Thermon Group Holdings Inc (THR) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Thermon earnings conference call, Q1 2015.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the call over to Ms. Sarah Alexander, Director of Investor Relations. Ma'am, you may begin.

Thank you, Candace. 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 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 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 in May. We also would 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. We've reconciled those items to the most comparable 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.

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. Thank you for joining our conference call and your continued interest in Thermon. Today we have two of our Senior Vice Presidents joining me on this call. Jay Peterson, our CFO, will follow me and present the financial details of our FY15 first quarter; and George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A.

For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical, and power generation industries.

While Jay will discuss the financial details in a moment, I would like to touch on some of the highlights for our first quarter of 2015. First of all, let me begin by saying that we're off to a good start for this fiscal year. Our revenue grew 3% over prior year. Our revenue mix for the quarter was 68% MRO/UE and 32% Greenfield. The resulting product mix produced gross margins that were 50% of sales. Our growing install base continues to favorably impact our gross profit.

Our EPS grew to $0.36 per share, which is up significantly year over year. Our backlog grew to almost $98 million. This was an increase of around $14 million over the prior quarter. Purchase orders received were up $18 million over the prior year. Quotations are also trending upward.

Thermon's updated pipeline of future projects remains solid, with over 550 opportunities for heat tracing with an estimated total value of $1.1 billion. Foreign exchange rates negatively impacted our revenue by $600,000, which was primarily attributable to the depreciation of the Canadian dollar. We believe that we're well-positioned in FY15 and are targeting mid single-digit revenue growth for this fiscal year.

Our global footprint continues to be a key component of our strategy to provide value to our customers worldwide and penetrate our targeted end markets. One example is that we recently opened up an office, a direct office, in Brazil. We are continuing to benefit from a rebound in the chemical, petrochemical, and power generation sectors that are related to the shale oil and gas development in the United States. Our Canadian business unit continues to do well even after the completion of several mega-projects. Smaller, more profitable projects have increased our MRO/UE sales and helped fill most of the void associated with the mega-projects' completions.

The geopolitical unrest between Russia and the West is of some concern, as it may delay some of the capital investments in the energy sector in Russia. We are still in the process of evaluating the potential effect of recent sanctions that have been announced. Just for the record, Russia represents less than 10% of our total revenue. While we recognize the current risk in Russia, we have also seen positive indicators elsewhere in the region. For example, quotations in other Central Asian countries such as Kazakhstan are up significantly.

We continue to look for opportunities where we can leverage our leadership position by providing thermal management solutions to the global energy and industrial markets. Over the last several months we have begun investing more time and more resources into researching inorganic growth opportunities. As a result, our M&A pipeline is building and we are evaluating several attractive and strategic opportunities.

Our management team would like to thank our employees throughout our global organization for their hard work and dedication. We would also like to thank our customers, investors, and advisors for their support and confidence. Once again, thank you for joining us today and I will now turn the call over to Jay Peterson, our Chief Financial Officer.

Thank you, Rodney. Good morning.

This morning I will discuss our first-quarter results, starting with top-line revenue. Our revenue this past quarter amounted to $67.7 million. That's an increase of 3% relative to the prior year's quarter. I would like to point out, Q1 is typically our lowest rev quarter in that we are not in the heating season. And we anticipate revenue to grow throughout the balance of the year.

Orders for the quarter total $80.6 million, relative to $63 million in Q1 of last year. That's a growth rate of 29%. We have experienced order growth in all four geographies this last quarter. Our backlog of orders ended June at $98 million; that's 15% higher than March of 2014. Relative to the end of Q1 FY14, our backlog increased by 6% from $92 million. Recall that typically only 40% or so of our business is ever resident in our backlog.

On a pro forma basis, excluding activity from our largest Greenfield project, revenue grew 20% compared to Q1 of 2014; and backlog grew 19% relative to Q1 of last year. I'd like to add that our Canadian subsidiary is up both year on year and sequentially in respect to backlog.

Now to discuss gross margins. Margin dollars this past quarter totaled $34 million. Compared to Q1 of FY14, our margins increased by 270 basis points, to 50%. This margin increase was due to the high mix of MRO/UE at 68% of revenues, whereas Greenfield totaled 32%. And MRO/UE grew 16% this last quarter due to our ever-increasing install base, with all four major geographies growing double-digits.

Turning to operating expenses and headcount, core operating expenses for the quarter, that is SG&A -- and this excludes D&A and any transaction-related expenses -- totaled $17.5 million. That's an increase of 14% over Q1 of 2014. The majority of these expenses relate directly to managing our growing book of orders and backlog. Our OpEx as a percent of revenue this past quarter was 26%, and again that excludes D&A. The number of full-time employees at the end of June was 836, up slightly from the 828 as of a year ago.

