Ceco Environmental Corp Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the CECO Environmental Second Quarter 2025 Earnings Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Hooser, Investor Relations. Please go ahead.

Thank you, Kevin, and thank you all for joining us on the CECO Environmental Second Quarter 2025 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, 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 fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings included 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 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 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 as well as your continued interest in CECO. As today's press release highlighted, in the second quarter, we delivered a number of financial records. Our Q2 and year-to-date results reflect positive impacts from the investments we have made to build and execute our operating model that continues to yield high-performance results while strategically and sustainably transforming our portfolio. As always, we strive to deliver leading environmental solutions to our global industrial customers, ensuring we protect people, protect the environment and protect our customers' investment in their industrial equipment. Now please turn to Slide #3 for a summary of the highlights of the quarter. In the quarter, we grew backlog to a new record, exiting the quarter at $688 million. Year-over-year, our backlog is up almost $300 million or more than 75%. Sequentially, our backlog rose approximately $80 million. This was made possible by another quarter of record orders. In Q2, we generated $274 million in new bookings. This is up 95% versus Q2 last year. We booked our largest ever order in environmental, selective catalytic reduction or SCR, emissions management solution for a major project in the U.S. power generation market. We continue to be very well positioned for future projects of similar or even larger scale and complexity. When combined with orders from the first quarter, our first half of 2025 book-to-bill is approximately 1.5. If you expand your look back and add just one more quarter, this is the third consecutive quarter with bookings of over $200 million for a total of approximately $720 million in new orders in the past 3 quarters. This level of orders is a direct result of several years of focused strategies to diversify our portfolio, gain access to new vertical markets and geographies, and to introduce new products and services. We believe we are well positioned for continued strong order bookings. Revenue of $185 million in the quarter, up 35% year-over-year, were also a new record as we continue to deliver strong project execution and navigate market dynamics. Adjusted EBITDA at over $23 million was up 45% year-over-year, driven by volume, strong gross margins and an improving SG&A cost profile. A few months ago, when we discussed our Q1 earnings, we articulated we had taken G&A-related cost actions. We are starting to see the benefits of those actions and our operational productivity initiatives. And in the final metric on this slide, we show EPS was $0.24 in Q2. This is up approximately 35% year-over-year. So overall, just great record results with solid performance. We exit Q2 with an incredible backlog and strong orders and margin momentum. Now let's turn to Slide #4. While we feel that Q2 was outstanding on many performance metrics, I think it's even more impressive to appreciate this isn't just a one-quarter phenomenon. On this slide, we capture a few data points and comments that highlight the first half of the year's performance and bolster my comments on our ability to deliver consistent results. First half bookings of over $500 million are up 76% when compared to the first half of 2024. First half revenues were up 37%. Like I said previously, we booked our largest ever order, and we believe we have several similarly sized opportunities in power generation and industrial markets ahead of us. The Profire acquisition, which we closed in early January this year, is delivering on the various synergies we discussed when we announced the transaction. And our continued multi-year growth of our sales opportunity pipeline is now over $5.5 billion. We feel very good about the key markets we have targeted with our investments and resources. We believe we have a multi-year opportunity with large growth themes. And those growth themes are captured in the far right column on this slide, the market continues to see an unrelenting demand for power generation. We are also seeing a strong uptick in semiconductor inquiries as well as natural gas infrastructure and industrial water solutions. And aside from some softness in Europe, we are seeing steady demand in almost every other region. We are expecting some modest inflation in the second half, but we are pleased with how we have been able to offset early supply chain cost increases with either productivity, price or overall project execution. Now please turn to Slide #5. As today's press release highlighted, we are raising our 2025 annual guidance for orders and revenue while reiterating our outlook for adjusted EBITDA and adjusted free cash flow. Starting top to bottom, we are raising our 2025 full-year orders guidance to exceed full-year revenues, thus delivering another positive book-to-bill for the year. We now expect our bookings to be 1.2x revenue, resulting in a bookings range of between $870 million and $930 million. The strength of our full-year order outlook is supported by robust underlying markets, a very active and significant pipeline of opportunities and the momentum we have built over the past 9 to 12 months of sustainable orders growth. For revenue, we are raising our outlook to $725 million to $775 million, up from a previous range of $700 million to $750 million. The $25 million increase on both the lower and the upper ends reflects the strong first-half performance in bookings and revenue, coupled with a record sales pipeline and negligible project delays this year. The midpoint of our full-year range speaks to revenues growing 35% year-over-year, of which approximately 20 points is driven by organic growth. With respect to full-year adjusted EBITDA and free cash flow, we are maintaining our previous outlook. The adjusted EBITDA range of $90 million to $100 million points to growth of approximately 50% year-over-year. Even with the modest increase in our full-year sales outlook, we still like current adjusted EPS range and expected margin expansion that it implies, which we expect to be higher than 12% to up to low teens in the year. This outlook continues to absorb our expectation that we will experience modest inflation in the second half of the year. It also includes an expectation we will add resources later this year to prepare for what we see as 2026 growth. Our record backlog and our full-year book-to-bill expectations, we can actually start to model double-digit growth for 2026. So of course, we want to ensure we are prepared to execute on that solid growth. Now let's turn to Slide #6. We often talk about the strength and size of our sales opportunity pipeline, but I wanted to spend a couple of minutes here to describe 2 key important items. First, that the pipeline is our best indicator of short- and medium-term organic revenue growth. And second, the building and maintaining a large and healthy pipeline does not come without appropriate investments in people, processes and systems. As you can see on this slide, there is a strong correlation between the size or value or growth of the pipeline and the level of bookings when you compare the 2 periods that we present. On the left side of the slide, for the period 2015 to 2020, you can see the pipeline was essentially flat over those 5 years, and therefore, orders and revenue trended flat to down over that same period. By comparison, on the right side of the slide, in 2021 to this year, our pipeline has grown almost 40% annually on a compounded annual growth rate basis. As our pipeline grew, so did the revenue performance with a normal lag time associated with bookings turning to revenue. The second point I want to make is that maintaining a consistently high level of viable opportunities certainly doesn't come for free. This level comes as a result of sustained investments in talented commercial teams, business systems and processes and market entry that has allowed CECO to penetrate new markets and customers, which in prior years wouldn't have necessarily known our name or our brands. And as long as market conditions are supportive and our global opportunity set is expanding, we will continue to sanction these increased investments to maintain and accelerate CECO's growth. 5 years ago, when I joined CECO, I knew it would not be easy to break out of the company's historic revenue range of limited to no growth. It would take expanding our sales pipeline by focusing aggressively on winning markets, by investing in new geographies, and by diversifying our product and service offering. As we approach our new revenue outlook of roughly $750 million for the year, and we expect on our way to a $1 billion company, we are pleased we have the business model in place to continue to grow our sales pipeline. It might not have been easy, but we have certainly come up short on a few things. But overall, we are very pleased with our long-term growth and how well we continue to transform the portfolio. I really look forward to the next 5 years. I will now hand it over to Peter, who will go through more detail on our financial results. Peter?

