CECO Environmental Corp. (CECO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the CECO Environmental Third Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marcio Pinto, Vice President of Corporate Integration and Investor Relations. Please go ahead.

Good morning, and thank you for joining CECO Environmental's Third Quarter 2026 Earnings Call. With me today are Todd Gleason, Chairman and Chief Executive Officer; and Peter Johansson, our Chief Financial Officer. Our earnings release and presentation include the relevant disclosures and non-GAAP reconciliations and they are available on our Investor Relations website. Today's discussion includes forward-looking statements, including our '26 and 2027 outlook and preliminary 2028 expectations, which are subject to risks and uncertainties, including those described in our SEC filings and in our presentation. We will discuss also non-GAAP financial measures. Please refer to the reconciliations and definitions in the presentation and appendix. Our reported results include Thermon from the June 1 acquisition date, and this quarter includes a full 3 months of Thermon's financial performance. Todd will begin with our business performance. Peter will then review financial results and updated '26 outlook, and then Todd will return to discuss our initial 2027 outlook and preliminary 2028 view. We will then open the call for questions. With that, I'll turn it over to Todd.

Thank you, Marcio, and good morning, everyone. Let me start by saying thank you to our global CECO teams for another outstanding quarter. It certainly is a very dynamic time with tremendous change, global investments in industrial infrastructure and a fast-paced information environment. What remains consistent is CECO's high-performance results. Let's review. Please turn to Slide #3. The overall takeaway is we had another quarter of record results, and our 2027 outlook points to even more tremendous results ahead. In the third quarter, we delivered revenue of approximately $404 million, adjusted EBITDA of $70 million and an adjusted EBITDA margin of 17.3%. Revenue more than doubled and adjusted EBITDA roughly tripled when compared against third quarter of last year. Legacy CECO performed very strongly with organic revenue growth of 30% and adjusted EBITDA growth of 64%. That underlying performance matters. The quarter reflects continued growth and improving profitability across legacy CECO, together with the full quarter of Thermon and the early benefits of our strategic combination. Total company orders were $778 million, and we ended the quarter with approximately $2.2 billion of backlog. Our Opportunity pipeline now exceeds $9 billion. Approximately 80% of our backlog relates to multi-industrial and energy applications with approximately 20% related to data center applications. Importantly, the projects within that backlog are funded and actively progressing rather than prospective projects that rely on future development activity to move forward. The Thermon integration remains on track and ahead of schedule. We have now captured approximately $22 million of annualized net adjusted EBITDA savings, representing approximately 55% of the 3-year target we laid out, and we've done so in the first 6 months. Those are annualized savings from actions completed with benefits flowing directly into earnings over time. Organizational and cultural integration is progressing nicely as well, and the teams are increasingly unified and focused on executing together to serve our global customers. In the quarter, cash generation was another highlight. We generated approximately $154 million of adjusted free cash flow, bringing year-to-date adjusted free cash flow to $192 million. That cash generation supported debt reduction and brought quarter-end net leverage to approximately 2x. The combination