Good afternoon. Welcome to the 28th Annual Needham Growth Conference. Our next session will be a fireside with the management of CECO Environmental, with the company's CEO with us today, Todd Gleason. We also introduce Marcio Pinto, VP of FP&A and Investor Relations. Urge you to reach out to him if you want to follow up with anything. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham, covering companies in the advanced industrial technology space. So, Todd, welcome.
Thank you.
To the conference.
Thanks. Great conference. Pleasure to be here and always nice to catch up.
Same here. Good. So, you know, maybe before we dive into the Q&A, let's start with just kind of a brief overview of CECO.
Yeah.
Because what I think we've seen over the last several years is a real transformation of the company. And so talk to us about how that's taken place over the last, what, four or five years.
Yeah. So a couple of themes. Transformation is probably the headline of maybe even why I was brought in in mid-2020, and then sort of, I guess I'd say what we've done, and for us, transformation, it started with, ironically, kind of getting smaller, and I'm not talking about our portfolio. I'm talking about how we operate, right, so the first thing we did was we delayered, and we got very basic in terms of our knowledge, my knowledge, and our leadership team's focus on the individual markets. We assessed those markets. We quickly either knew or realized and was reinforced that in both our industrial air portfolio and our energy portfolio, that we had very strong brand recognition and niche leadership, but it was niche for a reason. One, these were relatively small businesses, and they served a particular market or two and a geography or two.
So first transformation that we're really proud of over the last five years is that we took and incentivized and invested in those platforms, those businesses, to expand into new adjacent markets organically, expand into new geographic markets organically. That investment in our expansion in high-growth regions has yielded sales that have gone from $30 million to what could be approaching $150 million in the emerging markets, as people often refer to them. I think they've emerged. But these geographies, right? Industrial air, which had six or seven vertical markets that it really focused on, were six or seven brands, is now at least two to three X the number of markets we pursue with the same brands. Some of our smaller brands used to do $8-$12 million in sales, and they thought $12 million was a great year. One of those brands did $35 million in sales.
Right? So organically, our ability to move into new geographies, move into new markets was unlocked a bit. We then, once we started to prove to ourselves, let alone the public markets and the shareholders, that we could deliver fairly sustainable double-digit growth, then we started to add M&A. And I said when we started that we would be somewhat programmatic because I wanted our great analysts and our investment community to understand that we were not just going to do one big deal and then be done. We also weren't just going to do just one small deal and be done. We looked at our leadership position in air and energy, and we really said we can grow organically. But sometimes it's a smarter investment for you to go and add an acquisition.
It gets you much faster access to a market with technology or a service, some sort of a solution. But we said in our commitment is still this. As small as we were, we really felt that we had a very strong niche, but a very strong leadership position in industrial air. I'll come back to that in a second. So we were going to only add to that position. We weren't going to go off reservation and go looking for deals. Same thing with energy and energy transition. We had a very strong position. Anything we would do would just add to that. We're 100% industrial. We're very diverse.
We're 100% industrial, and 100% of our solutions provide some sort of environmental solution to protect employees, to protect the community and the natural environment around the facility, and to protect the investment that they have, our customers have, in their manufacturing processes and their equipment. So everything we do organically and inorganically is to advance that theme. How do we help our customers make more of what they need to make in a safe environment and an efficient environment? And how can we break into more vertical markets and explain to them that we're the best partner? Now, along the way, we've added water. It started off with a couple of very small acquisitions while we were investing organically in some early projects and expansion into new verticals. It's a space that I and a few of our leadership team know well from previous organizations.
Our view of industrial water, and if you know it, this won't surprise you, it's highly fragmented. It's highly fragmented within countries or regions. It's highly fragmented within solution providers. Yes, there are some big players. I worked at one of them. They are big because they make a lot of pumps and filters and systems, but they're not great in industrial water, which needs to incorporate engineered solutions. Then there's some very large players like Evoqua, which has now combined forces with Xylem, or Veolia, which has done a fair amount of consolidation. They go after either municipal or very large plant-level solutions. We felt, and we continue to feel that in industrial water, that some of our early acquisitions and our investments organically will help us build a $200 to $300 million industrial water platform over the next few years.
