Q1 2024 Thermon Group Holdings Inc Earnings Call
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Greetings and welcome to the Thermo on first quarter 2024 earnings Conference 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 call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I would like to hand, the call over to advance along Vice President of F. P N E and Investor Relations.
You may begin.
Thank you Dan Good morning, and thank you for joining today's fiscal 'twenty 'twenty four first quarter conference call.
Earlier. This morning, we issued an earnings press release, which has been filed with the S. E T on form 8-K.
And is also available on the Investor Relations section of our website.
The slides for this conference call can be found on our IR website under news and events I Our calendar earnings call Q1, 'twenty 'twenty four during.
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 as well.
What.
I would like to remind you that during this call we may make certain forward looking statements regarding our company.
He used to 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.
Actual results might differ materially from those contemplated by these forward looking statements and we undertake no obligation to publicly update any forward looking statements what else would result of new information future developments or otherwise, except as may be required by law no.
Now I would like to introduce first thing, our president and Chief Executive Officer, where he felt for any remarks.
Thank you Ivan good morning, everyone and thank you for joining us today.
I'll start today with a quick overview of Thunder Hawk.
We're a world leader in providing safe reliable and innovative mission critical industrial process heating solutions.
Customers in 85 countries from facilities on four continents.
Our almost 1400 employees have an industry, leading safety record and are dedicating to creating value for our customers and shareholders by executing our strategic long term plan, which I'll cover in more detail on the next slide.
In order to create long term value for our shareholders. We're guided by our three strategic pillars first profitably growing our installed base second de carbonization, digitalization and diversification to drive additional growth.
And third disciplined capital allocation.
As the global leader at the forefront of applying innovative process heating technology.
To solve critical thermal engineering problems for our customers, we benefit from a very large installed base.
This enables us to capture recurring revenues and drive growth across our traditional end market verticals.
While our culture of continuous improvement supports margin expansion.
In addition to capturing share across our traditional end markets. We're also pursuing three new areas to drive additional growth around the carbonization Digitization and diversification, we're expanding our sales and marketing efforts in these areas that utilize our core heating technologies to diversify our earnings.
Markets with a goal of having approximately 65% to 70% of our revenues.
In markets outside of oil and gas by the end of fiscal 2026.
Our digitization strategy is progressing well as we continue to expand our range of digital solutions that help our customers to optimize monitoring and maintenance across their assortments.
We're also enabling the energy transition as we supply our customers with products and solutions that help them achieve their sustainability goals around electric electrification and decarbonization.
Finally, our commitment to a disciplined capital allows Playstation strategy underpins, our first two strategic pillars.
Our robust balance sheet enables us to drive organic growth through reinvestment in our business to meet our fiscal 2026 goals were.
We're also well positioned to pursue inorganic growth through highly strategic bolt on acquisitions that meet our financial objectives.
Turning now to slide five Vermont solutions for energy transition.
This quarter, we'd like to share with you some of the ways that star months' products and solutions enable the energy transition.
On slide five you can see the range of storm on current electric heating products that can be used in both green and blue ammonia applications.
These include electric immersion heaters electric heat tracing systems and electrically heated tubing bundles.
Hydrogen is important piece of a sustainable energy future, but it's difficult to transport the pipeline. Our other traditional means due to a phenomenon called hydrogen corrosion cracking or HCC.
H C seeking a brittle and we can steal resulting in shorter asset life or unanticipated failures.
By adding nitrogen to hydrogen ammonia is created which is much easier to transform port via pipeline or other means.
As a result ammonia plants are an important part of enabling the use of hydrogen as a sustainable energy source.
Green ammonia uses renewable energy such as wind or solar power to produce hydrogen via electrolysis blue ammonia is produced when natural gasoline crack to generate hydrogen and Seo to where the C. O. Two has been captured and sequestered.
In either case produce hydrogen is didn't combined with nitrogen to create ammonia.
The global ammonia market is estimated to grow at a five 8% compounded annual growth rate through 2032.
Electric heaters play a crucial role in various stages of heating within ammonia plants, they're used to provide indirect heat at various stages of the process be it heat transfer fluids, such as molten salts or hot oils. They can also be used to directly heat reactants or to provide process heating for ammonia synthesis.
In addition to their environmental benefits electric heaters can also provides cost savings for ammonia plants, they offer precise and efficient heating reducing energy consumption and minimizing downtime.
With their compact size and easy installation electric heaters also have a smaller footprint than traditional heating system, allowing for more efficient use of space.
