Thermon Group Holdings Inc (THR) 2017 Q3 法說會逐字稿

Good morning everyone ladies and gentlemen. Thank you for standing by. Welcome to the Thermon earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

I would now hand the floor over to Sarah Alexander, General Counsel. Please go ahead.

Thank you, Karen. 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 8K 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 expressed written consent of the company is prohibited.

During this call, our comments made 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 in our quarterly filings and in our annual reports filed on form 10K with the SEC last 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 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 press release. These non-GAAP measures should be considered in addition to, and not as a substitute for, measures of financial performance reported in accordance with GAAP.

And now it's my pleasure to turn the call over to 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, we have Jay Peterson, our CFO, joining me on the conference call. Jay will follow me and present the financial details of FY17 third quarter.

To begin with an overview of the financials, after a soft quarter of bookings in Q2, revenue of $64.3 million fell short of our expectations for the quarter, and was down 14% year over year and 6% sequentially. We continue to see MRO deferrals, winter arrived late, and unlike most years, customers held onto those remaining capital dollars at calendar year end.

Despite the revenue shortfall, we did see a number of positives in our financial results for the quarter.

First, margins improved for the second consecutive quarter by 250 basis points to 44.5%, as we projected in the last earnings call.

Second, we had a positive book-to-bill of 130% and the second highest bookings quarter in the history the Company at $84 million.

These strong bookings levels drove backlog growth of 30% to $105 million for the quarter. This is the highest backlog the Company has seen since Q2 of FY15, which if you recall, was a record year of revenue for the Company. The greatest growth was in EMEA and Asia with both geographies reaching record backlog levels. The mix of projects ranges across all of our key-market sectors with power and downstream refining projects having the greatest impact.

The cost-out measures noted in the last earnings call are on track to realize approximately $3 million of savings in FY17. The combination of improved margins and better cost control resulted in $0.16 adjusted EPS for the quarter, up 6% -- or up $0.06 over the prior quarter, but down $0.09 year over year.

We will continue to balance the need to manage costs in under-performing businesses while making strategic investments where we see growth opportunities.

In the near term, additional resources will be required in both project managements and engineering to respond to the growing backlog. Understanding these costs will lead material sales on Greenfield opportunities.

From a market perspective, the overall folding gas upstream sector remains the weakest, while the midstream and downstream sectors have shown more resilience. The chemical and petrochemical sectors remain active, although there are signs of the overall pace slowing. There are some positive signs we are beginning to see from upstream operators, including Canada [Sagd] and Eurasia.

Combined cycle power projects have also been strong, particularly in the US although margins in this sector have historically been lower. Geographically, Europe, Middle East, Africa continues to be on pace to deliver a record year in both revenue and operating income.

In Q3, revenue was up 18.6% over the prior year, and is up 7.6% compared to a record year in FY16. After a quarter of growth, Canada revenues were down by 43% year over year, but effective cost management delivered 27.2% adjusted EBITDA for the quarter. Asia-Pacific Q3 revenue was down 23.6% from prior year due to project timing and is flat through the first three quarters of this year.

Backlog growth has improved visibility for numerous projects across this region with several destined for the Middle East and Caspian. The US business continues to underperform in the current fiscal year with difficult costs to a record year in FY16. In Q3, revenues were down 10.8% from the prior year and are down 6.9% year- to-date.

Although timing continues to shift, our project pipeline remains stable with over 800 identified opportunities representing approximately $1.1 billion in potential revenues over the next three to five years. While the number of opportunities have increased, we see the average size of projects remains lower than historical average due to a lack of very large upstream projects on the horizon.

Although the pace is moderated, we continue to push forward with investments in new product development to provide highly differentiated products and services to our customers. A two-channel controller, the TraceNet TCM2 was lost in January and is the latest addition to our comprehensive control and communications platform. The TraceNet family provides customers a comprehensive suite of hardware and software solutions to improve the efficiency and reliability while lowering overall maintenance costs of customers' operations.

In addition, we're on track to announce two other new products within the coming months.

We're also pleased to announce that David Buntin has joined the leadership team as Senior Vice President of Research and Development. David brings over 20 years of experience with controls and communications in hazardous environments and has had a strong history of success in both new product development and commercialization. We look forward to his contributions in accelerating our abilities to bring differentiated solutions to market.

