Thermon Group Holdings Inc (THR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Thermon's first-quarter fiscal year 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

And now it's my pleasure to turn the floor over to Sarah Alexander. Ma'am, please go ahead.

Thank you, Huey. Good morning and thank you 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 www.thermon.com.

A replay of today's call will be available on our website beginning two hours after the conclusion of the 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 8, 2012.

We also would like to advise you all that 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 reconcile those items to the most comparable GAAP measures in the earnings release. Adjusted EPS and adjusted EBITDA should be considered in addition to, and not as substitutes for, income from operations, net income, net income per share, and other measures of financial performance reported in accordance with GAAP.

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

Thank you, Sarah. Good morning, everyone, and thank you for your continued interest in Thermon.

We held our first annual shareholder meeting last week and had a good turnout. Nearly 95% of THR shares issued and outstanding were represented at the meeting. The voting results are available on a Form 8-K filed with the SEC yesterday.

Today we have two of our Senior Vice Presidents joining me on this earnings call. They are Jay Peterson, our CFO, who will follow me and present the financial details of our FY 2013 first 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 or industry trends.

For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. Our main market sectors that we serve are 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 industrial facilities.

While Jay will drill down on the Q1 financials in a moment, I would like to touch on a few highlights. Revenue grew 4% over prior-year Q1. Foreign exchange impact was negative due to a strong dollar. The revenue growth rate utilizing a constant currency factor was closer to 10%. Also, shipment delays due to construction scheduling on two to three large international projects pushed out projected billings to future quarters.

Q1 gross margins were very solid at 49.6%. This was a result of a strong MRO component in our revenue mix. Also, on May 1, 2012, we exercised another optional redemption of $21 million of long-term debt.

All in all, Q1 was a very solid quarter for us, as Q1 is historically our slowest quarter. As we've said many times, it continues to be a good time to be in the heat-tracing business. All our geographic business centers are doing well, and the main market sectors I mentioned earlier -- oil, gas, power, and chemical -- continue to drive our organic growth.

Our new cable manufacturing plant in San Marcus is now complete and fully operational. This increased capacity of one of our core product lines will lay the foundation for our future growth plans.

We are still enjoying a strong tailwind. Our energy level is high as a result of a strong business climate, the introduction of new products, and the capacity expansion of our heater cable production facilities.

Our revenue guidance for 2013 is low-double-digit growth. We would like to remind our investors that the timing of our revenues and earnings can fluctuate as a result of product mix and construction schedule delays on these large greenfield projects. This lumpiness does not reduce revenues or earnings, but can impact the financials of a particular time segment.

In closing, I'd like to say that our management team would like to thank our employees for their hard work and dedication. We would also like to thank our customers and investors for their support. Once again, thank you for joining us today.

Jay Peterson will now present our financials.

Thank you, Rodney. Good morning. Thermon demonstrated another solid quarter in fiscal Q1, and the momentum in our business continues. This morning, I will focus on the results of our core operating business and exclude those expenses relating to the optional bond redemption that occurred in May of this year.

Let me start with return on equity. On a Q1 EBITDA basis, our ROE was 38% this past quarter. In terms of revenue and orders, our revenue this past quarter grew to $67.2 million, a new Q1 record for Thermon, and an increase of 4% over the prior-year quarter's level. Note that the strong dollar negatively impacted our revenues by approximately $4 million, and our revenue would have grown by 10% had we not experienced these volatile currency situations.

Coupled with a strong start in fiscal year '12, and the fact that our first quarter is historically our low quarter from a seasonality perspective, it is not the heating season, and we are encouraged with the topline results. Our backlog of orders ended June at $117 million versus $82 million at the end of Q1 of last year. And that's an increase of 43%. And both hemispheres showed double-digit backlog growth.

Our book-to-bill for Q1 ended at 0.99. And again, by definition, our backlog only contains signed but unperformed purchase orders and agreements. And orders for the quarter totaled $67 million.

Next, let's talk about gross margins. Margins dollars grew this past quarter by 4% to $33.3 million, up from last year's level of $32 million, an increase of approximately $1.3 million. On a relative basis, our margins increased slightly, by approximately 10 basis points. And this past quarter, MRO constituted 59% of our total revenues, whereas greenfield totaled 41% of our revenues. And the currency impact to our Q1 margins amounted to $1.5 million.

