Q1 2020 Earnings Call
Ladies and gentlemen, thank you for your patience and please remain on the line. The third one group conference will be beginning in a couple of minutes. Once again, we do thank you for your patience and ask that you. Please remain on the line.
Today's Thermon group conference, we'll be starting in a couple of minutes.
Greetings and welcome to the Thermon Group Holdings, Inc. first quarter fiscal year 2020 earnings conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Kevin Fox Vice President Corporate development. Thank you you may begin.
Thank you Donna good morning, and thank you for joining today's conference call. We issued an earnings press release. This morning, which has been filed with the FCC on form 8-K and is also available on the Investor Relations section of our website at IR Dot Surmont dotcom.
A replay of today's call will also be available via webcast. After the conclusion of the call. This broadcast is the property of Thermon any redistribution retransmission or rebroadcast in any form without the expressed written consent of the company is prohibited.
During the call. We will also 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 should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.
Before I turn this call over to Bruce NJ I'd like to remind you that during this call. We may make certain forward looking statements regarding our company and business that are not historical facts.
Because forward looking statements relate to the future. They are subject to inherent uncertainties risks risks and changes in circumstances that are difficult to predict.
Please refer to our annual report and most recent quarterly report filed with the FCC for more information regarding our forward looking statements, including the risks and uncertainties that could impact our future results. Our actual results may differ materially from those contemplated by these forward looking statements. We caution you therefore against relying on any of these forward looking statements. They are neither statements of historical facts, nor guarantees or assurances of future performance any forward looking statement made by us during this call speak only as of the time at which it is made.
Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward looking statement, whether as a result of new information future developments or otherwise, except as may be required by law.
And now it's my pleasure to introduce Bruce themes, our President and Chief Executive Officer for his opening remarks.
Thank you Kevin and good morning, everyone. Thank you for joining our conference call and for your continued interest in Thermon.
Today, we have Jay Peterson, our CFO joining me on the conference call Jay will follow me and present, the financial details of our fiscal year 2021st quarter.
To begin with Q1 results.
After an overachievement in revenue in Q4 of fiscal year 2019, we were pleased with the revenue generation the team delivered in Q1.
We saw revenues of 91.7 million met our expectations for the quarter.
And increased 3.2% over prior year organically. This represented the sixth consecutive quarter of growth.
While we anticipate the mix to shift toward a more historical distribution between Greenfield and MRO you eat we continue to see a heavy mix of turnkey projects at lower gross margins that have been dilutive to the margin profile of the business.
Although we did see an improvement of 111 basis points sequentially gross margins declined by 419 basis points from the prior year quarter.
While we welcome the growth in the installed base, we are taking actions to drive margin improvements in the areas we control.
First we passed on a price increase in June that range from 3% to 5% and is anticipated to positively impact margins in the second half of the year by 100 to 150 basis points.
Secondly, we have continuous improvement initiatives underway that we expect to reduce cost of goods sold by 1% in the fiscal year.
Those actions have already begun to have an impact, but we'll be back end loaded to the second half of the year.
In addition, our new product development efforts are focused upon creating different differentiated value for our customers, while protecting and expanding the margin profile of the business and finally, we're focused on serving the installed base to grow the MRO you each segment of our business through our direct relationships with owners and operators and through our channel partners.
We did also see margins in backlog improved by 100 basis points for the second consecutive quarter on incoming order growth of 12% over prior year.
This represents the second consecutive quarter of double digit order growth.
The book to Bill was 90% for the quarter and backlog ended at 111.5 million.
The business delivered adjusted EBITDA of $13.1 million in a quarter a decline of 26.7%.
From prior year.
Adjusted EPS was 15 cents a share for the quarter down nine cents per share year over year.
Turning now to an overview of our markets and geographies from a market perspective upstream activity is flat to declining on low lower oil prices.
Both chemical and petrochemical sectors remain the most robust of our end markets as the outlook for global demand growth remains positive.
The project pipeline continues to improve led by opportunities in North America, and the Middle East.