We're also strengthening our presence in Eurasia with a new manufacturing location in Russia. Growth in the region has been a significant contributor to the success we have experienced in EMEA this year. The facility has already begun production of accessories and will begin to produce trace-heating cables to better serve a growing customer base in the region in Q1 of FY18.

Moving on, our M&A pipeline remains active and we continue to pursue opportunities that align with our strategies. Of the list of over 50 potential targets we mentioned in last quarter, we have a heightened focus of roughly 10 high-priority opportunities representing $500 million in revenue and $100 million in EBIDTA. We continue to build and refine plans to grow our addressable market by two to three times by the end of FY21.

Although now considered organic, the three acquisitions made in FY15 and FY16 were up in revenues by 4.1% year-to-date over prior, and generated 22% in adjusted EBITDA.

Looking forward, we're pleased to see the backlog growth, but do not anticipate an impact to our forecast in the current fiscal year. We're tightening our guidance of mid-single digit revenue decline to 7% decline subject to project shipments at quarter end.

Given the environment, we anticipate margin pressure to continue for the next several quarters due to an unfavorable Greenfield mix and competitive pressures. We have begun the budgeting process for 2018 and will provide an update in business outlook on the next earnings call.

Thank you again for joining us today. Jay Peterson, our CFO, will now address the details of our financial performance for Q3 FY17. Jay?

Thank you, Bruce. Good morning.

I would like to start off by discussing our Q3 financial results, and then conclude with revenue guidance for the balance of FY17.

First off, orders in revenues. Orders for the quarter totaled a robust $84 million versus $73 million in the prior quarter for growth of 15%, and marking our second largest bookings quarter ever. This bookings growth was led by EMEA with the 111% growth, followed by Asia Pac at 60% growth. And as mentioned, during our last conference call, we expected our book-to-bill to be positive and we delivered a 1.3 book-to-bill.

Our revenue totaled $64.3 million and that's a decrease of 14% over the prior year's quarter. The decline was led by continued contraction in Canada with a revenue reduction of 43%, and this was somewhat offset by EMEA with growth of 19%.

Our MRO/UE mix for the quarter was 67% of revenues, whereas Greenfield totaled 33%. Greenfield revenues declined by 25% in the quarter whereas MRO/UE declined by 7% due to a double-digit decline in the US, specific to the continued delay in maintenance spending. Our backlog of orders ended December at $105 million versus $81 million at the end of December, 2015, and that's an increase of 30%.

Both EMEA and Asia ended the quarter with record backlogs. As mentioned last quarter, we are experiencing a protraction in the turns in our backlog. Several years back, our backlog would typically turn within 12 months. And at present, construction cycles continue to be protracted and our turns have increased to 18 months or so.

Gross margins. Margins improved over the last 90 days by 250 Bps, and by 330 Bps over the last 180 days. And this increase was due to the higher mix of MRO/UE revenue versus these previous quarters. Versus the prior year quarter, our margins decreased by 270 basis points, with Greenfield margins declining by 8% due to continued competitive pressures in the Greenfield marketplace. Note that MRO/UE margins were essentially flat at 51%.

Core operating expenses for the quarter, that is SG&A, excluding depreciation and amortization of intangibles totaled $16.9 million versus $17.6 million in the prior year quarter, for a decline of 4%. Normalizing for the lumpy incentive accrual, our operating expense grew by 4% and this incentive expense is specifically related to those geographies that are achieving their financial goals this year.

Also we incurred approximately $500,000 in the quarter due to severance costs as we reduced our workforce to align with current revenue levels. Note that this level of operating expense comprehends the continued investments we are making in new product development for products that will be released later this year.

Over the last two quarters, we have taken actions that will decrease our expenses in FY18 by $3 million. These actions include a reduction in head count, program spending and general corporate expenses. Lastly, we have taken various 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 26%, again, ex D&A. The number of full time employees at the end of December was 939, versus 976 as of calendar December, 2015.

Turning to earnings, GAAP EPS for the quarter totaled $0.16 compared to $0.11 in Q2 and $0.08 in Q1. Free cash flow EPS outstripped GAAP for the quarter coming in at $0.27. And relative to the prior year, earnings were down by $0.10 or 38%.

Our EBITA totaled $12.6 million this last quarter and EBITA as a percent of revenue was 20%. Our best performance of the fiscal year but below our historical levels.

In terms of our balance sheet, our cash-in investments totaled $79 million this past quarter, and in the last 12 months we increased our liquidity by $14 million. Capital expense on a year-to-date basis totaled $5.1 million or 2.5% of revenue. And this is inclusive of both sustaining and expansion capital. And on a net debt to EBITA basis we ended the quarter at 0.1, and we anticipate to be net-debt free this fiscal year.

Lastly, guidance for 2017, we are refining our guidance of a 7% revenue decline for this fiscal year and will be providing guidance for FY18 during our next earnings call.

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

Thank you.

(Operator Instructions)

Our first question comes from line of Jeff Hammond from KeyBanc Capital Markets.

Hey, morning guys. So, can you just give little more detail on what projects are falling into these EMEA and Asia, that's driving the strength in the orders? And then just maybe speak about the quote activity that would suggest that, either that this strength continues or doesn't continue.

Yes so, Jeff, this is Bruce.

Looking at ore growth, I noted a lot of our ore growth is real good in power and downstream refining. If we look at EMEA and Asia Pacific, a lot of that growth has been a downstream refining, particularly in the Middle East, in Europe and in Eurasia. And then at Asia-Pacific, a lot of that has also been in downstream activity. Although, we have won a very substantial upstream project that, out of Asia, that will be executed there, but will be destined for the Caspian.

So that gives you an overview of the type of projects we're winning there in the Eastern Hemisphere. Looking forward, our quote activity remains active and has been consistent, to say -- I don't know if we will continue to book at these levels, but certainly we are seeing a sustained level of quote activity going forward.

Okay that's very helpful.

And then, I think you mentioned, into the end of the year, people didn't spend their CapEx/OpEx dollars. And you continue to see deferrals of MRO. We're starting to hear, with the turn in pricing, a little bit more optimism, a little bit more discussion about, downstream turnarounds normalizing.

Just give us your view on what you're see -- why you don't think you saw it in the December quarter and what the tone is as we move into calendar 2017?

The general feeling is that customers, most of them have a calendar fiscal year. So most of them held onto the capital dollars at year end for cash flow reasons. Typically, we would see the opposite. You would see a flurry of year-end spending, trying to get projects completed and buying of materials right at year end, and that really just did not materialize this year.

So, looking forward, we would like to see, at some point, we've seen at least two years of deferred MRO spending, would like to see that recover.

The good news that we've seen is our margins in our MRO has really remained stable, and you can see as that business recovers, it's been very positive to the overall margin profile of the business. And that's consistent with the history of the Company.

Okay. Great. Thanks guys.

Thank you.

Thank you. Our next question comes from Scott Graham from BMO Capital Markets.

Hi. How are you doing?

So, I have several questions for you, one of them jumped out when -- Bruce, you indicated that you are expecting gross margin pressure to continue for the next several quarters. Can you be a little bit more specific what you mean by that? Is that a year-over-year thing? Is that a sequential thing? Are we looking at margins staying at 43% and below? Give us an idea.

So let me speak to that. So, margins in backlog is really what I'm referring to and -- here's the good news, margins in backlog has stabilized. We're seeing them, at least for the last two quarters, they've been down but have not declined further.

What we have seen, Scott, is they're down about seven points from, let's say, levels two years ago. If you look at that backlog, just by the nature of how we measure backlogs, that's largely Greenfield work. And you can see in our margins, our MRO has actually held up so that Greenfield is down about seven points. Understanding that's 40% of the mix, it's around 280 basis point weight on margins compared to, let's say, margins two years ago.

And we actually saw that almost perfectly quarter over quarter when we look at our performance in Q3 of this year versus FY16. So when we talk about that, that's what we're seeing; margins in backlog largely related to Greenfield.

Right. What I want to tack onto that is, so when you say margins down the 200-plus versus two years ago, the margins two years ago were 50%, total gross margin. So, are you saying the margins will be in the 45% to 50% range? I just need a little clarity on this.

No, and so, yes. The margins were 50% and you know this very well. That had a big -- the biggest impact to that was the -- particularly we look at two years ago Q3 of FY15 was a record year in MRO sales. And so that really drove -- so the mix drove that less -- and when I speak of margins two years ago, I'm talking about margins in backlog and it's largely Greenfield.

The margins you talk about comprehensively for the business were more related to mix at that period of time. And we had another seven points of margin in our Greenfield project that did sit in backlogs.

