Thermon Group Holdings, Inc. (NYSE:THR) Q1 2024 Earnings Call Transcript August 5, 2023 Operator: Greetings and welcome to the Thermon First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin. Ivonne Salem: Thank you, Darren. Good morning and thank you for joining today’s fiscal 2024 first quarter conference call. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found on our IR website under News and Events, IR Calendar, Earnings Conference Call Q1 2024. During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comarable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.
VladisChern/Shutterstock.com I would like to remind you that during this call, we may make certain forward-looking statements regarding our company. Please refer to our Annual Report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as may be required by law. Now I would like to introduce Bruce Thames, our President and Chief Executive Officer, for his oening remarks. Bruce Thames: Thank you, Ivonne. Good morning, everyone, and thank you for joining us today. I’ll start today with a quick overview of Thermon. We’re a world leader in providing safe, reliable, and innovative mission-critical industrial process heating solutions to customers in 85 countries from facilities on 4 continents. Our almost 1,400 employees have an industry-leading safety record and are dedicated to creating value for our customers and shareholders by executing our strategic long-term plan, which I’ll cover in more detail on the next slide. In order to create long-term value for our shareholders, we’re guided by our 3 strategic pillars: first, profitably growing our installed base; second, decarbonization, digitization, and diversification to drive additional growth; and third, disciplined capital allocation. As the global leader at the forefront of applying innovative process heating technology to solve critical thermal engineering problems for our customers, w benefit from a very large installed base. This enables us to capture recurring revenues and drive growth across our traditional end market verticals, while our culture of continuous improvement supports margin expansion. In addition to capturing share across our traditional end markets, we’re also pursuing 3 new areas to drive additional growth around decarbonization, digitization, and diversification. We’re expanding our sales and marketing efforts in these areas that utilize our core heating technologies to diversify our end markets with a goal of having approximately 65% to 70% of our revenues come from end markets outside of oil and gas by the end of fiscal 2026. Our digitization strategy is progressing well as we continue to expand our range of digital solutions that help our customers to optimize monitoring and maintenance across their facilities. We’re also enabling the energy transition as we supply our customers with products and solutions that help them achieve their sustainbility goals around electrification and decarbonization. Finally, our commitment to a disciplined capital allocation strategy underpins our first two strategic pillars. Our robust balance sheet enables us to drive organic growth through reinvestment in our business to meet our fiscal 2026 goals. We’re also well positioned to pursue inorganic growth through highly-strategic bolt-on acquisitions that meet our financial objectives. Turning now to Slide 5 on Thermon solutions for energy transition. This quarter we’d like to share with you some of the ways that Thermon’s products and solutions enable the energy transition. On Slide 5, you can see the range of Thermon’s current electric heating products that can be used in both green and blue ammonia applications. These include electric immersion heaters, electric heat tracing systems, and electrically-heated tubing bundles. Hydrogen is an important piece of the sustainable energy future, but it’s difficult to transport via pipeline or othertraditional means due to a phenomenon called hydrogen corrosion cracking or HCC. HCC can embrittle and weaken steel resulting in shorter asset life or unanticipated failures. By adding nitrogen to hydrogen, ammonia is created which is much easier to transport via pipeline or other means. As a result, ammonia plants are an important part of enabling the use of hydrogen as a sustainable energy source. Green ammonia uses renewable energy such as wind or solar power to produce hydrogen via electrolysis. Blue ammonia is produced when natural gas is cracked to generate hydrogen and CO2, where the CO2 is then captured and sequestered. In either case, produced hydrogen is then combined with nitrogen to create ammonia. The global ammonia market is estimated to grow at a 5.8% compounded annual growth rate through 2032. Electric heaters play a crucial role in various stages of heating within ammonia plants. They’re used to provide indirect heat at various stages of the process via heat transfer fuids, such as molten salt or hot oils. They can also be used to directly heat reactants or to provide process heating for ammonia synthesis. In addition to their environmental benefits, electric heaters can also provide cost savings for ammonia plants. They offer precise and efficient heating, reducing energy consumption, and minimizing downtime. With their compact size and easy installation, electric heaters also have a smaller footprint than traditional heating systems, allowing for more efficient use of space. Thermon’s existing range of electric heating solutions, combined with our expertise in industrial process heating, make us an ideal partner for ammonia producers looking to improve their sustainability and efficiency. Turning now to Slide 6 on new Thermon technology. Here we see the newest addition in our Caloritech immersion heater line called the Quantum Truflow Heater. Our investments in research and development have yielded this patent-pending design that represents a stepchange in heating technology. The design has been validated in partnership with an industry-leading heat transfer institute using advanced modeling software and lab testing to achieve optimal heat transfer and energy efficiency. The higher efficiency reduced overall size and lowered total cost of ownership to make conversion from traditional hydrocarbon heaters to electric even more economically compelling across a wide range of end market. Turning now to Slide 7. Thermon’s Genesis Network and digital solutions provide our customers with full operational awareness and supervisory control over their heat trace systems using industry-leading wireless mesh technology that connects all heat trace controllers to the controller. This facilitates increased operational efficiency and reliability with fewer maintenance hours and lower total costs. Adoption continues to grow as customers recognize the significant benefits provided by the Genesis Network with 15% more new circuits added in the fist quarter of fiscal 2024. Based on our pipeline of opportunities, we anticipate the number of circuits doubling this fiscal year. On Slide 8 you can see that we are continuing to progress our end market diversification strategy. Thermon’s products and solutions can be used across a wide range of industries, and we’re seeing growth across several of these sectors. During the quarter, our bookings from rail and transit were up by 39% year over year, commercial was up by 29%, and food and beverage was up 120%. Our order intake from high-tech sectors continue to grow as well with bookings from data centers up over 600% and bookings from semiconductor end market up over 90%, accelerated by the CHIPS Act. Importantly, we are also seeing growth in sectors related to the energy transition. Our bookings from electric power were up 489% and our bookings from biofuels and green diesel were up 89% during the quarter. We’re encouraged by the steady incremental growth across these end markets as wecapture additional market share. On Slide 9, I’d like to once again highlight the progress we have made around our end market diversification strategy. This chart shows end market mix for the trailing 12-month period ending June 30th, 2023. Since last quarter, we’ve increased the percentage of our revenue that comes from, for example, the commercial and renewables end markets. CapEx spending in LNG and petrochemicals has been a significant growth driver as well. We’re also seeing growing demand related to projects in the specialty chemicals and gases, particularly related to semiconductor fabrication. There’s also a growing pipeline of opportunities around alternative fuels, such as biofuels, hydrogen and ammonia, and another round of investment to winterize and harden the U.S. power infrastructure across the south. Overall, with approximately 60% of our revenue generated from non-oil and gas end markets, we continue to make steady progress toward our goal of — fiscal ’26 diversificaton goals. Turning now to Slide 10 and our first quarter fiscal 2024 results. The Thermon team achieved another quarter of outstanding performance. As a quick reminder, our business is highly seasonal with our first quarter typically being the weakest and the third and fourth quarters being the strongest due to colder weather in the northern hemisphere. As a result, year-over-year comparisons are more appropriate than sequential quarterly comparisons when measuring performance. We delivered record revenue of $106.9 million, up 12% year over year over a prior year record, largely due to healthy growth in North America and Asia Pacific. Importantly, we saw meaningful growth in year-over-year revenue from resilient maintenance or OpEx activity. We saw even stronger operating leverage with adjusted EBITDA of $22.1 million, up 33% year over year, driven by higher volume, price realization, and productivity gains. Free cash flow was negative in the quarter due to timing of certain payments afer fiscal year end. Adjusted EPS was $0.40 per share, an increase of 58% over the prior year period. Finally, our book-to-bill ratio showed double-digit order growth at 1.12x, demonstrating continued strong demand from our customers. With that, I’d like to turn the call over to Kevin Fox for a more in-depth review of our financial results. Kevin? Kevin Fox: Thank you, Bruce, and good morning to all. Turning to our Q1 fiscal 2024 financial performance on Slide 11. Performance this quarter was once again outstanding as the global Thermon team continues to successfully execute our plan. Customer demand remained strong in the quarter. We reached $120 million in incoming orders, up 16% year over year. Book to bill was a very robust 1.12x. Spending remains strong across the U.S. and Latin America, and we continue to see signs of a rebound in Asia Pacific. In terms of our end market orders, we saw the most growth in the power sector during the quarter with customer demands expanding across th renewables, food and beverage, and commercial end markets. Trailing 12-month orders reached $475 million, which we believe supports our raised full year revenue guidance. Revenue in the first quarter was $107 million, a year-over-year increase of 12%, primarily driven by midstream and downstream oil activity across the U.S. and Latin America. The renewables, food and beverage, and power end markets also contributed to revenue growth in the quarter. Revenue from large projects was $27 million, up 21% versus prior year, while revenue from small projects and maintenance and repairs totaled $80 million, up 9%. On a trailing 12-month basis, 77% of our revenues were derived from customer OpEx spending and that is indicative of our business shifting away from more volatile capital budgets. Adjusted EBITDA for the first quarter was $22 million, up 33% year over year with adjusted EBITDA margin expansion of approximately 330 basis points. On a trailing 12-month basis, adjusted EBITDA was $99 mllion, or 21.8% of revenue, representing a year-over-year increase of 48%. As we take a step back and think about the evolution of adjusted EBITDA over the past few years, it is important to acknowledge the contribution of our process heating business largely through the acquisition of CCI Thermal in December 2017 to that growth. The THS business recently crossed the $100 million revenue threshold on a trailing 12-month basis. Profitability is slightly better than the overall company average and important data point as we consider the adjacent growth markets that we believe will be a key contributor to the earnings power of this business in the years and decades to come. Last, but certainly not least, is that the THS business is providing a return on capital 250 basis points over our current cost of capital, demonstrating the team’s ability to create meaningful shareholder value through a disciplined long-term focus on driving inorganic growth. Adjusted diluted earnings per share was $.40 in the quarter, a year-over-year increase of 58%. A quick modeling note. We are currently estimating a $0.21 per share impact from amortization expense in fiscal year 2024. As you can see by these results, we continue to drive our business forward, delivering meaningful, profitable growth despite the complex operating environment. On Slide 12, we will cover the updated balance sheet. Our net debt to adjusted EBITDA ratio was 0.8x in the current quarter as compared to 1.7x in the previous year as we’ve both paid down debt and significantly grown EBITDA over that time period. Total debt at the end of June was down 25% to $114 million. Working capital was $156 million in the quarter, an increase of approximately 10%, primarily due to the combination of strategic inventory and seasonality. Working capital as a percentage of trailing 12-month sales was lower coming in at 34.6% at the end of the quarter, mainly driven by improved collections activity. Turning to cash flow. Net income in he first quarter was $11 million, up 67% year over year. CapEx spend was $2.8 million and free cash flow was negative $1.9 million, reflecting our typically weakest cash quarter due to the timing of certain payments and our ongoing investments for strategic growth, particularly around incremental capacity for our process heating business. We ended the quarter with cash at $33 million, and this represented a year-over-year decrease of 17% as we are improving our global cash management practices. While the broader macroenvironment remains uncertain, we are pleased with our strong start to fiscal 2024. We continue to see strong growth trends across our regions, end markets, and financial metrics. As we move ahead through fiscal 2024, we will continue to achieve positive results, diligently control costs, and create long-term value for our shareholders. Finally, I would like to thank the entire Thermon team for their hard work, which enabled us to deliver such strong first quarter results.And with that, I’ll turn it back over to Bruce. Bruce Thames: All right. Thank you, Kevin. I’d like to turn now to Slide 13. We’re raising our full year revenue and earnings guidance for fiscal 2024. As we look ahead to the coming quarters, we’re conscious of the ongoing macroeconomic volatility even as we continue to see growth across our business. At this time, we’re raising the lower end of our revenue guidance from $455 million to $462 million, and increasing the upper range to $488 million for the full year, which at the midpoint represents approximately 8% top line growth over fiscal 2023. GAAP EPS is now expected to be in the range of $1.48 per share to $1.62 per share, which represents 55% year-over-year growth at the midpoint. Adjusted EPS guidance has also been raised to $1.69 to $1.83 per share. We’ll continue to evaluate this outlook as we progress through our fiscal year. We expect to continue to generate significant [free] cash flow through the year to maintain a strong blance sheet, giving us the flexibility to reinvest in our business and evaluate bolt-on M&A opportunities. On Slide 14, you can see more details about our capital allocation priorities. As our top priority, we are committed to maintaining a healthy balance sheet across economic cycles with a leverage target of 1.5x to 2x under normal conditions. Our next priority is to fuel organic growth in our business by reinvesting in people, technology, and continuous improvement. These investments enable us to pursue our 3 strategic initiatives of decarbonization, digitization, and diversification. We also pursue inorganic growth by continually evaluating M&A opportunities. Our focus is on bolt-on acquisitions that meet our strategic and financial criteria, and we have a healthy pipeline of opportunities. Finally, we continue to evaluate opportunities to return capital to our shareholders when appropriate. As we wrap up today on Slide 15, we want to reiterate that Thermon is a leading global bran, providing safe, reliable, and innovative mission critical process heating solutions serving high-value diversified end markets with high barriers to entry. Our team relentlessly pursues operational excellence in order to deliver innovative products and differentiated solutions that create value for our customers. We believe that our large global installed base with longstanding customers across a variety of end markets is a significant competitive advantage, resulting in a resilient aftermarket franchise that generates high-margin recurring revenue. Our products and solutions are aligned with key long-term secular trends such as the energy transition, increasing environmental regulations, and growth in chemical demand. We believe that we are well positioned to capitalize on enormous opportunities associated with the energy transition and decarbonization through the electrification of industrial heat and to help our customers meet their own sustainability goals. Our strong and flexibl balance sheet with low leverage and high gross margins as well as our capital-light business model has enabled Thermon to remain resilient across economic cycles and continue to provide significant optionality. I’d like to end today by thanking the entire Thermon team for their outstanding performance this quarter and dedication to our culture of continuous improvement and to meeting our customers’ needs. As we look ahead to the balance of fiscal 2024 and beyond, I’m excited to see what we will achieve together and I’m confident we will continue to deliver profitable growth and value for our shareholders. Darren, I’d like to turn the call back. Over to you, so that we can now take some questions. See also 15 Countries That Spends Most Time on Social Media and 25 Countries with the Highest Proportion of Immigrants.
