Good day, and thank you for standing by. Welcome to the CECO Environmental Third Quarter 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marcio Pinto, Vice President of Financial Planning and Investor Relations. Please go ahead.

Thank you, Tanya, and thank you for joining us on the CECO Environmental Third Quarter 2025 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation, which is on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on the Form 10-K for the year ended December 31, 2024. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We've provided comparable GAAP and non-GAAP numbers in today's press release and provide non-GAAP reconciliations in the supplemental tables in the back of the slide deck. All right. With that, I'll turn the call over to CECO's CEO, Todd Gleason. Todd?

Thanks, Marcio, and good day, everyone. Thanks for your time and for your continued interest in CECO. I'm very pleased to discuss another strong quarter as well as our reaffirmed outlook for 2025, and our initial view of full year 2026. With that said, please turn to Slide #2. This executive summary slide captures the main points we hope you take away from today's earnings call and our release this morning. We will provide much more detail in later slides, so I will be brief. We delivered another high-performance quarter with outstanding top line and bottom-line growth. We exit Q3 with a new record backlog even after generating our highest ever quarterly revenue. In the quarter, we expanded EBITDA margin nicely while we continue to invest in long-term growth resources and operating capabilities. Given the tremendous visibility we have in our backlog and sales pipeline, we reaffirm our full year 2025 outlook and introduce our full year 2026 outlook, which points to another year with very strong growth in both sales and adjusted EBITDA. As you will hear from this call, we remain very bullish as we are encouraged by strong market dynamics in our most impactful sectors and pleased that our proven operating model continues to deliver for our customers and for our shareholders. Now let's dive into more details. Please turn to Slide #3. Demand for CECO solutions and services continues at a record-setting pace. Our backlog grew to $720 million, a new record; year-over-year, our backlog is up approximately $280 million or 64%. Sequentially, our backlog increased by approximately $30 million. This new record backlog was made possible by another quarter of robust order intake of $233 million in new bookings, which is up 44% versus Q3 of 2024. We continue to book a nice mix of midsized and large-sized orders, particularly in the power generation and energy transition sectors. While we didn't book any mega jobs this quarter because of timing of those particular jobs, we are very pleased with how those power opportunities continue to develop. We remain well positioned for these larger projects, which we define as greater than $50 million and even greater than $100 million. When combined with orders from the first half, our year-to-date 2025 book-to-bill is nearly 1.3, with $735 million in year-to-date orders. If you expand the bookings across the past 4 quarters, we have now booked approximately $950 million in new orders, with each quarter comfortably above $200 million. With the investments we have made to position our businesses to capture and capitalize on robust demand in our core markets, we expand into new geographies and offer more new solutions and services. Our sales pipeline is now over $5.8 billion, which adds to our confidence for sustainable growth. Quarterly revenues came very close to eclipsing $200 million for the first time and produced an all-time record of $198 million in the quarter; this was up 46% year-over-year. Through 3 quarters of 2025, we have already generated more sales than all of last year, which had been a previous record. When we entered 2025, we forecasted strong growth. And I would submit that our year-to-date bookings and revenues are meeting or exceeding the bullish outlook we originally provided. Adjusted EBITDA was up 62% in the quarter as our sales growth and improving G&A cost profile continue to allow nice EBITDA margin expansion. And Q4 free cash flow of approximately $19 million was in line with the nice cash flow performance we expected and a strong rebound from our first half of 2025. We expect to continue to improve our working capital position as we navigate the balance of the year. A final metric on this summary slide shows adjusted EPS was $0.26, up approximately 86% year-over-year. So overall, record results and solid performance, and we enter Q4 with an incredible backlog and sustainable momentum in all of our growth programs. Now please turn to Slide #4. As today's press release highlighted, we are reaffirming our full year 2025 annual outlook across the board. This represents full year revenue of between $725 million to $775 million, which is up approximately 35% at the midpoint year-over-year. For adjusted EBITDA, we are maintaining $90 million to $100 million, which is up approximately 50% at the midpoint and free cash flow at around 60% of adjusted EBITDA for the year is also reaffirmed. You can see the comments on the right side of the slide. One of the items we highlight is our expectation that Q4 bookings will be above $250 million. And depending on the timing of just a few orders, we might actually deliver our first $300 million-plus quarter. Now before I hand it over to Peter, let's move to Slide #5 for a quick overview on CECO's prime position to benefit from current market dynamics and also navigate potential challenges. For the remainder of '25 and our initial 2026 outlook, we have a strong market backdrop in power, electrical equipment, industrial reshoring, industrial water and natural gas infrastructure sectors. Each of the past 4 quarters, we have booked orders in the critical infrastructure projects to support domestic power generation and energy delivery investments. And our pipeline would indicate we have the opportunity to maintain that pace throughout 2026. We see these projects continue to grow in both size and volume as we not only head through that year, but into 2027. We remain bullish on the industrial water and wastewater treatment sector and in particular, the international water infrastructure projects, where we now have our most active and largest pipeline of opportunities associated with water reuse and recycling applications. We expect substantial orders to be placed over the next 4 to 6 quarters with a sales pipeline that extends also well into 2027. Industrial reshoring in the global semiconductor and electronic component sectors also remain robust, and CECO's breadth of capabilities in industrial air and energy applications ensure that we are very well positioned to continue to win in these areas. We remain extremely focused on optimizing our project pricing and margin levels based on constant communication with our extended supply chain, including our fabricators, component suppliers and raw material suppliers. We have seen moderate inflation in select commodities and components that we include in our costing models and work to mitigate our designs and sourcing plans. Certainly, last but not least, M&A. We have not announced the transaction since we closed the sale of our global pump business in late Q1 as well as the acquisition of Profire Energy in early January of this year. But that doesn't mean we haven't been actively building our M&A pipeline and advancing certain deal-related discussions. We remain focused on the sustainability of CECO's portfolio, building a world-class industrial company with leadership positions in several meaningful industrial niches. We expect to have more to discuss in the coming quarters. As far as challenges or uncertainties, at CECO, we believe that proper planning for scenarios is one of the hallmarks of a high-performance company. We remain laser-focused on the things we can control, and we prepare for additional actions if certain headlines turn into headwinds. As such, we continue to monitor tariffs and the impact on inflation. We are also monitoring the U.S. Government shutdown and what impact that might have on various operational items. So far, nothing that we can point to as far as moving the needle up or down as it pertains to CECO. We will maintain our focus on these potential factors and act accordingly. Best to be proactive when possible, and that's our plan. I will now hand it over to Peter, who will go into more detail on our financial results.

