Thermon Group Holdings, Inc.

Thank you, Huey. 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 be available on our website beginning 2 hours after the conclusion of the call.

This broadcast is a property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the expressed written consent of the company is strictly 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 on June 8, 2012.

We also would like to advise you all that forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions 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, including adjusted EPS and adjusted EBITDA. We have reconciled those items to the most comparable GAAP measures in the earnings release.

Adjusted EPS and adjusted EBITDA should be considered in addition to, and not as substitutes for income from operation, net income, net income per share and other measures of financial performance reported in accordance with GAAP.

And now, it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone.

Thank you for your continued interest in Thermon. We held our first annual shareholder meeting last week and had a good turnout.

Nearly 95% of THR shares issued and outstanding were represented at the meeting. The voting results are available on a Form 8-K filed with the SEC yesterday.

Today, we have 2 of our Senior Vice Presidents joining me on this earnings call. They are Jay Peterson, our CFO, who will follow me and present the financial details of our FY 2013 first quarter; George Alexander, our Executive Vice President of Global Sales, who will assist in the Q&A session by answering questions that pertain to global markets and our industry trends.

For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. Our main market sectors that we serve are the oil, gas, chemical and power generation industries.

Our heat tracing system provides freeze protection and temperature control for piping, vessels and instrumentation. These mission-critical systems ensure the continuous and safe operation of industrial facilities.

While Jay will drill down on the Q1 financials in a moment, I would like to touch on a few highlights.

Revenue grew 4% over prior year Q1. Foreign exchange impact was negative due to a strong dollar.

The revenue growth rate utilizing a constant currency factor was closer to 10%. Also, shipment delays due to construction scheduling on 2 to 3 large international projects pushed out projected billings to future quarters.

Q1 gross margins were very solid at 49.6%. This was a result of a strong MRO component in our revenue mix.

Also, on May 1, 2012, we exercised another optional redemption of $21 million of long-term debt. All in all, Q1 was a very solid quarter for us, as Q1 is historically our slowest quarter.

As we've said many times, it continues to be a good time to be in the heat tracing business. All our geographic business centers are doing well, and the main market sectors I mentioned earlier, oil, gas, power and chemical, continue to drive our organic growth.

Our new cable manufacturing plant in San Marcos is now complete and fully operational. This increased capacity of one of our core product lines that will lay the foundation for our future growth plans.

We're still enjoying a strong tailwind. Our energy level is high as a result of a strong business climate, the introduction of new products and a capacity expansion of our heated cable production facilities.

Our revenue guidance for 2013 is low double-digit growth. We would like to remind our investors that the timing of our revenues and earnings can fluctuate as a result of product mix and construction schedule delays on these large greenfield projects.

This lumpiness does not reduce revenues or earnings, but can impact the financials of a particular time segment.

In closing, I'd like to say that our management team would like to thank our employees for their hard work and dedication. We would also like to thank our customers and investors for their support.

Once again, thank you for joining us today.

Jay Peterson will now present our financials.

Thank you, Rodney. Good morning.

Thermon demonstrated another solid quarter in fiscal Q1, and the momentum in our business continues. This morning, I will focus on the results of our core operating business and exclude those expenses relating to the optional bond redemption that occurred in May of this year.

Let me start with return on equity. On a Q1 EBITDA basis, our ROE was 38% this past quarter.

In terms of revenue and orders, our revenue this past quarter grew to $67.2 million, a new Q1 record for Thermon and an increase of 4% over the prior year quarter's level. Note that the strong dollar negatively impacted our revenues by approximately $4 million, and our revenue would have grown by 10% had we not experienced these volatile currency situations.

Coupled with a strong start in fiscal year '12 and the fact that our first quarter is historically our low quarter from a seasonality perspective, it is not the heating season, and we are encouraged with the top line results.

Our backlog of orders ended June at $117 million versus $82 million at the end of Q1 of last year. And that's an increase of 43%, and both hemispheres showed double-digit backlog growth.

Our book-to-bill for Q1 ended at 0.99. And again, by definition, our backlog only contains signed but unperformed purchase orders and agreements, and orders for the quarter totaled $67 million.

Next, let's talk about gross margins. Margins dollars grew this past quarter by 4% to $33.3 million, up from last year's level of $32 million, an increase of approximately $1.3 million.

On a relative basis, our margins increased slightly by approximately 10 basis points. In this past quarter, MRO constituted 59% of our total revenues, whereas greenfield totaled 41% of our revenues.

And the currency impact to our Q1 margins amounted to $1.5 million.

In terms of operating expenses and net headcount, our core OpEx this last quarter, that's SG&A excluding amortization of intangibles and transaction-related expenses, totaled $15.9 million, an increase of 5% from the prior year. Due to the recent redemptions in our bonds, our quarterly cash interest payments have been reduced from $5 million a quarter to approximately $2.8 million, and this equates to an increase in earnings per share by $0.09 a share per quarter on a pretax basis.

And I'd like to point out that our EPS is also impacted by $0.09 a quarter due to the noncash amortization expense due to the acquisition by our sponsor, CHS, in 2010. The number of full-time employees at the end of June was 772.

That's up from the 680 as of June 2011, and 96% of these were -- additions were in production, sales and engineering and directly relate to managing our growing business.

Next point is earnings. GAAP net income for the quarter totaled $6.6 million compared to a prior year quarterly loss of $5 million.

GAAP EPS was $0.21 a share versus an $0.18 loss in the prior year period. And adjusted EPS came in at a record $0.23 a share versus $0.20 1 year ago.

The EPS adjustments are expenses relating either to the pay-down of our debt or in the case of fiscal year '12, certain transaction-related expenses. And also, our EPS was negatively impacted by approximately $0.01 a share from the combined effects of foreign exchange when considering translation and transaction impacts.

Finally, in terms of our balance sheet, our cash balance at the end of June was $13.6 million compared to $31.6 million in the prior year period. And this decrease in cash was due to the optional redemptions of our long-term debt.

Our days sales outstanding for Q1 was 70 days versus 63 days 1 year ago. Our days in inventory at the end of June was flat at 96 days versus 95 days 1 year ago.

And lastly in aggregate, our cash conversion cycle increased to 130 days versus 101 days, and this increase was due largely from a significant decrease in payables attributable to our declining inventory balances.

We continue to delever the business. At the end of June, our long-term debt was reduced to $118 million, and just 15 months ago, we had $210 million in long-term debt.

And note that all of this $92 million in debt reduction was due to optional redemptions that were enabled by our strong cash flows and to a lesser extent, our IPO proceeds.

And a little over 1 year ago, our debt leverage was approximately 4.2, and we believe, this fiscal year, it will end at approximately 1.5. And our business continues to be highly capital-efficient.

This past quarter, for example, our maintenance CapEx amounted to less than 0.5% of revenues, and this excludes the 900K capital investment we made in the completion of our new manufacturing facility.

In summary, we had a solid quarter, and we continue to perform at record levels. We will continue to manage our expenses and our capital investments, and we plan to opportunistically reduce our debt leverage.

Looking forward, we remain guardedly optimistic about the future due to our current order activity and our strong backlog.

Two cautionary notes, however. We continue to be impacted by the volatility of foreign currency, and we will likely experience similar FX financial impacts in Q2 as we experienced in Q1.

In addition, in Q2, we anticipate a one-time 150-basis-point negative impact to gross margins due to the startup of our new manufacturing facility in San Marcos, Texas.

Thank you for your support and your continued interest. We plan to next announce our financial results for Q2 fiscal year '13 via a conference call and press release in November of this year.

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

Jay, first, can you just go through a couple of numbers quickly again? What did you say on interest expense?

What do you expect the run rate to be on a quarterly basis going forward?

Yes. Previously, it was approximately $5 million a quarter, and that's the cash aspect of our interest payment.

There's some amortization that's on top of that. And going forward, it will be closer to $2.8 million.

And again, that excludes the amortization of the bond issuance costs. So those are both cash numbers, Brian.

Got it. And what was order growth in the quarter?

Order growth relative to the prior quarter was essentially flat from Q4 to Q1, if memory serves. From a year ago, we did $70.3 million in orders, and this last quarter, we did $66.7 million.

So it's down, I guess, 0.5%.

Okay. And then, can you just make sure that I'm clear on the $3.7 million that was called out in the press release?

It sounds like -- based on the comments that you just made now in the call that most of that was FX. Because if I back out that $3.7 million, your revenue growth rate goes from about 4% to 10%.

But I find that most of it's due to FX. How much was due to the project timing?

Yes. The number that we mentioned in the press release, the $3.7 million, and in my discussion I mentioned this was approximately $4 million, that was all FX, 100% of that impact was FX.

On top of that, Rodney mentioned some large projects, primarily international, that were scheduled in Q1 that did get moved into Q2 and thereafter. And that was approximately in aggregate $4 million coincidentally.

Just on gross margins, I mean, how -- you guys have been guiding to kind of mid-40s. You've been bumping up against high-40s.

Just maybe talk about the sustainability of that. And then, if you can just clarify the -- what the 150-basis-point onetime hit is attributable to, that'd be helpful.

Yes. Why don't we start with the second one later, Jeff?

And I don't want to turn this discussion into a cost accounting discussion, but recall that we had been increasing our inventories for the transition from our old manufacturing facility to our new manufacturing facility. And since we are now in our new manufacturing facility, we have fewer inventories on our balance sheet today and in Q1, and therefore, we will have fewer inventories to absorb those costs.

Now this is a one-time event, and we do not believe this will happen going forward. And also, we're anticipating just some normal startup costs, if you will, going through with the new production capabilities in this new facility.

So it's -- we're just trying to be very, very cautionary and conservative with what we think will happen this quarter, Jeff.

Okay. That's helpful.

Gross margins. Recall, if you look at our history over a more protracted period of time, going back, let's say, half a decade, the gross margins in the 45% range were typical on a quarterly basis and an annual basis.

We are seeing margins well above that at present, and we do not want people to forget that it is quite possible that our margins will end up down in the mid-40s due to the timing of these significant projects that we're involved in. So again, we're trying to be somewhat conservative in terms of how we talk about the future.

Okay, great. And then, just on the orders and backlog, I mean, you guys have had substantial order growth and backlog growth.

This time kind of orders flattened out, backlog flattened out. Can you just talk about how much of that is choppiness, lumpiness, how much of that is any kind of slowing or extending sales cycle around some of the macro volatility, how much is, in your mind, seasonality?

Jeff, this is George Alexander. I think it's a little bit of all of that.

Remember that this is not the heating season, so we do expect a slowdown from the -- in terms of incoming orders as far as the seasonality of our business. The volatility that exists in the market right now is something that we are seeing some impact in -- for instance, in the European, western European environment especially.

But overall, with the energy sector continuing to be strong, our project activity is strong and also, our quoting activity is strong. So it's -- I think it's mainly related to the lumpiness of project schedules in terms of our -- we don't have control over that, and they tend to shift to the right.

But that's nothing new. That's pretty much, historically, always been the case.

So our business is largely impacted by the weather in the northern hemisphere. So we are expecting a significant upturn as we go on into our fiscal year as far as MRO business, especially.

Okay. And then, last question.

I think your guidance last quarter was for low double-digit revenue growth, and it's unchanged. But I mean, you called out this FX impact, which was a 5, 6 points this quarter.

It looks like it's going to be a similar impact. So I mean, it seems like that issue is with you.

Is that low double-digit kind of pre-FX or you think you can overcome the FX headwind?

We do believe we can overcome the FX headwind unless there's some huge, huge additional volatility from where we're at, at today. But right now, the plan is to overcome that.

Jeff, it's Rodney. We believe that we still have our goals in sight because our backlog is still strong.

And those backlogs -- and the math around that backlog still suggests what we've previously given guidance on.

And one thing to clarify, Jeff, when we announced a backlog of $117 million, had it not been for FX, that backlog would've actually grown to another record for Thermon.

Do you know what the impact would've been on the backlog?

Rough numbers, and it's only a guesstimate. Let's say $5 million.

It would've been another new record for Thermon.

On the gross margin outlook, I'm trying to square up a couple of different comments. You talked about the push-out in some of these larger international projects, and obviously, when that mix changes, you're going to have -- it's a detrimental to gross margins, I guess, on a mix issue.

But you're also talking about the MRO business looking really strongly back half of the year. Does the strength that you're expecting in MRO business in the rest of the year offset kind of the mix shift downward on the OE side or I guess, having greater percent of your OE because some of these projects have shifted out?

If we look at it over the next 9-month period, yes. Could there be some variation within a 90-day reporting period?

Yes. But on a more protracted period, we think that's a fair comment, Charlie.

Okay. And with regards to the tax rate, can you give us a sense of what you're expecting tax rate rest of the year or maybe sort of full year if you don't have it broken down?

For the full year, I would model 35.5%, and that's down a little bit from last year. And that had to do with us repatriating dividends from some other countries.

But for the full year, if you were to model, let's say, 35.5%, maybe 36%, you'll be in the very close neighborhood.

Okay. That's helpful.

And just on the orders again, I want to make sure I understand the dynamic here. Because it looks like orders, $67.7 million, is down about 5% year-on-year.

Is that -- is the MRO side of that order business about in line with where it was and is the downward shift just due to the lumpiness of large projects?

Again, I think -- this is George again. I think it's largely due to the shifting schedule of the projects.

And I think our MRO business is still consistent. We were -- as Jay mentioned in his report, it was 59-41.

So that's very close to what our model is, it's 60-40. So again, it's mainly -- I think it's mainly due to the scheduling of the projects and us having to work with our customers in that regard.

My question relates to the debt repayments that you've been able to do thus far and what you think you can do and what strategy you can implement in the future? Do you have another optional $20 million debt repayment next year?

No, we do not, Andrew. The next provision within our agreement is 2014, where we're able to call the balance at 104 3/4.

However, our debt does trade. And as I mentioned, we will opportunistically, look at the trading activity, both in terms of the volume and premium, and see whether it makes financial sense for us to acquire it in the open market.

And we have done that in the past, and we would like to do that more so in the future.

So in other words, you'll be able to -- you don't need to repatriate cash this year or next until you can keep that tax rate down a bit?

It's actually the opposite. The tax rate is lower when we repatriate.

So -- but we do plan on doing additional open market acquisition of our debt.

Just a couple of follow-ups here. Any disruption or change in the landscape as you see some of your competitors change hands?

Jeff, this is George Alexander. We really haven't seen any significant changes yet, that our competitors appear to be continuing to operate as they did prior to the -- either their acquisition or pending acquisition.

So the competitive landscape still is pretty much the same.

Okay. And then just on capital structure, I mean, you talked about kind of the deleveraging and wrapping up the year at 1.5x debt-to-EBITDA.

What do you think is the ideal capital structure? And then also, separately, can you just give us an update on what you're hearing from your private equity ownership in terms of their long-term plans?

This is Rodney. Let me take the second part of your question.

CHS Capital is the largest shareholder. They eventually will sell.

They have not given us any timing -- timetables at this point. And so that's currently where we stand.

And in terms of the optimal leverage or leverage that we could manage to, we could go as high as 4, Jeffrey, especially with some of the rates we're seeing today in the marketplace. However, with our coupon today at 9.5, we'd like to take that virtually to 0.

I think we can do that over the next several years. But if we were to do a transaction, we would be comfortable at a much higher leverage point.

Okay. So it sounds like in terms of capital allocation, highest priority is to continue to chip away at the debt.

Assuming that would do not have an attractive candidate that we would be looking at.

Also, we're still in a mode of our #1 priority with our business is reinvesting in our business model. To maintain the global footprint that we have requires that sort of investment, especially in these kind of growth markets: Russia, China, India and so on.

So we want to continue doing that, and then we look at the option of either debt redemptions or -- basically that's it. Or -- yes, that's it, sorry.

Okay. Once again thank everybody for their interest in Thermon.

We look forward to speak with you guys and having favorable results in November. So again, thank you, and everybody, have a safe and nice day.