Thermon Group Holdings, Inc. (NYSE:THR) Q2 2024 Earnings Call Transcript

Thermon Group Holdings, Inc. (NYSE:THR) Q2 2024 Earnings Call Transcript November 6, 2023

Operator: Greetings. And welcome to the Thermon Group Holdings, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Ivonne Salem: Thank you, Latonia. Good morning and thank you for joining today to fiscal 2024 second quarter conference call. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on our Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News & Events, IR Calendar, Earnings Conference Call Q2 2024. During the call, we will 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.

I would like to remind you that, during this call, we may make certain forward-looking statements regarding our company. Please refer to our annual report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results may differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as might be required by law. Now I would like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Bruce Thames: Well, thank you, Ivonne. And good morning, everyone, and thank you for joining us today. I’d like to begin the day with a quick overview of Thermon for those of you who may be new to the story. We’re a world leader in providing safe, reliable and innovative mission-critical industrial process heating solutions to customers in 85 countries from facilities on four continents. Our technology is agnostic and many of our solutions enable the energy transition through decarbonization and electrification. Our approximately 1,400 employees have a best-in-class safety record and are dedicated to creating long-term value for our stakeholders by executing our strategic plan, which I’ll cover in more detail on the next slide.

Turning now to slide 4, Thermon’s strategic pillars. We’re generating sustainable value by implementing our long-term strategy that is based on three pillars – first, profitably growing our installed base; second, decarbonization, digitization and diversification; and third, disciplined capital allocation. We’ve developed a large global installed base over the last 69 years by providing our customers with mission-critical industrial process heating technology and solutions. These solutions typically represent less than 1% of the initial capital cost of the process facility, but are critical to ensuring safe, reliable and efficient operations. This enables us to increase recurring revenues and realize growth across our traditional in-market verticals while expanding margins through operational excellence.

In addition, we’re driving growth through our long-term strategic initiatives of decarbonization, digitization and diversification. We are a key enabler of the energy transition through electrification and decarbonization of industrial inc. Our innovative solutions drive energy efficiency, facilitate a circular economy and help our customers achieve their sustainability goals. Through our digital solutions, we also help our customers to optimize maintenance through enhanced controls and monitoring. Our core technologies, plus our decarbonization and digitization solutions, are supporting our efforts to diversify our end markets with a goal of having approximately 70% of our revenues come from outside of the oil and gas by the end of fiscal 2026.

Underpinning our first two strategic pillars is our commitment to a disciplined capital allocation strategy. Our strong balance sheet allows us to reinvest in our business to drive organic growth and positions us well to pursue inorganic growth through highly strategic bolt-on acquisitions that meet our financial objectives. On slide 5, you can see that we’re continuing to progress our end market diversification strategy with approximately 64% of our trailing 12-month revenue coming from diversified end markets. We’ve seen significant success in the food and beverage end market with revenue growth of 219% over the last year. We also continue to capture share in the rail and transit market, where revenue was up 26% year-over-year, and in the commercial market, where revenue was up 16%.

Of particular note is the 92% year-over-year growth in the renewables end market, which is also a testament to the ways that Thermon is enabling the energy transition. The expansion in renewables market reflects increasing activity across alternative fuels, hydrogen and ammonia. Additionally, we’re well positioned to support our traditional end markets in upstream and downstream oil and midstream gas. Should the energy transition take longer and additional investments be needed to support demand, we are well positioned to meet their needs. Turning now to slide 6 on driving diversified order growth. Despite continued high oil and gas prices, orders from diversified end markets continue to outpace orders from the oil and gas sector. As of September 30, approximately 74% of our year-to-date orders were from diversified end markets, up 33% year-over-year, while orders from oil and gas end markets were down 13% year-over-year.

As I mentioned on the previous slide, about 64% of our trailing 12-month revenue is from diversified end markets compared to 74% of orders year-to-date, indicating that demand continues to accelerate across these diversified end markets. We’re seeing increased demand for our solutions in rail and transit power and petrochemical end markets as well. Additionally, approximately 10% of our bookings year-to-date are related to decarbonization and electrification across a wide range of end markets. On slide 7, you can see two recent examples of how we’re putting our decarbonization strategy into action. During the second quarter of fiscal 2024, 11% of incoming orders and 7% of revenues were related to decarbonization opportunities with our pipeline now growing to over $150 million.

Here, we have two exciting examples of emerging opportunities in the hydrogen economy. The first example details Thermon’s contribution to the first comprehensive and scalable clean hydrogen energy complex in Canada. The project in Edmonton, Alberta is part of an accelerator program that supports Canada’s 2030 greenhouse gas emission reductions targets as well as their 2050 net zero emissions goals. Across this site, Thermon supplied a wide range of solutions across multiple product lines. We’re supplying environmental heating products for the job site and unit heating. The energy complex requires Thermon’s electric heat tracing as well as emerging and circulation products from our process heating product lines. The completed system will also use digitization and predictive analytics through our Genesis network.

After the facility is up and operational, the Thermon products and solutions will be fully powered by energy generated from the clean hydrogen power plant. The second example highlights our focus towards emerging decarbonization markets. In this case, Thermon provided a series of unique solutions for the production of sustainable aviation fuel. Thermon partnered with a refiner to provide a heating system to produce sustainable hydrogenated biofuels for commercial jets with the goal of reducing the overall emissions from aircraft. In addition to providing cleaner burning fuels, our customer wanted to reduce Scope 1 emissions by implementing electric alternatives for heat inputs that would have traditionally been hydrocarbon fired. Additionally, the refinery needed electric options for more precise start-up control and turn down to increase yield.

To meet these goals, Thermon developed an electric heating foundation to be used for all critical services and processes throughout the refining process. To support the future growth of the sustainable aviation fuel supply, we also standardized the design of our solutions and product mix to enable rapid future scalability. These two examples illustrate the breadth and depth of Thermon’s electric heating solutions and our unmatched expertise in industrial process heating that make us uniquely positioned to provide the heating technology needed to enable the new hydrogen economy. Turning now to slide 8 and our second quarter fiscal 2024 results. This quarter, the Thermon team generated record revenue of $123.7 million, an increase of 23% year-over-year, driven by strong growth in US, Europe and Asia.

We had double-digit growth in year-over-year revenue from OpEx activity associated with recurring maintenance. Our profitability continued to grow with adjusted EBITDA up 26.5% year-over-year to $27.7 million. This was largely due to volume growth, price and productivity. Adjusted EBITDA margins increased approximately 60 basis points, driven by leverage on our fixed cost base. Free cash flow improved by $1.9 million year-over-year due to improving DSOs. Adjusted EPS was $0.49 per share, an increase of 30% over the prior-year period. Finally, our bookings grew an impressive 22% year-over-year and the book-to-bill ratio was 0.94 times in the quarter. Year-to-date, our book-to-bill continues to be positive at 1 times and bookings on a trailing 12-month basis are now $489 million.

But with that, I’d like to turn the call over to Kevin for a more in-depth review of our financial results. Kevin?

Kevin Fox: Thank you, Bruce. Turning to the Q2 fiscal 2024 financial performance on slide 9. The global Thermon team continued to deliver strong results in the second quarter. Customer demand remained healthy. We reached $116 million in incoming orders in the quarter, up 22% year-over-year. Demand remained strong across US and Latin America, while spending was flat in Canada. In terms of our end market orders, we saw the most growth in the chemical and petrochemical sector during the quarter with customer demand expanding across the renewables, food and beverage, and rail and transit end markets. Trailing 12-month orders reached $489 million, which we believe supports our updated full year revenue guidance range. Revenue in the second quarter was $124 million, a year-over-year increase of 23%, primarily driven by the growth in renewables, power and food and beverage end markets in the quarter.