Thank you, Todd, and good day, everyone. Thank you for joining Todd and I for CECO's Second Quarter 2025 Earnings Call. I'd like to start on Slide 8, and I'll provide some additional color on our financial results for the quarter. CECO finished the second quarter with a record backlog of $688 million. This is up 76% versus prior year and a 14% increase sequentially. Of the total, approximately $70 million is related to the recent acquisitions with the balance of the increase coming from organic orders growth. The second quarter of 2025 represents the 10th of the last 11 quarters showing a backlog increase. The increase was helped along by strong orders in the power generation, semiconductor, industrial water and natural gas infrastructure end markets, broad growth across a range of applications. As Todd previously mentioned, this was the third consecutive quarter where CECO delivered orders greater than $200 million with our second quarter orders of $274 million, up 95% versus prior year and 20% sequentially for that book-to-bill of approximately 1.5x in the first half of the year. On a trailing 12-month basis, orders totaled $883 million, up 58%, representing a robust book-to-bill of 1.35x and a record for any 12-month period in company history. Driven by demand in power, natural gas, semiconductor and industrials, produced in wastewater separation applications, CECO booked over $0.5 billion of orders for the first 6 months of 2025. As mentioned in our press release this morning, the company booked our largest ever order in the quarter for a project in the Power Generation segment. That order plus a number of small- to medium-sized projects for natural gas infrastructure and power generation yielded over $140 million of our total bookings in the quarter, with the remaining half coming from industrial air and industrial water customer segments and applications, quite a diverse and well-rounded order book for the quarter. Revenue in the quarter of $185 million was an increase of 35% year-over-year. With approximately 20 points generated by the company's most recent 3 acquisitions and the balance of the growth driven by organic results. Sequentially, revenue was up 5% despite the natural headwind related to the sale of the Global Pump Solutions business that closed at the end of the first quarter. In the quarter, project-related delays that impacted revenue recognition in the second half of 2024 have abated, and our quarter-end backlog and pipeline strength gives us confidence in delivering on the updated revenue outlook Todd recently presented for the second half of 2025 and for the full year. Adjusted EBITDA was $23.3 million in the quarter, an increase of 45% versus prior year, with margins improving approximately 90 basis points. Gross profit margin was slightly over 36%, up 50 basis points year-over-year. Mix due to higher short-cycle revenue was a tailwind to gross profit margins in the quarter and mainly attributable to our recent acquisitions. SG&A spending in the quarter benefited from the absence of quarter 1 expenses that do not repeat in subsequent periods and the initial impact of our G&A cost actions taken in the quarter. Sequentially, adjusted EBITDA was up approximately 65% with 470 basis points of margin expansion attributable to higher volumes, favorable mix, the initial benefit of cost actions taken in the quarter and the absence of the aforementioned nonrecurring period expenses from Q1. On a TTM basis, adjusted EBITDA grew 11% with margins down slightly, impacted largely by the results of Q1 of this year. Adjusted EPS in the quarter was up $0.04 or 20% on similar dynamics that impacted adjusted EBITDA, partially offset by higher interest expense in the period. Before I leave this page, I would like to thank the global CECO team for a robust first half of 2025 and reiterate from my perspective, a few highlights from that first half performance that have positioned CECO very well for an even stronger second half of the year. Orders of $502 million were up 76%. Revenue delivery of $362 million was up 37%. Adjusted EBITDA of $37.3 million in the first half of the year was up 27%. We have made excellent progress on the integration of our 3 most recent acquisitions. We executed on the separation of the Global Pump Solutions businesses and systems and are transitioning support functions, reaching conclusion at the end of quarter 3. And finally, we have continued to advance on our project execution and sourcing initiatives, key elements of our operating excellence agenda. Now let's turn to Page 9, and we'll discuss briefly backlog. I will not spend much time on this slide because I