Sarah Alexander - General Counsel Bruce Thames - President and Chief Executive Officer Jay Peterson - Chief Financial Officer.

Brian Drab - William Blair Scott Graham - BMO Capital Markets Charley Brady - SunTrust Robinson Humphrey Jon Braatz - Kansas City Capital.

Good day, ladies and gentlemen and welcome to the Thermon Earnings Conference Call Q3 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to introduce your host for today’s conference, Ms. Sarah Alexander, General Counsel. Ms. Alexander, you may begin..

Thank you, Daniel. Good morning and thank you all for joining today’s 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 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 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 quarterly and annual reports filed with the SEC.

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, revenue growth, profitability, leverage ratios, acquisitions, acquisition synergies 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 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.

And now, it is my pleasure to turn the call over to Bruce Thames, our President and Chief Executive Officer..

Thank you, Sarah. Good morning, everyone and thank you all for joining our conference call today and for your continued interest in Thermon. It is greatly appreciated. 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 2018 third quarter.

To begin with an overview of the financials for the quarter, overall we are very pleased with the operating performance in Q3. We saw year-over-year growth in bookings, revenue, backlog, and EBITDA in both the organic business and on the acquisition on a pro forma basis.

Focusing first on our organic business, we are seeing improved performance based upon cost-reductions and process improvements implemented over the last year that we believe are sustainable going forward. We're also seeing improving end markets in our organic business that led to year-over-year revenue growth of 19% and backlog growth of 26%.

We also saw organic margins expand by 100 basis points year-over-year and OpEx trend down on a percentage basis excluding one-time expenses related to the acquisition. Now turning to the recent acquisition of CCI Thermal Technologies which we now call Thermon Heating Systems or you'll hear referred to as THS.

We are extremely pleased with the performance during the first two months as being part of Thermon. Our teams on both sides have successfully worked together to first stay focused on the customer and second make the integration as seamless as possible.

Both revenues and profits from this business has thus far met or exceeded the business case during the first two months of operation. The revenues of $16.1 million drove our year-over-year revenue growth to 44% in the quarter and improved our EBITDA margins on an adjusted basis by 130 basis points.

Moving now to the combined businesses, we saw a book-to-bill of 114% with organic at 115% and inorganic at 108%. The combined backlog of $168 million was up 26% organically year-over-year with the new Thermon Heating Systems representing an additional $35 million of that increase.

The organic backlog growth was largely attributable to petrochemical and power project bookings in the U.S. and Latin America. Thermon Heating Systems also saw a 21% year-over-year backlog growth and 10% consecutively both on a pro forma basis. GAAP EPS finished at $0.02 a share versus the prior year of $0.16 per share.

However, looking at our adjusted EPS provides a much better indicator of the true potential of these combined businesses and the positive impact of the operational improvements made over the last year. Excluding the one-time charges related to the acquisition and U.S.

tax reform, adjusted EPS finished at $0.24 a share relative to $0.16 a share last year representing a 50% increase over the prior year Q3. In addition, strong cash flows and EBITDA growth reduced our net debt-to-EBITDA from 3.4 at the time of the acquisition to just 3.0 only two months later. Jay will cover the impact of the U.S.

tax reform and one-time acquisition -related adjustments in more detail. From a market perspective, the oil and gas sector continues to show early signs of recovery with increased maintenance spending and moderate capital spending on smaller projects. The chemical and petrochemical sectors remain active with improved bookings in the U.S.

and much better visibility for fiscal 2019. Combined cycle power projects remained steady and looking geographically revenue was up across all reporting segments with double-digit growth versus prior year in all but the U.S. Backlog conversion is improving in the Eastern hemisphere as shipments began to materialize in Q3 and will continue in Q4.

After a very robust H1 in Canada, we're pleased to see that trend continue into Q3. Greenfield project activity in the U.S. and Latin America also increased as anticipated in Q3 and we saw strong order growth as customers are beginning to release projects that have been slow to move.

With a positive book-to-bill of 163%, the outlook for the year in the U.S. and Latin America and visibility for fiscal 2019 has significantly improved. Moving on to our project pipeline, the number of opportunities remained stable at over 800 while the total value within our pipeline has grown to approximately $1.1 billion.

We're working to expand this to include the new acquisition; however, the pipeline does not yet include opportunities for Thermon Heating Systems. Much of this project growth from the prior year is in midstream and chemical or petrochemical projects.

We continue to invest in new product development to lead the industry with innovative solutions that create unique customer value and a differentiated position for the business. We will have more new product announcements in the coming quarters. The integration of Thermon Heating Systems is progressing as planned.

We continue to be impressed with the caliber of the people, the quality of their products and the commitment to superior customer service.

We remain on track to meet or exceed our financial objectives for this business and from a strategic perspective, early feedback from the market has been very positive on that expanded solution set and the potential revenue synergies which were not included in the investment returns.

Our M&A pipeline remains robust, but our near-term capital allocation has shifted to debt reduction as the first priority.

Looking forwards, the healthy backlog and improving end markets in North America combined with the increased pace of project execution in the Eastern hemisphere provides line of sight to over achieve our organic revenue plans for the year.

As a result, we are increasing our revenue guidance for the full year range to a range of $258 million to $263 million. Inorganically we reiterate our guidance of $38 million to $41 million in revenue at 24% to 26% EBITDA margins bringing the combined total revenue guidance to range for the year from $296 million to $304 million.

We're pleased with the results and remain cautiously optimistic on the positive signs of recovery we're seeing in many of our end markets. Under the current oil price environment, we see these trends continuing into fiscal 2019.

This in combination with the expanded addressable market represented by the Thermon Heating Systems acquisition positioned the company well for success in fiscal 2019 and beyond. Thank you again for joining us today. Jay Peterson, our CFO will now address the details of our financial performance for Q3 fiscal 2018.

Jay?.

Thank you, Bruce. Good morning. I would like to start by discussing our Q3 financial results and then conclude with updated revenue guidance for the balance of fiscal year 2018.

Starting off with orders and revenue, total orders for the quarter grew 9% year-on-year on a pro forma basis and 21% sequentially and we experienced order growth in both our organic business with record orders of $88 million and Thermon Heating Systems and going forward in this discussion we will refer to Thermon Heating Systems as THS.

In aggregate on a GAAP basis our revenue grew from $64.3 million to $92.7 million and that's a growth of 44%. On a pro forma basis total revenue grew by 19% with organic growing from $64.3 million to $76.6 million with all four major geographies showing growth in the quarter.

For the two months since the acquisition, THS grew revenue from $13.7 million to $16.1 million on a pro forma basis in that 17% revenue growth.

Our organic Greenfield mix for Q3 was 38% of revenues, whereas MRO/UE totaled 62% and Greenfield revenues increased by 38% over prior year quarter due to a step up in capital spending whereas MRO/UE increased by 10%. And FX currency translation positively impacted our revenue in the quarter by approximately $3 million.

Our total backlog grew to $168 million with both organic and THS achieving record backlogs. In addition, organic margins in our backlog are up 3% year-on-year.

Our organic book-to-bill for the quarter was positive at 115% and that's marking our fifth consecutive quarter with a positive book-to-bill and also THS had a positive book-to-bill for the quarter at 108%. In terms of gross margins, our total gross margins increased by 110 basis points to 45.6%.

Contributing to the improved margins this past quarter was an increase in higher-margin electrical products mix, continued cost management, and improved project execution.

Now moving to operating expenses, operating expenses for the quarter that is SG&A and this excludes depreciation, amortization of intangibles, and transaction related expenses, totaled $21.6 million versus $19.9 million on a pro forma basis in the prior year quarter.

One-time transaction related costs totaled $3.5 million and in addition reflected in other income expense we took a non-cash foreign exchange hedging charge of $3.3 million relating to a hedge placed to cover currency impact from the announcement of the transaction to the closure 30 days later and a second non-cash charge of $2.2 million or currency hedge on the five-year intercompany loan between our U.S.

and Canadian entities. And our operating expense as a percent of revenue was 23% and again this excludes D&A and transaction related expenses. Moving to taxes, our tax rate for the quarter was 51.5% and the effective rate was the result of low pre-tax income of $1.7 million due to transaction related charges. And relative to U.S.

tax reform we are currently estimating to pay $6.8 million in cash taxes over the next eight years and a net GAAP tax charge of 800k and that 800k charge is incorporated in the 51.5% rate I previously mentioned. Prior to U.S. tax reform had we decided to repatriate our excess foreign cash, Thermon’s tax rate would have been 35%. Post U.S.

tax reform we planned to repatriate excess foreign cash at an estimated tax rate of 26%. Moving on to earnings, GAAP EPS for the quarter totaled $0.02 compared to a prior year of 16%. And excluding all transaction related costs and the two FX charges, our adjusted EPS totaled $0.24, an increase over the prior year by 50%.

