Thermon Group Holdings Inc (THR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2015 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 call is being recorded. I would now like to turn the call over to Ms. Sarah Alexander. Please go ahead.

Thank you, Amanda. Good morning and thank you for joining us for today's earnings conference call. We issued an earnings press release this morning, which will be 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 that will be filed with the SEC later this week. 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, succession planning 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. Now, it is 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 earnings call. Jay Peterson, our CFO will follow me and present the financial details of our FY15 fourth quarter. Eric Reitler, our Senior Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global market segments and our current industry trends.

While Jay will discuss the financial details in a moment, I would like to touch on some of the highlights from our 2015 fiscal year. First of all, it was a very good year to be in the business. Higher revenue of $308.6 million was a major achievement for Thermon. We're extremely proud of our employees and agents around the world for helping Thermon reach this $300 million milestone. Our revenue grew 11% over prior year. Our revenue mix for the year was 59% MRO/UE and 41% Greenfield. The resulting product mix produced gross margins that were 50% of sales. This strong margin was primarily driven by revenues from the US and Canada business units.

Our EPS grew to $1.38 per share, which is up 15% year-over-year. Our backlog was approximately $76 million at the end of Q4. This was a decrease of $9 million over the prior year, which was primarily driven by a $7 million negative foreign currency impact. Thermon's updated pipeline of future projects increased a little over 600 identified opportunities for heat tracing with an estimated total value just over $1 billion.

Foreign-exchange rates negatively impacted our annual revenue by a little under $13 million, which was primarily attributable to the depreciation of the Canadian dollar and the euro against the US dollar. Our revenue guidance for FY16 is mid-single-digit growth over prior year. We have continued to look for M&A opportunities where we can leverage our leadership position by providing thermal management solutions to the global energy and industrial markets.

We recently announced the acquisition of Sumac, which will increase our addressable market in the industrial space by providing electrical products and services for temporary power systems on a global basis. Our M&A pipeline today is still very active and we are continuing to evaluate several more attractive opportunities. It is very possible that we will acquire another company this fiscal year.

Our new warehouse is now complete and the tube bundle capacity expansion is scheduled for completion in July. Our expanded control panel facility is also now fully operational and has increased our panel production capacity by 70% to 80% and at the same time reduced shipment lead times by as much as 50%.

Before I turn the call over to Jay, I would like to quickly address the macro issue that I am sure is still on everyone's mind and that's the future price of oil. We still believe that the global demand for energy will continue to increase over the next several decades and we believe our customers will continue to make investments to support the future increase and demand for energy. We are monitoring the potential impact of oil prices on our future business and we are anticipating a contraction in our organic business, particularly in Canada. I'd like to add that Canada is coming off of a record year, which creates a difficult comp heading into a tough year from a macro perspective.

We are increasing our R&D spending to improve our product offering for new applications that will generate new revenue. We are also adding personnel on a global basis to increase our local support service in developing markets. Our goal is to make strategic investments in FY16 that will better position our Company for a robust 2017 as delayed oil and gas projects come back on schedule with the higher oil prices. We plan to monitor market trends and adjust our investment spending as required. This may put some near-term pressure on EPS results in FY16.

Additionally, I'd like to highlight the recent announcement of our new Chief Operating Officer, Bruce Thames. He is a talented professional that is assuming responsibilities for sales and operations in order to help drive our strategic growth initiatives and operational improvements going forward.

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. Thank you again for joining us today and Jay Peterson, our CFO, will now address the details of our financial performance for Q4.

Thank you, Rodney. Good morning. I'd like to start off by discussing our Q4 results, then turn to our record fiscal year results and then conclude with high-level guidance for FY16. First off, revenue. Our revenue this past quarter was $74.3 million and that's an increase of 10% over the prior year's quarter. Note that FX currency fluctuations negatively impacted Q4 revenue by 8 percentage points or $6.2 million. Mix in the quarter between MRO/UE and Greenfield was 61% for MRO and Greenfield came in at 39%.