think it speaks for itself. With the great performance in quarter 2, our backlog is continuing a steady upwards climb as we convert on the growing sales opportunity pipeline. Our $688 million backlog has more than tripled since the end of 2021, and we expect this backlog to fully convert to revenue within the next 24 months, with the majority converting over the next 18. Our book-to-bill for the first half of the year was very strong and is the highest of any recent period, further underpinning our confidence in future revenue growth. Please now turn to Page 10, where we'll briefly discuss gross profit and gross margin. This slide, similar to previous earnings decks, presents CECO's gross profit and gross margin performance by quarter since the fourth quarter of 2022 on a TTM basis, which we look at to normalize for quarter-to-quarter fluctuations and provide a look back to the start of CECO's operating excellence agenda. Since the fourth quarter of 2022, CECO has expanded TTM gross profit margins by approximately 500 basis points, with TTM gross profit dollar growth of slightly greater than 80%. In the second quarter of 2025 that most recently concluded, our business delivered gross profit of $73 million and a gross profit margin of 36.2%, an increase of 100 basis points sequentially. Our teams continue to execute very, very well, and this trend is continuing to become our baseline. On a TTM basis, our gross profit margin was 35.2%, well within the range we're targeting for our business. This improvement over the past 2-plus years is attributable to the progress our teams have made implementing our operational excellence agenda, capturing annualized savings in the range of over $10 million and improving project execution and the impact of our commercial and portfolio transformation initiatives to improve the business mix and to deliver acquisitions with accretive gross profit margins. For the balance of the year and beyond, we will continue to implement and expand on our operating excellence agenda focused on project execution and sourcing and to increase our focus on G&A expense optimization and process simplification to further benefit adjusted EBITDA delivery. Please move to Slide 11, where we'll quickly review cash flow debt and leverage. Starting on the left side of the page with free cash flow, a schedule prepared that shows you how we walk from GAAP net income to adjusted free cash flow on a year-to-date basis. Cash flow in the second quarter was a net outflow of $3 million, which represents a sequential improvement of $12 million versus the first quarter of the year. The improvement was due in large part to higher operating income and net favorable cash payments on projects booked that were then offset by working capital requirements supporting CECO's substantial revenue growth. On a year-to-date basis, the outflow of approximately $18 million is due to elevated working capital funding needs in support of CECO's revenue growth. Capital expenditures of approximately $4.5 million is largely due to investments in our ongoing ERP system migration. On the right side of the slide is a brief summary of CECO's gross indebtedness position with the primary drivers of change in the quarter shown for you. We ended the second quarter with gross debt of approximately $236 million, a modest increase from the end of 2024. Excess cash from the divestiture of the Global Pump Solutions business was applied to pay down the revolver credit facility balance early in the second quarter, which was then subsequently tapped to fund working capital increases. Net debt at quarter end is approximately $199 million, an increase of $19 million from year-end 2024. Net debt balance of $180 million, $9 million of the addition came from the second quarter of the year. At this level of net debt, CECO's leverage ratio is approximately 2.7x our bank EBITDA of $74.2 million, leaving us with an investment capacity of $104 million, an increase of $35 million from the end of 2024. This is more than adequate to fund our growth needs, our investment needs, and is supportive of future M&A in the back half of the year, in which we remain active in cultivating various M&A opportunities. But in the near term, we continue to focus our capital deployment on further reducing our debt levels and leverage ratios to further strengthen our balance sheet and reduce cash interest payments. I've now concluded my remarks on CECO's quarter 2 2025 financial results, which I consider to be very solid and a strong recovery from a somewhat slow start to the year. And I now want to hand the mic back over to Todd for his final remarks and a wrap-up.