of our backlog, pipeline and integration progress gives us high confidence as we introduce our initial 2027 outlook. At the midpoint, we expect approximately $2.2 billion of revenue and $500 million of adjusted EBITDA. I will discuss the 2027 assumptions and ranges after Peter reviews our financials in more detail. Now please turn to Slide #4. This slide puts the quarter and year-to-date into the context of the high-performance company we have built over several years. Since 2020, we have delivered sales growth at a compound annual growth rate above 20%, expanded EBITDA margins by more than 700 basis points, and we've completed more than a dozen accretive acquisitions. Our sales pipeline has expanded approximately 6x and backlog has grown approximately tenfold. Those are powerful metrics that don't just happen by chance. It has been a steady series of focused investments and strong execution by our great teams. We have also broadened our portfolio. Across industrial air, industrial water, energy and thermal management, we serve customers with different investment priorities and project schedules. That breadth provides opportunities across multiple markets, and each of our platforms have exciting growth opportunities heading into 2027. We recognize the questions that some investors are asking about the macro environment, including the durability of demand, the pace of infrastructure investment and the exposure of industrial suppliers to data center spending. Our view starts with the projects and customer relationships we manage directly. Our backlog consists of funded, permitted and active projects. Cancellation or often referred to as debooking rates remains very low and continue to track our long-term average of below 0.5%. Direct engagement with end customers gives us visibility into project requirements and execution schedules. We continue to monitor those schedules closely as projects move through engineering, procurement and delivery. Backlog quality also supports our margin outlook. The booked margin profile provides a solid foundation for future profitability as projects convert to revenue. We then have additional opportunities through sourcing, productivity, integration savings and the operating benefits of higher volumes. The cash performance is equally relevant. Our model has relatively modest fixed capital requirements and effective management of customer milestones and working capital can generate substantial cash. We saw that this quarter. The resulting debt reduction expands our capacity to support growth and future acquisitions. Additionally, we look at the combination of revenue growth and EBITDA margin as an indicator of performance. The combination of these 2 metrics is often associated with what's known as the Rule of 30 or Rule of 40 companies. These refer to companies whose numeric addition resulting from the combination of top line growth rates and operating or EBITDA margins adds to over 30 or 40 as quite often, those companies regularly receive higher trading multiples. On the basis shown in this deck, the combination for CECO is over 40, therefore, a Rule of 40 company for 2026. And our initial '27 outlook is to be a Rule of 50 or higher company. So premier industrial companies operate at a Rule of 30 or higher, we are pleased to continue to be in this premier neighborhood. And finally, on this slide, we note that we have a track record of meeting or exceeding the initial annual guidance we provide, and we continue to use the same planning discipline as we do each year. We evaluate customer demand, execution capacity and the risks in the operating environment, and we translate all that into the opportunities and the challenges ahead. Now I will hand it over to Peter, and he will walk through the quarter's financial results and our updated full year 2026 expectations. Peter?

