Thermon Group Holdings Inc (THR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Thermon's Q4 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host, Ms. Sarah Alexander, General Counsel. Ma'am, you may begin.

Thank you, Brian. 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 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 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 to be filed with the SEC on or before May 30.

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 earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.

And now it's my pleasure to turn the call over to 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 our fiscal 2017 fourth quarter and full fiscal year.

To begin with an overview of the financials, revenue of $67.6 million met our projections for the quarter and was down 6.5% year-over-year and up 5% sequentially.

MRO showed signs of strengthening in Canada and was up 32% in Q4. The net Q4 impact from all geographies was a decrease in MRO of 6% year-over-year. Margins declined by 260 basis points year-over-year and 270 basis points consecutively on a greenfield mix of 40% versus MRO of 60%. Margins in greenfield were lower due to a higher mix of labor within the quarter.

On a positive note, MRO margins improved 400 basis points from prior year.

We have seen stabilization in our margins and backlog over the last 4 quarters are the levels remain 6% to 7% below averages 18 months ago.

Several factors have contributed to the decline. First, competitive pressures on fewer projects have created a challenging price environment. Second, there has been a fundamental geographic mix shift of business from North America to the Eastern Hemisphere where margins have historically been lower. Finally, despite our efforts to rightsize the business, manufacturing volume variances have reduced absorption of fixed overhead by 220 basis points throughout the year.

We continue to rationalize facilities, particularly in Canada, and anticipate positive operating leverage as business returns to more normalized levels.

Although bookings were down year-over-year, we continue to see backlog growth and a positive book-to-bill of 103%. Backlog of $107 million was up 32% year-over-year and 2% consecutively. Backlog continues to be low in the Western Hemisphere, but we have begun to see stabilization in Canada over the last 2 quarters.

We continue to see backlog in EMEA and Asia at record levels. Efforts to expand our addressable market have driven the majority of the backlog increase year-over-year.

The cost-out measures to realize approximately $3 million in savings in fiscal 2017 finished within $100,000 of our goal. We anticipate the annualized impact of these efforts will result in a $3 million reduction in SG&A and $3 million in lower manufacturing overhead costs.

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

Both GAAP and adjusted EPS finished at $0.10 per share versus a prior year of $0.10 per share and $0.20 per share, respectively.

From a market perspective, we have begun to see some activity in the shale plays as a positive sign in the upstream sector. Recent divestitures of oil sand assets by majors have delayed what spending may have occurred as ownership is transitioned and management philosophies change.

Both chemical and petrochemical sectors remain active, although the majority of new large projects are coming from the Eastern Hemisphere. We continue to see opportunities with combined cycle power projects, particularly in the U.S., although margins in this sector have historically been lower.

Geographically, EMEA finished 2017 at record levels in both revenue and operating income. In Q4, revenues from Europe were up 11.9% over Q4 fiscal 2016 and an 8.8% increase over the full year. In fiscal 2017, Europe generated $9.1 million in operating income, a 5.9% increase over fiscal 2016.

We continue to see challenging market conditions in Canada, where revenues were down 38% in Q4 and 26.7% for the full year. However, through effective cost management and strong margins from the temporary power solutions business, our Canadian revenue delivered $8 million in operating income, an increase of 10.1% over fiscal 2016.

Despite the growing backlog and improved visibility, Asia Pacific Q4 revenues were down 19.3% from Q4 2016 and 6.3% for the full year. Fiscal -- for fiscal 2017, Asia Pacific generated $4.5 million of operating income, down 18.6% over fiscal 2016.

The U.S. and Latin America finished the year with strong revenues during the quarter, up 1.3% over a strong Q4 2016 comp but down 5.3% for the full year. The U.S. and Latin America business represented the majority of the decline in both revenue and operating income during fiscal 2017. For the year, this region generated $5.3 million in operating income, down 74% over fiscal 2016.

We expect the U.S. region to continue to be challenging in the next 2 quarters due to the lack of large projects, but anticipate business levels to pick up later in the year, based upon current visibility and timing.

The number of opportunities within our project pipeline continues to grow to over 850 identified projects. And the total value remains approximately $1 billion. The lower average project value is due to the lack of large Canada upstream projects over the next 3 to 5 years that had been seen historically.

Although the pace has moderated, we continue to push forward with investments in new product development to provide highly differentiated products and services to our customers. At the beginning of this year, we committed to 4 new product introductions during fiscal 2017. Two new product introductions were announced earlier this year. During Q4, we announced the last 2 product introductions. The first is a new ThermTrac 5 KV, a long line heating solution to lower the total installed costs by extending the distance between power sources. The second is a new higher-rated HTSX self-regulating cable, which puts Thermon in the lead for performance globally in our flagship trace heating product line.

In addition, a model upgrade was released for the most advanced controller in our lineup, the TraceNet Series, to improve overall performance in large installations. This system integrates seamlessly with the TraceNet Command software announced earlier this year. These combined solutions enable customers to monitor system performance and manage information both locally and remotely to improve reliability and efficiency while reducing total costs of ownership.

Looking forward, we've begun to develop 3- to 5-year product and technology road maps for our business that will differentiate Thermon solutions in the marketplace, create new value for our customers and unlock new revenue streams for the business. We believe that technology can be leveraged to provide smart solutions to improve safety, reliability and efficiency while reducing total cost of ownership for our customers. We'll share more specifics on this plan in the coming quarters.

During the cycle, we've continued to make investments in key geographies with growth potential. To strengthen our presence in Eurasia, our new manufacturing location in Russia will enable Thermon to meet import substitution requirements to unlock additional revenue opportunities. This facility has already begun production of accessories and is well on track to produce heating cable in Q1 of this year to better serve a growing customer base across the region.

Our M&A pipeline remains active, and we continue a disciplined approach to pursuing opportunities that are closely aligned with our strategy. While this pipeline continues to strengthen, we have narrowed our focus to several potentially actionable opportunities, one of which could close within this fiscal year.

Inorganic revenues are not comprehended in the fiscal 2018 plan due to the binary nature of these transactions. We continue to build and refine plans to grow our addressable market by 2x to 3x by the end of fiscal 2021.

Although now considered organic, the 3 acquisitions made in the fiscal 2015 and 2016 contributed 9% of our revenues and generated 23% in adjusted EBITDA during fiscal 2017.

Looking forward, we are pleased to begin fiscal 2018 with our backlog up by 32% over prior year, but we've not yet seen all the signs of a sustained recovery. Margins in backlog have also stabilized over the last 4 quarters, providing some confidence we found the bottom. We're watching maintenance and UE spending very closely as another indicator of a sustained recovery.

Based upon the current economic environment, we are projecting organic revenues to be flat to down low single digits for fiscal 2018. We anticipate a very slow start to the year in Q1, particularly in the U.S. This is largely due to the current engineering project load early in the year, with material shipments beginning sometime in Q2. We anticipate activity to increase later in the year on small to midsized projects.

Our FY 2018 plans include continuing to expand our geographic coverage and growing our addressable market at the current level of spending with modest increases in R&D spending.

I would like to take this opportunity to thank our Thermon employees around the globe for their collective efforts to serve our customers and manage the business in a challenging market.

I remain confident that our business model is sound, we have the right people and are making the right investments to position this business for future success.

Thank you again for joining us today. Jay Peterson, our CFO, will now address the details of our financial performance for Q4 and full year 2017. Jay?

Thank you, Bruce. Good morning. I'd like to start off by discussing our Q4 results, then turn to a summary of our fiscal year results and finally conclude with high-level guidance for fiscal year 2018.

First off, revenue and orders. Our revenue this past quarter totaled $67.6 million. That's a decrease of 7% over the prior year's quarter.

In the quarter, EMEA grew by 16% to $20.7 million, and that's a record quarter for this geography. The U.S. and Latin America grew by 1.2% to $30.9 million. We continue to experience significant erosion, however, with our Canadian business, which was down 40%, followed by a 21% decline in Asia Pac. And all of these numbers I just mentioned are in a constant currency basis.

Our MRO/UE mix for Q4 was 60% of revenues, whereas greenfield totaled 40%. Orders for the quarter totaled $69.4 million versus $72.6 million in the prior quarter, for a decline of 4%, and we did experience double-digit order growth in the quarter for both Europe and Canada.

Our backlog of orders ended March at $107 million versus $81 million at the end of Q4 '16, and that's an increase of 32%, with the growth being driven in the Eastern Hemisphere. One encouraging dynamic is that we have held our backlog gross margins constant over the last 4 quarters. And our book-to-bill for the quarter and year was 103% and 110%, respectively.

In terms of gross margins, margin dollars this past quarter totaled $28.3 million or 41.8% of revenue. Versus the prior year quarter, our margins decreased by 260 basis points due to an increase in the labor content of greenfield revenues and also due to a higher mix of greenfield revenues in the Eastern Hemisphere.

Greenfield margins declined in the quarter from 42% to 30%, whereas our MRO/UE margins increased from 46% to 50%, and that's the highest level for the year.

In terms of operating expenses and headcount, our core operating expenses for the quarter, that is SG&A, and this excludes depreciation and amortization of intangibles plus any transaction-related expenses, totaled $18.3 million. And that's a decrease of 2% from the prior year quarter. Concurrent with this decrease, we were able to also increase our spending in research and development and released 4 new products into the marketplace.

Our operating expense as a percent of revenue was 27%, again, excluding D&A, and this is essentially flat with the prior year level of 26%.

The number of full-time employees at the end of March was 959, down from the 1,025 as of calendar March 2016, and that's a decrease of 6%.

Earnings GAAP EPS for the quarter totaled $0.10 compared to a prior year GAAP of $0.10. And free cash flow EPS significantly outstripped GAAP EPS for the quarter and totaled $0.34 a share.

Our EBITDA totaled $10.4 million this past quarter, and EBITDA as a percent of revenue was 15.4%.

Turning to our balance sheet. Our cash and investments balance [grew to] $87.6 million this past quarter, and this balance eclipsed our year-end debt by $7 million. And we are fully aware that our balance sheet provides us ample capability to acquire strategic businesses, and our target debt-to-EBITDA is in the 2x to 3x range.

One thing to note is that our amortization of our bank term loan will increase this year to $20.2 million versus $13.5 million in prior years.

And turning to the full year 2017 performance, I'd like to recap some accomplishments. First off, we grew our backlog by $26 million, in spite of a very challenging macro environment. We also generated free cash flow earnings per share of $0.59 versus GAAP EPS of $0.45. And we have essentially completed our Russian manufacturing facility, enabling us to be more competitive in this growing region.

And we grew cash and investments year-on-year by $3.1 million for an increase of 4%, and we reduced our debt balance by 17% over the last year to $80 million.

And I would like to conclude with some fiscal year 2018 guidance points. First off, we are planning top line revenue to be flat to slightly down the coming fiscal year, excluding any contribution from M&A. Gross margins are estimated to be in the low to mid-40% range, consistent with our performance over the last year. And as Bruce mentioned, fiscal year '18 is going to be an investment year in research and development. And we expect operating expenses to grow slightly. However, if we see order rates decline, our flexible cost structure will enable us to tighten spending as necessary.

And one last guidance point. Our planned CapEx for this year will total $6 million or approximately 2% of revenue, and that's down from the $8.2 million in capital that we realized in fiscal year '17.

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

(Operator Instructions) Our first question comes from the line of Scott Graham from BMO Capital Markets.

This is Katja calling from Scott Graham. First question, can you discuss what you expect the mix impact to be within greenfield and MRO going forward?

Yes. This -- we typically -- we have a hard time forecasting that quarter-to-quarter, but we do anticipate it to be consistent with our historical averages of 60-40. Again, based on project timing, that can vary by 4% or 5% in any given quarter.

Okay. So you did say that you expect gross margin to be in the low to mid-40s. At what -- I mean, does this -- it is within what it was this year. In which -- going forward, what do you expect -- how is it going to pan out? Is it going to be -- is it stabilizing? Or you still expect some decline in the first couple of quarters? Can you discuss a little bit more detail?

Well, yes. So I don't expect any further erosion based upon -- we track our margins and backlog. Now granted, the vast majority of our backlog is really greenfield projects, and those margins have been -- actually, have kind of low loss for the last 4 quarters. So I don't expect any further erosion. Mix will have the biggest impact, and that will depend on some things we talked about. Geographic mix has an impact, but certainly, the greatest of which is greenfield versus MRO. Product mix, electrical versus mechanical, those are also smaller factors that can impact margins quarter-to-quarter. But we -- the price environment has not fundamentally changed, so we do not anticipate any significant changes in margins in the coming year. I think when we begin to see customers pushing project timing, and timing becomes important, pricing -- the pricing environment will improve. And also some of the things I noted, as we begin to see margin -- excuse me, we see volume increase in -- particularly, in our electrical products, we will see manufacturing and absorption improve. And I think, over time, we've got at least 2 points of operating leverage there in the business.

And I think you mentioned that the -- you're going to see cost savings for the SG&A. Is that correct?

Correct.

At $3 million this year?

Yes, yes. And we have essentially moved forward with the plans that we had communicated in Q2. And we do anticipate to see those going forward.

Okay. One last question. With the orders, can you discuss what happened this quarter, why we saw decline? I know they were up last quarter.

Yes. A lot of that has got to do with timing. We had a -- really, an exceptional order rate in Q3. We didn't see some of the projects materialize in Q4. At least we didn't see customers release purchase orders for those. We haven't lost any with -- the ones that were critical that we call must wins. We've not lost those orders. They just -- customers have been holding on to those purchase orders and not releasing them. So...

And our next question comes from the line of Brian Drab from William Blair.

Just on the cost cutting, cost savings, could you review those numbers again? I know you just -- in that last question, you said -- confirmed the $3 million in SG&A. Was there some coming out of COGS as well? And then I know you said R&D will be up. So if you could just again -- and sorry to make you repeat yourself, but just review the puts and takes that there are in the COGS line and the SG&A in fiscal '18.

Yes, Brian, the -- this is Jay. The total was actually $6.4 million, $3 million from SG&A, $3.4 million in cost of goods sold. And those activities have concluded. They were -- the savings were a little muted, if you will, in Q4 due to, primarily, our lumpy short-term incentive plan accrual that actually will have some peaks and valleys, depending on our performance throughout the year. And that (inaudible) accrual was for -- primarily for those geographies that achieved their incentive targets this last year.

Okay. And then the $3 million in SG&A savings, that will be more than offset by step-up in R&D so that step-up in R&D is greater than $3 million in fiscal '18. Is that correct?

No. The R&D step-up, which will be rather modest in overall spending, will reduce that $3 million. It's about $400,000 in increased R&D. We're still in the same neighborhood.

Okay. And then I'm just trying to reconcile that with your guidance count, which I think I heard was that OpEx will grow slightly with revenue. You gave the revenue guidance, that wouldn't lead me to forecast an increase in SG&A. So can you help me reconcile that $3 million in SG&A, cut $400,000 in R&D increase, but OpEx is up?

Yes. The other item which will either happen or won't is that if we hit our objectives this year, again, we will have a lumpy short-term incentive plan accrual year-on-year.

Okay. So there could be more than $2 million in incentive compensation this year, incremental over fiscal '17.

Correct.

Hey, Brian, just real quick. Think of it in terms of increase from our Q4 run rate.

Got it. That's helpful. Okay. And then one other comment that I'm trying to reconcile is that I think Jay said the backlog gross margin has remained constant over the last 4 quarters and...

That is correct.

Okay. And then -- but we're seeing these declines year-over-year, pretty substantial declines in gross margin. I know that's the increased labor content. Is it maybe the case that the labor isn't included in the backlog? Or could you just help me reconcile that?

No, it is included. We -- so if you look at this last year versus the peak, it's approximately 6 or 7 points below what we saw for the prior year. And this backlog reduced margin has been very consistent from Q1, Q2, Q3 and Q4 at 29%. So this is kind of the environment that we have lived with for the last 365 days. And we have not seen any further erosion in that number since 5 quarters now.

Okay. Okay. But 4 quarters ago, though, the reported gross margin was much higher, right, than it was now. Are you saying you just weren't dealing with -- you -- the step-down in the backlog gross margin that had happened previously, I guess, is what -- okay.

Yes. That's an event we have experienced in the last quarters.

Okay. I think I've got that one. And then I don't know if you have the breakdown for us of revenue by end market. I think your latest investor presentation still shows the fiscal '16 breakdown. But if you have that, that would be interesting to see how fiscal '17 was in terms of petrochem and energy, et cetera.

Yes. That's something we don't have at this 5 moments, Brian. But we can provide you some high-level directions in terms of how those end markets moved over the year.

Okay. At a later time? Or you can give me a sense for how they move now on your call?

At a later time.

Got it. Okay. Okay. And then I guess just one more question, if I could. Since the last report, which end markets or geographies have you become incrementally more cautious on or more optimistic regarding over that time period?

