Sarah Alexander - General Counsel and IR Bruce Thames - President and CEO Jay Peterson - CFO.

Brian Drab - William Blair & Company Martin Malloy - Johnson Rice & Company Patrick Wu - SunTrust Robinson Humphrey Jonathan Braatz - Kansas City Capital Associates Scott Graham - BMO Capital Markets Corp.

Greetings, and welcome to the Thermon Group Holdings Incorporated First Quarter Fiscal Year 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Sarah Alexander, General Counsel. Please go ahead..

Thank you, Diego. 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 would also 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, 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's my pleasure to turn the call over to Bruce Thames, our President and Chief Executive Officer..

Thank you, Sarah. Well, good morning, everyone and 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, and Jay will follow me and present the financial details of our fiscal 2019 first quarter.

We are now seeing our teams focus on strategy and execution during the industry downturn directly translate into improved operating results at the early stages of a recovery. Many of the positive trends that we saw in the second half of fiscal 2018 are continuing in the first quarter of fiscal 2019.

The integration of CCI Thermal Technologies, now called Thermon Heating Systems or THS is progressing well. We've just successfully completed the consolidation of our production facilities and are on track to achieve the cost synergies identified in the original plan.

We are also seeing sales synergies not included in the plan beginning to materialize due to the combination of our sales efforts and expansion of our addressable market. The outcome of these efforts drove first quarter results that exceeded our expectations in terms of both revenue growth and operating leverage on the business.

Revenues of $88.9 million were up 71.8% year-over-year with organic growing 31.3% excluding FX on a weak [ph] comp. Inorganically, we saw Thermon Heating Systems finish at $18.8 million in revenue, up 22.9% on a pro forma basis and on track with our base case for the acquisition.

Margins declined by 130 basis points year-over-year on a much stronger Greenfield mix of 45% versus 55% MRO/UE compared to 28% and 72% respectively in the prior year quarter.

As we look at the impact on tariffs -- that tariffs may have on the business, we believe price increases and absorption on the increased volume will offset any inflationary impact on gross margins.

While the traditional heat tracing products are somewhat impacted, we see a greater impact on the process heating product lines due to the higher steel content. On a positive note, copper prices have fallen significantly over the last quarter.

Despite the margin impact to the mix change, the incremental volume drove very strong operating leverage in the overall business with adjusted EBITDA of $17.9 million in the quarter, an increase of 156% and GAAP EPS of $0.09 a share, up from $0.01 a share in fiscal 2018.

Adjusted EPS was $0.24 a share in the quarter, up from $0.08 per share in the prior year quarter, an increase of 200%. THS contributed $0.04 a share, adjusted EPS in the quarter went fully burdened with the associated debt. SEC adjusted EBITDA was 20% for the quarter, up 660 basis points year-over-year.

We continue to see the positive cash flow and EBITDA expansion of the business drive lower net debt to EBITDA. At the end of October, following the acquisition, we had a net debt to EBITDA of 3.4 times. Just eight months later, that has now been reduced to 2.5 times.

We will continue to focus on debt reduction to ensure this business is well positioned to capitalize on future investment opportunities. Turning to bookings, bookings grew 7% year-over-year on a pro forma basis and 4% organically.

We continue to see backlog conversion accelerate on modest incoming order growth resulting in an 83% book-to-bill for the quarter. The backlog is up 31% year-over-year and 5% on a pro forma basis. We believe materialization of the backlog is moving from a protracted 18 months toward a more normalized 12 to 15 months period.

We also believe this shift should represent a tailwind for the balance of the year. From a market perspective, upstream is improving with the exception of the Canadian oil sands though larger investments have been slow to develop. We are, however, seeing modest investments in the Canadian shale plays and in-field SAGD drilling operations.

The chemical and petrochemical sectors remain the strongest of our end markets as the project pipeline improves globally. We see the expanding differential between the oil and gas price per BTU improve investment economics and drive the overall pace of projects.

