Help them, and we would participate if there was a municipal sewage treatment facility that was, you know, in our geographic region. We would participate with them in terms of putting treatment in. The interesting thing about the leachate from the landfill, it's not the only source of PFAS. Every industrial discharge has got PFAS in it that's going to the treatment facility. Even if we were to take care of it from a solid waste standpoint, it's still a problem for the municipal sewage treatment facilities.
Maybe I'll sneak one last one in really quick, and I'll probably have to—oh, I'm sorry, I didn't see.
Just had a question regarding your M&A strategy historically and your current leverage. I know you mentioned you're below three times total and a little below two times net. If Bloomberg's correct, I see you have a $700 million undrawn revolver, so you've got about a billion dollars of cash liquidity. What multiples, I guess, would make you more bullish on doing M&A, whether it's public or private with the current macro backdrop, please?
What multiples of cash flow?
I guess cash flow will repay the debt .
I don't—I think that we're really looking at it from a free cash flow standpoint and looking at it strategically in terms of over the top of our existing business. As an example, for a $100 million business, you're going to pay market rate of, you know, 10 or 11 times, you know, EBITDA. The smaller transactions are going to be six, seven, eight times. Once you get to a more mature business, you're going to pay—you're going to pay a market multiple, which in some cases could be 10-12 times EBITDA.
Right. I mean, I think from a bullish perspective, I don't think, you know, you don't need the multiples to go down for Casella to really be looking to do more M&A. I mean, I think the pipeline is pretty good at the prices that they're seeing right now. To what John was saying, you know, even when you're at that, let's call it 10-11 times, post a synergy scenario, you know, you're probably going to take another turn or two turns off, depending upon how it overlays the footprint. You know, I don't think we need, you know, a pullback in expectations on, you know, sellers looking or willing to accept a lower price at this point.
Yeah, I would agree. I would agree 100%. There's no question that we have more opportunity. I mean, you don't hear about the opportunities that we walk by. You only hear about the ones that we do. And we walk by quite a few because those just don't meet the threshold. That doesn't mean that we're not paying market rates. We are. We'll pay market rates for, you know, those larger transactions for sure.
It seems like you have a lot of opportunities to go, John and Brian. Thank you for being here today. Congratulations on all your success. Hope to have you back next year. Thank you.
Thank you.
Thank you.
Okay. Now we'll get Michael Burgio back up here to introduce our next company. All right. Now I'd like to introduce Peter Johansson, the Chief Financial Officer of CECO Environmental. CECO Environmental is a provider of innovative environmental solutions to the global industrial and commercial markets. Its products and services include air pollution control systems, liquid filtration and separation technologies, noise and vibration control systems, energy recovery solutions, environmental compliance services, and industrial process equipment. CECO has around 35 million shares outstanding, trading around $23 for an $800 million market cap and net debt of about $180 million. With that, welcome.
Good morning.
Maybe just to start, we could begin with a brief background on CECO and talk about some of your key products.
CECO is a company that has been around for many, many years. It got its start almost 100 years ago supplying technologies to coal-fired power plants in the Midwest, but has rapidly evolved through a series of acquisitions, both domestic and global, as well as the addition of new technologies to the portfolio. Today we're an industrial, sustainable environmental solutions provider. We focus on contaminant removal and contaminant control opportunities, whether that contaminant is airborne, waterborne, or in a process, liquid or fluid or gas. We offer a wide range of technologies and solutions, be it physical, mechanical, chemical, or biological, to perform that objective for our customers. We are a global business. We operate in the U.S. and Canada, U.K. and Europe, the Middle East, India, Singapore, China, and Korea.
Excellent. That's a helpful overview. Maybe we could just briefly touch on how the portfolio has shifted since 2020.
Yeah. In 2020, the current CEO, Todd Gleason, inherited a portfolio that was focused on energy. It was about a 65-67% kind of order book on energy applications, principally in refining and power generation. There was some industrial exposure and some fluids exposure. Today, that portfolio is dramatically different. We've accomplished the transformation via a change in our commercial approach, as well as the addition of some nice tuck-in M&A transactions. The portfolio today is approximately 30-35% in industrial applications treating air and air pollutants, 25% in water, and the balance in energy. That energy focus is more oriented around new energy, supporting the transition to natural gas, the additions of solar and wind, and looking out at the rebirth or the restart of nuclear.
Given that shift, how has that impacted CECO's positioning and strategy?
