Sarah Alexander - Rodney Lynn Bingham - Chief Executive Officer, President and Director Jay C. Peterson - Chief Financial Officer, Chief Accounting Officer, Senior Vice President of Finance and Secretary George P. Alexander - Executive Vice President of Global Sales.

R. Scott Graham - Jefferies LLC, Research Division Brian Drab - William Blair & Company L.L.C., Research Division Charles D. Brady - BMO Capital Markets U.S. Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division Jonathan P. Braatz - Kansas City Capital Associates Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division.

Good day, ladies and gentlemen, and welcome to the Thermon Earnings Conference Call Q1 2015. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the call over to Ms. Sarah Alexander, Director of Investor Relations. Ma'am, you may begin..

Thank you, Candace. Good morning, and thank you for joining us for today's earnings conference call. We issued an earnings press release this morning, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website at www.thermon.com.

A replay of today's call will be available on our website after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the express written consent of the company is prohibited. During this call, our comments may include forward-looking statements.

These forward-looking statements are subject to risks and uncertainties, and our actual results may differ materially from the views expressed today. Some of these risks have been set forth in the press release and in our annual report on Form 10-K filed with the SEC in May.

We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions and various other aspects of our business. During the call, we will also discuss some items that do not conform to Generally Accepted Accounting Principles.

We've 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.

And now, it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer..

Thank you, Sarah. Good morning, everyone. Thank you for joining our conference call and your continued interest in Thermon. Today, we have 2 of our Senior Vice Presidents joining me on this call.

Jay Peterson, our CFO, will follow me and present the financial details of our FY 2015 first quarter; and George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A. For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions.

We serve oil, gas, chemical and power generation industries. While Jay will discuss the financial details in a moment, I would like to touch on some of the highlights for our first quarter of 2015. First of all, let me begin by saying that we're off to a good start for this fiscal year.

Our revenue grew 3% over prior year, our revenue mix for the quarter was 68% MRO/UE and 32% greenfield. The resulting product mix produced gross margins that were 50% of sales. Our growing installed base continues to favorably impact our gross profit. Our EPS grew to $0.36 per share, which is up significantly year-over-year.

Our backlog grew to almost $98 million. This was an increase of around $14 million over the prior quarter. Purchase orders received were up $18 million over prior year. Quotations are also trending upward.

Thermon's updated pipeline of future projects remained solid with over 550 opportunities for heat tracing with an estimated total value of $1.1 billion. Foreign exchange rates negatively impacted our revenue by $600,000, which was primarily attributable to the depreciation of the Canadian dollar.

We believe that we're well-positioned in FY 2015 and are targeting mid-single digit revenue growth for this fiscal year. Our global footprint continues to be a key component of our strategy to provide value to our customers worldwide and penetrate our targeted end markets.

One example is that we've recently opened up a office, a direct office in Brazil. We are continuing to benefit from a rebound in the chemical, petrochemical and power generation sectors that are related to the shale oil and gas development in the United States.

Our Canadian business unit continues to do well even after the completion of several megaprojects. Smaller, more profitable projects have increased our MRO/UE sales and helped fill most of the void associated with the megaprojects completions.

The geopolitical unrest between Russia and the West is of some concern as it may delay some of the capital investments in the energy sector in Russia. We're still in the process of evaluating the potential effect of recent sanctions that have been announced. And just for the record, Russia represents less than 10% of our total revenue.

While we recognize the current risk in Russia, we have also seen positive indicators elsewhere in the region. For example, quotations in other central Asian countries, such as Kazakhstan, are up significantly.

We've continued to look for opportunities, where we can leverage our leadership position by providing thermal management solutions to the global energy and industrial markets. Over the last several months, we have begun investing more time and more resources into researching inorganic growth opportunities.

As a result, our M&A pipeline is building, and we are evaluating several attractive and strategic opportunities. Our management team would like to thank our employees throughout our global organization for their hard work and dedication. We would also like to thank our customers, investors and advisors for their support and confidence.