Combined cycle power projects are showing slow, steady, single-digit growth as natural gas continues to be the fuel of choice for power generation. Nuclear projects in North America are largely related to maintenance and life extension. We see some activity in Asia with new reactors coming online. Transportation has been active in the U.S.

and Canada with a number of multi-year transit contracts being awarded that help moderate the seasonality associated with the energy sector. Geographically, North America continues to show strength in fiscal 2019 that began in the second half of fiscal 2018.

We are seeing growth in Canada slow with the lack of pipeline takeaway capacity limiting further investments. There have been some recent pipeline developments that could potentially result in an improving environment for investment going forward. In the U.S. and Latin America, we are seeing growth gain momentum in fiscal 2019.

Maintenance spending has remained robust across North America and is anticipated to continue at this pace. In the Eastern Hemisphere, we continue to see larger projects in backlog move forward in the first quarter of 2019. We expect this to continue into next quarter. We've also seen stronger MRO and quick turn business growth in Q1.

We're making progress in expanding our R&D team to accelerate development of our product and technology roadmaps. These roadmaps will result in an expanded portfolio of solutions to differentiate Thermon in the marketplace, create value for our customers, and unlock new revenue streams for the business.

In Q2, we will announce the first of five product launches planned for this fiscal year. Our M&A pipeline remains robust, but our near-term capital allocations will be directed toward debt reduction as the first priority. Looking forward, we're pleased to begin fiscal 2019 with a strong start to the year.

The positive momentum that we have been building for the last three quarters has increased our confidence level for the balance of the year.

As a result, we are raising the forecast for the traditional heat tracing business from a range of 3% to 5% to a range of 7% to 10% for the full fiscal year while maintaining our original guidance for Thermon Heating Systems.

This change increases our overall revenue guidance to $371 million to $384 million for the year, this is up 20% to 24% over fiscal 2018. And no M&A is comprehended in these revenue projections. I'll now turn the call over to Jay Peterson, our CFO to address the details of our Q1, fiscal 2019 financial performance.

Jay?.

Thank you, Bruce. Good morning. I will start by discussing our Q1 results and then turn to a review of our updated guidance for fiscal year 2019.

Starting off with revenue, in orders, our revenue this past quarter totaled $88.9 million and that's an increase of 72% over the prior years' quarter, and that's a record start for both our organic business and Thermon Heating Systems. Organic revenue in constant currency grew 31% this past quarter.

FX contributed 4% to revenue growth and M&A revenue contributed 36%. And on a pro forma basis, our total revenue grew by 32%. This past quarter, we continued to experience positive signs of a recovery with all of our geographic -- organic geographic geographies growing this past quarter.

And in addition, Thermon Heating Systems revenue increased by 22.9% and that's on a pro forma basis. Our organic MRO/UE mix for Q1 was 55% of revenues whereas Greenfield totaled 45%. Total orders for the quarter were $74 million versus $55 million in the prior quarter for an increase of 34%.

And on a pro forma basis, orders grew 7% in both our organic business and THS experienced order growth in the quarter. Our backlog of orders ended June at $144 million versus $110 million as of June fiscal year 2018, and that's an increase of 31%.

Our organic backlog grew by 4% and on a pro forma basis, THS backlog grew by 8% and backlog margins also grew by 100 bps year-on-year. Our book to the bill for the quarter was 0.83. And moving to gross margins, total margins were 45% of revenue and they grew 67% year-on-year.

Versus the prior year quarter, our margins declined by 130 basis points due to a decrease in the MRO/UE revenue mix and an increase in Greenfield revenues in the Eastern Hemisphere, a geography that historically experiences lower project margins. And lastly, margins from Thermon Heating Systems were slightly lower than our corporate margins.

And on a pro forma basis, margin dollars grew by 29.7%, up from $30.6 million to $39.7 million. Next operating expenses, core operating expenses for the quarter, specifically SG&A and this excludes depreciation and amortization of intangibles totaled $23.4 million versus $17.6 million in the prior year for an increase of 33.2%.

