Thermon Group Holdings Inc (THR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Thermon earnings conference call for Q3 2012. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ms. Sarah Alexander, Director of Investor Relations. Please go ahead.

Good morning and thanks for joining us for today's earnings conference call. We issued an earnings press release this morning, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website at Thermon.com.

A replay of today's call will be available on our website beginning two hours after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the express written consent of the Company is strictly prohibited.

During this call our comments may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties and our actual results may differ materially from the views expressed today.

Some of these risks have been set forth in the press release and in our annual report on Form 10-K filed with the SEC on June 20, 2011. We would also like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions and various other aspects of our business.

During the call we will also discuss some items that do not conform to generally accepted accounting principles, including adjusted EPS and adjusted EBITDA. We have reconciled both items to the most comparable GAAP measures in the earnings release. Adjusted EPS and adjusted EBITDA should be considered in addition to and not a substitute for income from operations, net income, net income per share and other measures of financial performance reported in accordance with GAAP.

And now it is my pleasure to turn the call over to Rodney Bingham, Thermon's President and Chief Executive Officer.

Good morning everyone and thank you for your continued interest in Thermon. Today we have two of our executive team leaders joining us on this earnings call. Jay Peterson, our CFO, will follow me and the financial details of our FY 2012 third quarter. George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global markets and industry trends.

For those of you that are not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical and power generation industries. Our heat tracing systems provide freeze protection and temperature control for piping, vessels and instrumentation. These mission-critical systems ensure the continuous and safe operation of the industrial facilities they are installed in.

Well, we had a very good quarter. We set new records for revenue, orders, gross margins, backlog and EPS. As we have said before, this continues to be a very good time to be in the heat tracing business. All of our geographic business centers are doing well, and our main market sectors, oil gas and power, continue to drive our revenues and earnings.

At this time we would like to reaffirm our previous guidance of modest double-digit growth for FY 2012. Our Q3 revenue mix was 65% MRO, 35% greenfield. For reference our year-to-date mix for 2012 is 63/37 MRO to greenfield.

Our new cable manufacturing plant is nearing completion, and we will start installing equipment in early March, which is just a few weeks away. We will be in production by March 31.

Currently we're enjoying a strong tailwind. Our activity level is high as a result of a strong business climate and the introduction of new products and the expansion of our heating cable production facilities.

We would like to remind our investors that the timing of our revenues can fluctuate as a result of engineering and construction schedule delays. This lumpiness does not reduce revenues, but can impact the financials of a particular time segment.

Once again, thank you for joining us today, and I would like to turn the call over to Jay Peterson, who will present our financials for the quarter.

Good morning. Thermon demonstrated a very solid quarter in fiscal Q3, and we again set several financial records, including orders, revenues, backlog, earnings and cash generation.

In the following discussion we will focus on the results of our core operating business and exclude those expenses relating to the optional bond redemption that occurred in October of this fiscal year.

First off, let's start with return on equity. On a Q3 EBITDA basis, that is Q3 EBITDA annualized, our ROE was 42% this past quarter, and the highest level since our IPO of last year.

In terms of revenue, our revenue this past quarter grew to $68.8 million, a new record for Thermon and an increase of 6% over the prior-year quarter number of $64.9 million, with both hemispheres showing growth.

Year-to-date our revenues totaled $202 million, and are up 13% over the prior year. The quarter was also a new record for orders, $84 million, eclipsing our previous record of $70 million by $14 million. And note that our orders grew 43% year-on-year and our book-to-bill this quarter was 122.

Our backlog of orders ended December at $102 million -- that is also a new high for Thermon -- versus $80 million at the end of Q3 of fiscal year 2011. And that is an increase of 28%, and again with both hemispheres showing growth -- that is double-digit growth. And note by definition our backlog contains signed but unperformed purchase orders and agreements.

We had record gross margins this past quarter. Margin dollars grew by 14% to $34 million. And that is up from last year's level of $30 million, an increase of over $4 million. And on a relative basis our margins last quarter were 49% versus 46% one year ago. And this relative increase was primarily due to product mix with MRO/UE constituting 65% of our revenues in Q3.

In terms of operating expenses, our core operating expenses for the quarter, SG&A, and that excludes depreciation and amortization of intangibles, totaled $15 million versus $14 million in the prior period.