Once again, thank you for joining us today. And I'll now turn the call over to Jay Peterson, our Chief Financial Officer..

Thank you, Rodney. Good morning. This morning, I will discuss our first quarter results starting with top line revenue. Our revenue this past quarter amounted to $67.7 million, and that's an increase of 3% relative to the prior year's quarter.

I would like to point out Q1 is typically our lowest rev quarter and that we are not in the heating season, and we anticipate revenue to grow throughout the balance of the year. Orders for the quarter totaled $80.6 million relative to $63 million in Q1 of last year and that's a growth rate of 29%.

And we have experienced order growth in all 4 geographies this last quarter. Our backlog of orders ended June at $98 million, that's 15% higher than March of 2014. Relative to the end of Q1 fiscal year '14, our backlog increased by 6% from $92 million. And recall that typically, only 40% or so of our business is ever resident in our backlog.

On a pro forma basis, excluding activity from our largest greenfield project, revenue grew 20% compared to Q1 of '14, and backlog grew 19% relative to Q1 of last year. And I'd like to add that our Canadian subsidiary is up both year-on-year and sequentially in respect to backlog. Now to discuss gross margins.

Margin dollars this past quarter totaled $34 million. Compared to Q1 of fiscal year '14, our margins increased by 270 basis points to 50%. This margin increase was due to the high mix of MRO/UE at 68% of revenues, whereas greenfield totaled 32%.

And MRO/UE grew 16% this last quarter due to our ever-increasing installed base, with all 4 major geographies growing double digits. Turning to operating expenses and headcount.

Core operating expenses for the quarter, that is SG&A, and this excludes D&A and any transaction-related expenses, totaled $17.5 million and that's an increase of 14% over Q1 of '14. The majority of these expenses relate directly to managing our growing book of orders and backlog. Our OpEx as a percent of revenue this past quarter was 26%.

And again, that excludes D&A. The number of full-time employees at the end of June was 836, up slightly from the 828 as of a year ago. Now to discuss a couple of below-the-line items, including interest expense and taxes.

This quarter, we amended the terms of our senior secured credit facility, which reduced the fixed component of the interest rate of our LIBOR-based borrowings by 25 basis points. This amendment will result in interest expense savings in the range of $1.4 million over the note's remaining term.

And regarding taxes, we released a $3.2 million deferred tax liability for previously accrued foreign earnings that are no longer expected to be repatriated. Now turning to earnings. GAAP net income for the quarter totaled $11.5 million versus a net loss of $6.9 million in Q1 of '14.

GAAP EPS totaled $0.36 a share versus a loss of $0.22 a share in Q1 of '14. And after excluding the impact of the deferred tax liability reversal, the company generated adjusted net income of $8.3 million and adjusted EPS of $0.26 a share. And this compares to Q1 of '14 adjusted net income of $7.5 million and adjusted EPS of $0.23 a share.

And a table explaining the adjustments can be found in our earnings press release from earlier this morning. Our adjusted EBITDA totaled $17 million this past quarter, ahead from the prior year performance of $16 million. And EBITDA as a percent of revenue was a healthy 25% in Q1. And the last area of discussion relates to our balance sheet.

Our cash balance was $77.3 million at the end of Q1 and that's an increase of 70% year-on-year. Leverage at the end of June, on a net debt basis, was at a record low of 0.5x, down from approximately 4x back in 2010. And our business continues to be highly capital efficient.

This last quarter, CapEx amounted to a total of approximately $750,000, 1% of revenue, and our conversion ratio was 99% for the quarter. And I would now like to turn the call back over to Candace..

[Operator Instructions] And our first question comes from the line of Scott Graham of Jefferies..

I'm looking at the numbers that you gave on the -- I think, Jay, you said sales would've been up 20% were it not for some -- the contrary, the project runoffs. I just wanted to make sure I squared my math here.

Are you suggesting that the project revenue in the quarter was x that -- those runoffs, was up more than 25%?.

From the loss of Kearl?.

That's correct..

Yes..