Revenue from large projects was $36 million, up 54% versus the prior year, while revenue from small projects and maintenance and repairs totaled $88 million, up 14%. On a trailing 12-month basis, 76% of our revenues were derived from customer OpEx spend. Adjusted EBITDA for the second quarter was $28 million, up 27% year-over-year, with adjusted EBITDA margin expansion of approximately 60 basis points. On a trailing 12-month basis, adjusted EBITDA was $105 million, representing a year-over-year increase of 35% with adjusted EBITDA margins increasing to 22.0%. Adjusted diluted EPS was $0.49 per share in the second quarter, a year-over-year increase of 30%. On a quick modeling note, we are currently estimating a $0.21 per share impact from amortization in fiscal 2024.

Through the first half of our fiscal year, we have delivered profitable growth by continuing to execute our strategic plan in an uncertain macroeconomic and geopolitical environment while simultaneously controlling our fixed costs and investing in the future. On slide 10, we will cover the updated balance sheet. We ended the quarter with cash at $31 million, which represented a year-over-year decrease of 4%. Total debt for the quarter was down 23% to $111 million. This decrease, combined with the sizable growth in adjusted EBITDA over the last 12 months, resulted in a net debt to adjusted EBITDA ratio of 0.8 times compared to 1.4 times in the prior-year period. Working capital was $160 million in the quarter, an increase of approximately 3%, primarily due to the combination of strategic inventory deliveries and the seasonal inventory build in advance of the winter months, offset by the decrease in accounts payable.

Working capital as a percentage of trailing 12-month sales was lower, coming in at 33.6% at the end of the quarter, mainly driven by improved collections activity. Turning to cash flow. Net income in the second quarter was $15 million, up 34% year-over-year. CapEx spend was $3 million and free cash flow was $0.6 million, reflecting normal preheating season inventory builds and our ongoing investments for strategic growth, particularly around incremental capacity for our process heating business. We expect cash generation to improve significantly in the third and fourth quarters, driven by increased volume and the consumption of finished goods inventory during the heating season. We are very pleased with our strong performance in the first half of fiscal 2024, and we continue to produce solid growth across our end markets, regions and financial metrics.

As we look ahead to the second half of fiscal 2024, we are well positioned to deliver profitable growth, and we are prepared to manage a wide variety of economic scenarios. Finally, I would like to thank the global Thermon team for their hard work, dedication to our customers and commitment to delivering long-term value for our shareholders. And with that, I’ll turn it back over to Bruce.

Bruce Thames: Well, thank you, Kevin. I’d like to turn now to slide 11. As we look to the back half of our fiscal year, we’re raising our full year revenue and earnings guidance for fiscal 2024. This revised guidance balances the positive growth we continue to see in the first half of our fiscal year, while acknowledging the ongoing macroeconomic and geopolitical uncertainty and potential impact of global monetary policy. In light of this, we continue to be prudent with spending while investing for growth. We are raising the lower end of our revenue guidance from $462 million to $478 million and increasing the upper end from $488 million to $498 million, which at the midpoint represents 11% organic growth year-over-year. GAAP EPS is now expected to be in the range of $1.59 per share to $1.69 per share, which represents 64% growth at the midpoint.

Adjusted EPS guidance has been raised to $1.84 per share to $1.94 per share, which at the midpoint represents 21% year-over-year growth. Turning now to slide 12. I’m pleased to invite you to join us for Thermon’s first Investor Day, which will be held on Tuesday, November 14 in person in New York City or via webcast. Joined Kevin and me, plus other members of the senior leadership team, for more in depth detail about our long-term strategy, financial outlook and live Q&A. We hope you’ll be able to join us. As we wrap up today on slide 13, we’d like to leave you with the following messages. Thermon is a leading global brand that provides mission-critical process heating technology and solutions to a variety of diverse end markets. Our operational excellence, innovative products and differentiated solutions are significant competitive advantages and create sustainable value for our customers and shareholders.