Our adjusted EBITDA grew by 72% in the quarter and totaled $21.7 million or 23% of revenue. Organic adjusted EBITDA as a percent of revenue improved to 22% and that’s much closer to our historical levels and what we anticipate to deliver in the future. Adjusted EBITDA for THS totaled $4.6 million or 29% of revenue and it grew year-on-year by 12.2%.

Please see the table in our press release for a detailed bridge from net income to adjusted EBITDA. Next the balance sheet and future capital allocation. Our cash balance ended at $52.2 million this past quarter versus $79 million one year ago, and the decrease was due to the acquisition of THS.

At the time of the October acquisition, our net debt to EBITDA leverage was 3.4x and it is currently at 3.0x, and we believe we can de-lever the business through a net 2.5x within the next 9 to 12 months beating our previous October guidance by one whole year.

CapEx spending for the quarter totaled $1.3 million or 1% of revenue and our EBITDA conversion ratio was 96% for the quarter. And based on our ongoing ability to generate cash and the benefit of recent U.S.

tax reform, we anticipate making optional debt payments in the neighborhood of $30 million over the next year and an additional $30 million in fiscal year 2020 and this will increase our EPS by approximately $0.04 a share in fiscal year 2019 and $0.08 a share in fiscal year 2020. Lastly, summary and 2018 guidance.

We are quite pleased with the financial performance of our organic business and the THS businesses. Both businesses grew orders top-line revenue and backlog and are well positioned to exit the year with continued momentum.

We believe we will finish the year with total revenue in the $296 million to $304 million range and we are maintaining our previously revenue guidance of $38 million to $41 million for THS.

And we will be providing an update on the synergies and cost reductions relative to the THS acquisition during our next earnings conference call along with guidance for fiscal 2019. I would now like to turn the call back over to Daniel to moderate our Q&A session..

Thank you. [Operator Instructions] And our first question comes from Brian Drab - William Blair. Your line is now open..

Hey, good morning and Jay, I think that you may have just told me that you are not going to answer my first couple of questions, but I'm just going to see what you're willing to share now. So your previous targets for CCI for the last 12 months ended July 31, 2018 was $29 million and then $29.3 million and then $31.4 million with the synergies.

Has that changed and did I – I don’t know if I heard you today say that there might be more than the originally planned synergies?.

Yes, in terms of what we announced relative to synergies was that there would be $2 million worth of total synergies relating to the acquisition and we are right in the middle of that as we speak and we will be able to provide additional guidance and an update on that at our next call.

In terms of the revenue, we are holding to the revenue number that we mentioned back in October and the range is still at $38 million to $41 million over the five-month period..

So, no update on any of that, okay..

Brian, this is Bruce, real quickly, my comment around the revenue synergies which would not include in the business case, it is very early, so any impact we might see from that would be significantly out in the future. So, we'll keep you updated as we progress..

Okay, and then did you say what for the three months ended December, you know for the whole December quarter what CCI grew, I guess I am going to say THS sorry?.

Yes, we actually did, but it was only for the two months that they were part of our business, and that, they grew 17% during that two-month period..

Okay, and then go ahead Bruce..

No, no, I'm sorry, go ahead..

Okay and then the tax rate going forward with the new tax policy?.

Tax rate going forward and this assumes and we plan to repatriate foreign cash to pay down debt 26%..

Okay, so that’s you consolidated regardless of repatriation or not, your consolidated effective tax rate going forward is 26%?.

Correct..

Okay.

And then may be a question one for Bruce, but are you getting more visibility on some of this petrochem projects any better visibility then you had a few months ago, and whether it's orders coming in or just discussions that you are having with some of the oil majors?.

Yes, we are. In fact the bookings in the U.S. which I referenced their book-to-bill was 163%. The bookings in the U.S. represented 57%, the bookings in the quarter 53% of bookings in the quarter.

