Q1 2024 CECO Environmental Corp Earnings Call

Participants

Steven Hooser; Investor Relations; Three Part Advisors, LLC

Todd Gleason; Chief Executive Officer, Director; CECO Environmental Corp

Peter Johansson; Chief Financial Officer, Chief Strategy Officer; CECO Environmental Corp

Aaron Spychalla; Analyst; Craig-Hallum Capital Group LLC

Rob Brown; Analyst; Lake Street Capital Markets, LLC

Gerry Sweeney; Analyst; Roth MKM

Bobby Brooks; Analyst; Northland Securities

Amit Dayal; Analyst; H.C. Wainwright & Co., LLC

Presentation

Operator

Good morning, and welcome to the CECO Environmental First Quarter 2024 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Steven Hooser

Thank you, Howard, and thank you for joining us for the CECO Environmental First Quarter of 2024 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, Chief Financial and Strategy 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 the Investor Relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual results. 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 Q for the quarter and into the required by applicable securities laws. We undertake no obligation to update or publicly revise any forward-looking statements that we make here today, whether as a result of new information, future events or otherwise.
Today's presentation will also include references to certain non-GAAP financial measures. We provided the comparable GAAP and non-GAAP numbers in today's presentation. Today's press release and provided non-GAAP reconciliations in the supplemental tables in the back of the slide deck.
And with that, I'd now like to turn the call over to Todd Gleason, Chief Executive Officer. Todd?

Todd Gleason

Thanks, Steven, and to our audience. Thank you for your interest and continued support.
Please turn to slide number 3 a s I will highlight some key takeaways related to our first quarter performance. As outlined in today's press release, we started 2024 by delivering a solid first quarter, which puts us in a strong position in terms of our full year outlook. Later, we will go through each of these financials in more detail but let me touch on just a few of the highlights listed on this slide.
I am pleased that our backlog of approximately $390 million back to near record levels. Our book-to-bill in the first quarter was driven by very good orders levels, which was in line with our expectations to start the year first quarter sales and adjusted EBITDA were at record levels for a first quarter. So we feel good about how our top-line and bottom-line kicked off 2024.
Importantly, the quarter was highlighted by record gross margins for any quarter, which we believe demonstrates our strategic progress to drive operational excellence programs and steadily advancing and further diversifying our overall portfolio. Lastly, our working capital performance was very strong, helping to dramatically improve our year over year free cash flow performance.
Now turning to sales. We exit Q1 with a record pipeline of sales pursuits, and we are excited about the breadth and balance of this pipeline, especially some important energy transition orders, which could be meaningful in 2024 and over the coming years. And while we didn't make any acquisitions in Q1, we were active with capital allocation.
During the quarter, we opportunistically took advantage of some short-term price dislocation, share price dislocations and bought back $3 million of CECO stock. We now have repurchased $15 million of stock since 2021, which leaves $10 million remaining on the stock buyback authorization that we announced in May of 2022.
Turning to M&A, like I said, what we have not announced any transactions in a few quarters. We remain very pleased with the quality and activity of the M&A environment and the pipeline of strategic opportunities. We continue to evaluate. We will continue to move forward with our M&A process and keep you posted. All in all, we feel great about our position and our ability to drive meaningful performance. And as always, I want to thank team CECO for your customer focus, accountability and high performance.
Now turning to slide number 4, we will expand a little bit more on our financials. Let's start with orders, which came in at approximately $145 million, essentially flat with the same strong results we delivered to start 2023. These orders helped to drive the strong book to bill that I just mentioned.
Sales were approximately $126 million, up 12% year over year. Q1 sales were modestly impacted by seasonal aspects related to fewer project days and project timing that accelerated some sales forward into Q4 of 2023 in delayed a little revenue recognition into Q2 of this year. On a trailing 12-month basis, our sales are up [20] on double digit. Full year sales growth in our near record backlog gives us a great visibility to upcoming periods of growth.
Adjusted EBITDA of $13.2 million is the highest first quarter EBITDA result in company history, and our 10.5% EBITDA margins are up almost 200 basis points year over year. On a trailing 12-month basis, EBITDA is approximately $61 million, up 44%.
Our adjusted EPS and free cash flow also reflect our ability to offset higher interest expense tax items in working capital needs related to future growth. We are very pleased with these results, and they give us a very solid confidence that we are a great position to start 2024. I will provide some additional commentary on our outlook for the full year after Peter provides further review of our financials.
And with that, I'll hand it over to Peter.

Peter Johansson

Thank you, Todd. Good morning, everyone. On a thank you for attending our earnings call today. As I provide additional color on CECO's financial performance in the first quarter, I will reinforce two key themes first cycle of starting the year on a very positive note, and second cycle remains well positioned to achieve our objectives for the remainder of the year.
Yes, let's start this review by turning to slide number 6 that cover three key highlights during the quarter. Backlog, gross profit and EBITDA. On slide 6, I'm highlighting these three financial metrics because they're solid indicators of our strong start and our overall positioning for the remainder of the year.
Starting from the last of the page. Backlog at quarter end closed at approximately $390 million, 9% year over year and a $20 million from year end 2023. This is a record level for any Q. one quarter end. As Todd highlighted earlier, rising backlog is a key indicator of future period growth and gives us great visibility to revenue for the next nine or so months.
Moving to the center of the page. Gross profit of $45 million delivered in the quarter is up 29% year over year on higher volume and higher margins, nearing the 36% level margins, which are up 470 basis points from a year ago period and approximately 100 basis points above Q4 on a sequential basis, resulting from continued business and project mix improvements.
Operational Excellence initiatives that are really starting to deliver for us and ending this page on the right-side adjusted EBITDA follows the same trajectory as gross profit ending the quarter up 36% year over year, with margins expanding approximately 200 basis points. I want to remind all of you that these margins are after the investments we are making in our business and commercial and technical resources and updating our business systems investments that we believe are important to continue to make and add key capabilities to our organization and to support sustainable growth.
Before I leave this page, I want to highlight that adjusted EPS is up 1% year over year as we overcame $0.06 of higher interest and tax expense was $0.17 of operational performance. Share count was a slight headwind to EPS in the quarter as well.
Would you please turn to slide 7? So we'll take a look at orders. Orders for the quarter of $145 million were essentially flat year over year. They were balanced across industrial. And as Todd alluded, our first quarter of 2023 was also historically strong. Sequentially, we delivered an increase of almost $20 million as some orders that pushed into Q4 from Q4 into Q1 were booked during the quarter.
On a TTM basis, orders increased year-over-year by $70 million to $582 million. We are pleased with the level of orders in Q1, which has the potential to be higher by $15 million to $20 million. However, these orders for which we have verbal confirmation, and all board took longer than anticipated to convert to a formal purchase order and have now been or will be realized in the second quarter.
Additionally, in the quarter, a number of incredibly exciting and large energy transition jobs, metallurgy many in the power generation side took meaningful steps forward towards realization in Q2 and the second half of 2020 for further underpinning our confidence in the full year outlook. In fact, April bookings were already off to a very strong pace and reinforce our view that Q to be very successful.
Please now turn to slide 8 for some additional color on sales. Sales for the quarter of $126 million were at 12% increase over the same period in 2023 and a quarter one sales record for the company. Organic growth in the quarter was approximately 12%. On a TTM basis, sales increased year over year $516 million to $559 million and is up sequentially by $15 million. Sales in the quarter reflect 21% of the full year sales outlook, which is the same as in Q1 2023 relative to what was achieved for the full year 2023.
This Q1. Typically Q1 typically have fewer revenue days than either Q4 Q2, which can be our largest quarters for revenue delivery and in 2024, both the Chinese New Year and Ramadan fell into the first quarter, impacting our Asian and Middle Eastern locations and customer our activities. The reduction in revenue days helps to explain a portion of the sequential step down in sales. Pod highlighted some revenue recognition acceleration that pushed first Q for higher expense in Q1. And we experienced two projects with engineering, right, Elise and approval delays, delays that have now been resolved so that the resulting revenue recognition will now occur in the second quarter.
And as you now just turn to slide 9, and we'll touch on backlog because backlog continues to remain at near record levels. CECO conclusion, Q1 2024 with backlog of $390 million, representing a 9% increase year on year, of which we expect at least 70% to convert to revenue. In 2024 the record levels of backlog are persisting, even after CECO delivered a record sales quarter in Q4 and in Q1, highlighting the strength of our opportunity to orders conversion. The strong book-to-bill with record sales in the quarter. It places a slightly ahead of 2020, the three and in a strong position relative to our full year outlook.
Now let's turn to slide 10 for some additional discussion on margin. Gross profit margins in the quarter were 35.7%, a record level, which gives us a lot of confidence that we are on the right path to meet our target of mid-teens EBITDA margin in 2025-2026 period. The improvement year over year has been largely driven by improving mix with our short-cycle brands and acquired businesses, contributing higher volumes, improving project execution and improved book margins also contributed to this high mark. We are also starting to see the benefit of select sourcing and productivity initiatives across our operations and supply chains. We are in the early stages of these initiatives, but the initial results are very positive.
And I think about the sequential performance, I was pleased to see a further step up of approximately 100 basis points in margin despite the lower sales volume. Short cycle mix versus prior quarter was a driver accounting for about 25 basis points of improvement. Favorable backlog. Margins from the acquired entities contributed approximately 25 basis points, and the benefit of a factory closure in China completed in December of last year added another there are 50 basis points in the quarter. On a TTM basis, gross profit of $181 million approximately 33%, with margins increasing by 150 basis points to 32.4%. This level is almost back to historical margin levels and on track to our internal targets, supporting our long-term target of mid-teens EBITDA margin by 2025 2026.
Moving to adjusted EBITDA, Q1 2024 delivered $13.2 million, a record for any quarter, one, benefiting from record sales in the first quarter with margins expanding appropriately about 200 basis points to 10.5%. EBITDA drop-through on higher sales was partially offset by seasonally higher G&A expenses, which included our inaugural global leadership meeting held in Dallas and investment in a commercial excellent product excellence project with a leading consulting firm and the launch of our global and source global sourcing and productivity initiatives.
Other items impacting EBITDA in the quarter were the absence of a favorable nonrecurring benefit from a customer settlement in 2023 and the addition of the G&A expenses from transcending Cameco businesses acquired in 2023, which were not part of CECO in the first quarter last year. On a TTM basis, adjusted EBITDA of $61 million is up 44%, with margins increasing by 140 basis points to 11% and well on track to our internal targets, supporting our target again of mid 10s EBITDA in the 2025 2026 timeframe.
Now let's move to slide 11, and I'll quickly review our cash position and liquidity. CECO finished the quarter with gross debt of $102 million from year end 2023. Net debt of $84 million was higher by $6 million from the year-end period, and our leverage ratio of 1.4 times was unchanged from year end. Net debt was lower by $15 million or 15% from the year ago ending quarter was our net debt to EBITDA ratio of [1.4:1], a full turn lower than year over year and well below our max allowable levels. Our capacity increase sequentially by $2 million to approximately $119 million, which fully covers our planned expenditures and investments for full year 2024.
Regarding our cash position, CECO ended the quarter was $40 million in global cash, a decrease of $8 million from year-end 2023 and an increase of $5 million from a year ago period. Cash from operations driven by strong working capital management was 2 million was approximately $2 million for the quarter and up $13 million year over year. Very, very strong performance, which offset our seasonal first quarter cash obligations. In the quarter, we funded CapEx investments of approximately $3 million for growth and business system and IT upgrades executed a $3 million stock buyback and made $3 million in debt reduction payments.
Please turn to slide 12 for a brief update on our capital deployment strategy. I would like to take this opportunity to revisit with you our approach when it comes to capital allocation. Stepping back for a moment when the seek good transformation began, Todd stated that we will be very thoughtful and intentional about capital allocation. Initially invest yes, the inorganic growth and enhance business capabilities, creating the capacity and processes to sustain growth. Once we were comfortable with your organic growth trajectory, we would begin to layer in acquisitions to complement the organic results and to advance our leadership in industrial air, build leadership and industrial water and maintain leadership in energy transition.
And finally of the economics are attractive, we would consider stock buybacks as an additional lever to create shareholder value. As I assess our results over the past three-plus years, I can confidently state that we have executed on our priorities and delivered on the strategy we laid out and feel confident stating we will continue down this path, adding further to our leadership positions while potentially creating new ones all while creating shareholder value and making good on our promise to protect the environment, protect the employees that work in our customers' facilities and protect our customers' industrial equipment and produce their environment, improve their environmental outcomes.
I want to now highlight some of the accomplishments starting at 12:00 position of the wheel shown on the left side of the page. Starting in 2021, we have invested over $25 million into growth resources and programs to drive core organic growth and to upgrade our commercial and operational processes, including expanding our commercial and project teams globally. These investments include the addition of talented sales, engineering and for global footprint and in targeted product and technology innovations continue into the three o'clock position.
We have been steadily increasing our spend on targeted high leverage, high impact capital expenditures to support our current and planned growth and to improve our global business tools and systems. We concluded 2023 was an investment level two times that of 2020 to support capacity expansions in our Dean and fibrotic Pump & Wakefield acoustics locations.
And to kick off our company-wide ERP consolidation initiatives, we are planning a further increase in 2024 as we extend our ERP consolidations and migrations globally, further strengthen our cyber security defenses, launch and scale. Our sourcing and productivity initiatives and upgrade and expand facilities have recently acquired businesses continuing around the loyal.
To the 6:00 position we arrive at the M&A value creation lever. We have been selective in programmatic with our M&A efforts, executing nine transactions over the past three-plus years, transactions tightly aligned with our paid playbook, paying an EV. the EV EBITDA multiple in the 6 to 7 times range on a trailing basis.
Our deployment has been balanced across industrial, air, industrial, water and energy transition with a focus on complementary assets that support our advanced build, maintain strategy. Whilst we have not announced the deal over the past two quarters, I can assure you our pipeline is very active and we are well advanced with a number of attractive opportunities, which I believe can closed in the second half of the year. With approximately $100 million of available capacity. We are comfortable that we can fund the organic and M&A capital plan for 2024 and still retain a comfortable cash cushion.
And finally, moving to the 9:00 position, I will briefly comment on stock buybacks are remaining deployment option with the $3 million purchase executed in the first quarter. Since 2021, we have repurchased $15 million of stock at an average price of $8.20 per share, approximately 70% below the current market value, leaving $10 million on our current authorization. While we are not expecting to execute the remaining balance and company quarters, we will continue to be opportunistic and step in as we did in Q1 when we identify a short term share price dislocation.
That concludes my summary of CECO's First Quarter 2024 financial results, a high-quality start with strong momentum heading into the second quarter and setting the table for a strong remaining 2024. And now back over to Todd to take you through some additional commentary on our outlook and his concluding remarks. Todd?

Todd Gleason

Thanks, Peter. A lot of good details with respect to our financials and insights into our performance, including the most recent slide there regarding capital allocation. Thank you.
We're going to go to the final section. I will turn to slide number 14. As a reminder, we initiated our full year 2024 guidance back in November of last year. We increased our guidance just a little over a month ago when we provided our Q4 2023 earnings. Today, we are maintaining our full year 2024 guidance, which we believe represents a strong overall outlook.
That said, as we have mentioned several times today and in our press release this morning, we do see areas that could produce additional upside to our annual outlook. Of course, even with our growing and well diversified portfolio, we remain conservative to some extent to better balance potential macro and market. The issue issues that could reprice supply chain challenges, et cetera.
We have high confidence in our near record backlog as we enter Q2 as well as the largest ever sales pursuit pipeline, which includes it includes the aforementioned mega energy transition programs. We feel we are well positioned not only for these energy transition programs, but for some additional large earlier in the industrial water opportunities, including jobs driven by the data center hyperscale buildout.
Additionally, we have a very strong balance sheet and as Peter just mentioned, a robust M&A pipeline. So we look forward to providing any updates to our outlook as we move forward throughout the quarter and the year.
Now please turn to slide 15, which is our last slide. In summary, CECO had a high-quality start to the year. We are reaffirming our guidance while signaling potential upside. We are proud of the financial results in Q1, especially when looking at the record gross margins, which show the ongoing progress we are delivering.
With respect to operational excellence, we look forward to providing updates on our large order opportunities throughout the year. And we love the balance. Our sales pipeline has across industrial, air, industrial, water and energy transition, as well as our geographic balance. We remain committed to steadily transforming Chico into a high-performance company that delivers outstanding shareholder value.
With that, I'll now open it up to questions and then I'll wrap up with just a couple of concluding remarks. Operator?

Question and Answer Session

Operator

(Operator Instructions) Aaron Spychalla, Craig-Hallum Capital Group.

Aaron Spychalla

First for me and the energy transition order opportunities, can you give a little more detail on what's driving that? You know, how big some of those order opportunities could be and then solve the EPA emissions rules here recently? Just wanted to kind of better understand how that might be driver for your business.

Todd Gleason

Yes. Thanks, Aaron, and good morning, all. This is Todd. And I'll start with a few comments, especially as it relates to the energy transition orders, and then I'll hand it over to Peter, who can add additional color to that, and then we'll make sure we get good answer on the EPA number one on energy trends, but in no particular order, I would say there's a there's a I see a huge known headline driver with respect to power a globally.
So there is a mega investment that has started to upgrade or to add new power capabilities globally. So if it's in the North America, you're looking at new investments in the grid and in power supply, backup power for wind and solar, but also a, I think a continuation of conversion from coal to natural gas headlines are our rollover in that regard. And we've always been well positioned to serve that transition in energy. And we like where that is building.
We may be seeing some of the larger, um, opportunities we've seen in a long time, if ever some of these jobs are well north of 2030, $40 million and a few, could potentially be a multiple of that, even. But again, we're in the early phase of some of these, and we're in the advanced phase of others.
Now it's not just power or if it is power, it's not just what people think of oftentimes is power. You know, as I already mentioned, with backup power or data centers, there's a significant opportunity that we are maximizing throughout the UK and potentially Europe as those data centers are built in more urban air areas. So the backup power has to have noise attenuation and management solutions that were in prime position for with Wakefield and acquisition we made about 15 months ago and doing quite well.
And geothermal and carbon capture are also on energy themes that are growing in in terms of we see order opportunities. It might even suggest that we’re more active now in nuclear than we were years ago. So frankly, it's a pretty large array of energy transition is a basket, I would say, of energy transition opportunities. But the mega theme is probably still set during around the power topic.
Peter, you want to add to that?

Peter Johansson

Aaron, and for the rest of us gathered here today, it's all about energy. Nothing happens if an electron isn't flowing, or a fuel source isn't provided to some form of power generations. We're in a very interesting inflection point. We've hit an inflection point after about 10 years of flat lead global demand. Every major region is now experiencing substantial growth in demand. There's a lot of drivers. They all are converging, and there's limited numbers of companies that can help deliver not only that power to deliver that power and that energy and clean way.
And we're one of those companies and that will lead into my remark on EPA is doing actually isn't a surprise. The EPA is doing is just codifying the thinking over the last many, many years as they have now seen supply chains and technology catch up with their aspirations to eliminate the most polluting pharma power generation. They've just put a stake in the ground. We're prepared for our customers are prepared for it. It's going to be an exciting ride. It won't be a linear climb, but it can be very interesting.
The big beneficiary is going to be in this regard, not just renewables can be nuclear and other forms of of what we might have thought it historically out of date, energy, hydro and geothermal are going to see renewed interest because it's about the entire mix. So although the EPS signaling coal is their target with their essentially signaling is our energy mix has to change.

Aaron Spychalla

Understood. Some great. Great color. Thank you for that. And then just maybe second on the margin performance. Great, great progress there. Create the commentary. Sounds like those pretty balanced across operational initiatives. You just wanted to understand more. It sounds like that's that's sustainable. And just how you're thinking margins kind of progress from here?

Todd Gleason

As we look towards the rest of the year, things we like our we like our sustainable margin expansion story. It's all going to use the word sustainable. That said, let me backup for just a second. The you know, the roughly 35.7% gross margins in the quarter did have some, you know, did have some in the period a modest benefit just in terms of mix and some good execution, of course, but also timing associated with that execution.
And if you sort of removed goes on or normalized that, I would say because they were one-timers, but they were beneficial in the period of events. If you normalize for that, our margins in our gross margins and on a run rate basis kind of coming out of the first quarter, our, you know, 50 to 100 basis points more normalized at lower than that still great. Right. Would still be probably certainly near record gross margin levels.
Now with that said, we are we've been talking about for a lot of long period over it here that we anticipate there's going to be a bit of a breakout year for us on some of the margin side, the work we've been doing on our supply chain excellence and operating excellence, quality, lean, et cetera, paying off the work that we've done to improve our portfolio, both with M&A as well as introducing new products and more efficient regions are paying off our growth internationally, which is now we think very stage able and growing is paying off.
So you know, again, we I'll just go back to our we're not a quarterly company. We believe an annual. I really feel like this continues to confirm. We're well on the path to that mid 10s EBITDA margin over the next few years.

Aaron Spychalla

Great. Appreciate the color there. Thanks for taking the questions, and I'll turn it over.

Operator

Rob Brown, Lake Street Capital Markets.

Rob Brown

I wanted to follow up again on the sales pipeline for large order activity around the year area in the PC here center area, and it's just color on kind of what what's in the pipeline and what do you see there?

Todd Gleason

Yes. Well, you know, on the air side, we our teams have continued to just do a great job of balance diversifying across, you know, a blend of industries that isn't stopping. We have, you know, a quarter to quarter, so it ebbs and flows a little bit. You know, you win a handful of job, sometimes even faster than we anticipate. And then you have a little bit of a lull as you replenish that pipeline. But industrial air, it really represents the continued strength of investments across a number of deals, industries. And I know that there are times and things accelerate like in semiconductor, for example, and then they slow down as another.
Maybe picking back up again, you're seeing a lot of news talking about fabrication plants that are going to be winning a new government contract for capital to be, you know, starting those buildouts. We're involved in those discussions, for example, but infrastructure and even the energy and sustainable energy side, if you think about industrial layer, as you're making all the components for solar and wind energy infrastructure that is industry.
And so from industrial air, it isn't one or two, two or three industries per se. It's a real balanced set of saying with industrial water, a very global now and with our industrial water capabilities, not just because of the acquisition of DS. 21 and other businesses. But just on the organic growth that we've done in the Middle East and other regions has added up just a huge pipeline of industrial water capabilities. And we're becoming well know now in industrial water, we're fine double so to speak, as companies are looking for partners to help them with their expansion.
And of course, the more recent actions that company this and Kimco have really also opened up big, big markets and in a variety of different applications that we're investing organically to help those businesses grow. And we have strong leadership teams there that, you know that are excited about organic and potentially inorganic growth as we can to invest in industrial water.
And then look, energy transition, as Peter said, of probably the most exciting energy pipeline that we've had in my almost four years now of CECO. And I would say almost across the board, whether you're talking about legacy energy, gee, the applications around power around natural gas pipeline and infrastructure solar or excuse me, our although all the renewables, as we already talked about, you know, it's up. It's a big pipeline in terms of energy and probably the certainly the largest it's been since I've been here.

Rob Brown

Okay, great. Thank you. And then on the kind of long-term targets of mid 10s EBITDA from sort of from here, you had great results from the quarter with going from here. What are the main drivers to go into mostly operating leverage from here? Or do you see more gross margin expansion this month?

Todd Gleason

Well, I think we're going to see gross margin expansion year on year just like we did in the first quarter. And so holding a strong gross margin. We anticipate that, like I said, Q1 might have had a slight in the period benefit, but that doesn't mean that it was it was a temporary gross margin expansion. So we like our gross margins expanding.
Certainly our sales volumes are going to are going to be up year over year and sequentially as we go from Q1 to Q2, as we mentioned a few jobs, the timing of which in the Q2, just a larger, more a more, I guess, a bigger, a bigger work quarter period globally. So we're going to see volume conversion on the SG&A line as well.
So I think you're going to see balanced gross margins year-over-year expansion and really good balanced volume leverage on SG&A below gross margin. And those two are going to be consistent over the next few years. You're going to see that growth translating into EBITDA margin expansion, you're going to see better mix and operating excellence translated to higher gross margins. The combination of those two gets you to the, you know, we'll get to we got to get to 12% versus for a full year. And then 13% and 14%. But I think it's a bit of a stair step motion that we're anticipating.
If you think about sequential TTM progress, we continue to see of somewhere between 50 and 100 basis points sequentially improving. We would expect to see gross margins. It is improving up to their that the mid 30s over the next eight quarters, it's not going to be a step up and then a flat line. We that's the kind of the results you expect as you're transforming and improving processes and you're going through some of you as you're rolling out waves of improvement across an organization.
Look to the I would point you to a chart we used one or two earnings calls ago, we show the components of the margin expansion, but we're really talking about here are the things we're doing, and operations really get that gross margin level solidified. So we get the full benefit of volume on the G&A flowed through in the portfolio changes.
So this is just what we're working in three dimensions, if you will, on getting to the mid-10s EBITDA, it's not just gross margin and gross margins important component. But once we get to a I'll call it a plateau in the mid-30s will see other areas of improvement rapidly catch-up.

Rob Brown

Okay, great. Thank you. Congrats on progress.

Operator

Gerry Sweeney, Roth.

Gerry Sweeney

Just a question on the markets are obviously very excited about pipeline order book, et cetera. Are you seeing strength across the board? Are there any other weaker areas are I think even more importantly, are there some areas that are even turning around where maybe you could see additional strength as we go through the year into next year?

Todd Gleason

Yes. Look, it's a good question, Gerry. So look, for us, I'd say we certainly have seen we see cycles, right? So yes, because we're so diversified industrial air from we've used this example many times with investors a few a little bit of can is a market that's so important to us in one of our product categories.
And there's a great year, maybe still a benefit from a lot of people being at home and having up aluminum cans beverages at their fingertips more often. And so there was a capital expansion associated with that. And then the very next year, that cycle turned over and it was it was a weaker market because of that, I wouldn't have said a lot of that publicly because the way we understood that it was a temporary capital infusion in that industry. And then reset the following year. Ironically, in 2022, we saw a recovery in a lot of our metals. Aluminum was a good example where in 2020 and 2021, those industries had to slow down in large part because no one was making claims because of COVID travel restrictions, et cetera. And then we saw recovery.
So in industry, I would say we've seen some pockets of strength from a year ago that have slowed down but are now picking back up could be EV battery and semiconductor. As I said, they're very kind of short-term cyclical ebbs and flows in those industries. But overall, I think we would I still say our demand for general industrial remains very balanced.
And I know that there's a lot of indicators out there. We look at them to come now that are the IS. ads and the PMIs, et cetera, that point to some interesting areas of sort of strength and weaknesses in industrial. But we're not seeing a lot of weakness. Frankly, we're seeing a lot of consistency. And but we are seeing cycles come up and down.
But and energy look, I think 10 years ago, CECO probably would have seen visibility to a similar energy market. But it's been a long time since we've seen the types of inquiries balance across a lot of the energy markets that we're seeing. And that's both legacy energy that I think we use that term. I'm sure we're not the only ones that are using the term. You know what people think of upstream, downstream, midstream, et cetera, that legacy energy, we like that.
There's still a significant issue, but that has to occur in those spaces for a variety of reasons to maintain energy production for a lot of end markets, not just for energy consumption, but then now we're talking about a lot of new energy and new energy transitions very, very, very rich.

Gerry Sweeney

Got it. How long I mean, obviously, AI, I mean, it's permeating through everything, a lot of different industries, but it feels as though just on the energy generation front, we're probably in the early innings. How long are these energy uptick cycles?

Todd Gleason

So we went into our AI asked this morning and we have a I how long I was going to be here, and it set up here to sensitive. So it turns out a I feel pretty strongly that it's going anywhere now we'll see what that means. Each job sales are up. I look, these cycles and energy are they're not head fakes. They're not sure how long does this mean we have an eight-year cycle. I know my game to play, right? I will today where we're at a relatively early innings of a multiyear, a multiyear investment phase.
The fastest and best sign posts we're seeing is quadrupling of demand by 2020, 2032. That means in order to have developed in order to have from a, I imagine, gigawatts supplying data centers yet that doesn't include crypto. It doesn't include manufacturing, does include charging electric cars. It does include electrifying industrial processes just from the data center demand. It a quadrupling of current gigawatts to three gigawatts.
It takes anywhere from 24 to 48 months to get through a design build permit and install process depending on what you select to put in. So back down from the five years at least six years of what we're seeing today, not including what else is out there.

Gerry Sweeney

But if you believe your future's electrically powered you would have would be favorably disposed?

Todd Gleason

Yes, yes, yes, Gerry, we've all been around long enough to know that at times, things are going to be as strong as they appear, and they're also not going to be looked at as they appear are our gain here. It has to play it where we don't want to overinvest to chase a theme. We want to be well positioned to benefit and to supply for the same without necessarily overextending ourselves audit, right?
So we think organically and inorganically, our view is these are cycles. Some we're going to be as high in as strong as they met, appear someone that and some will be very fast-moving that could be new regulations could be new entrants could be a variety of things. So for us is playing the balance, right? We're not going to get it all right, but we're going to try our best to play that balance out.

Gerry Sweeney

Totally fair, really appreciate that. But that's just one other quick question on cash flow. 1q is better much better than last year. I know you're generally stronger cash flow as you go through the year on. Should we this sort of Q1 imply just improving cash flow for in terms of metrics?

Todd Gleason

Well, I think Q1 implies that we're continuing to work very well at working capital management. The finance teams, the business teams are they're all over it. We focus on it better more sustainably, not just once a once a year for a quarter that we banging away at it, you know. So we have better processes, better incentives around it as well. So we like it. We like the results. I think it speaks to the poor start. We had last year more Jerry than it was a great start. We had this year. So the good news is we're just better each year.

Gerry Sweeney

Got it. That's already. I appreciate it. I'll jump back in line. Thanks.

Operator

Jim Ricchiuti, Needham & Co.

This is actually [Chris Greiner] on for Jim. Thank you for taking the questions. When looking at the sales pipeline, which is which is quite healthy, are you able to characterize even at a high level, the nature of the pipeline between whether it's discretionary growth type projects that your customers are looking at versus projects that are more mandated by regulation?

Todd Gleason

Yes, it's a good question, Chris, and thanks for jumping in to ask a question for, you know for you and for Jim or other questions too. We don't I don't have that at my fingertips. I would say what's important is in no particular order of importance, our $3.5 billion or so pipeline is up 3% go. So it's a very big, balanced pipeline. A lot of that still does have to do with the fact that we have a large in installed base, great relationships with customers.
So they are they're constantly coming to us to talk about replacing very high performing, but aged equipment out there in the marketplace. We have more aftermarket and services as well that we've ever had. So there's a blend of that that's in our backlog as well.
You know, and I would say very little of we do feel super discretionary out there that the customer, so these aren't of these are usually fairly medium to long-term projects that they've been looking at the priority in their capital allocation budgets. We've been in regular dialogue. Rarely does a a very large well over $1 million project come to us quickly. I we've how we've been we've known about it for 3, 6, 9, 12 months. These energy transition jobs. We've known about already of not all of them, most of them for well over a year, been working with the customers.
These things, their engineering design studies that we've either done or we've qualified on the approved vendor list, so to speak, which is very hard to become a member of that club. And so, you know, I think we're looking we're looking at a really balanced, um, it's not because of one area of the bamboo shoots of growth or something isn't because there's this huge capital infusion in a new green field project. It's pretty balanced.

Perfect. Great. Thank you very much. In the past, you've spoken about CECO's involvement with the B-21 Raider program, for example, and what we're seeing some signs that we could be in the early innings of significant ramp in investment in the defense industrial base here in Europe. I'm just curious if you from your point of view, are you seeing any early indications of any potential tailwinds for defense related applications from where you stand?

Todd Gleason

Yes. We participate more on like enable destroyers, a different class of naval ships. And just for your glasses, DDGFFG. things of that nature. And we are seeing a good pipeline. There is a really balanced pipeline, our separation filtration business, as well as some of our other product portfolios with respect to silencers, et cetera, we would say well positioned looking good and certainly an uptick year over year back in 2020, 2021. There was also a strong defense budget for some of those categories, but we haven't seen it as strong as I as we're currently seeing at some time.

Great. Thank you very much for that color. Appreciate. Thank you.

Operator

Bobby Brooks, Northland Capital Markets.

Bobby Brooks

So just following up on the actual rent following up on the potential record size energy transition opportunities, I just want to confirm, I know in the slides you mentioned, I think you framed it on 100, 20 million. That is those large deals or potential record-breaking energy transition deals? And the follow-up is, are those almost certainly in 2025 impact on revenue? Or is there any chance that those could kind of impact the fourth quarter of 2024? It would be a modest impact to the fourth quarter.

Todd Gleason

There's some percent of complete revenue that we might receive from potentially some designs being accepted, which signifies our ability to start to go in and order materials and contracts, its contractors, et cetera. So there is some upside potentially to revenue. We're really talking about orders. So Bobby, it's a good question, and I want to be clear on that for us all exaggerate to make a point if we had a mega, if we had if we had $100 million order in August, we're not going to get a lot of that revenue probably in 2024.
We buy like I said, we might get some with respect to the first quarter call milestone of the project. We could be engineering, you know, acceptance and things of that nature because we would be spending some money, as you can imagine. So there'd be a percent of that overall project. It would be associated with that first wave of execution. But beyond that, yes, we're really talking about 2025, and that will help us shape our outlook for 2025.
Again, I'm the luckiest CEO in the world. I have a balanced great team and I bet and across the board, all of our employees, but a balance of long-term visibility and backlog. And I think a growing sustainable and repeatable short term. And we're in aftermarket pipeline and portfolio this also building. So I'm one of the few CEOs I can almost start to look at 2025 and do not only modeling of what that short term could look like with the right market dynamics and investment, but also truly have a backlog that I can model with a high degree of accuracy and start to think about what that could look like for 2025.
So we have a lot of work to do to make 2020 for the success that we wanted to be. These orders would put us in great position for 2025, maybe element and buying. These are the same projects that we have discussed in the past. We're just getting that coming more into focus and they're not just in the U.S., we're seeing renewed and accelerating interest in other geographies. And where they're addressing the same concerns around clean power as we are here.

Bobby Brooks

Got it. That's terrific color. And then maybe just diving a little bit more on to that. You know, the comment that Todd just gave about, you know, building out the having a growing short term aftermarket pipeline. Could you just maybe give a little bit more color on that and how you guys have been building that is just the installed base growing or has it been for specific M&A that you guys have done and that's been growing at? Or is it just a cycle thing where the filters are you guys are installing are needing to replace from the one that you did in 2021 or something or some dynamics like path?

Todd Gleason

Yes. It's all I would call it a methodical, short term progress sort of like as they say, getting first downs are important to move the ball down the field. That's what we've been doing with our, you know, adding our short-cycle short, more shorter-term revenue, aftermarket services replacement.
So take the Transcend acquisition from almost exactly a year ago. Now 40%-ish of their revenue is aftermarket filter media, right? So that's that's an uptick in terms of revenue mix for us as a company. But the acquisition of Transcend, when you're now a $550 million company, you make an acquisition of a $12 million, $13 million, $14 million company when we acquired them. That's a first out, right? Because it's a smaller piece of our portfolio, but a really strategic and important one.
Now the things that we're doing with transient and with other areas that have similar dynamics like industrial water, that has been more on M&A play for us with the Compass or Kimco strong aftermarket components associated with each of those and the organic investments we made. An industrial water since I've arrived, has also produced some of the largest aftermarket projects in our company's history, including the one we mentioned last year, which was a $9 million order for aftermath market. So U.S. Services, which is a two-year revenue cycle associated with that $9 million order. So all of these are somewhat larger first down. Some are smaller first downs, but it's really about us just continuing to build out that balance methodically data bus.