That starts now in 2026 with some big wins. So the transformation has been structural, cultural, portfolio organically, both including water, but also portfolio inorganically. We've done approximately 14 transactions now in the last three and a half years. Our multiple on average has been seven to eight times. We've kept our balance sheet healthy, not over-leveraged. And look, we're pleased with the results. We're obviously happy to deliver shareholder value. It's why I'm here. There's other reasons I'd like to believe that I work hard, but that's one of the scoreboards that everyone looks at. So transformation is a theme. I think that we have another opportunity for the next five years to really continue that theme and transform CECO, not just in scale, but I think leadership.
Yeah. And certainly what has, I think, surprised investors is the last couple of years we've seen just enormous growth in bookings. And I'd say, and let's spend some time on what some of the principal drivers to that. But fair to say a lot of that has more recently been AI-related in the power generation from customers like GE.
And by the way, not to interrupt you, but you notice I didn't say anything about power or that in our transformation because that existed. That was one of the original investment theses of CECO. Now what we've done is put ourselves in a better position for it.
Yeah. And tell us about that. How specifically in this area, how did you put yourself in a better position? Obviously, you've had some strong market tailwinds as well. Right? But go ahead.
Yeah. No, look, so you know one was smart enough to not damage anything. I mean, you're really good looking when you just hang around and things come back to you. So knowing that power was going to be a market, whether it was in 2025, 2026, 2027, we didn't know back in 2021. But there was no scenario that baseload power hadn't been underinvested in. There was no scenario that as potentially there was going to be more reshoring of industrial coming out of COVID, that we had enough power. There was no scenario that the electrification and the automation and the robotics, let alone AI, that data centers in 2021 wasn't yet a theme. But there was no scenario that we had enough power in this country and in other countries. So we knew, we believed. So what did we do?
One, we started to add good, great resources, better systems. We also made a couple of really good acquisitions. One was Transcend, which we bought in the second quarter of 2023. That allowed us to control our own destiny in separation filtration media, where we were buying from the market. Now we could design. That is natural gas infrastructure, but that also feeds natural gas power. Right? Our emissions management solution, we continue to invest in technology tools and solutions so that when GE Vernova and Siemens Energy needed us most, we were ready to go. We were ready to go with global supply chain. We were ready to go with redundant capabilities in supply chain. We were ready to go with more engineering, more application engineering. We went from 12 resources in India to 145 resources in India.
A lot of that is our ability to move with speed on application engineering, 24-hour project management and support. Our ability to work around the clock on these complex projects, bid on more projects, put ourselves in position to win more, lose more too. That's okay. We need more at bats. That was an intentional investment to prepare for power.
Yeah. And by the way, what would you say the change has been in your win rate if you go back a couple of years to where you are now?
Yeah. I mean, look, our win rate has certainly gone higher. It's funny. We don't look at win rate as much as you would think. We look at the pipeline growth. I believe that win rate is important. We know it's not going down. We believe that more at bats, to go back and use that term again, is what we that gets us more wins. How we win? Look, we're not the low-cost bidder. Yes, as we've grown our industrial water capability, we've taken jobs at lower than average CECO margins to continue to get more reference sites. That's changing. Right? But in power and in other places, we feel that what we've done has demonstrated to the energy providers our commitment to quality, our commitment to speed, our commitment to cost management. Power now influenced heavily by data and AI.
The needs for these supercomputing things that are going on, a term that most of us maybe had heard but hadn't become familiar with: behind the meter. Right? These are real themes now. Right? Companies, organizations, investment groups that are taking matters into their own hand, not waiting for the grid to be expanded, not waiting for every area to approve permitting. They're going to places where they can just go behind the meter and create their own power supply. That's why Texas and other locations are critical. For us, we wanted to be ready for it. Our win rate is influenced as much as anything, Jim, on the following to stay on the power theme. The smaller the power application, take a gas turbine engine. These are aerospace engines. That's why oftentimes people refer to them as aeroderivative.
If it's simply an aeroderivative gas turbine out there, our win rate probably is about what it's always been, maybe even lower. And the reason it's maybe even lower on these smaller projects for us on emissions management, for example, is that the larger projects, the customers, GE and Siemens, they really see the unique nature of what we and a handful of other companies can bring to that. And so they want to make sure there's no capacity constraints. Now, we would say there's not. But convincing your customer that they can give you a 20%-25% win rate on the smaller aeroderivatives when they know that you're going to have a 30%, 40%, 50%, 60% win rate on the larger frame systems, there's a nervousness there. Now, what's happened in power for us, and we're starting in 2025, these big jobs, they were always later cycle.
Not all of them. GE's announced some very large jobs that they've already started to work on, Kingston and others. But now these big jobs where our win rate is generally very high. They just started in the second half of 2025. We announced several of our largest orders back to back, an $80-ish million order in Q3, $135-ish million order in Q4.
That's where we want to spend some time on as well.
These are big jobs that there's not a lot of us that can do that.
Yeah. Yeah. And so let's talk about that mid-December announcement of that order. First of all, this was one of those large orders that you presumably alluded to in the Q3 call. Can you give us a sense as to an order of that size, what that encompasses? Yeah, because I think there's still some confusion among folks as to what we're talking about.
An order of that size is generally referred to, and I'll try to be as basic as I can, which, by the way, it's not hard for me. But we call them frames. And it is you have a series of turbines and power generation equipment that's framed inside of a large enclosure. So instead of seeing necessarily all of the gas turbines in an array on a campus, you were framing a gigawatt of power.
Okay? And so now you're looking at one large emissions, air contamination, NOx removal solution. Okay? You're looking at one large noise abatement, thermal acoustics, stack and tower, and infrastructure associated with heat and dampers and expansions. Right? You're looking at one or two large gas inlet separation filtration. So what can CECO through our brands provide? Those things that I just mentioned. Gas needs to be treated and perfected coming in.
We provide through our Peerless separation filtration solutions and Transcend, those separation media solutions that go all the way through midstream pipeline, including into the facility. Right? Heat and noise management through a very complex and fluctuating. It's not how high the temperatures can go. It's how fast they go there. Right? Things go boom. Things bend. Things warp if not designed correctly. And then once the power has been generated, just like a car, you have a muffler to muffle the sound. That's the noise abatement. And then you have an exhaust. Well, unlike a car, you don't have something at the back of the exhaust filtering out the NOx because it's a car. I'm not suggesting it's not polluting because we all understand the environmental impacts of that. But this is a significantly much larger exhaust system.
And so we provide could be the gas treatment coming in, the heat and noise management of the entire structure as it goes through the combustion of the power, and then the emissions associated to eliminate to a high, high level of environmental sophistication, the NOx.
Was there, Todd, was there always that appreciation of the range of product that you offered customers, these large customers, or is this something that has evolved and there's now a much stronger appreciation of what you guys do with the customer?
Yeah. What's evolved are a couple of things. Maybe a slight appreciation. We do a much better job of articulating to our customers how we can partner with them. You can imagine I'm sort of a business development person by nature. So how can we sit down and really design an A to Z solution with the customer so that they feel better about one partner versus five? So that appreciation has certainly matured. The other appreciation is our businesses work well together. Right? And I think they see the collaboration matters. If I'm out there trying to win an emissions management solution, but we can offer some partnership with thermal acoustics, right, and that positions us better to win, then great. And we have an entire incentive model where there's a shared incentive. There's a penetration globally that we can do.
Our ability to leverage the same resources in India didn't exist before. Our ability to go after markets in Southeast Asia, right, after markets in Qatar, after markets in the Middle East didn't exist before. So a lot more shared capabilities than ever existed.
Yeah. I mean, to what extent was that even going on, apart from the fact that you've made the investments in India more recently in the last couple of years? But was this, for lack of a better term, cross synergy going on five years ago?
It wasn't. And without that sounding uber critical to what was or wasn't going on five years ago, the world's changed. Yeah. And so we changed with it. Right? I'm not suggesting that Dennis, if he were still here from five years ago, wouldn't have done the same things. But I would say that because of our shared resources and investments in a lot of the capabilities, it just naturally occurred. And we market better. We show up with a bundled solution. We leverage the best relationships. Tim Shippee, who runs our emissions business, or David Taylor, who runs our separation filtration business, or Martin Pranger, who's now over the top of our strategic business group, but developed our thermal acoustics business, Aarding. Right? The three of them know who has the best relationship with whom and who has the best insights into different projects. And we leverage those relationships.
Years ago, they would have been not as collaborative. Right? And so our model now has allowed for that partnership.
Okay. Good. Helpful. The order intake for the quarter, $300 million. Right? You had alluded, and I think in the earnings call, you guys had alluded to the potential for some large projects, I think one or two in the Mideast. So can you give us an update on whether that number that you put out there in that same press release in mid-December included those orders?
It did not. And that is not a negative. We know that a quarter one way or the other does not a frustration make. And so we have some very attractive jobs beyond the ones we mentioned in power that are still coming. We have some very attractive opportunities that verbally we feel good about in water, industrial water, produced water, water treatment, wastewater, all for industry. Nothing against municipal or residential or leisure, but this is all heavy industry. We like relatively challenging water environments. The dirtier, the better, we might suggest. And those are in front of us. So look, I mean, there's a positive to only delivering a little over $1 billion in revenue when we could have maybe done even better. But that is because the opportunity is that Q1 and Q2, the pipeline looks pretty attractive.
Okay. So some of these could close potentially.
They better.
Okay. Good.
Otherwise, Marcio's in trouble. We don't want that.
Getting back to some of the customers that have been in the power generation have been very clear about demand trends. Yeah, talking to the fact that they're sold out for the next several years.
Amazing.
So help us understand how that plays into your thinking about the business over the next few years?
Well, I mean, no CEO doesn't love the word visibility. Right? Unless it's a lack of. And so look, in our $6 billion pipeline, and our pipeline represents when I joined, we had a $1-$1.5 billion pipeline. We had a good pipeline management process. These are jobs that are in our CRM. They're going to book win or lose. We believe they're going to be won or lost in the next 18 months. We have it broken down by month, by date, by project site. So we've gone from $1.5-$6 billion. Some of that's market growth. Some of that's market expansion that we invested in, geographic and vertical or adjacent markets. Some of that's acquisitions, admittedly. But we've gone to $6 billion. Of the $6 billion, some of the neighborhood of 20% are discrete power jobs in the next 18 months. Okay?
Look, these jobs would have been $200-$300 million a few years ago. Now we're well over a billion. These are jobs by location, by name, by site. We've already done the designs where we know which ones we feel best about winning and which ones we feel less best about winning. For us, the visibility on, I'd say, half that $6 billion is incredibly strong. Water, power, semiconductor, certain areas around industrial air where we have very strong relationships. By the way, industrial air for us is the most diverse business. You might think it to be the most complicated. I think it's the easiest. You walk into any industrial manufacturing facility. I don't know that every industrial manufacturing facility has a hood in it.
But if you have a hood over a welding station or cell, you have a hood over a paint booth. You have a hood over a metal rolling or dust, engineered wood cutting. Dust is in the air. Trust me when I say that hood is not evacuating the air to the drain or the cartridge or the York HEPA filter. That is going to an air remediation system. If there's a hood in an industrial facility, we make a solution for that. It could be a regenerative thermal oxidizer. It could be a scrubber. It could be whatever. Our ability to see what's going on in reshoring, our ability to see what's going on in semiconductor, our ability to see what's going on in a lot of different applications is probably the best visibility we've had.
I feel the best about our pipeline than I think Marcio and I have felt in years.
Does that pipeline extend? And we're going to talk about the international markets, but I promise we're going to talk about something other than just AI data centers. But fair to say a lot of the activity in that area has been in the U.S. Are you getting traction?
Especially water. I'd say 75% of our almost billion-dollar pipeline over the next few years in industrial water is outside of the U.S. So that's one of the biggest areas. Industrial air now, which is a roughly billion-dollar piece of our $6 billion pipeline, probably 40% of that's outside the U.S. and growing. So look, our win rate might fluctuate by country or by region a little bit, but it's worth our time. It's worth our time to penetrate these markets and to be there for them. Some of the acquisitions we've made have made us very basic and fundamental with our customers in Southeast Asia, Singapore, where we've quadrupled our resources as well. We've combined office locations with some of the acquisitions we've made for synergies as well.
Our ability to, we think, represent Western Europe, while not a heavy growth area, was one that we lacked in presence in Germany and other locations. We feel good about that. We like diversity. We like balance.
Okay. You mentioned a theme that I think I'd like to go back to, and that's this electrification of everything, and talk to us a little bit about how you see CECO participating and what it's clearly going to be a multi-year phenomenon.
Yeah. Yeah. Well, I don't decouple AI and data centers and electrification and automation. I just don't. I know that it's important to have a sense of what's the driving factors behind growth and investment. Our view is we're really not doing much at the data center. We're doing a lot for power. Right? We're not necessarily doing much in the data center, but we're doing a lot for the cabinet manufacturers that are supplying racking systems. We're not doing much in the data center, but we're doing a lot for the systems that might need to be doing water management or just because there's manufacturing involved. Right? So for our view, this is a heavy investment in the global economy. And so electrification just is going to create more nuclear, which might not be huge in terms of top line. It's going to take time. It starts now.
We're looking at quadruple the number of proposals than we were just a year ago. These are very high-margin, attractive jobs. You have to be certified to participate in a steam separator and in other solutions for nuclear, for geothermal. It's called an energy supercycle because it's not just one seat at the table called gas turbine power. Right? Maybe coal is even being sustained a little bit longer than people thought. Right? But you go around the table and you can see some dramatic increases in bid proposals in nuclear and some of these other areas. It's exciting.
I believe nuclear carries with it some attractive margins?
I'd say 15 points higher than our average.
Yeah. Okay. And these may be projects that are out in the distance, but.
Yeah. You know, look, we've had a good track record of a few a year on occasion, certainly, and it can ebb and flow. We're seeing that tick up pretty dramatically. So I mean, look, it's going to have a positive impact. Again, diversity being the word that I like to use a lot. Great football teams get a lot of first downs. Maybe they throw the ball further down the field at times. We like businesses that get us a lot of first downs.
How well appreciated do you think it is among the investment community of CECO's global presence? I mean, you alluded to some regions, Middle East, Asia. I mean, tell us, because sometimes I'm not sure it's fully appreciated.
Yeah. It's a good question, Jim. It likely isn't. I think we've moved pretty quickly to become more global. I think we've started to talk more about industrial water. I don't blame investors. You need to see the proof in the pudding. Right? Most CEOs are somewhat promotional about strategy and vision and things that we see that could happen. I'm not. I'm just a fact-telling guy. But if I were promotional, I would have been talking about industrial water over the last year and a half. And it's on the come up, and now we know that it's happening. That's going to be a very international business, as I just suggested. Right? I believe this is a $100-$200 million revenue business in the next few years. I believe greater than 50% of it's going to be outside the U.S. We like the margins.
We like the aftermarket, the recurring revenue. Each of these projects has an opportunity to have a multi-year recurring revenue stream of membranes, chemicals, aftermarket parts and supplies, services, et cetera. Some of them will have less. Some of them will have more of those components. I think it's up to us to make sure that investors, as we approach a billion in revenue, they really understand that roughly 50% of our revenue is generated outside of North America. Now, you throw a $135 million power job in Texas into the mix, and all of a sudden, your mix gets a little skewed in a short period of time. But look, there's some big energy jobs in Qatar and Saudi. We've expanded into those regions smartly with good investments. We're not afraid to invest in growth.
We have been doing so, maybe even at the limitation of our EBITDA margin over the last few years. Now, I'm not going to apologize for 25% CAGR over a four-year period on bookings and revenue, two-thirds of which is organic. However, we are admittedly behind some of our stated goals to get EBITDA margins up to 15%. And again, I own that. But when you see the growth opportunities that we feel we see that are rightfully ours over the next few years, we want to make sure we have resources in place to go and capture those. And then as we capture those, our volume will absorb that SG&A. So look, we're still very committed to that mid- to high-teens EBITDA margin.
