Thermon Group Holdings Inc (THR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome Thermon earnings conference call third quarter 2016. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). I would now like to turn the call over to your host for today, Sarah Alexander, General Counsel. You may begin.

Thank you, Sonia. 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 also be available via web cast 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, revenue growth, profitability, leverage ratios, acquisitions, acquisition synergy's, 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 Bruce Thames, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone. Thank you for joining our conference call and for your continued interest in Thermon. Today I have Jay Peterson, our CFO, joining me on the conference call. Jay will follow to present the financial details of our fiscal 2017 second quarter. To begin with the positive news for the quarter, revenue was consistent with our expectations at $68.8 million, and we finished the first half just 2% below the prior year revenues.

Gross margins remain under pressure but improved by 80 basis points over Q1 of this year to 42%, as anticipated in the call last quarter. Our backlog ended the quarter at $85.7 million, a 4% increase over prior year. In Q1 of this year we delivered a book-to-bill ratio of 122% and have enjoyed five consecutive quarters at 98% or greater in a very challenging market. This quarter our book-to-bill ratio fell to 86% and our backlog declined sequentially by 10% from Q1 on bookings of $59.1 million, a 22% decrease from prior year.

We believe this lower incoming order rate was related to continued delays and deferral's of both projects and maintenance spending and is reflective of the overall market. We continue to have visibility on the orders in our pipeline but customers are holding on to capital dollars and are performing the minimum required maintenance to sustain operations. Additionally, gross margins remain under pressure and are 5.7% below prior year and 3% below our historical averages predominantly related to mix and price. Greenfield projects represented a higher revenue mix of 36% versus MRO/UE at 64% relative to a mix of 34% to 66% respectively in Q2 of fiscal 2016. In the quarter, gross margin impact of all acquisitions combined had no effect on historical margins.

Finally, we also continue to see near term pricing pressure as the number of large projects decline and there is excess capacity in the industry. Jay will cover margins in more detail during the financial results. We typically see margins improve in late Q2 and Q3 during the heating season as MRO/UE sales increase. We do expect margins to modestly improve in Q3 but could fall short of our historic level of 45% due to a warm start to the winter and weaker maintenance and upgrade expansion spending.

We anticipate that these margin head winds will continue for the next several quarters until end market demand begins to recover. To effectively manage through the cycle, we've taken additional cost-out measures during the quarter in under performing businesses that will reduce spending by $6.5 million on an annualized basis, with $3 million to be realized in fiscal 2017. Jay will provide more details on these reductions. We'll continue to manage costs in our under performing businesses while making strategic investments where we see growth opportunities.

From a market perspective, the oil and gas upstream sector remained the weakest, while the midstream And downstream sectors have shown more resilience. The chemical and petrochemical's sectors remain active although there are signs of the overall pace slowing. Combined cycle power projects have also been strong, particularly in the US. Geographically, Europe, Middle East and Africa delivered a strong second quarter, up 22% in revenue over the prior year and 35% sequentially. At mid year, Europe, Middle East, Africa revenues are up 2% compared to a record year in fiscal 2016.

Canada for the first time in six quarters showed growth of 3.3% year-over-year. Asia-Pacific Q2 revenue was down 1% from prior year but is up 13% for the first half, compared to prior year and is off to a strong start overall. Visibility remains good here for numerous projects across the region, with several destined for the Middle East and Caspian.

The US business has been performing well during the cycle, but results are lagging in fiscal 2017 with difficult comps to a record year in fiscal 2016. The US has been the biggest drag on financial performance in the quarter and year due to the gross margin impact associated with the mix of construction projects and lower volumes.

Although timing continues to shift, our project pipeline remains stable with over 800 identified opportunities representing approximately $1.2 billion in potential revenue over the next three to five years. While the number of opportunities have increased, we see the average size of projects is significantly less due to the lack of very large upstream projects on the horizon.

We remain confident in the long-term viability of our markets and continue to push forward with investments in new product development to provide highly differentiated products and services to our customers. The second product launch scheduled for this year will be released in the coming weeks. The remaining two product introductions that were noted in the April earnings call are scheduled for launch in Q4.

Our M&A pipeline remains active and our revised strategy has opened the aperture for a broader universe of possibilities with 55 potential targets identified with revenues totaling $2.9 billion and EBITDA of $577 million. We continue to build and refine plans to grow our addressable market by two to three times over the next five years.