And on a pro forma basis, our core spending increased from $21 million to $23 million or 11% and that should be compared to a 32% increase in pro forma revenue. Our OPEX as a percent of revenue was 26.3% and excluding depreciation and amortization, and that's an improvement of 770 basis points from the prior year level of 34%.

And these spending reductions were accomplished concurrent with an increase in R&D spending for future product offerings. Intangible amortization expense totaled $5.8 million this past quarter. And now on to earnings, GAAP EPS for the quarter totaled $0.09 compared to a prior year quarter of $0.01, and that's an increase of 800%.

Thermon Heating Systems contributed a loss of $0.03 a share to our GAAP EPS, and on a fully burdened basis, and this includes all incremental interest expense. Adjusted EPS, as defined by GAAP EPS plus amortization expense and onetime charges, totaled $0.24 a share relative to $0.08 a share in the prior year quarter.

And THS contributed $0.04 a share to this $0.25 a share total. And we will be communicating this construct going forward due to the high level of noncash amortization expense running through our income statement.

And at present, we are expensing $5.8 million per quarter or $0.13 per share each quarter for amortization or approximately $0.50 a share on an annual basis and this is an after-tax construct. EBITDA grew by 156% versus the comparison quarter and EBITDA as a percent of revenue was 20%.

EBITDA totaled $17.9 million this past quarter comprised of $13.9 million from our organic business and $4 million from Thermon Heating Systems, and that amounts to a pro forma growth of 79%.

And due to continued expense management and increasing gross margins, we were able to leverage our business model by 2.4x this past quarter with EBITDA growth of 79% relative to revenue growth of 33% and both of these are on a pro forma basis.

And this leverage was resident in both our organic business with leverage of 2.8x and Thermon Heating Systems with EBITDA to revenue leverage of 1.3x.

In terms of our balance sheet, our cash and investment balance at the end of June totaled $31 million and recall, our net debt-to-EBITDA ratio was 3.4x at the time of the October 31st acquisition and to growth in EBITDA and a reduction in net debt, we have delevered the business to 2.5x and this is all within an eight month period.

And lastly, fiscal year 2019 guidance. There are several guiding points I would like to discuss. First off, we are planning top line revenue to be in the $371 million to $384 million range for this fiscal year.

At present, we are not comprehending M&A revenue in this guidance, however, it is possible we will have actionable targets in the second half of the fiscal year. And lastly, we expect to reduce our net debt-to-EBITDA leverage in excess of a half a turn over the balance of the year, and this excludes any M&A transactions.

And I would now like to turn the call over to Diego to moderate our Q&A session.

Diego?.

Thank you sir. [Operator Instructions]. Our first question comes from Brian Drab with William Blair & Company. Please state your question..

Hey good morning and congratulations on the great results. .

Thank you Brian and good morning. .

I actually have the same question today that I had when you initially gave the fiscal 2019 guidance and it's that if you plug in the result now for the first quarter and you look at the guidance for the full year, unless I'm doing the math wrong, it really implies like 2% to 3% organic revenue growth for the balance of the year for 2Q through 4Q and I'm wondering why that would be given the momentum that you have?.

Well, I'd like to start with -- the modest overgrowth is certainly not as significant as what we'd like to see in the business. There are some other positive things that we're seeing and that's just the overall pace of execution, the materialization of the backlog, I think that certainly represents a tailwind.

And if you look at our business on a trailing 12, our bookings are right around $290 million on a trailing 12 months. So that gives us some confidence in going forward. But again, we feel like first of all, high single-digit in fact getting in to double-digit growth is pretty respectable for this business.

Beyond that, I think it'd be -- looking at this on kind of a quarter-by-quarter basis and considering the project nature and some of the lumpiness of revenues, I think is not necessarily the best way to look at the overall growth in this business..

Okay, okay. And I understand the high single digits, impressive. I just -- obviously, I just -- 2% to 3% for the balance of the year is not as impressive and obviously, everyone's looking forward and unfortunately whatever you did in the first quarter is kind of history.

So I'm trying to gauge what's ahead, and I'll follow-up more later on that one, but....

