CECO ENVIRONMENTAL CORP Q3 FY2026 earnings call

• Record Financial Performance: Delivered record revenue ($404M) and adjusted EBITDA ($70.1M) in Q3 2026, with legacy SECO showing strong organic growth of 30% in revenue and 64% in EBITDA.
• Thermon Integration Progress: Integration is ahead of schedule, having captured approximately $22 million in annualized net adjusted EBITDA savings (55% of the three-year target) within the first six months. Organizational and cultural integration is progressing well.
• Backlog and Pipeline Strength: Ended Q3 with a record backlog of ~$2.2 billion (up 205% YoY) and an opportunity pipeline exceeding $9 billion. Approximately 80% of the backlog relates to multi-industrial and energy applications, with 20% tied to data centers; all projects are funded and active.
• Cash Generation and Balance Sheet: Generated $154 million in adjusted free cash flow for the quarter, bringing YTD adjusted free cash flow to $192 million. Net leverage decreased to approximately 2.0 times, well within the target range of 2.0–2.5 times, creating substantial liquidity capacity.
• Rule of 40/50 Status: The company qualifies as a 'Rule of 40' company for 2026 based on growth and margin metrics, with initial 2027 guidance projecting a 'Rule of 50' or higher status.

The company reported consolidated revenue of approximately $404 million, representing a 105% year-over-year increase. Adjusted EBITDA reached $70.1 million (17.3% margin), up 201% from the prior year. Legacy SECO organic revenue grew by 30%, while the newly acquired Thermon segment contributed significantly to the total results starting from its June 1st inclusion. The combined entity achieved record orders of $778 million and a backlog of approximately $2.2 billion.

• Full Year 2026 Revenue: Maintained at $1.3 billion to $1.375 billion (as raised in August).
• Full Year 2026 Adjusted EBITDA: Maintained at $200 million to $225 million.
• Full Year 2026 Orders: Increased outlook to $2.5 billion or greater.
• Full Year 2026 Adjusted Free Cash Flow: Raised to approximately 100% of adjusted EBITDA (previously expected at least 55%).
• Initial 2027 Outlook: Revenue expected between $2.1 billion and $2.3 billion (midpoint ~$2.2B); Adjusted EBITDA expected between $475 million and $525 million (midpoint ~$500M), implying a margin of ~22.7%.
• Preliminary 2028 View: Anticipates double-digit top-line and bottom-line growth, with adjusted EBITDA margins around 23.5%.

• Macroeconomic Uncertainty: Potential impacts from inflation, post-election policy changes, and geopolitical developments.
• Data Center Investment Sentiment: Monitoring fluctuations in AI and data center investment spending, though current backlog is firm.
• Supply Chain and Inflation: Ongoing monitoring of supply chain constraints and input cost pressures, which are largely priced into current margins.
• Execution Risks: Standard risks associated with integrating acquisitions and executing on large-scale industrial projects.

Q: Analyst asked about the conversion rate of the current backlog into 2027 revenue and whether the margin profile of that backlog is improving compared to recent periods. / A: Management confirmed that at least 70% of the year-end 2026 backlog is expected to convert into revenue in 2027, consistent with historical averages. They noted that the backlog currently holds a higher gross margin profile than recent quarters due to larger, newer projects with faster recognition profiles, providing strong visibility into future profitability despite monitoring inflation and supply chain factors.

Q: Analyst inquired if the sales synergies mentioned were related to cross-selling Thermon products into SECO’s existing project pipeline, and how the commercial strategy was structured regarding this. / A: CEO explained that SECO’s early visibility into projects allows Thermon teams to qualify for thermal solutions on upcoming jobs, driving organic growth. CFO clarified that they are not creating a single unified sales force but rather leveraging separate platform integrity where customers request bundled solutions, leading to incidental cross-selling and lead passing between teams without disrupting their specialized focus.

Q: Analyst questioned the primary constraints to delivering the 2027/2028 outlook (capacity, labor, supply chain) and the capital allocation priorities between debt reduction, dividends, and M&A given the strong cash flow. / A: CEO stated that while unpredictable external factors exist, the team feels balanced regarding known constraints like supply chains and labor, which are being managed through talent acquisition and process maturity. Regarding capital allocation, management emphasized that the balance sheet will be used aggressively for both internal organic growth investments and programmatic M&A to acquire niche industrial leaders, viewing debt reduction as a means to enable further strategic investment capacity rather than an end goal itself.

Q: Analyst asked if the preliminary 2028 outlook and high-single-digit Thermon growth assumptions were baked into the 2027 guidance, and what the pricing environment looks like across the portfolio. / A: CEO indicated that the 2027 guidance includes high-single-digit Thermon growth with upside potential, supported by strong demand in reshoring, infrastructure, and power sectors. He noted that pricing remains robust, with standard product list prices increasing to outpace inflation, and project-based pricing benefiting from a strong demand cycle, allowing the company to defend and improve margins.