CECO Environmental Corp. Q3 2026 EARNINGS CALL - CECO ENVIRONMENTAL CORP

Explicit Guidance:

• FY 2026 (Full Year): Maintains revenue guidance of $1.30B–$1.375B and adjusted EBITDA of $200M–$225M (as of August); increases full-year orders outlook to $2.5B+; raises adjusted free cash flow conversion expectation to ~100% of adjusted EBITDA (up from 55%); expects year-end backlog >$2.2B; pro forma calendar view (including full year of Thermon) implies 2026 revenue of $1.5B–$1.6B and adjusted EBITDA of $255M–$280M.
• FY 2027 (Full Year): Initial outlook of $2.1B–$2.3B revenue (midpoint ~2.2B) and $475M–$525M adjusted EBITDA (midpoint ~$500M); implies adjusted EBITDA margin of ~22.7%; expects adjusted free cash flow conversion of 50%–60% of adjusted EBITDA; anticipates orders growing 20%+ with a strong book-to-bill ratio throughout the year.
• FY 2028 (Preliminary View): Anticipates double-digit top-line and bottom-line growth; expects adjusted EBITDA margins of ~23.5%; sales pipeline projected to exceed $10B in coming quarters.

Business-Segment Outlook:

• Thermon Integration: On track and ahead of schedule; captured ~$22M in annualized net adjusted EBITDA savings (55% of 3-year target) within first 6 months; expects to capture 70%+ of the target by the 1-year acquisition anniversary; actioned ~$2.5M in revenue synergies; Thermon organic growth contribution expected at high single digits with potential upside.
• Backlog Conversion: Expects 70% (potentially higher) of year-end 2026 backlog to convert to revenue in 2027; backlog quality supports margin expansion in 2027.
• Product/Vertical Mix: Power generation, data centers, semiconductor, and natural gas infrastructure driving growth; data center applications represent ~20% of backlog (fully funded, active projects); industrial water and wastewater treatment expected to see double-digit growth, with large Middle East projects viewed as upside potential pending geopolitical stabilization.
• Thermon Specifics: Thermon revenue mix consists of shorter cycle and faster-turning orders; Thermon business itself performed double-digit growth in Q3.

Market and Competitive Outlook:

• Demand Trends: Sustained strong demand across power generation, energy infrastructure, semiconductor, and industrial water; "Rule of 50" expected (Revenue Growth + EBITDA Margin >50) for 2027, up from "Rule of 40" in 2026.
• Debooking/Retention: Cancellation/debooking rates remain low, tracking long-term average of <0.5%.
• Pricing Environment: Strong demand environment supports pricing power; 35% of portfolio is standard product with list prices increased to outpace inflation; ability to defend pricing expected in 2027.
• Pipeline: Current sales pipeline >$9B; preliminary view suggests pipeline will exceed $10B in next few quarters, with 18–24 month visibility covering the $9B base.
• Competitive Positioning: SECO viewed as a "premier neighborhood" company with high visibility into project requirements and execution schedules compared to peers.

Macro / Industry Outlook:

• Economic/Infrastructure: Macro view centers on robust global investments in industrial infrastructure; demand for power driven by electrification, digitization, compute needs, and grid baseload requirements expected to remain stable 2–5 years out.
• Geopolitical Risks: Monitoring inflation, post-election policy changes, and geopolitical developments (specifically Middle East conflicts delaying some large water projects); these factors were considered in outlook construction.
• Data Center/AI: Continued sentiment and investment in AI/data centers; SECO views data center projects in backlog as funded and active, not reliant on future development.
• Interest Rates/FX: Interest rates noted as slightly elevated; no specific FX guidance provided, though global team integration and supply chain monitoring are ongoing.

Strategic Initiatives:

• M&A & Growth: Maintains robust M&A pipeline; plans to invest programmatically for organic growth and acquire niche industrial leaders; credit facility capacity of ~$344M available for strategic investments, trade finance, and CapEx.
• Integration Synergies: Targeting additional 1–2 percentage points of organic growth for Thermon via commercial synergies (e.g., thermal solutions on power/gas projects); operating excellence efforts (ERP migration expected complete for legacy entities by mid-2027; "80-20" complexity reduction).
• Capacity/Investment: Modest CAPEX requirements; focused on ERP migration and select facility upgrades; cash generation supports debt reduction to 2.0x net leverage (low end of target range) with anticipation of further reduction to 1.5x or below by year-end 2026.
• Geographic Expansion: Active expansion into new vertical and geographic markets; team focus on increasing "at-bats" in global industrial space.

Risks and Headwinds to Outlook:

• Operational Risks: Inflation levels potentially rising; supply chain constraints; labor availability; working capital management requirements (inventory focus).
• External Risks: Geopolitical conflicts (Middle East); policy changes (post-election); tariffs (potential new regulations); AI/data center investment sentiment volatility.
• Execution Risks: Project delays (none material in Q3, but monitored); ability to price through inflation; realization of integration and revenue synergies.
• Caveats: Management notes that 2027/2028 plans include contingencies for unknown future events (e.g., unforeseen supply shocks or geopolitical shifts); historical track record of beating initial guidance by >10% average outperformance, but future results subject to operating environment.

Management Tone on the Future:

• Confidence Level: "High confidence" in 2027 outlook and "very confident" in ability to execute; describes current market visibility for power generation as the "highest it's been for a 2-, 3-, or 4-year cycle."
• Strategic Posture: Aggressive investor stance on growth (both organic and M&A) balanced with disciplined debt reduction; views current trajectory as a "steady series of focused investments."
• Guidance History: Notes track record of exceeding initial guidance in 4 of the last 5 years, reinforcing belief in current projections.
• Tone Keywords: "Outstanding," "Tremendous," "Solid start," "Premier neighborhood," "Insatiable" (regarding margin growth expectations).

Miscellaneous:

• Financial Metrics: Q3 2026 revenue $404M (+105% YoY); Adjusted EBITDA $70M (+201% YoY); Book-to-Bill 1.92x; Net leverage ~2.0x.
• Upcoming Events: Management participating in Baird Industrials Conference (Chicago) and Ideas Conference (Dallas).
• Accounting Methodology: Guidance includes 7 months of Thermon results (post-June 1st acquisition); pro forma calculations used for 2026/2027 comparisons.
• Cash Flow: Q3 adjusted free cash flow $154M; YTD $192M; trailing 12-month FCF >$200M.