Thermon Group Holdings Inc. Q4 2023 Earnings Call
Hello, and welcome to the Thermo in Q4 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. You May press star one at any time should be placed in the question queue. As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to your host Yvonne Chan Wong Vice President F P&A and Investor Relations. Please go ahead Ivan.
Thank you Kevin Good morning, and thank you for joining today's fiscal 2023 fourth quarter conference call.
Earlier. This morning, we issued an earnings press release, which has been filed with the SEC on form 8-K, and it's also available on the Investor Relations section of our website.
Additionally, the slides for this conference call can be found in our IR website under news and then are your calendar earnings conference call Q4 2020.
During the call.
We will discuss some items that did not conform to generally accepted accounting principles, we have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release.
These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP I would like to remind you that during this call. We may take certain forward looking statements regarding our company. Please refer to our annual report and most recent quarterly reports filed with.
The S E T for more information regarding our forward looking statements, including the risks and uncertainties that could impact our future results.
Our actual results might 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 it may be required by law.
I would like to introduce those thing, our president and Chief Executive Officer for his opening remarks.
Thank you Bob.
Good morning, everyone and thank you for joining us today.
Before we talk about a record quarter and here I'd like to start today by setting the stage with a brief overview of thermometer.
Is the 68 year old company, we've been tested and proven resilient across many economic cycles.
We're a world leader in providing safe.
Reliable mission critical industrial process heating solutions to customers in 85 countries from facilities on four continents.
Our almost 1400 employees have an industry, leading safety record and are dedicated to creating value for our customers by executing our long term strategic plan.
I'd like to thank all of them are contributing to our record performance in fiscal 2023.
I'm looking forward to seeing what we can achieve together in the years to come.
On slide four you can see our strategic pillars.
In order to create long term value for our shareholders. We remain focused on three key areas.
First profitably growing our installed base second diversification, digitization and decarbonization and third disciplined capital allocation.
And our first pillar, we benefit from a very large global installed base, which provides a significant opportunity to capture recurring revenues, while driving growth across our traditional end market verticals.
In our second strategic pillar, we're driving additional growth through expansion into attractive adjacencies across diverse end markets are.
Our solutions are also enabling decarbonization through electrification and the long term transition towards sustainable energy sources.
In addition, we're expanding our digital solutions with products that utilize the industrial internet of things and support customer demand for enhanced productivity reliability efficiency and safety.
Underpinning our first two strategic pillars is our commitment to disciplined capital allocation.
Given the strength of our balance sheet. Our current priorities include inorganic growth through bolt on acquisitions with returns that exceed waac by year, three and when appropriate returning capital to shareholders.
Turning to slide five and an update on our diversification efforts.
As you can see we continue to make solid progress on the strategic diversification of our end markets with ongoing wins across key markets, such as rail and transit, where we saw growth of 29% and year commercial was also up 29% and food and beverage grew a 110 person.
And the year.
In addition, we're seeing traction in other selected markets linked to long term secular growth trends in the.
Turning to energy space, our revenue from nuclear power is up 16% and our revenue from Biofuels and Green diesel is up 245%.
We made inroads in the semiconductor end market with revenue up 15% and our revenue from biotechnology and market is up over 200%.
While the individual contributions from each of these market sectors is small today in aggregate they represent over $20 million of revenue in fiscal 2023, and we believe that the breadth of the total addressable market combined with our ability to grow share represents a solid growth opportunity in the years ahead.
Moving now to slide six on our Digitization strategy.
Last quarter, we introduced you to the Genesis duo the latest edition to our market, leading digital platform the Genesis network.
The platform provides customers with full operational awareness and supervisory control over their heat trace systems using industry, leading wireless mesh technology that connects all heat trace controllers back to the control room.
This enables greater operational efficiency through increased uptime with fewer maintenance hours and costs.
This quarter as we look back at the results of fiscal 2023, it's readily apparent that the benefits of this innovative digital platform form are resonating with our customers adoption is increasingly accelerating with a 350% year over year increase in new circuits in fiscal 2023.
