CECO Environmental Q3 2026 Earnings Call Transcript

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Provided by Quartr
November 9, 2026

Key Takeaways

  • Positive Sentiment: CECO reported record third-quarter results: revenue rose 105% year over year to about $404 million, adjusted EBITDA increased 201% to $70.1 million, and the adjusted EBITDA margin reached 17.3%. Legacy CECO revenue grew 30% and adjusted EBITDA rose 64%.
  • Positive Sentiment: Orders reached $778 million, with a book-to-bill ratio of about 1.92, lifting backlog to a record $2.193 billion; the opportunity pipeline exceeded $9 billion. Management expects at least 70% of year-end backlog to convert to revenue in 2027.
  • Positive Sentiment: The company raised its 2026 orders outlook to at least $2.5 billion and its adjusted free-cash-flow outlook to about 100% of adjusted EBITDA, while maintaining revenue guidance of $1.3–$1.375 billion and adjusted EBITDA guidance of $200–$225 million. Third-quarter adjusted free cash flow was about $154 million, and net leverage fell to approximately 2.0x.
  • Positive Sentiment: Thermon integration is ahead of schedule, with about $22 million in annualized net savings captured—roughly 55% of the three-year target—and management expects to reach at least 70% by the acquisition’s first anniversary. The company’s initial 2027 outlook is $2.1–$2.3 billion in revenue and $475–$525 million in adjusted EBITDA; its preliminary 2028 view calls for double-digit growth.
  • Negative Sentiment: Management cited inflation, policy changes, geopolitical developments, and uncertainty around AI and data-center investment as risks it considered in its outlook. Some large Middle East water projects have been delayed by regional conflicts, and those opportunities are not materially included in guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
CECO Environmental Q3 2026
00:00 / 00:00

Transcript Sections

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Operator

Good day, and thank you for standing by. Welcome to the CECO Environmental third quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marcio Pinto, Vice President of Corporate Integration and Investor Relations. Please go ahead.

Marcio Pinto
Marcio Pinto
VP of Corporate Integration and Investor Relations at CECO Environmental

Good morning, and thank you for joining CECO Environmental's third quarter 2026 earnings call. With me today are Todd Gleason, Chairman and Chief Executive Officer, and Peter Johansson, our Chief Financial Officer. Our earnings release and presentation include the relevant disclosures and non-GAAP reconciliations, and they're available on our investor relations website. Today's discussion includes forward-looking statements, including our 2026 and 2027 outlook and preliminary 2028 expectations, which are subject to risks and uncertainties, including those described in our SEC filings and in our presentation. We will discuss also non-GAAP financial measures. Please refer to the reconciliations and definitions in the presentation and appendix. Our reported results include Thermon from the June 1st acquisition date, and this quarter includes a full three months of Thermon's financial performance. Todd will begin with our business performance.

Marcio Pinto
Marcio Pinto
VP of Corporate Integration and Investor Relations at CECO Environmental

Peter will then review financial results and update the 2026 outlook, and then Todd will return to discuss our initial 2027 outlook and preliminary 2028 view. We will then open the call for questions. With that, I'll turn it over to Todd.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thank you, Marcio, and good morning, everyone. Let me start by saying thank you to our global CECO teams for another outstanding quarter. It certainly is a very dynamic time with tremendous change, global investments in industrial infrastructure, and a fast-paced information environment. What remains consistent is CECO's high-performance results. Let's review. Please turn to slide number 3. The overall takeaway is we had another quarter of record results, and our 2027 outlook points to even more tremendous results ahead. In the third quarter, we delivered revenue of approximately $404 million, adjusted EBITDA of $70 million, and an adjusted EBITDA margin of 17.3%. Revenue more than doubled, and adjusted EBITDA roughly tripled when compared against third quarter of last year. Legacy CECO performed very strongly with organic revenue growth of 30% and adjusted EBITDA growth of 64%. That underlying performance matters.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The quarter reflects continued growth and improving profitability across legacy CECO, together with a full quarter of Thermon and the early benefits of our strategic combination. Total company orders were $778 million, and we ended the quarter with approximately $2.2 billion of backlog. Our opportunity pipeline now exceeds $9 billion. Approximately 80% of our backlog relates to multi-industrial and energy applications, with approximately 20% related to data center applications. Importantly, the projects within that backlog are funded and actively progressing, rather than prospective projects that rely on future development activity to move forward. The Thermon integration remains on track and ahead of schedule. We have now captured approximately $22 million of annualized net adjusted EBITDA savings, representing approximately 55% of the three-year target we laid out, and we've done so in the first six months.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Those are annualized savings from actions completed, with benefits flowing directly into earnings over time. Organizational and cultural integration is progressing nicely as well, and the teams are increasingly unified and focused on executing together to serve our global customers. In the quarter, cash generation was another highlight. We generated approximately $154 million of adjusted free cash flow, bringing year-to-date adjusted free cash flow to $192 million. That cash generation supported debt reduction and brought quarter-end net leverage to approximately 2x. The combination of our backlog, pipeline, and integration progress gives us high confidence as we introduce our initial 2027 outlook. At the midpoint, we expect approximately $2.2 billion of revenue and $500 million of adjusted EBITDA. I will discuss the 2027 assumptions and ranges after Peter reviews our financials in more detail. Now, please turn to slide number four.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

