Q3 2022 Thermon Group Holdings Inc Earnings Call

[music].

Greetings and welcome to the firm on group Holdings third quarter 2022 earnings call.

Speaker 1: Greetings and welcome to the Therm on Group Holdings third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this...

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded.

Speaker 1: I will now turn the conference over to our host, Kevin Fox.

I'll now turn the conference over to our host Kevin Fox Chief Financial Officer for <unk> Group Holdings. Thank you you may begin.

Speaker 1: Chief Financial Officer for Thermon Group Holdings. Thank you.

Speaker 2: Thank you, Diego. Good morning, and thank you for joining today's fiscal 2022 third quarter conference call. Earlier this morning, we issued an earnings press release which has been filed with the FCC on Form 8K and is also available on the investor relations section of our website. Additionally, the slides for this conference call can be found on the IR website under news events, IR calendar earnings conference call Q3 2020.

Thank you Diego good morning, and thank you for joining today's fiscal 2022 third 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 the Investor Relations section of our website. Additionally, the slides for this conference call can be found on the IR web.

Under news events IR calendar earnings Conference call Q3, 2020 to 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.

Speaker 2: During the call, we will discuss some items that do not conform to generally accepted accounting.

Speaker 2: 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 gaps.

Should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.

Speaker 2: I'd like to remind you that during this call, we may make certain forward-looking statements regarding our company.

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.

Speaker 2: 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 those 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 be required by law.

<unk> from those 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 be required by law.

Speaker 2: Now, I'd like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Now I'd like to introduce Bruce <unk>, our president and Chief Executive Officer for his opening remarks.

Thank you Kevin and good morning, we hope everyone listening is staying safe and in good health. We appreciate you joining our conference call and for your interest in storm on.

Speaker 3: Thank you, Kevin, and good morning. We hope everyone listening is staying safe and in good health. We appreciate you joining our conference call and for your interest in Thermon.

Speaker 3: Kevin Fox, our CFO , is here to provide additional details on our Q3 financial performance following my remarks.

Kevin Fox, our CFO is here to provide additional details on our Q3 financial performance following my remarks.

Before we get started.

Speaker 3: I'd like to take this opportunity to recognize Renee VanderSaul, our Senior Vice President of Manufacturing, for his 20 years of service.

Like to take this opportunity to recognize Renee vendor solved our senior Vice president of manufacturing for his 20 years of service.

Speaker 3: During his tenure, Renee has been an important part of Thermon and has played an instrumental role in many of the companies' achievements.

During his tenure.

<unk> has been an important part of thumb on and has played an instrumental role in many of the company's achievements.

Speaker 3: He will be stepping down as of February 15th, but will assist in the transition through the end of April .

He will be stepping down as of February 15th but will assist in the transition through the end of April .

Speaker 3: At the same time, we are also excited to have Roberto Kuwahara join the team as the new Senior Vice President of Manufacture.

At the same time, we're also excited to have Roberto Kuwahara joined the team as the new senior Vice President of manufacturing.

Speaker 3: Roberto brings a wealth of knowledge and experience in international manufacturing operations, Six Sigma, the Toyota production system and operational.

Roberto brings a wealth of knowledge and experience in international manufacturing operations six Sigma the Toyota production system and operational excellence.

Speaker 3: Moving forward, he will be instrumental in expanding the capabilities and competencies within the senior leadership team that are needed to execute our strategy.

Moving forward he will be instrumental in expanding the capabilities and competencies within the senior leadership team that are needed to execute our strategy.

Speaker 3: I'd like to now turn to slide three and the third quarter results.

I'd like to now turn to slide three in the third quarter results.

Speaker 3: There are a lot of positive things we're seeing across the business's quarter highlighted by growth in the top line, net income, bookings, and backfall. We saw solid execution by the team in the third quarter with strong top-line growth as we see in-markets continuing to recover.

There are a lot of positive things, we're seeing across the business. This quarter highlighted by growth in the topline net income bookings and backlog, we saw solid execution by the team in the third quarter with strong topline growth as we see in markets continuing to recover rhem.

Speaker 3: Revenue for the quarter was $100.6 million, up 26.4% over prior year, with growth largely driven by North America. In the eastern hemisphere, the market recovery is lagged in a more challenging business environment, particularly in Asia, due to COVID-19 restrictions in many countries.

Revenue for the quarter was $100 6 million up 26, 4% over prior year with growth largely driven by North America and the eastern Hemisphere. The market recovery has lagged in a more challenging business environment, particularly in Asia due to COVID-19 restrictions in many countries.

Speaker 3: Net income of $11.3 million was up 82.3% over the prior year quarter. Also showed strong growth.

Net income of $11 3 million was up 82, 3% over the prior year quarter also showed strong growth.

Speaker 3: Adjusted EBITDA of $20.6 million was up 11% over prior year as supply chain challenges persisted, contributing to higher input costs.

Adjusted EBITDA of $26 million was up 11% over prior year as supply chain challenges persisted contributing to higher input costs with gross margins, finishing at 45% a large one time project was dilutive in the quarter by approximately 250 basis points.

Speaker 3: With gross margins finishing at 40.5%, a large one-time project was diluted in the quarter by approximately 250 basis points.

Speaker 3: Price has had a positive impact of 200 basis points, and we anticipate further price realization in the fourth quarter of this year.

Prices had a positive impact of 200 basis points and we anticipate further price realization in the fourth quarter of this year.

Speaker 3: Inflation was a 300 basis point headwind as both labor and material costs continued to rise.

Inflation was a 300 basis point headwind as both labor and material costs continue to rise.

Speaker 3: The team has been very adept at navigating supply chain disruptions, which we believe have peaked in Q3 and appeared to be improving in Q4. However, we see continued risks in both the availability of labor and material through the middle of the calendar year.

The team has been very adept at navigating supply chain disruptions, which we believe peaked in Q3 and appeared to be improving in Q4.

However, we see continued risk in both the availability of labor and material through the middle of the calendar year.

Speaker 3: The team has also done an excellent job around managing costs with SG&A at 19.2% of sales for the quarter and trending below the projected run rate for the year. Gap EPS and adjusted EPS were 33 and 37 cents per share respectively with adjusted EPS up 23.3% from the prior year quarter.

The team has also done an excellent job around managing costs with SG&A and 19, 2% of sales for the quarter and trending below the projected run rate for the year.

GAAP EPS and adjusted EPS were <unk> 33, and 37 per share respectively with adjusted EPS up 23, 3% from the prior year quarter.

Speaker 3: Our commitment to investing in our three long term strategic platforms remains. And I will address these in more detail later in our call.

Our commitment to investing in our three long term strategic platforms remained steady.

And I will address these in more detail later in our call.

Speaker 3: We continue to see a strong, broad-based recovery in our end markets. As a result, for the third consecutive quarter, we are raising full-year revenue guidance to $342 to $350 million.

We continue to see a strong broad based recovery in our end markets as a result for the third consecutive quarter, we are raising full year revenue guidance to $342 million to $350 million.

Speaker 3: Turning now to the external environment and our end markets on page four.

Turning now to the external environment in our end markets on page four.

Speaker 3: As we look across our geographies and in markets, we see activity in certain areas approaching pre-COVID levels, but we also see additional room for further recovery in Q4 and throughout fiscal year 23 as other areas lag.

As we look across our geographies and end markets, we see activity in certain areas approaching pre COVID-19 levels, but we also see additional room for further recovery in Q4 and throughout fiscal year 'twenty three as other areas lag.

As we look on the chart on this page of the presentation I would like to reinforce a couple of key points first roughly 52% of our end markets are outside of the oil and gas sectors second greater than 55% of our end markets are tied to chemical petrochemical natural gas.

Speaker 3: As we look on the chart on this page of the presentation, I would like to reinforce a couple of key points. First, roughly 52% of our end markets are outside of the oil and gas.

Speaker 3: Second, greater than 55% of our end markets are tied to chemical, petrol chemical, natural gas and power.

<unk> power.

Speaker 3: With natural gas as a bridge fuel and the chemical, petrochemical, and power markets being driven by the emergence of the middle class in developing economies, the growth outlook across these sectors is much more robust than upstream oil, which now represents just 16% of our revenue.

Natural gas is a bridge view and the chemical petrochemical and power markets being driven by the emergence of the middle class in developing economies the growth outlook across these sectors is much more robust than upstream oil, which now represents just 16% of our revenues.

Speaker 3: The chemical and petrochemical sector has shown a nice recovery and maintenance spending year to date and we are seeing capital projects that had been shared now moving forward.

The chemical and petrochemical sector has shown a nice recovery in maintenance spending year to date and we are seeing capital projects that had been shelled now moving forward.

Speaker 3: In the power sector, bookings were up 60% over prior year, led by activity in the Texas Gulf Coast following winter storm Uri.

In the power sector bookings were up 60% over prior year led by activity in the Texas Gulf Coast Following winter Storm Yuri.

Speaker 3: We continue to win business in the rail and transit sector with bookings up 20% over the prior year quarter. We also have a line of sight to several multimillion dollar transit opportunities in this space.

We continue to win business in the rail and transit sector with bookings up 20% over the prior year quarter we.

We also have a line of sight to several multi million dollar transit opportunities in this space.

Speaker 3: As we look to strategic adjacencies, Earmont is well positioned to play a key role in the energy transition.

As we look to strategic Adjacencies.

<unk> is well positioned to play a key role in the energy transition.

Speaker 3: From wind power to biofuels to hydrogen power, our solutions are critical to safe, efficient, and reliable operations.

From wind power to Biofuels hydrogen power, our solutions are critical to safe efficient and reliable operation.

Speaker 2: While nascent, hydrogen power is particularly exciting, with many opportunities for both blue and green hydrogen processing in our pipeline today.

While nascent hydrogen power is particularly exciting with many opportunities for both blue and green hydrogen processing and our pipeline today.

Moving on to slide five of the presentation.

Speaker 3: On a trailing 12 month basis, orders finished at 360 million, a level not seen since Q4 of FY20.

On a trailing 12 month basis orders finished at $360 million a level not seen since Q4 of FY 'twenty.

Speaker 3: During the current quarter, orders of 90.2 million grew 27% over the prior year period, but were down 25% sequentially due to a large one-time project secured in Q2.

During the current quarter orders of $90 2 million grew 27% over the prior year period, but were down 25% sequentially due to a large one time projects secured in Q2.

Speaker 3: Backlog is up 32% year over year and Booktabill finished the quarter just above one when adjusting for the impact of the one time project. As a note, we have had a positive Booktabill in six of the last eight quarters.

Backlog is up 32% year over year and book to Bill finished the quarter just above one when adjusting for the impact of the onetime project as a note. We have had a positive book to bill in six of the last eight quarters.

Speaker 3: I'd like to now hand it over to Kevin Fox, our CFO , to provide a more detailed review of the third quarter and year-to-date financial results. Kevin?

I'd like to now hand, it over to Kevin Fox, our CFO to provide a more detailed review of the third quarter and year to date financial results Kevin.

Speaker 2: Thank you, Bruce. We had another great quarter on the top line on page six. Revenue was up 26% versus the prior year quarter and up 12% on a trailing 12 month basis. Current quarter's revenue includes less than $1 million of benefits from foreign exchange.

Thank you Bruce we had another great quarter on the top line on page six revenue was up 26% versus the prior year quarter and up 12% on a trailing 12 month basis. The current quarter's revenue includes less than $1 million of benefit from foreign exchange revenue.

Speaker 2: Revenue growth was driven by both the U.S., Latin America, and Canada regions, with strong materials growth due to an increase in maintenance spending concurrent with the easing of COVID restrictions. We continue to see companies in the U.S. Gulf Coast making investments to improve infrastructure, especially power infrastructure, after both the winter storm and hurricanes from the last year.

Revenue growth was driven by both the U S Latin America, and Canada regions with strong materials growth due to an increase in maintenance spending concurrent with the easing of Covid restrictions, we continue to see companies in the U S Gulf coast, making investments to improve infrastructure, especially power infrastructure. After both the winter storm.

Hurricanes from the last year.

Speaker 2: The U.S. also benefited from the impact of the large one-time contract we mentioned last quarter, with almost 9 million of revenue booked in the period.

The U S. Also benefited from the impact of the large one time contract, we mentioned last quarter with almost $9 million of revenue booked in the period.

Speaker 2: We will provide these revenue figures for comparability purposes given the size and nature of.

We will provide these revenue figures for comparability purposes, given the size and nature of the contract and.

Speaker 2: In the Eastern Hemisphere, both AMA and APAC declined due to the continuing impact from the pandemic and the slower recovery in certain countries. In both regions, our project business has been more impacted than material sales.

In the eastern Hemisphere, both EMEA and APAC declined due to the continuing impact from the pandemic and the slower recovery in certain countries in both regions. Our project business has been more impacted than materials sales on a TTM basis revenues are up 12% as we pass the inflection point into year over year growth.

Speaker 2: On a TTM basis, revenues are at 12% as we pass the inspection point into year over year growth. We are realizing the impact of price increases put in place in the second half of 2021. And as a reminder, those are most applicable to our materials.

We are realizing the impact of price increases put in place in the second half of 2021 and as a reminder, those are most applicable to our materials business pricing had a positive impact of about 200 basis points overall with the impact accelerating from the first half of the fiscal year, which is a trend we expect to continue in the fourth.

Speaker 2: Pricing had a positive impact of about 200 basis points overall, with the impact accelerating from the first half of the fiscal year, which is a trend we expect to continue in the fourth quarter.

Quarter.

Speaker 2: Reported gross margins in the quarter were 40.5% versus 46.4% in the prior year period. If we exclude the impact of the large one-time contract, margins would have been 43%. So currently the contract is about 250 basis points diluted.

Reported gross margins in the quarter were 45% versus 46, 4% in the prior year period.

If we exclude the impact of the large one time contract margins would have been 43%. So currently the contract is about 250 basis points dilutive.

Speaker 2: Pricing was a positive impact of 200 basis points on GERS margins, and we expect the accretive impact from pricing actions to continue through the year. The global supply chain challenges continue to impact our business through higher input costs.

Pricing was a positive impact of 200 basis points on gross margins and we expect the accretive impact from pricing actions to continue through the year.

Our global supply chain challenges continue to impact our business through higher input costs.

Speaker 2: Extended lead times or limited availability of raw materials and inconsistent labor availability. The cumulative impact of those factors on manufacturing productivity was approximately 350 basis points in Q3, slightly higher than anticipated as those headwinds persisted.

Tended to lead times or limited availability of raw materials and inconsistent labor availability the cumulative.

The impact of those factors on manufacturing productivity was approximately 350 basis points in Q3 slightly higher than anticipated as those headwinds persist.

Speaker 2: Finally, we have the combination of a significantly decreased benefit from the Canadian emergency wage subsidy that was reported in COGS this year versus last Plus the different margin mix within projects revenue that had an impact of approximately 200 basis points versus prior year

Finally, we have the combination of a significantly decreased benefit from the Canadian emergency wage subsidy that was reported in Cogs. This year versus last plus the different margin mix within projects revenue that had an impact of approximately 200 basis points versus prior year.

Speaker 2: The team continues to diligently work with our customers and suppliers to navigate the challenging environment in our...

The team continues to diligently work with our customers and suppliers to navigate the challenging environment in our industry while.

Speaker 2: While we expect certain input cost headwinds and the availability of qualified labor to continue to pose challenges, the pricing actions we've taken will help offset that impact in the PNL.

While we expect certain input cost headwinds and the availability of qualified labor to continue to pose challenges the pricing actions, we've taken will help offset that impact in the P&L.

Now on page seven.

Speaker 2: continue to focus on the overtime versus point in time revenues and want to confirm we will no longer be disclosing the MRO-UE framework in fiscal 23. As a reminder, the new metric includes 100 percent of our revenues, whereas the previous construct only incorporated the legacy heat tracing business.

Continue to focus on the overtime versus point in time revenues and want to confirm we will no longer be disclosing the MRO UE framework in fiscal 'twenty three.

As a reminder, the new metric includes 100% of our revenues, whereas the previous construct only incorporated the legacy heat tracing business. We believe this is a more accurate representation of the two unique revenue streams and since it is derivative from GAAP revenue recognition standards is also a more robust framework.

Speaker 2: We believe this is a more accurate representation of the two unique revenue streams, and since it is derivative from gap revenue recognition standards, is also a more robust framework than the previous MRO UE Disclosure.

The previous MRO UE disclosure.

Speaker 2: Historical information remains available and are FCC filing through comparability.

Historical information remains available in our SEC filings for comparability.

Speaker 2: Revenues recognized over time are generally represented of project work where we have engineering and installation services, whereas point in time revenues are more aligned with product or material only sales. Over time or project revenues represented 41% of total revenue this quarter versus point in time or material revenues of 59%. Excluding the large one time contract, this split was 36, 64 versus 35, 65, and the previous.

Revenues recognized overtime are generally represented a project work, where we have engineering and installation services, whereas point in time revenues are more aligned with product or material only sales overtime. Our project revenues represented 41% of total revenue this quarter versus point in time or material.

Revenues of 59%.

Excluding the large onetime contract. This split was $36 64 versus $35 65 in the previous year.

<unk> revenues grew 25% in the quarter and 29% on a year to date basis, which again highlights the strong increases of our customer maintenance spending and viewed over the longer term is representative of the value of the global installed base of our business we.

We will continue to provide the greenfield versus MRO mix through the end of the year, which was 39% Greenfield and 61% MRO.

<unk> 36, and <unk> 64, respectively in the prior year.

Speaker 2: On PJ for this SGA metric, we deduct depreciation from the FCC reported selling general and administrative expense.

On page eight for this SG&A metric, we deduct depreciation from the SEC reported selling general and administrative expenses in the quarter SG&A was $19 3 million or 19% of revenue on a run rate basis, we are below our target of approximately $80 million that we projected at the start of the year.

Speaker 2: In the quarter, SG&A was $19.3 million or 19 percent of revenue. On a run rate basis, we are below our target of approximately $80 million that we projected at the start of the year.

Speaker 2: The team continues to execute on our investment plans while managing controllable spend. We started the process of funding our strategic initiatives for diversification, technology enabled maintenance and developing markets, and we will continue to build our product development road maps for the heat tracing and process heating lines.

The team continues to execute on our investment plans, while managing controllable spend we started the process of funding our strategic initiatives for diversification technology enabled maintenance and developing markets and we will continue to build our product development roadmaps for the heat tracing and process heating months.

Speaker 2: Adjusted EBITDA was $20.6 million, or 20.5% of sales. This includes a deduction for a Canadian emergency wage subsidy of $200,000, and we do not believe we will have any additional benefits from this program.

Adjusted EBITDA was $20 6 million or 25% of sales. This includes a deduction for our Canadian emergency wage subsidy of $200000 and we do not believe we will have any additional benefits from this program adjust.

Speaker 2: Adjusted EBITDA is up 2.1 million from the prior year to increase volume and pricing, but offset by the items we've previously mentioned that impact the cost of sales.

Adjusted EBITDA is up $2 1 billion from the prior year due to increased volume and pricing, but offset by the items. We've previously mentioned that impacted the cost of sales.

GAAP EPS was <unk> 33 per share an increase versus prior year of 18 and.

Speaker 2: Gap EPS was $0.33 per share, an increase versus prior year of $0.18, and adjusted EPS was $0.37 per share versus last year's $0.37.

And adjusted EPS was <unk> 37 per share versus last year's 30 cents.

Speaker 2: On page nine, the balance sheet continues to trend in the right direction as we manage the growth of our business.

On page nine the balance sheet continues to trend in the right direction as we manage the growth of our business.

Speaker 2: Cash is down 17 million Euro per year as we've paid down set and improved our global cash management process.

Cash is down $17 million year over year, as we've paid down debt and improves our global cash management processes.

Speaker 2: You can see the impact on our total debt with a 22% reduction versus prior year, resulting in net debt to adjusted EBITDA of 2.2 times.

Can see the impact on our total debt with a 22% reduction versus prior year, resulting in net debt to adjusted EBITDA of two two times.

Speaker 2: We expect this to further decline to approximately 1.5 times by the end of the fiscal year, excluding the impact of any potential acquisition.

We expect this to further decline to approximately one five times by the end of the fiscal year, excluding the impact of any potential acquisitions. The M&A pipeline remains robust and we have ample capacity under our new debt agreement to execute when attractive opportunities are available.

Speaker 2: The M&A pipeline remains robust and we have ample capacity under our new debt agreement to execute when attractive opportunities are available.

Speaker 2: Networking capital is down 4 million year over year, or six points as a percentage of revenue. The cash conversion cycle is down to 130 days, but year over year improvement of over 60 days. This is a great result given the external environment, especially around suppliers, and we're focused on continuing to improve the cash flow of our business.

Net working capital is down $4 million year over year or six points as a percentage of revenue.

Cash conversion cycle was down to 130 days year over year improvement of over 60 days. This is a great result, given the external environment, especially around suppliers and we're focused on continuing to improve the cash flow of our business.

Speaker 2: We continue to generate positive quarterly cash flows with free cash flow of 2.6 million in the quarter as we invested in the networking capital along with the growth of our top line.

We continue to generate positive quarterly cash flows with free cash flow of $2 6 million in the quarter as we invested in the networking capital along with the growth of our top line.

Speaker 2: CapEx was only $700,000 and predominantly focused on maintenance, and we will likely see incremental investments in our strategic initiative in the quarters ahead.

Capex was only $700000 and predominantly focused on maintenance and we will likely see incremental investments in our strategic initiatives in the quarters ahead.

Speaker 2: Overall, another good quarter of financial results is we continue to grow the business. I'm pleased with the top line performance and expect we will continue to see price realization in our fourth quarter. The global team continues to respond to rising input and transportation costs while keeping our facilities operating safely and delivering for our customers.

Overall, another good quarter of financial results as we continue to grow the business I am pleased with the top line performance and expect we will continue to see price realization in our fourth quarter.

Global team continues to respond to rising input and transportation costs, while keeping our facilities operating safely and delivering for our customers. Our balance sheet is strong our technology is winning in the market and our people make a difference every day.

Speaker 2: Our balance sheet is strong, our technology is winning in the market, and our people make a difference every day.

Speaker 2: I want to say a special thank you to our employees across the globe for their commitment and all the fantastic work they are doing for our customers and shareholders. And with that, I'll turn it back over to Bruce for an update on the progress we're making with our strategic and...

I want to say a special thank you to our employees across the globe for their commitment and all of the fantastic work. They are doing for our customers and shareholders and with that I'll turn it back over to Bruce for an update on the progress, we're making with our strategic initiatives.

Speaker 3: Thank you, Kevin. I'd like to turn now to slide 10.

Thank you Kevin I'd.

I'd like to turn now to slide 10.

Speaker 3: The team is making progress in advancing our three strategic platforms to achieve our goal of 550 million in revenue by the end of fiscal 2026 while driving operational excellence to achieve EBITDA margins in the low to mid 20% rank.

Now the team is making progress in advancing our three strategic platforms to achieve our goal of $550 million in revenue by the end of fiscal 2026, while driving operational excellence to achieve EBITDA margins in the low to mid 20% range.

Speaker 3: Beginning with the developing markets, the team has built a detailed analysis by customer and in-market identifying the specific needs by country or region. We've established an initial localization roadmap that would be instrumental in growing share in these emerging economies.

Beginning with the developing markets. The team has built a detailed analysis by customer and end market identifying the specific needs by country or region. We've established an initial localization roadmap that will be instrumental in growing share in these emerging economies.

Speaker 3: On our next call, we'll provide more on our stands for Fiscal Year 23 to meet local requirements, market lead times, and regional price points.

On our next call, we'll provide more on our plans for fiscal year 'twenty three to meet local requirements market lead times and regional price points.

Speaker 3: While we have seen a delay in the overall market recovery in the Eastern Hemisphere, we believe there is pent-up demand that will return as economies emerge from COVID-19 restrictions.

While we have seen a delay in the overall market recovery in the eastern Hemisphere. We believe there is pent up demand that will return as economies emerge from COVID-19 restrictions.

Speaker 3: We continue to advance our diversification of end markets in the quarter as well. Recently, we have added a new business development manager for rail and transit and have launched a new on the health of our Blizzard Duty rail switch heater that has been well received by our class one rail cuffs.

We continue to advance our diversification of end markets in the quarter as well recently, we have added a new business development manager for rail and transit and have launched a new RV Hellfire Blizzard duty rail switch heater that has been well received by our class one rail customers.

Speaker 3: We've also launched our zero-hologin low-smoke commercial heat tracing cable that is gaining momentum, particularly in Europe . Based upon feedback from our channel partner, we expect sales to double in the coming year. During the quarter, we have secured wins and two data centers for our commercial products. And finally, we've lost the marketing campaign and food and beverage that is yielding early results with key wins and some new applications.

We've also launched our zero halogen low smoke commercial heat tracing cable that is gaining momentum, particularly in Europe based upon feedback from our channel partner, we expect sales to double in the coming year during.

During the quarter, we have secured wins in two data centers for our commercial products and finally, we've lost the marketing campaign and food and beverage that is yielding early results with key wins and some new applications as you prepare to watch the Super Bowl next weekend, you may be interested to know that firm on plays a role in providing.

Speaker 3: As you prepare to watch the Super Bowl next weekend, you may be interested in know that Thermon plays a role in providing those much needed game day essentials with 1.1 million in orders for potato chip, dressing in food oils, and brewing production operations.

Those much needed game day essentials with $1 1 million in orders for our potato chip dressing and food oils and brewing production operations.

Speaker 3: Our third strategic platform, technology and able maintenance, continues to gain momentum in the marketplace. The Genesis Network, a self-healing mesh network that enables centralized control, has been successful in early customer pilot programs.

Our third strategic platform technology enabled maintenance continues to gain momentum in the marketplace. The Genesis network of self healing mesh network that enables centralized control has been successful and early customer pilot programs.

Speaker 3: The quilt backlog is growing and early adopters are seeking to expand the installations across their operations.

<unk> backlog is growing and early adopters are seeking to expand the installations across their operations. We also have new product introductions to augment this solution set that will be announced during the first half of fiscal year 'twenty three.

Speaker 4: We also have new product introductions to augment this solution set that would be announced during the first half of fiscal year 23.

Speaker 4: Looking forward on page 11, we are very pleased with the continued momentum we are seeing in our business.

Looking forward to pay on page 11.

We are very pleased with it.

We are seeing in our business.

Speaker 4: The Thermon team has done an excellent job in positioning this business for success during recovery and in the energy transition that is underway.

<unk> team has done an excellent job in positioning this business for success during the recovery and in the energy transition that is underway.

Speaker 4: Thermal solutions are mission critical in the majority of the diverse in-market streets served.

<unk> solutions are mission critical in the majority of the diverse end markets we serve.

Speaker 4: We see additional recovery in our traditional end markets in Q4 and throughout fiscal year 23 that will be augmented by our efforts to grow and expand our addressable market.

We see additional recovery in our traditional end markets in Q4 and throughout fiscal year 'twenty three that will be augmented by our efforts to grow and expand our addressable markets.

Speaker 4: As a result, for the third consecutive quarter, we are raising our full year revenue guidance to 342 to 350 million, from 330 million to 345 million, representing 24 to 27% year over year top line growth.

As a result for the third consecutive quarter, we are raising our full year revenue guidance to $342 million to $350 million from $330 million to $345 million, representing 24% to 27% year over year top line growth.

Speaker 4: While input costs continue to be a headwind on EBITDA margins, we anticipate some of these costs to be transitory and that our operational excellence programs will drive productivity gains combined with price increases to mitigate the residual impact over the next several quarters to further expand EBITDA margins.

While input costs continue to be a headwind on EBITDA margins, we anticipate some of these costs to be transitory and that our operational excellence programs will drive productivity gains combined with price increases to mitigate the residual impact over the next several quarters to further expand EBA.

<unk> margins.

Speaker 4: I'm personally excited about the opportunities that lie ahead. We have a resilient business model that generates strong cash flow at Attracted Martin.

I am personally excited about the opportunities that lie ahead.

Have a resilient business model that generates strong cash flow at attractive margins, a very capable team a sound strategy and recovering in markets that position us well to create shareholder value over time.

Speaker 4: a very capable team, a sound strategy, and recovering in markets that position us well to create shareholder value over time. With that, I would like to hand it back over to our moderate and for the Q&A portion of our call.

With that I would like to hand, it back over to our moderator for the Q&A portion of our call.

Thank you.

Speaker 1: And ladies and gentlemen, at this time, we will be conducting a question and answer session.

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Speaker 1: Our first question comes from John Brass with Kansas City, Capitol, please state your question.

Our first question comes from Jon Braatz, with Kansas City Capital. Please state your question.

Good morning, Bruce Kevin.

Speaker 2: I'm going to jump. Couple more questions. Bruce, can you tell me what may be the opportunity that may be in front of you in your Eastern Hemisphere Asian markets? I know the markets have been weak there, but how much maybe they're pent up the man, new capital projects, how significant can that turn around be when it happens?

Good morning, John couple morning, Gents couple questions. Bruce can you tell me what maybe the opportunity.

That may may be in front of you and in your Eastern Hemisphere Asian markets I know the markets have been weak there but.

How much.

Either pent up demand new capital projects, how significant can that turnaround b.

When it happens.

Speaker 4: As I look at that, John , I see it much the same as what we're now experiencing in the West. I don't want you to walk away the impression that there's not additional lift that we can see in the Western hemisphere as well in North America, particularly. But yes, in the East, I would expect

As I look at it John .

I see it much the same as what we are now experiencing in the west end and I don't Wanna.

I don't want you to walk away the impression that there is not additional lift that we can see in the western hemisphere as well in North America, particularly.

But yes in the east I would expect.

Speaker 4: that recovery to look very similar. I'm certain that the demand is.

That recovery to look very similar I'm certain that the demand is there.

Speaker 4: is there is Pins Up Demand there. We look at our business in Asia. It's even off a bit from last year. So when I look at kind of where we were previously, I see...

There is pent up demand there we look at our business in Asia.

It's even.

Off a bit from last year.

So when I look at kind of where we were previously.

I see.

Speaker 4: easily, you know, 15, 20% opportunity just in the broken recovery in in Amia in Europe , milk at least Africa. I would say it, it, it, it may be.

Italy.

15%, 20%.

And growth in recovery.

In EMEA in Europe , Middle East Africa, I would say it may be.

Speaker 4: is, you know, more than 10 to 15% range, but certainly

As.

More in the 10% to 15% range, but certainly some.

Speaker 4: some nice additional growth opportunities in the East.

Some nice additional growth opportunities in the east also see additional running room here in the west as well sure sure Okay. Okay.

Speaker 2: I also see additional running room here in the west as well. Sure. Sure. Okay. Okay.

Kevin how much of.

Speaker 5: that large project remains to be filled.

That large project remains to be filled.

Speaker 2: Yeah, John , so I think we've done almost 12 million year to date. If you think a little under nine this quarter, I think it was a little under three last. We think it's going to be probably north of 20 million for the year. So, you know, we're a little over halfway through that contract right now.

Yes, John So I think we've done almost $12 million year to date, if you think a little under nine this quarter I think it was a little under three last we think it's going to be probably north of $20 million for the year. So we're a little over halfway through that contract right now okay.

Speaker 5: Okay, still some margin headwoods in the fourth quarter. Yes, I correct.

So still some margin headwinds in the.

In the fourth quarter, yes.

Yes, that's correct.

Speaker 5: Okay. And then obviously you did a very well, a very good job in terms of managing the SGA expenses. Are they anything unusual in there that might come back a little bit or are these you view these this ratio is sort of more more permanent and will be with us for some time.

Okay and then.

Obviously, you did it very well a very good job in terms of managing the SG&A expenses.

Are there anything unusual in there that might.

It might come back a little bit or are these.

You'd be you'd do you view. These this ratio sort of more <unk>.

Permanent and.

We will be with us for some time.

Speaker 2: Yeah, John , I think more of the latter, if you think maybe roll back the clock a year. So when we obviously had to take some some actions on the base cost, the intention was to get the business to a place that, you know, in a more permanent basis is starting to look like what it looks like today, essentially. There should be some operating leverage in the businesses. We continue to grow, but, you know, that S-GNA is a percentage of sales, you know, in the call at the low 20s, I think is a place where we can get to on a more permanent basis, you know, not there yet on a year today, they're trailing 12 months basis. But I think the future of S-GNA is the percent of the sales is more representative of today than what it's been, you know, six, 12, 18 months ago. Yeah.

Yes, John I think more of the latter if you think maybe roll back the clock a year or so when we we obviously had to take some actions on the base cost the intention was to get the business to a place that.

On a more permanent basis is starting to look like what it looks like today essentially there.

There should be some operating leverage in the business as we continue to grow but.

Of that SG&A as a percentage of sales.

Call. It the low Twenty's I think is a place where we can get to on a more permanent basis not there yet.

On a year to date or trailing 12 month basis, but I think the future of SG&A as a percentage of sales is more representative of today than what it's been 612 18 months ago Yep Yep Alright.

Speaker 5: All right, hard Kevin, thank you much.

Alright, alright, Kevin Thanks, so much.

Okay. Thanks, Jeff.

Speaker 1: Thank you. Our next question comes from Brian Drabbe with William Blair. Please, take your question.

Thank you. Our next question comes from Brian Drab with William Blair. Please state your question.

Speaker 2: Hi, thanks. Congratulations on a continued recovery here and the execution.

Hi, Thanks.

Congratulations on a continued recovery here in the execution.

Speaker 6: Just, you know, first, you're looking at slide six. And I think you just answered part of this question, but with these gross margin had went, that you called out in slide six with the contract, the supply chain.

Yes.

First.

Looking at slide six I was wondering.

And I think you just.

Answered part of this question, but with these gross margin headwinds that you called out on slide six.

The contract the supply chain.

Speaker 6: emergency wage subsidy. Can we just talk a little bit about

Emergency wage subsidy.

Can we just talk a little bit about that.

Speaker 6: duration of these headwinds. I guess the one-time contract is going to fall off after a couple more quarters. How are you looking at that?

The duration of these.

Headwinds I guess, the one time contract is going to fall off that for a couple more quarters.

How are you looking at that.

Yes.

Speaker 4: Brian , this is Bruce. So, the contract will largely, will be completed with the bulk of it by the end of this fiscal year. So, you know, while it's accreted, the EBITDA is diluted to gross margins. So, you know, that will be falling off.

Brian This is Bruce so.

The contract will largely be completed with the bulk of it by the end of this fiscal year or so.

While it's accretive to EBITDA. It is dilutive to gross margins, so that that will be falling off.

Speaker 4: When I look at some of the cost increases that we've incurred here in the supply chain and the labor costs increases. You know, as I've used some of these, I believe they're transitory. I think some of these are commodities. I think in other cases, there's been shortage of supply and there's been surprise gousing, particularly in electronic components.

When I look at some of the cost increases that we've incurred here in the supply chain.

And and the labor cost increases.

I view some of these I believe they are transitory I think some of these are commodities I think in other cases, there's been shortages of supply in and Theres been some price gouging, particularly in electronic components I think as supplies will return those will normalize so I think.

Speaker 4: I think as supplies, you know, return, those will normalize, so I think, you know, we'll

Well we'll.

Speaker 4: We'll see that come back. I do believe the labor.

We will see that come back I do believe the labor costs are here to stay and I think there is probably some of the material price increases that will that will get locked in as well so.

I expect that to probably be.

Speaker 4: middle of the calendar year, you know, my glass ball was no better than yours, but I do expect to see some of that come back in the line. And then the fit earlier, we have additional...

Middle of the calendar year.

My glass ball is no better than yours, but.

But I do expect to see some of that come back in line.

Earlier, we have additional pricing realization, we expect during the fourth quarter and were certainly evaluating our opportunities.

Speaker 4: pricing realization we expect during the fourth quarter. And we're certainly evaluating our opportunities to selectively increase price.

Selectively increase price.

Speaker 4: going forward where we see some of these residual cost landing and we need to get more price in the market.

Going forward, where are we where we see.

Some of these residual costs landing and we need to get more price in the market.

Got it so.

Just kind of building on that as you look forward.

Speaker 6: kind of building on that as you look forward to the fourth quarter and next year. Can you give us any more?

For the fourth quarter and next year can you give us any more.

Speaker 6: directional guidance around gross margin, you know, this fiscal year it's averaged, I know there's a lot of factors here, but you know it's averaged like 38 and a half percent for the first three quarters.

Like directional guidance around gross margin.

That's fair.

Fiscal year, it's averaged.

I know, there's a lot of factors here, but its average like 38, 5% for the first three quarters.

Speaker 6: And I guess, directionally, I think you'd tell us it should be going up. Can you give us any sense for, as we look forward to?

And.

Directionally I think you can tell us it should be going up can you.

Can you give us any sense for as we look forward to.

Speaker 4: that fiscal year, what's the normalized level that you think you can shoot for it? What I would expect, because of the some unusual one-time expenses and the delusion of this part of this, of this,

Next fiscal year.

Whats the normalized level that you think you can shoot for.

What I would expect because of the some unusual one time expenses in the dilution of this all of this.

This.

Of this.

Speaker 4: one time project and some of the headwinds we've seen.

One time project and some of the headwinds we've seen I would expect margins to be in the low.

Speaker 4: I would expect margins to be in the low to mid 40% range in the coming year. And some of that will depend on, obviously depend on mix and how strong the capital projects come back.

To mid 40% range in the coming year and some of that will depend on obviously depend on mix and how strong the capital projects come back.

Speaker 4: in the coming year, and so that will have an influence. Obviously, my expectation that if it were on the lower end of that, we would see a stronger capital cycle, which would be positive for the top line.

In the coming year, and so that will have an influence obviously.

My expectation that if it were on the lower end of that we would see a stronger capital cycle, which would be positive for the topline.

Speaker 6: Got it. Okay. Thanks. And then Kevin, you're talking about op-ax in terms of percentage of sales kind of longer term. I just want to.

Got it okay.

Thanks, and then Kevin you're talking about.

Opex in terms of percentage of sales kind of longer term I just want to.

Speaker 6: You get a little help if I could on modeling this in the more near term though, you know, it's been the run rate per. You know, we look at on adjusted off that space is so I hope my numbers kind of line up with how you can think about it, but you know, like 28 million was kind of the old run rate, you know, plus or minus hour, I get 23 last couple quarters, is this, you know, we're.

You'll get a little help if I could on <unk>.

Modeling this in the more near term, though it's Ben.

The run rate for.

We look at it on an adjusted Opex basis, I Hope my numbers kind of lineup with how you can think about it but.

$28 million was kind of the old run rate plus or minus <unk> 23 last couple of quarters is this.

Sure.

You'd guide us to kind of is that sustainable.

Speaker 6: you'd guide us to kind of is that sustainable for the you know through the next four or five quarters.

Through the next four or five quarters here that where we're going to be.

Speaker 2: that where we're going to be. Yeah, I guess Brian , the first thing is kind of the jumping off point here about, you know, we've talked about the target around 80 million for this year. That exudes the depreciation. I think that's probably the two to three million at quarter.

Yes, I guess, Brian the first thing is kind of the jumping off point here about we've talked about the target around $80 million for this year that excludes the depreciation I think that's probably the two $2 million to $3 million a quarter.

Speaker 2: That's the delta between year 23 and maybe year 20. But, you know, as we think about the base cost of the business, you know, profitable growth and operating leverage is the name of the game here. So we're going to be trying to calibrate those investments that we're making in the business, you know, whether that's around our strategic initiative.

Elton between year, 'twenty, three and maybe our 'twenty.

But you know as we think about the base cost of the business profitable growth and operating leverage is the name of the game here. So.

So we're going to be trying to calibrate those investments that we're making in the business, whether that's around our strategic initiatives.

Speaker 2: You know clearly thinking about the labor force and making sure we've got qualified safe people who can be run on the plants and everything around that nature. But we do expect there's significant operating leverage in the business. So you know if the top line

You know clearly thinking about the labor force and making sure. We've got qualified safety people, who can be run on the plants and everything around that nature, but we do expect there is significant operating leverage in the business. So you know off the top lines growing by you know 510, 15%. We think the the SG&A number is going to be growing at a rate that is below that.

Speaker 2: Growing by 5, 10, 15%, we think the SGA number is going to be growing at a rate that is below that to create that improved profitability in the business. So probably too early to talk about specific numbers for fiscal 23, but we certainly expect.

Create that improved profitability in the business so.

Too early to talk about specific numbers for fiscal 'twenty, three but we certainly expect that as the business is growing that the energy transition is kind of taking a hold we're going to have to invest in those strategic initiatives that is going to drive incremental costs, but the balance here is going to be to do that in a way where we're managing profitable growth at the same time.

Speaker 2: that is the business is growing, that the energy transition is kind of taking a hold. We are going to have to invest in those strategic initiatives that is going to drive incremental costs.

Speaker 2: But the balance here is going to be to do that in a way where we're managing profitable growth at the same time. So don't really want to put a dollar against it right now. We can probably come back to that when we talk about fiscal 23 here in the next quarter. But that's generally the conversation we're having with the leadership team and board.

Don't really want to put a dollar against that right now we could probably come back to that when we talk about fiscal 'twenty three here within the next quarter, but that's generally the conversation, we're having with the leadership team and board.

Got it Okay and then.

Speaker 6: I can't believe it's already been four years since you acquired CCI. And one of the things you could just talk about, you know, what, as you're seeing, you know, the recovery in your business, are you seeing that in both the, you know, what I guess you call thermon heating systems and the legacy business, or is one performing better than the other? Yeah, Brian , this is...

And what I can't believe it's already been four years since we acquired CCI.

And I was wondering if you could just talk about what is youre seeing the recovery in.

And your business are you seeing that in both but I guess you can call it their heating systems and the legacy business, whereas one performing better than the other.

Yes, Brian this is Bruce actually.

Speaker 4: If you'll call that that business the process and environmental heating product line.

If youll recall.

That business, the process and environmental heating product lines.

Speaker 4: they actually lead heat tracing in the recovery they did in the last, and we're seeing the same thing here. So, we actually are seeing a stronger and earlier recovery in the process of environmental heating, and we expect the heat-based tracing business is recovering as well, but it's lagging.

Actually they actually lead heat tracing kind of in the recovery. They did in the last and we're seeing the same thing here. So we actually are saying.

Stronger than earlier recovery.

Process and environmental heating.

And we expect the heat tracing business the heat based chasing business is recovering as well, but it's lagging.

Speaker 4: by six months or so. So it's what has historically happened, it's what's happening now. So we feel good about that business and where it's going. And it's also a leading indicator of what we can expect in the legacy business.

By six months or so so.

It's what has historically happened its whats happening now.

So we feel good about that business.

And where it's going.

And it's also a leading indicator of what we can expect in the legacy business.

Speaker 6: Right. And can you say anything about what the margins are today in those businesses, you're relative to one another?

Right and.

And can you say anything about what the margins are today and those.

Businesses relative to one another.

Kevin do you want to comment precisely just like relative yes, it's like is one higher than the others.

Speaker 6: Kevin, do you want to come in there precisely just like relative just like is one higher than the others?

Speaker 4: Yeah, Brian , I think relatively the THS business has always been viewed as slightly accretive versus the core. I think that trend has continued through the course of the acquisition. So I wouldn't say there's been any fundamental shift on the profile of the business between the two with the process eating being a little more attractive on the balance versus It's for material sales than the project sales which tend to be diluted on the heat tracing side.

Yes, Brian I think relatively the CHS business has always been viewed as slightly accretive versus the core I think that trend has continued through the course of the acquisition. So I wouldn't say, there's been any fundamental shifts on the the profile of the business between the two with the process eating being a little more attractive on the balance versus heat tracing.

It's more material sales then then the project sales, which tend to be dilutive on the heat tracing side.

Speaker 6: Okay. And then just last question, I'm just curious on the slide where you showed that 16% of revenues from upstream oil, how does that break down these days between oil sands and non-oil sands?

Okay and then just last question I'm, just curious on the slide where you showed the 15.

16% of revenue from upstream oil.

How does that break down these days.

Between oil sands in non oil sands.

Speaker 4: The bulk of that, the bulk of those revenues are actually in Canada and in Eurasia in colder climates. It's not all but I would say at least 80% of the population are in the same area. The bulk of that, the bulk of those revenues are actually in the same area.

The bulk of that.

The bulk of those revenues are actually in Canada and in Eurasia.

Colder climates, it's not all but I would say.

At least 80, 80% or more.

Speaker 7: Yeah, and so that's still.

Yeah.

And so that that's still.

Speaker 4: You're still generating revenue in the oil. Oil stands not talked about is much. I mean, really no, is that a lot of MRO business from pregetary? It is a, yeah, it is a very solid recurring revenue stream in MRO UE and it's, you know, I could go back and, you know, it's $50 million a year, largely material sales in Canada that are linked to some of those end markets. They continue to operate and produce and they've got to maintain those assets.

You're still generating revenue in the oil sands oil sands not talked about as much I mean, what really know is that a lot of MRO business from <unk>. It is yes. It is a very solid recurring revenue stream.

MRO UE in it.

I could go back and.

$50 million a year largely material sales in Canada that are linked to some of those end markets there.

They continue to operate and produce and they've got to maintain those assets.

Speaker 8: And that's still relatively higher margin business isn't it with the very very not feeding I saw for a good idea. Yeah, absolutely. Yeah. Okay. Thank you very much. Yep.

Mhm and Thats still relatively higher margin business isn't isn't it with.

Very not feeling great.

Self regulate.

Absolutely yes.

Okay. Thank you very much youre welcome.

Okay.

Speaker 1: Thank you. And ladies and gentlemen, don't over the questions at this time. I'll turn it back to Bruce Tames for a close and remark.

Thank you and ladies and gentlemen, there are no further questions at this time I'll turn it back to Bruce <unk> for closing remarks.

Speaker 4: Well, I'd like to thank everyone for their interest in term on and for joining. I'd also like to just take a moment and thank our employees around the globe that each and every day serve our customers and are focused on creating value for our shareholders. Appreciate your interest and enjoy the rest of your day.

Well I'd like to thank everyone for their interest in <unk> and for joining I would also like to just take a moment and thank our.

Our employees around the globe that each and every day serve our customers and our focus on creating value for our shareholders.

State your interest enjoy the rest of your day.

Speaker 1: Thank you. This concludes today's conference. I'll parse me disconnect. Have a good day.

Thank you. This concludes today's conference all parties may disconnect have a good day.