So yes, I think the U.S., we see some -- a gap in the backlog in the U.S. And while the backlog remains around that $37 million mark, it -- we do see timing. Particularly in the first quarter, it will be soft. And we talked about MRO sales. We just haven't seen that increase in the MRO sales. Now on a positive note, as we begin to talk to customers, they are talking about higher spending levels in the coming year, but we've not yet seen that materialize. Conversely, we're -- EMEA's continues to be very strong, and we see that both driven by Russia and the Middle East.

Okay. It sounds like -- just 2 follow-up questions. The timing that you've mentioned several times on the call and delays, what end market is that in?

We've seen it in, as far as just project timing delays, petrochem, refining. It's been fairly broad-based. We haven't seen it in power projects, but I would say downstream and the few upstream projects we do have, I'd say, in oil and gas. Power has not been the case.

Okay. And then some cautious comments on the call today regarding the first quarter, first half, do you want to tell us anything more in terms of how to build the revenue forecast through the year? For example, is the seasonal downtick from fourth quarter to first quarter going to be more dramatic this year than in past years or about the same?

We don't provide quarterly guidance, but we do anticipate the seasonal downturn in Q1 to be more pronounced.

Our next question comes from the line of Bhupender Bohra from Jefferies.

So yes, Brian actually took all the questions here, so -- but yes, I just wanted to speak about and get more color on the competitive pressure here you've been talking about for a few quarters now. If you look at the market share, there are 2 big players, you and the Pentair business here, and BARTEC is pretty small. Can you just give us more color in terms of like where are you seeing these competitive pressures? Like from -- whether it's like project or MRO and from the other 2 players in the market or like mom-and-pops? Anything on that?

Bhupender, it's predominantly in the greenfield projects. Those -- we've always competed very aggressively to win those. It's all about growing the installed base. And so that -- because there are fewer projects, the competition has been willing to accept lower margins. There's fewer projects to go around, and so they are really competitively bid. And customers are -- they're going through multiple rounds of tenders. So that's all created a very challenging price environment. I guess the other thing is some of that has spilled over into some of the UE opportunities, which historically have been fairly well direct to sign and not bid. I'm not -- I don't think we're losing any share, but those are more competitive than they have been in the past. MRO margins have been very stable. And so -- but it's predominantly in the capital spending where we've seen it.

Okay. Got it. The other thing -- I just wanted to run this by you in terms of the preventive maintenance idea from your customers. As they are going into more of IoT, like Internet of Things, and making their products more intelligent on the field, has that anything to do with kind of extended maintenance period here with the tools they are applying on the field that kind of pushes out the MRO stuff and that's what -- are you seeing any impact of that? Or...

I mean, I think over time that that's certainly feasible. I don't know that we've observed a large enough shift in the technologies employed in our end markets to make up any material change in their maintenance cycles. We have seen a lot of deferred maintenance spending. Probably the biggest component of that is some of the UE things which could be debottlenecking and other types of things which can be a bit more discretionary. Again, I think some of the positive signs we have heard from the marketplace is that those spending levels will -- should increase this year, but we've not yet seen that occur.

Okay. Got it. And lastly, just wanted to -- you guys have done, in good times and bad times, like gross margins above [45%] level. That's what the model is. Do you think that's sustainable as you kind of think about growing your addressable market, like you said, 2x to 3x your current addressable market? It seems like you -- I don't know what kind of products you're looking into, you have mentioned about timekeeping and -- especially on the industrial side, and you're looking at gross margin profile of the business you have right now. So if you can give us a sense like how should we think about Thermon 2, 3 years down the line with that expansion of addressable market.

Yes. So we believe that we can leverage our core competencies with our existing end customers and create some additional value. A lot of that is going to be in other types of heating solutions in hazardous environments and engineered solutions. So -- and when I say solutions, it's a combination of products and services that we can provide to our clients. We do see technology as an enabler, and we also see adjacencies -- I mean, we just -- we highlight our performance on some of our M&A activity. And the reality is, this year, those businesses delivered a 23% EBITDA, certainly, not at the peak of the EBITDA this business is capable of producing but a very respectable EBITDA profile. And the types of opportunities we're looking at going forward are in that range as well.

Okay. Did you say you're looking at opportunities which are 25%-plus EBITDA at the peak level? Or is that how we should think about?

I said the businesses we've acquired thus far are 23%, and the ones we're looking at going forward are in a similar range.

And our next question comes from the line of James Picariello from KeyBanc Capital.

So just on the greenfield revenue in the quarter and regarding the labor content, were there any onetime-related items with respect to the labor items that you call out, just to try to get a sense for the future mix?

Yes. I would say what we saw margins in greenfield was consistent with what the margins we've seen in backlog. So to the extent we have more of that flowing in a year or in a quarter, I think those margins are going to be fairly consistent until we begin to see some type of end market recovery and accelerated demand for products. So I don't know if that answered your question, but...

No, no, it does. And then you mentioned in your prepared remarks facility consolidations in North America. Have you executed and closed certain facilities already? Or do you have a certain number targeted? Any color there?

Yes. We have closed -- we announced closures of 2 facilities in Canada, and we're looking at a further consolidation. We'll give you more updates on that. We should -- we'll give you more updates on that in the next quarter.

Okay. The savings from those are included in that $6.4 million bucket that was for project?

That's correct.

Okay. And then just the last thing then on M&A. What are you seeing in the pipeline? A challenge is, though, you might have sort of a chunkier deal that you're looking at. Would that -- I mean, to get to 2x to 3x net leverage, is that in the $100 million zip code? How we should think about it potentially?

Yes. The 2x to 3x leverage, that does not necessarily equate to one specific deal. It could be one or it could be 2 deals over the next 12 to 18 months, hypothetically.

But am I reading too strongly between the lines that there is a deal that's larger than what you've executed in the past?

Yes, definitely.

(Operator Instructions) Our next question comes from the line of Charley Brady from SunTrust.

This is actually Patrick Wu standing in for Charley. I just wanted to dig a little bit deeper into the backlog and I think your commentary about it's more heavily weighted on the Eastern Hemisphere now, at least the current backlog versus historicals. What has been the shift, I mean, in terms of what is the mix now for Eastern Hemisphere backlog currently versus what has in the past? And has that sort of provided sort of the elongated sort of the pushout of how long the backlog expands? Is that a function of bigger mix to the Eastern Hemisphere? Can you add more color on that?

Absolutely. Projects in the Eastern Hemisphere historically are more protracted, particularly Middle East where a lot of these are destined, cycle times are much longer. So that's definitely having an impact. But just customer behaviors as well. They're slower to get information. I think they're just dragging out some execution probably for cash flow reasons or other things, I don't know. But those -- these are -- the shift to Eastern Hemisphere, without question, is impacting the overall cycle time. So as far as -- historically, we don't have those numbers to say this much is in Eastern Hemisphere, but I mean, you can see just by the sheer levels of backlog and the Eastern Hemisphere backlog that the increases in both EMEA and Asia-Pacific, they're at record levels. And in the Western Hemisphere, Canada is really at a near-term low. So that shift, that mix shift has an impact on margins as well as timing and backlog.

Would you say the majority of the current backlog is in the Eastern Hemisphere? Because I think you said $37 million in the U.S., right, with the backlog. One of the questions you referred to earlier. But -- so ex (inaudible) and ex Canada, what is the Eastern Hemisphere's sort of take on that?

Yes. I would be quoting the numbers off the top of my head. I do know that at current backlog of the $107 million, roughly $9 million is in Canada, $37 million is in the U.S. and then -- excuse me, yes, but that's for current year. So and the balance would be in the Eastern Hemisphere.

Got it. Great. And then can you maybe talk a little bit about the incremental sort of opportunities that you'll be seeing in Russia now that you've completed the manufacturing plant there? How should we think about that opportunity moving forward, incremental to what you already have there?

Russia sales are reported in the EMEA business unit, and you can see the backlog and revenue growth there.

Okay. And then just one last one, if I can squeeze in, maybe for Jay. Can you guys budget in terms of price mix on volume or maybe even in materials? The 260 sort of bps that the gross margin sort of declined, can you bucket that and help us frame how to think about which aspects are sort of more weighted towards?

Yes. I think the best way to look at it is 2 years ago or thereabouts, when our revenues approached -- when they exceeded $300 million a year, we were over-absorbing to the tune of approximately 2%, so we had 2% uptick of incremental gross. Today, when we're $40 million to $50 million less than that, we are under-absorbing in the range of 2%, okay? Now to get to that over-absorption level, we'll have to obviously increase revenues. But the other wildcard is what does the external pricing environment look like when we do hit the $300 million level again in the future.

And I am showing no further questions. And I would like to turn the call back to Bruce Thames, President and CEO, for any further remarks.

Well, again, I'd like to thank everyone for joining. Thank you for your interest in Thermon. And we appreciate your participation in the call today. Thank you.

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