This slide puts the quarter and year-to-date into the context of the high-performance company we have built over several years. Since 2020, we have delivered sales growth at a compound annual growth rate above 20%, expanded EBITDA margins by more than 700 basis points, and we've completed more than a dozen accretive acquisitions. Our sales pipeline has expanded approximately 6x, and backlog has grown approximately 10x. Those are powerful metrics that don't just happen by chance. It has been a steady series of focused investments and strong execution by our great teams. We have also broadened our portfolio. Across industrial air, industrial water, energy, and thermal management, we serve customers with different investment priorities and project schedules. That breadth provides opportunities across multiple markets, and each of our platforms have exciting growth opportunities heading into 2027.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We recognize the questions that some investors are asking about the macro environment, including the durability of demand, the pace of infrastructure investment, and the exposure of industrial suppliers to data center spending. Our view starts with the projects and customer relationships we manage directly. Our backlog consists of funded, permitted, and active projects. Cancellation, or often referred to as debooking rates, remains very low and continue to track our long-term average of below one-half of 1%. Direct engagement with end customers gives us visibility into project requirements and execution schedules. We continue to monitor those schedules closely as projects move through engineering, procurement, and delivery. Backlog quality also supports our margin outlook. The booked margin profile provides a solid foundation for future profitability as projects convert to revenue. We then have additional opportunities through sourcing, productivity, integration savings, and the operating benefits of higher volumes.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The cash performance is equally relevant. Our model has relatively modest fixed capital requirements, and effective management of customer milestones and working capital can generate substantial cash. We saw that this quarter. The resulting debt reduction expands our capacity to support growth and future acquisitions. Additionally, we look at the combination of revenue growth and EBITDA margin as an indicator of performance. The combination of these two metrics is often associated with what's known as the Rule of 30 or Rule of 40 companies. These refer to companies whose numeric addition resulting from the combination of top-line growth rates and operating or EBITDA margins adds to over 30 or 40, as quite often those companies regularly receive higher trading multiples. On the basis shown in this deck, the combination for CECO is over 40, therefore a Rule of 40 company for 2026.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Our initial 2027 outlook is to be a Rule of 50 or higher company. Premier industrial companies operate at a Rule of 30 or higher. We are pleased to continue to be in this premier neighborhood. Finally on this slide, we note that we have a track record of meeting or exceeding the initial annual guidance we provide, and we continue to use the same planning discipline as we do each year. We evaluate customer demand, execution capacity, and the risks in the operating environment, and we translate all that into the opportunities and the challenges ahead. Now I will hand it over to Peter, and he will walk through the quarter's financial results and our updated full year 2026 expectations. Peter?

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Good morning, everyone. Thank you for joining Todd, Marcio, and myself for a review of CECO's third quarter 2026 results and an outlook for the full year. Please turn to page six. On this slide, we present a summary of the key business metrics and performance highlights for the quarter. As a reminder, this is our first report with a full quarter of Thermon in our reported results, and the resulting financial performance was outstanding, demonstrating both the continued strength of the legacy CECO businesses and the strong contributions from the Thermon acquisition. Revenue for the quarter exceeded $404 million, an increase of 105% from the prior year. Legacy CECO revenues increased 30%, supported by the accelerated conversion of our growing backlogs. There were no material project delays that impacted our results in the quarter.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Adjusted EBITDA for the quarter was $70.1 million, up 201% over prior year, resulting in a margin of 17.3%, 550 basis points higher than the same quarter in 2025. Legacy CECO adjusted EBITDA increased 64%. Adjusted earnings per share in the quarter was $0.60, a $0.34 increase over the same period in 2025. Orders in the quarter were $778 million, higher by 234%, reflecting a book-to-bill of approximately 1.92 times. Legacy CECO orders increased approximately 165%. Quarter-ending backlog reached approximately $2.2 billion, another record for CECO, with our legacy business backlog increasing by 167%, reflecting the continued strength in demand across our power generation, energy infrastructure, semiconductor, and broader industrial end markets. Another highlight and record in the quarter was our outstanding adjusted free cash flow, which reached $154 million.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Conversion from adjusted EBITDA was outstanding, reflecting 220% conversion, which allowed us to make substantial reductions in our gross bank debt balances, resulting in a net leverage at quarter end of approximately 2.0 times, well within our target range. This result highlights the improved cash flow generation and margin profile of the new CECO portfolio that we fully expected would result from the combination with Thermon. For the first nine months of 2026, orders were slightly above $2 billion, exceeding full year 2025 bookings by 90%. Revenue was $895 million, and the book-to-bill ratio was approximately 2.3 times. Year-to-date adjusted EBITDA was approximately $131 million, with an adjusted EBITDA margin of 14.6%, an increase of approximately 380 basis points over prior year. Through September, we generated $192 million of adjusted free cash flow.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Strong collections and advance payments from customers contributed to that performance, and we ended the quarter with approximately $530 million of net debt, a substantial reduction from the position at the end of the second quarter. Given the aforementioned orders and cash performance, we will be increasing our full year expectations for both metrics. We are maintaining our revenue and adjusted EBITDA ranges we raised in August. More to come on the full year 2026 outlook when we reach slide 10. Now, please turn to slide number seven for some additional details on our financial results for the third quarter and trailing 12 months. We concluded the quarter with a record backlog of $2.193 billion, up 205% versus prior year, and up 21% sequentially from our previous high of $1.82 billion.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Backlog has now increased in 13 consecutive quarters and has been accelerating over the last eight quarters. Third quarter orders were $778 million, an increase of 234% over the prior year period, as our business platforms booked significant orders across a wide range of end markets, including power generation, LNG, and gas processing, natural gas transportation, semiconductor and electronics production, and industrial wastewater and produced water treatment. On a trailing 12-month basis, orders have reached $2.355 billion, a 147% increase over the prior trailing 12-month period, and book-to-bill was 2.12 times, an outstanding result. Revenue is another strong result in the third quarter, exceeding $400 million, 105% greater than last year, inclusive of a full quarter of Thermon's performance. CECO's standalone revenue in the quarter was $256 million, approximately $21 million above the company's previously quarterly high set in quarter two of this year.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