Orders for the quarter totaled $52 million versus $62 million in the prior year quarter. And the largest reduction in order activity was in our Canadian affiliate with a reduction of $19 million in orders. Our backlog of orders ended March at $76 million versus $85 million at the end of Q4 FY14, a decrease of 11%. And $7 million of the decline or 75% of it is attributable to foreign currency fluctuations.

In terms of gross margins, margin dollars grew this past quarter to $34 million or 45.9% of revenue. Versus prior year quarter, our margins decreased by 260 basis points due to the 50% growth of Greenfield revenues in the quarter. And in addition, our mix of lower margin construction revenue grew to 24% of quarterly revenues versus 17% in the prior-year quarter.

Operating expense and headcount, core OpEx for the quarter; that's SG&A excluding amortization of intangibles and any transaction related expense totaled $18 million and that's an increase of 21% from the prior year. Excluding the Q4 incentive accrual, our OpEx for the quarter would have grown 5%. And our operating expense as a percent of revenue was a competitive 24%. Again, that excludes D&A. The number of full-time employees at the end of March was 990 and that's up from 829 as of calendar year March 2014. I'd like to note that 93 of those additions were from our recent acquisition of Unitemp in South Africa.

GAAP earnings for the quarter on an EPS basis totaled $0.32 compared to a prior year of $0.30. After adjusting for an escrow settlement with our predecessor owners, our adjusted EPS was $0.28 this last quarter versus $0.30 in the prior year. FX fluctuations negatively impacted our EPS by $0.02 this past quarter and a total of $0.06 for the entire year. Our EBITDA totaled $17 million this past quarter and EBITDA as a percent of revenue was 23%. One thing I'd like to note on our balance sheet, and that is on a net debt to EBITDA basis, we ended the year with a ratio of 0.18 and that amounts to $108 million of debt and $94 million in cash.

Turning to the full-year performance, we set many records this last year including total revenue of $309 million, that's up 11%, total orders of $302 million, total gross margin of $155 million, EBITDA performance of $83 million and that's up $9 million over FY14, GAAP EPS of $1.52 and our cash balance approaching $100 million.

In terms of 2016 guidance, there's several points I'd like to make. First off, we are planning top-line revenue growth in the mid-single digits for the fiscal year and we are anticipating contraction in our organic business. Gross margins are estimated to be in the mid to high 40% range for the year. And as Rodney previously mentioned, FY16 is going to be an investment year for Thermon and we anticipate operating expense growth to outpace revenue growth. In addition, due to the growth investments in our ERP system and the final spend for our increased tube bundle capacity, our planned CapEx this year will total $6 million, essentially flat with last year's CapEx spend. I would now like to turn the call over to George Alexander for some additional comments prior to the Q&A session.

Thank you, Jay. Most of you have probably seen the press release we issued last month regarding my new role at Thermon. I'm pleased to announce that I have transitioned into the role of special advisor to the Chief Executive Officer as of April 1, 2015. I'm honored to have spent the last 44 years with Thermon. I've grown up with this Company and am extremely proud to have witnessed and been involved with its many accomplishments over the years.

I'm also pleased to introduce Eric Reitler, who relocated with his family from Michigan to San Marcos, Texas in September 2013 following his promotion to Vice President, Global Sales and Marketing. On April 1, 2015, he was promoted to Senior Vice President, Global Sales and Marketing and he is present to participate in the upcoming Q&A session. I worked very closely with Eric over the last 18 months and I'm confident that he is the right person to lead the sales and marketing effort going forward. Eric joined Thermon in 1998 and has been instrumental in substantially growing Thermon's regional market share in the midwest market in the US as well as developing an extensive network of sales channels.

I will continue to be available to mentor the sales and marketing team as well as actively participate in the evaluation of inorganic growth opportunities and the integration of recently closed acquisitions. I am looking forward to the next chapter of my life after retiring from the Company on March 31, 2016. But I am committed to a smooth and successful transition and anticipate being available on an as-needed consulting basis following my retirement. I'm confident that we have added the right talent to our executive management team to lead Thermon to the next level. I hope that you all stay in touch and I look forward to continuing as a shareholder for many years to come. I would like to now turn the call back over to Amanda to moderate the Q&A session.