In midstream, we are well positioned to capitalize on an expanding pipeline of LNG investments that will increase global capacity by an estimated 100 million tonnes per annum.
Valued at approximately 85 billion through 2028.
This represents a compounded annual growth rate of 5% to 7% in the market.
We've seen a few of these projects that could be awarded in fiscal year 2020, but will not begin to materialize until fiscal year 2021.
We believe that this trend will provide a significant tailwind through 2025 and beyond.
Combined cycle power projects are trending positively showing low single digit growth, particularly in the us and Latin America.
The trend transportation sector in North America continues to create opportunities to diversify in markets for Thurman.
We anticipate several large infrastructure projects in eastern Canada, and the us will contribute to bookings in fiscal year 2000.
Our installed base and the associated approvals in the nuclear sector position us well to capitalize on a steady flow of refurbishments planned in the coming year years.
Geographically the Western Hemisphere shows continued strength in Q1, which we anticipate will continue through the balance of the year.
In the eastern Hemisphere, the outlook in Asia remains positive, but is offset by weakness in Europe Middle East Africa that we expect will continue through the balance of our fiscal year 2020.
Turning now to growth.
Overall, we're pleased with how well the business is positioned for future growth.
Since fiscal year 2015, our opportunity pipeline has virtually doubled in size consistent with our efforts to expand the addressable market.
This is augmented by the recent stream of new product introductions, driven by advancements in smart technology and material science.
These new product introductions are beginning to have a positive impact on results and we are on track to announce five more new product launches in this fiscal year.
We remain committed to developing technology that differentiates thermal on in the marketplace to create sustainable value for both customers and shareholders over the long term.
We're also investing in the globalization of the thermo on heating systems business line by leveraging our existing footprint.
We've seen several examples where the initial thesis on delivering an expanded process heating solution is being validated by our customers.
This expanded solution set and the associated increase in our addressable market.
Is anticipated to provide opportunity for growth over the next several years.
Our M&A pipeline remains robust.
We have some significant opportunities on the balance sheet to improve our cash cash position in the coming quarters that will create additional capacity for the right strategic opportunity.
Looking forward, we maintain our revenue forecast of 2% to 4% organic growth for fiscal year 2020.
I'd like to take this opportunity to entity to thank our thermal and employees around the globe for their unwavering commitment to serving our customers and creating value for our shareholders.
Thank you again for joining us today, Jay Peterson, our CFO will now address the details of our financial performance for Q1 fiscal year 2020 Jake.
Thank you Bruce good morning.
First off I'd like to start by discussing our Q1 financial results.
Then finish with guidance any discussion on margin enhancements for the current fiscal year first off revenue and orders our revenue. This past quarter totaled 91.7 million, an increase of 3.2% over the prior year's quarter and a record start for Thurman.
The legacy revenue mix between MRO, Uli, and Greenfield was 51% and 49% respectively.
With the Greenfield mix significantly higher than in the past.
FX decreased total revenue by approximately 2%.
And in constant currency.
Our topline revenue grew by over 5%.
And we continue to experience positive signs of a recovery.
With our legacy business revenues showing growth for the sixth consecutive quarter.
Orders for the quarter totaled $82.8 million versus $73.8 million in the prior quarter for a growth rate of 12%.
And our backlog of orders ended June at 111.5 million.
Versus 144 million as of June of fiscal year, 19, and that's a decrease of 23%.
And margins in our backlog improved.
By 100 basis points over the last 90 days.
And our book to Bill for the quarter was negative at 0.90.
Turning to gross margins.
Margins were 40.5% of revenue and gross profit declined by 490 basis points.
The legacy mix shift to Greenfield revenues was the significant driver.
Of the lower than typical corporate margins.
Due to their higher content of engineering, and construction labor and third party buyout items.
We believe it is important to win these lower margin projects understanding there is a near term dilution to our gross margins.
Due to the margin rich maintenance business that will occur as soon as 36 months from now.