Now to discuss a couple of below-the-line items, including interest expense and taxes. This quarter we amended the terms of our senior secured credit facility, which reduced the fixed component of the interest rate of our LIBOR-based borrowings by 25 basis points. This amendment will result in interest expense savings in the range of $1.4 million over the notes' remaining term. And regarding taxes, we released a $3.2 million deferred tax liability for previously accrued foreign earnings that are no longer expected to be repatriated.

Now turning to earnings. GAAP net income for the quarter totaled $11.5 million versus a net loss of $6.9 million in Q1 of 2014. GAAP EPS totaled $0.36 a share versus a loss of $0.22 a share in Q1 for 2014. And after excluding the impact of the deferred tax liability reversal, the Company generated adjusted net income of $8.3 million and adjusted EPS of $0.26 a share. And this compares to Q1 of 2014 adjusted net income of $7.5 million and adjusted EPS of $0.23 a share. A table explaining the adjustments can be found in our earnings press release from earlier this morning. Our adjusted EBITDA totaled $17 million this past quarter, ahead from the prior-year performance of $16 million. EBITDA as a percent of revenue was a healthy 25% in Q1.

And the last area of discussion relates to our balance sheet. Our cash balance was $77.3 million at the end of Q1. That's an increase of 70% year on year. Leverage at the end of June on a net debt basis, was at a record low of 0.5X, down from approximately 4X back in 2010. And our business continues to be highly capital efficient. This last quarter, CapEx amounted to a total of approximately $750,000, 1% of revenue, and our conversion ratio was 99% for the quarter.

I would now like to turn the call back over to Candace.

Thank you.

(Operator Instructions)

Scott Graham, Jefferies.

Hey, good morning, Rodney, Jay and Sarah.

Good morning.

I'm looking at the numbers that you gave on the -- I think, Jay, you said sales would have been up 20%, were it not for the project run offs. I just want to make sure I square my math here. Are you suggesting that the project revenue in the quarter was, ex those runoffs, was up more than 25%?

From the loss of Kearl?

That's correct.

Yes.

So then, if that's the case, particularly running up against easier comparisons in the second half of the year, is there a reason why the organic -- the sales estimate that you're thinking for 2015 -- shouldn't that have some upside to it now? Based on what you're seeing, particularly given on top of this, the booking number that you reported?

Well, certainly we had a great quarter in terms of bookings performance, Scott. Certainly our backlog is growing. But we just have one quarter underneath our belt. And by no means are we in a position to increase our guidance. We're going to take this one quarter at a time.

Very good. Thank you for that.

The other question that I had was really around the sands, where you said your Canadian subsidiaries -- I think you said those sales were up. I think you also said -- I don't want to put words in your mouth -- I thought you said bookings were up as well. Could you talk about what the sands customers are saying about their capital spending over the next 6 to 12 months? That does seem to be a point of contention.

Scott, this is George.

Just to be clear on what's happening in our Canadian business, our Q1 revenue was up in Canada over the projections that we have for our FY15 budget. But they were not up year over year as far as Q1 is concerned, because Q1 of 2014 did have a significant amount of Kearl content. But our performance in Canada overall is very -- we are very pleased with it. Our business remains strong there.

As far as the feedback that we're getting from our customers, it's kind of a tale of two cities, so to speak, in that the SAGD projects that we've been talking about for several quarters now, continue to be very active, robust. And we're not seeing any push-back there in terms of capital investment. So we remain confident and excited about that opportunity.

On the mining side, there is some delays going on in Canada, as far as the projects there are concerned. But having said that, there's also some talk now about some capital expenditures going forward on a couple of new mining projects. So it is a mixed message in the marketplace. But from our perspective, as we've been talking about, our revenue focus and the content of our forecast comes primarily from the SAGD project side.

And, George, are those two businesses about the same in size? Or could you give us a little, a thumbnail, on that? Which business is bigger?

There's no question that the upgraders associated with the mining projects are the larger projects, but there's also not very many of those. There's a smaller number of those opportunities out there, whereas the number of opportunities in the SAGD arena, while smaller on a per-project basis -- and again, I'm not saying they're small, but they're smaller than the upgraders -- there's more of them.

Got it. Thank you.

My last question relates to the continuing rise in the cash balance. Rodney, this is more pretty squarely at you. I know that you guys have been working hard behind the scenes. You got new people in place on the M&A side looking for things. Versus a quarter ago, do you think you are any closer on finding something and closing a smaller-sized acquisition sometime in the next six months?

The answer to that question is yes. The only analogy I can give you is if our stove had four burners, we have the front two burners on high.

So within six months -- is that reasonable?

Yes, yes.

Very good. Thank you.

You're welcome, Scott.

Thanks, Scott.

Brian Drab, William Blair.

Good morning.

Morning, Brian.

First question -- Jay, you mentioned that we should see revenue improve throughout the year. Can you be a little more specific on that point? Can you comment as to whether we should see a sequential increase in revenue quarter by quarter throughout the year? Could you even give us a little bit of granularity in terms of, should we see Greenfield stepping up quarter by quarter, and MRO/UE?

Good question, Brian. Here's what I can tell you.

Our backlog continues to grow. Our order rates are doing quite well. We are off to a very strong start this year. We believe our Greenfield will grow throughout the year, especially when we look at some of the projects that are both in the quoting stage and in our backlog. So the balance we have seen in this last quarter, we'll see a little switch, a little shift in that to more Greenfield. That's what we anticipate.

We are not in the heating season as of Q1. But we are shifting into the heating season, and that will cause revenues historically to increase in Q2 and Q3. So sequentially, if history repeats itself, we will see growth in Q2 and Q3.

Sequential growth?

Yes.

Okay, thanks.

And I think we talked about this a little bit on the last earnings release: given the mix on the Greenfield side is more towards some of these smaller projects, could we possibly see gross margins stay at this elevated -- at least on historical basis -- an elevated level of around 50%?

I don't think we'll stay at 50%. But you're right, these smaller Greenfield projects will be at a higher level than the margins we've seen from these mega-Greenfield project levels we saw two, three, four, five years ago.

Okay, okay.

And then a quick update on the commercial opportunity and the emissions monitoring opportunity. And that's all for me. Thanks.

Hey, Brian, this is George.

The emissions monitoring business continues to perform well for us. As we've mentioned in our previous call, that is one of the growth drivers, one of the areas that we're projecting to drive growth in our business. At the end of the first quarter it's performing well.

As we said, as long as there is smokestacks and plants being built, or modified for that matter, to meet new regulatory standards, that's positive for the emissions monitoring business.

And on the commercial side, is there any comment you can make there?

The commercial business continues to be something that we're taking advantage of from the standpoint of targeting low-hanging fruit, if you will. It's not a massive focus from a marketing perspective, because our focus is the industrial electric heat tracing business. But because we do have the capacity expansion available to us as a result of our cable-making operation, we [aren't] able to take advantage of targeted opportunities. It's performing as we have expected and forecasted.

Okay, thank you.

You're welcome.

Charley Brady, BMO Capital Markets.

Thanks. Good morning.

Good morning.

Good morning, Charley.

Could we talk about the SG&A expense for a sec? I know that it's ticked up a little bit. Is this the run rate we ought to be assuming, either from a dollar term or a percentage of sales? Certainly on a percentage of sales it did tick up a little bit. Maybe you can dig into what's driving that. Is it more of a sales focus to drive higher sales? Or what's happening there?

Yes. I would look at it more from a dollar term rather than a percent term or relative term. It is absolutely due to us driving additional sales, both for the balance of this year and for next year. If you dissect the actual expense drivers, it's related to salary; it's related to R&D expenses, marketing expenses, and contract labor expenses, Charley.

Thanks. And with respect to the backlog, how much, if any, of that, is tied into the Russia business that is having an issue these days?

Charley, this is George.

Our business in Russia is off a little bit in Q1. There's no doubt that, that's somewhat related to the concerns about the political situation or unrest there. There's not a lot of our backlog that's contained in Russia at this point in time. We do expect some of the larger projects, the larger capital spend activities in Russia, to be pushed out. I think that's been well-publicized recently.

Having said that, similar to the rest of our business, the smaller orders, the maintenance and the upgrades and expansions of smaller projects are holding in pretty strong. So are our margins in Russia. So it's not all bad.

Okay. What I was really trying to drive to at that, too, was, there's not a meaningful amount in the backlog that potentially could get canceled because of what's going on over there?

That's correct.

Okay. I don't know if I missed it -- did you give guidance on what you thought the tax rate was going to be this year, excluding the one-time thing we saw in Q1?

Yes. For the next three quarters, somewhere in the range of 28% to 28.5%, Charley.

Great. Thanks very much.

You're welcome.

Jeffrey Hammond, KeyBanc.

Hey, guys. Just a couple of quick follow-ons.

So the higher tax, what's driving that versus --?

Recall, a year ago we did the permanent reinvestment decision. So that actually reduced it by about 10 points. Going forward, when we have variability in earnings from the foreign countries or for the US component of earnings, we have a projection on which countries are going to grow, which countries are going to be more profitable. It's the skew within the foreign countries and the US that will move the tax rate up or down going forward, Jeffrey.

Okay, great.

And then back to SG&A -- so it looks like last year SG&A was running sub-$16 million. You did high $17 millions. And you're saying that, that's a sustainable run rate for the balance of the year? That higher investment continues?

Yes, sir.

Okay. And then on the mid single-digit growth, can you update us on how you're thinking about growth rates and MRO versus Greenfield relative to that mid single-digit number?

Yes. A couple different thoughts on that. One is -- quite candidly, our MRO business is doing much better than we expected. The margins it's driving, the mix within, the MRO mix is driving margins higher than we planned at the start of the year. All of that is goodness. We do not anticipate for that to continue forever.

You'll notice our backlog is up significantly. And we will invoice that backlog throughout the year, and that will increase our Greenfield invoicing and increase the mix of Greenfield throughout the year. Will it get down to the 60/40 split for the balance of the year? Uncertain. But we are anticipating Greenfield mix to increase, and MRO mix to decrease, through the balance of the year.

Also recall that we do have some -- we had very strong MRO year last year and during the heating season and into the fourth quarter. So we do have some tough comps coming up on the MRO side.

Right, okay. Helpful.

And then, Rodney, you mentioned a couple of deals on the front burner. Are these in that small bolt-on range? Or anything more meaningful?

More than bolt-on range.

Okay, helpful. Thanks, guys.

Thanks, Jeffrey.

Jon Braatz, Kansas City Capital.

Good morning, everyone.

Good morning, Jon.

A follow-up question to your sales forecast for the year: given the order rates, given the way things are going, it looks pretty good. What gives you a little bit of a pause of concern about some of these trends continuing? Is it some project delays possible? Is it weather? What specifically might give you some concern about these growth rates continuing?

Well, all of those things do affect the business climate. One of the things that we do have to manage every quarter and every year is the timing of the construction schedules of our Greenfield business. So that's something we have to build in and bake into our forecast. The other thing is that weather does play a part in the MRO side of our business. It does magnify it when we have particularly hard cold winters that come early and stay long.

But again, the UE side of our business is not seasonal. That's usually a reflection of the regional or global economy. If there is one thing that's out there that would give us significant concern at this point, it would be some sort of global recession as a result of some major event in the world. But we don't, short of the Russian issue right now, we don't really see that.

Okay. Jay, you had mentioned that your gross margins on the MRO business are improving because of mix. Did I hear that correctly?

Yes. This last quarter -- whenever we sell of lot of our heater cable -- electrical self-regulating heater cable -- the sweet spot of our product line, that's our margin-rich products, that drives higher gross margins. And we, in fact, did that this last quarter, more so than what we planned.

How big a percentage of that sweet spot is MRO revenue?

That drives MRO. That is right smack dab in the middle of the MRO component.

Okay, okay, all right.

And then lastly -- and Jay, I was a little bit distracted. You mentioned interest savings from an amendment. Can you go over that for me again?

Yes. It's over the balance of the term loan over the next five years; it will save us about $1.5 million, $1.4 million -- just under a penny a year.

Okay.

It's not all that dramatic, but nor is it insignificant.

Yes, all right, Jay. Thank you very much.

Thank you, Jon.

(Operator Instructions)

Martin Malloy, Johnson Rice.

Good morning.

Good morning, Marty.

With respect to the oil sands, is there a major maintenance cycle that we should be cognizant of relating to some of the larger projects you worked on over the last three or four years coming up?

Yes. The cycle for these large capital projects tends to be that, when the project is completed, within the first two or three years, normal maintenance cycles will start. The historical data that we have indicates that of the initial capital spend, or the total install base, that there's somewhere between 7% and 10% of MRO activity that's associated with that. Then on a longer-term basis, seven or eight years, there tend to be revamps, turnarounds, or upgrades that are associated with that install base.

So yes, we are seeing some of that from the install base, the significant install base that has resulted from the mega-projects in Canada. Obviously on Kearl, we're not seeing the MRO from that particular project start yet. But it will be in the not-too-distant future.

Okay. And then could you talk about your expectations for orders related to the build-out of petrochem facilities in the US? When do you expect those to ramp up?

Yes. The chemical industry in particular is already on an uptick in the US. This is primarily in FY15, in the current fiscal year, is primarily related to chemical processing. It's not specifically the ethylene crackers that are in the news, because those are, I think, projected to start around 2016 or 2017 in terms of construction. But the shale gas business is also driving significant uptick in activity in the chemical processing side of the business. Some of the uptick in our backlog is reflected from that.

And would that be more Brownfield expansions of existing facilities?

Yes, that's correct.

Okay, thank you.

Thanks, Marty.

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

Once again, I thank everybody for their interest in Thermon. After a good start, we feel like we're on target to maintain the guidance we've given this year. We look forward to talking to you on the next earnings call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone.