Ceco Environmental Corp Q4 FY2024 Earnings Call

Hello, everyone, and welcome to the CECO Environmental Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Steven Hooser, Investor Relations. Please proceed.

Thank you, Carmen, and thank you for joining us on the CECO Environmental fourth quarter 2024 earnings call. On the call with me today is Todd Gleason, Chief Executive Officer, and Peter Johansson, Chief Financial and Strategy Officer. Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with the earnings presentation, which is on the website at 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 fact are forward-looking statements. Such statements are based on certain estimates and expectations and subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on Form 10-K for the year ended December 31, 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 are made here today, whether as a result of new information, future events, or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We provided the 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 Todd Gleason, Chief Executive Officer. Todd?

Thanks, Steven. Good day, everyone, and thanks for your time today. Please turn to Slide #3, which summarizes today's earnings report. I'm going to hit on a few financial highlights as Peter will give more details in his financial review in just a few minutes. As we announced in our press release today, we closed 2024 in line with the revised outlook issued in mid-January. Let's review some of the figures. Starting with full-year revenue, we finished the year at $558 million. While this was a record year for CECO, our growth rate on a year-over-year and consolidated basis was up only 2%. The customer-driven project delays that plagued us throughout much of 2024 did abate late in the year, but not in enough time for us to make up the shortfall to our original guidance. Adjusted EBITDA was also a full year record. We finished 2024 at $62.8 million, which was an increase of approximately 9% versus prior year and with adjusted EBITDA margins expanding approximately 70 basis points. Peter will elaborate more on this in his remarks, but we are pleased with our ongoing margin expansion and we expect EBITDA margins to rise in 2025 as we will continue to see the benefit from stronger volume and mix as well as advancements we continue to make with our operating excellence efforts. In fact, our gross margins expanded very nicely, driven in large part by $10 million of productivity savings in the year. Moving to the last two items in the upper right sections of the slide. I'm very pleased to report that full-year and quarterly orders were both company records, and it wasn't even close. The previous record for a quarter was approximately $165 million, so for us to deliver $219 million in Q4 really demonstrates our market leadership and the strength of key verticals that we participate in. These eye-popping fourth-quarter orders produced growth of over 70% and our full-year orders of $667 million were up mid-teens year-over-year. As a reminder, our orders turn to revenue in a staggered fashion depending on the type of project. Some orders turn to revenue rather quickly within 30 to 90 or 100 days, while other orders have a profile that has a longer duration of revenue recognition, perhaps even nine to 18 months. In either case, our orders rarely de-book. Our de-booking experience is less than 2%, and in most years, it can be less than 1%. We will highlight some of the strong markets that drove these record orders growth, and we continue to see tremendous opportunities across various markets, including power generation, natural gas infrastructure, industrial air and produced water end markets and other diversified industrials. In fact, so far in Q1 of 2025, we have maintained a very strong orders profile, so we expect continued robust levels. And these record orders helped us build a tremendous backlog, which closed at $541 million, an increase of 46% from previous year end. The increase reflects the strength of our pipeline that yielded nearly $400 million worth of orders in the second half of 2024, including two large projects in power generation totaling around $100 million. The power generation market as a whole is just embarking on what we expect will be a multi-year capital investment super cycle. This market, coupled with how well we are positioned to benefit from broader macros of reshoring industrial manufacturing, electrification, global investments in infrastructure and data centers, and growing needs for industrial air and water treatment solutions helps to grow our sales pipeline to new heights. So in summary of this slide, we ended the year with lower-than-guided revenue and EBITDA, but we are extremely pleased with the bookings momentum in both Q3 and Q4. This momentum has carried into 2025. And coupled with our recent acquisitions that we are