Thank you.

(Operator Instructions)

Scott Graham, Jefferies.

Good morning.

Good morning, Scott.

George, congratulations; phenomenal job over a phenomenal career.

Thank you, Scott, appreciate that.

Also, more housekeeping, I don't know how close the flooding has gotten to you, but best wishes and hopes for you, your Company, your employees and families.

Scott, this is Rodney, and thank you for your concern and asking. We have had minimal impact on Thermon. We've had a few employees with car damage and one with house damage. And right now, that looks like the worst of it for us in the Wimberley/Blanco area. Communications are still coming back, but it looks like that the Thermon family has come through it well.

Well, thank goodness for that.

So, I have a number of different questions here. I want to triangulate toward something here. If FX was about a minus 8% sort of headwind for you guys in the quarter, that will ease as FY16 rolls out, but obviously not immediately. So, the first couple quarters, I suspect that the FX will be in that minus 5% to minus 8% range.

And if we add to that the fact that the orders declined 16% -- and I know that includes FX as well, let's even call that organically down 10% -- you're thinking of a modest contraction in organic sales for 2016. Can you give us a little bit more meat to that? It would seem to me like, given those factors, it might be more.

Hi, Scott. How are you doing? This is Eric. I would like to address that on the order side.

In general, we're seeing order business be fairly strong or fairly robust throughout the globe, ex the upstream activities associated with Canada. So, from the standpoint of the orders, from quarter-over-quarter reduction, the majority of that was our upstream business into Canada operations.

Our belief into growing our Business is associated with our global project tracking systems that we have, and the vision, primarily focused on the petrochemical and downstream side of the energy industry, as well as the chemical and power industries that has given us room for forecasting growth associated with our Business, ex upstream in Canada operations.

Understood. If I just may ask this question: As you model that to come up with a guidance level for organic sales, have you considered that things maybe get a little worse before they get better? And have you considered weaker pricing within that framework?

From a perspective of Thermon's business as a whole, in general, we historically have seen a back-weighted FY16. In other words, from a near term, the pressures that you're referencing will probably be realized from the standpoint of a weaker first half compared to a relative second half.

But from the standpoint of overall projects, from the standpoint of the project pipeline that we're looking at, and the business mix associated with those projects, we're seeing continued strengths for wanting to invest within the Company in our core business. We have confidence in our business model and our core business to grow the business in the midstream, downstream of the energy sector, as well as the chemical and power industries.

Okay, okay. That's fair.

My other question relates to the decision by the Company to spend some money on the SG&A line at a time when oil and gas is just a very difficult market, and that is 60% of your sales. So, it seems to me like, if you are expecting, with the acquisitions, sort of a mid-single-digit top line, but then for margin to be weaker, that you're, let's say, triangulating toward a flat year EPS-wise. Those are my words. If you agree or disagree, that's up to you if you want to express that, but it seems like a flattish year.

So, is your comment about -- this gives us the flexibility to pull back on spending, to make sure that you get a flat year, and not worse than that? Or am I reading that wrong?

Scott, this is Rodney. In terms of the timing on spending, that's a good question. Our decision at this point to go forward is obviously a look at our overall forecasting, which includes the market areas Eric just talked about.

But more importantly, it's a timing issue with what we see as new revenue streams created by new applications and products that we either have started to launch or will launch in the next several months for this fiscal year. And we believe that 2017 will be an up year, but we need to be in position with the R&D spending and other areas of investment initiatives so that we are better positioned at that time to take advantage of what we think will be a fairly robust time after FY16. So, that's why we're going to continue to invest at this point.

Now, with that said, we will obviously be managing our spending and managing our resources so that if it does, as in your words, might get a little worse, then we're able to react to that. In fact, we already have. We already have a plan and some controls in place that are watching the price of oil, and either the status of some of these major Greenfield projects that have pushed -- especially on the upstream side, have pushed out to the right.

