CECO Environmental Corp. (NASDAQ:CECE) Q2 2022 Earnings Conference Call August 8, 2022 8:30 AM ET
Company Participants
Steven Hooser – IR
Todd Gleason – CEO
Ramesh Nuggihalli – COO
Peter Johansson – Incoming CFO & CSO
Conference Call Participants
Jim Ricchiuti – Needham & Company
Rob Brown – Lake Street Capital Markets
Amit Dayal – H.C. Wainwright
Bill Dezellem – Tieton Capital
Operator
Good morning, and welcome to the CECO Environmental Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note today’s event is being recorded.
I would now like to turn the conference over to Steven Hooser. Please go ahead, sir.
Steven Hooser
Thank you, Steve, and thank you everyone for joining us on the CECO Environmental second quarter 2022 earnings call. On the call with me today is Todd Gleason, Chief Executive Officer; Ramesh Nuggihalli, Chief Operating Officer; and our recently announced and incoming Chief Financial Officer and Strategy Officer, Peter Johansson.
Before we begin, I’d like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation, which is on our website at cecoenviro.com. The presentation materials can also be accessed through the Investor Relations section of the website.
I’d also like to caution investors regarding forward-looking statements. Any statements made in today’s presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on Form 10-K for the year ended December 30, 2021. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise.
Today’s presentation will also include references to certain non-GAAP financial measures. We reconciled the comparable GAAP and non-GAAP numbers in today’s press release as well as the supplemental tables in the back of the slide deck.
Now, with that, I’d like to turn the call over to Chief Executive Officer, Todd Gleason. Todd?
Todd Gleason
Thanks, Steven, and good day, everyone.
We’re going to start with Slide #3 of the presentation that Steven mentioned to follow along with our prepared remarks today. We have a number of topics to cover as always and this slide provides a high-level summary of today’s focus areas.
First, today we announced two leadership changes. Matt Eckl who has been our CFO since early 2017 and Pamela Turay who has been our Head of Human Resources for about four years will be leaving CECO. I want to thank Matt and Pam for their contributions to our organization. We appreciate all the things they have done to help us advance as a company. We made the decision to hold today’s call without Matt, as we both agreed to maintain focus on our excellent second quarter performance and outlook. Matt is working to ensure we have a smooth transition, which is well underway and I’m sure many of you will stay in touch with Matt. We wish both he and Pam much success. Our finance and HR teams are in great shape and working on transition items.
I’m also pleased to announce that Peter Johansson will join CECO as our new Chief Financial and Strategy Officer. This is an expanded role and one that fits Peter’s unique stripes and tremendous experience. We are driving our platform growth and enterprise-wide strategic development very aggressively. Peter will partner with me and our leadership team to tighten up these growth programs and ensure we have leading processes to identify and execute investible strategy. Peter brings over 30 years of experience in business development strategy, capital management programs and other business management analytics. His background includes diverse industrial leaders such as Accudyne, IDEX, ITT, Trane, and also AlliedSignal, Honeywell. I have a few of those names in my career profile too. Peter has been working with our leadership team as a consultant for about six months, as we’ve been building our M&A pipeline and evaluating market opportunities. While, Peter, will officially assume CFO duties next week, he is on the call with us today, although Ramesh and I will field today’s questions.
Let me pass it over to Peter to say hello. Peter? I think we might be having some technical difficulty on Peter’s side of the phone here.
Peter Johansson
There we go. There we go.
Todd Gleason
Thank you. Go ahead, Peter.
Peter Johansson
All right. Good morning, everyone. This is Peter and I’m looking very much forward to being part of this wonderful journey that CECO is about to embark on, great challenges and great opportunities ahead of us.
Todd Gleason
Great. Thank you, Peter. We look forward to you joining us officially next week.
We also mentioned that our General Counsel Lynn Watkins-Asiyanbi, will assume the newly created role of Chief Administrative and Legal Officer. In this role, Lynn, will drive our human resource and legal functions and partner with our business leaders to ensure we have nimble and effective programs in place to support growth, new operating models, and of course, maintain strong compliance and development. So I want to once again thank Matt and Pam for their service. And of course, welcome Peter and Lynn into their new roles.
