CECO Environmental Corp (CECO) 2020 Q4 法說會逐字稿

Good morning, and welcome to the CECO Environmental Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Eckl, Chief Financial Officer of CECO Environmental. Please go ahead.

Thank you for joining us on the CECO Environmental Fourth quarter 2020 Conference Call. On the call today is Todd Gleason, Chief Executive Officer; and myself, Matt Eckl, Chief Financial Officer.

Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website.

I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings on Form 10-K for the year ended December 31, 2020.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.

And with that, I'll turn the call over to Todd.

Thanks, Matt. Throughout much of 2020, we started our earnings calls by thanking our dedicated employees, their families and our great customers and operating partners. It has been a challenging time as the entire world has been forced to navigate the global pandemic and adjust how we work and interact. We are very pleased with how team CECO has come together to embrace new technologies, processes and adhere to rigorous COVID policies to ensure health and safety. So once again, thank you for all you do to ensure we deliver for our customers and drive value for all constituents.

As is highlighted on Slide 3 and in our press release this morning, CECO delivered strong results in the fourth quarter of 2020. Let's quickly review the facts and figures, and later, Matt will provide more color around some of these numbers. Orders were up mid-teen levels, both sequentially and year-over-year as we booked $77 million in the fourth quarter. Getting back on the orders growth trajectory is always a positive, but even more important, as we saw reductions in our backlog. We look to turn the corner on this trend early in 2021, as we believe our orders growth will continue.

Sales were $83 million, which did reduce backlog because it was obviously higher than new orders. The fourth quarter sales results were down 7% versus 2019, but they were up sequentially 7% over Q3 2020. Our project teams continue to execute very well despite the challenges of COVID restrictions. Gross margins came in at 31.6%, which is a little higher than we originally expected because of the mix of projects that drove our fourth quarter sales growth. Gross margin rates have been steady throughout 2020, but year-over-year, we are down almost 200 basis points. A year ago, we had very attractive margin rates in our backlog because of some large high-margin projects, and those jobs have been fully executed. Unfortunately, replacing those higher-margin projects with new orders was stifled in early to mid 2020 because of the COVID-related market softness. As we enter 2021, we expect to see more higher-margin project opportunities.

Adjusted EBITDA of almost $10 million, produced margins of 12%. This was up approximately 70 basis points year-over-year. So pause on that for just a second. Gross margins were down 200 basis points versus Q4 2019, but EBITDA margins were up, which means we have reduced SG&A as a percent of sales by approximately 270 basis points on a period comparison basis. Now not every quarter will show that level of year-over-year margin expansion, but it does demonstrate the amount of cost we have reduced to better position CECO for strong margin conversion going forward. A lot of great work has gone into our productivity, thanks to the team for their focused efforts.

Non-GAAP earnings per share were down year-over-year, as certain tax benefits in Q4 2019 did not repeat in Q4 2020. EPS of $0.16 was up significantly quarter-over-quarter, which shows a steady improvement in our income from sales. On the bottom half of Slide 3, we provide some commentary around how we continue to position CECO for sustainable performance. We have reduced costs in various functions and specific areas, but we have maintained key growth resources to take advantage of improving markets. We are seeing stronger bid proposals and engineering work in the majority of our end markets. So we expect continued growth in orders. As I just articulated, CECO's cost structure is more efficient. As volumes come back, we expect to reach new heights with respect to EBITDA margin rate levels.

Since my arrival in the second half of 2020, we have been evaluating our best growth strategies. We will be articulating our longer-term strategic focus in the coming quarters, but we continue to make very good progress with our shorter-term investments in new technologies and service to enable growth. Lastly, as we announced a few months ago, we have commissioned an internal group to pull together our first sustainability report. We are proud of the work we do to serve our customers and communities to provide advanced environmental solutions. So that will be a great story to tell. And we also have a very good internal risk management framework, including environmentally sustainable operations, high social standards and strong governance controls and policies that we look forward to more fully disclosing.

Let's turn to Slide #4. This is one of our regular earnings slides. On the left side of the slide, we highlight end markets that are predominantly related to certain energy markets. And on the right side, we provide detail on our broad and diversified industrial markets. Let's review the details.

Walking down the left side of the slide, you can see we had $9 million in order bookings associated with projects in oil and gas refining space. While this level would typically be lower than average, the $9 million is up well over 100%, both year-over-year and sequentially versus Q3 2020. We expect continued orders growth in this area as we have seen a very depressed refining environment for over a year. We are now seeing more CapEx dollars allocated to maintenance operations.

Moving on, midstream of $16 million is up double digits year-over-year, but we expect this market to remain somewhat choppy over the coming periods. Next, power generation natural gas is steadily improving. We have a very good and active pipeline of opportunities, and our $18 million of orders is strong double-digit growth versus Q4 of 2019 and represents over 70% growth sequentially. And at the bottom of the left side is power generation solid fuel, which is our smallest market segment. We believe this market has bottomed, and we should start to see orders rebound in 2021.

On the right side of the slide, let's start up top with Industrial Solutions. The $22 million of orders provides nice growth versus 2019 and sequentially. Like much of power generation, we are seeing a very healthy pipeline of engineering and project opportunities. We have seen continued progress in General and Industrial segments for a few quarters, and we expect this to continue, especially with our pipeline visibility, which Matt will highlight more in just a minute.

And in our Industrial fluid handling areas, we booked $9 million of orders in the fourth quarter, which is flat year-over-year, but up 5% sequentially. We expect continued expansion in this area. We have worked very hard to drive improvement in our on-time delivery and continued quality. Our Fybroc, Dean and SEPCO brands are well respected, and we are investing in more growth resources to take advantage of opportunities and add new channel partners. Examples include the recent launch of [Intelliquip], an online Dean Pump configuration tool for both pump sizing and order placement and the addition of new territory sales managers, including some strictly responsible for upgrading our international distribution channel, where we have not seen the results we should otherwise expect with a fantastic brand name like Dean Pumps.

I will now hand it over to Matt and then wrap up with some comments in a bit. Matt?

Thanks, Todd. I'll start with Slide 6 in orders. At $77 million of orders, we are pleased to see all 3 segments grow sequentially and year-over-year. While we are still below our pre-COVID averages, we see markets are improving as power gen and refinery markets start spending on deferred CapEx. Industrial customers seem less concerned by the outcome of the U.S. election and COVID. December was a very strong orders month for CECO, as confidence factors grew amongst our customers.

Doubling down on Todd's comments, our pipeline continues to expand and reached $1.9 billion, a new height in my 4 years plus, mostly driven by our push in new adjacent markets like EV production and industrial wastewater. Energy booked $46 million in Q4, up over 16% versus our trailing 12-month average, which we believe is an inflection point as the economic pressures of COVID subside. $9 million came from our refinery based FCC Cyclones, which were up triple digits both year-over-year and sequentially.

While the $9 million level is not yet back to our historical averages, we are pleased that we had year-over-year improvement in this category because for the full year, we're down 50%. We are growing more confident this will be an area of strong orders growth in 2021. The Industrials and Fluid both posted their second consecutive quarter of orders growth. Industrials was a bit more pronounced at 11% growth sequentially. We're very encouraged by the progress this team is making with wins in electric vehicle manufacturing and food and beverage in the quarter. Fluids grew on par with its peers at 5% sequential and 1% year-over-year. We like the trend coming out of COVID, but we won't be fully satisfied until orders are well above $10 million per quarter.

While we are seeing our distributors start to restock, a positive sign, our end markets, including oil and gas, hospitality and aquaculture are still cautious until mobility and tourism improves. On the right, revenue grew 7% sequentially on energy backlog conversion. Simply put, end users constructing plants in Asia and U.S. have started to gain momentum, while Europe and Middle East jobs are still experiencing COVID delays. I'm pleased with the health and the execution of our backlog.

While covering revenue, we want to take a minute to address a new metric we intend to report on a quarterly basis that we're highlighting as short-cycle sales. These sales are steadier and typically higher margins. They turn from booked order to sale in less than 4 months, sometimes much, much faster. This metric represents the combination of sales via aftermarket, replacement parts, recurring contracts or services and distribution-based short-cycle sales.

In Q4, short-cycle sales were $17 million and $71 million for the full year, that's approximately 23% of our total revenue. As we look at the CECO portfolio today, our product set doesn't necessarily lend itself towards a high percentage of predictable recurring sales because many of our largest sales-related areas come from our customers' CapEx budget. Additionally, CECO's current technology solutions last a very long time and don't typically incorporate a lot of rotating equipment. So there are less replacement parts or service needs. However, we are firm believers that if we start to measure our short-cycle sales, we can steadily improve the dollar level and ultimately the mix of overall CECO sales. This will also be an area of interest as we explore acquisition targets.

As Todd provides his update on strategy, we believe that a higher mix of predictable revenue versus project work will be a core initiative of our capital allocation in the future, and I look forward to updating you on this regularly.

On Slide 7, our backlog sits at $183 million, which is down 3% sequentially and 15% year-over-year. Our book-to-bill ratio was sub-1 again in Q4 as our project execution and revenue generation picked up speed. But as previously mentioned, I'm optimistic about 2021, as I look at our sales funnel, which should produce solid orders in the coming quarters. This is the first time in my tenure that our funnel has eclipsed $1.9 billion, which is up $500 million pre-COVID levels and $200 million over Q2 of 2019, which is the last peak at $1.7 billion. From a qualitative standpoint, all quotes greater than $2 million come across my desk for approval, and I'm happy to say, I haven't been this busy with commercial activity in quite a while.

Moving on to Slide 8 and our key profitability measures. Our gross margins were at 31.6% in the quarter, which is down 40 bps sequentially and 2 points year-over-year, primarily due to project mix. I'm actually pleased with the gross margins this quarter as they came in higher than we originally expected. We continue to see customer delays in our previously mentioned large double-digit middle eastern water separation project. With this [dropping] into Q1 of 2021, gross margins mixed higher in Q4. Non-GAAP operating income was $8.8 million in Q4, growing primarily on volume and SG&A cuts.

Adjusted EBITDA at $10 million, was up 34% sequentially and remarkably flat versus prior year despite lower year-over-year revenue as our proactive cost measures provided benefit. At 12% EBITDA, investors should rightly see that with our more efficient cost structure and some market tailwind, the operating leverage that our business model provides will be very productive. We firmly believe that as our backlog begins to grow and we continue to execute with our more efficient and streamlined cost structure, that we will achieve full year EBITDA margin rates of greater than 13% in the next few years.

Touching on operating expense. Since April, we've a ultra-focus on our costs. Our Q4 SG&A reflects the benefit of these actions that total greater than $10 million of annualized structural savings. These savings included an approximately 20% reduction in our workforce, 3 facility closures, exiting loss businesses and pay freezes. We don't take these actions lightly. These have been aggressive cuts, but we must preserve our best talent and profitability, and we will move stronger as markets turn in our favor in 2021. The fourth quarter did have some likely nonrecurring cost reductions in lower healthcare costs and lower variable incentive pay accruals. While we do expect some reinvestment and inflation heading into 2021, we see a normalized rate of $18 million per quarter with levers and contingencies if markets were to lose momentum.

On Slide 9, we summarize the quarter, a few quick highlights. First, with revenue down 7% and EBITDA down 2% year-over-year, our decremental EBITDA margins were strong at 200 basis points year-over-year. Despite lower volume and gross margins, our proactive operating expense reduction improved EBITDA to 12% margin. Looking at this sequentially, volume growth flowed through EBITDA and incremental margins of 51%, further evidence of our great operating leverage.

Second, GAAP earnings per share was $0.05 in the quarter and down $0.19 year-over-year, driven by a $1.2 million of earnout expense to the EIS acquisition, $900,000 attributed to a noncash write-down of an intangible, and lower favorable benefits from stock compensation and tax credits that reversed in Q4 of each year. On a non-GAAP basis, EPS was at $0.16 and down $0.11 as certain tax items were much lower in the fourth quarter of 2020, and we also had lower volume.

Slide 10 summarizes our full year 2020 performance that I'm very proud of. With orders down 27% year-over-year to $280 million, our backlog remains strong, and we continue to execute well for our customers, generating $316 million of revenue at a solid 33% margin. Despite restructuring, furloughs and plant closures, this team kept executing. That persistent execution led to EBITDA of nearly $33 million and non-GAAP earnings per share of $0.56. That's nearly flat to 2019, despite the significant reduction in orders. All in all, I would say, great job team CECO.

Flipping to Slide 11. The area we underperformed in 2020 was on working capital and free cash flow. Much of this is due to the reduced backlog in our energy business. Our Industrial Solutions and Fluid Handling business performed well, generating $19 million in free cash flow, an improvement of $20 million year-over-year. Unfortunately, working capital and energy soaked up most of this benefit with an increase of $20 million, as our backlog declined. The orientation of our energy projects are typically upfront loaded. As customers place orders, they also pay up ahead of doing the work. With energy orders down 35%, we've received fewer upfront payments, negatively impacting our Project WIP as evidenced on the left chart.

As orders start to come in, we expect Project WIP to cycle back into a favorable position, increasing our working capital and increasing our cash flows. This is a typical cycle we've seen repeat in the past, as we assess our working capital metrics internally, all are performing well. This is purely a function of timing and backlog. We fully anticipate that with growth in 2021, our asset-light business model will generate substantial cash flows.

Briefly, on Slide 12. Our balance sheet is healthy. We paid down $4 million of debt in the quarter to end the year with a balance of $74 million. Our bank defined leverage ratio is relatively flat at 1.9 turns and our net leverage sits at 1, with $60 million of capacity available.

Slide 13 summarizes 2020 in comparison to prior year's performance. As stated previously, despite the significant reduction in orders, the team continued to execute for customers and grow EBITDA profitably, setting a strong base for an imminent market rebound. In hindsight, the structural cost actions, coupled with previous year's estimates to streamline CECO has served us well, setting the stage to scale CECO well above our 13% EBITDA margin expectations.

I'll conclude on Slide 14, wrapping up my take on 2020. A decade from now, as we look back on this period of time, we will be thankful for steady decisions made in an uneasy time. I want to highlight a few people and wins that bolster my outlook on CECO that is extremely optimistic. I want to thank our previous CEO, Dennis Sadlowski, for his unwavering leadership at CECO through 2 major down cycles and seamless transition this year. Thanks to our new CEO, Todd, who I don't envy for having to come up to speed amid a pandemic. But we all appreciate the speed and tact at which he had made tough decisions.

I'd be remiss if I didn't mention our Board for their support as we navigated this tricky 2020. Our HR team, led by Pam Turay, has demonstrated the perfect balance of sincerity and humility for our employees with a bias for swift action. We all thank you for ensuring a safe work environment, navigating work-from-home protocols and flawlessly executing on our restructuring plans.

From an internal investment standpoint, I couldn't be more pleased with the actions taken to continue to advance CECO in 2020. When I joined in 2016, we had many integrated processes and business systems. We have come very far since. In 2020 alone, our IT team led by Teressa Erickson closed 5 legacy ERPs, introduced Microsoft Teams globally to support employee productivity as we work from home and added critical layers of cybersecurity protection systems infrastructure.

CECO is now on 4 ERPs down from 13 legacy and 2 acquisitions. And our U.S. shared service center team, led by Scott Christy, persevered through the challenging year to implement several software tools, including Coupa, that automates peer requisition, expert AI, automates cash collection and invoice pay that eliminates checks and generate rebates for CECO. Its leadership and a commitment to continuous improvement that has allowed CECO to reduce its cost per transaction by 2/3 and financing IT costs by 37% year-over-year, just remarkable.

In 2020, we also integrated 2 strategic transactions, EIS and Mader, executing on synergies, onboarding employees and opening up new markets, first acquisition to be sourced, closed and integrated 100% remotely. We all look forward to the days when we can actually meet those teams in person. Lastly, the call to action on cost. So many of our business unit leaders contributed selflessly to preserve CECO's balance sheet and profitability. Thank you to the amazing employees at CECO that sacrificed so much this year. We are stronger for it and ready for 2021.

With that, I'll turn it to Todd.

Thanks, Matt. And I echo your remarks and appreciate your perspective after you have helped CECO navigate some challenging markets several times over the past 4 years. I have mentioned on both earnings calls since my arrival, how capable and dedicated the CECO team is, and that comes through in your assessment of the continued hard work.

Let's wrap up with the next few set of slides, please turn to #16. The top section points to the 2020 review from an orders and backlog perspective. As we've already mentioned, orders were down 27% for the year. We estimate that COVID-related market impacts drove at least 80% of that decline. And the fact that orders were up in Q4, we think demonstrates that we are well positioned for market recovery. Unfortunately, this order decline for full year 2020 means we enter 2021 with 15% less backlog or project revenue. This will put some pressure on the first 2 quarters, which is why we are stressing that orders growth, cash flow generation and margin conversion are key indicators of how well we are turning the corner as COVID impacts start to subside.

The middle section reiterates a series of strengths we have highlighted before. With approximately 40% of our professional staff being engineers or application specialists, CECO is uniquely positioned as a leader in key environmental and industrial process sectors. We will continue to build off this expertise. We are also extremely asset-light, which means we have a certain amount of flexibility when end markets ebb and flow. Both of these qualities allow us to invest for growth in a focused manner. And we expect to generate strong free cash flow in 2021. So our already healthy balance sheet will be in great shape to have the right pieces of our portfolio.

Toward the bottom of the slide, we highlight that we are committed to delivering financial results that reflect our improved cost structure in recovering markets. There may be a quarter or 2 in early 2021, where revenues are lower from our reduced starting backlog, but we expect to rebuild that backlog throughout the year and deliver.

We are close to finalizing our new enterprise strategy. We will have a strong focus on CECO's leading technology platforms that represent our best position for sustained growth. Within CECO, we have 10 to 12 platforms that span air filtration and quality management, gas and liquid separation and industrial processes and flow. Some are certainly better positioned for organic investment and their markets will continue to provide sustainable growth. We will also focus on adding more short-cycle revenue platforms to CECO over time to add more balance to our portfolio.

A couple of examples of current organic investments would be our water treatment platform where we've recently introduced reverse osmosis, desanding and desalting technology, which rounds out our ability to serve our Middle East customers produced and oily water separation needs. Prior to this year, the scope of work CECO could bid on was limited to separation internals only, not a full customer solution. Another would be our advanced analytical services and training team that we just launched based out of Houston, Texas. This group of experienced service engineers targets our brownfield customers and comes with a Rolodex of new service customers. Their focus is repairing, calibrating and testing analyzers, and continuous emissions monitoring systems, or CEMS, that are installed in the field today. Listening to our customers, we understand CapEx is tight, and we need to keep their current systems operational. We expect the services team to rapidly become a multimillion-dollar business in a short period of time.

So we look forward to sharing our more comprehensive and new enterprise strategy in the near future. This will provide investors with a roadmap for how we will steadily elevate our position as an environmentally focused, diversified industrial.

If you turn to Slide 17, you may remember the slide image on the top left from our Q3 earnings presentation. We wanted to reiterate that as we navigate 2021, which, again, we expect to show solid orders and backlog growth that CECO is much better positioned for strategic investments and higher-margin results. Bottom line, back in 2017, we saw a sudden decline in end markets, but CECO was not yet efficiently organized internally nor did we had a strong balance sheet at that time. Today, we have much more robust systems and processes, and our balance sheet is an enabler, not a detractor. As we see market growth, we will be stronger and more agile.

Please turn to Slide 18. We remain committed to these financial targets, especially as markets recover and become more normalized. Revenue growth of at least 5% is something we believe our leading platforms can deliver. We also believe we are closer to realizing 13% EBITDA margins, especially when we get our backlog back to 2019 levels. So these financial targets are well within reach. Finally, we expect to generate solid free cash flow in 2021, always a key goal of our organization.

Now let's wrap up on Slide 19. It has been a unique 12-plus months. Our focus on delivering for our customers is always important, and we remain committed to doing so while maintaining health and safety. We have been aggressive with cost management and improved our operational efficiencies. As Matt highlighted, this has been a steady focus for CECO, and we are in better position than ever. We saw nice momentum in the fourth quarter in key energy markets, and we expect much of that to continue. And we look forward to articulating more of our key initiatives and strategic priorities. This will help to focus CECO toward a more clear and executable growth program, and our investors can track the progress. We thank you for your support, interest and your time today.

With that, we will open up the line for questions. Operator?

(Operator Instructions) And the first question comes from Jim Ricchiuti with Needham & Company.

Just a question about the short-cycle business and the metric you're providing. And what I was curious about is, is that short-cycle business more weighted toward maintenance-related revenue? Or is it more of the traditional?

Yes. Jim, Todd here. And I'll start and then I'll hand it over to Matt, who's done a lot of work with his team on assembling the data and the information behind it. It does include maintenance and sort of repair. But it also is, I guess, I'll use your words, sort of more of a classic or standard set of businesses as well. Businesses that when we book the potential order, we book the sale, we produce and ship the product relatively quickly. So it does also include some of our product lines and businesses, such as our pumps business, et cetera. So it's a combination of 3 or so things -- 3 or 4 things. It's aftermarket, repair, parts. The small area of our business is where we do have some recurring revenue and then our sort of short-cycle book-to-ship businesses like our Fluid Handling.

Got it. Do you guys view this as something of a leading indicator for the business?

Maybe, yes. I think that's a good way to look at it. So one of the reasons we want to put a spotlight is for the following: number one, I think, historically, we, as an organization, have talked about and maybe almost even sort of consistently, but never really provided any real metrics around things like recurring revenue. We're going to grow our recurring and our services revenue, but we never really put specific numbers to it and then a spotlight on it. And even the same thing somewhat true internally, if you want to say that from a holding ourselves responsible for focusing on improving and driving results in that area. So we're starting now, right?

We wanted to put a real number out there that we expect to talk about, and potentially even provide more color in advance quarter-over-quarter and year-over-year. And I -- it is an indicator for sure of, I would say, sort of the general industry, so to speak, especially in our industrial businesses, where we do have a little bit more of our short-cycle space.

Jim, I would just add 1 thing. The majority of our business is CapEx spend, and we really want to drive maintenance spend with our customers. So pumps, filters, duct work, services with the customer, repairs, all higher-margin business that are deemed as short cycle. So that's what's all-inclusive in that.

And last comment, not to continue to pile on to the answer. But we highlighted a new services team offering that we're launching this year, and we're excited about that. I think our ability to not only show the metric and talk about how we're driving those results, but then really add very specific -- even if they are somewhat small, initiatives that we're doing within our businesses, I think it provides more clarity to our investors where we're taking organic investment to start and potentially down the road some other investments to continue to grow, where we do want to find more sustainable revenue profile of our organization.

Got it. That makes sense. And just a question on the backlog. I mean I'm curious if you could give any perspective in terms of the margin profile of the backlog, just also in light of the comment you made about the fact that you'll be building backlog, but there's going to be some pressure, it sounds like, in the first couple of quarters of the year.

Yes. As we look at backlog margins right now, Jim, they're reflective of our Q4 margin rates, maybe a little bit pressured. Just because in the last 2 or 3 quarters, as some of the bookings on the energy side have come in, we've seen some pricing pressure there. But for the most part, we're executing through cost measures and executing for our customers to increase those margins as we deliver them.

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

With respect to this analytics services business as a part of maybe your recurring revenue efforts, is this product ready to grow? Or does it need some more development?

Not a product, it's a services team. It's an expansion to really a lot of other relationships we already have with existing brownfield customers. So these are existing facilities that -- in the -- predominantly in the energy space. We're starting with a regional focus. We believe that the focus area that we're hiring and that we're leveraging our relationships as well as the service technicians, if you want to call it that, for the specific space. And we predicted -- we specifically called out continuous emission monitoring. That's a pretty broad category, but a very important category.

There's a lot of data analytics, a lot of part components to it as well. So it's not a product offering as much as it's a technical service offering. And we're ready to go, and we're just going to be building out that team as we continue to prove out the momentum.

I mean we already have the test equipment, the trucks and the men.

Understood. And then roughly, do we have an estimate of how big this opportunity is within the existing customer base?

Well, it's a fairly large opportunity and other companies that are in this space have shown the propensity to be able to grow relatively steadily. Obviously, we're starting here. So in the year, it's a relatively small number. We believe, though, that this could easily be, in the next few years, a solid double-digit millions of dollars of revenue as we continue to invest and grow.

Maybe last one for me. As the economy comes back, maybe a backlog starts building up again, do you expect some of the costs you took out of the business to come back in again based on the growth needs going forward?

So in 2021, we'll absolutely see some increases just because of variable pay health care costs. You can't take Q4 and just annualize that out. But I think I had coordinated on the call in my remarks that we think it's around $18 million per quarter, which is well below the $21 million to $22 million per quarter we had previously. No, we don't expect to have to increase our cost structure. Our aim is that 13% or greater EBITDA margins, we need to get that growth. We're tracking utilizations of all our application engineers. And our project management team. And we'll increase as the backlog grows, but we're going to maintain our margin rates in that sense. So I don't see it having to grow too much and make a kind of investment, Amit.

And the next question comes from Bill Dezellem with Tieton Capital.

A couple of questions. First of all, you'd mentioned that you have the highest pipeline that you have had in several years. Is that due to the market expanding? Or is that really CECO-specific initiatives that's leading to that?

Yes. This is Todd. And then I'll hand it over to Matt, who again, he and his team have done a tremendous amount of work with our businesses on analyzing the historical perspective as well as how we model out this pipeline and we're getting better at it every day. It's our largest pipeline. And so I mean, I think it's indicative of a couple of things. Number one, we're -- we feel that we continue to maintain our performance and our position in markets, and that's attributable to how we continue to invest in those markets internationally. So we're expanding into adjacent markets consistently that provides more market scope for us, I think, to add into the backlog -- or excuse me, into the pipeline, number one.

Number two, we saw a fair amount of deferrals in opportunities over the last, especially, 12 to 18 months, some of which economically related -- associated with COVID. So if you think about where our historic backlog -- or excuse me, pipeline had been at its previous peak of, call it, $1.7 billion, I might say at least half of the new record, getting from $1.7 billion to $1.9 billion is that natural increase associated with higher levels of deferment from the previous periods. COVID being a unique environment. I don't know that we were tracking this level of pipeline because we didn't own all these businesses 10-plus years ago when the financial crisis hit. And then the other is our expansion into adjacent markets and our investment into being a leader.

Matt's nodding that I hit the answer. So we're good with that.

Okay. Then how do you see or believe that the Biden administration's approach to all things environmental enhances your air and the water business. Just can you talk through that either headwind or tailwind that you believe this administration is setting up?

Yes. We're learning, obviously, pretty quickly here what some opportunities could look like. We think we're interested, obviously, in areas of environmental and water, as you mentioned, Bill. So certainly keen to learn more what our customers are asked to do and want to do in this space. I think infrastructure investment is going to be -- could be interesting for the economy and for industrial companies like ours, where we're positioned. Look, we really like, across most of our end markets, the feel of confidence, like we said, the large pipeline of opportunity.

We think that as much as anything, internationally, domestically, the confidence of businesses that we're moving past the pandemic constraints, potentially coupled with some new investments coming in, in infrastructure and in environmental regulation, those could be positives. And again, I think our pipeline shows that we have some unique opportunities.

And then lastly, what additional insights would you like to share about your refinery customers, either their behaviors or signals and their turnaround plans? And just how you would characterize them today versus what would be normal if we had not gone through the COVID-related oil price downturn?

We do a lot of feed studies for all the independent refiners and some of the big integrators all over the globe. And I will say that the feeds are driving more leads and our pipeline higher, I would say, internationally, is where we're seeing the majority of it. India is a market that, right now, HPCL is -- and I think it's IOCL, I forgot the other one, that are both moving forward with some large projects. In the U.S., if you read what the independents are printing, CapEx budgets are down 30% to 40% year-over-year, as they continue to cut because of mobility data, transportation, COVID still is a pressure on them.

But what we are seeing is in those CapEx budgets, Bill, there's a shift from new plants and this conversion from renewable diesel over to maintenance. So all the CapEx that they deferred last year is starting to come back. As we said, multiple times over, look, our business, you can't defer it forever, the equipment will break down. So we believe that those leading indicators are all positive for us. Obviously, if you watch what's happening with crack spreads from April till today, they continue to rise. They're in the band of the last 5-year average, which is good. Outside of that means they're making no money whatsoever. They're making cash to reinvesting back into the business. So several leading indicators for us that refinery is headed back up. And we're excited about that, obviously.

Matt, taking your comment one step further. Are you sensing that you, at least in 2021, will have a larger share of the CapEx budget?

We believe that there will be a larger share of the CapEx budget for all refineries. We don't comment on the share of our wins of those orders that are placed.

Yes. But Bill, we've talked, I think, before -- and certainly we tried to explain that last year 2020, obviously, the balloon of CapEx, if you want to say, got smaller. And we feel that the -- just to play out that example, the air in the balloon, so to speak, was pushed more to one side of the CapEx maintenance that maybe didn't -- that we didn't benefit from. And this year, that air in the balloon may have gotten larger, but even if it didn't, and we believe it is, but even if didn't, so to speak, that air is being pushed over to our side of the maintenance CapEx arena for 2021, and we already feel like we're seeing that sort of that opportunity set.

And the next question comes from Tate Sullivan with Maxim Group.

You mentioned a couple of times electric vehicle production during your comments. I mean, where are you in the sales process with this opportunity? Are you already doing projects? And is it a global opportunity or U.S. right now? Please, if you can provide that?

Yes. I'll sort of start by maybe saying, yes, all of the above. I mean, we're actively bidding on new opportunities. It's a growing space. There's expansion in this space internationally, domestically. We've won some projects recently in domestic areas. We're very close, we think, to some attractive projects internationally as well. So I think this is an area that we look forward to highlighting as we sort of continue to move along. And then look, for our space as well, like a lot of industrial providers of solutions, we look at not only new builds, but we look at conversions in automotive and other industries' plant conversions, right? So as those plants start to really now convert from one class of vehicle to an EV manufacturing space, they really have a fairly large CapEx build-out and we're benefiting from that as well.

Can you -- as a follow-up, can you give an example what type of equipment do you provide to the EV industrial customers? I mean, I imagine it's not NOx emissions, is it? Does it have an environment angle? Or can you provide an example?

VOCs, dust collectors, so think of RTOs and think of dust collectors is two really good examples there, where we're cleaning the air, and at the same time, obviously, eliminating the fall of the organic compounds that are generated in those environments.

Great. And a separate one for me. I saw in your K, the percent of revenue from outside the U.S. is 35% in 2020. I mean, should people going forward associate you as a growing international company? Do you -- you mentioned some Middle East opportunities as well. Or can you just frame that discussion, please?

Yes, ebbs and flows. I think if you were to go back 2 years ago, it was close to 50-50. Our energy business drives a lot of that year in, year out of international. So if you have a bunch of refinery or power gen orders that happen to be in Europe at the time, then the sales go up. For example, as one of our largest customers are GE and Siemens and depending upon where that power plant is around the globe, that's where we'll have handed destination sales force. So it ebbs and flows with our energy business. So no reflection of the future. We do believe, though, that international is strong right now.

(Operator Instructions) And the next question is a follow-up from Jim Ricchiuti with Needham & Company.

Just as it relates to the last question, I know the business ebbs and flows between domestic and international. But is there any additional color as to where you're seeing some recovery in markets? Is it -- are you -- have you noticed more of a recovery, more strengthening, for instance, in the U.S. market in Q4? Or is it still tougher to tell because it depends on various projects that you're targeting?

So in Q4, I would say, in the energy sector, we did see India increase. We saw China increase as well. In our industrial sector, I'd say North America is the strongest. We are seeing opportunities across Europe. We've recently added an international sales manager over there to continue to grow our industrial and fluid handling capabilities. And so that's opened some of the pipeline, Jim. But in energy, North America, as Todd used in the remarks, kind of choppy right now.

Yes. Got it. And again, I know the market is still fairly unsettled as we're in this gradual recovery. But I'm wondering how you're looking at inorganic growth opportunities. How active is the -- are the activities right now? Is the pipeline building? Are you looking actively? Or is it still something that you're being a little bit more cautious on in this current environment?

Yes. I think we're certainly building, we think, a very focused funnel for analysis. There are certainly opportunities out there that are, as we advance our strategy and our strategic thinking, both organically as well as how we think about our portfolio going forward, we want to make sure that we have the appropriate funnel of opportunities that really match up well with where we think the markets are going, where we think we have a best opportunity to expand leadership positions and especially continue to balance out, like I said, sort of our business or revenue profile to more repeatable, sustainable sort of short-cycle businesses.

So look, I would say, Jim, we're not transacting anything right now, right? We're very focused on our strategy, on our organic opportunities. But yes, we're building a funnel, and we're starting to feel really good about our strategic plans coming together so that when we're ready to execute. It's very clear internally and externally, what we're focusing on and why we're doing it.

And this concludes our question-and-answer session. I would like to turn the conference back over to Todd Gleason for any closing remarks.

Yes. Thank you. Well, look, I appreciate your time and interest today. Let me double down on comments that we made, thanking team CECO, all of our customers and partners. We navigated a very challenging year. Proud of our results. But more importantly, I'm really proud of the commitment that our employees and everyone that's associated with our organization showed as we -- there was no playbook 12 months ago when we embarked on the tough decisions and the challenges that we all faced. And so we appreciate all those efforts. We hope everyone continues to stay focused, healthy and safe. We look forward to speaking with everybody soon.

And with that, we'll say, enjoy the day. We'll talk to you soon.

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