Due to the recent redemptions in our bonds, our quarterly interest payments have been reduced from $5 million a quarter to less than $3.5 million, and this equates to an increase in earnings per share by $0.05 a share per quarter. And I want to point out that our EPS is impacted by $0.09 a quarter due to the non-cash amortization expense due to the CHS acquisition in 2010.

The number of full-time employees at the end of December was 715. That is up from the 640 as of calendar December 2010. And 85% of these additions were in production, sales and engineering, and relate to managing our growing business.

In terms of earnings on a GAAP net income basis we set a new record this quarter with income just shy of $7 million compared to the prior-year income of $3 million. And GAAP EPS doubled to $0.22 a share versus $0.11 in the prior-year period.

Adjusted EPS came in at $0.01 higher versus $0.12 one year ago. And, again, the adjustments are expenses relating either to the paydown of our debt or in the case of fiscal year 2011 transaction-related expenses.

This last quarter our EPS was impacted negatively by less than $0.01 a share from the effects of foreign exchange when considering both translation and transaction impacts.

Let's now turn to the balance sheet and cash flow. Our cash balance at the end of September -- I'm sorry, December was $20 million compared to $35 million in the prior-year period. This cash decrease was due to the optional redemptions in our long-term debt.

From a free cash flow perspective we generated $6.4 million or $0.20 a share. Our DSO improved to 60 days versus 64 days one year ago. And our days in inventory at the end of December increased to 105 days versus 70 days one year ago. And this recent growth in our inventory was planned and is due to the transition to our new production facility.

Lastly, in aggregate, our cash conversion cycle increased to 109 days versus 93 days a year ago. And, again, this increase was due to the level of our inventories and we anticipate a reduction in our inventory in the coming months.

From a debt perspective, at the end of December our long-term debt has been reduced to $139 million. That number was $210 million nine months ago. Note that all of this $71 million in debt reduction was due to optional reductions enabled by our strong cash flows and IPO proceeds.

In May of 2010 our debt leverage was approximately 4.2. Today it is approximately 2, and believe that next year it will approach 1.5.

Our business continues to be highly capital efficient. For example, this past quarter our maintenance CapEx, excluding the investment we are making in our new manufacturing facility, amounted to less than 1% of revenues.

And in summary, we continue to perform at record levels, including order activity, topline revenue, and earnings, and all of these achievements were accomplished within an uncertain economic global environment.

We will continue to manage our expenses and capital investments, and we plan to reduce our debt leverage. Looking forward, we remain guardedly optimistic about our future due to our current order activity and our healthy backlog.

One caution, however, due to the current level of large projects in our Q4 backlog, we believe that our margins in this current quarter have downward exposure relative to the margins we have experienced in the first nine months of the year.

We plan to next announce our financial results for Q4 fiscal year 2012 and year-end via a conference call and press release in June of this year.

I would now like to turn the call back over to Ally to moderate our Q&A session.

(Operator Instructions). Andrew Gadlin, CJS Securities.

Rodney, you opened the call by talking about timing of revenues. And then, Jay, you just highlighted that Q4 -- should be some large projects in that. Can you talk about some of the factors influencing them?

Our products are installed basically at the end of a greenfield project. So you have got 95% plus of the construction schedule that has to be completed prior to the heat tracing materials needing to be installed.

So when you have construction delays of the mechanical piping system, which is where our tracing goes, or in the engineering and documentation segment of the project, this can push planned material shipments and engineering deliverables from one month to the other, or to case at the end of a third month of a quarter or even a fiscal year. So when we mention time segment changes basically that is what I was referring to.

So in the first, call it, nine months of this year we have seen some push out of greenfields from those periods into later periods?

Yes, we have. We have had some push out and we have also had some compression in some projects that decided to accelerate their construction schedule.

And your MRO business has been doing really well. Do you expect that to continue?

Yes, we do. We see no reason why it should not. It is tracking above our timeless business model of the 60/40 mix we have had over the last several years, so it is -- we see no reason why it will not continue.

Okay, thank you very much.

Jeff Hammond, KeyBanc.

So just back to the lumpiness, because I see a lot of good numbers and growth in the order rate. Is it just a signal simply that the margins are going to be lowered given the mix or -- I mean, maybe you can put a little finer point around the revenue guidance of low-double-digits with one quarter less. If we have a strong OE mix end of the year does that mean revenues are a lot higher as well?