integrating very well, we expect 2025 to be a banner year for CECO. Let's move to Slide #4. I've had the chance to spend significant portions of my career working with or around world-class CEOs and leaders that transform companies into value creation machines. Each company had unique operating models, and of course, each CEO was different. But a common aspect was a multiyear perspective, which incorporated a focused value creation strategy and, of course, the ability to maintain performance even if one year wasn't quite as good as other years. What was always important was meaningful progress. Well, despite a year in which CECO didn't hit all of our stated performance metrics, our teams continued to ensure we are making the right progress in our value creation strategy. I hope our investors don't lose sight of the foundation we have been building and our transformational results. Now let's look at the details on this slide. As you can see, moving from the left side to the right, please note the five-year progression of three key metrics. First, with orders. Our annual book-to-bill has exceeded one in every year, and we expect this to continue in 2025. Our multi-year orders growth has been a solid 23% CAGR. Some of you might remember that prior to 2021, the average quarterly orders level for CECO was around $90 million. In 2024, we booked over $90 million in December. In that specific month, we didn't book a single order greater than $10 million, so I'm not cherry-picking a month with one or two huge bookings. As we exited 2024, our sales pipeline was approximately $4.5 billion compared to approximately $1.5 billion as we exited 2021. I believe this is high performance and transformational. Moving to the second metric, revenue, we have grown our sales every year since 2021 with a three-year CAGR of approximately 20%. We have been delivering consistent sequential growth, which has been a balance of executing our organic strategies to expand into new markets with solutions and services as well as adding niche leadership businesses via our programmatic M&A model. We have added global diversity, and our 2025 outlook reflects the momentum we have coming into the year with a record backlog and robust end markets. And finally, for adjusted EBITDA, it is another consistent and high-performance growth story. For the past four years, we have grown adjusted EBITDA over 34% CAGR and we have experienced EBITDA margins growing over 300 basis points. I believe we're just getting started on margin expansion as we advance our operating excellence programs and the benefits that we will derive from improved business mix and the uplift from accretive acquisitions. I am proud and grateful for my career experiences and my exposure to some incredible leaders. I would submit that what we are doing here at CECO should capture the attention of those same mentors and former colleagues given the sustainable and transformational value creation we continue to deliver. Importantly, this is a huge tribute to the great team members at CECO who work tirelessly to deliver world-class results by giving our customers best-in-class solutions. So, thank you to team CECO. Please turn to Slide #5. We wanted to include this slide as well as the next one to highlight that our transformation isn't just financial results. We shared this material in many of our investor presentations and with certain internal meetings. The takeaway here is that we are a radically different company than 4 to 5 years ago. We have a balanced industrial air, industrial water, and energy transition set of businesses that are each leaders in very important niche markets. And we are being recognized more and more each day for the tremendous work we do to support our global customers and to sustainably execute across complex industries. And if you turn to Slide 6, we wanted to stress that while we were very diverse, we are also very focused. CECO is 100% focused on niche leadership in industrial markets with a myriad of diverse solutions and services. That diversity continues when you see the number of end markets we serve within those industrial sectors. Every day, we work with leading industrial companies to solve some of their most complex industrial air, water, and energy contamination removal, treatment, and emissions challenges. While we are 100% focused on industrial, our diverse solutions offerings and diverse end markets are so vast that it gives us tremendous balance. We will continue to leverage this access to diverse markets, providing a range of solutions while we maintain a nimble capability to move from industry to industry based on market dynamics. Our business leaders work very well together to ensure CECO maximizes our full potential to take advantage of growth opportunities. I will now hand it over to Peter, who will provide additional detail on various financial and operational items. Peter?