The other points on this slide will be more concise. We hope you take away that CECO delivered an outstanding Q2 and very strong year-to-date performance. We continue to deliver on our very transparent roadmap and we believe we are establishing programs to help drive real sustainable results.
We will also discuss our full-year outlook, which we are increasing given our year-to-date performance and our confidence around what we see in our backlog and across our opportunity funnel. We hope you also take away that our capital allocation program is driving good utilization of cash, as we continue to identify and close accretive and strategic acquisitions and we are buying back our shares. More to come on all those points.
So please turn to Slide #4. Our strong Q2 and year-to-date results are driven by many important factors. Of course, we have certain end markets that are growing and we are well-positioned in those markets. However, I would submit that we have fundamentally changed CECO and continue to advance our organization.
As we state in the slides subtitle, we are now two years into a systematic program to reshape CECO and drive higher performance. I joined the company in July of 2020, time flies. For over a year, we navigated the challenges of COVID protocols. We can all agree it was and has been a crazy time. We are still overcoming some of the ramifications associated with inflation, supply chain issues, and of course, last year’s great resignation. But early on, I identified some opportunities and some obstacles within CECO. We set our sights to invest time and energy on those key strategic and operating items.
One’s work is obviously never done, but in place today, we have a number of important components that will help sustain our performance. A year ago, we changed our operating structure from large segments to our very focused and nimble business platforms. This organizational design provides much more accountability, faster speed of execution, and a better opportunity for visibility around growth and productivity.
We also said we would establish an ESG strategy and we have. Our inaugural ESG report was published earlier this year, but that’s just a start. We have formal programs inside CECO along with our Board. We are now establishing ESG 2.0 a team that will drive new environmental, social and governance programs. We are pleased that our ESG score dramatically improved, but we want to take it to the next level. And we believe ESG is something our customers and employees care deeply about and rally around.
Over the past year, we have added two new Board members. Richard Wallman, and Bob Knowling, are outstanding additions to our Board and for me, great partners and advisors as we drive transformational growth. Our leadership team is more diverse, more experienced, and a strong cultural fit to how we will drive our operating model.
In many ways, a CEO is only as good as their leadership team and I’m feeling pretty good. And when I joined two years ago, CECO had not initiated a focus capital deployment program. We’re certainly driving programmatic M&A, and we’ve already completed multiple transactions this year alone. And we have repurchased almost $10 million worth of CECO stock in just the past year. I could extend this list because we are proud of our company and many more accomplishments, but for now I will end that we have made increased investment and we continue to make the more investment in new products and business development. I look forward to highlighting some of our new product wins and new market opportunities as we dive deeper into our results today and in future quarters.
Please turn to Slide #5. As we have talked about systematic change and transformation, we wanted to be somewhat transparent about what we were planning to do and then of course, do those things. Transparency and focus are two very important areas I demand from our business leaders and we hold them accountable as we invest in their success.
A year ago, I shared this slide during our Q2 2021 earnings call. We shrunk it down to make a few points on the right side of that slide. You might recall that at the end of Q2 last year, we had a decent orders growth, but not necessarily the overall financial performance that would stand out. I stated we were putting the pieces in place to drive a real growth program. We shared this slide last year to outline the high-level steps we would take in the second half of 2021 and throughout 2022 to drive value. As you can see, we sort of checked the boxes on the right side of that slide. Everything from finishing 2021 as expected to our capital deployment programs, programmatic M&A and of course, great organic growth, we feel good that we shared our plans and more importantly, that we are executing on those plans with great results.
The combinations of Slide number 4 and 5, I hope put an exclamation mark on the fact that CECO is making systematic change and steady transformation. It isn’t just a quarter or two of good results, but instead, a more reliable operating model and leadership team from the Board down through our great platforms and all of our great functions.
Now let’s dive into Q2 and year-to-date results. So please turn to Slide #7. This slide provides a summary snapshot. On the left side of the slide, we highlight key financial metrics for the second quarter and year-over-year percentages 33% orders growth. Our $114 million worth of orders follows the first quarter all-time record orders of over $160 million. We have a new all-time record backlog as a result. 34% revenue growth in the quarter and 31% revenue growth year-to-date just outstanding execution, overcoming challenges in the supply chain and continuing to deliver for our global customers.