Thanks, Peter. So as Peter said, let's go ahead and wrap up with Slide #13, and then we'll welcome the Q&A session. As we enter the second half of 2025, we believe CECO remains very well positioned to benefit from our diverse end market exposure and key mega themes that remain very, very strong. Our $5.5 billion or higher pipeline provides tremendous visibility into many exciting opportunities, large and small, and we look forward to continuing to maintain a strong bookings level. I am very pleased with our Q2 and year-to-date performance, records almost across the board. It speaks for itself. But to have 76% backlog growth, 95% orders growth and revenue and adjusted EBITDA up 35% and 45%, respectively, is just outstanding. As always, I want to thank team CECO for your customer-first dedication and outstanding teamwork. We continue to be bullish with respect to our full-year outlook, and we are pleased with the progress we are making on the integrations of the 2025 acquisition of Profire Energy and the acquisitions we made late last year with Verantis Environmental and W.K. Group. We also continue to see opportunities to generate additional synergies with those acquisitions as well as the access that they each provide to new vertical markets and geographies. So with that, we'll pause, open up the line for questions, and then I'll wrap up with some closing remarks.

Our first question comes from Rob Brown with Lake Street Capital Markets.

Congratulations on a great quarter. First question is on the pipeline and the power gen market. You've had some good orders there. How would you say the pipeline is for the rest of the year and into next year in power gen? What are the size of the opportunities? And how much capacity do you have there to take on work?