<unk> existing range of electric heating solutions combined with our expertise in industrial process heating make us an ideal partner for ammonia producers looking to improve their sustainability and efficiency.
Turning now to slide six on new Claremont technology.
Here, we see the newest edition and our calories Tech immersion heater line called the quantum true flow heater, our investments in research and development have yielded this patent pending design that represents a step change in heating technology the.
The design has been validated in partnership with an industry, leading heat transfer Institute using advanced modeling software and lab testing.
To achieve optimal heat transfer and energy efficiency.
The higher efficiency reduced overall size and lower total cost of ownership.
Conversion from traditional hydrocarbon heaters to electric even more economically compelling across a wide range of end markets.
Turning now to slide seven <unk> Genesis network and digital solutions provide our 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 to the controller.
Yeah.
This facilitates increased operational efficiency and reliability with fewer maintenance hours and lower total costs adoption continues to grow as customers recognize the significant benefits provided by the Genesis network with.
With 15% more new circuits added in the first quarter of fiscal 2024.
Based on our pipeline of opportunities, we anticipate the number of circuits doubling this fiscal year.
On slide eight you can see that we're continuing to progress our end market diversification strategy.
<unk> products and solutions can be used across a wide range of industries and we're seeing growth across several of these sectors during the quarter, our bookings from rail and transit were up by 39% year over year commercial was up by 29% and food and beverage was up 120%.
Our order intake from hi tech sectors continue to grow as well with bookings from data centers up over 600% and bookings from semiconductor and the market up over 90% accelerated by the chips Act.
Importantly, we are also seeing growth in sectors related to the energy transition our bookings from electric power were up 489% and our bookings from Biofuels and Green diesel were up 89% during the quarter were encouraged by the steady incremental growth across these end markets as we capture additional.
Market share.
Yeah.
On slide nine I'd like to once again highlight the progress we have made around our end market diversification strategy. This chart shows the end market mix for the trailing 12 month period, ending June 32023, since last quarter. We've increased the percentage of our revenue that comes from for example, the commercial and renewable.
And markets.
Capex spending in LNG and petrochemicals has been a significant growth driver as well.
We're also seeing growing demand related to projects in the specialty chemicals and gases, particularly related to semiconductor fabrication.
There's also a growing pipeline of opportunities around alternative fuels, such as biofuels hydrogen in pneumonia.
And another round of investment to winterize and harden the U S power infrastructure across the south.
Overall with approximately 60% of our revenue generated from non oil and gas end markets. We continue to make steady progress toward our goal of F. R of fiscal 'twenty six diversification goals.
Yes.
Turning now to slide 10 in our first quarter of fiscal 2024 results.
The third man team achieved another quarter of outstanding performance as a quick reminder, our business is highly seasonal with our first quarter typically being the weakest and the third and fourth quarters being our strongest due to colder weather and the normal northern hemisphere.
As a result year over year comparisons are more appropriate than sequential quarterly comparisons when measuring performance.
We delivered record revenue of $106 9 million up 12% year over year over a prior year record largely due to healthy growth in North America and Asia Pacific.
Poorly we saw meaningful growth in year over year revenue from our resilient maintenance for Opex activity we.
We saw even stronger operating leverage with adjusted EBITDA of $22 1 million up 33% year over year, driven by higher volume price realization and productivity gains.
Free cash flow was negative in the quarter due to timing of certain payments after fiscal year end <unk>.
Adjusted EPS was <unk> 40 per share an increase of 58% over the prior year period.
Finally, our book to Bill ratio showed double digit order growth at 1.12 times, demonstrating continued strong demand from our customers.
With that I'd like to turn the call over to Kevin Fox for a more in depth review of our financial results Kevin.
Thank you Bruce and good morning to all.
Turning to our Q1 fiscal 2024 financial performance on Slide 11 performance. This quarter was once again outstanding as the global firm on team continues to successfully execute our plan.
Demand remains strong in the quarter, we reached $120 million in incoming orders up 16% year over year book to Bill was a very robust 1.12 times.
Lending remains strong across the U S and Latin America, and we continue to see signs of a rebound in Asia Pacific in terms of our end market orders, we saw the most growth in the power sector during the quarter with customer demand expanding across the renewables food and beverage and commercial end markets trailing 12 month orders reached four.
<unk> hundred 75 million, which we believe supports our raised full year revenue guidance.
Revenue in the first quarter was $107 million a year over year increase of 12%, primarily driven by midstream and downstream oil activity across the U S and Latin America.