That's fine. That makes a lot more sense and Jay, just to bring this full circle, you are expecting gross margin in FY18 to be up off of the low level of FY17, right?

Yes, it's a little premature to make that statement. We're literally right in the middle of our budgeting cycle.

One thing I would like to reiterate is that the gross margin that Bruce has mentioned in our backlog, we have seen those gross margin levels since Q1 of FY17 and some of that has already burned off into, for example, the revenue we realized this last quarter.

I got you. That's no problem. As you understand, you're in the middle of your planning process, so interests can be limited.

Let me also understand a little bit more; a comment that you made, Bruce. You said that given the size of the backlog now, you need more resources. What I'm saying, what I'm thinking here is your MG& A has been running down the last couple quarters. But in fact, not down, at least this quarter, not down as much as sales.

Right.

So would it be -- particularly given that the timing of these things continues to push out, is it not maybe a little premature to be adding resources to the business given those two factors?

The resources will be driven by our timing for our engineering deliverables. So, we will make sure that as we do add resources, it will be commensurate with the requirements for deliverables on projects in backlog.

That's great. Thank you for that.

And last question is this. I know that you were looking at a $1 billion $1.5 billion addressable market way back when you initially came to market publicly.

What is your addressable market right now? And your desires to increase -- just give us the baseline now versus where you expected to be, out several years.

So, today, our addressable market is roughly $1.5 billion. Our goal is again, to grow it three times, so that would be $3 billion to $4.5 billion range. We've identified three key areas for growth. They are all essentially with our core customer base, so we don't have a lot of customer risk and they complement the solution sets we bring to the market today.

That's great, thanks a lot.

Thank you. Our next question comes from line of Bhupender Bohra from Jefferies.

Good morning.

Jay, just a housekeeping question here on the orders. Can you give us a core number on that 14%, 15% number?

I'm sorry, Bhupender, I didn't fully hear the question.

On the orders, can you give us the organic orders number?

Yes, it's a little hard to do that right now because we have melded, or in the process of melding specific entities together. Let me see if I can double check the records. I just don't -- it might take a little digging.

Did it have any effect, impact during the quarter? If you have the dollar numbers for effects?

Very, very nominal. The revenue impact for Q3 was a little over $500,000 negative, $530,000.

Okay, got it.

So I'm guessing the order impact is somewhere in that same range.

Okay got it.

So the other question is for Bruce here. In overall, again, the press release, again talked about project delays and deferrals of CapEx and the maintenance CapEx here. From a geographic standpoint, can you give us a sense, and from the end-market perspective, where do you see within your backlog, those kinds of things are happening? The Canadian oil sands? Or is it EMEA or Asia-Pacific, or the US Chemical, Petrochem? Any more color on that? Thanks.

Yes, year to date, we've really seen a slowdown in the US. And its -- we've really seen two things. Revenues have been down year over year and we've seen more margin compression the in the US. And a lot of that has to do with the mix of Greenfield work we're doing there and a higher labor component of that work.

Canada, after we saw some growth last quarter was actually down substantially. The good news there is they've done a very good job in cost management. And so we're still seeing good profitability on that business, despite the lower profit line.

The US has been probably, year over year, has represented about 75% of the shortfall. And we see that in the type of projects we're getting, and just a slowdown when I speak to the chemical, petrochemical beginning to slow, we see some of that activity moderating.

Eastern Hemisphere has really been the biggest growth, and a lot of that is really related -- some of its related to independence, but a lot of it is related to state-owned entities and some continued spending and investment, particularly in the Middle East but also in Eurasia and other parts of the Eastern Hemisphere.

So, that gives you, at least a look that the state-owned entities are continuing to invest, independent of the cycle, whereas we haven't seen the capital spending return in more of the public sector.

Okay. And within the Canadian oil sands, have things stabilized over there? In terms of, I think your commentary mentioned about some activity on the SAGD side of your customers?

We're cautiously optimistic there. We have seen some renewed boat activity and some plans, but a number of SAGD operators, so that's certainly positive.

We don't foresee any spending in the large, major projects for big mining and upgrading, which can be very large expenditures. We don't see that in the foreseeable future, but we have seen a lot of improvements in efficiencies and costs there in the Canadian oil sands, particularly as it relates to SAGD. And we think with the rising price of oil and some of the efficiencies gained, we will see some investments.

The real question is timing. Will that happen in FY18 or will that be beyond?

Okay. And lastly, on the pricing. I think, over the last few quarters, some of your conference calls, you did mention the pricing has been weak. Has anything changed? Or have you seen stability within the pricing environment?

We don't see it eroding further. That's the good news.

We haven't seen it really improve. The positive sign, here, that it's largely isolated to our Greenfield opportunities. And, the opportunity here is obviously to grow the install base, and then the MRO margins have held up. And by growing that install base, we can capture those recurring revenues. So, we've been purposeful in doing that during this cycle.

Okay got it. Just one more here. On the backlog, when you look at your backlog today versus historical, what would you say in terms of size of the project would be? I think you did mention that the size of the projects have come down, especially within your opportunity of $1.1 billion, which you see on your dashboard. Can you give us a sense, on the size of the projects that have come down 25% or 30%, is there a number?

When the Canadian oil sands were going quite strong, the projects could be in the $20 million-plus range, even greater. We really only have one project in backlog that is above $10 million. We did book several projects during the quarter that were in the $5 million to $10 million range. Unfortunately, Bhupender, I don't have the exact statistics or the median or average project size. All I can tell you is what we more, anecdotally, what we have seen as far as the bookings.

Okay, got it, thank you.

Thank you. Our next question comes from line of Brian Drab, from William Blair.

Hey, good morning. Thanks for taking the question.

So, back to gross margin if I could, just for second. And maybe just focusing specifically on the fourth quarter. If you look at what happened in the second quarter and third quarter, revenue levels are about the same. The mix of Greenfield and MROs are about the same, and you have this big step-up in gross margin of 250 basis points from second quarter to third quarter.

What can you tell us about the mix and what you're seeing? We're almost halfway through the fourth quarter, in terms of the direction that gross margin goes in the fourth quarter. And then maybe the magnitude of the change?

Yes, it's a little preliminary, but what we're seeing is consistent. More so, what we have seen in Q3 than in the prior quarters. And a lot of that is going to be predicated on the mix of MRO, UE.

Okay. Got it.

And then, this was discussed somewhat earlier on the call, but as you look out to FY18 and you're going to be entering that year, it looks like, with pretty solid backlog. Bruce, you just mentioned some good projects coming in, in the $5 million to $10 million range. Does that potentially skew the mix more toward Greenfield, and potentially put, maybe a cap or some pressure on gross margin as you enter FY18 relative to FY17? And I know, Jay, you're going to say it's premature. But is that, at least, a thought that makes sense?

So yes. Brian, let me get this one.

So looking forward, this will all be dependent upon what happens with MRO and maintenance spending. And so, because mix has such a big impact on the margin profile of the business. And so, it's really hard to predict. At some point, we have to see some level of recovery in MRO spend. Now, we haven't finalized our plans for FY18, so I really am not prepared to tell you what we anticipate those spending levels to be and how that will impact mix. But we would expect Greenfield margins to continue at the level we have seen in the last two quarters in FY18 based upon our current backlog and the length of time that we are seeing it takes to execute these projects.

Okay got it. Thanks.

And then, can you just -- maybe this is a question for Jay, but talk specifics about the restructuring. I think you said in the past, to reduce spending by $6 million or $7 million in FY18. Where are you in terms of completing those restructuring actions? And is this OpEx level that we saw in the third quarter representative of what we see going forward? Or does it step down, in terms of dollars, from here as we move forward?

Yes, the total we talked about was $6.4 million and roughly half of that was SG&A, and half of that was cost-of-goods sold. Some of that has, actually most of the SG&A, has gone through the P&L, and the same with the cost. But I think the comment that Bruce made where we are going to manage our spending based on the level of activity is really the prudent point here, in that if the business starts growing, there will be additional people required to execute that backlog.

And we will be able to provide some more comment and guidance on this once we finalize our budgeting plans for this upcoming fiscal year.

Okay got it. And then the last one is something I've discussed with Sarah quite a bit offline. But can you comment on the recent activity regarding the pipelines? More news about Dakota pipeline today and Keystone and what the opportunity is? It sounds like it's modest, if anything, on the pipeline itself, but what that does for your business upstream and downstream potentially?

Yes, Brian, this is Bruce. So there are some opportunities on the pipelines themselves, particularly around the pump stations and any type of terminals and things like that.