Through the last five years, you know, the company has grown substantially. In 2020, the company had approximately $310 million of revenue. This year, we're on track to deliver between $700 million and $750 million of revenue. The transition away from kind of an energy-heavy portfolio to one that's more balanced across industrial and markets and natural gas infrastructure has led to higher growth and has led to higher profitability. We think a much more balanced business model that'll have sustainable growth in the future.
As it relates to growth, maybe you could contextualize how should we be thinking about CECO's key growth drivers?
CECO has grown, you know, as many companies over the past half dozen years, as, you know, our end markets have improved, we've seen higher order rates. Being present and being a leader in select applications and having brands that have been established for, you know, 60 to 100 years, we get the call. That is the reactive piece of it. We have a much more proactive business and customer development approach to selling and market development today. We have transformed a majority of our businesses from order takers to business developers.
You know, the incentives are in place to drive growth. The growth mindset is very different. On top of that, you know, we've repositioned our internal teams from thinking about serving markets to deploying solutions across multiple end markets. I'll give you an example. We had a brand that was very well established in supplying technology to steel rolling mills and supplying technology to metallurgical facilities, call it forges and foundries. When the phone rang, they answered the phone. They generally won, and there was a nice $15 million business.
We sat down with this team and said, "Well, why aren't you serving aluminum?" "Well, they never call us." "Why aren't you talking to the titanium guys?" "They never call us." "Why aren't you talking to the guys that process precious metals?" "Well, they never call us." Guess what? We fired the head of sales. We hired some people that were proactive. Now we have a $50 million order book in that business. We are supporting the three largest aluminum rolling mills being built in Alabama. We're now working upstream in precious metals production for, you name it, batteries, solar, you know, some of the other new energy technologies.
That story plays out across a number of our businesses where we've changed from a reactive mindset to a proactive growth mindset. And we're paying people to do so. We're driving stock ownership deep into the company. When I joined just three years ago, I think there was 25 to 30 holders of stock in the management team. Today it's 150. I mean, you wouldn't think that makes a difference, but in a population of, when I arrived, 850, now 1,300 employees, it makes a big difference. They're owners and they're acting like it.
Definitely. That sounds like a very effective growth strategy. We briefly touched on the end markets. I want to dive a little deeper into that. Maybe you could go into more detail on the end markets CECO's serving and then just geographically, you know, where's the growth and what are the more attractive geographical regions?
Yeah. Our business is present, as I mentioned previously, in about nine core locations. They're centered around a lot of, you know, industrial and power and hydrocarbon processing activity. If you think about our business and three groups of customers, there are those that generate power, deliver electrons. There are those that convert hydrocarbons, whether it's gas or oil, from the entire kind of the value chain from, you know, from wellhead to consumer. Then there's, you know, industrial customers in, you know, clean as well as heavy industry.
Some principal industrial end markets are semiconductor and electronics production, metals processing, metals manufacturing, automotive manufacturing, aircraft manufacturing. Anywhere you are assembling, you know, sophisticated equipment or making components that have manufacturing processes. We've got a large position in battery production, a large position in solar panel production. Any facility that requires heat for a process, whether it's for drying, it's for pressing, it's for generating hot water that goes into a reaction or processing of chemicals will be present. Because they all can generate a contaminant in some form, and they all consume natural gas or some other source of fuel that will also create a combustion byproduct that needs to be treated.
That's a great overview. I want to just shift briefly to some of the market conditions CECO's experiencing right now. Just maybe you could touch on the macro uncertainty and the impact there. I guess we could get to tariffs too.
I'll start with tariffs. Today, my answer is no different than six months ago. We're monitoring the situation and we'll react accordingly. We have position, we have plans in place depending on, you know, what the final outcome is. In terms of overall exposures of company, our principal concern is Canadian goods shipped to the U.S. We operate a supply model that's principally fabricator-driven, and our fabricators are in the regions where the projects are executed. Our exposure as a percentage of total revenue is relatively modest. Most of the Canadian content that we purchase today does have US MCA exemptions.
We'll see if those are still in place in a week or 10 days or a month. We believe we're in a good position to weather the storm. As far as macro conditions, I think all of us in this room have heard about the rapid increase in demand for power globally, whether that is power generated by natural gas being burned in gas turbines, whether it's solar, whether it's wind, whatever form it takes. You know, we've got a rapidly growing demand as a globe and appetite for energy. You know, we don't see that abating. You know, there are some select supply chain constraints.