Thank you, Todd. Good day, everyone, and thank you for attending our fourth quarter and 2024 year earnings call today. If you would please turn to Slide 8, I'll provide you with additional insights into CECO's financial results for the quarter and the full-year. Starting with backlog. We closed the quarter with a record backlog of $541 million, up 46% versus prior year and 24% sequentially. Of the total, approximately $50 million is related to the 3 acquisitions completed in 2024. Orders in the quarter and the year were also records. Fourth quarter orders of $219 million represent a 71% increase versus prior year, also up sequentially by $57 million or 35%, with a book-to-bill ratio of 1.4 in the quarter and 1.2 for the full year. Although the timing of 2024 bookings impacted our ability to recognize revenue on the P&L in the quarter and for the year, we are well positioned to realize this revenue in 2025 and into 2026. Revenue in the quarter of $159 million was an increase of 3% year-over-year and up sequentially by approximately $23 million or 17%. Although we fell short of our expectations for fourth quarter revenue as we exited the third quarter, I am happy to see the step-up sequentially, which represents approximately $640 million of revenue on a run rate basis before the benefits of the Verantis acquisition completed in late December and the Profire acquisition completed in early January. This performance supports our confidence in delivering on our 2025 outlook. For the full year, we recorded revenue of $558 million, also a record. A modest increase versus prior year as revenue recognition was impacted by the 2 main factors Todd mentioned previously, customer-driven project delays and slower to realize timing of bookings in the first half of 2024. We delivered $19.1 million of adjusted EBITDA in the fourth quarter, which was down slightly by approximately 2% year-over-year, but an improvement sequentially of approximately 34%. Gross profit margin was 35.8% in the quarter, up 120 basis points versus the same period in 2023 and 240 basis points sequentially as our material sourcing, productivity, and project execution initiatives continued to deliver benefits. We also realized the benefits of an improved portfolio and business mix in the period. Adjusted EBITDA margin of 12% was down 54 basis points versus the prior year period, driven mainly by the timing of investments in SEG&A in anticipation of revenues that I've mentioned were late to materialize. These additional expenses were partially offset by gross profit expansion in the quarter. On a sequential basis, our Q4 adjusted EBITDA margin was up approximately 150 basis points. From a full-year perspective, we delivered adjusted EBITDA of $62.8 million, near the high end of our previous guidance, with full year margins of approximately 11.3%. Both metrics are up versus prior year. Adjusted EBITDA grew $5 million or 9% with margins expanding 70 basis points, benefiting from business mix, M&A, and overall expense management, which I will elaborate more on on the next page. For 2024, the delivered incremental adjusted EBITDA margins of 40% was a strong result given the softer-than-anticipated volume. Adjusted EPS was essentially flat year-over-year for both the quarter and the full year as moderate growth in adjusted EBITDA was more than offset by tax timing and select below-the-line items. Finally, moving to free cash flow, we were disappointed with how we ended the year, but have already seen a quick turnaround with respect to cash generation in 2025. Cash flow for the fourth quarter was an outflow of $4 million due to working capital timing, largely driven by collections scheduled to be received in the quarter that unfortunately hit our bank account in the first week of 2025. These delayed cash receipts amounted to approximately $15 million. On a full-year basis, cash flow performance was somewhat under pressure given the aforementioned customer-driven project delays and the bookings that were postponed into the second half of the year, both of which hindered our ability to recover to a more consistent working capital delivery profile as our billings reflected the delayed timing of projects and bookings. When viewed as a group, I estimate that these factors negatively impacted full-year free cash flow by approximately $30 million. On Slide 21 in the appendix, we have included details that provide additional color on this topic and help bridge those components and their impact to our 2024 free cash flow performance. We fully expect this delayed 2024 cash delivery will be recovered in 2025, just like we expect to fully capture the benefit of the delayed 2024 revenue. Please turn with me to Page 9 now, where I will discuss gross profit and our gross profit margin performance. To orient you to the presentation on this slide, we are presenting CECO's gross profit performance by quarter since the fourth quarter of 2022 on a TTM basis in order to normalize for quarter-to-quarter fluctuations. And I'm providing a lookback of two years to the point where our sourcing and productivity initiatives were launched. Since the fourth quarter of 2022, we've expanded our gross profit margins by approximately 500 basis points, with a gross profit dollar growth of approximately 53%. Over the past two years, a number of focused operational and portfolio actions have enabled this improvement. The impact attributable to our operations excellence efforts is an annualized savings of approximately $10 million. An increase in shorter-cycle sales, improved project execution leading to the realization of project contingencies, and acquisitions with accretive gross profit margins have also contributed to our consistent and sequential improvement. I feel good about our team's performance and our ability to sustain the current profitability levels with modest improvements continuing in 2025. As we move through 2025, we will continue our cost-saving pursuit through sourcing, functional productivity, and improved project execution. In addition, we expect to see benefits from our early deployments of lean in a number of our businesses and the synergies captured and to be captured from our recent acquisitions of W.K, Verantis, and Profire Energy. A possible modest headwind to 2025 gross profit margins could be the already booked and expected to book large to mega sized projects in a few markets where gross profits tend to be below the company average, but have above-average EBITDA margins as these jobs have very little incremental costs below gross profit-related expenses. So for these large jobs, the operating income is very attractive. Now I'd like to move from Slide 9 to Slide 10 for a quick review of cash flow and liquidity. We'll start on the left side of the page with a free cash flow walk from net income on a year-to-date basis. For the full year, we delivered less free cash flow on a year-to-date basis due to working capital timing and higher capital expenditures. Working capital is lower by approximately $30 million, negatively impacted by customer payment timing. The large amount of second half bookings resulted in a significant increase in customer down payment receivables still open as of year-end. These receivables create a cash tailwind for the company in the first half of 2025. CapEx investments were up approximately $9 million year-over-year as we continue our investments in ERP migration and consolidations, and we chose to invest in select machinery and facility upgrades to improve throughput, increase capacity, improve productivity, and accommodate lean production model changes. Depreciation and amortization is up year-over-year to reflect the increases in capital spending in the prior years. On the right side of the slide, we are presenting a more streamlined bridge of the sources and uses driving the change in our debt position. We ended the fourth quarter with a gross debt of approximately $217 million, resulting in net debt of approximately $180 million as we utilized the upsized credit agreement to execute on strategic M&A with leverage at the end of the period reaching approximately 3x our bank EBITDA. In 2025, with the expected proceeds from the pending sale of our Fluids business, plus the application of operating cash flow for debt repayment, we expect to reduce our outstanding borrowings on our revolver and lower our leverage ratio to a comfortable 2.2x EBITDA, yielding approximately $100 million of dry powder in the third quarter of 2025, a level more than sufficient to continue executing against our programmatic M&A strategy and to make incremental investments in organic growth. And with this slide, I conclude my summary on CECO's Q4 and FY 2024 results and will now hand back the presentation to Todd.

Thanks, Peter. Please turn to Slide 12, which really helps to set up our discussion for 2025. We have steadily grown our backlog and ended 2024 at $540 million. This provides great visibility to full year 2025 revenue already in our backlog projects. Any discussion of a robust full year outlook should start with a highlight slide that resembles this one. I'm very proud of the sustainable growth we have shown, and this slide reiterates that we have consistently grown our book-to-bill greater than 1.1 and even 1.2. That is strong confirmation that we have created a double-digit growth organization and our sales CAGRs, which I highlighted back on Slide 4, reflect our strong orders growth. Moving to Slide 13, we felt this was another informative slide to add. We hope you find it helpful as it highlights how we produce revenue. On the left side of the slide, you can see our sales are fairly balanced across short, medium, and longer cycles mix of business. Starting with the 30% of our sales which are shorter cycle or relatively consistent flow of sales from aftermarket, services, and standard product shipments. As we have stated in prior calls, we continue to evolve the portfolio towards a greater shorter cycle mix of business with a goal to reach 50% in the next few years. A similar amount of revenue is generated from lightly configured engineered solutions. This is a mix of revenue that we often refer to as mid-cycle because from booking to revenue generation, these projects generally convert in six to nine months. And finally, the balance of our sales is from longer or larger projects. These are highly engineered and CECO has an outstanding reputation engineering and delivering these complex and custom-built solutions. These projects start to turn to revenue anywhere between three to nine months, and they last anywhere between 12 to 18 months. On the right side of the slide is a fairly self-explanatory sales pipeline visual with supporting information. As I mentioned earlier, we have built our sales pipeline from $1.5 billion in 2021 to over $4.5 billion as we exited 2024. This sales pipeline is a combination of replacement systems from our large installed base to our ability to enter new markets and support existing or new customers with their needs. Now let's turn to Slide 14. As we highlighted in today's press release, we are maintaining our 2025 guidance. We expect the full year to produce orders greater than revenues, thus implying another positive book-to-bill for 2025, which would extend our run of book-to-bill greater than 1.0 to five years. For revenue, we are reiterating our outlook for a range of between $700 million to $750 million, which is a 30% growth rate year-over-year if you take the midpoint of that range. About half of our growth is organic and half is from the acquisitions we have already completed and started to integrate. For adjusted EBITDA, we reiterate the expectation between $90 million to $100 million, an increase of 50% versus 2024 at the midpoint. Margins are expected to continue a nice improvement as well. And with respect to free cash flow, we are introducing a range of 60% to 75% of full year adjusted EBITDA. This is higher, about 10 percentage points when compared to our standard free cash flow guidance as we have significant receivables that slid into 2025 and which Peter already outlined. On the right side of this slide, we highlight a few dynamics we think are important to track as we navigate the year. I will categorize them in two areas. Tailwinds, because we already have good visibility to this momentum, and monitoring, because there is general uncertainty in some areas. For tailwinds, we highlight our record backlog entering the year, our orders momentum in strong markets, and the fact that we continue to increase our market opportunities, which is reflected in the $4.5 billion sales pipeline. We will continue to monitor the potential impacts from tariffs and other legislative or administrative items. There is just a lot of interest, but also a lot of uncertainty in these topics. And of course, interest rates and inflation are also important to monitor. Each year, we encounter positive and negative surprises, so we will focus on what we can control. And when we have the ability, we will pull various levers to maximize our upside and, of course, work to offset any downside factors. Finally, we have the acquisition of Profire and the late Q1 divestiture of Fluid Handling already incorporated in our full-year outlook. Now let's turn to Slide 15, which is our summary slide. In summary, we are pleased with our ongoing transformation even with the mixed results in 2024. There were a number of important records, but also some shortfalls versus our 2024 guidance. We have a very good track record identifying, acquiring, integrating, and growing very strategic and accretive businesses through our programmatic M&A, and we expect to continue this successful approach. I am pleased with our sales pipeline and margin expansion progress, and we have a lot of opportunities with each. And more importantly, we have created a significant amount of shareholder value over the past three, four years and remain very committed and aligned with shareholder value creation. And I want to thank Team CECO once again for delivering for our customers and navigating complicated and challenging markets. You inspire me and our entire team every day. With that, we will open it up for questions.