Margins from Thurman heating systems were accretive to our corporate margins.
And we continue to be on track for this acquisition.
To provide a return on capital in excess of our weighted average cost of capital.
By fiscal year 2021.
Gross profit declined by 2.6 million or 6.5% versus the comparison period.
And while we have experienced cost increases attributable to the terrorists.
We have largely been able to pass these increases along to our customers.
And we have not seen any material impact.
Two our gross margins due to these tariffs.
Moving to operating expense core operating expenses for the quarter that is SGN, a excluding depreciation and amortization of intangibles.
Totaled $25.1 million.
Versus $23.4 million in the prior year.
And that's an increase of 7.3%.
The drivers behind this increase included a 13% growth in research and development spending.
And other incremental personnel cost specific to achieving our fiscal year 20 strategic initiatives.
Our operating expense as a percent of revenue was 27.4% again, excluding DNA.
And that's an increase of 100 basis points from the prior year level of 26.4%.
Turning to earnings GAAP EPS for the quarter.
Totaled four cents a share compared to the prior year quarter of nine cents.
A decrease of five cents per share.
Adjusted EPS.
As defined by GAAP, EPS less amortization expense and any one time charges.
Total 15 cents a share.
Relative to 24 cents a share in the prior year quarter, and we will continue to communicate.
This adjusted EPS construct going forward.
Due to the high level of noncash amortization expense running through our income statement.
And at present, we are expensing $4.4 million per quarter.
Or nine cents per share.
Or approximately 36 cents a share on an annual basis after tax.
For non cash amortization.
And note that the total amortization expense will decrease in May a fiscal year 21 to approximately 10 and a half million dollars per year.
Due to the roll off of certain assets related to the 2010 private equity acquisition of Therma.
And EBITDA declined by 27% versus the comparison period.
And EBITDA as a percent of revenue was 14.3%.
And EBITDA totaled $13.1 million this past quarter.
Moving to the balance sheet and our capital allocation philosophy.
Our cash and investments balance at the end of June improved to $35.3 million.
And our Capex spend for the first quarter totaled $1.7 million.
Or 1.9% of revenue.
Recall, our net debt to EBITDA ratio was three point fourx at the time of the October 2017 CCBI acquisition.
And it is presently at two point Fourx.
With additional de levering anticipated this fiscal year.
And lastly, our capital allocation priority.
In the absence of any near term M&A transaction.
Is to continue to reduce our debt through optional debt.
Repayment.
In terms of taxes, our tax rate for the first quarter was 3%.
And this was positively impacted by the release of a tax reserve relating to the CCBI acquisition.
And we continue to work with our tax advisors on potential strategies to optimize our income tax structure and at the conclusion of this analysis. It is possible our tax rate will be exposed downward later this fiscal year.
And finally fiscal year 2020 guidance there are several guidance points I would like to discuss.
First off we are holding to our previous revenue guidance of 2% to 4% growth.
Relative to our current margin performance.
Various activities are in process to improve our margins, including.
Four and a half million dollars in cost reductions.
Within anticipated realization of $2.5 million in savings.
This current fiscal year.
Announced price list increases with an expected 2% margin impact for our maintenance related products.
In recent and planned product announcements.
That we anticipate will yield accretive gross margins.
And lastly, as we head into the heating season, we typically see a seasonal uptick in margins due to the increased mix of MRO activity.
And in conclusion due to growth in cash and trailing 12 month EBITDA.
And continued reduction in our net debt, we expect to improve our net debt to EBITDA leverage to approximately 1.5 X.
At the end of this year.
And that's excluding any M&A transaction transaction.
I would like to now turn the call over to Donna.
To moderate our Q and a session.
Donna.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key once again that is star one to register questions at this time.
Our first question is coming from Brian Drab of William Blair. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Good morning, Brad.
Good morning, So first just to clarify a couple of things. So when you give the greenfield and MRO legacy that's excluding th us right.
That is correct Brian .
Okay and so.
What is.
What was the growth.