This is George Alexander. One of the things to also keep in mind about the impact of product mix and also timing is that MRO is influenced by the heating season in the Northern Hemisphere. So in our major markets our MRO business naturally increases during the third quarter because that is the heart of the heating season.

As Rodney mentioned, the greenfield projects are driven by project schedule and is not impacted by the timing during the year itself. It is just the timing of the projects and how they progress and when the products are scheduled to be on site.

We do see just as it falls, the greenfield projects we see a significant shipping load or delivery schedule in the fourth quarter of this year. So that is why we are seeing a possible downward pressure on our margins in the fourth quarter. We are expecting the quarter to be a good quarter.

Can you give us a sense of what you think the mix is going to be in the fourth quarter between greenfield and MRO?

Not specifically in terms of the percentage mix, but we do think it will be more heavily influenced by the greenfield projects, so we expect the mix for greenfield to increase. But I don't think we have a specific percentage.

Then just on the order front, you mentioned you beat your previous record by a healthy margin. What is driving this order growth? Should we think of that as lumpiness or any kind of inflection points in the business where you are seeing business accelerate or you're starting to take orders for some of this new capacity? Just maybe a little more color around that order strength.

Well, again, not to be repetitive, but this heating season was certainly influenced in the Western Hemisphere by last year's winter. The entire country had a very cold winter last winter, so it caused a lot of attention to be drawn to maintenance projects. This year in Europe they're having an extremely cold winter this year, so that is also drawing attention to our business in that part of the world.

So a lot of it -- we are seeing a lot of activity, a lot of growth, pretty much across all of the energy end markets, but particularly in power generation and the oil and gas.

So the order strength isn't just a couple of big orders flowing in.

Not at all; not at all. It is across the board and it is also across all geographies.

Thanks, guys.

Brian Drab, William Blair.

Congratulations on a great quarter. A few questions. First, any update on the size of the pipeline, you have been talking about it as about $1 billion in size?

This is George Alexander. Now the pipeline continues to be active. It is still at or near about $1 billion. The scheduling of projects is still something that we are monitoring closely. But our activity, again, in the energy markets, as I said before, especially in power generation, and then in both upstream and downstream oil and gas continues to be very strong. And as a result the number of projects and the activity in our pipeline continues to be strong.

We are not seeing any pushback in terms of funding of projects. Again, there is a few that are being delayed. Probably one of the ones that everybody hears and sees about recently is the Keystone Pipeline from Canada. But in general the activity is still very strong and still of a high value at or near $1 billion.

Okay, great. Then with the strong growth in orders in the Western Hemisphere can you talk about, first of all, is that across a number of projects or is there one large projects that is influencing that that you won, and in what markets? Is that driven largely by oil sands or what other market?

This is George again. First of all, the strong orders are global. They're both the Eastern and Western Hemispheres across all geographies. So it is not just in the Western Hemisphere.

And the other very good news is that, again, it is across all of our major end markets. It has been very strong in the power generation industry. It has also been strong in the upstream and downstream oil and gas sector. So it is very encouraging because it is not heavily dependent on, or focused on any one geography or any one end market.

I guess, I am I am wondering -- as I read the press release and I see 69% order growth in the Western Hemisphere and 12% in the Eastern Hemisphere, there is a much -- 12% is great, but 69% is great -- beyond great. So is there anything -- any more detail you can give us as to why one hemisphere was stronger than the other?

I think if you look at it, it's a flip-flop from last quarter. And, secondly, in the Western Hemisphere, again, in the third quarter that is the heart of our heating season, the seasonality of the MRO business. And we did see a significant upturn in orders from the power generation industry in the Western Hemisphere because of the -- you read about the brownouts in Texas in the winter of 2011. There were significant requirements for MRO business that related to those effects.

So, again, I referenced the fact that the increase in orders in the West was primarily due to the heating season itself and we did see a lot of orders from the power generation industry.

Okay, great. Then, last one for me, is just any update on the commercial market opportunity and developing partnerships there and new product that you're bringing to market?

It is ongoing, and it is -- our process is moving forward positively. That is still a very attractive growth opportunity for us. And we are looking forward to continuing to grow that business. So it is moving forward and it has been very successful so far.

Okay, great. Thanks very much.

Charlie Brady, BMO Capital Markets.

Could we get a revenue breakdown between Western and Eastern Hemisphere?