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

Good morning.

Hey Rob.

Hello, Rob.

You mentioned observing some momentum in the order pipeline going into 2025. I would like to understand where you see this strength and what you've experienced so far this year.

I believe we are experiencing the same strength, Rob. While we may be repeating ourselves, the power generation markets, the reshoring of industrial, and overall infrastructure, not just natural gas, present several areas of uncertainty as we approach 2025. However, the momentum we observed in orders during the third and fourth quarters remains very strong. As we reach the midpoint of the first quarter, we have noticed a robust and vibrant orders market, and we anticipate that this will continue, especially considering the advanced stages of many of our pipeline discussions.

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

We are very excited to integrate the talented team and leading solutions of Profire into the CECO portfolio. In the past seven or eight weeks, our enthusiasm has only grown. The leadership at Profire and various teams within CECO are actively exploring significant opportunities, particularly in the energy market and helping Profire tap into industrial markets. We are also collaborating with our industrial teams to more effectively penetrate market opportunities. Additionally, we have initiated productive discussions on how Profire can expand internationally using our existing market presence in the Middle East and other global regions. This acquisition is the largest I have overseen since becoming CEO, and while it is not the largest in CECO's history, it stands out in the past five years. The integration may turn out to be quite efficient since Profire was already publicly traded, which means many of our integration programs can proceed smoothly due to their established processes aligning closely with ours. From an integration standpoint, we are optimistic. With regards to growth and collaboration, we are very enthusiastic. We believe that with the right investment and leadership, Profire has the potential to be one of our acquisitions that we can double in about three years. We are also very positive about the synergies we anticipate from Profire. We look forward to advancing the integration throughout the year, providing updates, and investing in growth.

