CECO Environmental Corp (CECO) 2021 Q3 法說會逐字稿

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

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

Thank you for joining us on the CECO Environmental Third Quarter 2021 Conference Call. On the call today 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, which is on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website.

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

Thanks, Matt, and good morning. We're going to start with Slide #3. Before Matt and I dive into the numbers, I would like to reiterate a few key points we provided in this morning's earnings release. As my quote highlighted in the release, CECO has a bit of a tale of two CECOs, we are at a juxtaposition of sorts. On the one hand, we have CECO orders growth up 39% in the quarter and up 33% year-to-date. However, given the long cycle nature of our businesses, orders don't turn into revenue for several quarters on average, and sometimes even longer. So despite great and real growth year-to-date on bookings, our income statement has been waiting for that growth to show up in revenue and income. It will come.

We highlight forward-looking outlook today, and we expect Q4 and 2022 to show higher revenue and income. On the flip side, our revenue has been mostly flat throughout 2021 because orders had been down in 2020, which lowered our beginning of year 2021 backlog. So despite great orders growth this year, as I just mentioned, our Q3 revenue was essentially flat, and our third quarter revenue was mostly derived from orders booked last year, which had a lower margin profile because of the very competitive market conditions in 2020.

As we have mentioned numerous times, we suggested various quarters in 2021 would be sort of, "our Rio COVID," period. So while backlog protected some of our results last year in 2020, we have been working through the lower backlog and margin profile throughout this year, 2021.

Unfortunately, other challenges hit our third quarter performance with unprecedented costs and project timing issues because of disruptions in global supply chains, logistics, inflation, customer delays and labor shortages. All in all, a somewhat perfect storm hit CECO very early in the quarter. July was perhaps the worst month financially in over a decade. We started to recover somewhat in August and made solid progress in September, but not enough to close the gaps on operating margins.

We expect fourth quarter in 2022 to demonstrate higher revenue and income results. We have maintained our focus and investments on driving for growth and also to enable strategic transformation. We will discuss some of those items, including the addition of a new board member and the successful stock buyback program during the balance of our prepared remarks. So the key takeaway from our release, and we hope from today is that we have the backlog and orders momentum to start to sustain real top line growth, and we expect much better margins going forward, which we will revisit in just a few minutes.

So now looking at the details on Slide 4, you can see the numbers reflect the narrative I just outlined. Q3 orders up 39% year-over-year, very balanced across many of our platforms. Our sales funnel remains above $2 billion, so we continue to expect strong orders in the coming quarters, too. Sales were $80 million, up a modest 3% year-over-year. We estimate sales were limited by approximately $10 million in the third quarter because of lingering effects of COVID restrictions, customer delays and supply chain issues that impacted most of our end markets.

Third quarter gross margins, EBITDA and EPS were all well below our historic levels and operational expectations. We typically average gross margins between 32% and 34%. So our third quarter gross margins of 28.4% are really not acceptable. We have actions in place to build margins back up. Our SG&A costs were essentially flat sequentially, so it was our lower gross margins that were the main driver in our lower EBITDA and EPS. And those margins did improve each month throughout the third quarter, so we have started to execute better already.

Matt will provide additional color around the major cost impacts, but we just weren't able to pass along cost inflation fast enough or get certain customer change orders through the process in time to offset the costs that burdened our third quarter. Additionally, we would acknowledge that our execution was not optimal. We hold ourselves accountable for performing at a higher level around project management, which could have added at least another point or 2 of EBITDA margins in the quarter.

Certainly, there were short-term issues that many companies are dealing with. But we have turned the dials up on our execution, so we will be driving higher results. The last figure on the slide is free cash flow, which came in around $6 million. This was basically flat with last year's third quarter. Matt will cover more on cash in just a few minutes.

Now please turn to Slide #5. We provided a similar slide last quarter. Sequels orders have grown 33% year-to-date, which has helped to rebuild our backlog, which stands at approximately $219 million. So while we are navigating some short-term execution and cost challenges, we are in great position for the fourth quarter and full year 2022 growth.

And if you turn to Slide 6, you will see that our year-to-date orders growth has been balanced across our portfolio. Industrial Air orders are up almost 80% year-to-date, as we continue to do very well in aluminum beverage can facilities, engineered wood manufacturing, electric vehicle manufacturing and other end markets. We expect the demand in Industrial Air will remain positive.