Looking forward, our core business model remains resilient, our balance sheet remains strong and our cash conversion allows us to operate from a position of strength. Based upon the lower order rates in Q2, a warm start to the heating season, and overall customer sentiment, we are reducing our guidance for the year from flat to low single digit growth, to mid-single digit decline in revenue.

Given the environment we anticipate margin pressure to continue for the next several quarters due to an unfavorable mix and pricing. However, the cost reduction initiatives should position us well to benefit as our end markets recover.

Thank you again for joining us today. Jay Peterson, our CFO, will now address the details of our financial performance for Q2 fiscal 2017. Jay?

Thank you, Bruce. Good morning. I would like to start off by discussing our Q2 financial results and then conclude with updated revenue guidance for the balance of the fiscal year. First off, our revenue this past quarter totaled $68.8 million and that's a decrease of 2% over the prior year's quarter. In this last quarter from a revenue perspective, three of our geographies performed as expected. However, our US business experienced a double digit revenue decline due to a strong comparable and lower than anticipated MRO/UE activity.

Our Canadian business experienced slight revenue growth in the quarter, and this is the first time this has occurred in the past six quarters. Our MRO/UE mix for Q2 was 64% of revenues; whereas Greenfield totaled 36%. And Greenfield revenues grew 3% over the prior year quarter due to a strong performance in Europe; whereas MRO/UE revenue declined by 4% due to a double digit decline in the United States.

Orders for the quarter totaled a disappointing $59 million versus $76 million in the prior year quarter for a decline of 22%. And our book-to-bill for the quarter was 86% it is our expectation that our book-to-bill will be positive in the current fiscal quarter. Our backlog of orders ended September at $86 million versus $82 million at the end of September 2015. That's an increase of 4%.

We are experiencing a protraction in the turns of our backlog. Several years ago our backlog would typically turn within 12 months. At present, due to depressed capital spending, our terms have increased to 15 to 18 months.

Gross margins. Margin dollars this past quarter improved over the last 90 days by 80 basis points. Versus the prior year quarter, our margins decreased by 570 basis points due to several factors including reduced profit margins in our construction business, an unfavorable product mix, and continued pricing pressures.

Turning to operating expense and head count, our core expenses for the quarter, that is, SG&A, and this excludes depreciation, amortization of intangibles, and any transaction-related expenses totaled $18.7 million versus $16.4 million in the prior year quarter, equating to a growth of 14%. Note that in fiscal year 2016, we accrued a reversal of $660,000 in incentive versus a positive $900,000 this last quarter, for a year-on-year delta of $1.6 million. And this incentive accrual in the current quarter is specifically attributable to those geographies that are achieving their financial goals this year. Normalizing for this lumpy incentive accrual, our operating expenses grew at 4% in the quarter.

In addition, $200,000 of the spending increases related to one month of additional IPI expense this past quarter versus the prior year quarter, and approximately $300,000 in severance-related expenses. And note that this level of operating expense spending comprehends the continuing investments we are making in new product development for products that will be released later this year. Over the last 60 days we have taken actions that will decrease our spending in fiscal year 2017 by $1.6 million, and in fiscal year 2018 by $3 million.

These actions include a reduction in head count, program spending, and general corporate expenses. And lastly, we have taken actions that will decrease our cost of goods sold by approximately $3.4 million in the next fiscal year. Our operating expense as a percent of revenue was 27%, and again this excludes depreciation and amortization. The number of full time employees at the end of September was 946 versus 979 as of calendar year September of 2015. In terms of earnings, GAAP EPS for the quarter totaled $0.11 compared to a prior year of $0.21, for a decline of 48%. And our adjusted EPS was $0.01 lower than GAAP due to the release of a deferred tax liability relating to the Unitemp acquisition from the past year.

Our free cash flow EPS amounted to $0.24 a share versus $0.15 in the comparable period of one year ago. Our adjusted EBITDA totaled $10.7 million this past quarter, and adjusted EBITDA as a percent of revenue was 16%. And this is well below our historical levels. From a balance sheet perspective, our cash balance ended at $76.7 million this past quarter, and over the last 12 months we increased our cash balance by $15 million while also reducing our debt balance by almost $18 million for a net increase in liquidity of nearly $33 million. On a net debt to EBITDA basis, this ratio ended the quarter at .2 and we anticipate to be debt-free again on a net debt basis during this current fiscal year.