Good morning, everyone. Thank you for joining Todd, Marcio and myself for a review of CECO's third quarter 2026 results and an outlook for the full year. Please turn to Page 6. On this slide, we present a summary of the key business metrics and performance highlights for the quarter. As a reminder, this is our first report with a full quarter of Thermon in our reported results, and the resulting financial performance was outstanding, demonstrating both the continued strength of the legacy CECO businesses and the strong contributions from the Thermon acquisition. Revenue for the quarter exceeded $404 million, an increase of 105% from the prior year. Legacy CECO revenues increased 30%, supported by the accelerated conversion of our growing backlog. There were no material project delays that impacted our results in the quarter. Adjusted EBITDA for the quarter was $70.1 million, up 201% over prior year, resulting in a margin of 17.3%, 550 basis points higher than the same quarter in 2025. Legacy CECO adjusted EBITDA increased 64%. Adjusted earnings per share in the quarter was $0.60, a $0.34 increase over the same period in 2025. Orders in the quarter were $778 million, higher by 234%, reflecting a book-to-bill of approximately 1.92x. Legacy CECO orders increased approximately 165%. Quarter ending backlog reached approximately $2.2 billion, another record for CECO with our legacy business backlog increasing by 167%, reflecting the continued strength in demand across our power generation, energy infrastructure, semiconductor and broader industrial end markets. Another highlight in record in the quarter was our outstanding adjusted free cash flow, which reached $154 million. Conversion from adjusted EBITDA was outstanding, reflecting 220% conversion, which allowed us to make substantial reductions in our gross bank debt balances, resulting in a net leverage at quarter end of approximately 2.0x, well within our target range. This result highlights the improved cash flow generation and margin profile of the new CECO portfolio that we fully expected would result from the combination with Thermon. For the first 9 months of 2026, orders were slightly above $2 billion, exceeding full year 2025 bookings by 90%. Revenue was $895 million, and the book-to-bill ratio was approximately 2.3x. Year-to-date adjusted EBITDA was approximately $131 million with an adjusted EBITDA margin of 14.6%, an increase of approximately 380 basis points over prior year. And through September, we generated $192 million of adjusted free cash flow. Strong collections and advanced payments from customers contributed to that performance. And we ended the quarter with approximately $530 million of net debt, a substantial reduction from the position at the end of the second quarter. Given the aforementioned orders and cash performance, we will be increasing our full year expectations for both metrics. We are maintaining our revenue and adjusted EBITDA ranges we raised in August. More to come on the full year 2026 outlook when we reach Slide 10. Now please turn to Slide #7 for some additional details on our financial results for the third quarter and trailing 12 months. We concluded the quarter with a record backlog of $2.193 billion, up 205% versus prior year and up 21% sequentially from our previous high of $1.82 billion. Backlog has now increased in 13 consecutive quarters and has been accelerating over the last 8 quarters. Third quarter orders were $778 million, an increase of 234% over the prior year period as our business platforms booked significant orders across a wide range of end markets, including power generation, LNG and gas processing, natural gas transportation, semiconductor and electronics production and industrial wastewater and produced water treatment. On a trailing 12-month basis, orders have reached $2.355 billion, a 147% increase over the prior trailing 12-month period. And book-to-bill was 2.12x, an outstanding result. Revenue is another strong result in the third quarter, exceeding $400 million, 105% greater than last year, inclusive of a full quarter of Thermon's performance. CECO's stand-alone revenue in the quarter was $256 million, approximately $21 million above the company's previously quarterly high set in quarter 2 of this year. We expect revenue growth to continue in the fourth quarter, tracking the significant expansion of our backlog and growth in orders, most notably in our power generation, semiconductor and natural gas infrastructure application. Trailing 12-month revenue finally broke through the $1 billion level, reaching $1.110 billion, a record for any 12-month period in company history of 55%. And we expect sequential revenue growth to continue, supported by our growing backlog, strong sales pipeline conversion and demonstrated execution. Adjusted gross profit for the quarter and for the trailing 12 months increased 127% and 53%, respectively, on higher volumes and the benefits of the Thermon combination. Sequentially, margins increased 262 basis points to 36.3%. This improvement was expected as margins moved higher due to improving volume and mix on larger projects, newer higher-margin projects with faster revenue recognition profiles, improving execution and operating excellence efforts and the benefits from blending in the Thermon margin profile. Trailing 12-month gross profit margins were 34.4%, a level we expect to maintain or deliver above. Adjusted EBITDA for the trailing 12-month period, which included 4 months of Thermon operating results, was $160.4 million, resulting in a margin of 14.4%, an increase of nearly 336 basis points. Adjusted EBITDA delivery benefited from higher volumes, accretive Thermon product margins, lower operating G&A expenses, ongoing complexity reduction efforts, including the benefits from our 80-20 efforts and lower corporate G&A spending. Along with the higher adjusted EBITDA, free cash flow