We will be putting that in our Q. That will come out later today or tomorrow.

We will look for that. With respect to bond redemption you have got another window of opportunity, I guess, in early fiscal 2013. Is it your intention to continue paying that down when those windows are available?

Yes, that would be our intention. I don't want to guarantee that we are going to do it, but that is certainly a very viable use of our cash. We are able to in May purchase $21 million at 103, so that is something we are looking at doing. But we're not going to guarantee we are going to do it, but it is probable.

Then, I guess, not to beat a dead horse on the mix issue, but as we look to Q4 on the revenues, are you -- just to clarify -- are you expecting Q4 revenues to be above third quarter sequentially?

We're not giving quarterly guidance like that at this time. We do believe we will have a very solid quarter in Q4. But as we mentioned, there is issues with the timing of greenfield projects and such. But we see a fair level of activity.

Great, thanks, guys.

Martin Malloy, Johnson Rice.

Could you talk a little bit about the timing of greenfield awards that we might see related to oil sands projects? There's a number of large projects, I believe, headed in the construction second half of this year and 2013. And, also, have the A tracing equipment awards taken place for Kearl Phase II?

In terms -- this is Rodney. I will go backwards. We have -- Kearl II -- the Kearl Phase II project, the heat tracing has been awarded and announced, and we were the successful heat tracing vendor on that project.

As it relates to timing of greenfield projects, in terms of working a project from the pipeline to the order award, if you are looking at that sort of timing, basically that takes place anywhere from -- that is a one- to three-year period that it takes to develop and secure an order for a project of that type magnitude.

And are you seeing increased conversations with customers related to expansions of capacity or new facilities in the petrochemical and chemical area domestically and here along the Gulf Coast specifically?

We do have -- we are tracking some significant projects domestically. And, yes, we do expect to see some awards of contracts in the not-too-distant future in the petrochemical market domestically and internationally.

Thank you.

Jon Braatz, Kansas City Capital.

Rod, can you remind me how much additional capacity you are adding with the new facility? And are you already pre-selling it? And I guess as we look into 2013, is that added capacity really going to be truly added revenue on top of your quote unquote core revenue as we look into 2013?

As a part of our growth for 2013, yes, the additional capacity will be included in that growth. But just to remind you of the actual expansion itself and scope it is for the heater cables that we manufacture here in the San Marcos campus. And for that capacity expansion it depends on which particular flexible heating cable that you are referring to. But the capacity is anywhere from double the capacity of some to a 40% increase in others.

And also just as a point of a clarity that is just our flexible heater cables. We also have high-temperature mineral MI cables, the industry calls them, and those are manufactured in Calgary, Alberta, and are not a part of the capacity issue -- of the capacity addition of the San Marcos facility.

It is not, right?

That is correct.

And the other thing is we are hearing a lot about an industrial renaissance here in the United States. A lot of it to do with the abundant natural gas that we have. Are you seeing any activity yet in some of the chemical companies -- chemical industries that you might serve? Beyond the oil and gas are you seeing any activity in new construction and so on in that regard?

This is George Alexander. Yes, as I mentioned earlier, we are involved with quite a few projects in the fine chemicals and specialty chemicals arena in the US in the domestic market.

And the significant increase in the exploration as far as oil and gas -- and it is particularly the gas industry -- is also creating some opportunity for us on a smaller scale than the oil sands -- much smaller scale than the oil sands, but still creating additional opportunities for us in that market.

There is a lot of investment by US chemical companies internationally. So there is a lot of that investment that is being directed and influenced from the US that is also quite encouraging as far as new business in the future.

Great, and one last question. As you begin some of these commercial sales, how should we look at margins on that piece of business relative to your current margins?

The margins fit very well with our current business model, so that is one reason why it is quite a good piece of business for us and one that we are looking forward to expanding.

All right, thanks, George.

Scott Graham, Jefferies.

So the capacity expansion sounds like it is on track, yes?

Correct.

So by the end of next quarter, we will be past it?

We will be in production, that is correct.

Right. Now on the backlog, help me understand something here. We had a real good backlog growth number, but assuming that all the orders go into the backlog, and then you said the shipments in the greenfield business where lighter than MRO -- and I'm obviously assuming that greenfield goes in that larger dollar per order -- why is your backlog not actually even higher than what it was? Maybe I'm just missing something on the math.

If I can help, Scott, this is Jay. The MRO business, 60% to let's say 65% of our revenues and orders is typically in our backlog at a flash at a very specific point in time. It turns very, very fast. Said differently, when you look at our backlog of $100 million plus the great, great majority of that is greenfield.

So these large -- this large increase in our backlog is predominantly greenfield. And also our MRO business is growing, but that never typically gets reflected in our backlog because it is a point in time measurement.

I think I got that, although maybe I will catch you more after the call.

Okay, I wanted to just also ask Rodney -- I think there was an earlier question on the M&A environment, but you have a transaction that is going to occur with Tyco, and I was just wondering maybe you can wrap this into one answer. What do you think of that -- of the Tyco business split? And how does that affect the M&A environment, does that make it potentially more competitive?

From our standpoint, I assume you're talking about the breakup of the three entities -- Tyco Thermal, which is our competitor. Tyco Thermal Controls is a part of the Tyco Flow Controls Group. They have been a part of that group for some time so -- I mean, the short answer to that is we don't see any significance in the changing of the landscape that exist in the heat tracing business.

But with that said, I'm obviously not privy to their Board meetings. I am not aware of what they plan on doing. But we have held pretty much the same market position for several years. And for us the latest development seems more to be in part with their own corporate planning cycle, and we don't see it having a major impact in the heat tracing marketplace.

Fair enough, thanks. If I might ask this last one on M&A. We have got seven weeks left in this quarter. So if we just put this quarter aside, would you be disappointed if you didn't close a deal in fiscal 2013, Rodney?

No. Right now we are enjoying a healthy business climate. We see significant opportunities as we have alluded to earlier for organic growth within our wheelhouse, especially the industrial environment. And we do not see that changing, and so therefore a lack of a potential acquisition is not -- we consider to be a major negative to us, either currently now or at the end of the next 12 month cycle.

So at this point then it doesn't sound like there is anything that is ready to roll in 2013. Is that a fair statement?

We have candidates. We have had discussions, but I guess if I could give you the best answer I can is we don't have anything on the front burner.

Very good. Thanks a lot.

(Operator Instructions). Amy Wilson, Ramsey.

Thanks for taking my question. Could you help us understand when the Kearl II project was awarded, and if that is included in orders and backlog?

This is George Alexander. It was awarded probably about six months ago. And the way that our backlog is reflected is that it consists of signed and committed detailed purchase orders. So the portion of Kearl II that has been defined in terms of the engineering deliverables is included in our backlog.

It will take probably about three years -- two to three years for that project to mature and be completed. So in rough terms we probably will see it on a one-third, one-third, one-third basis over the next two to three years as it gets defined, engineered and the process gets closer to completion.

So my understanding was that Imperial gave the go-ahead for the expansion just at the end of 2011. Can you help me understand how it ends up being in your backlog before the Board of Imperial approves the expansion project?

Again, it is only in our backlog if the materials that are associated with the engineering deliverables have been defined. So we're just now beginning the process of defining the deliverables. So much of it is not currently in our backlog -- most of it is not currently in our backlog.

Is it in orders then?

We do have the committed order for the project. Again, that order is not -- it is an order for engineering services and deliverables. When the materials come into our backlog is when it is defined, which it has not been yet, that is in process right now. So the materials are not currently in our backlog.

Okay.

If this helps at all, with Kearl I we might have received let's say 10 purchase orders over a protracted period of time. And at any given time there might have been one or two of those purchase orders represented in our backlog. So a very, very small level of our backlog historically and currently is reflective of Kearl.

So the backlog reflects more MRO stuff?

No, it is other greenfield objects in addition to Kearl.

This is Rodney. I have been involved in the Kearl project in Canada for quite a while. Let me just add a little bit to help you out. What is in the backlog for Kearl basically -- and don't take this in absolute value -- but is engineering fee work that we have been working on for several months. And so as Jay said there is very little material for Kearl II in the backlog currently. And it will take around three years to do it. But engineering fee work comes first on these major projects, and that is what we have been working on for several months now.

Okay, thank you, that is very helpful.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Rodney Bingham for any closing remarks.

Once again, thank all of you for your interest in Thermon -- your continued interest. As we said earlier, we are enjoying a good tailwind right now, a lot of organic growth potential going forward. And we look forward to updating you on the year-end final in June, so if we don't talk to you before then we will see you in June. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.