And lastly, guidance for the balance of 2017. We are updating our guidance of flat to low single digit growth for this fiscal year to mid single digit decline due to continued frozen capital budgets and our lower than expected Q2 bookings. In addition, we will have severance related expenses in the amount of approximately $300,000 for actions that took place in early October. I would now like to turn the call over to Sonia to moderate our Q&A session. Sonia?

(Operator Instructions). And our first question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is now open.

Okay, so just on the cost takeout, so you're taking out $3 million out of SG&A and $3.4 million out of cost of goods sold and we would get $3 million of that in fiscal 2017 and the balance in 2018? Is that the way to think about it?

Yes, $1.6 million in each SG&A and COGS during the current fiscal year, and then the other numbers we provided were the full year impact.

For next fiscal year.

For next fiscal year.

Okay, great. I know there was like, I think, a stub for IPI, but could you give the acquisition revenue contribution in the quarter, and any kind of FX impact? And then maybe for the full year, how you're thinking about core growth within this mid-singles decline?

Yes. We had M&A revenue of $861,000, and that was for the one month stub period for IPI. And then, going forward, after this quarter, we will not have organic or inorganic revenue in that we define it as businesses that we've owned greater than 12 months is now part of organic. I can tell you, though, that we are quite happy with our M&A performance in three data points. We are achieving our EBITDA plan for the three acquired companies. We're definitely growing EBITDA year-on-year, and we're definitely growing revenue year-on-year. But going forward, those will be melded together but we will give some higher level perspective on the health of those businesses.

Okay. And then FX?

FX, from a revenue perspective, was actually positive for the quarter at $252,000. And this is the first time this has been positive for several years now.

Okay. And then just lastly, Bruce, I think you gave some statistics about targets, 55-some targets. Can you just talk about how the near term pipeline is looking, and what you see the likelihood you get something done over the next 6 to 12 months? Thanks.

Again, we have noted 55 different targets. Some of those obviously are more active than others. It is our intent to move ahead with M&A so we're pursuing that aggressively. As you know, with deals, predicting timing can be challenging. The opportunities are binary. I guess the main thing is that our strategy has actually expanded the aperture and gives us more opportunities.

Okay. Thanks, guys. I'll get back in queue.

Thank you. And our next question comes from Scott Graham of BMO Capital Markets. Your line is now open.

So would you guys be able to rank for us pricing mix and the construction mix in terms of importance to the gross margin decline in the quarter?

Yes. A couple of data points there. Our construction was impacted in the quarter by about 5% relative to the comp period a year ago. The balance of the basis point reduction is approximately 50% related to product mix, and 50% of the balance related to pricing pressure.

In perspective, though, the construction, I don't think anyone knows what the construction margins were. So that 500 basis points year-over-year, does that make that the largest of the three?

No, it's actually the smallest of the three, somewhere in range of 10% to 20% of the basis point erosion. So let's say 40% of it was related to continued pricing pressure, 40% of it related to an unfavorable product mix, and then the balance would be construction.

Right. Got you. Thank you. Just a question for you on the book-to-bill which you said in the third quarter you expect to be up. Isn't it the case that at this point in the cycle, that book-to-bill is becoming a little bit less important? Not for the long term but certainly for the intermediate term with these push outs? What do you think that will mean to you? Because a north of one book-to-bill is really not helping a ton, given the change in the guidance.

Scott, this is Bruce. What we saw in the weak book-to-bill in the quarter is it created a bit of a gap in our backlog. What we have seen in those projects, timing has moved out and so we still see them. The projects are still there. And our quote activity has actually improved. So it does have an impact, particularly as it relates to the quick turn business or our MRO business. That's really where we have been most negatively impacted. We have the least visibility on that in our US business particularly, which really has been the challenge in fiscal 2017. Those MRO sales are off by about 23% year-to-date.

Okay. Two other questions. When we talk about the Company's exposure to oil and gas, could you maybe frame for us what your exposure is to upstream US? Not sands but just sort of upstream US?

Certainly the exposure in the upstream sector in the US is less than in Canada. However, we do have business in the Marcellus and the, basically in the Dakotas. So those are the two areas where we have really had the most business. That has been down. But as that recovers we would expect to see some improvement in our US business there.

Got you. Thank you. Last question. The M&A pipeline is very impressive. The number target you guys have clearly gotten to work there and calling in some resources. Would you kind of tell us, maybe frame out, Bruce, what are some of the themes within that pipeline product-wise? Is it moving more into dry away from liquid? Steam versus electric? Just give us some ideas on what those 55 look like.

The things that we're looking at are certainly additional products and services that compliment our core. And so those are things in and around us being able to provide a more comprehensive thermal solution to our end markets. Other areas that we're looking at would be technology based, that would compliment our offering and improve our competitive position in the space. So those are kind of two of the overriding themes. And again, as we've looked at our strategy, it has really opened up the types of opportunities we've been able to pursue.

You know, you are saying here, I think you said $2.9 billion.

Right. 55 different companies, $2.9 billion in (inaudible) total revenues (inaudible)

If I may, that sounds like there are a number of them that are a lot more than just product add-on's. Could you maybe talk about some of the larger ones, what they look like?

I would rather not get into that specific detail at this time. Certainly, there are other opportunities. Some platform businesses that would compliment our existing offering with our current core customer base.

Good enough. Thank you.

Thank you, Scott.

Thank you. And our next question comes from Charley Brady of SunTrust Robinson Humphrey. Your line is now open.

Thanks, guys. I just want to ask about your commentary about your duration of the backlog being pushed out to longer than 12 months, now up to 18 months in some cases. Does that look to you as though that has stabilized? Or do you see it kind of continuing to move to the right? And I guess within that backlog, is there potential for anything to have to get pulled out because of a cancellation that's in the backlog today?

Yes, I'll answer the latter question first, Charley. Historically, when we receive a purchase order or a contract, in very, very rare occurrences do we ever see a cancellation. And I can almost count on one hand or less how many cancellations we have had over the last four or five years. So we really have not experienced any increase in cancellations, nor do we expect to receive or experience any cancellations. And this increase in the backlog duration is something that we've seen over the last let's say 9 to 12 months. At present we're not seeing it become any more protracted.

Thank you.

Thank you. And our next question comes from Bhupender Bohra of Jefferies. Your line is now open.

Just a question on your outlook. You mentioned in your release your project execution delays and the (inaudible) of CapEx. Can you give us some color in terms of the execution delays you've been talking about, from a geographic standpoint or from end market standpoint?

Yes, we've seen delays in the tendering process. We've also seen delays in execution. Particularly in petrochemical. We've noted that last quarter. We continue to see that, that there are delays in execution of some pretty large projects that are still out there. A lot of those are in the US. We've also seen some delays internationally, in the Middle East as well as in Asia. So it's been fairly broad-based, where we've seen these delays and deferral's. And a lot of them particularly we've seen the slowdown has been probably most pronounced in the petrochemical sector. It was really a lot more active, and still those projects out there but we just see the pace of execution slowing.

Okay. Got it. And can you remind us how big is petrochem for you, in terms of revenue mix?

Today, if you say "petrochemical," it's around 17%.

Okay. That's excluding oil and gas? Right? You're talking about like upstream, downstream?

Just petrochemical. If we looked at downstream, which you do get some crossover, downstream is probably somewhere in the range of about 25% of our business.

Okay, got it. Next question. On the backlog duration which we have been talking on the call here, now when you see your backlog kind of stretch to 15 to 18 months from historical 12 months. Are you doing anything differently or you plan to do in terms of the near term or short-term or small projects? Your sales force, are you looking at any different, channel wise or sales funnel you plan to increase? Anything differently?

We focused a lot on the power sector. It's been stronger. We have been very successful in the US and we are beginning to drive opportunities in Latin America and Asia as well. So that would be an area beyond that we've focused on. Certainly with the sales organization we're beginning to look at broader opportunities, particularly for our tubing bundle line and we've made investments there to really focus more in the eastern hemisphere. We have had a lot of success there in the Western Hemisphere. And there's certainly a number of other sales initiatives that we're driving to look at opportunities beyond some of maybe our core customers that we've had in the past.

Okay. Got it. And lastly on the cost cuts here, which are happening or which happened, like in, October and will be happening for the rest of the year, are those, you did say that it was in your SG&A. Are you taking out any like, on the sales force or is it more on the R&D side or engineers? What kind of head count reduction would be?

We have not taken any real action on the sales organization. Our focus has been more particularly around projects. As the pace has slowed, the need for capacity has been less. So those have been some areas. Certainly there have been other overhead where SG&A, back office-type positions where we've reduced staff just because the volume of business has been lower.

Got it. Thank you.

Thanks, Bhupender.

Thank you. And our next question comes from Brian Drab of William Blair. Your line is now open.

Thank you. Bruce, you just mentioned the tubing bundle business and I wanted to get a quick update in terms of what is the size of that business in terms of that revenue now? And are you still seeing the double digit growth rate in that business?

It's about a $40 million business for us. It has not been double digit growth this year but our sales have been strong. It's been a bright spot. But we expect the rate of growth to slow, although we are making some investments, as I just noted, in the Eastern Hemisphere with direct sales force there, and we would expect to see some benefit in the current fiscal year from those efforts.

Are you seeing anything in the regulatory environment more recently that is either positive or negative for that business in terms of the emission control?

Certainly, environmental emissions are the largest driver for that business. So those overall have been positive. Some of the new fuel cafe standards in the US are going to drive another round of investment in refining just to have lower sulfur fuels to be able to hit certain emissions standards. And so we do expect domestically to see some benefit but that's still a couple of years out. And we've talked to customers about their plans on retooling some of their crude trains and facilities to be able to meet those new standards. Certainly in Europe we've seen some significant spending, particularly in Eurasia, to upgrade those plants to be able to meet new fuel emissions standards, and as we've made investments there we're beginning to see more opportunities for our tubing bundle on there as well.

Okay. Thanks. And shifting gears, the construction services. This line of business hasn't been talked about much since the Company IPO'd. Can you just give us a quick summary on what percent of revenue has construction services accounted for historically? Is that higher year-to-date than it had been historically?

So the answer is "yes." Construction services. And here's the thing, Brian. It really is within the Greenfield that we've historically reported. There are two types of projects in Greenfield. There's design and supply. And then there's the turnkey construction. We predominantly provide turnkey construction in the US. And we do it on a limited basis in the Middle East but it's predominantly in the US. When you have turnkey construction, you have a lot more labor content. So it's dilutive to margins. So within Greenfield, it can provide some margin head winds. When we talk about construction we are seeing a higher mix of construction versus a more product, a higher product mix of our traditional design and supply within Greenfield. And so what we talk about that, that's what we're discussing. The 28% of our business today is above historical levels by 3-to-5 points, something in that range.

Okay. I had missed that. What is the 28% exactly?

It's the mix of construction services.

Okay. And labor? The reason I'm asking is because I understand, as you just pointed out, it's a lower margin business. And historically one of the differences between you and your primary competitor is that they have a much higher percentage, I believe, of labor in the overall mix. Is it kind of sustainable? Do you think that this is a sustainable kind of shift that will be a longer term headwind for margins that you're going to have percentage of total revenue that is labor higher than historically?

I do think that we are, I mean, with the acquisition of the IPI, certainly that has had an influence in our overall margins. The mix, particularly in the US, again, has been heavier on the construction side. And the construction enables us to be able to provide turnkey and position to win Greenfield. So in that respect it's positive. But it has had a negative overall impact. Really, the bigger issue is the fact that we're not selling as much products through our MRO sales. And that's been the greater impact to overall margins.

Okay. And if I could just ask one more? On the backlog, we talked about the 12-month historical period going to 15 to 18. I'm trying to reconcile that with the fact that your projects are, in general, on average much smaller than they had been historically. Seems like the lead times on some of these larger products that you had four or five years ago would have had the longer lead times. The question, I guess, is, are you seeing the current backlog that you have collected over the past several periods, those orders getting pushed out and those particular projects getting pushed out? Or are you seeing orders coming in just with much longer lead times? I mean, are you getting orders where the customer is saying we don't expect to receive shipment for 15 months?

We're seeing actually both of those, Brian. Both the smaller-sized projects and the middle-sized projects, both existing backlog and new orders. It has become more protracted.

Can you talk a little bit about why? I just don't understand why that is. Why does the customer even come to you 15 months ahead of time? Why don't they just keep that on the back burner? I don't understand that dynamic, exactly.

I will say, Brian, we do have one project in backlog that is sizable. It's in excess of $10 million. We expect it to grow. But that project particularly, the execution has been slow. And so that is certainly having an impact on the overall pace of execution that we're seeing in backlog.

I got it. Okay. Thanks very much.

Thank you. And our next question comes from Jon Braatz of Kansas City Capital. Your line is now open.

Good morning, Bruce, Jay. I can't speak for everybody but we haven't seen much cold weather here in Kansas City but I guess my question is; If there's a persistently warm winter, what kind of risk does that have on your revenue guidance and your expectation for the second half of the year? How important is cold-weather-induced sales?

We believe that we've factored in a warmer winter already into the revised forecast that we've just provided. And it's really important that you get cold early. It can have a significant impact. So that's already been factored in, that we're anticipating a warmer winter and we don't see MRO sales at average levels during the balance of the fiscal year.

Okay. All right. Thank you.

Thank you. (Operator Instructions). And our next question comes from Joe Hanzlick, of Confluence. Your line is now open.

Good morning, guys. I was just curious to see as far as when you talked about the MRO sales being down on a volume basis as well as the pricing pressure on that, if you can give us a little more color on why there's pricing pressure on that, if it's a smaller cost than the bill of materials?

The reality is customers have huge impact on their revenues, particularly anyone with upstream exposure. Their capital budgets have been slashed. You see a lot of press about gaining efficiencies, they're taking it out of supply base. They're squeezing every penny. What we've seen in the tenders, we're seeing things go 21 rounds in various revisions and tenders as they're looking to reduce cost through design and reduce cost through squeezing the supply base. And so that's been the biggest impact. Granted, it's a small percentage of spend and it's really been a strength for the business because it is mission critical. They really left no stone unturned, given the current market environment.

Okay. That's helpful. Obviously you gave us updated guidance for the rest of the fiscal year, looking out more long-term as far as the long-term revenue growth rates, how much do you expect the cycle to rebound as far as you to get back to your previously stated growth rates?

If you look back at our business over the last ten years, we've had growth rates around at the 10% level. That was in a much higher oil price environment, and so we anticipate, given a weaker oil price environment, maybe somewhere in the $50 to $60 range. We would expect somewhere around 3% organic growth, and then we would expect, as that would begin to approach $80, $90 a barrel, we would begin to see growth levels in a that 10% range organically. Now that I have said that, a big part of our strategy is to pursue M&A opportunities and to really look at expanding our addressable market through M&A. So we anticipate being able to execute on some M&A opportunities that over the next three to five years, our goals are to essentially grow the business to $500 million in revenue and $125 million in EBITDA. So M&A will be a key piece of our growth strategy going forward in a low oil price environment.

All right. Thanks.

Thank you. And we do have a follow-up question of Jeff Hammond of KeyBanc Capital Markets. Your line is now open.

Hey, guys, just wanted to get a little more clarity on that mid-single digit decline, how you're thinking of MRO which has been kind of weak year-to-date? Is that down mid-single digits or down worse? And then how you're thinking about Greenfield, which I guess you've seen maybe some stuff push but it's been growing in the first half. Just how to think, if we kind of split those two out, that would be helpful.

Yes, at this point in time it's really hard to discern what will occur during the next two months, Jeffrey. As you will recall, in terms of what we've seen thus far this year, especially in the second quarter, we've seen a small up tick in Greenfield, and a small downturn in MRO. And I don't think we will see great swings from those percentages in the second half of the year.

Okay. And then so if you're seeing a lot of slide in MRO and up tick in Greenfield, the confidence level that margins are up sequentially, is that a function of the cost saves coming through? Or just seasonality? Where might we see some risk to that gross margin?

It's actually both of those, Jeffrey.

Right.

The cost reductions, cost of goods sold reductions and the fact that we are going into the prime time heating season from an historical perspective.

Yes.

Okay. Thanks, guys.

Thank you.

Thank you. Ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to the President and CEO, Bruce Thames, for any further remarks.

Again, I would like to thank you all for joining us on the conference call today. Thank you for your interest in Thermon. Have a good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. That concludes today's program. You may all disconnect. Everyone have a great day.