63% growth in our adjusted EBITDA with year-to-date EBITDA margins over 10%, we continue to demonstrate very nice operating leverage and $19 million of free cash flow in the quarter is obviously very strong. We had some pent-up working capital, and so we knew we would have great performance with our cash this past quarter. Very pleased with our overall second quarter performance.
Now let’s move to Slide #8. We announced and closed two strategic acquisitions in the quarter. I encourage you to read the press releases we distributed earlier this quarter regarding Compass Water and Western Air. Here are a couple points. Compass Water is a leader in membrane-based industrial water treatment systems, and really helps our industrial water strategy. I would state that we are building our industrial water capabilities in business, sort of still early innings, so to speak, we have a growing base business and more and more solutions and we are committed to industrial water. Western Air helps us advance our already very well established and strong industrial air business. Western Air brings a nice compliment of standard dust collector solutions where historically our dust collection systems have been engineered custom orders. So this is a very strategic focus and Western Air brings to CECO an exciting additional product line called Inteliair, which is all about energy efficient solutions in smart sensor technology, very excited about these new capabilities. Both Compass Water and Western Air help grow our short cycle sales and we estimate we are at about 30% of our portfolio mix, which is up nicely from the 20% a little over a year ago, really great progress here.
On the right side of this slide, we highlight our share repurchase program. In the second quarter, we announced our $20 million three-year authorization, and we got after it. Buying back approximately $4 million in just a few months. We remain very committed to a consistent capital allocation program and we’ll provide regular updates.
Now let’s turn to Slide #9. We already highlighted a few of these second quarter financial results and this is the standard slide we provide each quarter. A few additional items worth mentioning. Our Q2 gross margins were below our historic average of 32% to 33%, but we are making very good progress with strategic pricing and productivity. We improved gross margins 150 basis points when compared to the first quarter of this year. We expect to deliver higher gross margins and to work our way through the year. And our backlog has higher margin profile coupled with our strategic pricing actions that are rolling out as expected.
Another financial metric on this slide that wasn’t included in our earlier summary slide is the significant growth in earnings per share. In the quarter, we delivered $0.18 of adjusted EPS. This is up a 100% when compared to Q2 2021. We are getting strong earnings growth from operations, and we expect to continue to drive meaningful EPS growth for the full-year.
Now, please turn to Slide #10. We provide some additional datapoints on our Q2 orders and revenue, comparing them to Q2 last year and also Q1 of this year. A few highlights. On the slide, we state that the $275 million of orders generated in the first half of the year is an all-time record first half. This eclipses the first half of 2016 by some 20% and back in 2016 CECO was very focused on large energy market opportunities that had produced some extremely large energy jobs in that year. Have I mentioned that we’re systematically transforming CECO? Well, this quarter, we had only one order above $10 million and it was in our separation and filtration platform. It was a Middle East project that required produced water treatment solutions to remove harmful pollutants and particulates. Another large order in the quarter of approximately $7 million was in our industrial air business to provide specialized missed recovery and elimination solutions in a hot cold aluminum rolling facility that is undergoing an expansion. We are also seeing some very nice LNG wins in pipeline investment and liquid separation. Finally, we continue to see some large programs in the $3 million to $4 million range for industrial air solutions in wafer fabrication and related Industries.
I could go on and on about our very diverse and attractive orders that we booked in the first half of 2022, but really overall just a very balanced order book across all of our platforms. And with the balanced orders book growth, we’re delivering sustainable revenue growth, as we show in the right side of this slide. Our platforms are delivering great organic growth and with our book-to-bill consistently over 1, we expect to sustain higher growth rates and sales dollars.
And this is reiterated when you turn to the next slide. Please go to #11. For the second straight quarter, we have an all-time record backlog with almost $289 million. This is up 35% this year. Our 2022 year-to-date book-to-bill is 1.4, just fantastic. Equally important are that our platforms are very excited about future opportunities and pursuits. Our sales funnel remains above $2 billion and we have many large bids that could produce some impressive wins in the second half of this year.
Now let’s go to Slide 12. As I mentioned a few minutes ago, our gross margins expanded sequentially, but remained down year-over-year. It does feel good to be back above 30% and we expect to sustain those levels with the strategic pricing, continued productivity and supply chain management that I already mentioned.
