Earnings Call Transcript - CECO Q2 2022

Operator, Operator

Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to Steven Hooser. Please go ahead, sir.

Steven Hooser, Moderator

Thank you, Steve, and thank you everyone for joining us on the CECO Environmental second quarter 2022 earnings call. On the call with me today is Todd Gleason, Chief Executive Officer; Ramesh Nuggihalli, Chief Operating Officer; and our recently announced and incoming Chief Financial Officer and Strategy Officer, Peter Johansson. 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 also 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 30, 2021. 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 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. Now, with that, I'd like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?

Todd Gleason, CEO

Thanks, Steven, and good day, everyone. We're going to start with Slide #3 of the presentation that Steven mentioned to follow along with our prepared remarks today. We have a number of topics to cover as always and this slide provides a high-level summary of today's focus areas. First, today we announced two leadership changes. Matt Eckl who has been our CFO since early 2017 and Pamela Turay who has been our Head of Human Resources for about four years will be leaving CECO. I want to thank Matt and Pam for their contributions to our organization. We appreciate all the things they have done to help us advance as a company. We made the decision to hold today's call without Matt, as we both agreed to maintain focus on our excellent second quarter performance and outlook. Matt is working to ensure we have a smooth transition, which is well underway and I'm sure many of you will stay in touch with Matt. We wish both he and Pam much success. Our finance and HR teams are in great shape and working on transition items. I'm also pleased to announce that Peter Johansson will join CECO as our new Chief Financial and Strategy Officer. This is an expanded role and one that fits Peter's unique skills and tremendous experience. We are driving our platform growth and enterprise-wide strategic development very aggressively. Peter will partner with me and our leadership team to tighten up these growth programs and ensure we have leading processes to identify and execute investable strategy. Peter brings over 30 years of experience in business development strategy, capital management programs and other business management analytics. His background includes diverse industrial leaders such as Accudyne, IDEX, ITT, Trane, and also AlliedSignal, Honeywell. I have a few of those names in my career profile too. Peter has been working with our leadership team as a consultant for about six months, as we've been building our M&A pipeline and evaluating market opportunities. While Peter will officially assume CFO duties next week, he is on the call with us today, although Ramesh and I will field today's questions. Let me pass it over to Peter to say hello. Peter? I think we might be having some technical difficulty on Peter's side of the phone here.

Peter Johansson, Incoming CFO

There we go. There we go.

Todd Gleason, CEO

Thank you. Go ahead, Peter.

Peter Johansson, Incoming CFO

All right. Good morning, everyone. This is Peter and I'm looking very much forward to being part of this wonderful journey that CECO is about to embark on, great challenges and great opportunities ahead of us.

Todd Gleason, CEO

Great. Thank you, Peter. We look forward to you joining us officially next week. We also mentioned that our General Counsel, Lynn Watkins-Asiyanbi, will assume the newly created role of Chief Administrative and Legal Officer. In this role, Lynn will drive our human resource and legal functions and partner with our business leaders to ensure we have nimble and effective programs in place to support growth, new operating models, and of course, maintain strong compliance and development. So I want to once again thank Matt and Pam for their service. And of course, welcome Peter and Lynn into their new roles. The other points on this slide will be more concise. We hope you take away that CECO delivered an outstanding Q2 and very strong year-to-date performance. We continue to deliver on our very transparent roadmap and we believe we are establishing programs to help drive real sustainable results. We will also discuss our full-year outlook, which we are increasing given our year-to-date performance and our confidence around what we see in our backlog and across our opportunity funnel. We hope you also take away that our capital allocation program is driving good utilization of cash as we continue to identify and close accretive and strategic acquisitions and we are buying back our shares. More to come on all those points. So please turn to Slide #4. Our strong Q2 and year-to-date results are driven by many important factors. Of course, we have certain end markets that are growing and we are well-positioned in those markets. However, I would submit that we have fundamentally changed CECO and continue to advance our organization. As we state in the slides subtitle, we are now two years into a systematic program to reshape CECO and drive higher performance. I joined the company in July of 2020, time flies. For over a year, we navigated the challenges of COVID protocols. We can all agree it was and has been a crazy time. We are still overcoming some of the ramifications associated with inflation, supply chain issues, and of course, last year's great resignation. But early on, I identified some opportunities and some obstacles within CECO. We set our sights to invest time and energy on those key strategic and operating items. One's work is obviously never done, but in place today, we have a number of important components that will help sustain our performance. A year ago, we changed our operating structure from large segments to our very focused and nimble business platforms. This organizational design provides much more accountability, faster speed of execution, and a better opportunity for visibility around growth and productivity. We also said we would establish an ESG strategy and we have. Our inaugural ESG report was published earlier this year, but that's just a start. We have formal programs inside CECO along with our Board. We are now establishing ESG 2.0, a team that will drive new environmental, social and governance programs. We are pleased that our ESG score dramatically improved, but we want to take it to the next level. And we believe ESG is something our customers and employees care deeply about and rally around. Over the past year, we have added two new Board members. Richard Wallman and Bob Knowling are outstanding additions to our Board and for me, great partners and advisors as we drive transformational growth. Our leadership team is more diverse, more experienced, and a strong cultural fit to how we will drive our operating model. In many ways, a CEO is only as good as their leadership team and I'm feeling pretty good. And when I joined two years ago, CECO had not initiated a focus capital deployment program. We're certainly driving programmatic M&A, and we've already completed multiple transactions this year alone. And we have repurchased almost $10 million worth of CECO stock in just the past year. I could extend this list because we are proud of our company and many more accomplishments, but for now I will end that we have made increased investment and we continue to make more investment in new products and business development. I look forward to highlighting some of our new product wins and new market opportunities as we dive deeper into our results today and in future quarters. Please turn to Slide #5. As we have talked about systematic change and transformation, we wanted to be somewhat transparent about what we were planning to do and then of course, do those things. Transparency and focus are two very important areas I demand from our business leaders and we hold them accountable as we invest in their success. A year ago, I shared this slide during our Q2 2021 earnings call. We shrunk it down to make a few points on the right side of that slide. You might recall that at the end of Q2 last year, we had decent orders growth, but not necessarily the overall financial performance that would stand out. I stated we were putting the pieces in place to drive a real growth program. We shared this slide last year to outline the high-level steps we would take in the second half of 2021 and throughout 2022 to drive value. As you can see, we sort of checked the boxes on the right side of that slide. Everything from finishing 2021 as expected to our capital deployment programs, programmatic M&A and of course, great organic growth, we feel good that we shared our plans and more importantly, that we are executing on those plans with great results. The combinations of Slide number 4 and 5, I hope put an exclamation mark on the fact that CECO is making systematic change and steady transformation. It isn't just a quarter or two of good results, but instead a more reliable operating model and leadership team from the Board down through our great platforms and all of our great functions. Now let's dive into Q2 and year-to-date results. So please turn to Slide #7. This slide provides a summary snapshot. On the left side of the slide, we highlight key financial metrics for the second quarter and year-over-year percentages 33% orders growth. Our $114 million worth of orders follows the first quarter all-time record orders of over $160 million. We have a new all-time record backlog as a result. 34% revenue growth in the quarter and 31% revenue growth year-to-date just outstanding execution, overcoming challenges in the supply chain and continuing to deliver for our global customers. 63% growth in our adjusted EBITDA with year-to-date EBITDA margins over 10%, we continue to demonstrate very nice operating leverage and $19 million of free cash flow in the quarter is obviously very strong. We had some pent-up working capital, and so we knew we would have great performance with our cash this past quarter. Very pleased with our overall second quarter performance. Now let's move to Slide #8. We announced and closed two strategic acquisitions in the quarter. I encourage you to read the press releases we distributed earlier this quarter regarding Compass Water and Western Air. Here are a couple points. Compass Water is a leader in membrane-based industrial water treatment systems, and really helps our industrial water strategy. I would state that we are building our industrial water capabilities in business, sort of still early innings, so to speak, we have a growing base business and more and more solutions and we are committed to industrial water. Western Air helps us advance our already very well established and strong industrial air business. Western Air brings a nice compliment of standard dust collector solutions where historically our dust collection systems have been engineered custom orders. So this is a very strategic focus and Western Air brings to CECO an exciting additional product line called Inteliair, which is all about energy efficient solutions in smart sensor technology, very excited about these new capabilities. Both Compass Water and Western Air help grow our short cycle sales and we estimate we are at about 30% of our portfolio mix, which is up nicely from the 20% a little over a year ago, really great progress here. On the right side of this slide, we highlight our share repurchase program. In the second quarter, we announced our $20 million three-year authorization, and we got after it. Buying back approximately $4 million in just a few months. We remain very committed to a consistent capital allocation program and we'll provide regular updates. Now let's turn to Slide #9. We already highlighted a few of these second quarter financial results and this is the standard slide we provide each quarter. A few additional items worth mentioning. Our Q2 gross margins were below our historic average of 32% to 33%, but we are making very good progress with strategic pricing and productivity. We improved gross margins 150 basis points when compared to the first quarter of this year. We expect to deliver higher gross margins and to work our way through the year. Our backlog has higher margin profiles coupled with our strategic pricing actions that are rolling out as expected. Another financial metric on this slide that wasn't included in our earlier summary slide is the significant growth in earnings per share. In the quarter, we delivered $0.18 of adjusted EPS. This is up a 100% when compared to Q2 2021. We are getting strong earnings growth from operations, and we expect to continue to drive meaningful EPS growth for the full-year. Now, please turn to Slide #10. We provide some additional datapoints on our Q2 orders and revenue, comparing them to Q2 last year and also Q1 of this year. A few highlights. On the slide, we state that the $275 million of orders generated in the first half of the year is an all-time record first half. This eclipses the first half of 2016 by some 20% and back in 2016 CECO was very focused on large energy market opportunities that had produced some extremely large energy jobs in that year. Have I mentioned that we're systematically transforming CECO? Well, this quarter, we had only one order above $10 million and it was in our separation and filtration platform. It was a Middle East project that required produced water treatment solutions to remove harmful pollutants and particulates. Another large order in the quarter of approximately $7 million was in our industrial air business to provide specialized mist recovery and elimination solutions in a hot cold aluminum rolling facility that is undergoing an expansion. We are also seeing some very nice LNG wins in pipeline investment and liquid separation. Finally, we continue to see some large programs in the $3 million to $4 million range for industrial air solutions in wafer fabrication and related industries. I could go on and on about our very diverse and attractive orders that we booked in the first half of 2022, but really overall just a very balanced order book across all of our platforms. And with the balanced orders book growth, we're delivering sustainable revenue growth, as we show in the right side of this slide. Our platforms are delivering great organic growth and with our book-to-bill consistently over 1, we expect to sustain higher growth rates and sales dollars. And this is reiterated when you turn to the next slide. Please go to #11. For the second straight quarter, we have an all-time record backlog with almost $289 million. This is up 35% this year. Our 2022 year-to-date book-to-bill is 1.4, just fantastic. Equally important are that our platforms are very excited about future opportunities and pursuits. Our sales funnel remains above $2 billion and we have many large bids that could produce some impressive wins in the second half of this year. Now let's go to Slide 12. As I mentioned a few minutes ago, our gross margins expanded sequentially, but remained down year-over-year. It does feel good to be back above 30% and we expect to sustain those levels with the strategic pricing, continued productivity and supply chain management that I already mentioned. Second quarter EBITDA of $10.6 million produced EBITDA margins over 10% for the second straight quarter. These EBITDA results show the outstanding leverage we are getting on our volume conversion. Just consider that if gross margins had remained at historic levels, our EBITDA margins would likely be 12% to 13% in the quarter. We certainly are not dwelling on what could be or what might have been. Instead, we remain focused on SG&A cost management, so we can produce consistent results. We are and will continue to invest in growth resources and technologies, but we're clearly doing so at a pace that allows for strong conversion so that we're also growing our bottom line. Now, please flip to Slide #13, which highlights our free cash flow and balance sheet. The main takeaway here is we have a strong cash flow generating organization that has allowed us to steadily invest in both M&A and share buybacks while essentially maintaining a very healthy EBITDA leverage ratio of just over 2x. We ended the quarter at approximately 2.1x. We believe we have more opportunity in working capital management so we are laser-focused on generating more cash this year. Let's review our outlook for the full-year. Please go to Slide #15. Earlier this year, we introduced a full-year outlook for the first time as a company. We believe outlining our expectations are important, sort of back to the, tell you what we're going to do and then get after it. I am pleased to share we are increasing our full-year financial outlook to reflect strong performance and confidence in our backlog and our operational execution. So here are the numbers. We now expect full-year orders to be between $430 million and $450 million. This would be up approximately 20% at the mid-point. You are right; we might remember that in 2021, we grew full-year orders approximately 30%. This is the result of our focused investments in our nimble and accountable platform organizations. They are just getting after opportunities and really developing new muscles for growth. Our updated outlook calls for full-year sales of $375 million to $400 million, with opportunity to exceed, if things go well, in our supply chains and those of our customers. At the mid-point of our revenue outlook sales is expected to be at some 20% year-over-year. We continue to expect full-year gross margins of about 30%, which is down 200 basis points versus 2021, but we expect to exit 2022 with a higher run rate than we produced in the first half of this year. We are also taking up our outlook for adjusted EBITDA. We now show a low end of $37 million and a high end of $40 million or higher. Again, if things go well with supply chain management and customer projects, we can certainly continue to deliver more. Not everything is in our control, however, on some of these projects and of course, in our supply chain, but we have a really good pipeline and, of course, we really are excited about our backlog. We continue to balance out on our investments for future growth and we expect our operating conversion to continue. So at the mid-point of our outlook, we expect our adjusted EBITDA to be up over some 50% versus last year. So the takeaway for this slide is that CECO is in a better position than ever for higher performance and we believe our 2022 outlook is indicative of that view. A couple more slides. Please turn to #16. As I highlighted a slide that we introduced a year ago, we decided to update the material and provide a somewhat refreshed, transparent high-level roadmap. In summary, we are building new processes, capabilities and initiatives to ensure that CECO 2.0, as I am calling it here today, delivers high performance. On the last section of the slide we provide summarized bullet points regarding how we expect to wrap up 2022 operationally. Our outlook points to strong second half results. We expect to exit with a large backlog to provide a foundation for growth in 2023. Our capital allocation program will continue to provide funding for M&A and share buybacks and we will maintain our investments to grow our shorter cycle business focus, so we can have a more sustainable earnings profile. If done right, we should be in a great position for an accelerated execution in 2023. I would acknowledge a continuation of a lot of themes, which is a good thing, programmatic strategic and right-size M&A is certainly one of those reoccurring themes. We expect to sustain our strong organic growth, while evaluating our portfolio and considering options for investment or rebalancing. Our new leadership team is confident we can drive our new operating model to the next level, a graduation to a new level, so to speak, that will help sustain performance. And we expect that in 12 to 18 months, we will revisit this slide and continue to accelerate in 2024 and 2025. We will provide progress reports on these items and perhaps do some deeper dives in our evolving operating model when we are ready to share some of those details. A lot of good things are happening, and we look forward to sharing. Now, let's wrap up with Slide #17, our last slide. Great results in Q2 and year-to-date. Our record backlog gives us confidence in second half growth and puts us in a nice position for beyond 2022. We hope you found the full-year guidance helpful, and we look forward to discussing this in more detail. We will participate in several investor conferences this month, including the Jefferies Industrials Conference this week and the upcoming Three Part Advisors Midwest IDEAS Conference. Ramesh and I hope to see many of you at these events and we look forward to introducing Peter. I know we have been redundant on this point throughout our march today, but our final bullet point here is my main focus, which is driving a steady portfolio shift to deliver higher performance. And with that, let me thank team CECO for delivering for our customers and being accountable for results. We also thank you, our investment community, for your interest today and would be more than happy to answer any questions you might have. So with that, I'll hand it back over to the operator and will address your questions.

Operator, Operator

Yes, thank you. We will now begin the question-and-answer session. And this morning's first question comes from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti, Analyst

Hi, good morning. First off, congratulations on the quarter.

Todd Gleason, CEO

Thank you. Appreciate it.

Jim Ricchiuti, Analyst

Couple of questions. Todd, first off you reference CECO's wins in the semiconductor market and I know some of this may not necessarily associate CECO with semi fabs, but yes, I noticed you were at the recent SEMICON West Show. And I guess my question is to what extent you think the company could benefit from the recent chips legislation?

Todd Gleason, CEO

Thanks, Jim. Good question. We were at the show. We're excited about our relationships we have in this space, has been an investment of ours and somewhat in anticipation of what could be a healthy market here in semiconductor manufacturing. There's certainly some interesting roles that we can play in their overall processes, especially as you can imagine around industrial layer solutions and others. So, I mean, simple answer is, you look, it's in our pipeline. There's some really great opportunities for us in the second half of the year. We hope to be talking about that in the next quarter and the quarter after that as well and maybe perhaps beyond. But we feel we're well-positioned for that investment in that industry. We're excited about what that legislation represents. Not only for us, of course, but I think ultimately in the longer-term for the health of our overall industrial economy and our ability from a supply chain perspective to have a little bit more control domestically of our destiny in this area. So anything that CECO can do to be part of that, we look forward to it.

Jim Ricchiuti, Analyst

Got it. And wondering if there was anything unusual in the Q2 revenue strength, because your guidance at the mid-point of your full-year guide, you suggest some deceleration in the second half. And is that just conservatism or I'm wondering is it timing or are you seeing anything in the business that might give you pause?

Todd Gleason, CEO

No. Thanks, Jim. Good question there too. So I think I'd say this. We do not see any changes, if you will, to our business profile, etc., other than the continued choppiness of the supply chain markets. And less so probably Jim and into our audience here for us don't get me wrong, we're working through challenges like everybody else, but we want to be appropriately thinking about challenges that could happen to our customers and have happened to them. And that's influential on some of our larger projects. So while we have an opportunity to potentially do certainly better than the mid-point of our guidance range. We also just want to be thoughtful that some of our customers are having to wait for other parts of their supply chain before they can accept let’s say installation and delivery. So at this point, we think it's appropriate to just sort of manage everyone's expectations a little bit on until we sort of work our way through these supply chain challenges.

Jim Ricchiuti, Analyst

It's helpful. Last question, I'll jump back in the queue. The M&A activity has clearly picked up a bit and in recent quarters, and I'm wondering how you would you might characterize the pipeline going forward.

Todd Gleason, CEO

Yes. Look, we have had a series of really strategic and good acquisitions. We love the technology and the adjacent markets that it gives us access to, great management teams, good cultural fits. We continue to look for organizations that have, I think a similar profile, strong management teams that help us expand where we're at and where we're going. Organizations that want to be part of we think a growing enterprise that is focused on industrial air, industrial water, and the energy transition. And one that does so I think that with increased investment for growth, there will be more. We expect the timing of acquisitions is always kind of tricky. So we'll obviously announce those as they come, but for us, we have a great pipeline of opportunities that we're evaluating. And with that, look, we're going to continue to generate strong free cash flows and deploy the capital as we've discussed.

Operator, Operator

Thank you. And the next question is from Rob Brown with Lake Street Capital Markets. Please go ahead. Mr. Brown, your line is live.

Rob Brown, Analyst

Hi, good morning. Congratulations as well on a nice quarter.

Ramesh Nuggihalli, COO

Thanks.

Todd Gleason, CEO

Thanks, Rob.

Rob Brown, Analyst

My question is about the gross margin, which has seen a nice increase. How do you foresee that trend continuing? Is the backlog and pricing support likely to bring it back to the 32% to 33% range? Additionally, what is your perspective on this?

Todd Gleason, CEO

Yes, we would love to achieve that tomorrow, Rob. As I mentioned in our prepared remarks this morning, if we were at 32% or 33%, it would reflect positively on our EBITDA margins, bringing them to 12% or 13% instead of 10%. Operationally, we are very proud of the opportunities ahead of us and our accomplishments, as we've been discussing our goal of reaching double-digit EBITDA margins and potentially moving into the teens for years. Regarding the gross margin question, our backlog does present a more attractive gross margin rate. There are large and small projects that can influence those margins depending on the quarter. However, we are confident that our sequential improvements can continue. Our goals are to exit this year at a higher rate than we achieved in the quarter, ideally at 31% or 32%, which would allow us to enter 2023 at gross margin levels we have historically enjoyed. With our acquisitions this year and moving forward, we aim to continue increasing those rates. In the short term, our focus is on managing inflation, securing strategic pricing, productivity, and supply chain management. Our teams are doing a great job with these efforts, and we will continue to prioritize them. Good question.

Rob Brown, Analyst

Okay, great. Thank you. And then second question really on the sales funnel, you talked about it being quite diverse, just some color on how that's developing. Are there areas where you're seeing sort of strength or weakness or do you sort of feel it's across the Board strength in your major market just some color on the sales funnel?

Todd Gleason, CEO

Yes. It's clear that we are not seeing uniform strength across all areas. While I wish it were the case that everything was consistently improving, that's not always the reality in the industrial sector. I wouldn't say we're experiencing significant weakness across our platforms, but we have noticed that some distributor inventory levels have stabilized in areas like fluid handling and other segments of our business. We are, of course, monitoring certain areas that are either slowing down or rebalancing their inventory. Aside from a couple of markets, like automotive, which did see a slight decline in orders this quarter, we are generally observing a solid level of strength overall. Overall, we believe that our pipeline is strong and diverse. The focus of our platforms gives us good visibility; if one market slows down, another often picks up. I frequently emphasize the need to be nimble because our teams are quick to pursue new opportunities. Notably, we are optimistic about the energy markets, especially related to energy transition investments in biogases and continuing prospects in LNG. This is a key area for us, and we anticipate positive developments in our core energy business over the next few quarters. Good question.

Operator, Operator

Thank you. And the next question comes from Amit Dayal with H.C. Wainwright.

Amit Dayal, Analyst

Thank you. Good morning, everyone. With respect to sort of the margin side of the story, could you provide any granularity on you're seeing some softness, I guess on the gross margin side, but operating margins continue to hold up and improve. What are the drivers that are helping you achieve sort of improving operating margins? Any color on that would be helpful. Thank you.

Todd Gleason, CEO

Yes. Yes. So obviously, we sort of spent a fair amount of time on gross margins. So let's just sort of for a second here leave that alone. We're not alone. I'm glad we're not alone in the sense that our gross margins have been impacted by the inflationary environment and some of the supply chain challenges. So what's driving our EBITDA margins higher is really our ability to convert the volume that we've delivered in the first half of the year. It's scaled. At the end of the day I'm not going to say it's all about volume for companies like ours that have a relatively fixed SG&A rate. We have invested more in SG&A, that's a combination of more people to support growth and activity, of course, increases like merit increases and incentive compensation and all those costs that are associated with those great people. But if you look at our SG&A as a percent of revenue, even though the dollars have gone up, the percent of revenue has gone down and so that contraction, if you will, in a good way of SG&A as a percent of revenue is, at this point, more than offsetting the other negative contraction of gross margin rate. And that ultimately what you want is to get back to the gross margins that we've historically enjoyed, and nothing has fundamentally changed about our business, I would submit to those of you that are listening today. It is just the market conditions that we're navigating and we're navigating well, but nonetheless, that's the condition that we're in. So, gross margins are down, but our operating conversion on our volumes is up. And if we're able to get our gross margins back up I think you're going to see even stronger EBITDA margins as a result. We look forward to hopefully delivering those.

Amit Dayal, Analyst

Thank you. Thank you for that. The CFO change, Todd, I mean, is that signaling larger M&A targets, like, how can we think about this change in terms of M&A as a part of your future growth?

Todd Gleason, CEO

Yes, we are not implying any specific signals with this change. Companies, organizations, and individuals evolve and seek new opportunities to gain fresh perspectives and processes. Both Peter and I, along with Ramesh and our entire leadership team, have extensive experience in managing large organizations and complex transactions. If my primary focus were on that aspect, I could have made different choices regarding our M&A team. However, this is not about indicating a shift in our M&A strategy. It is about our ongoing evolution as an organization toward new programs, processes, and operating models. This change comes at the right time for everyone involved, and we are excited to welcome Peter on board so that you can meet him and learn about his impressive background.

Operator, Operator

The next question comes from Bill Dezellem with Tieton Capital. This change is not about signaling a shift in our M&A strategy. Instead, it focuses on our ongoing evolution as an organization, which includes new programs, processes, and operating models. We believe this is the right time for all parties involved, and we view it as a healthy change. We are excited to welcome Peter on board, and we look forward to introducing him to everyone and sharing more about his strong background.

Bill Dezellem, Analyst

Thank you. My first question is relative to pricing. When do you anticipate the pricing moves that you have made already will be fully rolled into the results?

Todd Gleason, CEO

Yes. Approximately 30% of our company operates on a shorter cycle, and those price adjustments have either already been implemented or will be relatively quickly, quarter by quarter. At least 30% of our price changes have been well received by our customers, distributors, and channel partners. These are reflected in our results to some extent, probably around 70% or more for this quarter. Our long-term projects certainly involve pricing, but ultimately, it's about protecting our gross margins and how we're quoting jobs. We are raising our prices at a level that matches or exceeds the cost increases from our supply chain. This is why we anticipate stronger gross margin percentages in the second half compared to the first half. We are transitioning from lower margin jobs in our backlog that were booked 12 to 18 months ago at lower margins, towards higher margin jobs due to improved pricing and perhaps a better mix. Overall, we expect that 60% to 70% of our business will show stronger performance in the second half of this year.

Bill Dezellem, Analyst

And so, would you say, by the end of the fourth quarter, that the long cycle pricing actions you've taken will fully be reflected or will it be into 2023 before that's fully reflected?

Todd Gleason, CEO

If you want to use the term fully reflected, I would say we are approaching 2023. This is evident in how we continue to focus on pricing across our short and long cycle businesses, even through the last quarter and into this quarter. Consequently, that affects our backlog, which hasn't yet impacted our profit and loss statements. We are certainly not considering price drops at this point. We have traditionally not been the low margin provider on any projects, so we are maintaining our strong market leader position, where we have reinforced our uniqueness and stand by our quality and expertise. I believe most of this will be apparent in the second half of this year, but we still anticipate opportunities as we advance with our backlog entering next year. The term fully relates to our capacity to execute or recognize these changes this year; we won't fully realize it until we move into next year.

Bill Dezellem, Analyst

No, that's really helpful. And I want to take this line of thinking, one step further. Are you satisfied with the current pricing that you are bidding at today or should we anticipate that there will be additional price increases still to come?

Todd Gleason, CEO

I think asking a CEO or CFO if they are satisfied with pricing and financial results is a bit like asking a child if they want another cookie. Ultimately, we always want more, and we will evaluate our position in the marketplace and our cost structure. We continually assess our costs and supply chain. While there may have been some adjustments in terms of higher costs in the past, certain components and commodities are still fluctuating. Therefore, we’re always working on pricing. However, I feel confident about our current pricing situation. I don’t want to imply that we will introduce a lot of additional price increases across our brands and products. We understand that this has been a tough environment for many consumers and companies, and it will be nice when we are not all discussing inflation.

Bill Dezellem, Analyst

Right. Okay. If I may, I'd like to move to order growth, which I believe was up 33% in the quarter. Where did you see that strength?

Todd Gleason, CEO

Our separation filtration platform performed exceptionally well this quarter, particularly with produced water treatment, water filtration, and natural gas pipeline applications. Last year, among our eight business platforms, only separation filtration did not experience growth, while the other seven saw an increase in their order books. It's encouraging to report a strong first half of the year for this segment. I want to commend David Taylor and the team for their efforts in not just pursuing their traditional markets like midstream pipeline and various defense applications but also in exploring innovative opportunities within the energy transition, including carbon capture solutions. It's a key area to focus on moving forward. Additionally, our industrial air segment has maintained a steady trajectory for over a year, with Chris Tsourides and his outstanding team effectively identifying new opportunities across diverse end markets. While I could mention more, these two platforms stand out for their exceptional performance relative to their initial plans for the year.

Bill Dezellem, Analyst

Great. That's helpful. And thank you for taking all the questions.

Todd Gleason, CEO

Yes. Thank you, Bill. Operator, I don't know if we have any more questions, but let me know.

Operator, Operator

No sir. This does conclude the question-and-answer session. So I would like to turn the conference back over to Todd Gleason for any closing comments.

Todd Gleason, CEO

Great. Thank you, again. Thanks for everyone's interest today and participation not only in listening to our prepared remarks, but diving in and asking some great questions. We look forward to speaking with many of you not only today as we go through some of our scheduled or upcoming just sort of ad hoc investor calls and other calls. But hopefully, seeing many of you this week at the Jefferies Industrials Conference and this month at the Three-Part Advisors IDEAS Conference. And so with that, I would just once again thank team CECO for delivering these results and thank our leadership team and everyone for the focus that we have on continuing to execute and being accountable for our performance. And so with that, we'll end today's call and look forward to speaking and meeting with you all soon.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.