So then if that's the case, particularly running up against easier comparisons in the second half of the year, is there a reason why the organic -- that the sales estimate that you're thinking for 2015 shouldn't have any upside -- shouldn't have some upside to it now, based on what you're seeing, particularly given on top of just the bookings number that you reported?.

Although certainly we had a great quarter in terms of bookings performance, Scott, certainly our backlog is growing. But we just have one quarter underneath our belt, and by no means are we in a position to increase our guidance. And we're going to take this one quarter at a time..

Very good. The other question that I had was really around the sands, where you said your Canadian subsidiaries, I think you said those sales were up. And I think you also said up, I don't want put words in your mouth. I thought you said bookings were up as well.

Could you talk about what the sands customers are saying about their capital spending over the next 6 to 12 months? That does seem to be a point of contention..

Scott, this is George. Just to be clear on what's happening in our Canadian business. Our Q1 revenue was up in Canada over the projections that we have for our FYI '15 budget, but they were not up year-over-year and as far as Q1 is concerned because Q1 of '14 did have a significant amount of Kearl content.

But our performance in Canada overall is very -- we are very pleased with it. And our business remains strong there. As far as the feedback that we're getting from our customers, it's kind of a tale of 2 cities, so to speak.

And that the SAGD projects that we've been talking about for several quarters now continue to be very active, robust, and we're not seeing any pushback there in terms of capital investment. So we remain confident and excited about that opportunity. On the mining side, there is some delays going on in Canada, as far as the projects there are concerned.

But having said that, there's also some talk now about some capital expenditures going forward on a couple of new mining projects. So it is a mixed message in the marketplace. But from our perspective, as we've been talking about, our revenue focus and the content of our forecast comes primarily from the SAGD project side..

And George, are those 2 businesses about the same size? Or could you maybe give us a little thumbnail on that, which business is bigger?.

There's no question that the upgraders associated with the mining projects are the larger projects, but there's not -- there's also not very many of those.

There's a smaller number of those opportunities out there, whereas the number of opportunities in the SAGD arena, while smaller on per project basis -- and again, I'm not saying they're small, but they're smaller than the upgraders. There's more of them..

Got it. My last question relates to the continuing rise in the cash balance. And I guess, Rodney, this is more pretty squarely at you. I know that you guys have been working hard behind the scenes. You've got new people in place on the M&A side looking for things.

Versus a quarter ago, do you think you're any closer on finding something and closing a smaller-sized acquisition sometime in the next 6 months?.

The answer to that question is yes, and the only analogy I can give you is if our stove had 4 burners. We have front 2 burners on high..

So within 6 months, is that reasonable?.

Yes. Yes..

And our next question comes from the line of Brian Drab, William Blair..

First question. Jay, you mentioned that we should see revenue improve throughout the year.

Can you just be a little more specific on that point? Can you comment as to whether we should see a sequential increase in revenue quarter-by-quarter throughout the year? And could you even give us a little bit of granularity in terms of should we see Greenfield stepping up quarter-by-quarter in MRO/UE?.

Good question, Scott -- or Brian, sorry. Here's what I can tell you. Our backlog continues to grow. Our order rates are doing quite well. We are off to a very strong start this year. We believe our Greenfield will grow throughout the year, especially when we look at some of the projects that are both in the quoting stage and in our backlog.

So the balance we have seen in this last quarter, we'll see a little switch, a little shift in that to more greenfield. That's what we anticipate. We are not in the heating season as of Q1, but we are shifting into the heating season, and that will cause revenues historically to increase in Q2 and Q3.

So sequentially, if history repeats itself, we will see growth in Q2 and Q3..

Sequential growth?.

Yes..

Okay. And I think we've talked about this a little bit on the last earnings release.

But given the mix on the Greenfield side, it's more toward some of these smaller projects, could we possibly see gross margins stay at this elevated, at least on a historical basis, an elevated level of around 50%?.

No, I don't think we'll stay at 50%. But you're right, the smaller Greenfield projects will be at a higher level than the margins we've seen from these mega greenfield project levels we saw 2, 3, 4, 5 years ago..

