Q3 2020 Earnings Call
Greetings and welcome to the Thurman Group Holdings third quarter fiscal year 2020 earnings call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
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Pat.
Please note. This conference is being recorded I will now turn the conference over to our host Kevin Fox Vice President Corporate development. Thank you you may begin.
Thank you Diego good morning, and thank you for joining today's conference call. We issued an earnings press release. This morning, which has been filed with the FCC on.
Okay and is also available on the Investor Relations section of our website at <unk> Dot Surmont Dot com.
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During the call. We will also discuss some items that do not conform to generally accepted accounting principles. We have reconcile 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 majerus.
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Before I turn this call over to Bruce I'd like to remind you that during this call. We may make certain forward looking statements regarding our company in business that are not historical facts.
Because forward looking statements relate to the future they are subject to inherent uncertainties risks and changes in circumstances.
Says that are difficult to predict.
Please refer to our annual report and most recent quarterly report filed with the FCC 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 there was contemplated by these forward looking statements.
We caution you therefore, I guess relying on any of these forward looking statements. They are neither statements of historical fact, nor guarantees or assurances of future performance any forward looking statement made by us during this call speak only as of which the time. It has made facts or events that could cause our actual results to differ may emerge.
From time to time and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward looking statement, whether as a result of new information future developments or otherwise, except as may be required by law.
And now I'd like turn to introduce Bruce names, our President and Chief Executive Officer.
For his opening comments.
Alright, Thank you Kevin and good morning, and thank you all for joining our conference call and for your continued interest in thermo on.
Joining me on the call today as Jay Peterson, our CFO will follow me and present, the financial details of our fiscal year 2023rd quarter.
Starting off results in Q3 fell short of expectations and a record prior year Q3, primarily driven by weaker if you're in discretionary spending and other factors during the quarter.
Well, we projected weakness in capital projects, we expected to see stronger to.
Demand and their MRO you eat as the heating season began and its customers released the last fiscal budgets.
This year, we saw neither materialize, which negatively impacted both mix and volume in the quarter.
After two consecutive quarters of double digit order growth the weakening.
Our end markets. We noted last quarter has now led to two consecutive quarters of single digit order contraction.
I'd like to take a moment to discuss the trends, we're seeing with our customers and in our end markets from a capital investment standpoint, we see Capex estimates for the next 12 months.
Growing in the Middle East Africa in India, India moderate to neutral spending growth in North America in Asia, and Europe, continuing to be a very challenging and competitive market.
Geographically, the U.S. and Latin America, and Europe Middle East Africa, both contributed to the shortfall.
Relative to expectations and prior year in the quarter.
In the U.S. in Latin America, we anticipated the weaker capital environment as some large ethane crackers are coming online and the next wave of projects are in early planning an engineering stages.
However, we expected strong.
I agree you're in district discretionary spending that occurred in the quarter and we saw several new projects moved to the right.
In Europe Middle East Africa, we have highlighted challenging market conditions for several quarters that continue to persist our Canadian and Asia Pacific geographies were.
It's up low double digits over prior year.
We continue to see mixed signals in our end markets as well the outlook in upstream remains weak due to excess capacity and lower commodity prices. This is certainly began to weigh on capital deployment, but integrated oil companies.
Needs across other sectors of the industry. We also believe this contributed to the weaker year in spending we saw this quarter.
Downstream is also showing some weakness was slowing demand growth for transportation fuels capital projects in this sector continued to be driven by tightening environmental regulations.
For lower sulfur content and fuels and efficiency improvements.
However in other areas, we're seeing significant growth opportunities tied to natural gas and petrochemicals in midstream, we continue to be well positioned to capitalize on an LNG investment cycle.
We have been awarded a large Canadian LNG project that will begin to show in both bookings and backlog in Q4, we anticipate this project will positively impact financials in fiscal year 2021, and continue for the next two to three years thereafter.
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The warmer winter in Asia, and European LNG storage near capacity weaker demand could influence timing the final investment decisions for a number of planned projects. However, we continue to believe that global LNG investments will provide a tailwind for our business over the next.