conversion was substantial, and I will provide more color on cash flow and our debt position on Slide 9. Please now turn to Page 8 for a few highlights on backlog. Backlog continues its impressive growth on both a sequential and year-over-year basis, closing the quarter at $2.193 billion. Book-to-bill in the third quarter was approximately 1.9x. Our backlog, which is all firm and confirmed with customer POs and recovery terms in the rare case of a cancellation reflects a substantial portion of our future revenue and has now increased by approximately 10.2x since the end of 2021. Our sustained strong order performance and our continued success in converting our $9-plus billion sales opportunity pipeline underpins our expectation of extending the trend of greater than 25% top line growth for the full year in 2026. In terms of backlog composition, power generation projects for customers in utility, both gas and nuclear powered, industrial heat and power and data center applications represents approximately 60% of our quarter ending backlog. The remaining approximately 40% consists of a diverse mixture of projects and customers across energy and industrial end markets, including semiconductor and electronics, natural gas processing and transport, hydrocarbon and chemical processing, process electrification and industrial water and wastewater treatment. The legacy Thermon business represented approximately 13% of CECO's backlog as the Thermon revenue mix is comprised of shorter cycle and faster-turning orders and projects. Now please turn with me to Slide 9 for an update on cash flow and indebtedness. Third quarter adjusted free cash flow continued the strong momentum started in the second quarter as we generated approximately $154 million of cash and pushed our year-to-date adjusted free cash flow to approximately $192 million, an increase of approximately $191 million year-over-year, representing approximately 147% of adjusted EBITDA. For the trailing 12 months, free cash flow generation slightly exceeded $200 million or approximately 125% of adjusted EBITDA. Cash flow generation benefited from strong collections in the quarter on second quarter billings for large project milestones, receipt of down payments for new bookings, growth in our billed in excess balances and improved working capital management with a strong and increasing focus on inventory. Numerous major project milestones and the resulting customer billings were realized in the third quarter, creating customer receivables that we expect to collect during the fourth quarter and first quarter of 2027, continuing our free cash flow generation surge. Capital expenditures in the quarter were modest and largely driven by our ongoing ERP migration and consolidation initiative, which we expect will be essentially complete for CECO legacy entities by mid-2027. And we spent money on select projects and acquired facilities that were ongoing within the Thermon businesses. With the modest CapEx needs and our strong cash generation, we were able to apply a majority of our cash flow to reduce our debt balance. Gross debt at the end of the third quarter of approximately $604 million was lower by approximately $128 million, reducing our net debt to approximately $530 million and a third quarter end leverage ratio of 2.0x our trailing 12-month bank EBITDA. This is at the low end of our targeted leverage range of 2.0x to 2.5x, demonstrating once again our ability to quickly reduce the level of our borrowings made to support accretive and strategic growth initiatives. With the debt repayments we have made in the quarter, CECO has created substantial capacity of approximately $344 million within our current credit facilities, providing substantial liquidity to support our anticipated working capital, trade finance, capital expenditure and strategic investment requirements. And with additional sizable collections expected in the fourth quarter, supporting further repayments, we anticipate year-end leverage to be further reduced below the low end of our target leverage range, further increasing our revolver capacity and further lowering our cash interest expenses. Now let's flip to Page 10 for an update on our full year 2026 outlook. We are increasing our full year orders outlook to $2.5 billion or greater as market demand remains robust and our sales opportunity pipeline continues to expand. On this level of orders, we expect year-end backlog to exceed $2.2 billion. We are also raising our adjusted free cash flow outlook to approximately 100% of adjusted EBITDA, an increase from our previous expectation of at least 55%. This improvement reflects the cash already generated year-to-date and our current expectation for further collections and project working capital improvements through to year's end. In August of this year, we increased our outlook for full year revenue and adjusted EBITDA, incorporating the impact of the Thermon acquisition and expected higher CECO legacy business growth. We are maintaining our August revenue guidance of $1.3 billion to $1.375 billion and adjusted EBITDA of $200 million to $225 million. The adjusted EBITDA outlook includes approximately $5 million of Thermon cost synergies that will be realized during 2026. And as a reminder, includes 7 months of Thermon results beginning from June 1. On a pro forma calendar year basis, including a full year of Thermon results, we expect that 2026 revenue would reach $1.5 billion to $1.6 billion. And adjusted EBITDA of $255 million to $280 million. That pro forma perspective provides a better jumping off point for comparing the 2027 outlook that Todd will share with you shortly. And that concludes my review of CECO's third quarter 2026 results and a discussion of the full year outlook. I will now pass the mic back to Todd to provide as we have in prior years, our initial view of next year's outlook and his closing remarks.

Thanks, Peter. Please turn to Slide #12. As Peter just mentioned, each of the past 5 years on our third quarter earnings call and release, we provide an additional outlook for the next fiscal year. In each year, we substantially go through a similar process to compile this initial outlook. We provide our guidance construction road map on this slide. Our initial 2027 outlook reflects the ongoing business we can see through customer engagement, our order book and the execution plans associated with our operating teams and their goals and objectives. We start with an assessment of our sales pipeline, which has risen to above $9 billion. We combine that pipeline analysis with a similar valuation of our backlog, which, as you know, is approximately $2.2 billion. Power generation markets remain very strong, and our diversified industrial businesses provide additional opportunities. We expect growth across all of our business platforms as we head into next year. The margin profile of backlog also supports this outlook. Thermon adds to the profitability of the combined portfolio, while productivity, sourcing and operating execution provide further upside. Those benefits are reflected in our planning. Integration savings are progressing ahead of schedule. As I noted earlier, we have captured over $20 million of annualized net adjusted EBITDA savings, which is approximately 55% of our 3-year target. We now expect to capture approximately 70% or more of the target by the first anniversary of the acquisition. Our teams have also actioned approximately $2.5 million of revenue synergies. The opportunities include thermal solutions on power generation and gas filtration projects, along with early opportunities in international water applications. We continue to see the potential to add 1 or 2 percentage points to Thermon's organic growth through commercial synergies. In just a few months since integrating Thermon, we are off to a solid start. We are balancing those opportunities against uncertainty in the operating environment. Inflation, policy changes following the election, geopolitical developments and sentiment around AI and data center investment, all warrant attention. We've considered those factors in constructing our outlook. Some factors will improve the market, while others might create more pressure or uncertainty. That said, our leadership team has the experience and we have processes in place to monitor and adjust. I would remind our audience that since initiating annual guidance -- our annual guidance process in the third quarter of 2021 for full year 2022, we have exceeded our initial guidance in 4 of the 5 years and essentially met it in the remaining year. The average outperformance has exceeded 10% for revenue and adjusted EBITDA. That history reflects our planning processes and execution. While our current ranges reflect the information that is available today, we remain very confident in how we build our outlook. Please turn to Slide 13. It is rewarding and exciting to provide our 2027 outlook. At the midpoint of our initial 2027 guidance, we expect approximately $500 million of adjusted EBITDA on approximately $2.2 billion of revenue. That implies adjusted EBITDA margin of approximately 22.7%, just tremendous growth and year-over-year performance on almost every metric. The progression reflects our full year of Thermon, the conversion of our larger backlog and the margin and cost opportunities across the combined companies. We have direct customer engagement supporting the projects in that backlog and the data center projects, which I already mentioned represent about 20% of our backlog are all progressing on schedule. The slide also provides a preliminary view of continued growth in 2028. We provide this preliminary growth projection based on meaningful discussions we have with customers and our long-term analysis of our opportunity pipeline, which we anticipate to grow above $10 billion in the next few quarters. With these inputs, we currently see preliminary 2028 delivering double-digit top line and bottom line growth. This would yield adjusted EBITDA margins in that period of approximately 23.5%. We hope this snapshot of 2028 helps provide insights into our current assessment of market opportunities ahead, not just in 2027. While there is much to do, we look forward to and are confident in our ability to execute through the upcoming periods. As always, these operating plans include appropriate cost actions and contingencies alongside the benefits of integration and productivity. We will update our expectations as the year progresses and our visibility develops. Turning to Slide 14. This simply provides our 2027 outlook with a slightly different format in more detail. Just to repeat a few things. As I just mentioned, our '27 revenue outlook is for $2.1 billion to $2.3 billion, and we expect adjusted EBITDA of between $475 million and $525 million. At the midpoint, revenue growth exceeds 60% against the 2026 reported outlook and is up approximately 40% against the pro forma outlook. Adjusted EBITDA growth exceeds 130% against the reported outlook and would be up approximately 90% against the pro forma outlook. Again, just tremendous growth. We expect orders to grow 20% or more with a strong book-to-bill ratio throughout the year. Our pipeline and market activity support that execution while backlog provides visibility to revenue. The EBITDA outlook incorporates higher backlog margins, integration savings and the operating benefits of volume and productivity. It also factors in appropriate levels of inflation and other headwinds. We expect adjusted free cash flow conversion in the range of 50% to 60% of adjusted EBITDA. This initial assumption reflects our multiyear average. We will continue working capital programs to pursue additional cash generation as project schedules and customer terms allow. Now please turn to our final Slide 15. CECO serves diverse industrial and environmental markets, and we see growth opportunities across more than a dozen business platforms. Our third quarter performance reflects the investments we have made in our people, our processes and systems and together with the value of the Thermon combination and their great teams. The third quarter builds upon our strong legacy of CECO growth. A full quarter of Thermon and substantial cash generation are also highlights. Integration is ahead of schedule and backlog and pipeline support our initial 2027 outlook. Our leadership teams remain focused on customer execution and the operating actions that are within our control. We continue to monitor market developments and we'll adjust where necessary and communicate our progress. Once again, and as always, I thank our global teams for the work that is done to produce these incredible results. And thank you to our customers and shareholders for your continued support. With that, operator, I'd like to open the line for questions.

[Operator Instructions] Our first question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group.

I appreciate all the color on everything, including data centers. Maybe first question on backlog. I mean it sounds like most of your backlog and growth is coming from power gen and other areas of the industrial complex. Can you just talk about the margins within that backlog and how much conversion you're expecting in 2027 guidance and how that maybe compares to prior years?

Yes. I think a lot of consistency in how it compares to prior years. Things can move up and down a little as always. But to stay true to that, we expect at least 70% to convert in '27 in our current backlog. So as we wrap up the year, as backlog grows and we enter 2027, that ending 2026 backlog will turn at least 70%, sometimes higher in the next year. So that's usually our average. There's percentages of our backlog that turn faster and some percentages that are associated with 18 months of revenue generation or even more, but that's been our consistency. I'd say in respect to the margin question, we are at a higher gross margin level in backlog than our current gross margins that we just reflected in year-to-date and in the quarter. So we have a lot of visibility to our ability to execute on the margin profile that we've outlined. I'd say that as we book projects here in the third quarter and we look at the projects that we expect to book in the next few quarters, we like the margin profiles associated with those as well. So while there are areas around inflation and supply chain constraints that we monitor and we constantly are ensuring that we are addressing. We really like the way that our revenue is going to turn next year. It's very much in line with our expectation. And as I just suggested, the margins are certainly higher than what we've delivered already.

Understood. And then maybe on the pipeline and the orders in the quarter, any areas of strength to note for the quarter orders and then I think I heard commentary of the pipeline growing to $10 billion. Just maybe talk about what's driving that? And again, just conversations with customers that you're having on kind of interest rates and inflation.

Yes. So what's driving the $10 billion preliminary view of where it's heading is our sales pipeline, the $9 billion are projects that we know will be -- we anticipate will be actively won or lost or booked in some way in the next 18 to 24 months. If it's longer -- if it's further out than that, we don't put it in our sales pipeline that we share with investors or that we articulate. The $10 billion includes jobs as we move forward that we see coming down the pipeline that are not necessarily yet in that $9 billion. So while we articulate that the next 18 to 24 months, will be $9 billion. We continue to see that grow as we look out into the second half of '28 and '29, and those projects are substantial as well. The other thing I'd say is, as you know, Aaron, and most of our people that track us, we continue to grow in new markets, geographies. Those markets and geographies in the industrial space are quite often growing. So us growing our sales pipeline is simply a result of the team's efforts to introduce our services and solutions to new vertical markets and new geographic markets. I know Peter and I spend a lot of time on our operating reviews with the businesses talking about the growth of their markets and pursuits. And that has typically been one of our healthiest areas of strategic focus organically is expanding our opportunity set or at bats as they say, in the various vertical markets and geographic markets, and we don't see that slowing down anytime soon.

Our next question comes from the line of Bobby Brooks with Northland Capital Markets.

Good morning.

Bobby you are breaking up, Can you start over? We didn't hear the beginning of your question.

Can you guys hear me better now?

Yes, thank you.

Sorry about that. So when you guys initially bought Thermon, it was discussed how CECO -- given how earlier CECO gets involved in certain projects, it's given several months to even a year ahead of when Thermon's team might have known about certain projects that need their thermal management. It seems like -- I think you mentioned there were some sales synergies in the quarter that were captured. Is that related to that? And just wanted to just get a broader update of like is that still something you think can really help add organic growth to the business and just help cross-selling?

Yes. I'll start and then Peter can add. He's also done a lot of work on this. So what you -- the way your question was worded is accurate. Our visibility to the sales pipeline and our backlog gives a unique access point for Thermon and their teams to go and evaluate opportunities to cross-sell or sell into those projects or those upcoming projects. So that visibility is a salesperson's dream. And we provide, therefore, access to new market pursuits for Thermon every day across all of our platforms. The sales to date reflect some of that, where we have already booked or will be booking a project in backlog. We see an opportunity to include a heat process solution, an immersion heater, heat trace or something similar, and we get the Thermon teams involved, and we get them qualified on the project and off we go. So that's what's been happening there. There's a lot of other opportunities, I think, for both sides, not just Thermon finding opportunities to sell through CECO, but even in some cases, CECO leveraging the great relationships that Thermon has, the knowledge that they have in their geographic markets and industrial markets. So look, we say with conviction that we believe Thermon will -- the Thermon business has at least a point of organic growth as a result of this combination. And I would say that there's additional sales on the CECO side as well that can add just nice growth to the combination.

Bobby, you used the term called cross-selling. Well, that is not the strategy for bringing the commercial teams together, it is, in some instances, what we're finding happens is that one of our teams passes a lead to another team and they close. We are not creating a single sales force with an organization that sells across all of the applications and technologies. We're still maintaining the integrity and the focus of our business platforms because that's what our customers expect, and that's how our teams best execute. Where we're seeing the benefits are where customers are asking us to present them the solution with more technology in the package. So we need to be careful that when you use the term cross-selling, we're not seeking the synergies of one guy selling everything. That's just not our strategy.

That's very helpful to think of. And then just on -- to kind of piggyback on Aaron's question a little bit more. So I think you mentioned 70% of the -- 70% of what will exit the back -- or 70% of the year-end backlog expected to convert into sales in the next 12 months. Could you just discuss them like the remaining bridge of the '27 guide is just like typical cadence of like more short-cycle book and build stuff? And am I thinking of that right or is there a little more nuance?

No, it's quite simply that. I mean that's why we start off with the range, 70% could be higher as we roll into next year that turns into revenue. Then we have regular aftermarket and services and short-cycle sales. That provides us, frankly, with more upside if we see our short cycle pick up throughout the quarter or throughout the year. And so look, I feel like the visibility we have is unique versus a lot of companies in the industrial space. That's one of the reasons, not the only reason, but it's one of the reasons why on the third quarter earnings call, we provide full year outlook for next year. I don't know what percentage of companies do that in late October or early November, but we are certainly in the minority of companies that provide next year's outlook this early. But that visibility that we have in backlog and in our sales pipeline helps support that confidence and it's not just confidence. It really supports a bottoms-up model that allows us to see 70% of our revenue walking into the year almost with high visibility. And then the other 30-or-so percent of our revenue is what most companies do, which is we model the market. We model our typical demand. We model our flow of our short-cycle sales and aftermarket and services. So it's a combination of visibility and knowledge of how our markets are growing and how we're benefiting from those markets.

Super helpful. And just last one for me. I know in the past, there's been some excitement around large industrial water projects, specifically within the Middle East, kind of tied to some new energy production over there. I was just curious, was any of the 3Q orders benefit from that? Has that opportunity changed just with continued kind of kinetic energy over there? Just wanted to get a sense of what's happening over there.

Yes. Water has had continued to have good growth in the quarter. We have very large opportunities that we spoke of earlier this year, and we still have those opportunities. Some of those have been a little bit delayed because of some of the conflicts in the region, in the Middle East region. And so we're still seeing there's a large appetite for those when that disruption subsides. We don't have that -- we haven't put that in our outlook so much. We talk about it, and they're still there. They're included in our pipeline. But at this point, we remain very confident in our double-digit -- strong double-digit growth across industrial water. And those larger scale projects will be upside when they happen.

Our next question comes from the line of Rob Brown with Lake Street.

Just wanted to maybe hit the visibility question again kind of looking into '28. On the power side, how much visibility do you typically have as these power projects get developed? I assume you sort of, I guess, know by several years out that things are happening. But just maybe talk about the visibility in the power market in particular and how much kind of visibility you have there?