Year-to-date, our deck fabrication and installation business has experienced 28% orders growth, thanks to good business in the construction industry. And in our Fluid Handling business, which is comprised of pump and filtration solutions, our 17% year-to-date orders has been bolstered by strong automotive markets and we still believe there is growth ahead of us as desalination in oil and gas sectors start to really improve.

We are also advancing distribution and expect to invest more in this business for growth as it is our largest short-cycle revenue mix business. Our Emissions Management platform has the largest orders growth year-to-date, up 118%. The power generation market is starting to return to 2019 levels, at least from a gigawatt perspective, so we anticipate continued growth here. Our separation and filtration platform is the loan business with declining orders year-to-date. However, the midstream oil and gas market and the produced water markets are starting to show signs of improvement, and we believe this business is set to grow in 2022 with orders as our pipeline improves.

In our Thermal Acoustics platform, orders have been up 25% as the power generation business continues to steadily come back. And finally, our Fluid Bed Cyclones business is beginning to climb out of a very deep downturn in refining. Orders are up 61% year-to-date, and we expect strong orders in the coming quarters, too.

I will now turn it over to Matt and then wrap up later with some additional comments on our outlook and a summary. Matt?

Thanks, Todd. Let's start with Slide 8 and orders on the left side. We are pleased with the year-over-year and sequential growth we posted with $93 million of orders. Sequentially, the growth was led by our Engineered Systems segment. Most positively, we were awarded several jobs for our technical expertise, including an upgrade of SCR emissions equipment for a combined cycle power plant in Texas that required 96% NOx reduction. An acoustical equipment project in Germany and our market-leading FCC cyclone technology won a large refinery expansion award in Bangalore, India.

As Todd just highlighted, Industrial Air continues to book strong order growth as automotive, electric vehicle and general industrial markets continue to seek our leading air pollution control solutions. Fluid Handling, although down 13% sequentially, grew year-over-year as MRO spend in the U.S. markets continue to rebound from the troughs associated with budget cuts during COVID.

As we look towards Q4, our orders expectations remain strong in the $85 million to $100 million range with a handful of very large awards that will determine the exact outcome. Our sales pipeline remains at or near record highs, well above the $2 billion level. We continue to make investments in sales and marketing as opportunities continue to provide market growth in orders, bookings and pipeline pursuits.

We are starting to reinvest in trade shows, adding sales reps, investing in search engine optimization and other growth drivers to help sustain momentum. Looking to the right side, Q3 revenue was flat year-over-year and sequentially. As Todd mentioned, we believe we were negatively impacted by certain customer delays and supply chain factors that limited sales. Sequential growth in Industrial Air was offset by supply chain challenges experienced in our Fluid Handling business. The biggest impediment to growth, however, was in our Engineered Systems segment, where we encountered delays across several platforms in Q3. We believe around $10 million of revenue slipped out of Q3 into Q4 and early 2022, a continued negative from the COVID environment.

To give specific examples, we saw customers slowing progress on their site installation impacting our schedule, forcing CECO to delay our fabrication partners. We had customers prolonging technical drawing sign-off, which pushed out material purchases, a major contributor to our revenue recognition. And lastly, we were stalled on inbound materials receipt like steel and resin. That didn't allow our plants or vendor partners to deliver on schedule.

It's for these reasons that volume was below our expectations and certain cost overruns impacted margins. As we look into Q4, we expect to achieve at least double-digit growth in Q4 versus Q3. And as Todd highlighted previously, we expect meaningful growth for the full year 2022. The issues associated with our supply chain remain choppy, but less so each week and month. So we are getting much of that behind us and price through as quickly as possible. We'll talk a little bit more about 2022 in more detail shortly.

Briefly, on our short-cycle metric, we reported $19.5 million in revenue, up 10% year-over-year and 11% sequentially. We saw a nice increase in demand for dust collectors and industrials and our peerless coalescence filters in the quarter. The operating team continues to be focused on driving growth in short-cycle sales. As we know the margin profile in business mix is well above the CECO average.