If you put in context, we do believe first -- the first half, we're going to see some upside. Second half, we've got some more difficult comps. So we would expect that to -- those to be a little more challenging in the back half of the year when you just look at year-over-year growth..

Okay.

What are those specific projects, Bruce, can you remind us the second half of the year, why the difficult comps? I know it's a great performance, but are there specific orders that don't repeat?.

We had a really cold winter, we had some -- a big pickup in the maintenance spending, which we -- won't sustain, but won't necessarily increase above those levels. And so those are a couple of things plus some project timings.

So there were some good things that happened in the back half of the year that will make it a bit more difficult comp when we just look at year-over-year. Overall, we're seeing nice growth in the business and we're really happy with the overall operating performance as well as the improving end market conditions..

Okay, thanks. And then just on gross margin, I think that I heard the margin in the backlog is up a 100 basis points year-over-year.

Should we expect gross margin to be up commensurate with that roughly in the balance of 2019?.

Well, I think the mix -- we're going to see a healthier mix of Greenfield, which could offset that just with the mix of Greenfield versus MRO/UE, but I do believe the increased volume and our spending level should provide some EBITDA margin expansion to the tune of around 100 basis points above prior year..

Gross margin typically is lower in the first quarter just given seasonality, you did 45%, would you expect gross margin to be higher later in the year than it is, all things considered than it was in the first quarter?.

Yes, particularly in Q3 and Q4 due to the seasonality, absolutely..

Okay, thanks a lot. .

Our next question comes from Martin Malloy with Johnson Rice. Please state your question..

Good morning. Congratulations on the quarter. .

Thank you Martin..

I was wondering if you could maybe highlight some of the end markets where you're seeing the most activity in terms of customer conversations and bidding out there, is it petrochemical, gas processing, and maybe geographies?.

Yes, I kind of went through those throughout the call and broke them down. Certainly, the strongest of our end markets is in chemical and petrochemical. There are a number of things that are driving that, just demand growth.

We're also seeing a pretty positive impact as we see oil prices increasing and we're seeing that spread between the price per BTU in oil versus gas, that's increasing, which are really increasing the overall economics of all these projects. And we see that positively impacting pace.

We also see some -- when we look at oil and gas, we see some nice midstream projects materializing. Some of those in LNG with some fairly large projects on the horizon, probably won't occur in this fiscal year, but are building for really a positive impact in future years.

We -- I talked a little bit about power being slow, steady single-digit growth and we've been really successful in that end market, a very small percentage of our revenue in transportation. We've won some really nice projects in our heating systems business that is really providing some nice baseline revenues to help offset some seasonality.

And then geographically, I would say North America, particularly the U.S. and Latin America is really the bright spot. Asia-Pacific, we've got some great -- we got a building backlog and some really nice projects there. A lot of that will just depend on project timing and execution, but we see some nice growth in both of those geographies.

Canada will be slow, low single-digit growth we anticipate and Europe where it is probably the one area we watch most closely, we've got -- we've had a good backlog. It will really depend on incoming orders going forward..

Okay. And then the cash generation has been impressive here since the CCI acquisition. It seems like you've been able to pay down debt a little bit quicker than maybe initially expected.

In terms of the type of acquisition, the size and if they're bolt-on or new geographies, could you maybe tell us a little bit more about what's in that M&A pipeline?.

Yes.

So we've got a host of different companies both in our heat tracing related business and also process heating and ideally, we would like to find something that would be accretive to our margin profile and possibly be in a geography where we are underperforming today in certain areas of the world and possibly, utilize -- or go for a particular company that would have end market diversification to lower our oil and gas content.

So those are kind of the ideas that we're looking at. As we said before, we don't have anything actionable at this moment in time, but it is possible that in the second half of the year, we would have something. In terms of size, it could be smaller in terms of, let's say, $25 million to $50 million in top line revenue or it could be larger than that.

So we have a host of different ideas that we are contemplating..

Thank you. .

Thank you. Our next question comes from Charley Brady with SunTrust Robinson Humphrey. Please state your question..