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

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

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

Yes. I think we get better visibility as we go each year, Aaron, and it's a good question. Look, as I mentioned in one of my final slides, it's hard to have the confidence of having a 30% top line revenue projection without having that backlog that we have, right? So to have a backlog that is 40% or so higher than it was a year ago coming into the year, I would say gives us a lot of confidence and momentum entering 2025. And look, we work with all of our businesses to understand what of that backlog is in shorter cycle businesses so we have more visibility to the first two to three or four months of the year. What of it is still in mid-cycle and where are those projects at in their duration and then what's in longer cycle. Last year, we had visibility entering 2024, but we didn't have as rich a backlog coming into 2024. We sort of probably needed a stronger start to the year in bookings than we got. And then we obviously had certain key projects push out. This year I would say we're starting a little bit more all cylinders firing. We just completed a handful of acquisitions, so we have a lot of strength and momentum from those transactions where there's growth opportunities across the board. Our bookings in the fourth quarter, which included very little benefit from those acquisitions, of $219 million just gives us a lot of visibility to the healthy end markets that are out there. And so, for us I think there's more visibility to '25 as we enter the year for the full-year than we had coming into '24. And the fact that we're already seeing strong orders in the first part of the first quarter, that just gives us more confidence that we're going to continue to see a strong revenue for the year.

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

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

Yes, this is Todd. We've put in significant effort to assess our exposure to regions and countries where tariffs may apply. We understand the potential implications analytically, and we are confident that our project dynamics and contractual arrangements could allow for a price adjustment in response to such inflationary effects from tariffs. While we could discuss the quantitative aspects of this extensively, I am more focused on the qualitative side. I believe many CEOs share my concern regarding whether this uncertainty might generate unnecessary market dynamics that currently do not seem warranted. There may be considerable pauses as everyone works to understand the impacts. However, we are not witnessing that kind of pause. Instead, we see questions and some uncertainty among everyone involved, but I believe the financial impact of the tariffs will be minimal for us. We expect to manage it well due to our business relationships and contract structures. The economic uncertainty remains somewhat uncertain, but, so far, we have not experienced any negative effects, and we are optimistic that this will continue.

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

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

Good morning, everyone. I appreciate you taking my question. I want to follow up on Aaron's inquiry regarding the backlog. It appears that 2024 will be a transitional year for your company, as your backlog is now made up of larger and more complex projects than you typically handled in the past. Considering that the forecasting tools you were previously using may not be suitable for these new, bigger projects, could you elaborate on any new tools or processes your team has implemented to enhance the forecasting and tracking of the projects in your backlog? This should help provide more confidence in meeting your guidance this year.

Yes, there's a lot to discuss. Some of this is definitely worth exploring because we continuously work on our processes and tools. Even if we had met or exceeded last year’s initial guidance, there's still significant work to be done on the complexities of our project-based revenue model, which makes up over 50% of our revenue. We are integrating more businesses into a standard ERP system that enhances our visibility into their cost structures related to those projects. We have invested time and resources to adopt a more consistent revenue recognition model based on the percentage of completion, allowing for greater standardization across our various businesses. We have extensive experience with these large projects, and I want to correct a point you made, Bobby. While these projects may be larger, some of that is due to timing. We've handled $40 million and $50 million projects before, and forecasting has never really been the problem. The unique dynamics experienced last year provided valuable lessons. Heading into 2024, I personally believe we were more susceptible to project delays in terms of bookings or delays within our backlog. As we closed out 2023, our third and fourth quarter bookings weren’t as robust. When we started 2024, we anticipated those bookings would materialize early in the year, but they did not, resulting in a domino effect that we learned from. It's somewhat less about our systems and processes, which we are continuously enhancing, and more about the dynamics as we transition from one year to the next with the expectation of momentum. As reflected in our second half bookings, having completed several acquisitions rather than facing them ahead of us provides a clearer outlook. Generally, we refrain from providing quarterly guidance because our figures can fluctuate based on specific projects and dynamics. However, as we look toward 2025, it feels similar to our approach as we entered 2022, where we had good visibility regarding our guidance and performance, and I feel that same confidence as we head into 2025.

