CECO Q3 2026 earnings call transcript, November 9, 2026

So while there are areas around inflation and supply chain constraints that we monitor and we. You know, and we constantly are ensuring that we are addressing. We really like the way that our revenue is going to turn next year. It's very much in line with our expectation. And as I just suggested, the margins are certainly higher than than what we've than what we've delivered already.

Understood. Thanks. And then, you know, maybe on the pipeline and the orders in the quarter, any areas of strength to know? For for the quarter orders. And then I think I heard commentary of the pipeline growing to 10 billion. Just maybe talk about, you know, what what's driving that? And again, just conversations with customers that you're having on kind of interest rates and inflation. Yeah. So what's driving the 10 billion dollar preliminary view of where it's heading is, you know, our sales pipeline, the 9 billion are projects that we know will be. The we anticipate will be actively won or lost or or, you know, booked in some way in the next 18 to 24 months. If it's if it's longer, if it's further out than that, we don't 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, you know, necessarily. Yet in that 9 billion. So while we articulate that the next 18 to 24 months will be 9 billion, we continue to see that grow as we look out into the second half of 28 and 29. And those projects are substantial as well. The other thing I'd say is, as you know, Aaron, and most of our people that track us, we continue to grow into markets, geographies, those markets and geographies in the industrial space are quite often. growing. So, you know, us 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 is typically been one of our healthiest areas of strategic.

focus organically is expanding our opportunity set, our at-bats, as they say, in the various vertical markets and geographic markets. And we don't see that slowing down anytime soon. Great.

I'll turn it over. Thank you. Thanks.

Hey, hey, can you guys hear me better now? Yes, thank you. Sorry about that. So when you guys initially bought Thermon, it was discussed how given CECO, given how earlier CECO gets involved in certain projects, it's given, you know, several months to even a year ahead of when Thermon's 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? And just wanted to just get a broader update of, like, is that still something you think can really help, you know, add organic growth to the business and just help cross-selling? Yeah, I'll start and then Peter can add. He's also done a lot of work on this. So, the way your question was worded is accurate. Our visibility to the sales pipeline and our backlog gives a unique access point for Thermon and their teams to go and evaluate opportunities to cross-sell or sell into those opportunities, those projects or those upcoming projects. So, that visibility is a sales. And we provide, therefore, access to new market, you know, 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. So 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. So, 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.

Bobby, you used the term called cross-selling. Well, that is not the strategy for bringing the commercial... ...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. So 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.

Thank you for that color, Peter. That's very, very helpful to think of. And then just on to kind of piggyback on Aaron's question a little bit more so, 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, so then like the remaining bridge of the 27 guide is just like typical cadence of like more short cycle book and bill stuff? Am I thinking of that right, or is there a little more nuanced? No, it's quite simply that. I mean, you know, that's why we start off with a range, you know, 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. And so 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. outlook this early. But that visibility that we have in backlog and in our sales pipeline helps support that confidence. And 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. And 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. So it's a combination of visibility and knowledge of how our markets are growing and how we're benefiting from those markets. Super helpful. And 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 sale, any of the 3Q orders benefit from that? Has that opportunity changed just with continued, you know, continued kind of kinetic energy over there? Just wanted to get a sense what's happening over there. Yeah, water has had good growth in the quarter. We have very large opportunities that, you know, 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. And so, you know, we're still seeing there's a large appetite for those when that disruption subsides. We don't have that. 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, you know, we remain very confident in our double digit, strong double digit growth. Across industrial water. And those larger scale projects will be upside when they when they happen. Terrific to hear. Congrats on a strong quarter again. I'll return to the queue.

Thanks, Bobby.

Thank you.

A lot of visibility, Rob. You know, 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. 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, baseload power. There is no shortage of a need for power. It is not just tied to one thing. I think that that 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. And so even if some of these markets adjust somewhat in terms of their attractiveness, the need for power doesn't seem to be modulating much. And as a result, we see power markets out three, four, five years. And, you know, we're not we're not here to to make a claim that, you know, we're going to win. Six percent 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. And this is the first time that we've sort of given 2020, you know, the next year's outlook with a preliminary sort of.

snapshot of the following year. But we thought if there was ever a time to help the investment community with our view, our informed and deeply, you know, in sort of an 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. And, and I guess I said, it is not just based on one thing. It is based on a multitude of growth and need and demand. And, you know, again, our 27 reflects our backlog and our 27 reflects projects that we know are happening. 28 and 29 and 30 would be, you know, more forward looking, but we have a lot of visibility into the next few years.

Okay, great.

Thanks for that color.

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 it, or what's your sort of goal in that EBITDA margin level? 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, you know, 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 to 24 months. We're pretty committed to that. You know, we're going to continue to look. 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. 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've 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, you know, 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. 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 penalty. 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.

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

Hello, Tomo.

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? You know, maybe it's another, you know, 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. As far as the things we do know, you 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, you know, not getting easier, but we have our arms around it. So, 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. And 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, you know, is proven. Our processes are proven and I don't think we're doing anything particular. different here this year as we constructed our 27 outlook. Thank you. That's helpful. And on the other one is the balance sheet and capital locations. So the net leverage has fallen by 0.7 turns to 2.0 times since the settlement acquisition closed. What is your target leverage and how will you prioritize incremental cash among the debt reductions, investment?

Thank you. We're going to invest and grow. 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. But, you know, 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. And 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.

Awesome.

Thank you very much.

Congrats again. Thank you.

Good morning.

Perfect.

Good morning.

You talked about another couple of points of growth. Is that baked into the initial 27 guide? And then just 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 27 outlook. So kind of a two-pronger for 27. I'll start with price. Price remains good. You know, 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, you know, your standard list price. We do have at least, you know, 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. And 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. So 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. And then, yeah, on the 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.

Great, thank you. And 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? Yeah, I'd expect a similar seasonality to the first quarter. Some of it's... Seasonal, you know, just, you know, coming into the year, a lot of projects reflect that. A smaller quarter, in a sense, you know, and a bit of a reset on project timing and similar nature. So, look, you know, we don't have anti-gravity shoes as we walk into 2027 on some of those seasonal components. And I would just suggest that, you know, that it's going to be somewhat similar to our typical build. Q1 is one of our lowest, if not the lowest quarters, and 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. There's some seasonal factors on our P&L, and there's some seasonal factors that are just, you know, they're very consistent.

Okay, thank you. And 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 Industrial. 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'd also once again like to thank our global teams continue to deliver for our customers every day. And as always, I'm 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 27. Have a great rest of your day, and we'll talk to you soon. Thank you.