Several years.
Both chemical and petrochemical sectors remain the most robust of our end markets tied to cheap natural gas liquids as feedstock, particularly in the U.S., we're seeing a gap in this sector in the second half of fiscal year 20, as large capital projects are in various stages of.
Turning an execution for the U.S. Gulf Coast, Canada and across the Middle East in Asia, We anticipate backlog growth as these projects move to award over the next several quarters.
We're also seeing if you capital projects in renewables with biofuel processing plants over the next 20.
Our months that create additional revenue opportunities.
Combined cycle power projects remain steady, particularly in the U.S. and Latin America.
Demand for mass transit transportation in growing population centers continue to create large multiyear project opportunities in rail and truck.
Transit we were awarded a multimillion dollar multiyear transit project in Q3 that will be reflected in bookings and backlog in Q4 awards of this nature help balance the seasonality of the business through the continued diversification of our end markets.
In the nuclear.
Segment. The majority of thermals opportunities are tied to an MRO you spending within existing Canadian nuclear power facilities.
We saw an increase in your MRO activity in Q3, and we anticipate these activities to continue to generate revenue through late fiscal year 21.
Even with these mixed signals from the market. Our project pipeline continues to grow and we continue to see the global globalization of the process heating platform as a key growth opportunity moving forward.
Moving on to financials.
After eight consecutive quarters revenue growth.
We also saw contraction in Q3 against a record quarter total therm on revenue was down 16% from the prior year quarter on weaker capital projects, you're in discretionary spend and a slow start to the heating season.
Margins expanded 65 basis points over the prior year.
But were down 80 basis points sequentially.
We anticipate a stronger margin expansion due to our continuous improvement efforts and an improving mix, but several factors had a negative impact in the quarter first makes improved to more historical average of 62% MRO you eat versus 38%.
Greenfield, but less and less than anticipated due to the weaker discretionary spending in the quarter.
Second one time charges and volume variances negatively impacted margins by about 225 basis points in the quarter.
We're continuing to execute on our plan cost.
Auction initiatives, while also investing and new product development that will further enhance our margin profile overtime.
We also take efforts well take efforts to rightsize, our business, where warranted, while continuing to invest for growth.
Turning now to bookings.
Bookings or.
99 million for the quarter were down 6% from prior year and backlog was essentially flat sequentially on a positive note globalization efforts resulted in solid bookings for our process heating products up 4% year over year and 42% sequentially. In addition in a region that.
It has been challenged for the last several quarters, we have secured a sizable project in Europe Middle East Africa that contributed to order and backlog growth during the quarter against and otherwise flat incoming order rate.
I want to shift now to Oh focus to cash which has been a good story this year.
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A concerted effort on grow a working capital combined with a low capital intensity business model, we've been able to generate 19.9 million in free cash flow during the quarter and 46.3 million year to date as a result, we were able to pay down an additional 23 million in debt during the quarter.
At this time, our net debt to trailing 12 month adjusted EBITDA stands at 1.9 times.
From an M&A standpoint, we continue to evaluate transactions each quarter and the strength of our balance sheet positions us well for the right opportunity.
We will prioritize bolt.
On acquisitions that helped build upon our leadership position and key technologies globalize the process, an environmental heating platform or expand our addressable markets.
In the absence of attractive M&A, we will prioritize debt reduction the savings from the year to date debt reduction and associated interest.
This will translate to four cents a share in NPS on an annualized basis.
Additionally from an organic growth perspective, we're continuing to invest in technology that position storm on to win in the market. We have several projects nearing completion in the new product development.
That will be announced in the coming quarters. These new industry, leading solutions will provide connectivity and enhanced performance, while increasing safety and reliability.
Based upon the second consecutive quarter, a week over week or incoming orders and the movement and project.
Jules we're lowering our fiscal year 2020 forecast to 383 to 390 million for the year.
Well, China only represents 2% of revenue and our supply chain has limited exposure. We have included additional uncertainty in the range to.