Okay, okay. And then maybe just a quick update on the commercial opportunity and the emissions monitoring opportunity, and that's all for me..

Okay, Brian, this is George. The emissions monitoring business continues to perform well for us. As we've mentioned in our previous call, that is one of the growth drivers, one of the areas that we're projecting to drive growth in our business, and at the end of the first quarter, it's performing well.

So as we said, as long as there is smokestacks and plants being built or modified for that matter to meet new regulatory standards, that's positive for the emissions monitoring business..

And on the commercial side, is there any comment you can make there?.

The commercial business continues to be something that we're taking advantage of from the standpoint of targeting low-hanging fruit, if you will. It's not a massive focus from a marketing perspective, because our focus is the industrial electric heat tracing business.

But the -- because we do have the capacity expansion available to us in our -- as a result of our cable making operation, we aren't able to take advantage of targeted opportunities. And it's still -- it's performing as we have expected and forecasted..

And our next question comes from the line of Charlie Brady of BMO Capital Markets..

Could we just talk about the SG&A expense for a second? I know it's ticked up a little bit. Is this kind of the run rate we ought to be kind of assuming whether either from a dollar term or percentage of sales because certainly our percentage of sales did tick up a little bit.

And maybe you can dig into what's driving that? Is it more of a sales-focus to drive higher sales or what's happening there?.

Yes, I would look at it more from a dollar term rather than a percent term or relative term. And it is absolutely due to us driving additional sales both for the balance of this year and for next year.

If you dissect the actual expense drivers, it's related to salary, it's related to R&D expenses, marketing expenses and contract labor expenses, Charlie..

And with respect to that backlog, how much if any of that is tied into the Russia business that is having an issue these days?.

Charlie, this is George. Our business in Russia is off a little bit in Q1. So there is no doubt that, that's somewhat related to the concerns of about the political situation or unrest there. There's not a lot of our backlog that's contained in Russia at this point in time.

We do expect some of the larger projects, the larger capital spend activities in Russia to be pushed out. I think that's been well publicized recently.

And -- but having said that, similar to the rest of our business, the smaller orders, the maintenance and the upgrades and expansions of smaller projects are holding in pretty strong and so are our margins in Russia. So it's not all bad..

Okay. I guess what I was really trying to drive to at that too was there is not a meaningful amount in the backlog that's potentially could be canceled because of what's going on over there..

That's correct..

Okay. And I don't know if I missed it.

Did you give guidance on what you thought the tax rate was going to be this year, excluding the kind of onetime thing we saw in Q1?.

Yes. For the next 3 quarters, somewhere in the range of 28% to 28.5%, Charlie..

And our next question comes from the line of Jeffrey Hammond of KeyBanc..

Just a couple quick follow ons. So that the higher tax, what's driving that versus....

Yes, recall a year ago, we did the permanent reinvestment decision and so that actually reduced it by about 10 points. So going forward, when we have variability in earnings from the foreign countries or for the U.S.

component of earnings, we have a projection on which countries are going to grow, which countries are going to be more profitable and it's the skew within the foreign countries and the U.S. that will move the tax rate up or down going forward, Jeffrey..

Okay, okay, great. And just back to SG&A. So it looks like last year SG&A was running kind of just sub $16 million. You did kind of high 17s.

And you're saying that, that's a sustainable run rate for the balance of the year, that higher investment continues?.

Yes, Sir..

Okay.

And then just on the mid-single digit growth, can you update us on how you're thinking about growth rates in MRO versus Greenfield relative to that mid-single digit number?.

Yes, a couple of different thoughts on that. One is, quite candidly, our MRO business is doing much better than we expected. The margins, it's driving the mix within, the MRO mix is driving margins higher than we planned at the start of the year. All of that is goodness. We do not anticipate for that to continue forever.

You'll notice our backlog is up significantly. And we will invoice that backlog throughout the year, and that will increase our Greenfield invoicing and increase the mix of Greenfield throughout the year. Will it get down to the 60/40 split for the balance of the year? I'm certain, I'm certain.

