Thermon Group Holdings Inc (THR) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Thermon third-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference may be recorded.

I will now turn the call over to your host Sarah Alexander. Please go ahead.

Thank you Stephanie. Good morning everyone 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 also be available via webcast 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 last June. 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, revenue growth, profitability, leverage ratios, acquisitions, acquisition synergies 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 have 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 is my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

Thank you, Sarah. And thank all of you for joining today's earnings call.

As you are aware, we issued a press release in December announcing my upcoming retirement. We simultaneously announced a promotion of Bruce Thames to President and CEO effective April 1, 2016. I've been working closely beside Bruce since he joined the company last April, and I have been extremely impressed in his strategic thinking, his drive for success and his leadership. Bruce's broad experience, new ideas and fresh perspectives have left me with no doubt that he is the right person to step in and take the company to the next level.

I am proud to have been a member of this truly unique organization for the past 45 years. And I feel blessed to have had the opportunity to lead it for the last seven years. However I am now ready to turn over the reins to the next generation and begin my transition into retirement. I have made a commitment to the Board of Directors and to Bruce that I will continue to be available to mentor and consult with Bruce and the senior management team to ensure that the transition is completely seamless.

Our industry is currently in the midst of a tough cycle. However, we've been here before and I still remain confident in our strong business model and the long-term success of the company. I also look forward to continuing on as an investor in Thermon. Again thank you for joining us on the call today, and I would now like to turn it over to Bruce.

Thank you, Rodney. Good morning everyone, and thank you again for joining us today.

Before diving into the quarterly results, I wanted to take a moment to personally think Rodney for his leadership of Thermon over the last 45 years and his willingness to share his knowledge and experience with me over the last nine months. Rodney and I have been, and will continue, working closely together to ensure a smooth transition. While the current environment is difficult I look forward to the challenge of leading this great company to the next level. We have recently spent a significant amount of time developing a multi-year strategy and I am fortunate to be surrounded by an experienced management team and very capable employees. In the coming months I look forward to sharing more about this strategy, to drive accelerated top line growth by focusing on our core customers and growing the solutions we provide to significantly expand the addressable market.

Turning now to results. I would like to begin with a few comments about our in-markets and the macro environment we are experiencing. Our business continues to be negatively impacted by two primary factors: the low price of oil and the strong US dollar. Oil prices have had the greatest impact on high-cost producers. The Canadian oil sands have been hardest hit with greenfield activity and capital spending down dramatically from FY15. Our Canadian business that represented roughly one-third of our revenues in FY15 is down 57% in FY16.

In addition, foreign currency exchange rates and the strengthening US dollar continue to present significant headwinds for our business. Currently, approximately two-thirds of our revenues are generated abroad. The FX impact on revenues year-to-date has been $17.6 million or 8%.

On a bright note, the countercyclical nature of the chemical and power markets have benefited from the lower fuel and feedstock prices. Our US business has capitalized on these downstream and power investments and is poised to deliver at or near record performance for FY16. Europe and Asia have also grown year-to-date on a constant dollar basis with Asia benefiting from numerous downstream and chemical projects destined for the Middle East.

In November, we reduced our full-year guidance to reflect the top line revenue percentage decline of mid-to high single digits as compared to FY15. At the time oil was around $48 per barrel. In the interim months, oil prices have been extremely volatile, and have continued to slide, with recent prices declining to 13 year lows, below $30 a barrel. The financial and psychological impact on customers has been significant, resulting in multiple rounds of capital and operational spend reductions. In Q3 alone, we had numerous shipments delayed, primarily due to customer requests, negatively impacting revenues for the quarter. In addition, a warm winter and maintenance deferrals negatively impacted MRO/UE sales in the US and Canada during December. The combination of these two factors resulted in Q3 revenues of $74.4 million, down 15% from a prior record year and falling below our expectations.

Despite the current pricing pressure, gross margin performance for the quarter was strong at 47.2%. We are pleased that our operating cost management and operating discipline continue to deliver strong EBITDA margins of 25% despite the declining revenues and gross margin compression,. While orders in backlog have not been canceled and shipments are now scheduled for Q4, the current environment makes predicting timing of revenues much more challenging. As a result, we are revising our forecasted revenues for FY16 to decline 10% to 12% from prior year.

Our Q3 backlog of $81 million was down 2% from Q2 and 11% from prior year. The negative FX impact was $5.5 million representing more than half of the year-over-year decline. On a more positive note, Thermon's project pipeline of identified opportunities remains strong at $1.1 billion with the total number of projects increasing to over 800. The mix is also shifting to reflect more chemical and power projects.

Our acquisitions are performing within the range of expectations and are collectively accretive to earnings, with two meeting performance and the smallest falling short of expectations. We anticipate approximately $30 million in revenue from acquisitions in the fiscal year.

We continue to focus on new product development to differentiate our offerings in the marketplace by providing more comprehensive solutions to customers. Several launches and introductions are scheduled to begin late in Q4 and continue through mid FY17. We will continue to invest in new product development as a key driver of our organic growth.

Looking forward, our core business model remains resilient despite the current decline in revenue and competitive environment as evidenced by our solid gross and EBITDA margins. Our balance sheet remains strong, and our cash conversion allow us to operate from a position of strength. We will carefully manage our cost structure, but will continue to strategically invest in both organic and M&A growth opportunities. We believe the difficulties we are currently experiencing are cyclical and not structural in nature. The delays currently seen across the industry are creating pent-up demand for a recovery cycle in the future.

Thermon is well-positioned to take advantage of numerous opportunities when oil prices stabilize and our end markets recover. We are currently in the middle of our FY17 budgeting process and will provide additional guidance on the next earning call in late May. I would now like to turn the call over to Jay to discuss the quarterly financial results in additional detail. Jay?

Thank you Bruce. Good morning. This morning, before I get into the details of our financial performance I would like to emphasize three things about our business.

Number one; three of our geographies have shown revenue growth year-to-date on a constant currency basis. Number two; we continue to prudently manage our operating expenses and number three; our business model continues to deliver robust profits. This last quarter our business delivered an enviable 25% EBITDA return in spite of significant FX pressures and macro oil issues.

Now to get into the details. In terms of revenue, our revenue this past quarter totaled $74.4 million and that is a decrease of 15% relative to the prior year's record quarter. This decline in revenue is primarily attributable to the strong US dollar and continued reduced capital spend in the Canadian oil sands. And it is important to note that organic revenue in constant currency, and this excludes our Canadian geography, grew 8.6% over the last nine months. FX negatively impacted our revenue this quarter by $5.3 million and on a year-to-date basis by $17.6 million. M&A contributed $6.7 million in the quarter and $19.9 million year-to-date in terms of revenue.

Orders for the quarter totaled 73.1 million and excluding Canada our order book grew 3% in the quarter. Our backlog of orders totaled $81 million and that is essentially flat with Q2 FY16. And our book to bill was 0.98. It is also important to note that our backlog was negatively impacted by $5.5 million and that is on a year-on-year basis, due to currency. And also I would like to point out that typically only 40% of our orders are ever resident in our backlog.

Margin dollars this past quarter totaled $35.1 million. Compared to Q3 of FY15, our margins decreased 480 basis points to 47.2% which is within our historical range and against a near record comp. Also the gross margin impact from the three acquired companies impacted our overall gross margin by 60 bps in the fiscal quarter.

In terms of operating expense and headcount, our total operating expenses for the quarter, and that is SG&A, and this excludes depreciation and amortization and any transaction-related expenses, totaled $17.6 million, down from the prior year of $18.8 million. The majority of this spending reduction was in our Canadian affiliate, where we reduced our spending to be in alignment with the anticipated revenue over the near future. And these spending reductions on a worldwide basis will save approximately $5 million over the next 12 months. Year on year, our organic spend decreased by 14% and again, that excludes D&A.

The number of full-time employees at the end of December was 976, up 10% from the head count of one year ago. And the main driver of this increase was the three recently announced acquisitions. And excluding M&A, our headcount would've declined by 5% year on year.

In terms of interest and taxes, our interest expense totaled $720,000 for the quarter versus $840,000 in the quarter one year ago, and that is a decrease of 14%. Our effective tax rate for the quarter, and this is before extraordinary items, was 30%, and we are estimating the rate for the fiscal year at 29.9%.

In terms of earnings, our GAAP net income for the quarter totaled $8.5 million versus $15.6 million in Q3 of FY15. GAAP EPS totaled $0.26 a share versus an all-time record of $0.48 a share in Q3 of FY15. The combined effects of FX translation and transaction impacts reduced our EPS by $0.02 a share in Q3. Our adjusted EPS amounted to $0.25 a share and the $0.01 in adjustments relate to a $1.3 million contingent consideration payment anticipated to be paid to the seller of the Sumac business, and release of certain tax accruals that relate to the CHS transactions and IPI transaction.

On a free cash flow basis, our EPS was $0.69 a share, exceeding our GAAP EPS by $0.43 for the quarter. Our adjusted EBITDA totaled $18.3 million this past quarter, below the prior-year performance of $27.2 million. And as previously mentioned, EBITDA as a percent of revenue was a strong 25% in the quarter. Since April of this year, our three acquisitions added a total of $0.04 in earnings over the last nine months.

In terms of our balance sheet, our cash balance was at $79 million at the end of Q3, and that is an increase of $10 million in the last 90 days. Leverage at the end of December on a net debt basis was at a historic low of 0.4X and that is down by approximately 90% in the last five years. CapEx amounted to a total of $1.1 million, and that includes both expansion and sustaining capital, and that is approximately 1.5% of revenue. And our conversion ratio for the quarter was a healthy 94%.

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

Thank you.

(Operator Instructions)

Our first question comes from Jeffrey Hammond with KeyBanc, your line is open.

Good morning guys. Just on the MRO being down 20% plus, can you give us a better sense of how much of that is the deferred maintenance issue, how much is -- maybe a bigger chunk of MRO is these upgrades that are not happening? And then are you seeing people maybe being a little more careful as they do maintenance whether or not stripping off heater cable and is that changed the dynamic on aftermarket at all?

Jeff, this is Bruce. We've looked at that very closely and the way we report earnings is difficult for us to differentiate between MRO and UE so it is hard to say, but certainly the UE component is tied to capital expenditures, and that has had an impact. But we also have seen maintenance deferrals, and it's not maintenance directly related to the heat tracing system, it's more the maintenance that occurs on rotating equipment, pumps, things like that, that are heat traced. And so as that is deferred, the maintenance then -- or of the MRO sales associated with heat tracing is also deferred.

The other factor that I noted in my script was the warm winter. We saw a very warm winter, it arrived extremely late and the early seasonal sales that we would see that would really materialize particularly in November and December, just did not this year. So we see those three factors as having the greatest impact on our MRO/UE sales in Q3.

Okay. You mentioned North America, Asia, Europe is kind of still showing pretty good trajectory. Weakness seems to be isolated to Canada. Can you maybe speak to any signs of those markets softening, and then separately just in general, you mentioned chemical power and some downstream markets.

We are hearing more squishiness and delays in those markets prospectively. So I just want to get a sense of if there is any emerging risks to either of those regions or those downstream markets?

We have seen good orders and strength in those three markets as you have defined. We are pleased with at least the fact that our backlog is beginning to stabilize. We have seen our quote activity increase more recently. What we have not seen is that translate into bookings. We have seen the timing of some of these chemical projects move out. We've not seen that in the power projects.

Thanks guys.

Our next question comes from Charley Brady with SunTrust, your line is open.

Thanks, good morning guys. To focus on Canada, can you tell us what Canada was down in just Q3? I know you gave us the year to date figures?

There are two ways to look at that. In aggregate for Q3, Canada was down $16.2 million and this is against the prior year comp. In terms of the organic component, it was down $13.9 million, Charley, and FX impacted revenue negatively by $2.2 million for a total of $16.2 million.

Okay, that is helpful. Are you getting a sense that is -- the CapEx reductions are declining, or at least the slope of that downline is getting narrower? Oil is sitting around $30 and we've gotten below that, how much longer do you think until you hit the bottom on the Canadian oil sands projects and you get to a normalized run rate, at a base rate where you really -- it's all maintenance activity just to keep -- unless you are shutting in capacity on a permanent basis, there's a basic level of activity, when you think were getting close to hitting that?

What we have seen in Canada is really a seizing of a lot of the capital spending. So we don't see that getting much worse. What we are looking for is to see some of the maintenance spending recover. And so predicting timing of the bottom, or where it will exactly be is really difficult, given the volatility in oil prices and the impact that has had on customers and their budgets. It has translated not only from capital spending but into some of their operational spending as well. So we have seen it really impact both.

The positive signs I did note just a moment ago is we are seeing the backlog stabilize. It is down about 11% year-over-year and we have seen that over the last three quarters we have seen actually a little bit of recovery. And so we are really seeing the quote log improve significantly. What we have yet to see is that translate into incoming order rates. Predicting the bottom or when it will hit, is difficult but we do feel like we're getting close.

Just a comment on the backlog, I know you said nothing has been canceled yet, but have you gone through and done a pretty thorough scrubbing of that backlog to get a sense of potential cancellations on a backlog?

Absolutely. And I will reinforce one thing here, is that heat tracing -- when those capital dollars are committed we are very far into the projects and they are really trying to get the asset onstream and operational. By the time we receive a purchase order and it goes into our backlog, that commitment has already been made.

That is what really helps us not see a lot of cancellations. What we have seen is some deferrals in our project pipeline and some things have moved out. But again, we do see more activity in the chemical and power markets, to be able to offset some of that.

Thanks.

Our next question comes from Brian Drab with William Blair, your line is open.

Good morning. I wasn't able to be in the Q2 call so I want to say congratulations Rodney on an outstanding career and again you've been with the company for an incredible 45 years. Acknowledge just how rare it is to see that type of loyalty and commitment in a business leader. And obviously you did a great job growing the business and driving profitability consistently, so congratulations on a great career. And of course, good luck to Bruce, looking forward to working with you more.

Thank you.

Well, just a few questions. Can you give us a rough idea of how the business broke down, revenue broke down, in third quarter in terms of end markets by oil and gas, petro chem, power gen, as you typically do?

We don't have a breakdown on the end markets we usually do that at the end of our fiscal year, and report that.

Right, okay. Okay.

But certainly directionally, upstream spending is down.

At this point is oil and gas still the primary end market? As of the third quarter are you starting to see petro chem and power gen catching up?

The percentages -- the mix is shifting, and petro chem, which we would classify that somewhat as downstream -- petro chem, chemical and power are becoming larger percentages, we can see by just the types of projects we're winning. But overall oil and gas would still be the most substantial piece of our end markets.

Okay, thanks. And then, you gave us the 11% decline in orders on a nominal basis? I don't know if I missed it if you give that on an organic basis too? Maybe a question for Jay.

I don't have the organic number in front of me, just that the order book, including M&A, grew by 3%, and that excludes Canada. I can get you the details on the organic in a breakout call.

Okay, we will follow up on that. And you gave some really good year-to-date commentary regarding organic revenue growth by geography. I'm wondering if you give us a sense for the change in organic revenue for the geographies: US, Canada, Asia, Europe specifically and for 3Q.

For the quarter and this is organic, Europe, and these are rounded numbers, was up $2 million. AsiaPac was up $2.5 million --

Jay, I'm sorry to interrupt, can you give me a rough sense for percentage change?

I don't have that in front of me but I can get that to you.

I guess I will just take the absolute dollar for now. AsiaPac you said it was $2.5 million?

$2.5 million for AsiaPac. The US, which really is an anomaly, for the quarter was down $5 million. That is certainly not a year-to-date statement. Nor is it what we believe will occur for the full year. In Canada -- was down $13.9 million for a total decrease of organic of $14.6 million.

Okay thanks. It looks like, if I'm doing the math correctly, that you'll have quite a bit more revenue from acquisitions reported in the fourth quarter. You've made acquisitions at this point -- that the three total about $50 million, or at least at the time of acquisition, totaled about $50 million of terms of a run rate which was about [$12 million] on a quarterly basis, but we have $6.7 million in the quarter. Can you just talk about that disparity? I guess it is end markets primarily but also is seasonality a factor?

I think there is a couple of things. One is that one of the acquisitions we actually concluded in August, so there is only -- there is less time in the year that we've had that acquisition. As Bruce mentioned, for this fiscal year we believe M&A in total will generate somewhere around $30 million. And two of those are meeting expectation, one is a little more slower start than we anticipated.

Okay just to be clear the IPI was completed at the beginning of August but you have a full quarter, October, November, December, of revenue. Right, so each of these acquisitions contributed a full quarter, unless I have my timing wrong.

For Q3 that is correct.

For Q3. Okay, I think we have the rest of the math to work through that. And just a last question, thoughts around capital allocation philosophy, looks like Geoff DeMartino has absconded back to Chicago. Comments on what impact that might have on M&A activity in the future and any change in capital allocation philosophy?

Brian, this is Bruce. Going forward, first of all, just a couple of comments about Geoff's departure. Geoff was great addition to the team. He had made significant contribution in really elevating Thermon's M&A, or approach to M&A, and we wish him the best. His decision really was to get back closer to family in Chicago, and he had an opportunity, a career opportunity, and we wish him the best.

Looking forward for us, M&A is going to be an important part of our growth strategy moving forward. We remain committed to it. We continue to evaluate a number of M&A opportunities and will proceed. We are actively searching for a replacement for the role of Vice President of Corporate Development and we're actually looking to acquire some skill sets that will really enhance our ability to execute on this new strategy that we are moving forward with over the next several years. We still see a lot of investment opportunities to continue to build and grow this business going forward.

Okay, thanks very much.

Our next question comes from Jon Braatz with Kansas City Capital, your line is open.

Good morning, everyone. Bruce, you mentioned in your prepared comments a little bit about pricing pressure. Can you talk a little bit about what you're seeing in the market?

Yes. I would say it's most felt in Canada. But I would say on a global basis the reduction in capital spend has everyone fighting more aggressively for the remaining business. So we are seeing some pricing pressure globally but I would say it is most pronounced in Canada.

Can you -- any way you want to quantify the impact that lower prices might have been having on your top line?

I have been pleased that margins have held up as well as they have in the current environment. We expect margins to continue in the range we are seeing today. And I would say this, is that historically, greenfield projects have been extremely competitive so this is nothing new. We just see additional rounds of tendering that make it more competitive. On the MRO, it tends to be less impacted and so we would expect those margins to remain healthy.

Okay, thank you. One other question. If maintenance spending is deferred this year, could that mean that next year there might be greater maintenance spending, sort of a catch-up, plus the usual level of maintenance spending? Can you see a benefit next year from the delayed spending, in addition just to what they didn't do this year, but some additional spending?

Yes, so we do believe this is creating pent-up demand. There are certain maintenance that needs to be performed that is for safety reasons, some for regulatory reasons. We do believe there is some pent-up demand that at some point customers will move forward with. Predicting the timing of that is a bit more difficult.

Is that more or less in Canada again?

Yes, but we have seen some maintenance deferral more broad-based than Canada. And we saw lower MRO/UE in the US as well.

All right, Bruce. Thank you very much.

Thanks Jon.

Our next question comes from Bhupender Bohra with Jefferies, your line is open.

Good morning, guys. First question on Canada, can you give us the mix of the project revenues versus aftermarket mix?

Yes I've got that, Bhupender. For the quarter, in terms of greenfield, in the quarter $11.4 million. MRO/UE was $4.6 million and a total of $10 million. I'm sorry, a total of $16 million for Canada.

And you said this was down 57% or was that your year-to-date number?

For the quarter, Canada's revenues were down 44.9%.

57% was year to date.

Yes and that does include the FX impact.

That was $5.5 million, I think that was year-to-date, right?

$5.5 million was global for the quarter. The FX impact for Canada for the quarter was $2.2 million.

Okay, got it, thank you. And the other question on -- to Bruce actually, this was about the multi-year strategy, Bruce, you mentioned earlier in your commentary here, and how you want to expand the addressable market. When we look at Thermon, the company overall is going to end at revenue levels similar to 2012, right? Close to [$270 million] or plus, maybe. We had some expansion in your capacity which could support $300 million plus revenue.

Or more.

Yes, or more. Can you give us some color in how you plan to increase that? Just give us some idea on the addressable markets here, like where you think the company can go beyond in terms of oil and gas and other end markets?

I'd like to share more of that in the future discussions particularly in the May call, as we begin to roll out our 2017 plan. But I can say we are going to continue to focus on our end customers and that is the energy, chemical and power markets. And it's really expanding the solution set we bring to those customers around thermal management.

We have got some great plans to really expand the addressable market. Those end markets are huge. As we define those today it is fairly narrow and we see some opportunities immediately around what we deliver within our core competencies to where we can double or triple the addressable market.

Okay. And with respect to the pipeline you mentioned the project pipeline was about $1.1 billion around 800 projects. Could you talk about the mix of the projects, like -- 800, how that has changed compared to last year or the previous quarter?

So over the last couple of quarters we have seen a shift, again to more chemical and power. Some of that is just because of the nature of the opportunities in the marketplace, some of that is because of our sales focus. And we have seen a lower mix of upstream.

And certainly as we look at timing in that pipeline -- because it represents probably the next 3 to 5 years -- the timing of some of the chemical and power is more near-term and some of the upstream opportunities we see further out.

Okay, thanks a lot. Final question for Jay, on the top line, I think you guys mentioned about some weather impact in the quarter. Have you sized that? How much in terms of dollar - what kind of revenue was deferred or canceled, or the impact in the quarter?

This is Bruce. So if we look at revenue, our revenue shortfall versus our expectations, about half of that was related to backlog that was deferred by customers for various reasons, could be project timing, or other factors. About the other half was related to MRO/UE incoming orders from predominantly the US and Canada. So about 50/50 of the mix.

So you're saying the other half, the MRO/UE that was weather-related? Incoming orders for US and Canada?

Yes, and if you'll recall I went through and outlined the components. Part of them are MRO/UE, there is a capital component, and so we see those dollars not being spent. The second factor was we had a much warmer winter, particularly compared to last year, it was extremely cold, and so we did not see some of the emergency type orders that we get due to system failures. And then we saw maintenance deferrals, due to tightening of operating budgets with the lower price of oil. So those three factors had the major impact on the MRO/UE decline we saw in Q3.

Okay, and what was your internal expectation in terms of revenue for the quarter?

We were expecting $5 million more in revenue than what we delivered.

Okay, that was year-over-year right? That you're talking about?

Yes.

Okay, thanks a lot guys.

(Operator Instructions)

Our next question comes from Jeffrey Hammond with KeyBanc, your line is open.

Hey guys, just a couple of follow-ups here. I know you're in the planning stage for FY17 but I guess what I'm trying to understand is, balancing oil being down another $7 or $8 year-to-date, and just people continuing to cut back CapEx versus some of your commentary about resiliency in a lot of these markets and quote log improving. I'm just trying to get a sense of trajectory into FY17 considering all those factors.

Jeff, this is Bruce. We are in the middle of that right now. So we are looking pretty closely and trying to get a sense for what capital budgets our customers have for this fiscal year and what will actually move forward. So I would say it's a bit early to tell, and we are still -- we are still working through that. We will have more information in the May timeframe.

Okay, and then, it sounds like your core headcount is down 5%, but can you just talk about how you're -- given the more mixed macro environment, how you're balancing continuing to invest in the business and focus on new products and invest in SG&A, versus managing cost for this weaker period.

Yes that's a great question. Our cost reductions have largely been in Canada. We've had some others around the globe, more internationally but if you look -- the challenge we have on a constant dollar basis - we have businesses outside of Canada that are growing.

The impact of Canada has caused us to slow the pace of investment so we are trying to continue to invest but also managing with the realities of today. And so our approach there has been to continue to invest outside of Canada but to pace that investment, so that we don't grow SG&A disproportionately. If you look at the core headcount being down 5%, it is misleading. Because we had a lot of contract resources particularly related to projects. And so if you look at the total headcount we'd be down roughly two times that.

Okay, thanks guys.

Thanks Jeff.

I'm showing no further questions, I will now turn the call back over to Rodney Bingham, President and CEO, for closing remarks.

Thank you for everyone's participation on today's call. And their interest in Thermon. We look forward to seeing you on the next earnings call and have a nice day.

Thank you ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.