Renewables food and beverage and power end markets also contributed to revenue growth in the quarter.
Revenue from large projects was 27 million up 21% versus prior year, while revenue from small projects and maintenance and repairs totaled $80 million up 9%.
On a trailing 12 month basis, 77% of our revenues were derived from customer opex spending and that is indicative of our business shifting away from more volatile capital budgets.
Adjusted EBITDA for the first quarter was $22 million up 33% year over year with adjusted EBITDA margin expansion of approximately 330 basis points on a trailing 12 month basis, adjusted EBITDA was $99 million or 21, 8% of revenue representing a year over year increase.
<unk> a 48%.
As we take a step back and think about the evolution of adjusted EBITDA over the past few years. It is important to acknowledge the contribution of our process heating business largely through the acquisition of Cci's thermal in December 2017 to that growth the.
The Phs business recently crossed the 100 million revenue threshold on a trailing 12 month basis profits.
Profitability is slightly better than the overall company average an important data point as we consider the adjacent growth markets that we believe will be a key contributor to the earnings power of this business for years and decades to come.
Last but certainly not least because that's a T. H S businesses, providing a return on capital 250 basis points over our current cost of capital demonstrating the team's ability to create meaningful shareholder value through a disciplined long term focus on driving inorganic growth.
Adjusted diluted earnings per share it was 40 cents in the quarter the year over year increase of 58%.
A quick modeling note. We are currently estimating a 21 cents per share impact from amortization expense in fiscal year 'twenty 'twenty four.
As you can see by these results we continue to drive our business forward delivering meaningful profitable growth. Despite the complex operating environment.
On slide 12, we will cover the updated balance sheet.
Our net debt to adjusted EBITDA ratio was 0.8 times in the current quarter as compared to one seven times in the previous year as we both paid down debt and significantly grown EBITDA over that time period.
It'll debt at the end of June was down 25% to $114 million.
Working capital was 156 million in the quarter, an increase of approximately 10% primarily due to the combination of strategic inventory and seasonality.
Working capital as a percentage of trailing 12 month sales was lower coming in at 34, 6% at the end of the quarter, mainly driven by improved collections activity.
Turning to cash flow.
Net income in the first quarter was $11 million up 67% year over year Capex spend was $2 8 million and free cash flow was negative $1 9 million, reflecting our typically weakest cash quarter due to the timing of certain payments and our ongoing investments for strategic growth, particularly around incremental.
<unk> for our process heating business, we ended the quarter with cash of 33 million and this represented a year over year decrease of 17% as we are improving our global cash management practices.
While the broader macro environment remains uncertain. We are pleased with our strong start to fiscal 'twenty 'twenty four we continue to see strong growth trends across our regions and markets and financial metrics. As we move ahead through fiscal 'twenty 'twenty four we will continue to achieve positive results diligently control costs.
Long term value for our shareholders.
Finally, I would like to thank the entire Fairmount <unk> team for their hard work, which enabled us to deliver such strong first quarter results.
With that I'll turn it back over to Bruce.
Alright, Thank you Kevin I'd.
I'd like to turn now to slide 13.
We're raising our full year revenue and earnings guidance for fiscal 2024, as we look ahead to the coming quarters, we're conscious of the ongoing macroeconomic volatility even as we continue to see growth across our business at this time, we are raising.
The lower end of our revenue guidance from 455 million to $462 million and increasing the upper range to $488 million for the full year.
At the midpoint represents approximately 8% topline growth over fiscal 2023.
GAAP EPS is now expected to be in the range of $1 48 per share to $1 62 per share, which represents 55% year over year growth at the midpoint.
Adjusted EPS guidance has also been raised to $1 69 to $1 83 per share will continue to evaluate this outlook as we progressed through our fiscal year.
We expect to continue to generate significant cash flow through the year to maintain a strong balance sheet, giving us the flexibility to reinvest in our business and evaluate bolt on M&A opportunities.
On Slide 14, you can see more details about our capital allocation priorities as our top priority. We are 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 are.
Our next priority is to fuel organic growth in our business by reinvesting in people technology and continuous improvement. These investments enabled us to pursue our three strategic initiatives of de carbonization Digitization and diversification.
We also pursue inorganic growth by continually evaluating M&A opportunities. Our focus is on bolt on acquisitions that meet our strategic and financial criteria and we have a healthy pipeline of opportunities. Finally, we continue to evaluate opportunities to return capital to our shareholders.
When appropriate.
Yeah.
As we wrap up today on slide 15, we want to reiterate that Fairmount 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 team relentlessly pursues operational excellence in order to deliver innovative products and differentiated solutions that create value for our customers.
We believe that our large global installed base with long standing customers across a variety of end markets is a significant competitive advantage, resulting in a resilient aftermarket franchise that generates high margin recurring revenue.
Our products and solutions are aligned with key long term secular trends.
Such as the energy transition, increasing environmental regulations and growth in chemical demand.
We believe that we're well positioned to capitalize on enormous opportunities created.
Associated with the energy transition and decarbonization through the electrification of industrial eat and to help our customers meet their own sustainability goals.
Our strong and flexible balance sheet with low leverage and high gross margins as well as our capital light business model has enabled fairmont to remain resilient across economic cycles and continue to provide significant optionality.
I'd like to end today by thanking the entire Fairmount <unk> team for their outstanding performance this quarter and dedication to our culture of continuous improvement and to meeting our customers' needs. As we look ahead to the balance of fiscal 'twenty 'twenty four and beyond I'm excited to see what we will achieve.
Together and I'm confident we will continue to deliver profitable growth and value for our shareholders.
Darrin I'd like to turn the call back over to you.
So that we can now take some questions.
Thank you we will now be conducting a question and answer session. We would like to ask a question. Please press star one on your telephone keypad.
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Okay.
Our first questions come from the line of Brian Drab with William Blair. Please proceed with your questions.
Good morning. This is Tyler on for Brian Congrats on the solid results by the way orders and backlog look really healthy.
Thanks, Pat. Thank you yeah, no problem and just starting out I wanted to know just what factors went into your full year guidance raise and then just any general comments that you have on the view of the balance of the year.
Yeah. So as we kind of look at the order intake and where we are I think a key thing that we anchor on is our.
Trailing 12 month orders are sitting right at $4 $75 million and that's kind of at the midpoint of our guide and I think then as you kind of turn and look to the EPS side of the guidance, we're looking at margins in backlog.
And a lot of our continuous improvement efforts.
As well as just kind of what we've seen is moderation of some of the input costs that give us confidence that we have earnings power going forward.
Yeah.
Got it and then.
Just moving some of our end market commentary I think it would be good to hear any update that you have on your renewables opportunity do you have any timing on what the annual revenue opportunity could be and how that's been trending.
But we're seeing a weak we continue to see nice growth in fact within the quarter, we booked a somewhere north of $8 million.
And those opportunities and so we continue to see the opportunities grow.
There and the pipeline continues to grow and we will continue we will provide updates.
On those opportunities as well as the incoming order rates.
On a go forward basis. So overall, we continue to see investments are that are moving in the direction of these new opportunities and certainly.
Some of the new product launches like we referred to as the column heater.
Proves our ability to be able to provide.
<unk> differentiated solutions in this space and win share.
Tyler This is Kevin maybe just to build on Bruce's response as well, it's not just the revenue growth on the top of the funnel that we liked but when we look at the profitability on the decarbonization initiatives and particularly that that profitability is quite strong are generally above the company average as well. So it's something I think as we look at the earnings power.
The business, we feel pretty confident about the profitability with those revenues as well.
Great yeah above $8 million.
For that end market and now I'm, just wondering as our pipeline grows like what kind of builds on the progress more opportunities into wins.
For those end markets.
Yeah. So you know I think some of the wins or just a timing, but certainly on a competitive front we've done a lot.
New technology, we're watching that to give us a differentiated position.
But a lot of what we're doing is making investments in capacity because quite.
Quite frankly that the industry is.
Pretty soft.
Supply constrained at this time and so you.
We're making some pretty sizable investments, which is why our capex is up over.
You know a typical year, where L. Three and a half 4% of revenue and a lot of that is really being directed towards growing our capacity and.
Reducing lead times in the marketplace. So we see all of those as really a ways in which we can we can win and convert.
And Tyler that the technology is agnostic at the end of the day. So if you think about the sales cycle. If you will you know the front end of our business understands the technology really well and so it's really just applying that to end markets and making sure. We're putting those leads in front of the right people to get them converted so yeah, there's not a not a huge investment on that technology side, it's more on the capacity.
It is as Bruce alluded to so we can meet the demand in the market.
One last comment about that the the really the key differentiator we have in the marketplace.
Is in our technical competence around particularly around electrification and being able to work with customers.
On.
<unk> that have traditionally been hydrocarbon fired and converting those to a very different heating process electrical heating and we have not only the technical knowledge and competence, but also all of the software tools and the capabilities to be able to help them make that transition.