In terms of operating expenses and the headcount, our core OpEx this last quarter -- that's SG&A excluding amortization of intangibles and transaction-related expenses -- totaled $15.9 million, an increase of 5% from the prior year. Due to the recent redemptions in our bonds, our quarterly cash interest payments have been reduced from $5 million a quarter to approximately $2.8 million. And this equates to an increase in earnings per share by $0.09 a share per quarter on a pretax basis.

And I'd like to point out that our EPS is also impacted by $0.09 a quarter due to the noncash amortization expense, due to the acquisition by our sponsor, CHS, in 2010.

The number of full-time employees at the end of June was 772. That's up from the 680 as of June 2011. And 96% of these were -- additions were in production, sales, and engineering, and directly relate to managing our growing business.

Next point is earnings. GAAP net income for the quarter totaled $6.6 million compared to a prior-year quarterly loss of $5 million. GAAP EPS was $0.21 a share versus an $0.18 loss in the prior-year period. And adjusted EPS came in at a record $0.23 a share versus $0.20 one year ago. The EPS adjustments are expenses relating either to the paydown of our debt, or, in the case of fiscal year '12, certain transaction-related expenses. And also, our EPS was negatively impacted by approximately $0.01 a share from the combined effects of foreign exchange when considering translation and transaction impacts.

Finally, in terms of our balance sheet, our cash balance at the end of June was $13.6 million compared to $31.6 million in the prior-year period. And this decrease in cash was due to the optional redemptions of our long-term debt.

Our days sales outstanding for Q1 was 70 days versus 63 days one year ago. Our days in inventory at the end of June was flat at 96 days versus 95 days one year ago. And lastly, in aggregate, our cash conversion cycle increased to 130 days versus 101 days, and this increase was due largely from a significant decrease in payables attributable to our declining inventory balances.

We continue to delever the business. At the end of June, our long-term debt was reduced to $118 million. And just 15 months ago, we had $210 million in long-term debt. And note that all of this $92 million in debt reduction was due to optional redemptions that were enabled by our strong cash flows and, to a lesser extent, our IPO proceeds. And a little over one year ago, our debt leverage was approximately 4.2%. And we believe this fiscal year, it will end at approximately 1.5%.

And our business continues to be highly capital efficient. This past quarter, for example, our maintenance CapEx amounted to less than 0.5% of revenues, and this excludes the $900,000 capital investment we made in the completion of our new manufacturing facility.

In summary, we had a solid quarter, and we continued to perform at record levels. We will continue to manage our expenses and our capital investments. And we plan to opportunistically reduce our debt leverage.

Looking forward, we remain guardedly optimistic about the future due to our current order activity and our strong backlog. Two cautionary notes, however. We continue to be impacted by the volatility of foreign currency, and we will likely experience similar FX financial impacts in Q2 as we experienced in Q1. In addition, in Q2, we anticipate a one-time, 150-basis-point negative impact to gross margins due to the startup of our new manufacturing facility in San Marcus, Texas.

Thank you for your support and your continued interest. We plan to next announce our financial results for Q2 fiscal year '13 via a conference call and press release in November of this year.

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

(Operator Instructions). Brian Drab, William Blair.

Good morning. Jay, first, can you just go through a couple numbers quickly again? What did you say on interest expense; what do you expect the run rate to be on a quarterly basis going forward?

Yes. Previously, it was approximately $5 million a quarter, and that's the cash aspect of our interest payment. There's some amortization that's on top of that. And going forward, it will be closer to $2.8 million. And again, that excludes the amortization of the bond issuance costs. So those are both cash numbers, Brian.

Got it. And what was order growth in the quarter?

Order growth relative to the prior quarter was essentially flat from Q4 to Q1, if memory serves. From the year ago, we did $70.3 million in orders, and this last quarter we did $66.7 million. So it's down I guess 0.5%

Okay. And then can you just make sure that I'm clear on the $3.7 million that was called out in the press release? It sounds like, based on the comments that you just made now on the call, that most of that was FX, because if I back out that $3.7 million, your revenue growth rate goes from about 4% to 10%. But you're implying that most of it is due to FX. How much was due to the project timing?

Yes. The number that we mentioned in the press release, the $3.7 million, and in my discussion I mentioned that it was approximately $4 million, that was all FX. 100% of that impact was FX. On top of that, Rodney mentioned some large projects, primarily international, that were scheduled in Q1 that did get moved into Q2 and thereafter. And that was approximately, in aggregate, $4 million, coincidentally.

Okay, that's great. Thanks a lot. You might hear my new friend in the background; sorry about that.

Congratulations again.

Yes, thanks. All right, I'll get back in the queue.

Jeff Hammond, KeyBanc Capital Markets.

Good morning, guys. Just on gross margins, you guys had been guiding to kind of mid-40s. You've been bumping up against high 40s. Just maybe talk about the sustainability of that. And then if you can just clarify what the 150-basis-point one-time hit is attributable to, that would be helpful.

Yes, why don't we start with the second one later, Jeff.

Sure.

And I don't want to turn this discussion into a cost accounting discussion, but recall that we had been increasing our inventories for the transition from our old manufacturing facility to our new manufacturing facility. And since we are now in our new manufacturing facility, we have fewer inventories on our balance sheet today, and in Q1. And therefore, we will have fewer inventories to absorb those costs.

Now, this is a one-time event, and we do not believe this will happen going forward. And also, we are anticipating just some normal startup costs, if you will, going through with the new production capabilities in this new facility. So we are just trying to be very cautionary and conservative with what we think will happen this quarter, Jeff.

Okay. That's helpful.

Gross margins, recall, if you look at our history over a more protracted period of time, going back let's say a half a decade, the gross margins in the 45% range were typical on a quarterly basis and an annual basis. We are seeing margins well above that at present. And we do not want people to forget that it is quite possible that our margins will end up down in the mid-40s due to the timing of these significant projects that we are involved in. So, again, we're trying to be somewhat conservative in terms of how we talk about the future.

Okay, great. And then just on the orders and backlog, you guys have had substantial order growth and backlog growth this time; kind of orders flattened out, backlog flattened out. Can you just talk about how much of that is choppiness, lumpiness, how much of that is any kind of slowing or extending sales cycle around some of the macro volatility? How much is, in your mind, seasonality?

This is George Alexander. I think it's a little bit of all of that. Remember that this is not the heating season, so we do expect a slowdown from the -- in terms of incoming orders as far as the seasonality of our business.

The volatility that exists in the market right now is something that we are seeing some impact in -- for instance, in the European -- Western European environment, especially. But overall, with the energy sector continuing to be strong, our project activity is strong, and also, our quoting activity is strong.

So I think it's mainly related to the lumpiness of project schedules in terms of our -- we don't have control over that. And they tend to shift to the right. But that's nothing new. That's pretty much historically always been the case. So our business is largely impacted by the weather in the Northern Hemisphere, so we are expecting a significant upturn as we go on into our fiscal year as far as the MRO business especially.

Okay. And then the last question, I think your guidance last quarter was for low-double-digit revenue growth, and it's unchanged. But you call out this FX impact, which was 5, 6 points this quarter. Looks like it's going to be a similar impact. So it seems like that issue is with you. Is that low-double-digit kind of pre-FX, or you think you can overcome the FX headwind?

We do believe we can overcome the FX headwind unless there's some huge, huge additional volatility from where we are at today. But right now, the plan is to overcome that.

Jeff, it's Rodney. We believe that we still have our goals in sight because our backlog is so strong. And those backlog -- the math around that backlog still suggests what we'd previously given guidance on.

And one thing to clarify, Jeff -- when we announced a backlog of $117 million, had it not been for FX, that backlog would have actually grown to another record for Thermon. So that backlog --

Do you know what the impact would have been on the backlog?

Rough numbers, and it's only a guesstimate, let's say $5 million.

Okay. Great, thanks, guys.

It would have been another new record for Thermon.

Charlie Brady, BMO Capital Markets.

Thanks, good morning, guys. On the gross margin outlook, I'm trying to square up a couple different comments. You talked about the push-out in some of these larger international projects, and obviously when that mix changes, you've got to have -- it's detrimental to gross margins, I guess, on the mix issue. But you're also talking about the MRO business looking really strong back half of the year. Does the strength that you're expecting in MRO business in the rest of the year offset kind of the mix shift downward on the OE side, or I guess having a greater percentage of OE because some of these projects have shifted out?

If we look at it over the next nine-month period, yes. Could there be some variation within a 90-day reporting period? Yes. But on a more protracted period, we think that's a fair comment, Charlie.

Okay. And just with regards to the tax rate, can you give us a sense of what you're expecting tax rate rest of the year, or maybe for the full year, if you don't have it broken down?

For the full year, I would model 35.5%. And that's down a little bit from last year, and that had to do with us repatriating dividends from some other countries. But for the full year, if you were to model let's say 35.5%, maybe 36%, you will be in the very close neighborhood.

Okay. That's helpful. And just on the orders again, I want to make sure I understand the dynamic here, because it looks like orders, $67.7 million is down about 5% year on year. Is the MRO side of that order business about in line with where it was? And is the downward shift just due to the lumpiness of large projects?

Again, I think it's -- this is George again -- I think it's largely due to the shifting schedule of the projects. And I think our MRO business is still consistent. We were, as Jay mentioned in his report, it was 59/41. So that's very close to what our model is at 60/40. So, again, it's mainly -- I think it's mainly due to the scheduling of the projects, and us having to work with our customers in that regard.

Great. Thank you.

Andrew Gadlin, CJS Securities.

My question relates to the debt repayments that you've been able to do thus far, and what you think you can do, what strategies you can implement in the future. Do you have another optional $20 million debt repayment next year?

No, we do not, Andrew. The next provision within our agreement is 2014, where we are able to call the balance at 104-3/4. However, our debt does trade, and as I mentioned, we will opportunistically look at the trading activity, both in terms of the volume and premium, and see whether it makes financial sense for us to acquire it in the open market. And we have done that in the past, and we would like to do that more so in the future.

So in other words, you'll be able to -- you don't need to repatriate cash this year or next, and so you can keep that tax rate down a bit.

It's actually the opposite. The tax rate is lower when we repatriate. So -- but we do plan on doing additional open-market acquisition of our debt.

Okay, thank you very much.

(Operator Instructions). Jon Braatz, Kansas City Capital.

Jay, all my questions have been answered. Thank you.

Jeff Hammond, KeyBanc Capital.

Just a couple follow-ups here. Any disruption or change in the landscape as you see some of your competitors change hands?

Jeff, this is George Alexander. We really haven't seen any significant changes yet. Our competitors appear to be continuing to operate as they did prior to either their acquisition or pending acquisition. So the competitive landscape still is pretty much the same.

Okay. And then just on capital structure, you talked about the deleveraging process and wrapping up the year at 1.5 times debt to EBITDA. What do you think is the ideal capital structure? And then also separately, can you give us an update on what you're hearing from your private equity ownership in terms of their long-term plans?

This is Rodney. Let me take the second part of your question. CHS Capital is our largest shareholder. They eventually will sell. They have not given us any timing timetables at this point, and so that's currently where we stand.

And in terms of the optimal leverage, or leverage that we could manage to, we could go as high as 4, Jeffrey, especially with some of the rates we are seeing today in the marketplace. However, with our coupon today at 9.5%, we'd like to take that virtually to zero and think we can do that over the next several years. But if we were to do a transaction, we would be comfortable at a much higher leverage point.

Okay, so it sounds like in terms of capital allocation, highest priority is to continue to chip away at the debt.

Assuming that we do not have an attractive candidate that we would be looking at.

Also, too, we are still in a mode of our number one priority with our business is reinvesting in our business model. To maintain the global footprint that we have requires that sort of investment, especially in these high-growth markets -- Russia, China, India, and so on. So we want to continue doing that, and then we look at the option of either debt redemptions or -- basically, that's it. That's it. Sorry.

Okay. Great. Thanks a lot.

(Operator Instructions). Presenters, at this time I'm showing no additional questioners in the phone queue. I'd like to turn the program back over to Mr. Bingham for any additional or closing remarks.

Okay. Once again, thank you, everybody, for their interest in Thermon. We look forward to speaking with you guys and having favorable results in November. So, again, thank you, and everybody have a safe and nice day.

Thank you, sir. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.