You can't make an infinite amount of gas turbines, and you can't make an infinite amount of polysilicon. At the end of the day, companies are going to figure out how to generate the equipment to deliver the electrons. I said last year in an earnings call that it's all about the electrons. It's still all about the electrons in any way and how they're formed. Last year, I had one inquiry for a nuclear power plant upgrade. I'm sitting on 12 today. Okay. Last year, we had two large inquiries from gas turbine project developers for a total of $100 million.
We have $1.5 billion of open active order quotations in that space today. We expect to close at least half in the calendar year. Okay. That is for orders over the next three years that will deliver over the next three years. That is going to repeat every year, I fear, or I believe, for the next half dozen years. Refineries are being repurposed. They are being upgraded. Maybe they are not going to produce crude, but what they are taking is crude to produce plastics. Because everything has plastic in it, and we are going to have new forms of plastic that are more easily recycled and less, you know, less easily wasted.
You know, that's going to require our technology in those facilities. The high level is the macros are great. We're just, it's just bumpy right now. We don't know how we're going to, you know, we're all kind of have to ride through it. We think we're well positioned. Half our business is outside the U.S., half is in the U.S. That's something that's often overlooked when people are studying our business is, you know, the old CECO was 80% U.S. and energy. Now it's 50% U.S., I mean, 50% domestic, and it's, you know, a half or a third of that in energy. So we're much more resilient.
You touched on just the significant demand for CECO products. Maybe we could just get into more detail there. I mean, it sounds like an immense opportunity right now, especially in energy, like you were saying.
It is. You know, when I joined the company, we had an active opportunity pipeline of $1.2 billion. We're going to come out of this quarter with it being north of $4.5 billion. When I say active, that is outstanding quotes or business opportunities with customers that we expect will be awarded in the next 24 months. That pipeline continues to grow as we put opportunities in the top of the funnel and work them through the sale process. When I think about the opportunities outside of the U.S., in India, what's happening in India, we've grown our business in India from 20 people to 135 people.
We're planning to add another 30, business conditions permitting. They're going to build an economy in India over the next 30 years that rivals the size of China at the same point, 2008. They're going to do it a little differently. It's going to take a little bit longer, but we'll have an active role to play. We're making investments in Saudi Arabia. Saudi Arabia is completely turning over their entire operating model. They're going to invest in new cities that are industrially oriented because they've got a large population to employ and they've got growth aspirations.
You know, most American investors don't think about those opportunities holistically when they look at stocks, at least not when you're trading like we are as a small cap. We have direct access to those customers. We sit at tables with Aramco and SABIC every day to talk about how we're going to help them do that. We're sitting at the table with Reliance and with Adani in India. How are we going to help you build, you know, 10 gigawatts of solar in the next 10 years? You know, it's an interesting place to be, and we're at those tables. We can all kind of guess on how it's going to play out, but we were very bullish on how it will play out.
Definitely. It sounds like an immense opportunity. I guess on that note, I'd want to dive into just the competitive dynamics as well. I mean, large opportunity there must be immense competition as well.
Yeah, the competitive landscape that we face is quite interesting. There is no single company when we benchmark against industry that has the portfolio breadth and the applications reach that CECO offers in air, water, and energy. We have strong competitors in each one of those areas. They tend to be a small number of public global companies that have product lines that we compete against, but they tend not to be core parts of their business. For instance, in industrial water, we have Veolia, we have Xylem, our two large competitors, and Pentair.
Neither of them want to do large integrated solutions. They want to sell standard product, and they're fantastic at doing that. When a customer comes to them and says, "But what if it needs to look like this?" they somewhat freeze up and say, "Well, that's not what we sell. We sell this. A company like ours that's flexible and is solution agnostic will come in and deliver the end-to-end solution, and we'll buy product from a Xylem or a Veolia or a Pentair and put it in the solution and deliver it and then help the customer operate it.
When we think about the energy side, what we find is there's very few direct competitors in natural gas infrastructure and gas turbine exhaust and large industrial exhaust treatment packages. The industry has just not attracted large integrated operators. It is small to medium-sized private companies that once they have a job or two in backlog are full for the year. We have scale and we have relative advantage over that group because we have teams in the United States, the Middle East, India, and Asia that we can bring to bear on those projects.
Definitely. I think that'd be a good segue to discuss how CECO wins these contracts. I mean, you touched on it. CECO's won some larger deals over the last year. Maybe you could go into more detail on what the strategy is there.
Yeah. Our sales model is highly consultative, working directly with the end user, working with the end user's engineering proxies or in-house engineers. We work to be at the table early during conceptual design. We are there to influence key design decisions that not only we believe will yield the customer a better outcome, but also be more favorable to CECO when it comes time for an order to be placed or a bid for order call to be sent.
Through that consultative sales process, which can be months, it can be years depending on the nature of the project, we develop a very strong relationship with the customer, the customer's engineers and their proxies, as well as we gain unique inside information on how the project's going to be executed and funded. That allows us to put together a comprehensive proposal that meets the commercial and technical needs of that customer and also meets our financial objectives in terms of risk and return. What we find is that many of our customers have had over the last 20 years a substantial brain drain.
They are acting more as product developers and asset operators and not as developers. That gives us an advantage because our competitors do not have the breadth of technical capability or the scale in terms of engineering assets and resources that we have with our teams in Asia and India.
Excellent. I want to shift gears to, you know, the outlook for 2025. I think CECO put out an outlook of $725 million in sales. It's around 30% top-line growth. Maybe we could just dive into how that's constructed and what's driving that.
Yeah. Top-line growth consists of three components. The first is about $35 million-$40 million of revenue that did not get recognized in 2024 that's moved into 2025. We have the backlog that we exit 2024 with, a record backlog of $540 million. We believe 70%-75% of that backlog will convert in the year to revenue. We have the full year benefit of the four acquisitions made in 2024, and that contributes probably another $100 million to that upside when we take in, you know, the annualized run rate of those deals. We have organic growth in the year and the bookings we'll generate. Based on how the year has started, I feel very comfortable we're on track to cover not only the $725 million, but possibly more.
What kind of operating leverage is CECO set to experience with growth like that?
Historically, we've invested in infrastructure, be it systems or people, in advance of recognizing that revenue because we have the backlog. When CECO recognizes a sale, we drop it into backlog. That sale generally converts to revenue based on progress in the project over anywhere from four quarters to 12 quarters. I think we have an interesting model in that with 70% of our business being order, you know, business in backlog, 30% being shorter or quicker turn where it doesn't hit backlog, you know, we have that visibility, but it gives us the opportunity to plan that work. Hopefully that answered the question.
Definitely.
What we're looking to do through some of the acquisitions we've made is to further balance our business. We end up with a little less dependent on backlog and a little more quick turn business because that helps our cash generation profile.
That's very helpful. I guess looking back since 2020, you know, CECO's, and you touched on it, CECO's grown sales from a little over $300 million to over $700 million this year. I guess just looking back and then applying that forward, what have been the key drivers there? Do you expect that to continue?
The principal drivers, the first driver was we had to get organic growth, right? We had to move from a reactive selling organization to a proactive growth-oriented organization. The CEO, Todd Gleason, made a number of key organizational decisions early in his tenure that allowed organic growth cap and the culture on organic growth to change. I came two years after he joined. I inherited a somewhat different situation. Now I was managing growth. Also, when I joined, I was responsible and still am responsible for the corporate development and M&A activities.
Once we proved to ourself we could deliver real organic growth, we began to start thinking about what complementary acquisitions would accelerate that growth. We developed a program, we call it a programmatic approach to M&A, where we want to continue to layer in small deals that, you know, continue to reinforce our organic growth strategies, closing gaps in our portfolio, either technical or customer gaps, or giving us reach into new markets or new customers that are desirable that we could not reach on our own through organic investment.
We take those businesses and we roll our growth mindset into them and we give them the processes for growth and tools and we accelerate their growth. I'll give you an example of an acquired business where that's happened. We bought a business in the U.K. called Wakefield Acoustics. We bought the business for a very modest price. They had been in business in acoustics management for about 60 years in the U.K. They had been, you know, they had spent the last half dozen years quite constrained in their ability to invest to grow.
The first day after ownership, we sat down with the general manager, said, "What's the biggest cap you have on growth?" He said, "I need a new factory. I need another 30,000 sq ft so I can produce substantially more containerized genset packages for my data center customers." I said, "Okay, where's that plant going to be?" He said, "There's one right across the street." I said, "Why haven't you secured it?" He said, "We couldn't secure it. We were a small company." CECO, much larger, went in and secured the building for them. They're now active in that building.
They're, you know, and they've now grown that business from about $9 million when we bought the business this year to close to $30 million. It is little things like that that instill growth and you support that with capital and process and commitment to investing in their people. We have done that with half of the dozen acquisitions we have made so far, and we are on track with the balance to do similar things. That is the growth model. If you look at the move from approximately $310 million to $725 million, about 60% of that growth I would characterize as pure organic. The balance is a combination of acquired revenues and growth of the acquired businesses.
That sounds like a really effective strategy. On that topic, I want to just dive into what the criteria that CECO applies for M&A. What's the strategy?
The first criteria is it has to enable an organic strategy. We're not buying businesses as a consolidator. We're not looking to roll up an industry. We're not looking to build large-scaled organizations. We're looking to buy businesses that help the current organic strategy we have in place move faster or to add or eliminate a blocker to that strategy. That is the first test. The second test is culture. When we conclude diligence, the first two things we look at are, is the technology sound and are the people capable of integrating into a public company and do they share cultural attributes with CECO?
The third is financial. When I say financials, are they performing? Do they have the ability to improve? Is there income in the business or is there an opportunity to create income with a few simple moves? A lot of companies, they think about acquisition financial first, then technology or channel, and then people last. In some cases, we actually think about people even at the very beginning as we cultivate a deal. Eight of the 12 deals have been internally cultivated. They did not come to us through a process. You know, we knew the players, we knew the teams, we got comfortable with them.
You know, we closed, you know, instead of a dozen deals, you know, we had the opportunities, you know, well over 50 other opportunities that we passed on because we generally would not pass the cultural fit test. You would be surprised how many private sellers or sponsor sellers want to sell a business but have given no thought to how the people of their business will actually perform under new ownership.
Yeah, I mean, I think that's a great overview and very helpful. I want to just briefly turn to the audience to see if there's any questions.
Hey, Pete, how are you? William Bremer. Did I hear you correctly that your short-cycle recurring business is now approximately 30-35%? That's the first question I have. Secondly, given the acquisition of Profire and the recent divestiture of the fluids, where's your leverage ratio currently?
On the short-cycle business question, with the addition of Profire, that's where we're approaching 30% of the business where we classify as short-cycle. Our classification of short-cycle is an order to shipment less than six months. Medium-cycle, six to 12, 15 months. Long-cycle, 15 months or greater. Leverage after applying the cash and the transaction bill will be down around 2.2-2.4 times. We expect by the end of the second quarter to be well on our way to hitting the target 2-2 times.
Thank you.
Any further questions?
Hi. My question is, the fluid handling business that you sold is a great business in terms of generating cash, but it was a little bit slow and maybe it was not fitting. What does that say about the progress you have made regarding balancing leverage, profit, revenue of the other businesses that you were willing to sell a business that was such a basically a solid cash flow business?
Yeah, the reason we chose to sell the fluids business was twofold. The first was it doesn't grow. Well, it grows slowly. It was not a business we were going to invest in to grow. There are three very nice industrial pump brands that now will have an owner that's going to invest to grow them. The business will grow under a different leadership and a different strategy. We've gotten, we felt we were at the point now as a company in terms of size and cash generation from our other businesses, including the addition of Profire, that we were going to be able to sell the pump business with no detriment to our cash generation and our leverage. When I look at the Profire business, and if you look at the last four years, that business is growing 20+% top line.
It's a 50% gross profit business. We'll run it as a private platform inside our business rather than a public company at mid-20s EBITDA margins, and it generates 105% of the income to cash. Way better than the pump business we sold for approximately the same amount of money. Think about it as a trade in or out. We bought a business for $112 million. We sold one for $110 million, and it's a superior asset.
Yeah. Peter, for a guy that went to engineering from SMU and now doing financial engineering, very interesting. I'm going to give you a $10 million contract. I represent PIFF. How much cash am I giving you upfront? Is that changing over time?
Yes. I had that question earlier today, Mario.
Okay. I missed it.
No, no, no. Not here, but in a meeting. We strive to secure 20%-25% of a project's value as an upfront down payment. We'll secure that sometimes with a letter of credit or a bank guarantee, but often that's not required.
Thank you.
This is a great overview. I think we're just about out of time, but we're excited about CECO and we look forward to having you back next year.
Thanks for the invite. I appreciate having a chance to tell our story. We're excited and we think there's a lot more to come.
Thank you.