A few months back, we highlighted our start-up Advanced Analytical Services & Training team, AAST, that is focused on continuous emissions and monitoring services. We have been building good sales momentum, especially in the Gulf Coast region. You can check them out at cecoenviro.com/aast, which showcases some updates to their expanded service offerings. I also want to highlight a recent win for our customers by our Emissions Management platform. Last quarter, our customer had an emergency need for NOx compliance. Our team retrofitted an SCR system onto a mobile trailer and leased it to the customer in need of a low NOx burner solution. The team euphemistically refers to this as the green machine. I like the name because of what it does for the environment, but also the margins.

We are evaluating whether there is an ample customer demand to facilitate a small rental fleet but regardless, is a great example of ingenuity to solve our customers' emissions challenges. Short cycle remains approximately 1/4 of our total sales. This is a focal point of our M&A capital allocation strategy moving forward. Higher margins and more recurring revenue and cash flows are the focus of CECO's transformational story.

On to Slide 9. Our backlog is at $219 million, growing for a third straight quarter. Our book-to-bill ratio remains positive on a TTM basis and at 1.2x year-to-date. Looking back, the last time we achieved these levels of backlog was Q2 to Q3 of '19, which were record quarters for CECO. In addition, our 12-month pipeline remained above $2 billion and growing. As a long-cycle business, we are excited for 2022 and the outlook we see in terms of demand.

On Slide 10, our profitability measures underperformed in the quarter. Gross margins of 28.4% were well below our historical averages of 32% to 34%, and were impacted by several challenges in the quarter. Compared to the same quarter last year and Q2 of '21, our margins were down approximately 360 bps on a host of items that Todd has mentioned, and I will also address.

Approximately 1/3 of the sequential decline in margins was the impact of more revenue attributed to jobs booked and priced in late 2020, when slow market activity drove project bid pricing low. This competitive pricing environment really impacted several platforms, including Industrial Air, Emissions Management and acoustics. As these jobs progressed in Q3 and pre-COVID jobs with richer margins started falling off has placed increased pressure on our consolidated margins.

The next 1/3 of our sequential decline was tied to inflation, both labor and materials. While we expeditiously work to reduce quote validity for customers on steel pricing and/or pass inflation on to our customers, in several projects, change orders were met with resistance and delays. Or even a few projects where we couldn't pass on the rapid increases per the negotiated terms. We've been working to address our biggest project impacts first and working down the list to mitigate this risk in Q4 and 2022.

The remaining 1/3 of the margin decline is specific to supply chain challenges and our own execution. In a handful of projects, the stop and start of projects by our customers caused delays. The availability of materials to deliver to the vendors was stranded at port or on-site installation due to site preparedness and cost overruns. I know our operating team has significant experience and has executed in many market environments, but this was unprecedented times.

We continue to deliver for our customers and rest assured, we are correcting the root cause items that were amplified by this unique period, and we expect margins to improve sequentially.

As for non-GAAP operating income and adjusted EBITDA, both felt the effects of margin deterioration that could not be offset by volume despite such a large backlog. On a year-over-year basis, EBITDA was down $3.8 million and $3 million sequentially. SG&A contributed slightly to declines, but increases are attributable mostly to growth in our backlog and funnel. Year-over-year increases are related to prior year furloughs, wage cuts and other cost reduction measures affected during COVID.

Sequential increases are modest in related travel, marketing spend, investments to grow our new AAST services business and bank bonds attributable to new orders booked in 2021, all of which are associated with growth.

As stated, we are disappointed in the underperformance in Q3, but remain vigilant in our cost structure and committed to modest investment in growth. We believe EBITDA margins will continue to expand as volumes recover.

Slide 11 summarizes the quarter in total. A few quick highlights. First, 39% year-over-year orders growth is going to propel CECO into 2022 with a strong backlog to execute. Revenue is muted as Industrial Air and Fluid Handling largely offset one another, while Engineered Systems backlog grew much slower than expected. We believe $10 million of revenue delayed into Q4 and 2022.

Second, GAAP OI was down $1.6 million year-over-year, primarily on lower gross margins, offset by the nonrepeat of certain SG&A cost measures and restructuring expenses incurred in the prior year. Third, non-GAAP EPS was $0.01 in the quarter, down $0.10 year-over-year and $0.08 sequentially, driven primarily by lower-than-expected sales and gross margins, not offsetting SG&A increases in the quarter.