Thank you, Todd. Good day, everyone. Thank you for joining Todd and myself for CECO's Third Quarter 2025 Earnings Call. I would like you to turn to Slide #7 for more details on our recent financial results in the quarter. CECO finished the third quarter with a record backlog of $720 million, up 64% versus prior year and 5% on a sequential basis. This result delivers the 11th of the last 12 quarters with an increase in backlog. The increase was driven by good order rates across a wide range of end markets. Of the total, approximately $60 million is related to the recent acquisitions, with the balance of the increase being generated from organic order growth. Third quarter orders were $233 million, an increase of 44% over the prior year period, representing a book-to-bill of approximately 1.2x; and as Todd mentioned earlier, the fourth consecutive quarter with orders greater than $200 million for a trailing 12-month level of $954 million, 65% greater than the prior 12-month period. This $954 million level represented a book-to-bill of 1.33x revenue, a record for any 12-month period in CECO company history by a large margin and a 4-quarter average of approximately $238 million. The results were largely due to strong demand in power, natural gas infrastructure, semiconductor, and industrial water applications. I would like to point out that CECO is just shy of reaching $1 billion in orders on a 12-month basis for the first time in company history, a level that we expect to achieve in the coming 12 months. Revenue in the quarter of $198 million was the highest for any quarter in company history and an increase of 46% or $62 million over prior year. Approximately 30% of the year-over-year increase was generated by the company's most recent 3 acquisitions and the balance was from organic growth. Sequential revenue was up 7%, with a big assist from revenues recognized on large power generation projects booked in prior quarters, as well as strong backlog conversion from industrial air and industrial water projects. Adjusted EBITDA of $23.2 million was an increase of 62% versus prior year, with margins improving approximately 120 basis points over the year-ago quarter. On a trailing 12-month basis, adjusted EBITDA grew 26% to approximately $80 million, with margins down slightly, driven by our Q1 2025 results, which were lower than anticipated. On a sequential basis, adjusted EBITDA was flat on a dollar basis with 80 basis points of margin contraction due to lower gross profit margins in the quarter, partially offset by lower G&A spending. Gross profit margins of approximately 33% in the quarter were down 70 basis points year-over-year, mainly due to an adverse project mix as well as driven by a medium-sized project closeout with dilutive gross margins. Sequentially, gross profit margins are slightly down, driven by mix and the typical summer seasonal headwind dynamics. Sales, engineering and G&A expense continued its favorable downward trend with spending in the quarter down 4% sequentially, benefiting from cost-saving initiatives initiated in the first quarter and strong expense management. Adjusted EPS in the quarter was up $0.12, or 86% on higher volumes, operational excellence efforts, and G&A expense management, partially offset by higher interest expense. Now please turn to Page 8 to review our backlog position in more detail. With our strong orders performance in the third quarter, our backlog is continuing its steady upwards climb as we convert on the growing sales opportunity pipeline. At $720 million, CECO's backlog has more than tripled since the end of 2021. We expect the majority of this backlog to convert to revenue within the next 24 months, with a large portion scheduled to convert over the next 18 months. Our 2025 year-to-date book-to-bill is approximately 1.3x, further underpinning future revenue. Now please turn to Page 9, for a look at gross profit and gross margin performance. This slide, like in previous earnings decks, presents CECO's gross profit and gross margin performance by quarter since the fourth quarter of 2022. We are presenting it on a trailing 12-month basis to normalize for quarter-to-quarter fluctuations and to provide a look back to the start of CECO's operating excellence agenda deployment, which began in the fourth quarter of 2022. Since that point, CECO has expanded trailing 12-month gross profit margins by approximately 500 basis points with gross profit dollar growth of slightly greater than 95%. In the third quarter of 2025, our business delivered the second highest gross profit dollar performance for the company in a quarter of $64.6 million and a gross profit margin of 32.7%. The decrease of 300 basis points sequentially and 70 basis points year-over-year. Project mix and seasonal dynamics drove the quarter-on-quarter decline. I would like to remind the audience that a sequential step down from second quarter to third quarter is normal for CECO. This has occurred annually since 2020, most recently in 2024, where we experienced a 220-basis point sequential reduction before a similarly sized step-up in the fourth quarter. The seasonal dynamic is mostly due to fewer working days with summer holidays in Europe and the United States, resulting in a general slowdown in business operations. In addition, we chose to accelerate the closeout of an industrial air project with dilutive margins into the third quarter to put that behind us for the balance of the year. Similar to past years, we fully expect gross profit margins to bounce back into the fourth quarter and continue the upward momentum as we maintain long-term profit margins at the gross margin level at greater than 35%. On a trailing 12-month basis, our gross profit margin was 35% at the end of the third quarter. This improvement over the past 2-plus years is attributable to the progress our teams have made capturing annualized sourcing savings in the range of $10 million, improving project execution, and the impact of our commercial and portfolio transformation initiatives to improve the business mix while making acquisitions with accretive gross profit margins. For the remainder of 2025 and into 2026, we will continue to implement and expand on our operating excellence agenda, focusing on project execution and sourcing and increasing our focus on G&A expense optimization and process simplification to further benefit adjusted EBITDA delivery. These efforts will be bolstered by the addition of 80/20 to our operating model, a process which we have introduced late in the third quarter and will continue to drive deeper into the organization in coming periods. Now please move to Slide 10, where I'll review cash flow and indebtedness. Starting on the left side of the page with free cash flow generation. The schedule shows a walk from GAAP net income to free cash flow on a year-to-date basis. Cash flow in the quarter was a net positive of $19 million, a strong improvement of $22 million sequentially versus the second quarter due to strong cash generation from operations due to higher volumes, improved working capital management, and adjustments related to taxes paid on the gain on sale of the GPS business in the first quarter of this year. On a year-to-date basis, cumulative free cash flow is approximately $1 million. Year-to-date capital expenditures of approximately $8.7 million are largely driven by investments in our ongoing ERP system migration program, operating improvements in select production facilities and office updates and consolidations in Dubai, Shanghai, and Singapore as we integrated our legacy and acquired teams in those respective regions. On the right side of the slide is a summary of CECO's gross indebtedness with the primary drivers of change shown in the schedule provided. We ended the third quarter with gross debt of approximately $217 million, flat to year-end 2024 and a reduction of approximately $20 million from the end of the second quarter. Cash generated from operations and working capital initiatives was used to reduce our gross debt balance in the quarter to a level that now predates the Profire acquisition concluded in early January 2025. The reduction in gross debt, combined with the growth of our TTM EBITDA will result in a 25-basis point step down in the fourth quarter for the interest rate we will pay on our outstanding revolver balance, providing CECO with approximately $550,000 of annual savings in interest payments on the current balance. This benefit is exclusive of the benefit we will experience from further Fed rate reductions, of which 2 are expected by the end of 2025. Net debt at quarter end was approximately $186 million, a decrease of $13 million from the end of the second quarter and a slight decrease from the year-end net debt balance of $180 million. At $186 million, our net debt-to-EBITDA leverage ratio has been further improved to approximately 2.3x our third quarter TTM Bank EBITDA of $80.4 million. At the end of the quarter, our investment capacity is $109 million, an increase of $40 million from the year-end 2024 level and provides sufficient liquidity for our near-term needs. While we remain active in cultivating various M&A opportunities and expanding our deal pipeline, our short-term focus for capital deployment remains to further strengthen our balance sheet, accelerate our ERP migration efforts, and fund our double-digit organic growth. However, with our current capacity, we are well positioned to close on one of the tuck-in transactions working its way through our M&A pipeline. That concludes my remarks on CECO's third quarter 2025 financial performance, a solid result to follow up on an equally strong second quarter performance. And now back to Todd for his final remarks and a wrap-up.

Thank you, Peter. Let's now look ahead, including our initial outlook for 2026. On Slide 12, we summarize positive market and operational items, as well as certain challenges included in our 2026 outlook. We believe that investments in energy transition, such as increased power generation, expanded natural gas infrastructure, LNG investments, and a supportive policy environment that facilitates swift investments for economic benefits, are all significant positives for the energy transition, our customers, and CECO. Additionally, we see favorable market dynamics in industrial air and industrial water sectors, each with substantial opportunities as we move through Q4 2025 and into our 2026 sales outlook. I must emphasize how well-positioned CECO is for global general industrial investment and expansion. Having established a solid global water platform, we are also well set for large wastewater and produced water projects. The market dynamics are exciting, and we continue to invest to enhance our leadership and support our international operations. Regarding potential challenges or uncertainties, many of the concerns we previously mentioned remain relevant, such as tariffs, inflation, regulatory changes, and resource availability. These themes are not new, and we believe we have robust programs and processes in place to address them. Please turn to Slide 13, where I will share our initial full-year 2026 outlook. I am pleased to present this outlook, reflecting the strength of our operating model and our leadership in growing markets. We anticipate orders exceeding $1 billion, with a projected book-to-bill ratio of over 1.1. We have a solid sales pipeline, and we are eager to work with our customers to achieve over $1 billion in bookings. This booking level indicates future revenue, and we are set to become a $1 billion revenue company, with aspirations for more. Our full-year 2026 revenue outlook is estimated between $850 million and $950 million, representing a year-over-year increase of 15% to 25% compared to the midpoint of 2025. Our projected 2025 year-end backlog of around $750 million or more provides us with significant visibility as we begin 2026. Depending on bookings in Q4 2025 and Q1 2026, we'll have more clarity on next year's revenue range. Moving to adjusted EBITDA, we expect it to fall between $110 million and $130 million, a 20% to 40% increase year-over-year compared to 2025. Despite slight year-over-year declines in gross profit due to major power job revenue execution, we expect these to be offset by savings in our SG&A, leading to adjusted EBITDA margins rising by 110 to 150 basis points year-over-year. We also forecast adjusted free cash flow to convert 50% to 60% of adjusted EBITDA, contingent on reaching key project billing milestones and ongoing enhancements in working capital management. As we look at October and our 2026 outlook, we see considerable visibility and momentum, allowing us to confidently provide initial guidance for strong double-digit growth in both top and bottom lines, especially following what we anticipate will be an exceptional year in 2025. Please move to Slide 14. This is a favorite slide of mine, showcasing why there's much to be optimistic about. The graphics demonstrate positive growth and stable margin expansion. What stands out to me the most is how we have consistently delivered impressive, sustainable results. Our backlog has experienced a CAGR of 34% over four years; our orders and revenue both have a CAGR of 23% over five years. Our adjusted EBITDA CAGR stands at 35%. This consistent performance is a result of intentional investments in our people, growth programs, global expansion, and operational excellence, focused on safety, quality, timely delivery, and effective cash and working capital management. We are committed to deploying capital wisely to generate optimal returns for our shareholders. Notably, our shareholder returns over the past four to five years have been impressive, and we look forward to continuing to serve our customers and shareholders well into the future. Finally, let's proceed to our last slide, Slide 15. As we approach the end of 2025, CECO is well-positioned to take advantage of diverse end-market opportunities and strong mega themes. Our sales pipeline exceeding $5.8 billion offers significant visibility into exciting prospects. I am very satisfied with our Q3 and year-to-date performance for 2025, with year-over-year growth in backlog at 64%, orders at 44%, and revenue at 46% for the quarter. This growth trend is sustainable, and we are also pleased with our margin expansion of 124 basis points. I want to extend my gratitude to team CECO for their unwavering commitment to our customers. We remain optimistic about both our full-year outlook and the 2026 forecast, anticipating another strong year of double-digit growth in both revenue and earnings. We'll now pause to open the line for questions.

Our first question will be from Rob Brown of Lake Street Capital Markets.

Congratulations on all the progress. Just first on the kind of the project pipeline. I think you talked about some large projects in the works in terms of the industrial water side, in particular, and I guess, the power generation side. Could you give us a sense of where those are at and sort of what those projects entail?

Yes. I'll begin, and Peter can definitely provide more details. We'll focus on industrial water. We are well positioned globally for larger projects, and we are enthusiastic about many domestic applications and the growth potential in the U.S. However, the major projects are primarily located in the Middle East and various regions in Asia. These projects are related to produced water or water reuse in large installations. We believe our expanding reference sites and our partnerships with large organizations and EPC firms give us a competitive advantage. If they win the projects, we are their preferred technology provider. We are currently navigating the timing of these opportunities and maintaining ongoing discussions with them throughout the year. At this moment, it's really all about timing, and those larger projects will mainly be situated in the Middle East.

Then the 2026 outlook, I think you have pretty good visibility there with the current backlog. But are there projects that can come in that can move that up? I guess, what's sort of the ability for that to move up, I guess, in terms of project activity? What would have to happen to kind of hit the high end of that number?

Yes, I appreciate that we're discussing raising guidance for next year just a few days before Halloween. To be clear, we have a $5.8 billion sales pipeline, which represents jobs we confidently expect to move forward over the next 18 months. This amount is significantly higher than in previous years, and we are experiencing strong, sustainable double-digit growth. For the nearer term, particularly in Q4 of this year and the first half of next year, including Q1 of 2026, we have several larger projects that could positively impact our revenue profile in 2026 and 2027. The outcome depends on whether these specific projects advance and how many we secure in Q4 and early next year. For example, if we win both large industrial water jobs instead of one, or if we secure multiple power jobs instead of just one in the $75 million to $125 million range, our outlook could shift because we haven't included every potential job in our forecast. We have solid visibility from our backlog and expected win rate to support the performance we outlined. It's still early compared to when many companies share their 2026 outlook, but we are confident in our projections. That said, there are always factors that could enhance our visibility in the coming quarters, potentially leading to an improved outlook for 2026. At this point, we believe our guidance is accurate, reflecting our current position without being overly conservative or unrealistic.

One moment for our next question, which will be coming from Aaron Spychalla of Craig-Hallum Capital Group.

Maybe first for me, just on the pipeline in power generation. Can you maybe give us an update there? It seems like in the market, there's a focus on improving connections at the data center level and just getting to market faster. Are you seeing any acceleration in the pipeline there on the order front? And just maybe give a little more color on the activity levels there.

Yes. I don't know that we're seeing acceleration. I think we're seeing a very robust space with a lot of headlines and a lot of activity. No doubt it's easy and important to read what some of the larger organizations, like GE Vernova and Siemens and others are talking about, as they clearly are leaders in providing so much of the important power generation equipment, and we love partnering with them. And those conversations continue to be positive. Yes, there are times when things accelerate and ebb and flow, but they don't seem to be decelerating, I'll say that much. But I would say where we were a few quarters ago, I would say we feel very confident that pace being pretty sustainable. The pipeline is well over $1 billion for us of just those projects over the next 12 months or so. And so it's a very active set of discussions. Peter?

It's easy to feel overwhelmed by all the reporting on data centers. We need to maintain a balanced perspective on how much of this will become a reality. When you examine the backlog information from major OEMs, you'll find they are indicating that international demand is just as promising as that in North America. This demand stems from significant needs for power in various industries and the transition away from coal in those areas as well. We must be cautious and ensure that we look at our pipeline in a way that captures the best opportunities worldwide. Todd mentioned earlier that there is substantial immediate demand in the U.S. for data centers, but this is a long-term cycle that we anticipate will continue through at least 2030 or 2032. To echo Rob's point, we could secure it all today, yet still deliver over the next three to five years. This is a multi-year narrative, and I urge everyone to avoid becoming overly excited by headlines, as it takes years to build a plant, deliver equipment, and get it operational.

By the way, Aaron, I'm mentioning this because we've discussed it with you and others, and it's a question we've been asked as well, so it might come up in this Q&A. At CECO, our solutions related to power come later in the power build cycle. We focus on thermal acoustic noise abatement and emissions management. While we do have some involvement in gas infrastructure with separation filtration, our larger solutions for power projects typically occur in the second half, rather than at the beginning. We may engage in early conversations and bidding, and participate in budget assessments and planning, but we secure the jobs later in the cycle. As the cycle matures, we are starting to hit our stride.

Then maybe just switching to margins. You talked about 100 bps to 150 bps of kind of targeted EBITDA margin expansion. Can you just maybe talk about the confidence there? It sounds like there might be some mix just from some of these larger projects on the gross margin line, but you also talked about some of the early efforts on 80/20 and other lean initiatives and SG&A reductions. Just maybe help provide some color there, please.

It's really a steady approach for us, and we have confidence in this strategy. First, the volume we continue to generate gives us a lot of visibility through our backlog and margins in our projects. Although the gross margins might be slightly lower than the current company average of 34% to 35%, the EBITDA margin from those jobs is higher than the company average. We appreciate the dynamics that this volume brings in terms of consistent margin expansion. Second, we've invested heavily over the last few years in various areas to support and drive growth, and those investments will keep coming. As we grow and approach $1 billion, these investments can be absorbed more efficiently with increased sales, allowing us to gain more leverage in G&A and even some in S&E as we expand using resources already in place. Lastly, this is crucial for our recent gross margin improvement and will continue to enhance that area. Our operating excellence teams and investments in cost management strategies like 80/20, which we are currently implementing in our first set of businesses, aim for maximum efficiencies. They're focused on discovering and executing methods to achieve logistics savings and enhance cost management in our operations. Many of our businesses have experienced rapid growth, and 80/20, for instance, reassesses how to redesign our organization for optimal efficiency now that we're twice the size we were four years ago. We believe that operating excellence and 80/20 are essential for sustaining and enhancing our gross margins and for achieving those mid-teen EBITDA margins over time. We aim for a consistent increase of 100 to 150 basis points next year, possibly more, depending on volume and some mix factors. We're on the path to mid-teens or higher margins in the long run, and we maintain a balanced approach across various areas and processes that we consider vital.

Our next question comes from Gerry Sweeney of ROTH.

Congrats on a nice quarter. AI topic du jour, so let's stick with it. But just curious on the project side. So some of these data centers, they are switching different power, going a little bit more towards disaggregated power opportunities. Are there any opportunities in those locations for you guys versus the large turbine builds, et cetera?

It depends on how they choose to power the microgrid. If it's reciprocating equipment, the answer is little opportunity. If it's small format industrial gas turbines or aeroderivative gas turbines, there are certainly opportunities, but it depends on how the solution is defined and how many will be present. The challenge in answering that question definitively is there's no single standard concept for any of these solutions.

Then just sticking with the AI stuff or the power generation and build-out. At some point, does that expansion for a lack of a better word, stall just because there's just not enough capacity at some point in some of these build-outs? So instead of it being a higher hump, it's more of an elongated process. And do you have a sense of what that is if that's true?

The answer is yes, the process will be prolonged due to insufficient supply to meet current demand. When figures like $1 trillion in investment for data centers rising to $3 trillion per year are mentioned, it’s overwhelming and difficult to comprehend. Jensen Huang will indicate that it will indeed be $3 trillion each year over the next decade to fulfill global demand. This implies that the necessary megawatts for this power far exceed current industry capabilities, and this situation will persist for many years. Additionally, we must consider three other factors impacting our power grids. There’s the demand from new businesses and manufacturing returning to the U.S. and other developed nations, which is increasing energy requirements. The electrification of various sectors, including transportation, manufacturing, heating, cooling, and logistics, adds another layer of demand. While AI is capturing attention, traditional computing needs, such as cloud computing, gaming, crypto mining, and trading, also require significant electricity and will gradually be added to the grid. Analysts suggest that this trend will continue at some capacity through 2040 and at heightened levels until 2030. We are just at the outset of this development.

On that front, historically, I think a lot of your M&A has been maybe in the water and industrial side. Do you look at the opportunity on the power side? Are there acquisitions or opportunities for you to expand adjacent to what you're doing or add additional solutions to expand your wallet share? Our pipeline is well-balanced. We encourage all of our businesses to find ways, both organically and inorganically, to enhance their leadership positions. This is particularly true for our energy segments. In response to your question, our transactions have primarily focused on strengthening our leadership in industrial water and similarly in industrial air. We have made some savvy investments, such as the Transcend acquisition in the separation filtration sector, which has a substantial aftermarket and installed base. This was a great, high-margin investment we made a few years ago, and it continues to grow. We have doubled the business as we start to fully leverage that acquisition, and we are also exploring other opportunities in this area.

Our next question will be coming from Bobby Brooks of Northland Capital Markets.

I am interested in exploring the 2026 guidance further. Could you provide more detail on the macroeconomic conditions you are considering in the ranges of your 2026 guidance?

Yes, I believe we are in a stable position. We do not feel the need for any significant positive changes in the macroeconomic environment. We are aware of the same headlines as everyone else and are attentive to factors like interest rates and tariffs that could impact the economy. We have all gotten used to the fluctuations in tariff-related issues, and our supply chains have managed them well. While there are factors that could alter our view of the macro economy, we don’t anticipate any major swings, positive or negative, in the next 12 months. We do recognize that changes are possible, but based on our current pipeline and backlog, it's all about having visibility into steady markets. It’s challenging for us to predict how important power projects will respond to immediate headline concerns in the next six months. Although circumstances can change, tariffs and interest rates are unlikely to affect these significant investments. Similarly, the water projects are fairly independent of the overall economy. As you know, we are not particularly sensitive to short-term or intermediate changes in consumer sentiment or specific geographic shifts. Given that all of our sales come from industrial customers, who are currently in expansion and investment mode with a long-term outlook, we find it difficult to foresee a substantial economic shift.

Then I wanted to circle back on the cross-selling opportunities with Profire. So you've had Profire under your umbrella for 9, 10 months now. And I know one of the most exciting pieces to that acquisition was the cross-selling opportunities with their applications that historically had only went into U.S. oilfield service customers to then cross-sell that into your wide range of industrial customers as well as bringing it to your international OFS customers. So just curious to kind of hear an update on that and how that's progressed so far.

Yes, we believe there is still a significant opportunity for Profire as a business. We've invested considerable time with the team, and they are among the first where we will be implementing our 80/20 strategy to better understand how we can execute it at CECO. We've had extensive discussions with Profire regarding potential cross-selling opportunities and expanding into new geographic and industrial markets. While it's only been 9 to 10 months since the acquisition, we typically allow a year for our businesses to stabilize. We are actively seeking ways to enhance both operationally and commercially, and those initiatives are currently being established. The Profire team is enthusiastic about being part of CECO and is examining market trends within their core sectors, such as oilfields and energy applications. They consistently seek opportunities for innovation and investment. We've had productive conversations about both organic and inorganic investments in Profire. I maintain that this could evolve into a $100 million business in a few years, largely due to our capacity to introduce their products into a broader range of industrial and international markets.

Then just last one for me. Todd, you quote in the press release saying depending on timing, fourth quarter of this year could be the largest booking quarter ever, which is some really strong commentary and not something you've specifically noted in prior press releases. So I was just curious, aside from the multitude of shots on goal you have, especially with the large power gen and water projects, what else has given you confidence to speak to that? And maybe have you already had strong orders quarter-to-date through October?

It's a good point to bring up. We included it for a reason. Essentially, we just completed our fourth consecutive quarter with orders exceeding $200 million, and we're pleased with orders over $230 million. In the third quarter, we saw significant year-over-year growth and achieved a new record backlog, though this quarter did not include any major projects. We had several important jobs, typically between $20 million and $40 million, which historically we would have highlighted, but currently they aren't among our larger projects. Despite having only one significant project so far this year, we still generated over $230 million in the third quarter. We believe we are nearing the timing for a purchase order, which is crucial for booking jobs. Even with verbal agreements, we do not record anything until all terms and conditions and purchase orders are finalized. This gives us confidence in our pipeline visibility and the ongoing relationships we have with several customers. If several of these projects materialize in the fourth quarter, it could lead to our first quarter with over one major project, enhancing our confidence. Even if this does not occur, we still see strong potential for another excellent quarter exceeding $200 million. However, if those projects do materialize, we believe we could see a quarter surpassing $300 million.

Our next question will be coming from Jim Ricchiuti of Needham & Company.

One I'd like to just follow up, though.

Jim, we're having a hard time hearing you. The line is choppy.

Okay. Any better, Peter? This any better?

It's a lot better. A lot better. Thank you.

Good. Just a follow-up question on gross margin. I appreciate the commentary regarding the seasonal issue in gross margin in Q3 of last year. However, there was a sequential decline in revenues in Q3. I'm trying to understand what's affecting gross margin. Peter, you mentioned a closeout issue that impacted the Q3 gross margin. Could you provide more details on that?

It contributed 30 to 50 basis points to the reduction. We decided to negotiate with our client to close the project, recognize all outstanding change orders, and move on. It started with a lot of positive energy, but ultimately, we felt it was best to terminate and part ways.

And just, again...

I just want to add that historically, our weakest quarter in terms of gross margin is Q3. We anticipate a decline during this period as there are specific costs associated with goods sold that tend to impact this quarter, even though our volumes are solid. This quarter typically shows lower gross margins, and if you review our previous Q3 results, you’ll notice the trend. While it’s not guaranteed that Q3 will always be our weakest, I would estimate that around 80% of the time, it is the quarter most affected in terms of gross margin. If there is a decline, we expect it to occur in Q3. We had already predicted some decline due to various factors, and as Peter mentioned, there can be an additional 30 to 50 basis points of contraction. There was some inflation in the third quarter that we need to address, similar to how we have managed it in other quarters. Overall, we are satisfied with our gross margins year-to-date before Q3. This quarter aligned with our expectations. We believe we will return to higher gross margins, but we have certainly experienced some minor inflation impacts.

Again, looking ahead to 2026, it seems like you might be predicting slightly lower gross margins, or perhaps I misunderstood your comment. If that is indeed the case, it would mainly be due to the mix, particularly with industrial air and industrial water, resulting in a larger share of some of these bigger deals.

Yes, I believe we are indicating that if our gross margins in 2026 are lower on average than in 2025, it will primarily be due to the mix of large power and large water projects, which tend to have lower gross margins but still maintain strong EBITDA margins because the general and administrative costs associated with those projects are minimal. Given the scale of these large projects, it would be challenging for us to improve gross margins mathematically, but advantageous for our EBITDA performance. Therefore, if gross margins do decrease next year, we do not see this as a result of changing market dynamics or inflation, which we feel confident about. Furthermore, there could be opportunities in nuclear, defense, and certain short-cycle aftermarket segments which, if realized at projected volumes, could yield gross margins significantly higher than the average for our company and help counteract any downward pressure from large power and water infrastructure jobs. At this time, we are assessing the situation and do not provide a gross margin forecast for the year. We simply want to convey that if margins are lower, it may not be a substantial challenge but rather a reflection of the mathematical dynamics of the size of the contracts.

One moment for our next question, which will be coming from Joseph Giordano of TD Cowen.

This is Chris on for Joe. Have you observed any change in customer sentiment or project timing for water, wastewater infrastructure investments contingent in part or whole on some form of government funding as a result of any changes in pace of disbursements from the Infrastructure and Jobs Act?

We don’t see an impact. Our answer is quick and confident because the large infrastructure projects we’re involved in are not based in the U.S. or even Europe. They are in regions where those dynamics are not at play, where there are governmental pauses or timing issues with substantial funding. Rather, there are different investment criteria altogether.

Can you provide an update on how your short-cycle business trended during the quarter? And it's expected to be a larger share of the mix in the 2026 and what you see contributing to that?

The short-cycle segment remains consistent, and we are seeing encouraging growth in our short-cycle businesses, which are positively impacting our overall performance. The mix can be challenging, especially when we have significant power or water projects that tend to take longer. This can create a perception that the mix is stable, even if short-cycle activities are expanding quickly within our organization. Four years ago, short-cycle sales accounted for about 20%, and now that figure has risen to over 30%. While the composition may vary based on the specific projects, our aim is to achieve a balanced 50-50 split over time through both organic and inorganic strategies. Although this goal may not materialize by 2026 due to the timing of our projects, we are encouraged by the growth in applications and businesses that feature increased aftermarket content, such as filtration and aftermarket parts and services. Continuous investment in this area remains a priority, and the short-cycle performance has been stable throughout the year.

I am showing no further questions. I would now like to turn the call back to Todd Gleason for closing remarks.

Thank you very much, and thanks, everyone, for the questions and of course, the interest in our information today. Importantly, to our global teams that are delivering incredible value for our customers, thank you very much for all that you do. It's important for our customers that we have the most talented organization to protect people, to protect the environment and to protect our customers' investment in their industrial equipment. We're passionate about that. We are going to be presenting at several conferences in November and December. The information of those can be found at our Investor Relations website. We look forward to meeting with many of you when we're out on the road as well. So with that, we're going to end the call today. We appreciate it, and have a great day.

This concludes today's conference call. We appreciate your patience. You may disconnect.