Q1 2021 Thermon Group Holdings Inc Earnings Call
[music].
Greetings and welcome to the first quarter fiscal 2021 earnings conference call. At this time, all participants are no listen only mode.
A question answer session will follow the formal presentation, if anyone should require operator [laughter]. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Kevin Fox Vice President Corporate development. Thank you you may begin.
Thank you Maria and good morning, and thank you for joining todays fiscal 2021 first quarter conference call earlier. This morning, we issued an earnings press release, which has been filed with the FCC on form 8-K and is also available on the Investor Relations section of our website during the call. We will discuss some items that do not can form.
To generally accepted accounting principles, we have reconcile those items to the most comparable GAAP measures and 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 gap before I turn this call over to Bruce I'd like.
Can you remind you that during this call we may make certain forward looking statements regarding our company. Please refer to our annual report and most recently filed.
Filed quarterly report 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 and 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 or may be required by law with that said Oh, let's first famous our president and.
CEO to begin with his opening remarks.
Hi, Kevin Thank you and good morning.
We hope everyone listening is staying safe and good Hill. We appreciate you joining our conference call today and for your interest in Thermonics.
Jay Peterson, our CFO is with me and will provide additional information on our financial performance. Following my remarks.
Since our last update in June the thermal on team has remained focused on the safety and security of our employees customers suppliers and the communities in which we live.
As a supplier to critical infrastructure. We have remained open for business and have continued to focus on supporting our global customers.
We have experienced temporary facility closures due to local or regional restrictions in locations such as India in Russia during the quarter. Although both of these locations have begun to see an easing in restrictions and are now operational.
As we look across the globe many of our teams in Asia, where the virus first strop have begun to assume more normalized business activities, where the virus has been control.
We view this as a positive signs of what we may expect in the west as the virus is contained.
In many of our other locations, we continue to suspend business travel work from home where possible and follow the applicable W.H. Jo Ann CDC protocols.
I would like to thank our thermal employees around the globe for their commitment to our customers and our shareholders through these challenging times. Our employees are incredibly resilient and habit have quickly adapted to a new way of working.
Especially want to thank our frontline employees that have continued to be onsite, serving our customers each and everyday throughout this pandemic.
There are demonstration of our core values of care commitment and collaboration as well as our industry, leading safety performance is both admirable and appreciated.
With the uncertainty surrounding this pandemic our team has remained focused on value preservation and cash management.
The team took decisive action to reduce SGN, a by 16 million in the fiscal year and just over 17 million on an annualized basis over 75% of these reductions are structural and will provide added leveraged to the business when we emerge from this crisis.
In addition, we have performed extensive modeling to project cash flows and understood and understand debt covenants through a wide range of scenarios.
This is giving us confidence that we will be able to generate cash and manage the balance sheet with an approximately 40% decline in revenue using very conservative margin and working capital assumptions.
As we progress through the year, we will continue to manage our cost structure to align with the level of incoming business.
I would like to turn now to our first quarter results.
Our Q1 results with $56.8 million of revenue and 1.4 million of EBITDA were inline with our expectations for the quarter revenue was down 35% on a constant currency basis.
While adjusted EBITDA was down 88% gross margins for the quarter were 42.4% and improvement of 190 basis points over prior year and inline with our prior quarter.
We benefited from the receipt of Canadian wage subsidies, which we anticipate will continue through December as an offset to volume variances on our Canadian manufacturing operations.
GAAP and adjusted EPS were negative 18 cents and negative 11 cents during the quarter.
Driven by lower volumes attributed to the Kobin 19, lockdowns around the globe and the Opex plus dispute between Saudi and Russia that have led to an unprecedented oversupply of oil globally.
Our bookings for the quarter were 61 million, which were down 27% from prior year, but our book to Bill of 1.07 was positive for the second quarter in a row.
During the quarter, we saw de stocking in the channel with our distributors and representatives that was above and beyond our normal seasonality.
We also saw weakness in our MRO business due to safety measures our customers have implemented in an effort to prevent the spread of the virus.
Many have suspended project based maintenance activities to limit the number of contractors on site and manage cash.
We've also seen deferrals in turnarounds that were originally planned for this fiscal year.
We anticipate this will result in pent up demand for these products and services similar to what we experienced in fiscal year 2018, following the last downturn in fiscal year 2016.
April was the weakest month in our quick turn business and we saw modest sequential improvements in both May and June.
Backlog of 110 million was down 1.5% from prior year, but grew sequentially 4%.
We saw backlog growth of 19% and our environmental and process heating product lines, driven by a multiyear transit project and globalization efforts in the eastern Hemisphere.
We were pleased with our cash from operating activities of $3.4 million during the quarter, which was essentially flat over prior year, and we see additional opportunities to generate cash from the balance sheet going forward.
Geographically, we see bright spots in Asia that are more than offset by weakness in Europe, and North America due to the coven 19 restrictions currently in place.
Turning now to a discussion of our end markets. Our current end market exposure to oil and gas is approximately 55% to 60%.
Since the last downturn in fiscal year 2016, we have repositioned the business such that upstream represents approximately 14% of fiscal year 2020 revenues about half the percentage we saw in fiscal year 2015.
Addition.
With the addition of the environmental and process heating product lines, we have much greater exposure to natural gas and downstream petrochemical than in the past in response to this dual black Swan event, resulting from the pandemic and the OPEC oversupply of the oil market, we are seeing capital Budd.
It's being cut by 20% to 30% or more with the bulk of those cuts by independent oil companies focused on upstream investments.
The downstream capital budgets have been less impacted but we are seeing numerous projects being delayed or indefinitely postponed.
We anticipate that this will directly translate into lower greenfield bookings in the coming quarters.
We are seeing some signs of stabilization in the oil market.
After may futures contracts went negative prices have rebounded to around $40 a barrel.
He reports show a global inventory build through April and May that fell below initial projections in June there was an inventory drawdown due to improving demand inherence to OPEC curtailments and following us production.
Looking forward the is forecasting global inventories to steadily declined to more normalized levels by the second half of calendar 2021.
Although there are many factors on both the supply and demand.
Out of this equation.
This scenario would result in a tightening market with oil prices forecasted the average in the $50 a barrel range during the next calendar year.
In contrast to oil natural gas demand has been less impacted by coven 19 Lockdowns.
As sharp decline in industrial demand related to plant shutdowns has been the biggest driver during the quarter.
This demand combined with a warm winter.
Has led to global auto higher global inventories. However, the market is anticipated to recover more quickly than oil with the forecast in global demand in calendar 2021 to be at or near 2019 levels.
Demand growth during during 2025 are up to 2025 as anticipated at a 1.5% compounded annual growth rate driven in large part, but Asia and industrial demand growth.
Downstream refining and petrochemical is our largest end market at 42% of revenues in fiscal year 2020.
Refining has been most impacted in this sector due to the sharp decline in transportation fuel demand beginning in March.
April appears to have been the bottom followed by slow recovery in demand in May and June.
The outbreaks of Coven 19 around the globe recovery in demand will be slow and protracted, particularly in jet fuels.
Demand for petrochemicals has been less impacted and continues to have a positive mid term outlook for growth through 2025.
As restrictions are lifted and demand recovers, we expect budgets to be released and deferred spending to follow.
With maintenance budgets recovering first and capital spending emerging later.
We anticipate the petrochemical markets to recover more quickly as the overall economy rebounds.
Looking now the meant that the midstream sector. It is much better positioned to whether the current economic environment with a number of LNG projects in various stages of planning and execution.
LNG demand is anticipated grow at a 5.8% compounded annual growth rate through 2025 due to demand growth in Asia.
The chemical market, representing 21% of our revenues has experienced a slowdown in maintenance spending due to covert 19 restrictions. These end markets are wide ranging and include agriculture paint polymers et cetera, which are expected to recover more quickly as restrictions are lifted.
Forecasts show these markets growing at a 3.5% compounded annual growth rate through 2025.
Power in renewables markets, which represent approximately 6% of revenues have suffered a short term impact and should continue to offer steady opportunities in the mid term as industrial demand recovers post pandemic.
And while much of the coal to gas conversion has occurred in the West Asia is now in the process of making this transition.
Transportation, representing 3% of revenues in fiscal year 2020 continues to offer an opportunity to diversify our end markets. After securing a large order in light rail in Q4, we secured another large transit order representing a multiyear opportunity that we will expand the installed base in the U.S.
Yes in Canada.
Turning now to our investments in research and development.
Since 2015, Thurman has more than doubled our annual investments in research and development and we anticipating spending at approximately 2% of revenue per year going forward.
We have invested more than 25 million in our R&D efforts since 2015, and those solutions have generated an estimated 41 million in gross profit over the last three years.
Recent investment dollars have been focused on extending our industry, leading performance in heat trace developing enhance software and control solutions, and finally, reducing product cost to improve margins.
Looking forward, we expect to announce a major release in the coming months that will extend our technology lead and can tech connected controls.
This new solutions will enable our customers to monitor operations in real time improves safety and reduce cost through data analytics. These solutions come at a time when the world and our customers are looking for smart solutions to evolve how they operate in a post coven 19 invite.
Permit.
Given the backdrop and near term uncertainty in our end markets. We are focused on managing those things that are within our control.
First of primary concern is the safety of our employees and customers.
Second we're committed to actively managing our cost structure to the level of incoming business. Some of these controls are temporary however, the greater percentage, our structural and we will provide operating leverage when demand recovers.
Third we are committed to our continuous improvement program to drive a 1% reduction in cost of goods sold on an annual basis going forward. This fiscal year, our initiatives have targeted 3.9 million in savings to be realized during the fiscal year.
While these savings will be instrumental in offsetting volume variances. This year, they will offer opportunities to grow gross margins in the future.
Fourth.
We will manage our cash to ensure a healthy balance sheet and a near term focus on debt repayment, we have significant opportunities on the balance sheet to continue to generate cash this year and beyond in fact, our ability to generate cash during these unprecedented times is one of the great.
Strengths of this business.
Fifth we will continue to fund opportunities for organic growth through the introduction of new products capitalizing on our installed base and globalizing, our environmental and process heating product lines.
Executing on these five priorities will position the business to perform during this downturn and more importantly, profitably grow as our end markets recover.
Now looking forward given the current level of uncertainty, we do not intend to reinstate formal guidance for fiscal 2021 at this time.
We do believe that Q1 represents the low more watermark for the year due to covert 19 restrictions that were in place combined with a normal seasonality of our business.
With July bookings down 33% from prior year, we believe that there should be a modest improvement in Q2 with revenues that will be in line with this incoming order rate.
It is important to note that Q2 of our fiscal year 2020 was a record revenue quarter and would be a difficult comparison under any circumstances during the quarter. The cost out the actions. We have executed will begin to moderate the impact of lower volume on adjusted EBITDA margins and we anticipate that are.
Reduced capex budget will also contribute to a positive free cash flow for the year.
We will continue to moderate monitor the overall business environment and provide updates as markets evolve and visibility improves as we look ahead I want to emphasize the strength of this business model and our ability to generate cash through the cycle. We have a talented team that remains committed to.
Serving our customers and creating value for our shareholders.
By focusing on the priorities outlined thermal is well positioned to control cost manage the balance sheet, while generating cash driving continuous improvement and investing in organic growth opportunities, we will emerge a stronger more profitable business as our end markets.
Just to the next norm.
I'd like to pause here in handed over to Jay for a more detailed review of the financials.
Thank you Bruce good morning.
As we highlighted in our last call as we face the challenges presented by the coded virus and the disruption in the global oil market. Our focus has been on value preservation.
During the quarter, we recorded $2.9 million of severance cost related to the cost out actions outlined in June.
This reduction enforce.
Among other cost reductions.
We'll reduce SGN, a by $16 million in the fiscal year.
And we believe approximately 75% of these reductions are structural in nature and will provide incremental operating leverage as growth returns.
Also during Q1, our Canadian subsidiary subsidiaries qualified for and received a $2.4 million benefit from the Canadian emergency wage subsidy program.
And approximately 1.7 million of this benefit.
It was recorded under cost of sales, while the remainder impacted SGN ne.
And while we face significant challenges in our PM now related to cultivate 19, and the decline in oil prices our balance sheet remains strong.
And our cash and investments balance at the end of June improved to 48.2 million.
And also we generated 1.3 million in free cash flow during the quarter.
We have access to a $60 million revolver lineup credit.
Subject to a consolidated leverage ratio.
4.5 to one.
Steps down to 3.75 to one in December of this year.
In June we were able to amend our revolver credit agreement from a gross debt basis to a net debt basis.
Providing measurement credit for all cash on hand in excess of $60 million.
Affording us additional liquidity as we manage through these difficult times.
Our capex spend for the first quarter totaled 2.1 million inclusive of both growth and maintenance capital, we expect fiscal 21 capex to be 4.0 million.
Our net debt to EBITDA ratio is currently at two point Fivex.
And lastly, our capital allocation priority in the absence of any near term M&A transaction is to continue to reduce our debt through continued optional debt repayment and.
We remain confident in our current liquidity and ability to generate cash during the fiscal year.
In terms of revenue in orders our revenue this past quarter totaled 56.8 million in.
And Thats, a decline of 38% against the prior year record quarter and inline with our expectations for the fiscal quarter.
And note that Q1 is typically our low revenue quarter from a seasonality perspective.
The legacy revenue mix between MRO Uli in Greenfield was 68% and 32% respectively.
Versus a 51% and 49% in Q1 of fiscal year 20.
FX decreased total revenue by 2.4 million.
And in constant currency, our revenue declined by 36%.
Orders for the quarter totaled $60.6 million.
Versus 82.8 million in the prior year quarter for a decline of 27%.
And our backlog of orders ended June at $109.9 million, that's up 4% sequentially.
In versus 111.5 million as of June fiscal year 20.
Essentially flat with the prior year.
And our book to Bill for the quarter was positive at 1.07, marking the second consecutive quarter of a positive book to Bill.
Turning to gross margins margins were 42.4%, a 190 basis point improvement versus the comp period.
Gross margins were positively impacted by 299 basis points by the Canadian wage subsidy.
And gross profit declined by $13 million in the quarter and that is due to the double digit revenue decline or by 35% versus the comp period.
In terms of operating expenses.
Operating expenses for the quarter, excluding depreciation and amortization of intangibles totaled 25.2 million versus 25.3 million in the prior year.
And SG any expenses included $2.9 million of severance cost.
And on a go forward basis.
This includes the impact of recent cost actions, we expect our annualized SGN a run rate to be in the $88 million range.
And from a cash perspective, all but $700000 of the $2.9 million in severance has been paid out.
In terms of earnings GAAP EPS for the quarter totaled minus 18 cents, a share and thats compared to the prior year quarter of four cents, a share and Thats a decline of 22 cents per share.
And adjusted EPS as defined by GAAP, EPS, less amortization expense and any onetime charges.
Total minus 11 cents a share relative to 15 cents a share in the prior year quarter.
Adjusted EBITDA declined by 89% versus the comparison quarter and adjusted EBITDA as a percent of revenue was 2.4% and Thats a decline of 773 basis points versus the comp period.
Adjusted EBITDA totaled 1.4 million this last quarter.