Turning to Slide 12. Trade working capital remains at elevated levels of $50 million plus in Q3. We estimate we have approximately $20 million tied up in project working capital that will turn to cash in the next few quarters as volume increases and milestones progress. In the meantime, free cash flow remains choppy, but did produce a positive $6 million source of cash in the quarter.

Project milestones that were slow last quarter progressed this quarter, creating a favorable Q3 result. As always, I reiterate, we see no risk to our collections of our AR. It's strictly the lumpiness of our project-based business model. We intend to improve upon Q3 success in Q4 with an emphasis on progress milestone collections.

Finally, on Slide 13, our balance sheet remains in great shape. We paid down $3 million of debt in the quarter to $67 million. Our bank-defined leverage ratio sits at 2.2, and our net leverage sits at 1.2x with $45 million of capacity available. We're now in the third year of our credit facility, and we are revisiting our agreement with our great banking partners. The opportunity exists to take advantage of favorable credit market increase our capacity to execute on our M&A strategy. I look forward to updating you on our progress in Q4.

Lastly, I'd like to highlight the share buyback we executed since last earnings call. In the third quarter, we bought back approximately $3.7 million worth of stock, and over the past month or so, we completed our share repurchase authorization. Since early August, CECO has bought back and retired approximately 700,000 shares at an average price of $7.15, meeting our commitment target of $5 million. This buyback effectively offsets 5 years of dilution associated with stock compensation and align CECO with our shareholders.

With that, I'll turn it back over to Todd. Todd?

Thanks, Matt. Please turn to Slide #15. We haven't historically given guidance or details around quarterly or annual financial outlook. However, given the lower than normal gross margin and EBITDA results in the third quarter, we thought it would be helpful to highlight why this past quarter is more of an anomaly than a future trend.

On the left side of this slide, we reiterate the average of our 2021 quarterly bookings, which has been approximately $90 million a quarter, up 33% or up $70 million in real dollars. As we have repeatedly stated, given the long cycle nature of our projects, it takes a few quarters for bookings to turn to revenue. As a result, year-to-date average quarterly revenue has been only $75 million. So bookings are way up in the year, but revenue has been mostly flat year-over-year as we entered 2021 with depressed backlog, and we are still working off those lower volumes from last year's bookings.

Moving to the middle of the slide, you can see our backlog has grown from $183 million as we entered Q1 of 2021 to $219 million as we now enter the fourth quarter. That is up 20%, a really good sign for future growth. So how do we think about translating that to the next 4 quarters or so? The right side of the slide is a very simple approach to model out how we expect our backlog and performance to unfold over an annualized basis, so to speak.

Since we are averaging $90 million of quarters, that will be reflected in future sales, roughly speaking. So $90 million times 4 quarters would drive approximately $350 million to $370 million in sales. There are always some puts and takes with projects and short-cycle orders. But generally speaking, this is the range. Moving down the slide to discuss how this would turn into profits, you can see we firmly expect to rebound to our historic gross margins, which are above 30% and likely between 30% and 33%.

Finally, we remain comfortable with quarterly SG&A levels of between $18.5 million and $19.5 million, which would produce approximately 10% EBITDA margins with our current profile. This simple model should help you better understand the growth we expect to deliver on the top line and subsequently, the bottom line.

Could there be more upside? Of course. We are certainly pursuing more growth, investing in more growth resources and markets, working hard to increase prices to deliver even higher margins and evaluating costs, which may be decreased where appropriate. We can't predict all levels of inflation or project mix, so these are activities that help offset future cost pressures or potentially deliver meaningful upside. We hope this slide and this simple model gives you a helpful way to think about CECO as we enter Q4 and head into 2022.

Let's wrap up with Slide #16. I will be brief. Great orders year-to-date will generate great sales as we go forward, and our sales funnel remains at or near record levels, over $2 billion. We are not pleased with our third quarter margin rates, and we understand what we need to do to improve our execution regardless of market disruptions. We said we would complete the $5 million share buyback before the end of the year, and we have done so.