We had a very strong incoming order rate there and much of that is related to these petrochemical projects that are coming in 2019 and beyond, so the visibility has improved dramatically..

Is that your fiscal 2019 that you're to referring to or calendar ’19 your fiscal 2019..

That’s correct..

Okay and then can you just give us any more detail about what's going on globally where you're seeing the biggest, the greatest growth rates or the biggest opportunities whether it's an update on Middle East or Eastern Europe, Russia, just a little more detail on what you're seeing globally?.

Yes, so in Eastern Hemisphere the biggest drivers we've seen there are Middle East and Russia. And the good news there is we've had, we've been carrying a record backlog in the Eastern Hemisphere this quarter. We really began to see those projects move from backlog to revenue.

A lot of those projects had been engineering for a protracted period of time and now we're beginning to see that materialize, that had a significant impact on the Greenfield mix in the quarter and we do expect that going forward. When we look at Western Hemisphere, we've seen a significant improvement in Canada.

We think that’s going to be somewhat limited by just the price of oil there in Canada and so we do expect investments there to be more in infield development in SAGD and in infrastructures of midstream spending. In the U.S. we're seeing a lot more spending in petrochemical and downstream processing, so that looks pretty favorable going forward..

Okay and then just a last one, is there any reason why we would be more cautious or expect maybe a decline in gross margin sequentially going forward or it is the level we see here, where we should model?.

If you look, I would just say as you look forward to the balance of the year, I think just a year-over-year comp, we would have exposure of at least 200 basis point improvement in our gross margins in the organic business.

So I think that's probably what you should look for and we have seen stabilization in our margins in backlog at this level, so we should see going into 2019 we would expect the margin profile to be similar and as you know mix has a big impact on that..

Okay, so 200 basis points better, just put a slightly finer point on that 200 basis points better year-over-year is about 44 and you said that's only for the and it would be that's kind of the floor for the legacy business and then how do we think about THS blending that up or down?.

We've talked about that business being in and our forecast there is 24% to 26% EBITDA margins on that $38 million to $41 million in revenue and that 38 to 41 is for the five months of ownership for the full year so..

Does that mean that - are you indicating that it blends up gross margin Bruce?.

It has a slight positive effect to gross margin..

Okay, thanks very much..

Thank you..

Thanks Brian..

Thank you. And our next question comes from Scott Graham with BMO Capital Markets. Your line is now open..

Hey, good morning..

Good morning Scott..

Good morning Scott..

So it looks like the fourth quarter implied sales are organically slower than sort of just taking the mid points sort of like mid-single digit-ish kind of thing than they were this quarter.

Is that a timing thing, is that - did you have such good execution out of the backlog where there were some pull forward sales on that?.

It wasn’t pull forward sales. I would say our revenues – we had had some pent up projects that finally began to ship and that was a positive impact. We do expect that to continue into the fourth quarter. I mean, as you know, there is some seasonality in the fourth quarter.

We expect single, we expect both our organic as well as the acquisition to show growth, but it may not be the double-digit growth, it's probably more in the single digit range..

So that would suggest that your – the guidance which is truthfully Bruce runs a little counter to what you just said that the guidance is perhaps conservative?.

The guidance we gave was revenues to be flat on the organic business to up about 8% in the fourth quarter and so I think that’s consistent with what I just said..

Okay, so the next question I have is on sort of price cost, what are you seeing in terms of materials inflation and are you able to get, have you been increasing your prices and kind of where do you stand on that ratio?.

We have seen some material price inflations mainly in copper is the only one that has been of any significance and – but it hasn't had a material impact to our margins and we believe that we do have more pricing leverage and can pass that on in the marketplace..

Okay, would it also be fair to say that with inflation in metals seemingly continuing to inflect upward that you guys are either increasing prices now or really kind of at the ready?.

I would say more as to ready..

Okay, two other questions for me.

The organic orders in the quarter kind of they were I think about plus five and I know that there was currency in there as well, so again kind of same tiger different stripes, is this a timing issue in the quarter, is it a comp issue? It doesn't sound like you saw anything out there that is giving you more pause than last quarter at all, so what happened to the organic orders number this quarter?.