But we will -- we are anticipating Greenfield mix to increase and MRO mix to decrease through the balance of the year..

You can also recall that we have -- we do have some -- we have a very strong MRO year last year and during the heating season and into the fourth quarter. And so we do have some tough comps coming up on the MRO side..

All right. Okay, helpful. And then Rodney, you mentioned a couple of deals on the front burner.

Are these kind of in that small-bolt-on-range or anything more meaningful?.

More than a bolt-on-range..

And our next question comes from the line of Jon Braatz of Kansas City Capital..

Sort of a follow-up question to the -- your sales forecast for the year. Given the order rates, given the way things are going, it looks pretty good.

What gives you a little bit of a pause of concern about some of these trends continuing? Is it some project delays possible? Is it weather? What specifically might give you some concern about these growth rates continuing?.

Well, all of those things do affect the business climate. One of things that we do have to manage every quarter and every year is the timing of the construction schedules and of our Greenfield business. So that's something we have to build in and bake in to our forecast.

The other thing is that weather, it does play a part in the MRO side of our business. It does magnify it when we have particularly hard, cold winters that come early and stay long. But again, the UE side of our business is not seasonal. And that's usually a reflection of the regional or global economy.

So if there's one thing that's out there that would give us significant concern at this point, it would be some sort of global recession as a result of some major event in the world. But we don't -- short of the Russian issue right now, we don't really see that..

Okay, okay. Jay, you had mentioned that it -- that your gross margins on the MRO business are improving because of mix.

Did I hear that correctly?.

Yes. This last quarter, whenever we sell a lot of our heater cable, electrical self-regulating heater cable, the sweet spot of our product line, that's our margin rich products, that drives higher gross margins. And we, in fact, did that this last quarter more so than what we planned..

How big a percent is of that sweet spot is MRO revenue?.

That drives MRO. That is right smack dab in the middle of the MRO component..

Okay, okay, all right. And then lastly, Jay, I was a little bit distracted. You mentioned interest costs, interest -- some interest savings from an amendment.

What -- can you go over that for me again?.

Yes. It's over the balance of the term loan over the next 5 years. It will save us about $1.5 million -- $1.4 million, just under $0.01 a year. So it's not all that dramatic but nor is it insignificant..

[Operator Instructions] And our next question comes from the line of Martin Malloy of Johnson Rice..

Is there a -- with respect to the oil sands, is there a major maintenance cycle that we should be cognizant of, relating to some of the larger projects you worked on over the last 3 or 4 years coming up?.

Yes. There is a -- the cycle for these large capital projects tends to be that when the project is completed within the first 2 or 3 years, normal maintenance cycles will start.

And the historical data that we have indicates that based on -- of the initial capital spend or the total installed base, that there's somewhere between 7% and 10% of MRO activity that's associated with that.

And then on a longer-term basis, 7 or 8 years, there are -- tend to be revamps, turnarounds or upgrades that are associated with that installed base. So yes, we are starting to -- we are seeing some of that from the installed base, the significant installed base that has resulted from the megaprojects in Canada.

Obviously, on Kearl, we're not seeing the MRO from that particular project start yet, but it will be in the not-too-distant future..

Okay. And then could you talk about your expectations for orders related to the build-out of petrochem facilities in the U.S.

and when do you expect those to ramp up?.

Yes. The chemical industry in particular, is already on an uptick in the U.S. And this is primarily -- in FY '15 in the current fiscal year, is primarily related to chemical processing. It's not specifically the ethylene crackers that are getting in the news because those are -- I think are projected to start around '16 or '17 in terms of construction.

But the shale gas business is also driving significant uptick in activity in the chemical processing side of the business. And some of the uptick in our backlog is reflective from that..

And would that be more Brownfield expansions of existing facilities?.

Yes, that's correct..

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Rodney Bingham for any closing remarks..

Well, once again, thank you, everybody for their interest in Thermon. And after a very good start, we feel like we're on target to maintain the guidance we've given this year and we look forward to talking to you on the next earnings call. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone..