Good morning and welcome to the CECO Environmental Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.

Thank you for joining us on the CECO Environmental Third Quarter 2021 Conference Call. On the call today are Todd Gleason, Chief Executive Officer, and myself, Matt Eckl, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation, which is on our website at cecoenviro.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 facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on Form 10-K for the year ended December 31, 2020. Except to the extent required by applicable securities laws, we assume 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'd now like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

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

Thanks, Todd. Let's start with slide 8 and orders on the left side. We are pleased with the year-over-year and sequential growth we posted with $93 million of orders. Sequentially, the growth was led by our engineered systems segment. Most positively, we were awarded several jobs for our technical expertise including an upgrade of SCR emissions equipment for a combined cycle power plant in Texas requiring 96% NOx reduction, an acoustical equipment project in Germany, and our market-leading FCC cyclone technology won a large refinery expansion award in Bangalore, India. As Todd just highlighted, industrial air continues to book strong order growth as automotive, electric vehicle and general industrial markets continue to seek our leading Air Pollution Control Solutions. Fluid handling, although down 13% sequentially, grew year-over-year as MRO spend and the U.S. markets continue to rebound from the troughs associated with budget cuts during COVID. As we look towards Q4 our orders expectations remain strong in the $85 million to $100 million range with a handful of very large awards that will determine the exact outcome. Our sales pipeline remains at or near record highs well above the $2 billion level. We continue to make investments in sales and marketing as opportunities continue to provide market growth in orders, bookings, and pipeline pursuits. We are starting to reinvest in trade shows, adding sales reps, investing in search engine optimization, and other growth drivers to help sustain momentum. Moving to the right side, Q3 revenue is flat year-over-year and sequentially. As Todd mentioned, we believe we were negatively impacted by certain customer delays and supply chain factors that limited sales. Sequential growth in industrial air was offset by supply chain challenges experienced in our fluid handling business. The biggest impediment to growth, however, was in our engineered systems segment, where we encountered delays across several platforms in Q3. We believe around $10 million of revenue slipped out of Q3 into Q4 and early 2022, a continuing negative from the COVID environment. To give specific examples, we saw customers slowing progress on their site installation impacting our schedule, forcing us to delay our fabrication partners. We had customers prolonging technical drawing signoff, which pushed out material purchases, a major contributor to our revenue recognition. And lastly, we were stalled on inbound materials received, like steel and resin that didn't allow our plants or vendor partners to deliver on schedule. It's for these reasons that volume was below our expectations and certain cost overruns impacted margins. As we look into Q4 we expect to achieve at least double digit growth in Q4 versus Q3 and, as Todd highlighted previously, we expect meaningful growth for the full year 2022. The issues associated with our supply chain remain choppy, but less so each week and month. So we are getting much of that behind us and working to price through as quickly as possible. We'll talk a little bit more about 2022 in more detail shortly. Briefly, on our short-cycle metric, we reported $19.5 million in revenue, up 10% year-over-year and 11% sequentially. We saw a nice increase in demand for dust collectors and industrials and our peerless coalescing filters in the quarter. The operating team continues to be focused on driving growth in short-cycle sales. As we know the margin profile in that business mix is well above the CECO average. A few months back we highlighted our startup Advanced Analytical Services and Training team, AAST, that is focused on continuous emissions monitoring services. We have been building good sales momentum especially in the Gulf Coast region. You can check them out at cecoenviro.com/aast which showcases some updates to their expanded service offerings. I also want to highlight a recent win for our customers by our emissions management platform. Last quarter, our customer had an emergency need for NOx compliance. Our team retrofitted an SCR system onto a mobile trailer and leased it to the customer in need of a low NOx burners solution. The team affectionately referred to this as the Green Machine. I like the name because of what it does for the environment, but also the margins. We're evaluating whether there is an ample customer demand to facilitate a small rental fleet. But regardless, it's a great example of ingenuity to solve our customers' emissions challenges. Short cycle remained approximately a quarter of our total sales. This is the focal point of our M&A capital allocation strategy moving forward; higher margins and more recurring revenue and cash flows are the focus of CECO's transformational story. Onto slide nine. Our backlog is at $219 million growing for a third straight quarter. Our book-to-bill ratio remained positive on a TTM basis and at 1.2x year-to-date. Looking back, the last time we achieved these levels of backlog was Q2 to Q3 of 2019, which were record quarters for CECO. In addition, our 12 month pipeline remains above $2 billion and growing and the long cycle business we are excited for 2022 and the outlook we see in terms of demand. On slide 10, our profitability measures underperformed in the quarter. Gross margins of 28.4% were well below our historical averages of 32% to 34% and were impacted by several challenges in the quarter. Compared to the same quarter last year, and Q2 of '21, our margins were down approximately 360 basis points on a host of items that Todd has mentioned and I will also address. Approximately a third of the sequential decline in margins was the impact of more revenue attributed to jobs booked in late 2020, when slow market activity drove project bid pricing low. This competitive pricing environment really impacted several platforms including industrial air, emissions management and acoustics. As these jobs progressed in Q3 and pre-COVID jobs with richer margins started falling off, this placed increased pressure on our consolidated margins. The next third of our sequential decline was tied to inflation, both labor and materials. While we expeditiously worked to reduce quote validity for customers on steel pricing and/or past inflation on our customers in several projects, change orders were met with resistance or delays, or even a few projects where we couldn't pass on the rapid increases for the negotiated terms. We've been working to address our biggest project impacts first and working down the list to mitigate this risk in Q4 and 2022. The remaining third of the margin decline is specific to supply chain challenges and our own execution. In a handful of projects the stop-and-start of projects by our customers caused delays. The availability of materials to deliver to the vendors was stranded at port or on site installation due to site preparedness had cost overruns. I know our operating team has significant experience and has executed in many market environments. But this was unprecedented at times. We continue to deliver for our customers and rest assured we are correcting the root cause items that were amplified by this unique period and we expect margins to improve sequentially. As for non-GAAP operating income and adjusted EBITDA, both reflected margin deterioration that could not be offset by volume despite such a large backlog. On a year-over-year basis, EBITDA was down $3.8 million and $3 million sequentially. SG&A contributed slightly to declines, but increases are attributable mostly to growth in our backlog and funnel. Year-over-year increases are related to prior year furloughs, wage cuts and other cost reduction measures affected during COVID. Sequential increases are modest and related travel, marketing spend, investments to grow our new AAST services business and bank bonds attributable to new orders booked in 2021, all of which are associated with growth. As stated we're disappointed in the underperformance in Q3, but remain vigilant in our cost structure and committed to modest investment in growth. We believe EBITDA margins will continue to expand as volumes recover. Slide 11 summarizes the quarter in total. A few quick highlights. First, 39% year-over-year orders growth is going to propel CECO into 2022 with a strong backlog to execute. Revenue is muted as industrial air and fluid handling largely offset one another while engineered systems backlog grew much slower than expected. We believe $10 million of revenue delayed into Q4 and 2022. Second, GAAP operating income was down $1.6 million year-over-year primarily on lower gross margins offset by the non-repeat of certain SG&A cost measures and restructuring expenses incurred in the prior year. Third, non-GAAP EPS was $0.01 in the quarter down $0.10 year-over-year and $0.08 sequentially driven primarily by lower than expected sales and gross margins not offsetting SG&A increases in the quarter. Turning to slide 12. Trade working capital remains at elevated levels of $50 million plus in Q3. We estimate we have approximately $20 million tied up in project working capital that will turn into cash in the next few quarters as volume increases and milestones progress. In the meantime, free cash flow remains choppy, but did produce a positive $6 million source of cash in the quarter. Project milestones that were slow last quarter progressed this quarter creating a favorable Q3 result. As always, I reiterate we see no deterioration in collections of our AR. It's strictly the lumpiness of our project based business model. We intend to improve upon Q3 success in Q4 with an emphasis on progress milestone collections. Finally on slide 13, our balance sheet remains in great shape. We paid down $3 million of debt in the quarter to $67 million. Our bank defined leverage ratio sits at 2.2 and our net leverage sits at 1.2x with $45 million of capacity available. We're now in the third year of a credit facility and we are revisiting our agreement with our great banking partners. The opportunity exists to take advantage of favorable credit market conditions and increase our capacity to execute our M&A strategy. I look forward to updating you on our progress in Q4. Lastly, I'd like to highlight the share buyback we executed since the last earnings call. In the third quarter we bought back approximately $3.7 million worth of stock and over the past month or so we completed our share repurchase authorization. Since early August CECO has bought back and retired approximately 700,000 shares at an average price of $7.15, meeting our commitment target of $5 million. This buyback effectively offsets five years of dilution associated with stock compensation and aligns CECO with our shareholders. With that, I'll turn it back over to Todd. Todd?

Thanks, Matt. Please turn to slide number 15. We haven't historically given guidance or details around quarterly or annual financial outlook. However, given the lower than normal gross margin and EBITDA results in the third quarter, we thought it would be helpful to highlight why this past quarter is more of an anomaly than a future trend. On the left side of this slide, we reiterate the average of our 2021 quarterly bookings, which has been approximately $90 million a quarter, up 33% or up $70 million in real dollars. As we have repeatedly stated, given the long cycle nature of our projects, it takes a few quarters for bookings to turn to revenue. As a result, year-to-date average quarterly revenue has been only $75 million. So, bookings are way up in the year, but revenue has been mostly flat year-over-year as we entered 2021 with depressed backlog and we are still working off those lower volumes from last year's bookings. Moving to the middle of the slide, you can see our backlog has grown from $183 million as we entered Q1 of 2021 to $219 million as we now enter the fourth quarter; that is up 20%, a really good sign for future growth. So how do we think about translating that to the next four quarters or so? The right side of the slide is a very simple approach to model out how we expect our backlog and performance to unfold on an annualized basis so to speak. Since we are averaging $90 million of bookings a quarter that will be reflected in future sales, roughly speaking. So $90 million times four quarters would drive approximately $350 million to $370 million in sales. There are always some puts and takes with projects and short-cycle orders, but generally speaking, this is the range. Moving down the slide to discuss how this would turn into profits, you can see we firmly expect to rebound to our historic gross margins, which are above 30% and likely between 30% and 33%. Finally, we remain comfortable with quarterly SG&A levels of between $18.5 million and $19.5 million, which would produce approximately 10% EBITDA margins with our current profile. This simple model should help you better understand the growth we expect to deliver on the top line and subsequently the bottom line. Could there be more upside? Of course, we are certainly pursuing more growth, investing in more growth resources and markets, working hard to increase prices to deliver even higher margins and evaluating costs, which may be decreased, where appropriate. We can't predict all levels of inflation or project mix. So these are activities that help offset future cost pressures, or potentially deliver meaningful upside. We hope this slide and this simple model gives you a helpful way to think about CECO as we enter Q4 and head into 2022. Let's wrap up with slide number 16. I will be brief. Great orders year-to-date will generate great sales as we go forward. And our sales funnel remains at or near record levels over $2 billion. We are not pleased with our third quarter margin rates and we understand what we need to do to improve our execution regardless of market disruptions. We said we would complete the $5 million share buyback before the end of the year and we have done so. We look forward to transforming our portfolio with programmatic M&A activity and we have a good funnel associated with that. And finally, while not on the slide, but in our release this morning, I would like to welcome Richard Wallman to our Board of Directors. Richard has vast experience as an executive for leading companies throughout his career, which culminated in his role as Chief Financial Officer for AlliedSignal and Honeywell. Richard has been a long standing member of several companies' boards that have transformed their portfolios in very meaningful ways, including Roper Technologies. We look forward to his participation on our board. And with that, Matt and I will be very happy to answer any questions you have. Operator?

We will now begin the question and answer session. First question comes from Jim Ricchiuti, Needham & Company. Please go ahead.

Hi, good morning. I'm just trying to understand a little bit more about the dynamics that you're facing with respect to some of the cost pressures, the inflationary pressures and the backlog. I mean, I assume there's a bit of a lag factor in when you start to see the benefits of some of the price increases that you pass along. How should we think about the existing backlog and the profit profile of that backlog just given the ongoing cost pressures?