Okay. Guys, thanks very much.

Thanks, Scott.

Thank you, Scott.

Brian Drab, William Blair.

Good morning, and George, congratulations on a great run.

Thanks, Brian.

And congratulations, everyone, on a great year in a choppy environment.

I wanted to ask about the guidance here, and just make sure that I understand this -- that we all understand this. The guidance for total revenue growth, that's clearly up mid-single digits. But the guidance for organic to be down (inaudible) is a little confusing to me when I try and put these components together.

Acquisitions -- maybe this is a question for Jay. How much would you expect completed acquisitions to add to growth, in terms of percentage points of growth in FY16?

Over [2015] -- rough numbers, 8% to 10%.

So, 8 to 10 points of growth?

Yes.

So, there, we're talking about $20 million-plus, I guess, in terms of acquisition-related revenue?

In that neighborhood, yes.

Okay. And then, what are you expecting in terms of -- what does your guidance have in terms of FX headwind, in terms of percentage points?

We think FX will impact us less this year than last year, okay? Last year, for the full year we had almost a $13-million headwind from a revenue perspective; and from an EPS perspective, it was about $0.06. My guess, and it's only a guess, is that we will have somewhere in the range of 50% of those headwinds next year versus last year.

Okay. So, maybe just a 2-point headwind, then? Did you say it was $13 million last year, so maybe half of that, and $6 million on $300 million in revenue, so we're talking about maybe a 2%?

In that neighborhood.

Okay. Okay. I think that actually -- now that is making more sense for me, that organic -- so, if I think about organic, and when you talk about organic, you are excluding FX from that?

When we talk about organic, we're talking about GAAP EPS, okay?

I'm trying to stick on the top line, Jay, just to be clear, just on the revenue.

GAAP EPS and GAAP revenue, yes.

Okay, okay, so, the way I am building up to -- let's pretend for a second mid-single digit means it's going to be 5%. You've got 8 points of acquisitions, and you've got about a 2-point headwind on FX, and about, call it, a 1-point headwind on volume gets you to the 5% total. Am I at least directionally -- are those components in the ballpark of how you're thinking about it?

Yes, they are.

Okay. Thanks.

And then, maybe a question for Rodney or George, about some of these strategic investments that you are talking about, could you add a little detail as to what those are?

Most of those are in the press release on that section called outlook -- are pretty much addressed there. But just as a real quick, high-level recap for you, it is investing in new products and services that will capture new revenue streams for Thermon, or increase some current revenue streams that are just developing; so, products, services, certifications, et cetera.

Okay. I didn't mean to imply for a minute there, Rodney, that I didn't read your press release. I did see that section, but I was wondering if you could tell us any more about which end markets or geographies you're focusing on -- just any more detail around what those are?

Sure. Most of our efforts are focused around where we see the business coming from in the foreseeable future, and that's downstream oil and gas, petrochemical and power, and applications associated with those major areas.

This is Eric. From a geographical perspective, it's global, that we see the opportunities to deploy these.

Okay. Thanks. I'll follow up a little more on that after the call.

And then, did you give us an expected mix (technical difficulty) for FY16?

Brian, I am sorry, you broke up a little bit there. We didn't quite catch that question.

Brian, we think our historical numbers of 60/40 MRO to Greenfield will be good planning numbers for this year.

Okay, thank you. I'll get back in line, thanks.

Kathryn Thompson, Thompson Research Group.

Morning, this is Steven Ramsey sitting in for Kathryn Thompson. Thanks for taking my questions.

Can you guys share the gross margins for MRO and Greenfield by segment for the quarter and the fiscal year?

Yes, I've got the quarter and the year in front of me; however, not by segment.

Okay.

Okay. Greenfield for FY15 came in at 40%; MRO 57% for the year. For the quarter, Greenfield 42%; MRO 49%.

Great, thanks.

And then, I guess my last question: Could you share your thoughts on Sumac and how that will benefit? Does that benefit MRO and Greenfield; one or the other? And your strategy -- is that to gain wallet share with existing customers, or how you see that strategically? Thanks.

Strategically, again, this major market is the industrial sector. Obviously, the majority of it being in the upstream portion; however, there is a downstream component, and there is an MRO business through other marketing channels, like Reynolds and stuff like that, that adds to the mix. But again, looking at the upstream portion of the Business and the industrial sector, that's where it will benefit Thermon, we believe, since we are already in that space and are talking to the same people in the sales process.

Excellent. Thank you, guys.

Thanks, Steven.

Thank you.

(Operator Instructions)

Charley Brady, BMO Capital.

Good morning, guys.

Morning, Charley.

I guess, from the last question on the gross margin between MRO and Greenfield, that 49% on MRO for the quarter, it seems a little bit lower than maybe it's been historically. Is the construction mix you referenced earlier embedded in that, that pulled that down a bit?

Well, remember, our MRO business is MRO/UE. So, a lot of UE projects that are less than $1 million can impact that MRO/UE number.

Got it. Okay, fair point.

And I guess, as we look to the FY16 rev guidance and the mix -- the 60/40 mix you laid out -- as you look to your pipeline, your project pipeline of activity, particularly on the OE side, the Greenfield side, do you see a meaningful seasonality to the mix as we go through the year? I guess what I'm asking is: As you look to your project pipeline, do you know when stuff is going to hit? Do you see -- really lumpy or is it a little more smooth?

We see matching or following the historical models that Thermon has generated in the past, where we have historical trends of 45% to upper-40%s gross margin [industry]. It depends on the mix of the projects; when the projects gets executed. A lot of the projects' execution is a function of the customers' schedules -- when they talk about executing the actual project, all the way down to the micro inspection and releasing of equipment. So, it is lumpy by nature, but it is lumpy in the same traditional brackets that we've given guidance on that has historically bracketed our gross margin performance.

Okay. I just wanted to make sure there wasn't some sort of large job that was going to hit in one quarter that kind of skews it, maybe abnormally. So, it sounds like not.

I guess final question for you guys: If you look at the orders in the quarter, can you tell us what they would have been, if you back out the Canadian business that was down meaningfully?

Yes, there was a decline in Canada, for the quarter now, of almost 40% -- 38%. So, that was the biggest driver for the reduction, and we're actually seeing a small growth in Europe. We believe Europe has some expansion capabilities for this current fiscal year, including Russia.

Okay, that's interesting, particularly the comment on Russia, given the political landscape that's going on there. So, excluding Canada, would orders have been up, backing out the Canadian business?

From a quarter-over-quarter perspective, they would have been closer to flat, as opposed to being down, but not necessarily up.

Great. Thanks, guys, appreciate it.

Brian Drab, William Blair.

I just wanted to get a little clarification on the percentage of revenue that came from Greenfield in FY15. We're looking back at the quarters, and the percentages that we recorded in each quarter, and it doesn't really line up with the 41% for the total year. I'm wondering if there's just an easy reason why that would be, or if not, we can just follow up after the call.

Yes, Brian, the quarters are not additive to each other. It is a 12-month look back, based on the customer content in a given quarter. So, it's always a trailing 12-month average, and they are not additive. I can take you through the math on that, either off-line -- and also, I think in a footnote in our K, we discuss how that is calculated.

Okay, I will have to take a closer look at that because for the quarters, I've got 32%, 38%, 33% and 39%, and then we did 41% for the full year. So, I guess I'm happy to follow up with you off-line, if there is a more complicated answer. I guess I will just -- sorry, go ahead?

Yes, we can talk off-line, Brian.

Okay, I will leave it at that. Thanks.

Thanks, Brian.

Thank you. At this time, I'm showing no further questions. I would now like to turn the call back over to Mr. Jay Peterson for any closing remarks.

Thanks to all of you for your interest and participation in today's call. We look forward to discussing our progress with our business model at our August earnings conference call. Thank you.

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