Good morning. This is actually Patrick Wu standing in for Charlie. Thanks for taking my questions. So just wanted to touch a little bit on Greenfield, it seems like it has -- as a percentage of sales, it's been sort of at the highest level we've seen here for years now and I guess versus the 42% since last quarter so it's been trending up also.

I would -- it sounded like the sales came in a little bit higher than you guys had expected entering the quarter. I would imagine with Greenfield being a higher portion of sales, you would have a little bit more visibility entering the quarter than maybe what you planned in your initial guidance.

So was there maybe projects that sort of materialized a little bit later in the quarter, can you just talk a little bit about that in terms of the Greenfield percentage of sales?.

Yes, Greenfield really can have the -- create the most volatility in your quarter-over-quarter shipments. We saw a number of projects that shipped late in June, last couple of weeks to the quarter actually exceeded our expectations on some of those shipments. So some of that was actually in preparation for go live in Europe.

So we were able to ship a number of projects in advance of that, but some of that was just project timing. We're beginning to see accelerated, I noted particularly in the Eastern Hemisphere. So, we have had record backlogs in the company, and that backlog as you know really is largely representative of the Greenfield project work that we have.

Our MRO/UE, well particularly MRO is usually in and out of the backlog within a couple of weeks. And so at any given time when we take a snapshot of that backlog, you're only seeing a couple of weeks of MRO sitting there..

Okay. That's fair enough.

And I guess just a very quick follow-up to that then, what do you expect the Greenfield percentage of sales is may be for the remainder of the year? And then -- thanks for the color on the 100 bps improvement in backlog gross margin, just as I recall going back a few quarters, obviously, the margin profile and backlog have been weak by several hundred bps.

How far -- how much of those lower margin backlogs have you already worked through so far and is sort of the current backlog going to embed better pricing and better margins as we look forward instead of backwards?.

Yes, so for the full year for our organic business, we anticipate the 60% MRO/UE and 40% Greenfield split to remain true. That will vary by quarter, but if you look at historically the 60-40 split within a point or 2 is a very good way to look at our business and we do not see any reason why that would change over the coming year.

In terms of the margins in the backlog and the associated billings, we do have a significant project that is in our backlog and has been billing over the last quarter. There were significant revenue from that.

It is a strategic win for the company and the margins on that particular order are well below what we would typically see for a Greenfield project. So that is resident in our Q1 revenue and it will be going forward for the next year or longer.

But as Bruce mentioned, we do see the -- we're going into the heating season and that's when we will be shipping more of our quick turn business and that business has very high margins, 50%, even 60% for certain SKUs and we believe that will mitigate any margin erosion due to this competitively big project..

Okay, that's very helpful. And if I could just sneak in one more then, in the past you guys have talked about pipeline and the value of the pipeline.

Can you maybe keep us abreast of that -- of those two data points?.

Yes, so we still track our product -- our project pipeline. We're now looking at the combined companies. I don't have the exact figures, it's north of $1.1 billion. Again, it attracts from three to five year projects and that's really total company now.

We're also looking at the THS business, although we'll emphasize that there is very small component of our heating systems business because a lot of those are smaller value and don't classify as Greenfield in the way we define the metric..

Thank you. .

Our next question comes from Jon Braatz with Kansas City Capital. Please state your question..

Good morning Bruce and Jay. A question on the Canadian operations. Obviously, they have been under pressure and one of the reason is as you stated lack of pipeline capacity and takeaway capacity.

I guess my question is, should some pipeline -- should there be some pipeline announcements in Canada, how quickly can that change the fortunes of your operations in Canada? Does it happen over a period of couple of years, obviously, it takes time for pipelines to be constructed, but can you give us an idea of what the impact could be?.

Yes. I think that a couple of years is probably accurate. The reality is, it will take time for those to be built. I think as those begin to move forward, you'll see other investments begin to move forward. So that, that capacity will be brought online consistent with the availability of the transportation capacity.