Yes, Jim, this is Todd. And if Matt wants to add to this. So, we obviously have visibility to our backlog in terms of bid-to-margins, and then how we're executing against that bid-to-margin. As we entered the third quarter, we knew that margins were going to be lower than they've historically been which is in the low 30% range, 31% to 34%, we knew they were going to be slightly lower than that. And then obviously, we had some execution issues associated with a whole list of items that we don't need to revisit here from supply chain to inflation, etc. And that's really what impacted us. Our ability to get change orders in the third quarter to push additional prices through or surcharges through just—we weren't able to do that fast enough for two reasons. One, the ability to do it fast enough as we were seeing things; it's just sometimes hard to do in any business model—you have to get customers, obviously, distributors, etc., to accept things, your supply chain has to accept your own price pressures back down through the channel. So just the speed at which we were able to get price in the third quarter—we were behind, let's just say that. And then the other component, which is a little bit more a CECO business model situation, is that because we're long cycle, even if we do get price, we then have to wait for that percent of completion on our project to go through the process. So, we may have gotten price in the third quarter, and we did, but we now have to wait for a few quarters for that good pricing to show up. So we got kind of caught in the third quarter a little bit more than we probably historically have with all the noise in the chain, the supply chain, the execution, labor costs, etc. So I'll just state that we believe starting in the fourth quarter, you start to see gross margins steadily improve. We saw that throughout the intra-quarter from July through September, and we believe we're going to continue to see that and then as we're able to reflect the good moves that we've made in pricing heading into next year—especially—we have a lot of confidence in our ability to get back up to the mid to higher end of our gross margin range that we have historically been at. Matt?

When we look at our bid margins right now, the backlog is sitting around the lower 30% right now, Jim. And so I agree with Todd that we'll step back up. There were compounding effects of supply chain woes that occurred in the quarter that impacted the margins beyond just our bid margins. But bid margins are stepping back up. So I'd say low 30%.

And then, some of the more meaningful benefits of some of the pricing actions is that something we should anticipate more towards second half of next year? I think you're going to see?

In the first half of next year, you'll start to see that come back. It depends on price elasticity, depending upon each of our platform businesses. Some have a greater correlation to demand than others. I would tell you that businesses like our industrial air business, where demand is growing, you're going to have a greater elasticity. So you're going to have a tighter correlation. Therefore pricing is going to climb faster. Our short cycle businesses like pumps, that's a perfect example where demand you're seeing across the market is high, and we're getting price in the business instantaneously. It's showing up in the P&L. That's why the long cycle businesses that are impacted by refinery and power gen, where there's still growth, but they're larger singular jobs, and they're highly competitive—because of the long cycle nature of those businesses, you won't see those till Q1, Q2 of next year.

Okay.

Jim, actually, just to add on to that point, and I think, maybe another way you're asking the question was, could we see a future quarter that has slightly higher than historical average margins, right, like, could we see in a way, a snap back quarter? And look, I think management coming off a quarter where we know we underperformed our historic averages, we'd be reluctant to make a bold statement per se. However, I would acknowledge that potentially yes. At the end of the day, we are pushing change orders through for example. So customer A may not have—we may not have been able to get a change order approved in a particular period. But that same customer is going to approve that change order. If those things show up in a quarter, whereas you're also now starting to see these price actions come through, etc. Those are not artificial, because they're real. But they could artificially drive your margin up a little bit higher in one quarter. I mean, it's real, but it's just not necessarily sustainable. So could we see a snapback early Q1 or Q2 of 2022? Potentially. I would rather say what Matt said, which is we hope that we steadily build our gross margins back up, and then hold them.

Got it. Thanks a lot.

Thank you. Our next question comes from Amit Dayal, H.C. Wainwright. Please go ahead.

Thank you. Good morning guys. Appreciate all the visibility and color in the presentation. Todd, you mentioned some execution issues around supply chain logistical aspects, etc., impacting Q3 performance. Were these internal or external issues that you had to deal with and are these mostly resolved for Q4 and beyond?

Yes, thanks Amit. We appreciate the comments as well. So yes, as you well know, as we've articulated over the last few quarters, our platforms are separated into seven or eight platforms. It was about half of the platforms that were really early in Q3 that got quickly sort of behind on their ability to deliver or get prices and change orders through quickly. Take a look at our duct fabrication business, for example, you can imagine steel costs hit them pretty quickly throughout the later part of Q2 and early part of Q3. We had other execution issues in terms of supply chain, labor shortages, etc. All the headlines that you've heard across most industries hit two or three of our platforms hardest—our emissions business and in some parts of industrial air that deliver to larger projects. They all sort of started the quarter a little bit more behind and then really did a great job of picking up the pace and executing, but not able to quite catch up as you can see in our gross margin results, whether it be price that they weren't able to quite put through in the quarter or change orders approved. But I would say now that we're entering the fourth quarter is where we have fewer issues, if you want to call them that, from an execution perspective. No one wants to have a July or an August that sort of started slow and wobbly as we saw in some ways, but it does put the spotlight on it. And we've worked through a lot of those issues now and feel like we're going to have stronger gross margin performance in the fourth. I would tell you that, when I think about the platforms that were impacted the most—duct fabrication, which Todd mentioned to you, which is heavily tied to steel pricing and also it's labor intensive, where individuals have to go off to a site. We're not able to emerge as quickly. Emissions management, industrial air, where they operate and outsource production—so we got caught in between managing our fabricators who are filled up and managing our customers that have demand requirements and getting projects there on site. I think that we've moved some projects around, and we're starting to see a steady step up. So if I were to look at July, August, and September, there was a steady step up in gross margins, and we expect that to fall through into Q4, so you'll see a step up from Q3. But I would say we've largely identified and gone after the root causes of our execution issues, Amit.

Okay. Thank you. And just maybe one more from me. This $90 million level run rate, do you see that materializing for you in 4Q itself? Or maybe a little later?

I think we feel as we sort of articulated that the roughly $90 million of revenue that would be essentially reflects the average of our bookings year-to-date. Yes, we would expect that to start in the fourth quarter heading into next year for at least the early first half of next year on a relatively consistent basis. So yes, I'd say again, we don't like to give specific guidance. We want it to be helpful, though given the tale of two CECOs as I said in my quote—the fact that we are growing, we're growing nicely—unfortunately because we're long cycle that growth doesn't find its way up to the P&L for a few quarters. That will start in the fourth quarter.

Okay. That's all I have for now. Thank you. I'll take other questions offline.

Thank you. Next question comes from Tate Sullivan, Maxim Group. Please go ahead.

Thank you. You talked about in the quarter the issues in July with some of the project timing and supply chain, but just can you talk about backlog and any adjustments you had to make to the backlog in the quarter as well? Were those related to some of the temporary projects and/or can you just talk a little about that any cancellations or what else is in backlog please?

Yes. We always have minor cancellations, it's nothing significant. Otherwise, we call it out in the quarter; we always had anywhere from $1 million to $3 million of small projects that come in and out. So that wasn't a big deal. Shuffling the backlog was the issue. The biggest issue was customers were moving fast or slowing down depending upon where they were around the world. And our project managers have to manage through all that, manage the logistics of getting materials out to our sub-contractors on time, having our subcontractors slow down, or speed up. If the customer says don't do anything, you have to call your sub-contractor and ask them to put things at a halt. And obviously, that can come at a premium because they have to run their own business. We're not fully dedicated to them. So I would say if I think about our business model, when there's consistent growth you get exponential operating leverage on the bottom line. It appears that we saw in Q3 where supply chains were challenged at the ports in Long Beach, Miami, Norfolk—trying to get steel into the country, trying to move resin around— it was an extreme challenge for us and that impacted us. I think the backlog is extremely strong. We don't feel any weakness in there. We don't see anything in our cash flow that seems weak, we feel very good about our customer set. So it's just going to point to growth in the next quarter and into 2022. So it's a one time blip. Don't love it. But we're pretty confident about our ability to execute the $210 plus million of backlog we have right now.

Okay, great. That's all I have. I'll take it offline after. Thank you.

Thank you. Our next question comes from William Dezellem, Tieton Capital. Please go ahead.

Thank you. First question is relative to the logistics issues, what changed versus the second quarter?

So two things I think. Well maybe three. Logistics costs just went up obviously. I think most companies have seen just the delivery, whether it be expedited freights that needed to occur because things were stuck in ports. We had access still to getting components, but you needed to pay for that expedited freight from certain logistical areas. So, any costs or expedition definitely hit us more in the third quarter than it has historically. And then, we're bundling some of this, because our goal here isn't to call out any customer for sure. But we already articulated that we had $5 million to $10 million of revenue that were just sort of delayed in the third quarter, and that some of that was logistics, too. By that, I mean, we may have had our solution at the gates ready to be delivered, but they were waiting for electronics, or they were waiting for the main person to come for the foundation for our solution, etc. So we were saying logistics both from a cost perspective in the quarter, but it also cost us to sit around and wait at times, right? And how do you call that? Is that customer delays? Yes, maybe. But it's not their fault that they're waiting for other vendors or other suppliers or other installers to come. Rarely are we just a single solution that we plug into the wall per se. We're a part of a larger project. So if some of their parts of the project got delayed, I would say some of that was logistics that might have been outside of our control.