We look forward to transforming our portfolio with programmatic M&A activity, and we have a good funnel associated with that. And finally, while not on this slide, but in our release this morning, I would like to welcome Richard Wallman to our Board of Directors. Richard has vast experience as an executive for leading companies throughout his career, which culminated in his role as Chief Financial Officer for AlliedSignal and Honeywell. Richard has been a long-standing member of several companies' boards that have transformed their portfolio in very meaningful ways, including Roper Technologies. We look forward to his participation on our Board.

And with that, Matt and I will be very happy to answer any questions you have. Operator?

(Operator Instructions) First question comes from Jim Ricchiuti, Needham & Company.

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

Yes. Jim, this is Todd, and then I'll see if Matt wants to add to this. So we obviously have visibility to our backlog in terms of booked margins and then how we're executing against that booked margin. As we entered the third quarter, we knew that margins were going to be lower than they've sort of historically been, which is in the low 30% range, 31% to 34%. We knew they were going to be slightly lower than that. And then obviously, we had some execution issues associated with a whole list of items that we don't need to revisit here from supply chain to inflation, et cetera. And that's really what impacted us. Our ability to get change orders in the third quarter to push additional prices through or surcharges through, just -- we weren't able to do that fast enough for 2 reasons.

One, the ability to do it fast enough as we were seeing things is just sometimes hard to do in any business model. You have to get customers, obviously, distributors, et cetera, to accept things. Your supply chain has to accept your own price pressures back down through the channel. So just the speed at which we were able to get price in the third quarter, we were behind. Let's just say that. And then the other component, which is a little probably a bit more a CECO, again, business model sort of situation is that because we're long cycle, even if we do get price, we then have to wait for that percent of complete on our project to go through the process. So we may have gotten price in the third quarter, and we did. But we now have to wait for a few quarters for that good pricing to show up.

So we got kind of caught in the third quarter a little bit more than we probably historically have, with all the noise in the chain, right? The supply chain, the execution of labor costs, et cetera. So I'll just state that we believe starting in the fourth quarter, you start to see gross margins steadily improve.

We saw that throughout the intra quarter, from July through September, and we believe we're going to continue to see that. And then as we're able to reflect the good moves that we've made in pricing heading into next year, especially, we have a lot of confidence in our ability to get back up to the mid- to higher end of our gross margin range that we have historically been at. Matt?

Yes. When we look at our bid margins right now, that's sit in backlog, it's sitting around the lower 30% right now, Jim. And so I agree with Todd, that we'll step back up. There was compounding effects of supply chain lows that occurred in the quarter. That impacted the margins more than just our bid margins, but the bid margins are stepping back up. So I'd say low 30%.

And then some of the more meaningful benefit of some of the pricing actions, is that something we should anticipate more towards second half next year? It sounds like you're going to see...

In the first half of next year, you'll start to see that come back. It depends on price elasticity depending upon each of our platform businesses. Some have a greater correlation to demand than others. I would tell you that businesses like our Industrial Air business, where demand is growing, you're going to have a greater elasticity, so you're going to have a tighter correlation. Therefore, pricing is going to climb faster.

Our short-cycle businesses like pumps, that's a perfect example where demand you're seeing across the market is high, and we're getting priced in those business, instantaneously on showing up on the P&L. It's more of the long-cycle businesses that are impacted by refinery and power gen, where there's still growth, but they're larger singular jobs, and they're highly competitive. So I'm going to tell you that because of the long cycle nature of those businesses, you won't see those until Q1, Q2 of next year.

And Jim, actually, just to add on to that point. And I think maybe another way you were asking the question was could we see a future quarter that has slightly higher than historical average margins, right? Like could we see in a way, a snapback quarter? And look, I think management coming off a quarter where we know we underperformed our historic averages. We'd be reluctant to make a bold statement per se. However, I would acknowledge that potentially, yes, right? I mean, at the end of the day, we are pushing change orders through, for example. So customer A may not have -- we may not have been able to get a change order approved in a particular period, but that same customer is going to approve that change order. If those things show up in a quarter where you're also now starting to see these price actions come through, et cetera, those are not artificial because they're real. But they artificially drive your margin up a little bit higher in one quarter that's not -- by artificial, I mean, it's real, but it's just not sustainable, right?

So could we see a snap back early Q1 or Q2 of 2022? Potentially, right? I would rather say what Matt said, which is we hope to sort of steadily build our back way -- our gross margins back up and then hold them.

Our next question comes from Amit Dayal, H.C. Wainwright.

Appreciate all the visibility and color in the presentation. Todd, you mentioned some execution issues around supply chain, logistical aspects, et cetera, impacting 3Q performance? Were these internal or external issues that you have had to deal with? And are these mostly resolved for 4Q and beyond?

Yes. Thanks, Amit, and we appreciate the comments as well. So it was -- so as you well know and as we've articulated over the last few quarters, we have our -- sort of our platforms are separated into 7 or 8 platforms. It was about half of the platforms are really early in Q3. We're the ones that got quickly sort of behind, if you want to call it that, on their ability to deliver or get prices and change orders through quickly.

Take a look at our duct fabrication business, for example. You can imagine steel costs hit them pretty quickly throughout the later part of Q2, early part of Q3. We had other execution in terms of supply chain, labor shortages, et cetera. All the headlines that you've heard across most industries hit 2 or 3 of our platforms hardest. Our Emissions business and some parts of Industrial Air that deliver to larger projects.

All of those sort of started the quarter a little bit more behind. And then really did a great job of picking up the pace and executing, but not able to quite catch up as you can see in our gross margin results, whether it be price that they weren't able to quite put through in the quarter or change orders approved. But I would say now that we're entering the fourth quarter is where we have fewer issues, if you want to call them that, from an execution perspective. Look, no one wants to have a July or an August sort of kind of started slow and wobbly as we saw in some ways. But it does put the spotlight on it, and we've worked through a lot of those issues now and feel like we're going to have stronger gross margin performance in the fourth. Matt?

Yes. I would tell you that when I think about the platforms that were impacted the most, duct fab, which Todd mentioned to you, which is heavily tied to steel pricing and also it's labor-intensive, where individuals have to go off the site, we're not able to emerge as quickly. Emissions Management, Industrial Air where they operate as outsourced production. So we don't have plans per se.

We got caught in between managing our fabricators who are filled up and managing our customers that have demand requirements and getting projects there on site. I think that we've moved some projects around, and we're starting to see a steady step up. So if I were to look at July, August and September, a steady step-up in gross margins, and we expect that to fall through into Q4. So you'll see a step-up from Q3. But I would say we've largely identified and gone after the root causes of our execution issues, Amit.

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

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

Next question comes from Tate Sullivan of Maxim Group.

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

Yes. We always have minor cancellations, nothing significant. Otherwise, we call it out in the quarter, we always have anywhere from $1 million to $3 million of small projects that come in and out. So that wasn't a big deal. Shuffling the backlog was the issue. The biggest issue was customers were moving fast or slowing down depending upon where they were around the world, and our project managers have to manage through all that, manage the logistics of getting materials out to our subcontractors on time, having our subcontractors slow down or speed up. It's -- if the customer says don't do anything, you have to call your subcontractor and ask them to put things at a halt. And obviously, that could come at a premium because they have to run their own business. We're not fully dedicated to them.

So I would say, if I think about our business model, our business model, when there's consistent growth, gets exponential operating leverage on the bottom line. In a period that we saw in Q3 and the industrial world saw in Q3, where supply chains were challenged at the ports in Long Beach, Miami, Norfolk to trying to get steel into the country, trying to move resin around. It was extreme challenge for us, and so it impacted us.

I think the backlog is extremely strong. We don't feel any weakness in there. We don't see anything in our cash flows that seems weak. We feel very good about our customer set. So it's just going to point to growth in the next quarter and into 2022. So it's a onetime blip, don't love it. But we're pretty confident about our ability to execute the $210-plus million of backlog we have right now.

(Operator Instructions) Our next question comes from Bill Dezellem with Tieton Capital.

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

So 2 things, I think. Well, maybe 3. So logistics cost just went up, right? Obviously, I think would say, most companies have seen just the delivery, whether it be expedited freights that needed to occur because things were stuck in ports and you had access still, to getting components, but you needed to pay for that expedited freight from certain logistical areas.