Second quarter EBITDA of $10.6 million produced EBITDA margins over 10% for the second straight quarter. These EBITDA results show the outstanding leverage we are getting on our volume conversion. Just consider that if gross margins had remained at historic levels, our EBITDA margins would likely be 12% to 13% in the quarter. We certainly are not dwelling on what could be or what might have been. Instead, we remain focus on SG&A cost management, so we can produce consistent results. We are and will continue to invest in growth resources and technologies, but we’re clearly doing so at a pace that allows for strong conversion so that we’re also growing our bottom line.
Now, please flip the Slide #13, which highlights our free cash flow and balance sheet. The main takeaway here is we have a strong cash flow generating organization that has allowed us to steadily invest in both M&A and share buybacks while essentially maintaining a very healthy EBITDA leverage ratio of just over 2x. We ended the quarter at approximately 2.1x. We believe we have more opportunity in working capital management so we are laser-focused on generating more cash this year.
Let’s review our outlook for the full-year. Please go to Slide #15. Earlier this year, we introduced a full-year outlook for the first time as a company. We believe outlining our expectations are important, sort of back to the, tell you what we’re going to do and then get after it. I am pleased to share we are increasing our full-year financial outlook to reflect strong performance and confidence in our backlog and our operational execution.
So here are the numbers. We now expect full-year orders to be between $430 million and $450 million. This would be up approximately 20% at the mid-point. You are right; we might remember that in 2021, we grew full-year orders approximately 30%. This is the result of our focused investments in our nimble and accountable platform organizations. They are just getting after opportunities and really developing new muscles for growth.
Our updated outlook calls for full-year sales of $375 million to $400 million, with opportunity to exceed, if things go well, in our supply chains and those of our customers. At the mid-point of our revenue outlook sales is expected to be at some 20% year-over-year.
We continue to expect full-year gross margins of about 30%, which is down 200 basis points versus 2021, but we expect to exit 2022 with a higher run rate than we produced in the first half of this year.
We are also taking up our outlook for adjusted EBITDA. We now show a low end of $37 million and a high end of $40 million or higher. Again, if things go well with supply chain management and customer projects, we can certainly continue to deliver more. Not everything is in our control, however, on some of these projects and of course, in our supply chain, but we have a really good pipeline and, of course, we really are excited about our backlog.
We continue to balance out on our investments for future growth and we expect our operating conversion to continue. So at the mid-point of our outlook, we expect our adjusted EBITDA to be up over some 50% versus last year. So the takeaway for this slide is that CECO is in better position than ever for higher performance and we believe our 2022 outlook is indicative of that view.
Couple more slides. Please turn to #16. As I highlighted a slide that we introduced a year ago we decided to update the material and provide a somewhat refreshed, transparent high-level roadmap. In summary, we are building new processes, capabilities and initiatives to ensure that CECO 2.0, as I am calling it here today, delivers high performance. On the last section of the slide we provide summarized bullet points regarding how we expect to wrap up 2022 operationally. Our outlook points to strong second half results. We expect to exit with a large backlog to provide a foundation for growth in 2023. Our capital allocation program will continue to provide funding for M&A and share buybacks and we will maintain our investments to grow our shorter cycle business focus, so we can have a more sustainable earnings profile. If done right, we should be in great position for an accelerated execution in 2023.
I would acknowledge a continuation of a lot of themes, which is a good thing, programmatic strategic and rightsize M&A is certainly one of those reoccurring themes. We expect to sustain our strong organic growth, while evaluating our portfolio and considering options for investment or rebalancing. Our new leadership team is confident we can drive our new operating model to the next level, a graduation to a new level, so to speak, that will help sustain performance. And we expect that in 12 to 18 months, we will revisit this slide and continue to accelerate in 2024 and 2025.
We will provide progress reports on these items and perhaps do some deeper dives in our evolving operating model when we are ready to share some of those details. A lot of good things are happening, and we look forward to sharing.
Now, let’s wrap up with Slide #17, our last slide. Great results in Q2 and year-to-date. Our record backlog gives us confidence in second half growth and puts in nice position for beyond 2022. We hope you found the full-year guidance helpful, and we look forward to discussing this in more detail. We will participate in several investor conferences this month, including the Jefferies Industrials Conference this week and the upcoming Three Part Advisors Midwest IDEAS Conference. Ramesh and I hope to see many of you at these events and we look forward to introducing Peter.
I know we have been redundant on this point throughout our march today, but our final bullet point here is my main focus, which is driving a steady portfolio shift to deliver higher performance.
And with that, let me thank team CECO for delivering for our customers and being accountable for results. We also thank you, our investment community, for your interest today and would be more than happy to answer any questions you might have.
So with that, I’ll hand it back over to the operator and will address your questions.
Question-and-Answer Session
Operator
Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions].
And this morning’s first question comes from Jim Ricchiuti with Needham & Company.
Jim Ricchiuti
Hi, good morning. First off, congratulations on the quarter.
Todd Gleason
Thank you. Appreciate it.
Jim Ricchiuti
Couple of questions. Todd, first off you reference CECO’s wins in the semiconductor market and I know some of this may not necessarily associate CECO with semi fabs, but yes, I noticed you were at the recent SEMICON West Show. And I guess my question is to what extent you think the company could benefit from the recent chips legislation?
Todd Gleason
Thanks, Jim. Good question. We were at the show. We’re excited about our relationships we have in this space, has been a — an investment of ours and somewhat in anticipation of what could be a healthy market here in semiconductor manufacturing. There’s certainly some interesting roles that we can play in their overall processes, especially as you can imagine around industrial layer solutions and others.
So, I mean, simple answer is, you look, it’s in our pipeline. There’s some really great opportunities for us in the second half of the year. We hope to be talking about that in the next quarter, in the quarter after that as well and maybe perhaps beyond. But we feel we’re well-positioned for that investment in that industry.
We’re excited about what that legislation represents. Not only for us, of course, but I think ultimately in longer-term for the health of our overall industrial economy and our ability from a supply chain perspective to have a little bit more control domestically of our destiny in this area. So anything that CECO can do to be part of that, we look forward to it.
Jim Ricchiuti
Got it. And wondering if there was anything unusual in the Q2 revenue strength, because your guidance at the mid-point of your full-year guide, you suggest some deceleration in the second half. And is that just conservatism or I’m wondering is it timing or are you seeing anything in the business that that might give you a pause?
Todd Gleason
No. Thanks, Jim. Good question there too. So I think I’d say this. We do not see any changes, if you will, to our business profile, et cetera, other than the continued choppiness of the supply chain markets. And less so probably Jim and into our audience here for us don’t get me wrong, we’re working through challenges like everybody else, but we want to be appropriately thinking about challenges that could happen to our customers and have happened to them.
And that’s influential on some of our larger projects. So while we have an opportunity to potentially do certainly better than the mid-point of our guidance range. We also just want to be thoughtful that some of our customers are having to wait for other parts of their supply chain before they can accept let’s say installation and delivery. So at this point, we think it’s appropriate to just sort of manage everyone’s expectations a little bit on until we sort of work our way through these supply chain challenges.
Jim Ricchiuti
It’s helpful. Last question, I’ll jump back in the queue. The M&A activity is clearly picked up a bit and in recent quarters, and I’m wondering how you would you might characterize the pipeline going forward.
Todd Gleason
Yes. Look, we have had a series of really strategic and good acquisitions. We love the technology and the adjacent markets that it gives us access to, great management teams, good cultural fits. We continue to look for organizations that have, I think a similar profile, strong management teams that that help us expand where we’re at and where we’re going.
Organizations that want to be part of we think a growing enterprise that that is focused on industrial layer, industrial water and the energy transition. And one that does so I think that with increased investment for growth, there will be more. We expect the timing of acquisitions is always kind of tricky. So we’ll obviously announce those as they come, but for us, we have a great pipeline of opportunities that we’re evaluating. And with that, look, we’re going to continue to generate strong free cash flows and deploy the capital as we’ve discussed.
Operator
Thank you. And the next question is from Rob Brown with Lake Street Capital Markets. Please go ahead. Mr. Brown your line is live.
Rob Brown
Hi, good morning. Congratulations as well in a nice quarter
Ramesh Nuggihalli
Thanks.
Todd Gleason
Thanks Rob.
Rob Brown
My question on the gross margin, you’ve had a nice uptick. How do you sort of see that trending is the backlog kind of support and pricing support, getting back to that 32%, 33% range or — and sort of how’s your view on how I’m going to take?
Todd Gleason
Yes. We’d love to get there tomorrow, Rob. As I mentioned in the — in sort of our prepared remarks this morning, if we were at 32%, 33%, it just falls right down to our EBITDA margins and we would’ve been at 12%, 13% as opposed to 10%. And so, operationally, we’re very proud of that sort of that opportunity that’s in front of us, but also just proud of our accomplishment, because we’ve been talking about that as a company, probably for years, getting up into the double-digit EBIDA margin rate potentially getting into the team.
So to go back to the gross margin question, yes, our backlog profile has in a more attractive gross margin rate associated with it. Of course, there are big and small projects that depending on the quarter can influence those margins. But we have a confidence that our sequential improvements could certainly continue. And our goals and objectives are that as we exit this year we’re at a higher rate than we just delivered in the quarter. We’d like to be at 31%, 32% as we’re exiting the year, so that we can enter 2023 at back to the gross margin levels that we’ve historically enjoyed. And then with our acquisitions, this year and going forward, of course, our goals are to continue to take those higher. And but in the short-term, it’s really about inflation, it’s about our ability to get strategic pricing, of course, productivity and supply chain management. I think our teams are doing a great job of all of that, and we’re going to continue to focus on it. Good question.
Rob Brown
Okay, great. Thank you. And then second question really on the sales funnel, you talked about it being quite diverse, just some color on how that’s developing. Are there areas where you’re seeing sort of strength or weakness or do you sort of feel it’s across the Board strength in your major market just some color on the sales funnel?
Todd Gleason
Yes. Look, it’s certainly not all across the Board strength. I mean I wish that, in our world that balloons only went up and up and up and we grabbed onto all of them, but turns out that, that doesn’t always happen in the industrial landscape. I wouldn’t say we have a huge flare being shot in the air by any of our platforms on significant weakness.
We’ve seen some distributor inventory levels sort of flatten back out in terms of whether it be fluid handling or some of our other businesses. So look, we have — we of course are just sort of paying attention to some areas that are slowing down or restocking their inventory going forward.
And we’re — but I wouldn’t say other than a couple of end markets like maybe automotive, certainly in the quarter took a little bit of a pause in terms of some of the orders. But again it’s maintained a good level of strength there. Overall, we feel like it’s a pretty diverse and strong pipeline. The focus of our platforms really helps us have visibility. If one of their end markets is slowing a little bit, another one seems to be picking up and I use the word nimble, probably at least a dozen times — I — maybe a joke, but at least three or four times. And I use that word because they’re moving quickly to go after those other opportunities.
Of note, we would say some of the energy markets that we participate in both in terms of the energy transition areas that we think are going to continue to have sustained investment in areas around biogases and whatnot, but also just sort of back to let’s say LNG, I could use the acronym LNG, LNG, LNG, over again in terms of market opportunities we’re seeing. And so that’s just one area that I would highlight. I think other companies are as well. And we like that space and certainly there’s other investment in our core energy business that we think looks — what looks pretty good for us in the next few quarters. Good question.
Operator
Thank you. [Operator Instructions].
And the next question comes from Amit Dayal with H.C. Wainwright.
Amit Dayal
Thank you. Good morning, everyone. With respect to sort of the margin side of the story, could you provide any granularity on you’re seeing some softness, I guess on the gross margin side, but operating margins continue to hold up and improve. What are the drivers that are helping you achieve sort of improving operating margins? Any color on that would be helpful. Thank you.
Todd Gleason
Yes. Yes. So obviously, we sort of spent a fair amount of time on gross margins. So let’s just sort of for a second here leave that alone. We’re not alone. I’m glad we’re not alone in the sense that our gross margins have been impacted by the inflationary environment and some of the supply chain challenges. So what’s driving our EBITDA margins higher is really our ability to convert the volume that we’ve delivered in the first half of the year. It’s scaled.
At the end of the day I’m not going to say it’s all about volume for companies like ours that have a relatively fixed SG&A rate. We have invested more in SG&A, that’s a combination of more people to support growth and activity, of course, increases like merit increases and incentive compensation and all those costs that are associated with those great people. But if you look at our SG&A as a percent of revenue, even though the dollars have gone up, the percent of revenue has gone down and so that contraction, if you will, in a good way of SG&A as a percent of revenue is, at this point, more than offsetting the other negative contraction of gross margin rate, so and that ultimately what you want is to get back to the gross margins that we’ve historically enjoyed, and nothing has fundamentally changed about our business, I would submit to those of you that are listening today. It is just the market conditions that we’re navigating and we’re navigating well, but nonetheless, that’s the condition that we’re in.
So, gross margins are down, but our operating conversion on our volumes is up. And if we’re able to get our gross margins back up I think you’re going to see even — you’re going to see even stronger EBITDA margins as a result. We look forward to hopefully delivering those.
Amit Dayal
Thank you. Thank you for that. The CFO change, Todd, I mean, is that signaling larger M&A targets, like, how can we think about this change in terms of M&A as a part of your future growth?
Todd Gleason
Yes. We’re not trying to signal anything there, per se. I think, look companies and organizations and people evolve, and they look at new opportunities to continue to bring new perspectives, new processes. Certainly, Peter has a strong background as do I, Ramesh, our whole lead Lynn, our whole leadership team with large organizations that have done large complex transactions.
If that was my focus, I could have made this change or on that night, I could have agreed to go in different direction from an M&A team perspective. But — so it’s not about signaling the change in our M&A strategy. It’s about continuing to evolve as an organization, towards new programs, new processes, new operating models, and I think the right time for everyone involved in this, and so look it’s a healthy change and we look forward to bringing Peter on board, so you could all meet him and get to learn about his strong background.
Operator
[Operator Instructions].
And the next question comes from Bill Dezellem with Tieton Capital.
Bill Dezellem
Thank you. My first question is relative to pricing. When do you anticipate the pricing moves that you have made already will be fully rolled into the results?
Todd Gleason
Yes. So on the 30% of our company approximately, Bill, that is shorter cycle, those are — have already either found their way or will be relatively quickly, kind of, quarter-by-quarter. So think of at least 30% of our price actions which have been received well by our customers, our distributors, channel partners, et cetera, those are reflected not fully, but let’s say, 70 or so percent, maybe more reflected in our results in the quarter.
Our longer-term projects were — we certainly do call it price, but it’s really about protecting our gross margins and how we’re bidding jobs. So we’re increasing our prices equivalent or more so in some cases versus the cost that have been increased in our supply chain. Those are why we’re saying our second half looks richer from a gross margin percentage than our first half. The combination of us working off of lower margin jobs in our backlog over the last 12, 18 months that were booked a while ago at lower margins, therefore lower prices, now, we’re working off of or we’re starting to work off of higher margin jobs as a result of better pricing and maybe just better mix. So for us together, so 60%, 70% of our business is going to readout a little bit more in the second half of this year.
Bill Dezellem
And so, would you say, by the end of the fourth quarter, that the long cycle pricing actions you’ve taken will fully be reflected or will it be into 2023 before that’s fully reflected?
Todd Gleason
If you have to use the word fully reflected, I’d say we’re heading into 2023 probably because by the way we continue to, we think, work on pricing in our short and long cycle businesses even in the last quarter and in this quarter. So, but by extension of that comment, Bill, that’s going into backlog and hasn’t yet hit our P&L. And we’re certainly not for like dropping prices at this point on anything. We’re usually certainly not the, the low margin dinner on a project anyway, so we’re continuing to hold firm in our market leader position where we have strengthened and where our products are unique and we stand behind our quality delivery and our expertise. So I think for us it’s, I’d say, mostly are going to be baked-in in the second half of this year, but we expect that there’s still opportunities we go-forward into our backlog rolling into next year. It’s really the word fully — it’s really the word fully, that I’d say, we’re not fully — we’re not going to fully execute or recognize it this year that is more fully, as we head into next year.
Bill Dezellem
No, that that’s really helpful. And I want to take this line of thinking, one step further. Are you satisfied with the current pricing that you are bidding at today or should we anticipate that there will be additional price increases still to come?
Todd Gleason
I think, we’re — look, you’re asking a CEO or CFO if they’re satisfied with pricing and financial results is, sort of, like, asking a kid if he wants another cookie. I mean, at the end of the day, I think we want more, and so we’ll think about how — where we’re at in the marketplace, in our cost structure.
Here’s what I’d say. I think we consistently look at what’s going on with our cost and our supply chain and to the extent, we feel, and there has been a — maybe there was a capitulation in terms of certain things, in terms of a higher cost before. There are certainly some components, some metal, some other commodities, et cetera, that continue to bounce around.
So one, work is never done on pricing. But I’d say we feel really good about where we’re at with pricing right now. I don’t want to sit here and signal that there’s a bunch of additional price increases coming out in our brands and in our products. We appreciate that this has been a challenging environment for a lot of consumers, a lot of companies, and for all of us, both individually and collectively. It’ll be nice when we’re maybe not all talking about inflation.
Bill Dezellem
Right. Okay. If I may, I’d like to move to order growth, which I believe was up 33% in the quarter. Where did you see that strength?
Todd Gleason
Again, pretty balanced, but specifically our separation filtration platform, as I mentioned, both in terms of a lot of their, sort of, produced water and water filtration, also, their natural gas pipeline, just a really great strong quarter for separation filtration. For those of you that have been paying really super close attention to CECO last year across our eight business platforms, we have nine, because one’s our emerging markets platform, so we have nine platforms, but across our eight business or product line platforms, I think it was only separation filtration that didn’t grow last year. The other seven did in terms of their order book.
So it’s excellent that we had a very strong first half of the year in that business. And I want to thank all of our platforms, of course, David Taylor and the team are really doing a great job of positioning not only for their historic pursuits that they’ve done in, whether it’d be midstream pipeline or various applications, even associated with the Navy and the Department of Defense. But really getting after some unique opportunities in the energy transition and we look forward to talking about some of those carbon capture solutions, et cetera, as we go-forward into some of the future quarters.
So, that’s really a platform that I’ve a highlight as — is a really strong platform in the quarter. Industrial air has just been cruising at a very steady pace for well over a year and we continue to do so. And again, Chris Tsourides and the great team in Industrial Air are doing a fantastic job, finding new opportunities in their diversified end markets. And I’ll highlight those two. If you allowed me, I feel like I could go on and on, but those are two that I would definitely say are doing a fantastic job versus their original plans of the year.
Bill Dezellem
Great. And I’m actually going to have one follow-up question to that. The separation filtration business is that strength a function of something that that you all are doing specifically or is it this natural movement that takes place where they had poor orders last year. So almost naturally they end up having a rebound this year?
Todd Gleason
Yes. Bill, look easy comps are always nice when you’re starting to talk about orders growth. So let’s acknowledge that that the team has some lower comparables maybe versus some of our other platforms, but it’s both. Look, our Peerless branded solutions in separation filtration are leaders in the space. They’re — they exceeded the table, so to speak on many important applications for the customer. And so look, those opportunities are now coming to us and we feel good about our position to win the right jobs at the right price. And again we’re expanding into other areas that we maybe historically our legacy Peerless products didn’t necessarily pursue. As I mentioned, some industrial water areas, some emerging energy transition areas, we’ll be talking a lot about those we expect in the next few quarters Bill, but it’s a combination.
Unidentified Analyst
Great. That’s — that’s helpful. And thank you for taking all the questions.
Todd Gleason
Yes. Thank you, Bill. Operator, I don’t know if we have any more questions, but let me know.
Operator
No sir. This does conclude the question-and-answer session. So I would like to turn the conference back over to Todd Gleason for any closing comments.
Todd Gleason
Great. Thank you, again. Thanks for everyone’s interest today and participation not only in listening to our prepared remarks, but diving in and asking some great questions. We look forward to speaking with many of you not only today as we go through some of our scheduled or upcoming just sort of ad hoc investor calls and other calls.
But hopefully, seeing many of you this week at the Jefferies Industrials Conference and this month at the Three-Part Advisors IDEAS Conference. And so with that, I would just once again thank team CECO for delivering these results and thank our leadership team and everyone for the focus that we have on continuing to execute and being accountable for our performance. And so with that, we’ll end today’s call and look forward to speaking and meeting with you all soon.
Operator
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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