And a growing pipeline of opportunities.
Using.
Customer feedback we continue to innovate the Genesis network to provide expanded functionality for our customers with the latest software update released in April .
Turning now to slide seven on enabling the energy transition.
Here you can see the rapid growth of our pipeline of opportunities and wins for projects that help enable the energy transition.
This is an increasingly important part of our business, representing 8% of incoming orders in fiscal year 'twenty, three as our products and solutions to support our customers in achieving their sustainability goals and contribute to overall decarbonization.
On the right side of the slide we have selected examples of our recent wins, our innovative products and solutions are used across a variety of applications from renewable fuels to lithium ion batteries and from carbon capture to thermal energy storage.
On slide eight.
Reviewing the external environment I'd like to emphasize again the progress that we've made against our end market diversification strategy here, we see an updated chart with end market mix for the trailing 12 month period, ending March 31 2023.
Approximately 61% of our revenue came from non oil and gas end markets compared to roughly 45% in fiscal year 17, excluding our most recent acquisition power market.
Turning now to our full year results for fiscal year 2023 on slide nine.
<unk> achieved record revenue adjusted EBITDA and EPS in fiscal 2023, driven by our team's continued outstanding execution, despite ongoing macroeconomic volatility.
Revenue of $440 6 million was up approximately 24% year over year, driven by strong demand in North America as well as the recent rebound in growth in Asia Pacific more importantly revenue from customer Opex spending grew significantly compared to revenue from capital projects. This is indicative of.
Greater exposure to growth of the recurring revenues from the installed base and less exposure to large upstream capex projects, which we believe helps decrease the cyclicality of our business going forward.
Our profitability metrics were also robust during fiscal year 2023, driven by volume and improved gross margins and record adjusted EBITDA increased approximately 60% year over year to $93 3 million with a margin of 21, 2% adjusted.
Adjusted EBITDA margins expanded 480 basis points in fiscal 2023.
Price volume and operational excellence initiatives.
As a result free cash flow doubled to $48 3 million in the year.
Finally, we achieved record adjusted EPS of $1 56, a share a year over year increase of approximately 90%.
Moving to slide 10 in our fourth quarter fiscal 2023 results.
<unk> delivered another quarter of outperformance with record revenue of $122 5 million up 19% year over year due to sales growth.
Cross all geographies.
Record Q4, adjusted EBITDA increased 37% to $25 1 million driven by cost management and volume growth adjusted EBITDA margin expanded by approximately 260 basis points to 25% on improved gross margins and controlled spending.
Free cash flow of $21 9 million was up 66% adjusted EPS was <unk> 41, a share an increase of more than 30% from the prior year period.
If we look now to slide 11, you can see that our orders and backlog continue to remain strong.
We are very pleased with the momentum we're seeing in the business. This quarter, we achieved a record of $132 million in incoming orders up 17% year over year, while bookings on a trailing 12 month basis grew to $457 million up 15%, an all time high our book to Bill was.
1.0 wait times. This represents the 10th quarter of our last 13, where we've achieved a positive book to bill our backlog of $163 million was up 8% year over year, excluding FX impacts.
With that I'd like to turn the call over to Kevin for a more in depth review of our financial results Kevin.
Thank you Bruce now turning to revenue on page 12 performance. This quarter was outstanding as the global Fairmont team continued to drive profitable growth, while meeting strong customer demand.
Revenue in the fourth quarter was $123 million up 19% versus prior year and exceeding internal expectations. We delivered strong growth in all geographies due to sustained demand in maintenance activity and we are seeing green shoots in Asia with the improvement from reduced travel restrictions.
Maintenance spending in the oil and gas markets as the leading driver growth in general industrial and renewable markets was robust and we are still focused on executing against our long term goal of market diversification.
By the end of fiscal 2026, we expect that at least 65% of total revenues will come from diversified markets other than oil and gas up from 61% today and approximately 45% in fiscal 2017.