But the real opportunity is really on either end, both in upstream and downstream. As that oil comes down into the Gulf Coast, the opportunities around capacity expansions or maybe some shifts in refining capacity to handle the heavier crude. And the same would be true in the oil sands, in really giving them access to market, lowering the break-even point for their production there, particularly in Alberta.

And that will create opportunities for us on either end of those pipelines.

Okay, thanks very much.

Our next question comes from line of Charley Brady, from SunTrust, Robinson, Humphrey.

Thanks, good morning guys.

Morning, Charlie.

I just want to go back on the incremental expense, or the adding additional resources question. I understand that this is going to be tied to working off the backlog and [bringing] resources in, but there's generally going to be a lag. And I'm trying to understand the lag time. You'd have to bring people in, engineers in, to in fact, affect those orders. And the time before you'd recognize the revenue and the profits on it. Or is it strictly all percentage of completion, would be an immediate offset to that?

Yes it's a difficult question to pinpoint an answer on, Charley, in that some of the engineering expense could precede revenue and we would put that expense on the balance sheet until we incurred the revenue. So there wouldn't be a significant jump in spending, followed two quarters later by the revenues.

Okay, that's the point I was trying to get to, is really understand the dynamics of how that worked and it sounds like it's pretty straightforward.

If you look at the $105 million in backlog, you talked about the duration of that backlog stretching out versus what it used to be, how much of that $105 million do you think ships over the next 12 months?

90% to 95% of it. For example, when we look at how much it's been protracted, the great majority of the orders have been booked in the last 12 months. And let's say 10% or so preceded that.

So assuming we continue to see the delays that we've seen over the last year, it will primarily -- all of it will ship between the next 15 to 18 months. But it's not skewed to the 18-month mark. That's the point I would try to make.

Yes, that's what I was trying to understand. That's very helpful.

Your comment on the revenue guidance down 7% depending on timing of orders. And, we all understand how this stuff slips around. But, can you give us a sense of the downside risk? It sounds like there's not a whole lot really large orders that could really skew it one way or the other right at the end of the year. But I'm trying understand the potential downside from the 7% if stuff slips out a few weeks or a month or something like that.

It would be relatively small. A lot of this will depend around revenue recognition terms and the ability to ship parcels. It would be within $1 million of revenue. We're not talking about $5 million, so it would be within $1 million revenue.

Perfect. Helpful. And then just one more for me. Your commentary on the holding back of CapEx at the end of the year which is unusual, have you seen those dollars released at all? Or are they still, holding onto it? It sounds like they are probably still holding onto it.

Yes, that's what we've seen thus far. We haven't seen those being released.

We did, if you go back to -- I'm just talking more about, less about spend, but more around orders. We had such a weak bookings quarter in Q2 of this year. The good news is we saw them release those orders in Q3 and so -- but we have not seen the spending, that year-end spending we suspect that -- we're now in a new fiscal year for most of those customers and we would expect this to be a new capital plans for the year and we will watch what happens to overall capital spending in calendar, 2018 and our FY18.

Great. Thanks a lot. That's all for me.

Thank you.

Our next question comes from the line of John Braatz, from Kansas City Capital.

Good morning, Bruce and Jay.

Good morning John.

I have a few questions about your Russian expansion.

How big, initially, are you -- is that operation going to be? And should we -- two other questions. Should we consider the revenue opportunity in incremental opportunity? And then, secondly, will there be any significant startup costs associated with that expansion into Russia?

We've seen significant growth in EMEA this year. And significant piece of that is related to, not only the Middle East, but Eurasia.

Our investments there in Russia; we'll start up this plant in the Moscow region, are really to support the customer base in that region. It gives us a lot closer proximity, it gives us local content, it gives us a cost basis in the ruble. And so all of those things really position us much better to continue to win and grow our presence in the region. Russia's really a significant producer, probably second largest producer globally. If you look with roughly 10 million barrels of oil, equivalent daily, produced there. So we see a lot of opportunities, cool climate, all the things that are conducive to being a very heavy, heat-tracing intensive market.

So as far as startup costs, we have incurred -- some of that has been in the spending, but largely the capital expenditures are up on the balance sheet. Will flow through once we've completed the plant startup. We are adding staff now, we've already begun a very small levels of production and are producing some assemblies there. But we will begin full production by the end of the first quarter in FY18.

Okay, and secondly Bruce, there's been a lot of talk about oil and gas opportunities, an infrastructure spending in Mexico as they denationalize the industry. And are the Mexican -- assuming money is spent down there, are there opportunities for you if, indeed, that unfolds the way some people think it might?

Yes, we believe there are opportunities over the mid to long term. Right now we just have to see where all of this goes and how it moves. Right now, I'll tell you though, the spending in Latin America in the oil and gas sector has been extremely low. But we are beginning to see some signs of, particularly in Mexico, of some spending that may be forthcoming.

Okay.

We're certainly not at historical levels.

Yes. Sure, absolutely, okay. All right. Thank you.

Thank you.

Thank you. Our next question comes from the line of Martin Malloy, from Johnson Rice.

Good morning.

Good morning Mark.

Just looking at the schedule of the number of ethane crackers expected to come online this year through 2019 along the Gulf Coast and derivative petrochemical plants with them. Are there potential opportunities for orders for those plants out in front of you? Or have a lot of those orders already been placed?

A lot of those orders are currently in backlog. And we're in the process of executing them. We have three major ethane units that we're currently working on. Some of them have begun to deliver, others will be delivered over the next 18 months.

Okay. And then on the maintenance side, it's been some time that we've seen lower maintenance spending here. Can you maybe talk about, practically speaking and looking back at the history of the Company, how long can the customers defer spending maintenance or maintain it at a very low level? Is there some point just the corrosion of the pipes and valves, that they're going to need to catch up?

That's the general belief. For me, right now, what we've seen is when there have been issues, customers are doing the minimal required to maintain and sustain operations.

So we do believe at some point that there are safety issues, regulatory issues, other things that will demand and require that maintenance to occur.

There's been a lot of deferrals of turnarounds, particularly in the Gulf Coast. You're beginning to see and hear that based upon crack spreads, refined product inventories, things like that, that these end-users are now beginning to plan and execute those turnarounds. So based upon that, they've got to repair. Rotating equipment, flanges, valves, all types of things like that. A lot of those are then heat-traced.

So it will create some opportunities for us coming forward, or going forward. Again, I'd love to be able to predict exactly when that will occur and to what levels. But conventional wisdom says yes, that spending will have to return at some point.

Okay, thank you.

Thank you.

Thank you. And our next question comes from line of Charley Brady from SunTrust, Robinson, Humphrey.

Just a quick follow-up on housekeeping. Expectations for tax rate in Q4?

For tax for Q4, Charley, we're expecting a little over 24%, 24.2% based on projected revenues.

Great, thanks.

Thank you. And I show another follow-up from the line of Bhupender Bohra, from Jefferies.

Just a follow-up on the Russian manufacturing here. Can you give us the size of the revenue capacity for that manufacturing facility? Over time as you start producing and delivering products, how should we think about that?

We would expect the revenue -- the production capacity to be maybe in the $7 million to $10 million range within the first year and then that would grow over time.

Okay, got it. And the other question. Somebody did, on the call previously, talked about regulation. Now, we have seen some of the regulation-driven businesses, like the power business which you have.

Any issues or anything you have heard in terms of, as we hear more about, deferred regulation with EPA and with the Trump administration? Doing some changes which could delay regulations? Anything that you think would be of any significant impact to you going forward or no?

Yes, the biggest area is around environmental regulations. We see that impact our business in a couple of areas, particularly around the move on cogen facilities and the need to have reduced emissions and monitor those stacks. That drives our tubing-bundle business and creates, really, opportunities for us in those facilities. We've seen that to date.

The other area is just the tightening fuel regulations. There's -- new [CAFE] standards in the US are going to drive a whole round of investment in downstream refining. We're also seeing the tightening regulations in Europe drive the need for lower sulfur, cleaner fuels, a lot of the -- if you look at the Middle East, the Clean Fuels Project is all tied and related to that.

We're seeing a lot of the downstream spending in Russia tied to that as well. We also see the new standards on marine fuels and moving to lower sulfur content. That's going to drive a lot of investment in sulfur recovery units and things like that over the next three to five years. So environmental probably is the biggest regulatory driver that impacts our business, really in many areas.

Okay. And that would be (inaudible) how much of your revenue would be tied to that?

Unfortunately, I don't have that number.

Okay. No problem. Thank you.

Thank you.

Thank you and that concludes our question and answer session for today. I'd like to turn the conference back over to Thermon for any closing comments.

All right. Well, thank you all very much. We appreciate your continued interest in Thermon. Thank you for joining us today.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a good day.