That's a great question with several aspects. We're not facing any capacity issues. We are addressing our need to bring in key resources to manage projects and supply chain relationships, allowing us to effectively execute projects in terms of manufacturing and supply chain. The market remains strong, and our orders this quarter, along with those from previous quarters, are very promising. CECO believes we are still in the early stages regarding order bookings. For instance, when a significant gas turbine project is announced by a major system provider like Siemens or GE Vernova, they collaborate with their supply chain, with us being a strategic partner, to finalize the overall project design and systems. Thus, we see our pipeline as still in the early stages with respect to the substantial announcements made in power generation. Our pipeline looks impressive, exceeding $1 billion in power generation-related projects for our solutions. Peter, do you have anything else to add?

The active pipeline is well over $1 billion. We see that $1 billion coming to a decision in the next 24 months. That's across the large suppliers and some smaller end users who are going to self-perform work. We don't and have not seen any signs of this market slowing down.

To emphasize the capacity issue, we are frequently communicating with our end customers and power generation suppliers, who are very focused on the supply chain's capacity. They collaborate closely with us to ensure that regardless of whether they require thermal abatement, noise abatement, thermal acoustic solutions, or emissions management solutions for aero derivative or large frame systems, we can meet their delivery needs without encountering capacity challenges.

Okay. Great. And then I guess beyond the power gen market, I think you talked about quite a bit of strength overall across the board. But I guess what's sort of the environment around some of the other verticals you're tracking? What are the drivers there? And what do you kind of see the length of the demand curve in those markets?

Peter will provide more detail on each of these areas, but there are numerous markets to consider. The semiconductor sector has experienced some growth, followed by periods of stabilization over the past 18 to 24 months. However, the semiconductor market is showing signs of recovery with new fabrication capacity coming back online. Additionally, the natural gas infrastructure market has seen significant growth over the last 6 to 9 months, where we have leveraged our leadership position by offering separation, filtration, and vital environmental solutions. We have also made substantial investments in recent years to enhance CECO and our brand presence in industrial water, which encompasses both on-site solutions and related infrastructure. This market remains highly appealing to us. We believe we are in a strong position to expand into new geographies and markets due to our investments, relationships, and strategic acquisitions that provide access to these areas. Lastly, the industrial reshoring theme we’ve discussed consistently remains robust, as countries and regions worldwide are looking to gain better control over their supply chain capabilities. A prime example of this is the trend of bringing industrial production back to North America, which continues to show promising visibility and momentum for us. Overall, we are excited about the opportunities ahead. The power generation market, which is closely linked to data centers, AI, electrification, digitization needs, and automation, is notably the fastest-growing sector. The other markets I mentioned are also performing exceptionally well for us.

Our next question comes from Aaron Spychalla with Craig-Hallum Capital Group.

Maybe first, just to expand on Rob's question maybe a little bit. I think you talked about some similar sized opportunities in the industrial market. Just curious which parts of those end markets, geographies, etc., might that be in? And just is that something you expect this year? Or is that more into 2026?

Thank you, Aaron. We currently have several large opportunities in water projects across the Middle East, India, and Southeast Asia, each exceeding $50 million, that we are actively pursuing and progressing towards awards. This is the highest number we have ever seen, and it reflects trends in power generation as well. We're witnessing a resurgence in purchasing across various industrial end markets, including emerging semiconductor and electronic manufacturing, beverage can production, and new developments in metals processing, extending beyond traditional steel, aluminum, titanium, and nickel sectors that we've historically focused on. As the U.S. and other non-Asian markets invest in securing supplies of rare earths, copper, and other materials, we anticipate opportunities will arise in the next year or two. There is a lot of activity in this area. Additionally, the current administration's efforts to reduce bureaucratic obstacles have allowed projects to be approved and financed more swiftly, resulting in quicker project initiation. As demand for manufacturing increases in the United States in various forms, it will necessitate energy, logistics, and transportation, which in turn require materials produced in quarries, cement plants, and other sites where we supply equipment. We are now seeing a significant cycle in industrial performance, and that is our main focus.

Great, Peter. And then maybe on that, some of the red tape, can you just kind of talk about the Big Beautiful Bill and any impacts on the bonus depreciation as some of these projects maybe start to get moving? I mean, you've seen really good order growth thus far. Is that something that can help move some of these projects forward as well and benefit you?

Yes, it can't hurt, but we were already observing growth in our orders, opportunity pipeline, and booking rates even before the bill was passed. We continued to receive orders while the bill was being debated. No one waited to see the results. The aerospace sector will benefit, as will anyone purchasing or constructing large machinery. Additionally, there is likely to be a significant export wave of munitions, armaments, and defense equipment from the U.S. that will start impacting our economy. New plants will need to be constructed, and new sources of raw materials will need to be developed. Anytime the government steps back and allows industry and markets to function effectively, it is a positive development. While we are not taking a political stance, we are certainly not opposed to this approach.

We're not sure, to Peter's point, that there's any specifics with any bill either way that slows down the need for power that impacts the need for more automation and new industrial investment. These things are going to happen sort of with or without policy. We do believe policies certainly help to open up the speed and acceleration of which things happen. But I think we're more excited and interested in our big beautiful backlog than we are in any particular bills.

Our next question comes from Jim Ricchiuti with Needham & Company.

Just if we look at your guidance for second half bookings, I'm just wondering what does that imply for large orders? I know that's always tougher to predict the timing on some of these.

It’s a great question. I would say that it doesn’t capture the full potential of what we could book in the second half. I'm not suggesting we're being overly conservative in our bookings outlook, but we're also not overly optimistic about everything happening in the second half. We are taking a balanced view on the timing of these orders. It might be slightly less than what we’ve seen in the last couple of quarters, but it remains at a healthy level in terms of gross dollar amounts. This could change in various ways. As we've experienced before, an order might miss being booked in a quarter by a few days or weeks and then be counted in the next quarter. So, we can’t always predict when our customers will finalize their purchase orders with us.

Got it. And I wanted to go back to the comment you made in the release and I think in the deck about the inflationary pressures in the second half. So I guess the question I have for you, Todd, or Peter, is what flexibility do you have to pass on some of this to the market over time? Or is this also about some of the larger deals and sometimes it's a little bit more challenging to do that?

Yes, it may be more difficult to pass through costs on some larger projects. We have solid contracts and strong execution with our supply chain when we have fixed-price agreements with customers, and we similarly have fixed-price contracts with our suppliers. However, it’s not possible to pre-purchase or fix all costs. I've mentioned before, regarding our views on tariffs and inflation, that if most companies in the industrial sector are raising prices, which we believe they are, for items such as components, electrical parts, pumps, motors, valves, and fans—things we buy that aren't always negotiated in our supply chain—we are still purchasing those through distribution as needed. If those prices increase by 5%, 6%, 7%, or 8%, that's inflation we expect in the second half. We've accounted for that in our guidance. The price increases we've observed throughout the year will start to impact us through distribution now in the third and fourth quarters. This anticipated inflation, which we work diligently to pass on or absorb through productivity efforts, presents challenges for some of our businesses that are purchasing those components. Additionally, with a backlog close to $300 million year-over-year, which we expect may continue to grow, we are adding resources to ensure we can execute and deliver on time, on schedule, and ideally under budget. These investments are strategic; they allow us to stay ahead of the curve instead of scrambling on our projects. As a result, we may incur some costs ahead of revenue, which is a dynamic we anticipate in the second half. Our guidance reflects these two components.

Got it. Just one last question, has your perspective on the impact of tariffs on the business changed at all? And congratulations on the quarter, by the way.

Yes. No. Our thinking remains fundamentally unchanged. It continues to be a bit of an evolving headline and topic as policies and relationships and agreements change. But we believe overall that what we talked about at the first quarter and the analytics that we provided fundamentally hold true still.

Our next question comes from Gerry Sweeney with ROTH Capital.

Congratulations on a strong quarter. Many questions have been raised. To be honest, I'm multitasking right now. However, I wanted to revisit the topic of margins. In my opinion, I believe CECO could potentially reach mid-teen EBITDA margins. We are implementing changes in SG&A and making process improvements. I think there is a mix of factors at play, including leverage as we continue to increase gross profit dollars. Is achieving something in the mid-teens feasible over the next 12 to 24 months? How should we perceive that?

Yes, we need to reach sustainable low teens before moving into the mid-teens. We are aiming for that and expect to achieve it within that timeframe. We have been pleasantly surprised by the growth and opportunities in the market. When we identify these opportunities, we want to invest to penetrate those markets and enhance our industrial water business, expand our international capabilities, and grow our pipeline of sales and talent necessary to execute our plans. Our investments have been somewhat higher than we anticipated 12 to 18 months ago, but so has our growth rate. We are focused on that. If someone suggested we needed mid-teens margins to achieve success, we certainly have a plan to accomplish that. However, we value the investments we are making and the returns we anticipate in the long run. As we continue to grow, we believe that volume leverage and productivity will lead us to those mid-teen EBITDA margins. We are still committed to achieving them, even though we are a bit behind our initial expectations due to our investment cycle. Nonetheless, we appreciate the returns from our investments, and we remain dedicated to reaching those mid-teens margins.

I understand, and that seems reasonable. What we should focus on here is that growth is perhaps a bit ahead of our expectations. I prioritize growth over tweaking margins any day. This approach may be a tactical way to support growth, even if it slightly slows margin expansion. But ultimately, I would choose growth over absolute margins anytime. Do you agree?

That's correct. It might sound easy to say this in a high-growth company, but if we experience slower growth, we have various cost management strategies we could implement. My leadership team and I, along with the Board, have extensive experience in companies with lower growth rates. In those situations, companies with low single-digit growth often focus aggressively on their cost structures, as opportunities for investment in high growth are limited. We believe there's a balance to be struck between investing for growth and taking the necessary steps to enhance our margins. Our aim is not to have weak margins; we are pleased with how we manage gross margins, pricing, and productivity. We will keep refining our portfolio, and our second quarter results showed a better conversion of our selling, general, and administrative expenses. We're dedicated to this, and we are continuously examining costs to eliminate redundancies within our organization. Currently, our primary focus is on growth.

One other housekeeping item to mention is whether there was any foreign exchange impact in the quarter. I haven't specifically looked into that, to be honest with you.

De minimis. It's small.

De minimis. And then curiosity as an occupational hazard of an analyst, what is the gap between maybe Siemens, GE Vernova getting an order for a turbine and when you see the follow-on order for your equipment or your portion of the project?

Typically, both we and the supply chain are actively engaged in discussions, including preliminary budget proposals, to reassure clients about their potential suppliers and project costs. This approach helps instill confidence in their ability to fulfill orders. While we often feel closely aligned with them, there is generally a span of 6 to 12 months from the announcement of a large win to the realization of a purchase order. In instances where they announce a win that is several years away, it could take even longer for us to receive an order since they won't require our involvement for several years down the line. However, for most orders being announced, they are typically aiming for delivery within 18 to 36 months, and we would expect to receive an order 6 to 12 months following their announcement. That is the usual timeline.

Congrats again on the great quarter.

Thanks, Gerry.

Our next question comes from Bobby Brooks with Northland Capital Markets.

Congrats on the excellent quarter. About a month ago, you guys had announced the launch of a new Saudi Arabian office, which is in contrast to the fact most investors focus...

Bobby, it's very hard to hear you. Your line is very staticky. But yes, we can hear you, but just your line is a little staticky, but go ahead.

Yes, you guys can hear me better now.

Yes, go ahead.

Yes. So yes, just about a month ago, you guys announced the launch of a new Saudi Arabian office, which is in contrast to the fact that most investors focus on the domestic opportunities ahead for you guys given how large it is. But I think it would be helpful for investors to discuss the opportunities you're seeing globally in kind of the key regions. You mentioned it, I think, in the Q&A a little bit earlier and just maybe contrast that versus domestic opportunities because I get the sense that the international opportunity for CECO is a little underappreciated. And maybe you can just dovetail that with how selling Profire solutions to international customers has gone thus far.

Yes, we appreciate all of our regions, and we see significant opportunities in North America. However, we have also been steadily growing internationally over the past four years. Our high-growth markets, particularly in the Middle East, India, Southeast and East Asia, and China, have seen our sales increase from about $30 million to over $100 million during this time. The Middle East is a crucial area for our operations. We are well-established in Dubai, where our team is focused on expanding into new verticals such as industrial water and entering new markets not only in the Middle East but also in high-growth regions. We are strategically growing in Southeast Asia, including our acquisition of DS21 in South Korea, which enhances our sustainable access to the East Asian market and strengthens our relationships with regional EPC firms. Regarding the Middle East, we've successfully engaged with major companies in Saudi Arabia, where a local presence is invaluable. As we consider further investments in Saudi Arabia and elsewhere, we want to optimize those relationships. Establishing a local presence, including teams and offices, and potentially adding assembly and manufacturing capabilities will boost our growth in these markets, especially in Saudi Arabia, which is focused on local solutions. Our approach is to gradually build our presence in these countries, and we believe we are doing that effectively. We plan to continue this strategy in markets like Saudi Arabia, where we see long-term growth potential that aligns with our offerings.

We've placed our global operations in the eight largest industrial trading zones around the world. While we often discuss North America due to CECO's history of having over 80% of its business there about five or six years ago, we are quickly nearing a balance of 50% in North America and 50% elsewhere. This distribution will fluctuate each quarter and year based on orders and revenue. However, we consistently notice market growth in Korea, Southeast Asia, India, Saudi Arabia, the Gulf region, and North Africa. This growth is being driven by European clients investing outside Europe, with EPC firms that traditionally operate in Europe now working in India and the Middle East on projects for local end users and national energy companies. We also observe an increasing demand for our solutions in these areas as they focus more on sustainable and environmentally friendly practices, such as cleaner energy production and water reuse. The market drivers that we have seen in OECD countries are now emerging in what we often call developing regions. However, I believe these regions are actually developed markets that are beginning to prioritize environmental solutions and efficiency in resource consumption. This trend benefits CECO, and we are carefully investing in these areas as they open up for our solutions. The solutions that are standard in the U.S. are not yet the norm in many international markets, but we are progressing towards a point by the end of 2030 where our offerings in the U.S. will closely resemble what we provide in countries like Saudi Arabia, India, Malaysia, and Indonesia. This progression is beneficial for us, the environment, and the residents of those regions.

That's excellent color. I really appreciate it. And then my next question is, in the prepared remarks, you guys both indicated that the project delays that kind of hampered results in 2024 have abated. Could you maybe just discuss a little bit deeper why those have relieved?

Yes. Our customers got their acts together, and now we're moving forward constructively to deliver on the projects as we had initially defined them.

We experienced some larger projects that faced longer delays than usual, particularly in 2024. In the previous years, customers had been speeding up their projects. During 2022 and 2023, once projects were booked, customers typically executed either on schedule or slightly ahead of it. However, this shifted for some significant projects in 2024, which affected our outlook and performance for the year due to these projects being larger than average and encountering longer delays. Those projects have now returned to a regular operational schedule. Our customers are now organized, and we haven't encountered that same situation again. There will always be some projects on hold for various reasons, which occurs regularly in my experience at CECO and other companies. However, last year's situation was unique, and this year, things have normalized. Currently, we do not foresee any projects that we expect to be delayed, nor do we anticipate large projects in the latter half of the year that would raise concerns even if one or two were delayed. Our project distribution for the second half looks solid, and we believe we are in a good position. That's why we stated in our prepared remarks that we do not expect any project impacts to negatively affect us in the second half of the year, and there is nothing noteworthy, positive or negative, regarding project execution to report.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Todd for any closing remarks.

Thank you very much. Well, thanks for the great questions and of course, all the interest in our information today. Once again, I want to thank our global teams here at CECO for delivering such incredible value to our customers as we continue to protect people, protect the environment and protect our customers' investment in their industrial equipment. As many of you know, we'll be presenting at several upcoming conferences in the third quarter, which you can find on our website or we will be announcing via press releases. We hope to see you there. We're always available to answer any questions you might have. So with that, I want to thank everyone. Have a great rest of your day, and we'll talk to you soon.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect, and have a wonderful day.