Our large global installed base with longstanding customer relationships drives a resilient aftermarket franchise that generates high-margin recurring revenue. Through our existing technology, we believe that we’re well positioned to capitalize on the vast opportunity associated with the energy transition and decarbonization through the electrification of industrial heat. Our healthy balance sheet with low leverage and high gross margins as well as our capital-light business model enable Thermon to remain resilient across economic cycles and provide significant optionality. I’d like to end today by thanking the entire Thermon team for their outperformance, unwavering commitment to safety and dedication to meeting our customers’ needs. As we look ahead to the second half of fiscal 2024 and beyond, I’m eager to see what we can accomplish together as we continue to deliver sustained profitable growth and value for our shareholders.

Latania, we’d like to now turn it over to you to take questions.

Operator: [Operator Instructions]. Our first question comes from Brian Drab with William Blair.

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Q&A Session

Brian Drab: I usually don’t spend time on these conference calls congratulating management. But I just want to point out 12 out of the last 12 quarters, you guys have beat consensus revenue estimates. So very impressive and congratulations. Well, it’s really an impressive execution. So congrats. And I will be at the Analyst Day, so looking forward to that. I was wondering actually regarding the Analyst Day, can you perhaps give any sort of preview of – not numbers, but like what investors, analysts can expect there, maybe will you be laying out some longer-term financial goals?

Bruce Thames: Brian, what we’ll do is we’ll be focused still on our kind of our 2026 objectives, but we’ll do it deep – first of all, you get to meet the broader management team that’s really behind driving these results. And I think that’s a great opportunity. And we’ll be taking a deeper dive on really talking about our strategic objectives as well as our financial goals and providing more detail around just what is the path to achieve. And so, I really look forward to you attending and hope other existing and prospective investors will join us as well.

Brian Drab: It seems first, with this quarter, that you’re ahead of schedule in getting that mix to be more diverse – the revenue mix to be more diversified getting – I guess, the goal is to get to 70% non-oil and gas or 70% diversified as you say. How are you thinking about that longer-term goal? It seems like maybe you could go beyond 70 with today’s report.

Bruce Thames: That’s a great question. I’d like to kind of start and say we were guiding to a 65% to 70% range. So now we’re kind of targeting it more towards that 70% because we think we can get there by 2026. And certainly, as we begin to approach that 2026 time line and achieving that 70% goal, we’ll further extend that to look at where we’d like to go in just overall diversification of our end markets.

Brian Drab: And then speaking of end markets, food and beverage, you reported outstanding growth during the quarter. Can you talk a little bit about that segment of the business and remind us where you’re seeing the most success with types of projects, what geographies? And how is the outlook there and runway for that type of growth to continue potentially?

Bruce Thames: Yes. So in food and beverage, first of all, the great thing about that is, geographically, it’s extremely diverse. It’s really global. And we actually – f you think about the mix of our business in the Eastern Hemisphere, particularly across Asia, we actually see a much higher mix of more diverse end markets, including food and beverage than we do kind of maybe in some of the traditional oil and gas end markets that we see more in North America and Western Europe. First of all, it really began with a focus on that end market. The expansion of our product portfolio really gives us more opportunity than just heat tracing. But as we look at emergent heating and boilers and steam and other things like that, it really gives us an opportunity to build a much larger, more sustainable position.

So, certainly, the 219% is really strong growth. It’s on a fairly small base, but we feel like we’ve got a lot of room to run there just given the size of the market and kind of our existing share. So we feel good about the progress we’re making there and the increased focus with our front-end sales teams.

Brian Drab: Maybe I’ll ask just one more before I pass it on. But several years ago, you made the focused effort to diversify the product portfolio and get into process heating, expand the addressable market relative to the historical focus primarily on heat tracing. Where are you seeing the growth and the orders coming in in terms of process heating versus heat tracing? Are they both growing at the same rate? Or are you having more success in one area or the other at this point?