Yes. One item I did throw out there, Bill, is an example where we actually had to airfreight some material to a customer in order to avoid liquidated damages. We didn't see that in Q2 whatsoever. So that's one specific example. I also tell you that we had some profitable jobs that rolled off in Q2 that didn't exist in Q3. So now your backlog is tied more to jobs that were bid and awarded back in let's call it Q4 of last year in the COVID period. So then we saw the pricing period of Q4 roll into Q3 this year, which we didn't have in Q2 sequentially. So those are two examples of things that happened in Q3 that didn't happen in Q2.

That's helpful. And then, let me move to the broad environmental topic. I think last week the COP26 Summit took place in Glasgow. To what degree are you all a solution to the problems that are top of mind today in the environmental corners?

Look Bill, there's no shortage of emissions that occur whether it be methane, CO2, hydrogen—we think hydrogen is an interesting one for the future. Natural gas continues to be a bridge fuel whether it be this winter or many winters in the future. Our ability, we believe in industrial air—we're the leader or certainly in many categories of eliminating NOx. And so look, I think we're excited when we look at not only industrial growth that has been coming back and all of our industrial business remain strong. And I rarely get to say all, but almost all of our industrial businesses really do continue to remain strong from a double digit growth perspective. And look, as companies focus more on ESG, as countries around the world step up, and have to put in solutions that they otherwise maybe historically wouldn't have, and we know the countries that are some of the larger polluters, we go from not being as competitive in those countries to being very competitive in those countries because our solutions are proven. And as western companies are in those countries and want those proven solutions, we feel good about it. I think we like our order profile as a result of not only what's just been going on in general industrial, but more demand on environmental; absolutely is a benefit to CECO.

We're making investments to take a look at how we can impact CO2 and methane. If you've ever been in Los Angeles, about 30 years ago, you could barely see across the street because of the smoke and that was driven by power plants, coal and natural gas burning power plants that emitted NOx. When the Clean Air Act came in, they said we need to be able to reduce the amount of emissions. We were a part of that solution 30 years ago. CECO did that and today NOx is a fraction of what it was 30 years ago. The next thing they're going to tackle is CO2 and methane and CECO is preparing to be a part of that solution set.

And thank you for that. So relative to the CO2 and methane, do you have those solutions today? Or when you say that you're prepared to tackle those, is that all part of your acquisition strategy?

It's part of our acquisition strategy. I don't think anybody has a solution for them just yet on a commercial scale, whether it's direct air capture, pre-combustion, post-combustion—the fact of the matter is nobody is doing it in a big way just yet. There are some elements of methane. If you saw what EPA just posted last week, there's a big opportunity there. Our teams are looking at how we could take our VOC destruction processes and apply them for methane and CO2 today. We're not there just yet, but we are investing dollars and resources to do just that.

Two other quick comments: one of the reasons we're not there today is because there hasn't been a full commitment from industry to be there yet. It's difficult for us to invest large dollars in certain areas of innovation when you're not sure that the industry is ready for that innovation and begin to adopt it at a commercial scale. So let's just be clear that we think that as the industry starts to adopt it—again, whether it's because it becomes a cost advantage for them, an ESG advantage or it becomes regulated and mandated—there's going to be methane solutions, we're excited about that. Our application engineers can absolutely design solutions for methane. So whether or not we have an innovative product, or we just have a proven and reliable design of a solution, for us they're interchangeable. Whether we make a product or we engineer, design and install a product, we can do that.

Alright. Relative to industry, is it your sense that industry is now focused on these two items, methane and CO2? Or are we still at that point where industry is trying to figure out if they're interested?

We believe that industry is interested. There is demand for these items. The competitive set is going to be different. The folks that were traditionally up against us are not necessarily those that are solving for this. This is different types of research, systems and industries. Oil and gas is going to lead in the methane space, because they're closest to it, and they're going to be regulated against it. You're going to see people in the energy transition take leadership. There's going to be a lot of players in EMEA and so we're looking at those individuals who we can acquire and how we can attack that. The competitive set is going to be different.

Thank you both.

Thanks, Bill.

Thank you. Next question, Gerry Sweeney, Roth Capital. Please go ahead.

Hey, good morning, Todd and Matt. Thanks for taking my call.

Good morning.

I guess, obviously, a lot of issues in the quarter. They just start cascading down—all with your customers, suppliers, etc. But this is a higher level question. A lot of your business is asset light, I think, outsourcing some of the work specifically on fabricators. A lot of talk about changing supply chains. Does this potentially change some of that strategy, because it's an extra layer of management and evolving supply chain?

Yes. So we would say, it doesn't necessarily change our strategy, Gerry. I think it's a good question. I think we would acknowledge that in quarters like we just had that rapid change that we can't control all of, right, if you want to call it that. We have fabricators that we've outsourced to and it can make it more difficult when costs escalate as rapidly as they have done. I'm not the only CEO to use that word—unprecedented change in many areas of logistics and manufacturing costs, etc. Not being able to control our own destiny. Yes, I would say we're a little bit more asset light at times. And if I could go back in time, maybe we wouldn't have quite pushed out as much historically to fabricators. And we're going to look into areas where we can bring in a few areas within our manufacturing and assembly footprint, but it's not going to change our strategy. I think we feel like this too shall pass. We like our design across the board for the most part. Again, this is an unprecedented time. We don't expect this to continue. You look back at 2004, 2005, and 2006—15 years ago—steel, copper, aluminum went up dramatically. Every industrial company struggled in that period to pass on prices fast enough, and then they all got good at it. We've been good at it for 15 years. Again, this hit us all pretty fast. And that coupled with all the other noise—labor shortages, COVID restrictions around travel, etc.—that's really what caught us a little bit in the period. We're going to work through this. We're already working through it. Things have been improving. In the short term, we expect that to continue. It doesn't change our strategy. But it's a good question, Gerry. And I would acknowledge that, yes, we could have a slightly different asset light next year, we probably would have that.

Okay. No, I suspected that was the answer. I was just curious. And I know some of it was a sudden shock and again, cascade. The other question is, because Mr. Wallman just joined. He's from Honeywell and you even called out Roper. And Roper transformed a lot, especially in computers and technology, etc. How does this impact acquisition strategy? Where are we on that front? And, again, it goes back to—does it change a little bit? Or does he have his own visions? And maybe an update on that front?

Yes. Thanks. Look we're excited to have Richard join our board. He brings a tremendous amount of experience. I've also happened to know Richard for a few decades, and I always appreciate his sound input and guidance and he understands where we're at as an organization and much like the balance of our board they're all committed to the strategy that we have in front of us. Our M&A pipeline looks good. We've always said we wanted to get through our sort of COVID period here, which we're putting in the rear view mirror more and more every day, every week, every month. Third quarter was an unfortunate dip, but still an important step in the right direction to put that behind us more. Now as we move forward into the fourth quarter and into next year, you're going to—I believe you're going to start to see a steady, sensible programmatic approach to M&A. And Richard understands our views of building a stronger, bigger CECO, adding businesses that are short cycle, different industrial mix. Over time, we'll take a look at other ways to enhance our margin profile and our steady results of EPS to drive shareholder value. And Richard just brings a tremendous amount of experience, not only in his professional life, but also in his board roles, as you mentioned, Roper and Charles River Labs and others, that he's been a part of where he has seen a variety of companies in different places in their maturity get from point A to point B and beyond. Our board along with the new addition of Richard is very committed to what we're planning to do from an execution perspective.

Got it. That's very helpful. I appreciate it. That's it for me. Thank you.

Thanks. Hey, are there any other questions, operator, are we through the queue?

Well, that concludes our question and answer session. Now, I will go back to Mr. Todd Gleason for closing remarks. Thank you.

Okay, great. Thank you and look, we understand it was a tough Q3. We own that. And we continue to be very excited about the growth that we are putting in our backlog and what will start to transpire into P&L growth starting in Q4 and as we head into 2022. I'd like to thank all of the CECO associates around the world. It is still a challenging environment, and our team steps up every day to deliver for our customers and for each other. And again, we feel very confident in our abilities as we execute against the growth that we have been booking all year long. We believe our pipeline remains extremely strong. And again we appreciate everyone's support, the great questions on today's call and we look forward to following up in future periods with more growth. Thank you, everyone.

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect.