Conference Transcript - CECO 2026-06-11

Operator

Good morning. Welcome back for day two of the East Coast Ideas Investor Conference. Thanks for being here today. Our first presentation for you today is going to be CECO Environmental. CECO's been a client for us for a long-standing time since Todd took over as CEO. They're a diversified global industrial solutions company. Most recently, most of you are probably most excited to hear about the Thermon acquisition, which is the largest of the acquisitions that they've made to date so far. Really kind of changes the trajectory of the company. And just yesterday, they put out a press release announcing some of the financial targets and things of the combined company. So with that, I'll turn it over to Marcio Pinto, who's the head of FP&A and is also leading the integration efforts on the Thermon and Seco transaction.

Marcio Pinto, Head of Investor Relations

Thank you, Stephen.

Operator

Good morning, everyone.

Marcio Pinto, Head of Investor Relations

It's been a few exciting days here for us, and I'm happy to be here and walk you through some of the key points to our story. So as we've presented Tuesday, with the acquisition of Thermon, we now become a company with pro forma revenues of $1.5 billion, $250 million of pro forma EBITDA. And if you go back to our deal announcement, we have estimated approximately $40 million of cost synergies on a run rate basis to be captured by year three of the transaction. Prior to this acquisition, if you were following SECO, we were signaling about $950 to $1 billion worth of revenue for the year. This really advances our strategic agenda as we think about where we want it to be on a SECO standalone basis by 2030. This transaction really advances our agenda by about four years going into that objective. We're starting as a combined company with a very appropriate net leverage, given the relative size of the deal that we just concluded, that 2.6 times just on a pro forma basis. But also from a market positioning standpoint, we continue to be very much aligned with what were SQL strengths, specifically power generation, data centers, AI, industrial reshorting, global infrastructure. But now we're also adding Thermon's capabilities to our portfolio around electrification and data centers as well. We have specific long-term growth items that, you know, if you've be following our company, you would recognize industrial water international projects are becoming a key theme in our pipeline and within emissions management, talking about SCR and emissions controls around natural gas power turbines. Thermon, on the other hand, they have two key products that we think are real winners and will add some real upside to their top line story, a liquid load bank, a product specific to data centers, and medium voltage heaters, more for industrial, general industrial capabilities. The one point we also mentioned in the call is our ongoing momentum from a booking standpoint, $550 million of bookings by early June. You know, just two, three years ago, yeah, probably three years ago, $550 million would have been close to 50 percent or much more than 50 percent, I would say, actually, than our full year bookings. And so it's a significant change in our momentum and in the growth that we have in our company. One of the objectives of the transaction really was to make us a more balanced, mixed company from a revenue profile standpoint. Long cycle, 60 percent, short cycle, 40 percent of our revenues, that would compare with pre-transaction of about 80 to 70 percent of our revenues to being long cycle and the delta short cycle. This in two very summarized thoughts helps us with smoother performance quarter over quarter, less ebbs and flows associated with long cycle, and short cycle naturally are a tailwind to our gross margins. The integration program are on schedule, and as you'll see forward, we have that very well under control. So this is the new SECO, as we're calling it. We, quote-unquote, woke up one day, and we are at $1.5 billion. Now, the transformation has started a lot earlier. This is just a reference chart around our stock price, where 2020 is about the year that Todd Gleason, our chairman and CEO, started. with the company. About $7 a share by the end of that year. We were closing at about $95, I think a couple days ago. Significant run in our shareholder value. Now, how we got there, and this is the chart I want to pause a little bit. How we got there is a combination of multiple actions. And I would say we have developed this now over the last few years. Trial and error, but also a lot of success in applying this systematically across the organization. And I would divide them in two key items. Business transformation on the high side really allows us, or it's around organizational design. We are very intentional in dividing our P&Ls in a very market-focused way, call it belly-to-belly with our customers, and empowering those small P&Ls to make decisions around bookings and orders and decisions that really allows us to maximize our win rate. On top of that, you think about our corporate structure really to be as simple as possible, right? Be as less complex as possible and always structure it such that we help and we enable success at the small P&L level in the platforms. One of the key traits in our playbook really is a culture of performance. We align incentives with performance. If you perform appropriately, you are incentivized appropriately. Also, keeping in mind our win-write values. We don't want to win at all costs. We always want to win right and appropriately. And having a mentality and an approach of continuous improvement. The other part of our playbook really entails portfolio transformation. How do we grow our core? How do we invest in our people, in our processes, in our systems? How do we make sure we have geographic expansion? How do we make sure we have market expansion? You'll see that in one of my charts later where we talk about our growth in pipeline and commensurate growth in orders as well. And if you know SECO, you'd appreciate our strategic M&A intuition. We have bought about 13 companies now with Thermon over the last four years. And we're always very active. And one of the things you'll see is that we are not done yet, right? We obviously want and need to digest the Thermon transaction. We need to make sure integration and our processes now work together. But we're not done yet. And so the thought of this here is that that stock growth we have seen over the last six years, it's obviously aided by the circumstances of the markets we're playing in, right? Definitely on the tailwind position in all of our markets, industrial air, industrial water, energy, and now thermal solutions. But it also is driven or is sustained by a playbook that we have developed over time. this playbook now is sustainable so as we add more capabilities whether organically or inorganically we now have a playbook we can abide by that we think helps maximize shareholder value and value creation all right so pivoting a little bit here more specifically to the transaction the Thurman transaction was closed on June 1st announced in late February when it comes to integration and cost synergies. On the integration front, we have set up an integration management office. We have partnered up with Bain, a consulting firm. It's a team of about 25 individuals. And really think about it as, as we go through the various functions, whether it's HR or finance, operations, commercial teams, et cetera, it's what we'd call the concept of two in a box. You have a leader in Thermon, you have a leader from Seco, both discussing the process to understand how can we operate as a combined company. The intangible value associated with this is that we really want to create the best-in-class process or the process that best serves both companies in a very collaborative way. From a cost synergy standpoint, we had announced about $40 million of run rate synergies by year three, so that would be June 29. We have clear visibility to that, and we have, we think, upside as we go through the work with our teams, and it is something we'll be talking more about in the later part of this year. We have captured about $5 million of cost synergies by now after a couple of weeks as a combined company, mostly related with C-suite changes in our company and some public company costs that we are able to eliminate pretty quickly. One of the themes on the middle of this chart, growth synergies. One of the things that, as part of the deal announcement, we commented that may not have been well understood was we said that commercial synergies were upside to the model. I think the street probably interpreted that as there were no commercial synergies. We have been trying to be extremely clear ever since that there are commercial synergies. And I would make a distinction. From Thermon's standpoint, organically, liquid load banks, medium voltage heaters, they're gaining momentum in the market. Liquid load banks, if you know, Bruce Thames, the outgoing CEO, has spoken about a quote log of about $100 million at the end of March. And this is a product they launched probably less than 12 months ago. So that in and of itself will add about a point of growth relative to prior periods to Thermon. On the commercial synergy side, we do think we have an incremental one to two points of organic growth to Thermon, just flowing them through Seco projects. PowerGen, immediate opportunities are things that we are working right now, but also in industrial air where we have exposure to data centers and semis. You know, there are some interesting things we're working on. The second part of commercial synergy upside that we are leveraging or we will leverage is our international footprint. About 40% of our projects occur internationally on a SICO standalone basis. Thermon, on the other hand, had about 15% of their revenues internationally. There's some real skill we can leverage as a combined company. The thought now going forward for the next three to six months, really, is, like we say in the middle of that middle column, how do we coordinate pipeline opportunities? How can we coordinate access to pipeline on both companies so we can win more and leverage the power of Seco as a combined company? now on the right hand side least but not last this integration is important also for our workforce and we do mean that um you know we have made some swift changes as part of the transaction as i'm referencing on the top part of that column with leadership transition but then what excites me here about is as we become a much bigger company we have a lot more opportunities to our employees Very often in smaller companies, if you are a rock star, you want to evolve in your career, you get to a point where you either leave because you just don't have enough opportunities to stay in that company. I think that's changing now for us and for our workforce, and there will be a lot more opportunities to our best folks to really go through the ranks and grow in their careers always with us. Diving a little bit deeper here on the synergies, We think about $40 million by year three with a scenario of upside that we're working now. If you think about where are the costs coming from, you really think about a big chunk of it, I would say about 50% of the $40 million will come between public company costs. You think about investor relations firm, board of directors, auditors, et cetera, and G&A functions. finance, HR, IT, so on and so forth. That's about 50%. Then the remaining 50, I would say there's about 20% of that coming from procurement and supply chain. We're a bigger company, have better leverage. We can go and chase our supply chain for better pricing and better rebates. There's about 20%, 25% of that, that is about manufacturing footprint. So how do we think about our manufacturing capabilities at Thermon. Thermon, relative to Seco, is significantly different in the way they deliver revenue. Seco, on one hand, we outsource fabrication to our supply chain post-design of the solution. Thermon, on the other hand, they get a product, they get the order, they manufacture that product, and they deliver it to the customer. So looking at the supply chain environment and the manufacturing footprint on how it's best optimized. It's critical for us as we think about $40 million of run rate synergies, acknowledging that is a smaller piece of those three buckets I have on the chart. What we think will give us upside to the $40 million, and that is the work we're developing now and will continue to work over the next few months, is on the commercial side. How do we think about power generation? How do we think about the orders we are winning with G. Vernova and Siemens? And how do we bring thermal on? Same thing with data centers, general industrials, et cetera. That is how we get to a number higher than $40 million. We have been very deliberate, going very fast at costs in G&A. We'll continue to do so. We'll be very delicate in going after cost savings around manufacturing footprint and commercial teams because we do think this company is geared for growth. Now, on the topic of growth, two last charts or three last charts, I think, but I want to spend a little time here on this pipeline. As a combined company, we're now above $8 billion of pipeline, and both companies define this as discrete opportunities that we're chasing that will be awarded by a customer to us or a competitor in the next 18 months. SECO in 2021 had about 1.5 billion dollars of pipeline opportunities pre-acquisition we had about seven billion dollars growing seven plus and Thermon has north of a billion dollars worth of pipeline opportunities that's the power of this company combined from a top line standpoint part of the playbook that I was talking about a few charts ago how do you develop this pipeline. Like we're saying here, 65% of our pipeline growth, really, engineering capabilities, business development, processes, tools. That's called the organic piece of the investment that allowed us to grow into the $8 billion mark. Obviously, the markets on our side, PowerGen data centers, international water, industrial reshoring are aided by the investments we've done, and that's about a large piece of the growth we have had over time in our pipeline of bookings. M&A, these are the 12 acquisitions we have done over the last four years. They added about 15 percent to this number, mostly in water and in air, and now Thermon adds about 20 plus percent to this number. The thought, right, is from an integration standpoint as we think about a combined company. How do we bring $1 to $1.5 billion of thermon backlog into the existing SECO backlog? And how do we overlay that and look for commercial synergies, both here as well as across the world? This is work that takes time, but we have started it on week one of the transaction. now pipeline is the best indicator for future bookings growth and you can see a clear correlation between the ramp in our pipeline to ramp in our orders so our our strategy and our thesis really is more than talking about specific win rates in specific parts of our market our focus in our investments really is centered around how can we invest in people and capabilities so the pipeline the number of pipeline opportunities grows because we know if the number of pipeline opportunity grows and we cast a wider net to win more we will win more and i think this is substantiated by our our orders uh performance you look at you know 2022 527 million dollars we book that in two months this year, right? Also, on the high side of things, you know, the $550 million we booked in the quarter, they're driven by one large order in the PowerGen segment. But if you think about Q1 of this year, we booked about $450 million of orders. So the growth we've had has been very rapid. Last year, we ended with about $1.1 billion. You know, company record. We crossed that $1 billion mark from a booking standpoint, and we're now really well on track for $2 billion as a combined company. And as a reminder, by the end of May, early June, on the SECO standalone basis, we have booked about $900 plus million. So it's pretty active, and it will continue to grow. Okay, last chart before I open up for Q&A. This was a chart we had in our investor call on Tuesday. Kind of walking a little bit about around several numbers out there, but I would focus in the middle, right? On a reported basis for 2026, orders of $2 billion, revenue between $1.27 and $1.37 billion as a combined company, up about 20% at the same midpoint last year. Adjusted EBITDA of $195 to $225 million, up approximately 25% at the midpoint, and that already includes $5 million of cost synergies, and delivering free cash flow at about 55 plus percent of adjusted EBITDA. The caution here is that reported SECO for 2026 really only includes seven months of Thermon. June 1st, December 31st. That's why on the right-hand side, pro forma full year really establishes what this company would look like if we were together since January 1st. So adding Q1 2026 plus April and May, which are the stop period, You know, meaning in between Thermon as a public company and Thermon now as part of Seco. So on a full 12-month period, we are a company north of $1.5 billion, adjusted EBITDA at the midpoint of about $265 million, including $10 million of synergies. Again, we go from six months of realized synergies extrapolated to 12. And a company that in the first year of acquisition with moderate synergies, 17% adjusted EBITDA. And I would just want to end there. If you'd look at, and if you were with Seiko, with myself, or Todd, or Peter in prior conversations, prior Thurman, we would have said by 2030, or our path to 2030 is to be about $1.5 billion or more, and a mid-to-high teens adjusted EBITDA margins. We're there now. And that's the power of this combination, and that's why we're so excited about it. Okay? With that, I'll open up for some Q&A. I know we have 10 minutes for Q&A. Yeah. Page 10. Yeah.

Speaker 3

Yeah.

Marcio Pinto, Head of Investor Relations

Yeah. So the question for those on the web, because I will listen to the webcast, is how do we go from 1.3 to 1.5 book to bill, the 1.5 itself and the growth year over year? Look, the 1.5 itself is a result of the pipeline growth and how we have been cultivating pipeline opportunities, right? $8 billion of pipeline, and we think about that on an average of the last six months, being about pre-thermon, about $6.5, $7 billion, it gives you enough opportunities for us to win a lot more than we had in the past. And a lot of these projects and the way we have our business, it's more on a long cycle. So they go into backlog at full value, $50 million, just say, as an opportunity. And then they slowly bleed out of backlog over a period of 12 months. So part of the 1.5 dynamic is the fact that we book a lot of project cycle business, less short cycle. That we'll get into backlog for three, four weeks and then get out of backlog, say, within the same quarter. So the 1.5 is a result of project mix. The growth 1.3 to 1.5 is continued acceleration on our key markets. And I will say this, power generation, 25, 26 accelerates. It's a lot better, more active. But the real driver year over year to us has been industrial water and industrial air. Steady companies, steady growth, steady performance in 2025. But on the advent now of semis, you know, indirect adjacencies to call it data center economy, but also international jobs, we're growing, you know, that 0.2 points of book-to-bill year over year. So our markets are accelerating, and our markets are better, I think, relative to a year ago.

Operator

Yeah.

Marcio Pinto, Head of Investor Relations

Okay. Seems like we're good. Yeah, do you have one more? Yeah. let's do it yeah yeah yeah yeah so the question is whether the push for industrial reshoring is helping us specifically now I think it's it's difficult to to to create this line between what's that versus market dynamics and more demand in you know output but as well as semis I think the short answer is yes I think there's there is some benefit we've seen a lot of acceleration in semiconductor bookings and projects accelerating, so I think there's a natural incentive to invest in the U.S. I think we're being benefiters of that. More on industrial air side, less in industrial water, and I think as a result of that investment with industrial reshoring here in the U.S., we then have more opportunities on the power generation side, right, specifically to the context of the data center economy. You think about data center as sort of like the final product, but then you have semis that before that. Semiconductors and manufacturing footprint around semis help significantly our industrial water portfolio. Data centers to operate, they need a lot of power that helps our energy transition and emissions management business. So I think we are benefiting from that, and it's coming from in both areas of our portfolio. Yeah, so the question is how we're doing integration and how things are evolving. Look, as an integration leader, it's been really a pleasure to work directly with Thermon employees across a variety of functions, right? Operations, commercial, corporate G&A, typical functions. We've done several business travels to their sites in Canada, here in the U.S. as well. I think they are a very incredibly skilled workforce, very knowledge about their market. They remind me a lot of our SQL platform's technical capacity. They're very experts in what they do. They're really the best at what they do. They know their customer. They know what the customer wants, probably better than the customer knows himself. And I think that is pretty powerful from a commercial standpoint. I think capabilities, they have a lot of talent. They're located in Austin. There's a pool of talent in Austin I think we can cultivate. And I think they have embraced the transaction very positively. I mean, I have led, personally, workshops with 30-plus people in a room, and I can see the energy. I didn't feel the defensiveness of, I'm Thermon, I'm Seco, my process is better than yours, none of that. I think everyone is embracing it. We have a lot of momentum in our integration management office team, and, you know, my job really is to keep that as far as I can because we're doing a lot of good things with them. The key thing for me, and obviously $40 million of synergies, it's very important. That's a specific EPI that we have in front of us, and you guys will be measuring me on that. But really what excites us about that is the concept of how do we develop a better process from two companies, right? We have grown very fast. We have to catch up in our process, in our structure. They have had a more steady type growth. They offer things we don't have or we haven't developed given the pace of our growth. So we're very excited on bringing the best of both companies into one. And that is the main function of the IMO. That will go well beyond a three-year KPI of cost synergies. Go ahead.

Speaker 3

Yeah.

Marcio Pinto, Head of Investor Relations

Yes.

Speaker 3

Yes.

Marcio Pinto, Head of Investor Relations

Yeah, look, so the question is whether we have identified incremental opportunities above 40. I'll answer that to you in the second earnings call. But I'll tell you that we're very positive about what we're seeing. We will move fast as well in where we can move fast. Again, we don't want to break something that's working well. What's working well is commercial growth in Thermon. We don't want to break that. What's working well? This is a company that for a typical industrial company with 40-plus percent gross profit margins, they're doing something good about it. We don't want to break that. so we will move fast and with pace but delicately and thoughtfully so to your question we'll we'll talk more as we get into the summer but but I like what I'm seeing okay thank you very much hope you guys have a good day