremendous demand cycle.

Got it. Okay. I've probably taken up too much time as it is, but we have a follow-up, so thanks, guys. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Jim Rashuti from Needham and Company.

Hi, thanks. Morning. Maybe moving to some of the more mundane aspects. You talked about customer-driven delays, and I'm wondering if you could maybe size that for us, and do you expect these delays to catch up on some of these delays in Q3, or does that potentially slip into Q4?

Revenue recognition-related delays that are due to principally either customer review, customer approvals, or reaching a level of design freeze that's necessary to issue purchase orders to our suppliers are merely revenue postponements. And that then rolls into the third quarter, fourth quarter, subsequent periods. So that's not revenue lost, it's revenue deferred. And, Jim, so we do expect that will be a benefit to the third quarter and potentially the fourth quarter. In terms of customers taking longer to move from notification to formal award, that dynamic does produce, and then we're going to see in this year, a much larger back end of the year in terms of revenue. You know, we recognize 43% of the full year outlook in the first half. That implies 57% of our outlook will be in the second half. And these customer dynamics are a portion of that. Not all of it by any means. We have projects that were naturally planned that way.

And Peter, just the way you're seeing the business, is there the potential that It's even more weighted into Q4 this year, just given what you're seeing.

Historically, our business has had large Q4s. Q1 is typically our lightest. Q4, our heaviest. And Qs 2 and 3, maybe they ping pong back and forth. But we do have that operating norm in our business, with Q1 being lighter and Q4 being heavier. It also leads us to have heavier EBITDA delivery in the fourth period.

And ViroCare, congrats on that. This is about 13 million of annualized 24 revenue. Is that mix similar to your mix where, you know, 55, 60% of the revenues come in the back half, or is it more linear?

No, that business, as we understand it now, is more evenly distributed. As we diligence that business and came to understand kind of their project and revenue recognition processes, with 30% waiting to aftermarket, that's very steady. and they've got a small service component, which tends to be steady as well. So we're talking about 65% of their revenue, and we felt that was evenly balanced across the year. It can swing up or down a few points by quarter, but it's not going to change our overall quarterly balance of revenue significantly. What it will contribute, though, is revenue in the third and fourth quarter where we didn't have revenue from EnviroCare in the first seven months of the year. So that will exacerbate the shift, but next year it won't have a demonstrable impact.

And last question, just in general, the M&A pipeline, it's been kind of quiet, things picking up with this. What's your... How would you characterize the environment right now and the potential of doing more of these smaller deals that look like they could be quite attractive?

The environment's very active, whether it's private businesses or sponsor-owned businesses or corporate carve-outs. The activity in the markets is very, very high, much higher than a year ago, even higher than the first quarter. We're very selective. We work on – we feel a lot of inbounds, but we work on very few as we narrow them down through our evaluation process. But the pipeline's active, the pricing environment is positive, and the asset quality continues to impress us.

And we remain – so all of that is the positive, and we – have said and will continue to say, we've done a great job, and our business leaders have done a great job of building these relationships. We then advance those discussions. We have very... exciting uh opportunities that we believe if it makes sense for them the company that we look to acquire and us uh if it fits our operating model if it fits our culture and we can obviously find win-win transaction then we'll create a win-win transaction and we'll win together going forward and we'll invest in all of our businesses that we've acquired We've invested in growth. We've grown. We are excited about those opportunities. But we're also very consistent with the fact that if it isn't a win-win or if it's not a good cultural fit, we'll walk away. And we'll walk away as friends. And we've had, you know, a number of those in the last year, which is why it's taken us a little bit of time to, I think, get to the place in our pipeline where we have win-wins going forward. And so that's our focus. We're not going to deviate from our goals. strategy just to make an acquisition, as you can imagine. I'm not suggesting that other companies do that, but let's just say that it happens where people feel the pressure to close transactions and we feel that we can be selective.

Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Bobby Brooks from Northland Capital Markets.

Hey, good morning, guys. So you call in the remark. Hey, so you guys called out in the prepared remarks and proving that an improving business mix is going to be a tailwind for margins going forward. Could you just discuss what that improving mix contains? I know short cycle is a tailwind for margins. but it seems like the mix would tilt more towards long cycle stuff going forward, just given the commentary.

And I know that that traditionally- Bobby, I think the statement was that it benefited us in the first half.

Well, but if you do look year over year, So sequentially, well, let's just answer the question, I guess. With respect to the improving mix, yes, you're on to all of the right themes, Bobby. So first of all, the comment was associated with year over year. And so if you look at the third and the fourth quarter, our expectation is and remains that the investments and the productivity that we have been generating in the first half of the year, that that mix year over year will continue to be a benefit. And so, yes, you're also right in the question that we might have still a larger percentage of long cycle versus short cycle, which typically is not the mixed benefit, but we are going to have more short cycle year over year in terms of dollars. And we also would say that our long cycle businesses have higher margins in them. And that's a factor of a number of discrete things. So as you think about jobs in, let's say, separation filtration now with Transcend, with great aftermarket, when you look at some of the industrial water businesses that we've been building organically and inorganically over the last few years, higher margins in industrial water. and more consumables and more replacement parts, et cetera, that are just ongoing. All of those things trend up. If you look at even areas that might be small for our entire P&L but are a little bit more weighted in the second half, like applications for the U.S. Navy, Department of Defense, et cetera, those are higher margin. Some of the energy jobs that we have been winning and that are smaller are higher margin in our thermal acoustics business, for example. And then in other applications, while they're somewhat long cycle, they're in that sweet spot of size for us that is still higher margin versus the average long cycle job. So it's not one thing. Bobby, I guess, is my bit long answer here. It's a number of modestly sized factors that each of them contribute a little bit more to margins year over year. And I think that's our focus. Again, we're not a quarterly company. You know, we certainly produce quarterly revenues and quarterly results, but we don't think of sequential as our, you know, main driver and our main value creator. It is a six to 12 month, you know, cycle organization still, but we are, you know, we're very keen to the margin expansion year over year as it's still being very much in our wheelhouse.

Understood. That's great caller. And thanks for the clarification. And then just kind of kick, Piggybacking on that, you mentioned in one of your answers to Aaron's question on gross margins that you guys are better positioning the portfolio for higher margins as key. Is that just kind of the stuff that you just touched on, or could you maybe just explain what does better positioning the portfolio mean in terms of higher margins, and how does SECO plan on doing so?

Yeah, so I think, well, look, I think we'd probably be, and you even asked it as if we might give a redundant answer, and I think our short answer is, yeah, look, it is all the, it's all part of our operating model that's going to continue to drive that margin expansion. We, you know, we signaled that over the last year we've been investing in our platforms and in key corporate resources to get after opportunities in operating excellence and it's the classic components of supply chain you know uh purchases uh you know making sure that we're getting pricing um you know adding people resources to lean enterprise we've had more lean boot camps over the last six months than we did at any time in the company's history prior to that probably and these are getting out to all of our facilities looking at safety, quality, delivery, cost. The playbook of lean is now being adopted much more consistently across our operating model. And so it is these small wins. If you're improving the cost of poor quality and you're eliminating that scrap, you're eliminating that rework, these things just show up in margin because we have higher delivered margins than even we anticipated in our and our bookings, et cetera. So, you know, for us, it's about a whole bunch of singles and doubles, not home runs, including the acquisitions. It is, you know, incentivizing people differently this year for more margin expansion. We said that over the last few years, the pendulum, and I like to use that as a visual, was leaning a little bit more on growth organically and growth inorganically, still heavily incentivized on growth, which is why our outlook is low double digit growth which is mostly organic you know but this year we have a slightly more weighting towards driving margin expansion and we have more people incentivized specifically on productivity and margin expansion so it is a playbook that for us bobby and for everyone out there it it evolves it advances it doesn't radically change and so the evolution and the advancement of our playbook this year is to just apply more incentivized pressure on our ability to go after those 15% EBITDA margins, which we believe are inside our organization today and will continue to do organic and inorganic activities to ensure our delivery of those mid-teen EBITDA margins. But we're not going to try to do it overnight. It's going to be a slow, steady, sustainable race that we expect to win. And those are the types of things that we build on every quarter.

Understood. And just last one for me. So, You guys mentioned four billion, the pipeline's now at four billion. That's a 500 million increase from the last call. I was just curious on how much of that increase is new jobs entering the pipeline, and how much of that is due to the delays in projects that you guys have called out that in normal circumstances likely would have already been booked or just decided?

Well, we've had at least – let's just go with we've had at least $50 million worth of jobs that we hoped and expected might have been a – would have been very unlikely to have been in the beginning of the year, but we had an expectation set that they could have been in the second quarter. And it could be much higher. It could be $100 million worth of jobs that have now extended into the second half of the year. So that's a number that we can point to because we know the project specifically on those. But, you know, I think getting from, you know, $3.5 billion less than a year ago to $4 billion, that is also just our reference sites now in industrial water, which we didn't have before. Us having global expansion in markets like India that open up another $50 million worth of pipeline for us to go and pursue. And frankly, I think we would say that there are some end markets that we've mentioned that had a great 2021, but then 2022 and 2023 things sort of paused, and they're coming back a little bit in various general industrial. So there's ebbs and flows here, but I'd say $50 to $100 million is associated with jobs that just pushed out. The rest is us just continuing to expand into new markets geographically or kind of now some other markets coming back into favor in what could be the second half of the year, but certainly as we roll into 2025. Terrific.

Thank you for the call. I appreciate the time. I'll return back to you. Thank you.

Okay, Bobby, thanks.

Thank you. One moment for our next question. Our next question comes from the line of Amit Dayal from HC Wainwright.

Thank you. Good morning, guys. With respect to this lower interest rate environment you're anticipating, how should we think about sales cycles maybe accelerating for you? How does the business change? You've done very well through this higher interest rate environment. With interest rates potentially hitting lower, is that opportunity set even bigger for you? How should we think about it?

You know, it's a great question. I don't know that if I had to circle yes or no to just that question, yes, it's going to be a driver, no, it's not. I'm tempted to more circle no because I don't think that our customer's purchasing decisions, their capex, their growth investments, or the regulatory, or just their commitment to safety and the environment and their protection of their industrial equipment has much, if anything, to do with the higher interest rate. you know, or the lower interest rate situation. If interest rates went up a lot or were rapidly declining, then yeah, I think there would be some of that. So I think the answer is not a lot of change in our markets as a result of interest rates at the moment. That said, there are certainly some of the delays. And maybe some of the future opportunities that have not yet materialized are a little bit of an interest. I hate to use the word interest and interest rates, but there's a confidence that interest rates are going to come down. I also think that there's some... you know, topics associated with the presidential election. They could be creating budgetary pauses to see what happens with various decisions that could be associated with the change or the stability of an administrative policy program, et cetera. And so there are factors in the moment that are influencing modestly, at least, certain projects and certain decisions. They're not They're incredibly material, but they're out there and we see them and we hear them. So look, for us, I always say as a CEO, you know, if you give us high interest rates, but it's stable, we'll figure out what to do with that. You give us high commodity costs, but they're stable. We'll figure out what to do with that. If you give us lower interest rates or lower commodity costs, great. That's even better, it feels. And we'll figure out what to do with that. It's when things are moving around a lot and that uncertainty creates the pause. It isn't high or low, typically, that creates the pause. It is all of us waiting to see what's going to happen as a result of things. And so if we're anxious for anything, it is just for decisions, announcements, and things to become more finalized. And so if the Fed wants to just tell us exactly what they're going to do with interest rates, that'd be great, because then we can start to plan for that. If we all know the outcome of various policies and restrictions, et cetera, are going to come down the pipeline, that'd be great. So I think for most of us, the knowledge of what's going to end up being a more stable market over the next six to 12 months is probably the more interesting factor.

emit lower interest rates that are stable as a positive. Todd talked about the market impact. I'll talk about the impact on Seco. We have 100% of our credit is variable rate debt. Every reduction in interest rate is an improvement in our cash generation. The more cash we have and the lower the interest burden we have, the more likely we are to consider new investments, additional acquisitions, investments in growth, or alternate uses of that cash. It certainly makes the EPS environment more positive for us as a company. So we have our micro impact I can define. The macro impact, positive, but I don't think, to Todd's point, it's a big swinger.

Understood. Appreciate the call, guys. That's all I have. Thank you so much. Thank you.

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

Thank you, and I'd like to thank everyone for your great questions and, of course, the interest in our information today. Also, importantly, thanks to our Seco global teams, they continue to deliver incredible value for our customers as we protect people, protect the environment, and protect our customers' investment in their industrial equipment. Also, once again, I'd like to welcome the great team at EnviroCare International to Team Seco. Looking forward to getting to know each of you and working with you closely. We're going to continue to be active in the working and being out and available with investors. So we hope to see you as we present and have one-on-one meetings at the Midwest Ideas Conference in Chicago in late August, as well as the Jeffries Industrial and Lake Street Conferences in September. We'll be out in other opportunities to meet with investors across the country at various times, so we hope to see you if we're in your town. If you'd like to meet, please contact your representative at those conferences or reach out to us, and we'd be happy to set up a discussion. With that, I hope you have a great day, a great week, and we appreciate, again, your time on the call.

The conference has now concluded. thank you for attending today's presentation you may now disconnect