Count for the timing of shipments in the quarter.
Well the near term environment remains choppy thermo is well positioned within our market space. The key market drivers for growth remain intact as evidenced by our growing pipeline of opportunities, we see the emerging middle class in developing.
The nation's creating demand for chemicals, and petrochemicals tightening environmental regulations and natural gas as a bridge fuel all creating opportunities to grow and service our installed base.
Thermometer resilient business model in market diversity global footprint.
Decades of.
Engineering design expertise and pipeline of new product and technology, all support our competitive position in this space.
We will provide you guidance on our fiscal year 2021 during our next earnings call.
To the Thurman employees around the globe. Thank you.
For all that you do for our customers each and every day you are truly the therm on difference.
With that I'd like to now turn that turn it over to Jay Peterson, Our CFO, who will address the details of our financial performance for the third quarter Jay.
Thank you Bruce.
Good morning.
I will start by discussing our Q3 results, including our cash generation and debt pay down.
And then finish with guidance and the discussion on margin enhancements for fiscal year, 2021st off our revenue this past.
Quarter totaled $100.5 million and that's a decline of 16% against the prior quarter, which was an all time record high for therma.
On a year to date basis, the majority of our revenue decline is attributable.
So to the performance of our European business, which has been negatively impacted by the macro European economy among other factors.
The legacy revenue mix between MRO, you eat in Greenfield was 62% and 38%.
Respectively.
Versus a 35% and 45% mix in Q3 fiscal year 19.
FX nominally decrease total revenue.
By approximately $200000 and in constant currency.
Our revenue declined by 16%.
Orders for the quarter totaled $99 million versus 105.7 million.
In the prior year quarter for a decline of 6%.
And this was due to weaker than expected year end.
Spending.
They warmer start to the annual heating season.
Our backlog of orders ended December at 102.5 million.
Versus 135.9 million as of December fiscal year, 19, and that is a decrease of.
25%.
And as Bruce mentioned, there are several large greenfield projects that have been recently awarded to Thurman and we anticipate booking them into our backlog in the next 90 to 120 days.
And our book to Bill for the quarter was.
Essentially flat at 0.99.
Moving on to gross margins margins were 43.3% for the quarter, that's a 65 basis point improvement versus the comp period.
Sequentially.
Margins were down by 80 basis points.
That was attributable to close out costs for a large greenfield project.
Certain cost variances due to lower volumes.
Gross profit declined by $7.4 million due.
To the double digit revenue decline or by 14.5% versus the comp period, which was also an all time record high for thermo.
Cost increases due to tariffs have been relatively minor and we have largely been able to pass the.
These cost increases along to our customers.
Without any significant impact to our gmps.
Moving to topics core operating expenses for the quarter and this excludes depreciation and amortization.
Total 23.9.
9 million versus 25.8 million in the prior year.
Thats, a reduction of 7.4% and that is due to lower personnel costs.
In addition, comprehended in this opex decline is a 12%.
Growth in research and development spending.
And our operating expense as a percent of revenue was 24%.
Again, excluding depreciation and amortization.
And that's an increase of 200 bips.
From the prior year.
Couple of 22%.
And note that we have executed cost reduction actions in Europe.
In the month of January.
Better aligned our expenses with our incoming European order rate.
Now to earnings gap.
S for the quarter total 20 cents compared to the prior year quarter of 29 cents and that's a decline of nine cents per share.
And with the adjusted EPS construct as defined by GAAP EPS.
Less amortization expense in any one time charges.
Total 28 cents a share relative to 40 cents a share in the prior year quarter.
And we are currently expensing $45 million per quarter, or 10 cents per share or.
At least 40 cents a share on an annual basis after tax for non cash amortization.
And note that this total amortization expense will decrease in may of this year by $8.3 million annually.
Due to the full amortization of certain assets.
Related to the 2010 private equity acquisition of Therma.
And the impact.
Of this will be an increase to our GAAP EPS.
On an after tax basis of.
18 cents per share.
For fiscal year 21.
And EBITDA declined by 19.7% versus the comparison quarter.
And EBITDA as a percent of revenue.
Was 21%.
And this was a decline.
End of 100 basis points versus the comparison period.
And EBITDA this past quarter totaled $21 million.
Turning to the balance sheet and capital allocation.
This last quarter, we were able to both grow our cash balance.
Balance and pay down debt.
Our cash and investments balance at the end of December.
Grew to 37.1 million.
And we generated 19.9 million in free cash flow this quarter, and we were able to pay down 23.
Point $1 million in debt.
The additional debt pay down this current fiscal quarter.
On a year to date basis, we have generated $46.3 million in free cash flow and pay down $33 million and.
Yep.
And the debt pay down will reduce our interest expense of next fiscal year.
By four cents a share on an after tax basis.
The reduction in Anworth expense.
Coupled with the interest expense savings.
We will be accretive to our fiscal year 21 earnings per share by 23 cents again on an after tax basis.
With additional interest expense savings forthcoming.
Our capex spend for the third quarter totaled 2.1 million.
In dollars.
And that is inclusive of both growth and maintenance capital and amounted to 2.1% of revenue.
And our net debt to EBITDA ratio was three point fourx.
At the time of that October 2000.
17 CCRI acquisition.
And as sense improved to 1.9 next.
Additional de levering planned for this current fiscal year.
And our EBITDA conversion ratio.
As defined as EBITDA.
Less capex divided by EBITDA for the last 12 months was a healthy 89%.
An improvement.
Versus 87% in the prior year to date period.
And lastly, our capital allocation.
In the absence of any near term M&A transaction is to continue to reduce our debt through continued optional debt.
Repaying.
Taxes, the tax rate for the third quarter was 27% and tax expense in Q.
Q3 2020.
Reflects a reduction of taxes totaling $447000.
For the impact of a 4% tax rate reduction in the Netherlands.
And while this rate will be phased in over three years.
Accounting guidance requires that we adjust.
Respective tax accounts at the time the tax law becomes now.
We continue to reduce continue to work with our tax advisors.
On potential strategies to optimize our.
Income tax structure and at the conclusion of this analysis. It is possible that our tax rate will be exposed downward in fiscal year 2000.
And finally guidance there are several points I'd like to call out.
Due to the higher than expected D.
Celleration capital projects.
In a week or start to the heating season.
And although small the impact of the Corona virus.
We are revising our previous guidance to a 5% to 7% revenue decline over the prior year.
Relative to our current margin performance various activities are in process.
Our margins, including follow.
Four and a half million dollars in cost reductions.
With an anticipated realization approximately.
$2 million.
In savings this current fiscal year.
And with additional cost reductions planned for next year.
We announced price list increases earlier this year.
For our maintenance related products.
And that has higher.
Really offset margin impact due to negative volume impacts.
And recent and planned product announcements that we anticipate will yield accretive margins.
In conclusion.
[music] to growth in cash.
Our TTM EBITDA projection and reduction in our debt.
We expect our net debt to EBITDA leverage to declined to 1.7 to 1.8 X at the end of this current year, excluding any M&A transaction.
I would now like to turn the call back over to Diego.
To moderate our Q and eight session.
Thank you.
Ladies and gentlemen at this time, we will conduct our question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from Brian Drab with William Blair. Please state your question.
Hi, Good morning, Thanks for taking my question and Robert Brian.
Thanks did you say what THX revenue was in the third quarter.
No no we did not.
I got that here.
We'll be talking about that both this quarter and the next quarter.
But going into next fiscal year.
Due to the Finalization of the integration.
Into the legacy business.
We will it'll be unlike.
The that we will be discussing that.
Going forward. This current I'm here it was just under $22 million 21.9 million.
For the core 21.9 million for the quarter.
Okay.
All right so that the businesses as down.
Somewhat from from last year, but not not really.
Any different from the decline that you saw in the core business I guess.
Great that's correct.
And then.
Can you talk about the margins that you're seeing in Greenfield now.
Had been under.
Pressure somewhat are those dynamics that are putting greenfield margins under pressure still.
In place or what do you what do you see there.
Yeah, we haven't seen.
Material change in the Greenfield margins there there is still.
Running.
The.
The upper 20% range for the year and no vary a little bit on the type of project and geography, but.
But the averages in that range and has been for the last two or three years.
And then.
Margins in your backlog, then I guess, it's safe to assume that.
Those.
Margins are.
About it in that range as well.
The.
Yeah, we see the margins.
They're little dynamic based on which.
Which certain projects are in near term first.
The out term.
At present, the margins are essentially flat with the prior quarter.
Down down down modestly.
Okay.
Okay and then.
On the last call.
Talked about a couple major project wins.
Can you update.
At all on those projects and I guess, what I'm wondering is.
Bruce I think you said that.
Some projects have been pushed out.
Does that include some of these larger projects.
We talked about last quarter.
Yes. So that's a great question first of all we take a pretty conservative approach to how we both projects in backlog.
And so we've received.
A number of awards that.
The sizable awards that are not reflected in our book.
Things in backlog.
My reference to those projects that that could move.
Our not the ones that are better that have been committed the ones that are more in question around movement I have yet to clear F. I'd.
And then we did see.
In particularly in the Gulf Coast, but we saw some other project movement to the right.
By about six months and that there's various reasons that are that are driving some of that timing, but but Brian to answer. Your question, though there is no impact to the timing of those projects we.
Just get from builds and material and hard peos before we enter those into bookings and backlog.
I do know for the large Canadian LNG project that we've mentioned previously.
This this fourth quarter that will begin to impact backlog or bookings and backlog.
And those will be left with a multiple purchase orders over the next two to three years. So they won't just be one big number it will be bookings throughout the year at multiple quarters for multiple packages.
So so that's kind of what you should expect going forward.
So that the Canada LNG.
Next is not.
Really shown up in the numbers, yeah that'll start fourth quarter.
Thats correct, but it has not shown up in the numbers at all so okay at all okay. Okay.
I wasn't sure if there's anything early engineering work or something that was it hit but so that it will start in the fourth quarter I got it correct.
Okay I will save some other questions for later, but thank you very much.
All right. Thanks.
Thank you Brian.
Just a reminder to ask a question press star one on your telephone keypad tier move yourself from the Q Press Star too.
Our next question comes.
Comes from Joe conflict with confluence investment management. Please state your question.
Hi, Thanks for taking my question I'm, just looking on backlog over the last two years steadily decreased over the last eight quarters from 167 million down to about 102 million, what's that expectation for.
Backlog going forward sort of with the LNG in sort of without the LNG. Thanks.
Yes, so Joe.
Thanks for question, what we expect we expected in the second half this year to really began to see some backlog build and see a positive book to bill in the business.
For a couple of reasons, we've yet to see that materialized. Some of that as we have seen movement in project timing and some of that is just as we.
As we secured these commitments.
Moving through the engineering phases to get to from building material those have yet to be let with from Peos to hit our.
Logs. So you know our expectation excluding the large LNG project would be that we would begin to see some backlog bill that we did see that in Europe, which has been particularly weak and is largely responsible for the backlog declined you'd referenced our Asia Pacific.
Backlog remains strong Canada has been fairly flat and we've seen a drawdown in backlog from this time last year in the U.S. in Latin America, as we kind of a completed some large ethane crackers, but there are a whole nother wave of projects online in various stages of planning and execution.
But we believe we're well positioned to win and we believe should begin to hit backlog in the next several quarters [noise].
Okay. Thanks, a lot.
Thank you.
Ladies and gentlemen, there are no further questions at this time I'll turn it back to management for closing remarks.
Thank you didn't Diego and thank you again for joining this conference call today, we appreciate your interest and support for thermo on enjoy the rest of your day.
Thank you. This concludes todays conference all parties may disconnect have a great there.