Or a decline year over year, and MRO UBI business on an apples to apples basis, just I guess just for the legacy business.
Yes, 1.3% versus the comp period, excluding DHS.
So up 1.3%.
No down down one dollarsthree percent down 1.3% and so thats.
I think that you are expecting or at least as of the last report you're expecting pretty solid even double digit growth in MRO.
For the year is that.
This is my memory correct on that and then what if so wise.
What happened in this quarter and then for the full year do you still expect MRO you need to be up.
Yes so.
Brian This is Bruce.
We do expect to see MRO, you see growth during this year.
As you know the first quarter, our first quarter.
The year is is our off heating season, it's probably the most unpredictable as it relates to our MRO business and it's the first quarter, we actually did see.
Some decline in MRO you E business, we havent seen or heard anything from our customers that would indicate any change in behaviors and so we remain.
We continue to believe that we will see some and I didn't say I don't think we.
Implied double digit growth, but we'll see.
Some some solid.
Mid single digit low to mid single digit growth in our MRO UBIT you E business this year.
Okay got it and can you be any more specific on where you think gross margin should be modeled for the balance of the year and it sounds like you clearly some initiatives Harry will bring it up but.
Could it be mid mid Fortys again for the balance of the year or will we not get back to that that level.
Yes, Brian we've got a confluence of positive factors.
In our in our favor.
However.
If we have an inordinately large greenfield mix again, which is customer dependent.
That could mitigate the cost reductions pricing action and the seasonality that we see so it's really hard to give quarterly guidance.
Even directionally Jay I mean, it should I model, 40% or 45 is what I am wondering.
Closer to 40 or closer to 45 or.
Can't say.
Even directionally on yes, I don't want to put an exact number but but sequentially we are moving into the.
Prime time.
For our legacy business.
Okay, and then is there.
Any way that you can give me a sense for.
The the Greenfield.
Activity in the <unk>.
Then just the proportion because you just kind of said it if.
Greenfield activity remains elevated than gross margin will be under pressure of course.
Right.
What kind of visibility do you have to that.
Ratio for the balance of the year.
The dynamic we are seeing now and going about what we expected coming into this year.
Even though we had a strong order growth, 12% double digit for the segment. It was double digit order growth for the second consecutive quarter.
We are seeing a decrease in our backlog. So we're shipping a lot of those larger products projects Theyre Flushing out and so as we go through the balance of the year, we would expect that mix to shift.
More towards what we've seen historically in the MRO versus Greenfield mix and so that that's kind of an indicator and I think a couple other things to note.
Is aside from some of the initiatives, we have underway to improve the gross margins within the existing business we are seeing for.
The second or third consecutive quarter, we've seen.
Improvement in margins in backlog in this past quarter. It was a 100 basis points. So.
Okay and that first you mentioned, the 90% book to Bill.
Does that imply a sequential decline in revenue in the second quarter.
No.
But a sequential decline.
No we don't think so no.
Can you talk a little bit more about I mean, you book you booked less than your building I guess since you said that the backlog the point I guess is that the backlog is at a healthy level that's going to.
A lot of that was backlog is healthy to support our revenue forecast, that's what I would say.
Okay got it about that this year, which we.
We projected 2% to 4% growth we're right in the middle of that in the first quarter I don't see anything.
Going forward that would make us believe differently.
Got it and then just to clarify you Didnt change Jay how you're reporting adjusted EPS right, you're just reminding us that that's how you're reporting adjusted EPS correct.
That is correct Brian .
Okay. Thanks very much.
Thank you. Thank you Brian I appreciate your support.
Once again, ladies and gentlemen that is star one to register any questions at this time.
We're showing no additional questions in queue at this time I would like to turn the turn the floor back over to management for any additional or closing comments.
All right. Thank you Donna.
Again, I would like to thank everyone for joining the call today.
And for your interest in Thermon enjoy the rest of your day.
Ladies and gentlemen, thank you for your participation. This concludes todays event you may disconnect. Your log off at this time and have a wonderful day.
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