Yes, so I guess the one thing to note is, this was a record organic booking quarter. So and last year was the second highest we've had this actually beat the prior record. So that's pretty substantial bookings quarter.

If you just look at the run rate on our organic business, we would expect around $70 million a quarter to come in at 88 is significantly above that run rate. So we feel really strongly and I'll say we believe that Q3 is actually building more momentum going forward.

I think the other thing, the comment around FX goes back to the note that 53% of those bookings were in the U.S. and so on a percentage basis a lot less of that was international. So the FX impact just because of the mix would be less, but I don't have that number for you.

So, but I think the more important factor is that this quarter has built confidence for us going into the balance of the year and into fiscal ’19..

Yep, understood, last question and I think someone was trying to get to this in an earlier question. So your EBITDA margin in CCI was, might actually just have it about 29% in the quarter which is above the Thermon number. So you indicated that CCI’s mixed gross margin is only a modest positive on a run rate basis at least that's what I inferred.

Would that suggest that the rest of that differential is in SG&A?.

Yes, that is correct..

Okay, thank you..

Yes..

Thank you, Scott..

Thank you and our next question comes from Charley Brady with SunTrust Robinson Humphrey. Your line is now open..

Hey, thanks. Good morning guys..

Good morning..

I want to focus on the marketing G&A and engineering expenses and I think you started touching on it a second ago in response to Scott's question on the SG&A at THS, but that was unusually as a percentage of revenue, that was unusually low, is a pretty big step down from Q2 into Q3 was that skewed a lot because now that too much you had THS in there and going forward when we're trying to model that out as a percentage of the revenue number or even a dollar value I guess, should we be assuming that that's - that percent of revenue ought to be coming down relative to what historically Thermon has done without THS embedded in that?.

Yes, there were two positive factors. One is as I just mentioned THS certainly helps that ratio that percentage and also as we have grown the business we are getting back to the organic OpEx as a percent of revenue that we saw three years ago or so when we were performing at record levels, so it's really a combination of the two..

Okay, that's helpful thanks.

And then just on a go forward basis, I know it's hard on the MRO/UE business to give - kind of gauge because the duration of that is shorter, but as you look at kind of the incoming orders and kind of what your expectation is, can you give us a sense of, you know, should we see any kind of meaningful shift in that mix or kind of assume kind of the normal mix we've been seeing.

I guess I'm trying to understand, sorry, is there in there a skew it significantly towards Greenfield but or is there?.

Yes, this is Bruce. Timing on projects can have a significant impact within any specific quarter and in Q2 of this year we had less Greenfield shipments, project shipments. Q3 we saw those increase. If you were to average those out, they still fall around that, the 60-40 range within a couple of points.

So there's nothing going forward that we anticipate would change that significantly, but it's very hard to say with any given quarter just based upon project timing..

Yes, understood. I appreciate it. Thanks..

Thank you..

Thank you. [Operator Instructions] And our next question comes from Jon Braatz with Kansas City Capital. Your line is now open..

Good morning Bruce, Jay..

Good morning Jon..

I was looking - going back looking at my notes, and at it my notes and on CCI or THS and THS has a more diversified customer base I think than Thermon organically.

Are you seeing business improve in the sort of the non oil and gas markets for Thermon Heating Systems too?.

Yes, this has been fairly broad based.

Q - Jon Braatz Okay, how much, and you being able to help me, how much of their business is oil and gas?.

About 40, about 45%..

Okay..

But the one comment I would make there is they have a lot more exposure to mid stream and natural gas which we've been heavily focused historically on upstream, downstream and oil, so it does give us more diversification within energy..

Okay and then Jay looking forward, do you see any other, any additional “onetime” costs that we might see in subsequent quarters?.

No, we don't, nothing of any material nature. One thing I would mention though is as we de-lever the business, there will be some non-cash charges for prior debt issuance costs that will be burned off you if you will on an accelerated basis as we accelerate, the optional debt payments..

Okay..

Other than that, from this last transaction we think we have incorporated 95% to 98% of them nothing of any materiality..

Okay, thank you very much there..

Thank you and I'm not showing any further questions at this time. I would now like to turn the call back over to Bruce Thames for any further remarks..

All right. Thank you again for everyone joining the call today. We appreciate your interest in Thermon. Have a very good day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day..