FX negatively impacted revenue by $4 million due to the stronger U S. Dollar reported results also include power blanket financials worth $5 million in revenue this quarter and $17 million in revenue since the acquisition in June of 2022.
We are pleased that our integration of the power blanket deal is largely complete with the team now shifting focus to driving incremental growth through our shield shared channels to market and capitalizing on new product launches.
Large project revenues were roughly flat in the quarter. As a reminder, we believe large overtime project revenues are aligned with customer capital spending budgets and are more cyclical in nature small projects and maintenance and repair revenues, which were up 31% and 24% in the quarter, respectively and <unk>.
17% and 29% on a TTM basis, our representatives of maintenance repair and small upgrades on our installed base that help our customers maximize production uptime and efficiency.
Small projects and maintenance and repair revenue growth was driven by increased activity in design and supply projects, particularly in downstream oil and chemical end markets.
Small projects and maintenance and repair revenues represented 79% of total revenue this quarter versus large project revenues of 21%.
Over the last few years management has reduced our dependence on large upstream capex projects and we are now more aligned with the maintenance spending growth this cycle.
Now for gross margins and SG&A on page 13.
Gross margins in the quarter were 42, 1% versus a reported 41% last year, representing incremental margins of over 52% due to growth in customer maintenance spending.
In the fourth quarter of fiscal 2023 volume and pricing contributed an increase of 675 basis points supply chain headwinds were a negative 250 basis points and while they have generally improved over the last year. There are still some pockets of challenges we continue to navigate.
Year end inventory adjustments and the impact from investments and continuous improvement contributed an additional headwind of 265 basis points.
On an adjusted TTM basis margins are up 170 basis points due to higher volume and pricing offsetting the previously mentioned headwinds.
In the quarter, SG&A was $31 7 million or 26% of revenue versus the prior year of $23 5 million or 23% of revenue.
On a trailing 12 month basis, SG&A was $107 million or 24% of revenue up from $82 million and compared to 23% of revenue in the prior year, reflecting the acquisition of power blanket higher variable costs within SG&A and our long term investment in the de carbonization Digitization and diversity.
Diversification initiatives that we believe will drive the future growth of the business.
We continue to focus on driving profitable growth, especially as we invest in the resources needed to execute our long term strategic plan to diversify and scale the business as Youll see on the next slide the team has done an excellent job managing the balance between growth and profitability and we will maximize the value of each dollar we invest in them.
Business.
Moving on to page 14 for adjusted EBITDA and earnings per share.
This year's results represent the strength of the high margin low asset intensity Fairmont business model as we continue to deliver margin expansion in a complex operating environment.
Adjusted EBITDA was $25 1 million or 21% of sales in the quarter.
Adjusted EBITDA increased 37% up almost $7 million from the prior year, along with margin expansion of 260 basis points on a trailing 12 month basis. Adjusted EBITDA is now up to $93 3 million a new record along with margins of 21, 2% an expansion of 400.
80 basis points year over year.
Really a fantastic result for the team.
GAAP EPS in the fourth quarter was 23 per share slightly down compared to the 26 cents per share in the prior year. Adjusted EPS was <unk> 41 per share versus last year's 31 per share for.
For the trailing 12 month period, GAAP EPS was $1 and adjusted EPS was $1 56 per share.
Last quarter, we announced the exit of our operations in Russia and as of March 31, the entity value has been written down to a nominal amount.
This resulted in an impact to GAAP EPS of <unk> 13 per share in Q4, 23, and 35 per share for the full year, we expect to complete the Russia exit by the end of the second quarter of fiscal 2024 subject to the receipt of regulatory approvals and we do not anticipate any incremental material <unk>.
Fences associated with that process.
On page 15 will cover the updated balance sheet.
We ended the quarter with cash at 36 million. Despite the incremental borrowings for the power blanket acquisition that was 16 million lower year over year and combined with the substantial EBITDA growth. This resulted in a net debt to adjusted EBITDA ratio of 0.8 times, an improvement versus 1.5 times in the pre.
Your year.
We ended the quarter with lower working capital as a percentage of sales with a reduction in inventory from the elevated levels in recent quarters, we continue to navigate an improving but not yet fully reliable reliable supply chain environment, while implementing many new operational and manufacturing changes to drive improved profitability in the quarter.
<unk> and years ahead.
Strong free cash flow of $21 9 million reflects 18% of revenue and 278% of net income in the quarter and a total of $48 million in fiscal 2023.
Our low capital investment model yields significant free cash flow annually and the combination of our very strong balance sheet with low leverage provides optionality for capital allocation going forward.
In fiscal 2023, we delivered significant volume growth operating margin expansion and excellent free cash flow conversion, while improving the strength of our balance sheet and completing our first acquisition. Since 2017. This represents a big step forward in our plan to build a world class industrial technology business.
While some uncertainty in the macro environment exists, we are seeing strong growth trends across all regions supply chain costs and lead times are improving versus a year ago and the industry, leading thermal team continues to execute against its short and long term plans. We will continue to drive strong results and create value for shareholders and.
The years ahead.
Many thanks to the global Fairmont team for the great work and commitment that enables us to deliver for our customers shareholders and our communities.
And it back to Bruce.
Thank you Kevin.
I'll turn to slide 16.
For our guidance for fiscal year 2024.
We are very pleased with the strength of our business as we move into this fiscal year. We believe the record results in fiscal 2023 and have set a new baseline for us going forward.
In order to continue to grow and execute our strategic initiatives. Our fiscal 2024 plan includes an incremental $7 million and key investments new product development sales and business development. In addition, we anticipate investing approximately three 5% to 4% of revenues in Capex to fund strategic.
Strategic growth initiatives capacity expansion and operational excellence looking forward.
We're mindful of the higher of the hires of interest rates that could lead to a slowdown in spending that may result in a recession. However, our backlog is at or near record levels is up 5% year over year, and our quote volumes and incoming order rates remain robust.
Based on these factors revenue guidance for FY 'twenty four is projected to be from 455 million to $485 million for the full year, which at the midpoint represents approximately 7% growth over fiscal 2023.
No M&A activity is included in these projections.
For the full year, we anticipate GAAP EPS to be in the range of $1 45, a share to $1 61, a share representing a 53% year over year growth at the midpoint.
We expect to maintain a strong balance sheet throughout the year.
Moving to slide 17, and our long term revenue goals.
Our growth goals for fiscal 2026 remain unchanged, we're very pleased with our performance through the first two years of our five year plan is in the upper range of our initial goals with fiscal 2023 significantly exceeding our expectations.
We're encouraged by the ongoing advancements, we're making around diversification with important growth across multiple end markets. The continued progress of our digitization strategy with accelerating adoption of our innovative digital platform and our new product development are creating sustainable competitive.
Vintages in the marketplace and as we further align our sales and marketing activities to the long term secular growth trends of the energy transition and decarbonization, we expect to capture additional market share by providing our customers with products and solutions that enable them to achieve there.
Sustainability goals in.
In addition to revenue growth, we believe that our operational excellence combined with leverage on our fixed cost will yield EBITA margins in the low to mid 20% range going forward.
Turning to slide 18, and our capital allocation priorities.
Our disciplined approach to capital allocation underpins our growth aspirations first and foremost we're committed to maintaining a healthy balance sheet across economic cycles with a leverage target of one and a half to two times under normal conditions, while continually evaluating.
Opportunities to return capital to our shareholders.
We seek to drive organic growth by investing in people technology and continuous improvement. These.
These investments enable us to pursue our three strategic initiatives of decarbonization Digitization and diversification.
Our reinvestment in the business through research and development and new product development has resulted in a robust vitality index, representing 20% of fiscal 2023 revenues.
Finally, we continue to evaluate M&A opportunities against our strategic and financial criteria as a means of building our industrial heating platform, while diversifying our end markets, we target accretive return on invested capital to exceed WAC by year three.
And wrapping up on slide 19.
<unk> is a leading global brand, providing safe reliable and innovative mission critical process heating solutions, serving high value diversified end markets with high barriers to entry.
Our talented global team is committed to operational excellence and safely delivering results, while driving innovative product development that creates differentiated solutions in the marketplace.
Our large global installed base with long standing customers is a significant competitive advantage, resulting in a resilient aftermarket franchise that generates high margin recurring revenue.
We believe that we are very well positioned to support our clients in achieving their sustainability goals and to capitalize on the vast opportunity associated with the energy transition and decarbonization through the electrification of industrial heat.
Finally, our operating history has demonstrated that our business is resilient across economic cycles due to our high margin low capital intensity model that generates meaningful free cash flow.
As we look ahead to fiscal 2024, I'm excited about the opportunities in front of us.
Through the outstanding execution by our global team and the strength of our business Fairmont is ready to continue delivering profitable growth and creating value for our shareholders in the coming year and beyond.
With that I'd like to turn this back over to our moderator Kevin.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to move your question from the Q1 moment. Please while we poll for questions.
Star one to be placed in the question queue.
Our first question today is coming from Brian Drab from William Blair. Your line is now live.
Sure.
Good morning. This is tolerance for Brian just to start out looking at your gross margin in the fourth quarter. I know you explained the headwinds but is there any reason it was down sequentially from the other quarters.
The headwind was larger than previous quarters.
Yeah. Tyler this is Kevin it may be a few things to call out on the gross margin side of things.
Obviously, the volume was quite strong pricing was still positive in the quarter, but if we really kind of reflect internally some of those inventories for the higher cost purchase as in previous periods really start to get consumed at the end of the heating season. So that was a little bit of headwind and we had some adjustment for year end inventory, but as we think about the continuous improve.
<unk> side of things, we've really been investing in the business there and we completed over 47 kaizen events in the last year and as you pivot from a push to a pull model through the plant.
A look at the inventories and Theres a little bit of a hit there we had in the quarter, but I think the good news here is a lot of that is behind us and if you think about the opportunity sequentially going forward, we still have pricing power in the market and we think we've got some of those higher cost input items more or less behind us I mean, we certainly given the guidance for fiscal 'twenty four I think.
<unk> got to be higher in the years ahead, sorry, I think we still feel fairly fairly positive about margins improving going forward.
Alright, it sounds good yeah. It was that kind of leads into my second question like with the strong revenue guidance I like is there a reason that dps guidance isn't any higher or is there a potential for upside kit throughout the fiscal year.
Yeah, Tyler I think we are we take a look at what's going on in the world and whether it's you know geopolitical events in Europe or some of the discussion that's going on in Washington, There's elections up in our Western Province in Canada, There's just a little bit of maybe a hesitation I think that we're seeing from a customer standpoint that we wanted to factor into the bottom line.
And so I think at the end of the day, where we are here in may that would be the expectation for the year.
But I, but I think generally speaking the guide feels feels good for where we are today.
It sounds good and just touching on the maintenance spending do you have pretty good visibility of that throughout fiscal 'twenty four as opposed to like a capex projects.
Yeah.
We do we.
We get a good sense for our customers budgets. The vast majority of them are or on an annual kind of.
The calendar year, when they look at as they look at their budgets.
Particularly when you look at some of the more traditional end markets.
Commodity pricing is high.
Overall margins are good they've got.
They've got money to spend and you know right now that we haven't seen a huge capex spending so what we've seen is kind of a shift.
Investment in it.
Our current asset base to improve.
Throughput uptime reliability and maximize.
The assets they have in place.
To be able to meet kind of volume demand. So we believe the environment for ongoing going maintenance is robust and expect that those levels of spend to continue into this year.
And Tyler maybe to bring it full circle then if we think about that mix that person is alluding to is you guys are aware of that's obviously, a generally a higher margin business than some of the more project based activity.
Got it.
Yes, that's all I have for chase thanks for taking my questions.
Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Bruce for any further or closing comments.
Thank you Kevin and thank you all for joining US today, we appreciate.
Your interest and your investment in <unk>.
And enjoy the rest of your day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.