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

It's strictly for Profire, I would say. However, we're as creative as anyone else, so if we can make use of domestic manufacturing for various cost reasons, such as avoiding tariffs or maximizing our domestic operations, we might consider that. Verantis could be a relevant example due to their capabilities in Ohio and Cleveland that could be beneficial for our industrial air business. There are other manufacturing opportunities we could explore in different states, particularly in our industrial air ducting sector. I believe this is more of a longer-term consideration. Our facility in Denton, Texas, positions us well if we decide to enhance our supply chain capabilities there. But as of now, I think it's capital expenditure we should hold off on until we have a clearer understanding of the long-term economic benefits. That said, it's a valid question and I anticipate companies will continue to be strategic about their operational footprints. For Profire, the balance between Canada and the U.S. is appealing, and we might adjust our business strategies depending on economic demands.

It is perfect. I will jump back in the queue. Thanks guys.

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

Hi, good morning. This is Chris Grenga on for Jim. Thanks for taking the question.

Hi, Chris.

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

The short-cycle business is quite stable. In areas like industrial air, industrial water, and energy, a significant portion involves aftermarket replacement parts, filters, and services, which are consistent and continue to grow due to our existing installed base. We don't sell much through distribution, so our shorter cycle business isn't heavily stocked. Unlike some companies that may have inventory issues, we don't have that concern, which is advantageous since we aren't worried about excess inventory. However, we would appreciate having more business that involves such dynamics, as they can be beneficial.

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

There has. We discussed this in the fourth quarter, and we're still seeing the increase in the dialogue. I'll go back a couple of months. Literally after the election announced, the results were announced, our two largest customers in LNG plant development, both based in Houston, called us and said, come to Houston, we're going to start getting next year planned because these projects that have been deferred by the Biden pause are going to turn back on. We've rebid those projects. We've updated quotes and lead times, and we're seeing order activity begin, both in Louisiana and Texas as well as some international project work. So I think 2025 and 2026 are going to yield some very robust project work. Projects that have all their permits and were put on pause, and those which will now get permits and will proceed. And they're large. It's a very positive conversation. Dare I say the world needs more of it, and you can either buy it from us or you can get it from the Qataris. I suspect many would rather get it from us, meaning the U.S., not CECO.

I understand this wasn't your original question, Chris, but I’d like to elaborate on LNG, which many companies are currently focusing on, and I believe CECO is well positioned in this area. We're hearing a lot about the power requirements, and while new topics like DeepSeek may help lessen the power needed, the demand remains significant. I've read that within the next three years, we need to generate power equivalent to what Japan produces, and we’ll need to repeat that several times in the next decade. Additionally, there's an estimate suggesting that multiple trillions of dollars will be necessary for reshoring industrial manufacturing, not only in the U.S. but across North America and Europe as well. There's substantial movement occurring globally, and we feel well situated for it over the next five to ten years. We refer to it as an energy super cycle not just because of power or LNG, but due to the potential for significant investment across various energy sectors, including wind, solar, gas, and the infrastructure tied to them, as well as nuclear energy. We've seen an increase in nuclear project activities recently compared to last year. It appears that every energy sector is poised for higher investment in 2025, 2026, and 2027. This widespread demand, particularly for power and natural gas, is what characterizes this super cycle.

Thank you very much. It's really helpful.

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

Okay. Thank you. Thanks for your question and interest today. Also, once again, thanks to our global teams for delivering incredible value to our customers as we continue to protect people, protect the environment, and protect our customers' investments in their industrial equipment. We'll continue to be active meeting with investors, including presenting at the ROTH Conference in Dana Point, California in March, meeting with investors and other meetings in March as well. If you'd like to chat and meet, please contact your representative at conferences. Lastly, we look forward to speaking with you when we release our first quarter results in late April. So have a great rest of your day. And for many of you, we'll talk to you later. Thank you.

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