We expect revenue growth to continue in the fourth quarter, tracking the significant expansion of our backlog and growth in orders, most notably in our power generation, semiconductor, and natural gas infrastructure application. Trailing 12-month revenue finally broke through the $1 billion level, reaching $1.110 billion, a record for any 12-month period in company history of 55%. We expect sequential revenue growth to continue, supported by our growing backlog, strong sales pipeline conversion, and demonstrated execution. Adjusted gross profit for the quarter and for the trailing 12 months increased 127% and 53% respectively on higher volumes and the benefits of the Thermon combination. Sequentially, margins increased 262 basis points to 36.3%.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

This improvement was expected as margins moved higher due to improving volume and mix on larger projects, newer higher margin projects with faster revenue recognition profiles, improving execution and operating excellence efforts, and the benefits from blending in the Thermon margin profile. Trailing 12-month gross profit margins were 34.4%, a level we expect to maintain or deliver above. Adjusted EBITDA for the trailing 12-month period, which included four months of Thermon operating results, was $160.4 million, resulting in a margin of 14.4%, an increase of nearly 336 basis points. Adjusted EBITDA delivery benefited from higher volumes, accretive Thermon product margins, lower operating G&A expenses, ongoing complexity reduction efforts, including the benefits from our 80/20 efforts, and lower corporate G&A spending. Along with the higher adjusted EBITDA, free cash flow conversion was substantial, and I will provide more color on cash flow and our debt position on slide nine.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Please now turn to page eight for a few highlights on backlog. Backlog continues its impressive growth on both a sequential and year-over-year basis, closing the quarter at $2.193 billion. Book-to-bill in the third quarter was approximately 1.9 times. Our backlog, which is all firm and confirmed with customer POs and recovery terms in the rare case of a cancellation, reflects a substantial portion of our future revenue and has now increased by approximately 10.2 times since the end of 2021. Our sustained strong order performance and our continued success in converting our $9+ billion sales opportunity pipeline underpins our expectation of extending the trend of greater than 25% top-line growth for the full year in 2026.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

In terms of backlog composition, power generation projects for customers in utility, both gas and nuclear powered, industrial heat and power, and data center applications represents approximately 60% of our quarter-ending backlog. The remaining approximately 40% consists of a diverse mixture of projects and customers across energy and industrial end markets, including semiconductor and electronics, natural gas processing and transport, hydrocarbon and chemical processing, process electrification, and industrial water and wastewater treatment. The legacy Thermon business represented approximately 13% of CECO's backlog, as the Thermon revenue mix is comprised of shorter cycle and faster turning orders and projects. Now, please turn with me to slide nine for an update on cash flow and indebtedness.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Third quarter adjusted free cash flow continued the strong momentum started in the second quarter, as we generated approximately $154 million of cash and pushed our year-to-date adjusted free cash flow to approximately $192 million, an increase of approximately $191 million year-over-year, representing approximately 147% of adjusted EBITDA. For the trailing 12 months, free cash flow generation slightly exceeded $200 million, or approximately 125% of adjusted EBITDA. Cash flow generation benefited from strong collections in the quarter on second quarter billings for large project milestones, receipt of down payments for new bookings, growth in our billed and excess balances, and improved working capital management, with a strong and increasing focus on inventory.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Numerous major project milestones and the resulting customer billings were realized in the third quarter, creating customer receivables that we expect to collect during the fourth quarter and first quarter of 2027, continuing our free cash flow generation surge. Capital expenditures in the quarter were modest and largely driven by our ongoing ERP migration and consolidation initiative, which we expect will be essentially complete for CECO legacy entities by mid-2027. We spent money on select projects and acquired facilities that were ongoing within the Thermon businesses. With the modest CapEx needs and our strong cash generation, we were able to apply a majority of our cash flow to reduce our debt balance.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Gross debt at the end of the third quarter of approximately $604 million was lower by approximately $128 million, reducing our net debt to approximately $530 million and a third quarter end leverage ratio of 2.0 times our trailing 12-month bank EBITDA. This is at the low end of our targeted leverage range of 2.0-2.5 times, demonstrating once again our ability to quickly reduce the level of our borrowings made to support accretive and strategic growth initiatives. With the debt repayments we have made in the quarter, CECO has created substantial capacity of approximately $344 million within our current credit facilities, providing substantial liquidity to support our anticipated working capital, trade finance, capital expenditure, and strategic investment requirements.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

With additional sizable collections expected in the fourth quarter supporting further repayments, we anticipate year-end leverage to be further reduced below the low end of our target leverage range, further increasing our revolver capacity and further lowering our cash interest expenses. Now let's flip to page 10 for an update on our full year 2026 outlook. We are increasing our full year orders outlook to $2.5 billion or greater as market demand remains robust and our sales opportunity pipeline continues to expand. On this level of orders, we expect year-end backlog to exceed $2.2 billion. We are also raising our adjusted free cash flow outlook to approximately 100% of adjusted EBITDA, an increase from our previous expectation of at least 55%. This improvement reflects the cash already generated year to date and our current expectation for further collections and project working capital improvements through two years end.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

In August of this year, we increased our outlook for full year revenue and adjusted EBITDA, incorporating the impact of the Thermon acquisition and expected higher CECO legacy business growth. We are maintaining our August revenue guidance of $1.3 billion-$1.375 billion and adjusted EBITDA of $200 million-$225 million. The adjusted EBITDA outlook includes approximately $5 million of Thermon cost synergies that will be realized during 2026, and as a reminder, includes seven months of Thermon results beginning from June 1st. On a pro forma calendar year basis, including a full year of Thermon results, we expect that 2026 revenue would reach $1.5 billion-$1.6 billion, and adjusted EBITDA of $255 million-$280 million. That pro forma perspective provides a better jumping off point for comparing the 2027 outlook that Todd will share with you shortly.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

That concludes my review of CECO's third quarter 2026 results and a discussion of the full year outlook. I will now pass the mic back to Todd to provide, as we have in prior years, our initial view of next year's outlook and his closing remarks.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thanks, Peter. Please turn to slide number 12. As Peter just mentioned, each of the past five years on our third quarter earnings call and release, we provide an additional outlook for the next fiscal year. Each year, we substantially go through a similar process to compile this initial outlook. We provide our guidance construction roadmap on this slide. Our initial 2027 outlook reflects the ongoing business we can see through customer engagement, our order book, and the execution plans associated with our operating teams and their goals and objectives. We start with an assessment of our sales pipeline, which has risen to above $9 billion. We combine that pipeline analysis with a similar evaluation of our backlog, which, as you know, is approximately $2.2 billion. Power generation markets remain very strong, and our diversified industrial businesses provide additional opportunities.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We expect growth across all of our business platforms as we head into next year. The margin profile of backlog also supports this outlook. Thermon adds to the profitability of the combined portfolio, while productivity, sourcing, and operating execution provide further upside. Those benefits are reflected in our planning. Integration savings are progressing ahead of schedule. As I noted earlier, we have captured over $20 million of annualized net adjusted EBITDA savings, which is approximately 55% of our three-year target. We now expect to capture approximately 70% or more of the target by the first anniversary of the acquisition. Our teams have also actioned approximately $2.5 million of revenue synergies. The opportunities include thermal solutions on power generation and gas filtration projects, along with early opportunities in international water applications.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We continue to see the potential to add one or two percentage points to Thermon's organic growth through commercial synergies. In just a few months since integrating Thermon, we are off to a solid start. We are balancing those opportunities against uncertainty in the operating environment. Inflation, policy changes following the election, geopolitical developments, and sentiment around AI and data center investment all warrant attention. We have considered those factors in constructing our outlook. Some factors will improve the market, while others might create more pressure or uncertainty. That said, our leadership team has the experience, and we have processes in place to monitor and adjust. I would remind our audience that since initiating our annual guidance process in the third quarter of 2021 for full year 2022, we have exceeded our initial guidance in four of the five years and essentially met it in the remaining year.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The average outperformance has exceeded 10% for revenue and adjusted EBITDA. That history reflects our planning processes and execution. While our current ranges reflect the information that is available today, we remain very confident in how we build our outlook. Please turn to slide 13. It is rewarding and exciting to provide our 2027 outlook. At the midpoint of our initial 2027 guidance, we expect approximately $500 million of adjusted EBITDA on approximately $2.2 billion of revenue. That implies adjusted EBITDA margin of approximately 22.7%. Just tremendous growth and year-over-year performance on almost every metric. The progression reflects our full year of Thermon, the conversion of our larger backlog, and the margin and cost opportunities across the combined companies.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We have direct customer engagement supporting the projects in that backlog, and the data center projects, which I already mentioned represent about 20% of our backlog, are all progressing on schedule. The slide also provides a preliminary view of continued growth in 2028. We provide this preliminary growth projection based on meaningful discussions we have with customers and our long-term analysis of our opportunity pipeline, which we anticipate to grow above $10 billion in the next few quarters. With these inputs, we currently see preliminary 2028 delivering double-digit top line and bottom line growth. This would yield adjusted EBITDA margins in that period of approximately 23.5%. We hope this snapshot of 2028 helps provide insights into our current assessment of market opportunities ahead, not just in 2027. We look forward to and are confident in our ability to execute through the upcoming periods.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

As always, these operating plans include appropriate cost actions and contingencies alongside the benefits of integration and our productivity. We will update our expectations as the year progresses and our visibility develops. Turning to slide 14. This simply provides our 2027 outlook with a slightly different format in more detail. Just to repeat a few things, as I just mentioned, our 2027 revenue outlook is for $2.1 billion-$2.3 billion, and we expect adjusted EBITDA of between $475 million and $525 million. At the midpoint, revenue growth exceeds 60% against the 2026 reported outlook and is up approximately 40% against the pro forma outlook. Adjusted EBITDA growth exceeds 130% against the reported outlook and would be up approximately 90% against the pro forma outlook. Again, just tremendous growth. We expect orders to grow 20% or more with a strong book-to-bill ratio throughout the year.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Our pipeline and market activity support that execution, while backlog provides visibility to revenue. The EBITDA outlook incorporates higher backlog margins, integration savings, and the operating benefits of volume and productivity. It also factors in appropriate levels of inflation and other headwinds. We expect adjusted free cash flow conversion in the range of 50%-60% of adjusted EBITDA. This initial assumption reflects our multi-year average. We will continue working capital programs to pursue additional cash generation as project schedules and customer terms allow. Now, please turn to our final slide, 15. CECO serves diverse industrial and environmental markets, and we see growth opportunities across more than a dozen business platforms. Our third quarter performance reflects the investments we have made in our people, our processes, and systems, and together with the value of the Thermon combination and their great teams.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The third quarter builds upon our strong legacy of CECO growth. A full quarter of Thermon and substantial cash generation are also highlights. Integration is ahead of schedule, and backlog and pipeline support our initial 2027 outlook. Our leadership teams remain focused on customer execution and the operating actions that are within our control. We continue to monitor market developments and will adjust where necessary and communicate our progress. Once again, as always, I thank our global teams for the work that is done to produce these incredible results. And thank you to our customers and shareholders for your continued support. With that, operator, I would like to open the line for questions.