So I think that's kind of how you should look at it and think about it. There are a couple of shale plays in Canada, we've actually benefited from, and we some increasing investment activity that are of lower capital cost and certainly less risky and have lower breakeven points.

And so we expect to see some development there going forward independent of some of the other things we've seen in the Canadian market. I want to reemphasize there in Canada though, we've done a significant job of really rightsizing our business. We saw a 40 something percent revenue growth last year.

We just don't see that continuing at those levels this year and our EBITDA or our profitability was expanded some 2 times that. So Canada remains very profitable for us as a business. We've seen some nice growth, we just don't necessarily see that growth in this current environment at that pace..

Okay, and Bruce, to the extent that there is pipelines added and some of the construction of new projects go forward you're at the latter end of those projects, correct?.

We are. I mean we do benefit from some pipeline projects. There's certainly work on both from a process heating as well as heat tracing. So there -- those we would benefit just from the transportation projects themselves.

But then definitely on some other things around processing facilities and things like that, that may be related to that, we certainly benefit..

Alright, thank you very much..

Thank you and our next question comes from Scott Graham with BMO Capital Markets. Please state your question..

Hi, good morning, good quarter. So my first question is around the gross margin. I just kind of hope you can give us some of the puts and takes, obviously more puts. The mix was negative for OE versus MRO, completely get that. But I'm hoping you can kind of size what that meant for the margin.

Additionally, in the past, like in the first half of last year, I know you guys talked about no equipment mix that kind of aided the first half of last year gross margins and I'm wondering, which direction that mix went in the first quarter, maybe even the first half of this year? Could you kind of maybe bucket each of those for us?.

Scott, I guess as you look at that mix, here's is kind of what we're seeing. The good news is our MRO margins are up like 600 basis points. So that's really strong and that gives us a lot of confidence around price and our ability to offset any inflationary impact that we may see with materials and things like that.

What we did see is project margins were down by about 900 basis points. A lot of that is really related to the mix in the Eastern Hemisphere and when you talk about equipment, we do -- we did have a lot of third-party materials on those, which are dilutive to our overall margins.

So that's kind of the big story and as you said, just in a macro year-over-year quarter-over-quarter, last year was an uncharacteristically high MRO/UE mix. This year, we're actually on the opposite side of that with a stronger Greenfield mix, at 45% versus our average of around 40%.

So those are the kind of the big things that are having the greatest impact on the overall -- the net gross margins to the business..

Got you, thank you. I guess maybe another question on sort of the rest of the year sales. And I don't mean to be beat this to a pulp here but obviously the reason why these questions are being asked is that we kind of want to see how also you turn the corner into fiscal 2020.

So if I may, would you be able to tell us how much of your -- first of all, it seems to me like your sands business, I think, it's 10% to 15% of total sales, correct me if I'm wrong on that.

And how much was that business down in the first quarter or was it down?.

Year-over-year, it was not down. It's certainly down from historical level. So I guess that would be the best way to answer that. Canada was $56 million last year U.S.

Jay?.

Yes, in this past quarter, it has grown slightly. And when I say Canada, I mean inclusive of the oil sands plus Eastern Canada. And we saw that grow this last quarter modestly 2.5%, but also gross profit outstripped the revenue growth by almost 3x.

That grew at 7% and as Bruce mentioned before, we have cut the resources in Canada approximately in half over the last two years..

Right, but -- okay.

So then what I'm sensing that you're saying here for the rest of the year is that the sands portion of Canada will be down pretty hard?.

No. We just feel like it'll be flat year-over-year..

Okay, just trying to triangulate toward the previous question of supposition of sort of low single-digit organic certainly in the second half of the year.

I just can't triangulate to that type of number with non-sands oil and gas capital spending really doing well right now globally, the chemical markets doing well right now globally, and I guess I'm just kind of having trouble, is it possible like last quarter that may be you're 7% to 10% organic, you don't want to kind of go past there right now that may be you had some pull into the quarter for the second quarter, may be you're just being a little conservative on that, can you see that number being higher?.

Yes, I guess there is a couple of different vectors that we are analyzing, Scott. One is, by all measures we had an outstanding Q1. A very, very strong start, but keeping in the back of our mind, moderating what happened in Q1 with the order growth rate that we saw for organic at 4%, that was a little lower than our expectations.

We are moving into the heating season and in August and September, those are typically very strong order months for us. And in the event that we do have a recurrence of the strong order activity in our organic business and in THS in those two months, could we possibly be updating our guidance? Yes, it is possible.

But we really want to make certain we have a lot of facts and circumstances behind that update..

Okay. That's fair enough.

You had very good operating leverage on the SG&A line in the quarter, is that with the potential for slower organic in the second half of the year, are we going to see just a lot less operating leverage particularly with upper comps, is there going to be any operating leverage on SG&A in the second half of the year, do you think?.

We think so. I mean the incremental volume that we should see, we should see similar two to three times operating leverage on that incremental volume. Scott, I mean we've been really pleased with the overall -- our ability to bring those incremental revenues and gross margins to the bottom line.

We expect that to continue at a similar rate to the extent we grow -- as we grow revenues to the balance of the year..

Okay. Last question, I know that your guidance does not contemplate FX from here I think. But obviously, that's slipping the other way right now for many companies, and I'm sure including yours, and I know some companies talking about two to three quarters out being negative on the FX line, if not sooner.

So I know that your guidance doesn't contemplate that but that would actually maybe run the other way on the guidance.

How do you -- how will you handle that if that's the case? I mean will you communicate to us if the guidance goes lower only for the FX or kind of what are you thinking on that because it does appear to me as if second half FX could go negative on you?.

Yes. That is certainly a hard one to forecast.

But what we do have, we have very -- still there, Scott?.

Sir, looks like he disconnected..

Okay. We have very frequent touch points with our sales organization and when they forecast future revenues for us, they do that in many cases monthly and they use the current FX rate, at that point in time for the monthly, quarterly and balance of the year forecasts..

Thank you sir. [Operator Instructions]. Our next question comes from Brian Drab with William Blair & Company. Please state your question. Mr. Drab your line is open..

Sorry, Jay, can you give us the FX impact for the first quarter in terms of dollars, I might have missed that earlier?.

Yes. The impact in terms of revenue was $2.1 million with a nominal impact on earnings..

Got it, okay.

Positive $2.1 million?.

Right..

Of course, and then can you give us the order growth and revenue growth by U.S., Canada, Asia PAC, Europe possibly?.

Yes, in terms of the growth, we saw over a double -- doubling in Asia PAC for organic..

This is revenue or order side, Jay just to be clear?.

Orders. 112% impact from Asia PAC, EMEA was down 10%, U.S. and Latin America was down 11%, and Canada was down 13%. And that growth was 4%. THS was up in the quarter 18% and total Thermon as I said before was up 7%..

Okay, thanks.

And then can you do that same breakdown for revenue possibly?.

Sure. Revenue for Asia PAC was up 43%, EMEA almost doubled, 96%, U.S. and Latin America up 24%, and as previously mentioned, Canada was up 3%, total organic 36%, and THS was up 23%. And those are revenue figures..

Yes, and THS plus 23% on a pro forma basis?.

Pro forma, yes..

Okay, very interesting dynamic in that order growth by geography. Are you surprised by the softness in U.S. Latin America or I guess that's....

No, we weren't -- just as revenue is very lumpy, order activity is also very lumpy..

Yes, is there any one or two particular projects in Asia PAC that drove that massive growth?.

Yes, that's correct..

Yeah, okay, thank you very much. .

Thanks Brian..

Thank you. There are no further questions at this time. I'll now turn it back to Bruce Thames for closing remarks. Thank you. .

Alright Diego, thank you. I'd like to take this opportunity to thank our Thermon employees around the globe for their commitment to serving our customers and creating shareholder value. And they are truly, truly the Thermon difference, and I'd also like to thank everyone joining us on the call today for your interest in Thermon. Have a great day..

Thank you. This concludes today's teleconference. All parties may disconnect. Have a great day..