Successfully so I think those are kind of the key things that are driving our ability to win in this space.
Yeah that sounds great just kind of moving on from the renewables.
And market just kind of and this.
My last question just being besides renewables, what end markets and geographies are you seeing the most unexpected upside.
I mean, the U S Oh, well I mean, we expected to see growth, but it was really quite strong.
In this first quarter end and you know we saw yeah, we're seeing some some recovery in Asia, as well, which I would say is it was expected, but as we look at the bookings I think it's important not to be lost that.
Bookings this year were up.
16% over prior year.
Now if you go back to a prior year that was a record in incoming orders in as well and that was up 43% over the prior year. So we just look at the bookings growth.
It's pretty it's pretty significant and that's not to be lost and so.
We're seeing a lot of activity and investments in the U S, particularly we had some nice petrochemical wins, there's a lot of LNG opportunities just as a reminder, we're a little later cycle. So.
Where we have an one some of those but we see additional opportunities in the pipeline for both and then certainly the opportunities that we've seen around renewables, whether that is carbon capture and storage or is he ammonia and hydrogen that we've highlighted today.
Those are our driving additional upside and growth above and beyond what we would traditionally see.
In our space.
Got it and that's all I have for today, congrats on the quarter again solid work.
Sir I mean Charlotte.
Yes.
Our next questions come from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.
Good morning, Bruce Kevin.
Morning, John were John how are you.
Pretty good just a sort of a point of clarification I think you in the press release, you mentioned that organic growth was 11%, but if I'm not mistaken last year, you had seven seven about eight eight and a half million dollars from a.
The combination of our alert the completion of a large contract and earn some revenue from Russia.
Hmm I correct in that.
Yeah, So John maybe to kind of rewind it back a year, we had about little over $7 million from that large one time project that would be M. D. Organic number right. The acquisition was a $1 million of revenue in Russia was about one as well so a few pieces on each side of the line there to factor out okay. So ex those items Kevin.
It looks like your what I would call. It adjusted organic growth rate was near 20% is that what we do.
If you look at it that way.
That's about right John Okay.
So it look from that using that as sort of a rough reference point.
Going forward into the next three quarters.
Youre looking at obviously for a little bit of a moderation from that was there something in in the first quarter that was unexpected or are somewhat transitory.
In nature, if you want to call it that.
Yeah. John This is Bruce no not really and I'll tell you who the the incoming order rate and it was quite positive. So we are.
That actually gives us some confidence going into the year.
It's early and certainly we like to get a couple of quarters under our belt before we would call. The first here that was a full year I'll tell you, though is certainly gives us confidence and I'll point, you back to kind of the midpoint of our revenue guide being that 475.
Millions, which is right on our trailing 12 month incoming order rate, so kind of point to that.
And then you know some of it was a modest move.
Certainly in the EPS guidance, but I think it's important to note that.
That we see some strength in margins in backlog, which is quite frankly, a lot of our continuous improvement efforts that we began probably in.
In the fourth quarter of 'twenty, two are really beginning to yield some very positive results and give us some.
Our performance in productivity gains so that that would be kind of how it frames our views.
But there was nothing just one time in the first quarter and we're cautiously optimistic about the balance of the year, Okay. That's fair Ken.
Kevin the Oh, the operating expenses, where we're we're quite heavy.
In this quarter.
And obviously, you're investing in resources personnel and infrastructure due to reach these new markets.
But you know, let's say as we look forward, maybe even even a year from now let's say diesel those does that spending to begin to moderate is do we just see that buildup. This year and then maybe some easy next year.
Yeah, John I think you're thinking about it the right way I mean, if you look at the the SG&A line I'll call. It may be close to 4 million, that's primarily driven by the resources that you're alluding to and I think as the business continues to grow you know, we kind of look at that on a TTM basis as a percentage of revenue and targeting that in the you know call. It mid.
The low Twenty's is where we're really going for us as we think about the model of getting this business to 'twenty three 'twenty four it was actually 25% of EBITDA given the historical gross margins of the business, that's a pretty easy math problem to backstop, what we're shooting for over time. So I think the way you're thinking about it right will that investment decelerate as the business continues.
The scale that's absolutely the plan Okay, alright, thank you very much.
Thank you Sir.
Thank you there are no further questions at this time I would now like to turn the floor back over to Bruce <unk> for closing comments.
Alright, Dan. Thank you and thank you all for joining here today appreciate your interest in therm on and enjoy the rest of your day.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.