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group. Your line is now open.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum Capital Group

Yeah. Good morning, Todd and Peter and Marcio. Thanks for taking the questions. Appreciate all the color on everything, including data centers. Maybe first question on backlog. I mean, it sounds like most of your backlog and growth is coming from power gen and other areas of the industrial complex. Can you just talk about the margins within that backlog and how much conversion you are expecting in 2027 guidance and how that maybe compares to prior years?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah. I think a lot of consistency in how it compares to prior years. Things can move up and down a little, as always. But to stay true to that, we expect at least 70% to convert in 2027 in our current backlog. So as we wrap up the year, as backlog grows and we enter 2027, that ending 2026 backlog will turn at least 70%, sometimes higher, in the next year. So that is usually our average. There are percentages of our backlog that turn faster and some percentages that are associated with 18 months of revenue generation or even more, but that has been our consistency. I would say in respect to the margin question, we are at a higher gross margin level in backlog than our current gross margins that we just reflected in year-to-date and in the quarter.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We have a lot of visibility to our ability to execute on the margin profile that we have outlined. I would say that as we book projects here in the third quarter and we look at the projects that we expect to book in the next few quarters, we like the margin profiles associated with those as well. While there are areas around inflation and supply chain constraints that we monitor and we constantly are ensuring that we are addressing, we really like the way that our revenue is going to turn next year. It is very much in line with our expectation, and as I just suggested, the margins are certainly higher than what we have delivered already.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum Capital Group

Understood. Thanks. Maybe on the pipeline and the orders in the quarter, any areas of strength to note for the quarter orders? I think I heard commentary of the pipeline growing to $10 billion. Just maybe talk about what is driving that, and again, just conversations with customers that you are having on kind of interest rates and inflation.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah. What is driving the $10 billion preliminary view of where it is heading is our sales pipeline, the $9 billion, are projects that we know will be, or we anticipate will be actively won or lost or booked in some way in the next 18-24 months. If it is longer, if it is further out than that, we do not put it in our sales pipeline that we share with investors or that we articulate. The $10 billion includes jobs as we move forward that we see coming down the pipeline that are not necessarily yet in that $9 billion. While we articulate that the next 18-24 months will be $9 billion, we continue to see that grow as we look out into the second half of 2028 and 2029, and those projects are substantial as well.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The other thing I would say is, as you know, Aaron, and most of our people that track us, we continue to grow in new markets, geographies. Those markets and geographies in the industrial space are quite often growing. Our growing our sales pipeline is simply a result of the team's efforts to introduce our services and solutions to new vertical markets and new geographic markets. I know Peter and I spend a lot of time on our operating reviews with the businesses, talking about the growth of their markets and pursuits, and that has typically been one of our healthiest areas of strategic focus organically, is expanding our opportunity set, or at-bats, as they say, in the various vertical markets and geographic markets, and we do not see that slowing down anytime soon.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum Capital Group

Great. Thanks for taking the questions. I'll turn it over.

Operator

Thank you.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum Capital Group

Thanks.

Operator

Our next question comes from the line of Bobby Brooks with Northland Capital Markets. Your line is now open.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

When you initially acquired Thermon-

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Hey, Bobby.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

It was discussed how. Good morning.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Bobby, you're breaking up.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Can you start over?

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Can you start over? We didn't hear the beginning of your question.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

Hey. Can you guys hear me better now?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yes, thank you.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

Sorry about that. When you guys initially bought Thermon, it was discussed how, given how earlier CECO gets involved in certain projects, it's given several months to even a year ahead of when Thermon team might have known about certain projects that need their thermal management. It seems like, I think you mentioned there were some sales synergies in the quarter that were captured. Is that related to that? I just wanted to just get a broader update of, like, is that still something you think can really help add organic growth to the business and just help cross-selling?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah. I'll start, and then Peter can add. He's also done a lot of work on this. The way your question was worded is accurate. Our visibility to the sales pipeline and in our backlog gives a unique access point for Thermon and their teams to go and evaluate opportunities to cross-sell or sell into those projects or those upcoming projects. That visibility is a salesperson's dream. And we provide, therefore, access to new market pursuits for Thermon every day across all of our platforms. The sales to date reflect some of that, where we have already booked or will be booking a project in backlog. We see an opportunity to include a heat process solution, an immersion heater, a heat trace, or something similar, and we get the Thermon teams involved, and we get them qualified on the project, and off we go.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

That's what's been happening there. There's a lot of other opportunities, I think, for both sides, not just Thermon finding opportunities to sell through CECO, but even in some cases, CECO leveraging the great relationships that Thermon has, the knowledge that they have in their geographic markets and industrial markets. Look, we say with conviction that we believe Thermon will The Thermon business has at least a point of organic growth as a result of this combination, and I would say that there's additional sales on the CECO side as well that can add just nice growth to the combination.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Yeah. Bobby, you used the term called cross-selling. That is not the strategy for bringing the commercial teams together. It is, in some instances, what we're finding happens is that one of our teams passes a lead to another team, and they close. We are not creating a single sales force with an organization that sells across all of the applications and technologies. We're still maintaining the integrity and the focus of our business platforms because that's what our customers expect, and that's how our teams best execute. Where we're seeing the benefits are where customers are asking us to present them the solution with more technology in the package. We need to be careful that when you use the term cross-selling, we're not seeking the synergies of one guy selling everything. That's just not our strategy.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

Thank you for that color, Peter. That's very helpful to think of. And then just on, to kind of piggyback on Aaron's question a little bit more, I think you mentioned 70% of the 20 70% of what will exit the back, or 70% of the year-end backlog expected to convert into sales in the next 12 months. Could you just discuss, then, the remaining bridge of the 2027 guide is just typical cadence of more short-cycle book-and-bill stuff? And am I thinking of that right, or is there a little more nuance?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

No, it's quite simply that. I mean, it's why we start off with a range, 70%, could be higher as we roll into next year, that turns into revenue. Then we have regular aftermarket, and services, and short-cycle sales. That provides us, frankly, with more upside if we see our short cycle pick up throughout a quarter or throughout the year. Look, I feel like the visibility we have is unique versus a lot of companies in the industrial space. That's one of the reasons, not the only reason, but it's one of the reasons why on the third quarter earnings call, we provide full-year outlook for next year. I don't know what percentage of companies do that in late October or early November, but we are certainly in the minority of companies that provide next year's outlook this early.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

But that visibility that we have in backlog and in our sales pipeline helps support that confidence. It's not just confidence. It really supports a bottoms-up model that allows us to see 70% of our revenue walking into the year almost with high visibility. Then the other 30 or so percent of our revenue is what most companies do, which is we model the market, we model our typical demand, we model our flow of our short-cycle sales and aftermarket and services. It's a combination of visibility and knowledge of how our markets are growing and how we're benefiting from those markets.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

Super helpful. Just last one for me. I know in the past, there's been some excitement around large industrial water projects, specifically within the Middle East, kind of tied to some new energy production over there. I was just curious, was any of the 3Q orders benefit from that? Has that opportunity changed just with continued kind of kinetic energy over there? Just wanted to get a sense what's happening over there.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah. Water has had continued to have good growth in the quarter. We have very large opportunities that we spoke of earlier this year, and we still have those opportunities. Some of those have been a little bit delayed because of some of the conflicts in the region, in the Middle East region. We're still seeing there's a large appetite for those when that disruption subsides. We haven't put that in our outlook so much. We talk about it, and they're still there. They're included in our pipeline. But at this point, we remain very confident in our strong double-digit growth across industrial water. Those larger-scale projects will be upside when they happen.

Bobby Brooks
Bobby Brooks
Analyst at Northland Capital Markets

Terrific to hear. Congrats on a strong quarter again, guys. I will return to the queue.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thanks, Bobby.

Operator

Thank you. Our next question comes from the line of Rob Brown with Lake Street. Your line is now open.

Rob Brown
Rob Brown
Analyst at Lake Street

Hi, good morning. Just wanted to maybe hit the visibility question again, kind of looking into 2028. On the power side, how much visibility do you typically have as these power projects get developed? I assume you sort of, I guess, know by several years out that things are happening. But just maybe talk about the visibility in the power market in particular and how much kind of visibility you have there.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

A lot of visibility, Rob. This is probably the market we have the most visibility at the moment. You don't have to look much further than a lot of the power generation reports that are out there, both public companies, reports that are out there that are selling power generation solutions, as well as utility and demand, the need for more power for a range of electrification, digitization, compute, grid, base load power. There's no shortage of a need for power. It is not just tied to one thing. I think that the themes that are often associated with it in the short term are certainly important themes and important markets, but they're not the only ones. Even if some of these markets adjust somewhat in terms of their attractiveness, the need for power doesn't seem to be modulating much.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

As a result, we see power markets out three, four, five years. We're not here to make a claim that we're going to win X% of the jobs, et cetera. But as a result of the need for power and infrastructure across energy to support the need for power, gas infrastructure, and other related energy transition markets, we would say our visibility is probably at the highest it's been for a two, three, or four-year cycle. This is the first time that we've sort of given the next year's outlook with a preliminary sort of snapshot of the following year.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

But we thought if there was ever a time to help the investment community with our view, our informed and deeply educated view of the markets that we serve and are a leader in, that we see strength in those key markets, especially power generation markets, for several years. Like I said, it is not just based on one thing. It is based on a multitude of growth, and need, and demand. Again, our 2027 reflects our backlog, and our 2027 reflects projects that we know are happening. 2028 and 2029 and 2030 would be more forward-looking, but we have a lot of visibility into the next few years.

Rob Brown
Rob Brown
Analyst at Lake Street

Okay, great. Thanks for that color. On the EBITDA margin, you're kind of getting consistently into the low 20%. What's sort of your thinking on where that EBITDA margin can sustain at, or what's your sort of goal on that EBITDA margin level?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Well, we certainly want to sustain EBITDA margins, and we have a track record of doing so. It feels good to use the number 20-something associated with EBITDA margins. We forecasted that we could be in the high teens. We said we needed to get there first before we would talk about the 20s. Now that we're in the 20s, you're already asking me where we're going to go, Rob. I mean, you guys are insatiable. No, look, I think we're giving a preliminary view again that we'll be in the 22%, 22.5%, 23% range as we enter the next 18-24 months. We're pretty committed to that. We're going to continue to look at ways to get productivity. We're just getting started on a lot of our operating excellence journeys as a combined company with us and Thermon.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Anything we do going forward, we feel will benefit from our maturity in these processes and programs. Volume leverage is always going to be attractive for us when we get up to these levels. We got a ton of growth in front of us. I don't know that I'm ready to start to talk about margins in a long-term range above this 22%, 23%, but I can assure you that as we think about a longer-term outlook and guidance, which we'll be doing at some point in 2027, they will be higher.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Rob, think about it this way. Rule of 40 company, 20% and 20%, for a sustained period with higher rates of cash conversion, and a very deep pipeline of opportunities to invest that additional free cash flow for growth. I'm not sure whether you're 22% or 24%, it makes much of a difference. Once you've cleared the 20% hurdle and are growing 20% top line, and have the number of, and the track record of converting cash into growth as a compounder, you need to say much more.

Rob Brown
Rob Brown
Analyst at Lake Street

Okay. Yep, perfect. Great. Thank you. Congrats on all the progress. I'll turn it over.

Operator

Thank you. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is now open.

Tomohiko Sano
Tomohiko Sano
Analyst at JPMorgan

Hi. Good morning, everyone.

Peter Johansson
Peter Johansson
CFO at CECO Environmental

Hello, Tomo.

Tomohiko Sano
Tomohiko Sano
Analyst at JPMorgan

Thank you. First, congratulations on a very strong quarter. My question is on 2027 and 2028 outlook. What is the most likely constraints to deliver these outlooks, including capacities and labors, supply chains, or working capital? What levels of investment will be needed to address it? Thank you.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thanks. Good question. Always a very appropriate question when we deliver preliminary outlook. You could ask that question in 2021, you could have asked that question in 2022, you could have asked that question in 2023. I think you get my point here. We view the same constraints. Each year, there's usually a unique one, let's just say. It could be, back in the day, it could be a unique constraint that we certainly can't control, like COVID, or potentially the introduction of some new theme like tariffs that are going to have to be adjusted in real time as you experience them. Obviously, there's geopolitical conflicts. I'll start with, we look, we've all been in our jobs long enough to know there are going to be some things that come up in 2027 and 2028 that we just can't predict today.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

You want operating teams, you want a team with a lot of visibility in their projects, in the relationship with the direct end customer, that can then go, okay, well, how do we navigate and adjust for that uncertainty? Every time we give guidance, Tomo, and to the broader audience, we think about what could go wrong first, right? We think about, what are the challenges? Inflation, could that go higher? What does that look like? Can we price it through? Will we get productivity? What could be coming around the next corner that we just can't anticipate? Maybe it's another domestic situation that we have to understand, or an international situation. Those things you can't predict, but you have the experience built into your processes to react appropriately, and if not even proactively.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

As far as the things we do know, look, I think that we feel very good about our supply chains. We feel very good about the current cost environment and inflation environment. We have a great group of teams, and we're growing. We're adding talent regularly. That is not getting easier, but we have our arms around it. I think that we feel very balanced, as we do each year, that there's more opportunities to exceed. There are challenges that we know, and we have our arms around those, and we have them priced in. Then we have challenges that we don't yet know, but we have the experience and the processes to absorb them and adjust, and that's our expectation. Again, our track record is proven.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Our processes are proven, and I don't think we're doing anything particularly different here this year as we constructed our 2027 outlook.

Tomohiko Sano
Tomohiko Sano
Analyst at JPMorgan

Thank you. That's helpful. And on the other one is the balance sheet and capital allocations. The net leverage has fallen by 0.7 turns to 2.0 times since the Thermon acquisition closed. What is your target leverage, and how will you prioritize incremental cash among the debt reductions, invest spend, and M&A? Thank you.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We're going to invest in growth. That's what we do. We get our debt to an appropriate level. It's there. Could go lower. It's not like we say we have to get to 1.5 times levered. We're very comfortable going higher. We generate great cash flow, as we've demonstrated so far this year. We've paid down our debt expeditiously. Interest rates are at a little bit of a higher level, so if you can't generate free cash flow and pay down your debts, you should be thinking about investments differently. But we can, and we're going to think about investments for growth, I think, appropriately, and therefore aggressively. We're both a programmatic investor in growth internally for organic growth. We have built teams around the world. We have built supply chains around the world. We are innovative in our application engineering and for solutions.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We also then invest programmatically around M&A. We buy leading winning companies with great teams, cultures, and operating environments. We add their niche industrial leadership to CECO's portfolio, and we help each other grow even more. So, how we use our balance sheet internally will be for growth. How we use our balance sheet for inorganic will be M&A, and we will continue that programmatically for years to come.

Tomohiko Sano
Tomohiko Sano
Analyst at JPMorgan

Awesome. Thank you very much. Congrats again.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thank you.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Jim Ricchiuti
Jim Ricchiuti
Analyst at Needham & Company

Thanks. Good morning. Hopefully you can hear me okay.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We can.

Marcio Pinto
Marcio Pinto
VP of Corporate Integration and Investor Relations at CECO Environmental

Yeah. Good morning.

Jim Ricchiuti
Jim Ricchiuti
Analyst at Needham & Company

Perfect. Morning. I'm just wondering, just with respect to the last comment on M&A, I'm wondering, are the opportunities you're evaluating First of all, how active is the pipeline, just given the way you're paying down debt and with the cash flow generation? Are the opportunities you're evaluating changing at all in light of either the market conditions or the changing macro environment?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

We continue to see incredible opportunities, Jim. We have built an extremely robust pipeline of M&A. It allows us to move swiftly towards the best candidates for acquisition, and we then focus on building a strategic thesis, like we did with Thermon, like we did with other acquisitions in the last five or so years. I think that the dynamic overall has been pretty stable. We find great teams and great businesses that we think would be perfect fits for us, and the multiples work out because we continue to grow and achieve success together post-integration. I think that the businesses that we're finding that are out there across industrial niche leadership areas continue to be very attractive. Any acquisition we do, I think will fit our profile very nicely, and we feel good about the pipeline.

Jim Ricchiuti
Jim Ricchiuti
Analyst at Needham & Company

Good. Follow-up question just on that, of the initial 2027 outlook that you're providing today. Thank you, by the way, for all the color of not only 2027, but even looking out to 2028. Curious, I think you said in the deck, high single-digit growth within the Thermon business. You talked about another couple of points of growth. Is that baked into the initial 2027 guide? You also alluded to pricing, and I'm just wondering how the overall pricing environment across the portfolio stands as it relates to that initial 2027 outlook. Kind of a two-pronger for 2027.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

I'll start with price. Price remains good. We look at price a little different maybe than some companies because so much of what we do is project by project, so it's not your standard list price. We do have at least 35% of our company is standard product of some sort, so they have a standard list price of which we've done a nice job of increasing to keep up, if not get ahead of inflation and the pressures associated with that. Look, it's really a strong demand environment across reshoring. It's a strong demand environment across infrastructure. It's a strong demand environment in power and in energy. Look, we're in a good environment for our ability to If we're executing, we're getting price, and we're going to be able to defend it.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

On Thermon, they grew at double digits in the third quarter, which is very, very strong for them from a historic perspective. I think Thermon can keep that up. They have incredible leadership. Their organization is focused on the markets that they can see with the best growth. We're putting in probably high single digit for now, but there's upside in Thermon, not just uniquely Thermon, but in things that we can do together across our Thermon and our CECO platforms, all of which are working very effectively together to pursue these opportunities that we've been talking about. I think we've built in a little conservatism on what Thermon can grow, but we like building it in like that where we're starting the year.

Jim Ricchiuti
Jim Ricchiuti
Analyst at Needham & Company

Got it. Thank you.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thanks, Jim.

Operator

Our next question comes from the line of Joseph Giordano with TD Cowen. Your line is now open.

Analyst at TD Cowen

Hi, good morning. This is Chris on for Joe. The midpoint implying a 22.7% EBITDA margin. Just wondering if you could talk about what changed to support reaching that level sooner than the prior expectation for approximately 20% from the June framework? And should we expect margins to approach the 2027 midpoint earlier in the year, or is the outlook dependent on a meaningful second half ramp?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah, look, it's a gradual build, I'd say, a little bit as we get volumes higher, because some of it is related to volume absorption in a good way. So the margin expansion associated with volumes grow throughout the year a little bit. That's just the way we're currently building it. I think from where we're at today in the third quarter, you're going to continue to see EBITDA margin expansion. So, a little bit more in the second half than the first half, to answer the question, Chris. We appreciate that you guys are going to try to want to model that in accurately. So, obviously, we can be helpful in how to think about how volumes look like they could grow throughout the year based on our project portfolio, et cetera. But to get above 20% a little faster, it's all reflected in this higher growth profile.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

The margins that we have in our backlog associated with Jim Ricchiuti's question on pricing and just really good demand cycle, it's all reflected in our backlog margin, which allows us to be a little ahead of schedule.

Analyst at TD Cowen

Great. Thank you. Should we expect normal seasonality in the first quarter of next year, or does the size and timing of backlog conversion create a meaningfully different start to the year?

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Yeah, I'd expect a similar seasonality to the first quarter. Some of it's seasonal. Just coming into the year, a lot of projects reflect that. A smaller quarter in a sense, and a bit of a reset on project timing and some of similar nature. So, look, we don't have anti-gravity shoes as we walk into 2027 on some of those seasonal components. I would just suggest that it's going to be somewhat similar to our typical build, where Q1 is one of our lowest, if not the lowest quarters, just in terms of size and volume, et cetera. We also have some Q1 expense and cash payments associated with everything from taxes and other beginning-of-year bonuses and similar to that. So again, there's just some seasonal factors in the market.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

There's some seasonal factors on our P&L, and there's some seasonal factors that are just, they're very consistent.

Analyst at TD Cowen

Great. Thank you very much.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thank you.

Operator

Thank you. I am currently showing no further questions at this time. I would now like to hand the call back over to Todd Gleason for closing remarks.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Okay. Thank you. Thanks for everyone for the questions. I know we went a little over today. Appreciate the interest. We will be participating in several investor events throughout the remainder of the quarter, including being at the Baird Industrials Conference in Chicago tomorrow, as well as the IDEAS Conference here in Dallas in a couple of weeks. So we look forward to seeing a lot of investors at those events. I would also once again like to thank our global teams, continue to deliver for our customers every day. As always, I am proud to lead CECO as we protect people, we protect the environment, we protect our customers' investment in their industrial equipment. We look forward to providing more updates as we go through the next few months and as we head into 2027. Have a great rest of your day, and we will talk to you soon.

Todd Gleason
Todd Gleason
Chairman and CEO at CECO Environmental

Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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