Admittedly, we're a year behind what we said we might do in those categories, but we're probably a year ahead or more in terms of our growth. And I think it's a trade-off that at this point we're willing to make.
How much of that also, well, is any of that a function of the mix of business?
A little bit. On the gross margin side, that can change. You've heard me say, and I'll say it again here, take an average large power job, not all of them. Let's say that those have 2-500 basis points lower gross margin. They likely will raise our EBITDA margin by 100 basis points or more. So we will have periods in the future where you and I will be sitting here and I'll be explaining why our gross margins may have come down 100 basis points on average across our enterprise. But somehow, those exact same negative mix on gross margins, because they have very little SG&A, increased our EBITDA margins, just those same jobs by 100 basis points. It's not counterintuitive. It's math, and so our margins are probably not so negatively impacted by these jobs.
I think the investment to break into certain new markets geographically and water have suppressed because we've been investing ahead, and some of those jobs that we wanted to position for and took were at the lower both gross margins and EBITDA margins, but again, in order to get what could be a $50 million produced water multi-skid solution at higher margins, you need to have the reference sites.
That makes sense. There aren't many companies I follow that after their Q3 results in the earnings call, they're giving guidance for the out year, which you guys did back in what, early November or late October? I forget when.
Halloween-ish.
Okay. But you put out a range in $850-$950 million, I think, of revenues and $110-$130 million of EBITDA. Talk to us a little bit, Tom, just about the puts and takes to getting to that upper end of the range.
Yeah. I've said for years, and it's one of the things I enjoy the most. There's a lot of things I enjoy about CECO, including sitting and talking with you. But one of the things I enjoy the most is the visibility we have to the next 6 to 12 months in our pipeline, in our book to bill, in our bookings, in our backlog, in our knowledge of the market, in our partnership with the customers, our seasoned organization that is very plainspoken about the opportunities they have. We have a lot more visibility than the average company in the industrial space that goes exclusively through distribution, where they have shorter cycle sales, which helps them in the quarter. So some companies have more visibility to the next quarter because they already have loaded up the distribution and it's off and running.
We have a lot more visibility to the next 6 to 12 months. So it always seems to strike me because we give annual and not quarterly guidance, that as we're down to just one quarter and I have the visibility for the next 6 to 12 months that I think I have, I should move your focus to the next 6 to 12 months as opposed to just one quarter. Not because I'm afraid of one quarter's outlook only being the only one that exists, but because I have so much visibility. What limits us on the downside would have been a lower than expected Q4 bookings. That's a good grade that we got on the first test now. Right? So we feel good about the first test. Maybe even a lower first quarter of 2026 bookings.
Let's say one or both of those dynamics had happened or would happen. Now the low end of our guidance is in play, but the top end isn't off the record. If our first quarter bookings and it's trending well. If our first quarter bookings gives us the outlook that the second half of 2026 is what we expect it could be, now you're looking at the higher end of our guidance or more, and I think that we're not opposed to raising or evaluating guidance as we go through the year.
Good. So we're close to running out of time. So I'm going to try to lump this last question just in terms of you alluded to being active on the M&A front. You've done a number of these. And how do we think about capital allocation, debt, and the opportunity for more inorganic growth over the next year?
So look, we're going to continue to be programmatic. We have a great pipeline. Smaller transactions are still small. They're platform. They're bullets in the gun of our platforms. Could be a million or two of EBITDA, could be more. But these are things that are generally sourced by our most knowledgeable people in the field. They see something. They know it's going to be a great extension. Small business, important for them, important for me because it's important for them, but this isn't transformational. Now, small opportunities still exist. How we talk about those publicly, we'll always be clear that we made a few small things. Now, medium opportunities, which used to be much smaller, medium opportunities now could be 10 million of EBITDA or larger. Right? And I think we like that pipeline a lot. It's a very fragmented space. We're a natural consolidator of industrial air.
We're a natural consolidator of industrial water. We believe that there's a few areas of energy that we could benefit, our customers could benefit from us having more control and management around. Look, we're not opposed to doing something larger, transformational, but it's not something that we've done.
Okay. I think we're going to have to end it there. But thank you.
Appreciate it.