And free cash flow was positive for the quarter by $1.3 million and we remain confident in our ability to generate cash in service our debt going forward.
Our effective tax rate for the quarter was 29%.
That reflects a worldwide rate of 31%.
Less any discrete stock compensation related items.
And in late July last month, the US Treasury issued final rules regarding the global intangible low tax income or guilty tax.
And this revised tax code revise tax code will benefit Thurman.
And while we are studying the exact impact of the revised tax code, we do expect to see a lower tax rate for the balance of fiscal year 21.
Next the balance sheet.
Cash grew 5 million in the quarter to 48.2 million and we generated $7.7 million in cash from working capital management.
And our net debt to EBITDA was essentially flat with last year at two point Fivex.
And finally in conclusion, given the continued uncertainty surround the impact of coal. They had 19, we will not be providing any formal guidance at this time.
But we will continue to evaluate as the year unfolds and I would like to reiterate that we will continue to manage what we have control over including operating expenses continuous improvement initiatives and the management of working capital.
And as Bruce just mentioned, we will adjust our spending consistent with the incoming order rate and overall business activity.
I would like to now turn the call over to Maria to moderate our Q and a session.
Maria.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation Tom will indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset for pressing the star.
One moment, please and while we pull for questions.
Our first question is from Scott Graham with Rosenblatt Securities.
Please proceed marty's question.
Hi, Good morning, all thank you for.
A lot of formation behind the scenes there.
I do have two primary questions and the first is as I look back over the last.
Five years, because we've been through very rapid oil and gas and chemicals cycles, as you know and kind of stack up the order rate comp over that period.
It looks like the comparison from the first half of while last year was pretty equal of one Q1 Q last year. So Mike I guess my point would be with July bookings down 33 being worse than the first quarter why is that exactly why our bookings actually on on ARPU.
I know that the minus 33 is better than what we just saw a banana sort of like a five year stack comparison.
It's actually a little worse, so I'm, just wondering what that needs.
Yes, Scott this is Bruce.
This is what we've observed in the month I mean, let's face it bookings are lumpy.
But we have also seen.
This second wave of coated 19 outbreak and what we Havent seen is that recover as maybe quickly as we might have originally anticipate so we still see.
Really limited access to facilities and things like that and we do believe that is.
Slowing or having a negative impact on the sequential improvements we might have otherwise expected.
Okay. Okay.
So the fact that.
The July bookings are on a year over year basis weaker than the first quarter.
I guess I am just maybe fishing a little bit more.
For more than that versus there you did say that you are acting.
Some sequential sequentially weaker.
Something in oil and gas you said a lot of things scratcher end markets, but.
Was that item that youre, referring to maybe part of the July bookings being little weaker like that.
No not not really necessarily I think my comments around both the first quarter. We started out really low in April and May we saw some some improvements we did see some nice actually greenfield orders that landed in the quarter that contributed to the overall.
Bookings rate and the impact year over year.
And and I mean, we did have a fairly strong bookings quarter.
Last year in Q2, so I do think it's got to do overall with the impact we're seeing.
Due to the coated the 19 as well as what we're seeing in our end markets and oil certainly in the impact that's than had.
On our customers and then I think also it's relative to prior year comparisons that were.
Fairly robust overall first half of our last year was was record.
That's okay understood. So the other question is surrounding SDMA.
And really kind of maybe two parts that are number one I'm assuming that.
Bruce when I'm, sorry, Jay when you said the 88 million is sort of the new run rate that that is.
So of depreciation and D.
What is.
Is that is the schrager, we're SGN a being brought back the.
25% that you're going to bring back.
In orders is that sort of like one quarter orders year over year up is that two quarters, what's maybe a little bit more color on the trigger there.
Yes to answer your first question.
It is exclusive of depreciation and amortization.
And.
Your question relating to win the leverage will occur.
No no yes.
Okay about the 16 million. This year you talked about full run rate of 17 next year. What I'm wondering is you said that you're going to bring 75% or more structure.
The 17, and so that does suggest that 25% just sort of more variable and we'll we'll be brought back onto the books and I'm wondering what the.
Order rate trigger is for that begin.
Yes, Scott this is Bruce we would need to see some stabilization in the end markets and some sequential improvements.
And improved overall visibility before we would consider bringing back some of those temporary cost reductions.
That's great. Thank you.
Hey, Hey, Scott, Let me just clarify one thing before you ask this in a following question our.
Revolver is $60 million in the amendment that we're able to garner gives us measurement credit for all cash on the balance sheet in excess of $20 million I think I might have said 60 and 60, but it should have been 20 in it and in excess of.
Cash on the balance sheet at that level.
Thank you.
Our next question is from Brian with William Blair. Please proceed with your question.
Hi, good morning, Thanks for taking my questions in the first one is just Orion.
Good morning.
On the last call you mentioned that.
Scenario analysis rightly said I believe this revenue was down.
35% to 40% that that's the level, where you'd be cash flow breakeven.
Can you.
Just tell us is that still the.
Expectation.
Updated thoughts on on that and.
And is that and I'm trying to remember that that takes into account.
All the cost cutting thats been contemplated that as well right. It it does.
But one thing I would like to.
Clarify that 35% to 40% revenue did reduction has.
Good double conservativism in that in that it has rather depress gross margins and.
Rather depressed working capital management assumptions in that so we think thats, a very conservative number for us to be be cash flow breakeven.
Understood.
That's just a worst case scenario and all it is as a scenario just for frame of reference of course.
Exactly yes.
And then just.
Just to be clear I believe Bruce that you you said that the order is down 33% in July.
That that would be your best guess.
For us to use that as the.
Proxy for for for what might.
Translate to revenue the revenue declined for the September quarter is that correct I know that that is that.
Clarify this not yet it's not guidance, but that's what we're seeing an incoming order rate, we would expect our revenues to be inline with the incoming order rate for the quarter.
And in those.
Orders and in the backlog.
Can you talk a little bit more about what you're seeing in terms of the margins and whether you expect the first quarter gross margin level to be the trough for for margins as well as the trough for revenue.
Yes. So the revenue question, we think sequentially.
Revenue will improve and that the worst is behind us.
Also due to the volume increase we think we'll have a positive impact on.
Fixed cost absorption.
And also to clarify that the costs that were taken out we really only had one full month.
The costs that were taken out of the impact to gross margins and then we have the favorable seasonality.
In terms of the backlog, we do see backlog margins.
Typically lower than typical right now, but they really vary from month to month, depending on what projects are in the backlog.
Okay, Jay can I, just pricey with one follow up on that lower than typical.
And and typical is is what is it or the lower than what you saw in the in the first quarter.
They are.
As of the what Onboarded margin in the first quarter. So three I would say 300 to 400 basis points, probably closer to 300 basis points lower but again that is that just one.
One point in time and it would change literally every every week or every month.
Okay, good et cetera, and I'm kind of walking away with impression that maybe gross margins steps down before it comes back up.
No not necessarily.
For projects, possibly but again, it's all predicated on timing.
And with with some of the cost actions with some of the cost absorption due to increased volumes.
And the seasonality aspect is typically.
Relating to maintenance.
Those would all be accretive to mark, yes, and everything in the backlog or put most of whats in the backlog is though the greenfield.
Mostly and.
Correct.
There and all these other factors okay, Okay I got it.
Thanks very much.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question.
[music].
It appears that there are no further questions at this time.
I would like to turn the floor back over to Bruce themes, President and CEO.
Great. Thank you again I would like to thank all of you for joining us on our call today.
And enjoy the rest of your days. Thank you.
The fault.
Before we conclude I do have one more question.
Okay.
We are happy to take it.
Okay.
Okay.
Okay. It does look like they have been disconnected. This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
Alright, Thank you again Maria.