Bobby Brooks

Terrific color. Maybe just to ask a last one here on your last comments on the prepared remarks about the job of jobs being spurred by the data center buildout. You know, that's really just to confirm that's still really a European UK opportunities with the acoustics. We spoke with the Ku6 piece for our, you know, making sure the power generation is quiet in those urban communities or is there any opportunity or is that like a more broader opportunity where you might see some industrial air and water revenues from that?

Todd Gleason

Today, the most direct benefit is in our UK business in packaging gen sets for data centers. And as you point out in urban areas in the UK and Ireland or if they were evaluating opportunities to that same work for the same customers in the U.S. as they their demand grows and they're growing at the outgrowth in their supplier base, they view us as a potential supplier. So we're evaluating that opportunity here domestically, but there are other benefits to CECO for all our supply base.
Load power is growing. A lot of these investments in large gas turbine firepower as far as are a direct result of a data center growth. And so we're benefiting from scale of that dimension that dynamic. There's also a data center. Demand for water will assume a lot of water got to treat a lot of water once it's consumed. We've seen is some inquiries there as well. Not necessarily in the US, but we've seen that outside the US as the Middle East and Asia are beginning to invest in our own infrastructure.
And then dare I say, two steps away. You've got to produce semiconductors that go into the servers that go into the data centers. one of the semiconductor fab facilities requires what we built for the scrubber, whether it's or no produce that they produce water treatment or as ultrapure water supply for silencing on power systems at the facilities.

Bobby Brooks

Got it. Appreciate the color, guys. So now you can think about it in multiple dimensions and investment in a data center, right now impacts multiple places. That's terrific color. Definitely a lot of problems of the notes portfolio goes growth going forward. I appreciate the color, and I'll jump back into queue.

Operator

Amit Dayal, H.C. Wainwright.

Amit Dayal

Just with respect to the outlook for companies move into new ones due to the quarterly you could see home from larger portion of that or crude coming from seasons. I just want to understand the cadence, you know, for the rest of your own with respect to mode revenues right now?

Todd Gleason

Yes, I'll let I'll let Peter kind of maybe to give a little bit more color on how we kind of are looking at our internal cadence.

Peter Johansson

Look, we always knew Q1 was going to be the smallest of the quarters materially. Just in terms of the that, you know, the things we mentioned already on the call just report respect to it's almost always our smallest quarter. We knew the project timing coming into the quarter was going to be a little bit lighter as well. And you know, look, I would say a fairly a fairly nice step up in Q2. Sometimes Q3 can be a challenging quarter. But actually this year it's going to be relatively consistent a little bit with Q2 within the range of a Q2, um, you know, sort of overall and in Q4 just historically has been our strongest quarter. I think we'll know a little bit more color as we exit that the second quarter in terms of how we're looking at the second half of the year, at which point, we'll probably give any color and updates on that thinking.

Amit Dayal

But if you're looking at your models and you're sort of are saying, you know, could 2Q in Q3 be fairly equally sized with Q4 being a larger book of the final remaining three quarters, that would probably be a normal dynamic given where we're sort of coming in to start the year. I think you're doing any business to trend.

Peter Johansson

Yes. I think the theaters confirming that we will generate more than half of the total sales and earnings in the second half of the year.

Amit Dayal

Okay. Thank you. Thank you. Appreciate that. And just some of the last one, I guess is around them, you know, the mix of I guess you indicated that already, but it looks like the mix in the backlog is leaning more towards higher margin revenues from that food. Is that a fair assessment?

Todd Gleason

Yes, I think we've certainly been pointing to that, and it's been and is this quarter, but for a number of quarters now that we've seen gross margin expansion, you know, kind of consistently, obviously, this quarter was a big step up that, like I said, had some but positive timing benefits. But overall was a mix benefit that we've been seeing, not just in our backlog but in our portfolio overall. So that's why our backlog, we see the mix and margins in our backlog in its benefit year over year. And when can we expect that to continue to be.

Amit Dayal

Okay. That's all I had guys taking the questions offline. Thank you so much.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference over to Todd Gleason for any closing remarks.

Todd Gleason

Thanks for the questions and your interest in our information today. So to start by again thanking our global teams, continue to deliver incredible value to our customers. As we continue to focus on being a leader, protecting people, protecting the environment, protecting our customers' investments and other industrial equipment.
Couple of updates. We're going to be presenting later this month at the Craig-Hallum Conference in Minnesota as well as in June at the Wells Fargo Industrial Conference in Chicago, and then the Ideas East Coast Conference in New York and the Roth London conference. So if you want to make, please contact your representative conference first contact and we'd be glad to meet with you there from and we look forward to that. Obviously, we're available to connect and any time as well.
And so we will be releasing our second quarter results we expect towards the end of July. And until then, we thank you and have a great rest of your day.

Operator

Ladies and gentlemen, the conference has now concluded. Thank you for your attending today's presentation. You may now disconnect.