So any cost or expedition definitely hit us more in the third quarter than it has historically. And then we're bundling some of this because our goal here isn't to call out any customer for sure. But we already articulated that we had $5 million to $10 million of revenue that was just sort of delayed in the third quarter, Bill. And that, some of that was logistics too. And by that, I mean, we may have had our solution, "at the gates, ready to be delivered". But they were waiting for electronics or they were waiting for the cement person to come and pour the foundation for our solution, et cetera. So when we're saying logistics, both from a cost perspective in the quarter, but it also caused us to sit around and wait at times, right? And then how do you call that? Is it customer delays? Yes, maybe, but it's not their fault that they're waiting for other vendors or other suppliers or other installers to come.

Rarely are we just a single solution that we plug into the wall per se, right? We're waiting -- or the customers -- we're a part of a larger project. So if some of their parts of the project got delayed, I would say some of that was logistics that might have been outside of our control.

Yes. One item I just threw out there, Bill, as an example was we actually had to airfreight some material to a customer in order to avoid liquidated damages. We didn't see that in Q2 whatsoever.

Yes.

So that's one specific example. I'll also tell you that we had some profitable job that rolled off in Q2 that didn't exist in Q3. So now your backlog is tied more to jobs that were bid and awarded back in, let's call it, Q4 of last year in the COVID period.

So then we saw the pricing period of Q4 roll into Q3 of this year, which we didn't have in Q2 sequentially. So I would tell you those are 2 examples of things that happened in Q3 that didn't happen in Q2.

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

Yes. So look, Bill, there's no shortage of emissions that occur. Whether it be methane, CO2. Hydrogen, we think, is an interesting one for the future. Natural gas continues to be a bridge fuel, whether it be this winter or many winters in the future. Our ability -- we believe in Industrial Air, we're the leader, or certainly in many categories, of eliminating NOx. And so look, I think we are excited when we look at not only industrial growth that has been coming back and all of our industrial business will remain strong. And I really get to say all, but almost all of our industrial businesses really do continue to remain strong from a double-digit growth perspective.

And look, as companies focus more on ESG, as countries around the world step up and have to put in solutions that they otherwise maybe historically wouldn't have. And we know the countries that are some of the larger polluters, we go from not being as competitive in those countries to being very competitive in those countries because our solutions are proven. And as Western country companies are in those countries and want those proven solutions, we feel good about it.

I think we like our order profile as a result of not only what's just been going on in general industrial, but more demand on environmental absolutely is a benefit to CECO. We're making investments to take a look at how we can impact CO2 and methane. And if you remember methane in Los Angeles about 30 years ago, you could barely see across the street because of the small -- you know what that was driven by? Power plants. Coal and nat gas burning power plant that emitted NOx.

When the Clean Air Act came in, they said, we need to be able to reduce the amount of emissions. We were a part of that solution 30 years ago. CECO did that. And today, NOx is a fragment of what it was 30 years ago. The next thing that they're going to tackle is CO2 and methane. And CECO is preparing to be a part of that solution, Bill.

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

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

And 2 other quick comments. One of the reasons, "we're not there today," is because there hasn't been a commitment from industry to be there, right? So how hard -- it's difficult for us, if you want to say, invest big dollars in certain areas of innovation when you're not sure that the industry is ready for that innovation and they're going to adopt it at a commercial scale. So let's just be clear that we think that as the industries start to adopt it, again, whether because it becomes a cost advantage for them, an ESG advantage or it becomes regulated and mandated. And there's going to be solutions, I'm just going to stick on methane for a second. We're excited about that. Our application engineers can absolutely design solutions for methane. So whether or not we have an innovative product or we just have a proven and in reliable design of a solution, for us, they're interchangeable. Those are ubiquitous for us. Whether we make a product or we engineer, design and install a product, we can do that.

All right. I'm going to stick on this topic one more and then -- pardon me?

Go ahead. Sorry about that.

Okay. So relative to industry, is it your sense that industry is now focused on these 2 items, the methane and CO2? Or are we still at that point where industry is trying to figure out if they're interested?

We believe that industry is interested. There is demand for it. The competitive set is going to be different, Bill. So the folks that we're traditionally up against are not those that are solving for this. Those moms and pops that we go up against traditionally are not after that. This is different type of research in terms of industries. Oil and gas is going to lead in the methane space because they're closest to it, and they're going to be regulated against it. You're going to see people like Exxon that are a part of the energy transition, people like Chart.

And there's going to be a big -- a lot of players out of EMEA. And so we're looking at those individuals who we can acquire, also how we can attack that. And so it's going to be a different competitive set.

Next question, Gerry Sweeney, ROTH Capital.

I get, obviously, a lot of issues in the quarter. They just start cascading down all -- with your customer suppliers, et cetera. But this is a higher level question. A lot of your business, asset-light, I think you outsourced some of the working, specifically on fabricators. A lot of talk about changing supply chain. Does this potentially change some of that strategy because it's an extra layer of management in the evolving supply chain?

Yes. So we would say we doesn't necessarily change our strategy, Gerry. I think it's a good question. I think we would acknowledge that in quarters like we just had, that rapid change -- that we can't control all of, right? If you want to call it that, that we are -- we have fabricators that we've outsourced. It can make -- when costs escalate as rapidly as they have done, unprecedented. I'm not the only CEO to use that word, Unprecedented change in many areas of logistics and manufacturing costs, et cetera, not being able to control our own destiny. Yes, I would say we're a little bit too asset-light at times, right?

And we -- if I could go back in time, maybe we wouldn't have quite pushed out as much historically to fabricators. And we're going to look into areas where we can bring in a few areas within our manufacturing and assembly footprint, but it's not going to change our strategy. I think we feel like this 2 shop has. We like our design across the board for the most part, again, I think that this is an unprecedented time. We don't expect this to continue.

You look back 2005, '04 and '05 and '06. So 15 years ago, I was in it then. Steel, copper, aluminum, they went up dramatically in every industrial company, which I was at one of them. Struggled in that period, too, to pass on prices fast enough. And then they all got good at it. And we've been good at it for 15 years. Again, this hit us all pretty fast. And that, coupled with all the other noise that's still going on from labor shortages to COVID restrictions around travel, et cetera. That's really what caught us a little bit in the period. We're going to work through this. We're already working through it. Things have been improving. intra-quarter. We expect that to continue. It doesn't change our strategy. But it's a good question, Gerry, and I would acknowledge that, that yes, we could have a slightly different asset-light mix, we probably would have that.

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

Yes, thanks. Look, we're excited to have Richard join our Board. He brings a tremendous amount of experience. I have also happened to have known Richard for a few decades, and I always appreciate his sound input and guidance and understands where we're at as an organization. And much like the balance of our Board, they're all committed to the strategy that we have in front of us.

Our M&A pipeline looks good. We've always said we wanted to get through our sort of COVID periods here, which we are putting in the rearview mirror more and more every day, every week, every month. Third quarter was an unfortunate dip, but still an important step in the right direction to put that behind us more now as we move forward into the fourth quarter and into next year, you're going to -- I believe you're going to start to see a steady, sensible, programmatic approach to M&A. And Richard understands our views of building a stronger, bigger CECO. Adding businesses in our short cycle, different industrial mix.

Over time, we'll take a look at other ways to enhance our margin profile and our steady results of EPS to drive shareholder value. And Richard just brings a tremendous amount of experience not only in his professional life, but also in his Board, as you mentioned, Roper and Charles River Labs and others that he's been a part of where he has seen a variety of companies in different places in their maturity get from point A to point B and beyond. And our Board, along with the new addition of Richard is very committed to what were what we're planning to do from an execution perspective.

Is there any other questions, operator? Or are we through the queue?

No, that concludes our question-and-answer session. I'll go back to Mr. Todd Gleason for closing remarks. Thank you.

Okay. Great. Thank you. And look, we understand it was a tough Q3. We own that. And we are -- we continue to be very excited about the growth that we are putting in our backlog and what will start to transpire into P&L growth starting in Q4 and as we head into 2022. I'd like to thank all of the CECO associates around the world. It is still a challenging environment, and our team steps up every day to deliver for our customers, for each other. And again, we feel very confident in our abilities as we execute against the growth that we have been booking all year long.

We believe our pipeline remains extremely strong. And again, we appreciate everyone's support, the great questions on today's call, and we look forward to following up in future periods with more growth.

Thank you, everyone.

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