Greetings. Welcome to the Thermon Group Holdings Third Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to our host, Kevin Fox, Vice President, Corporate Development. Thank you. You may begin. .

Thank you, Diego. 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 SEC on Form 8-K and is also available on the Investor Relations section of our website at ir.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, and 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, 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 and changes in circumstances that are difficult to predict.

Please refer to our annual report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. 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 fact nor guarantees or assurances of future performance. Any forward-looking statement made by us during this call speak only as of which the time it is made.

Facts 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, I'd like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening comments..

All right. Thank you, Kevin, and good morning. And thank you all for joining our conference call and for your continued interest in Thermon. Joining me on the call today is Jay Peterson, our CFO, who will follow me and present the financial details of our fiscal year 2020 third quarter.

Starting off, results in Q3 fell short of expectations and a record prior year Q3, primarily driven by weaker year-end discretionary spending and other factors during the quarter.

While we projected weakness in capital projects, we expected to see stronger demand in MRO/UE as the heating season began and as customers release the last of fiscal budgets. This year, we saw neither materialize, which negatively impacted both mix and volume in the quarter.

After two consecutive quarters of double-digit order growth, the weakening in our end markets we noted last quarter has now led to two consecutive quarters of single-digit order contraction. I'd like to take a moment to discuss the trends we are seeing with our customers and in our end markets.

From a capital investment standpoint, we see CapEx estimates for the next 12 months growing in the Middle East, Africa and India; moderate to neutral spending growth in North America and Asia; and Europe continuing to be a very challenging and competitive market. Geographically, the U.S.

and Latin America and Europe, Middle East, Africa, both contributed to the shortfall relative to expectations in prior year in the quarter. In the U.S. and Latin America, we anticipated the weaker capital environment as some large ethane crackers are coming online and the next wave of projects are in early planning and engineering stages.

However, we expected stronger year-end discretionary spending that occurred in the quarter, and we saw several new projects move to the right. In Europe, Middle East, Africa, we have highlighted challenging market conditions for several quarters that continue to persist.

Our Canadian and Asia Pacific geographies were both up low double digits over prior year. We continue to see mixed signals in our end markets as well. The outlook in upstream remains weak due to excess capacity and lower commodity prices.

This has certainly begun to weigh on capital deployment by integrated oil companies across other sectors of the industry. We also believe this contributed to the weaker year-end spending we saw this quarter. Downstream is also showing some weakness with slowing demand growth for transportation fuels.

Capital projects in this sector continue to be driven by tightening environmental regulations for lower sulfur content in fuels and efficiency improvements. However, in other areas, we are seeing significant growth opportunities tied to natural gas and petrochemicals.

In midstream, we continue to be well positioned to capitalize on an LNG investment cycle. We have been awarded a large Canadian LNG project that will begin to show in both bookings and backlog in Q4. We anticipate this project will positively impact financials in fiscal year 2021 and continue for the next 2 to 3 years thereafter.

With a warmer winter in Asia and European LNG storage near capacity, weaker demand could influence timing of final investment decisions for a number of planned projects. However, we continue to believe that global LNG investments will provide a tailwind for our business over the next several years.

Both chemical and petrochemical sectors remain the most robust of our end markets tied to cheap natural gas liquids and feedstock, particularly in the U.S. We're seeing a gap in this sector in the second half of fiscal year '20 as large capital projects are in various stages of planning and execution for the U.S.

Gulf Coast, Canada and across the Middle East and Asia. We anticipate backlog growth as these projects move to award over the next several quarters. We're also seeing a few capital projects in renewables with biofuel processing plants over the next 24 months that create additional revenue opportunities.

Combined cycle power projects remained steady, particularly in the U.S. and Latin America. Demand for mass transportation and growing population centers continue to create large multiyear project opportunities in rail and transit.

We were awarded a multimillion dollar, multiyear transit project in Q3 that will be reflected in bookings and backlog in Q4. Awards of this nature helped balance the seasonality of the business through the continued diversification of our end markets.

In the nuclear segment, the majority of Thermon's opportunities are tied to MRO/UE spending within existing Canadian nuclear power facilities. We saw an increase in MRO activity in Q3, and we anticipate these activities to continue to generate revenue through late fiscal year '21.

Even with these mixed signals from the market, our project pipeline continues to grow, and we continue to see the globalization of the process heating platform as a key growth opportunity moving forward. Moving on to financials. After 8 consecutive quarters of revenue growth, we saw a contraction in Q3 against a record quarter.

Total Thermon revenue was down 16% from the prior year quarter on weaker capital projects, year-end discretionary spend and a slow start to the heating season. Margins expanded 65 basis points over the prior year, but were down 80 basis points sequentially.

We anticipated stronger margin expansion due to our continuous improvement efforts and an improving mix, but several factors had a negative impact in the quarter. First, mix improved to a more historical average of 62% MRO/UE versus 38% greenfield, but less than anticipated due to the weaker discretionary spending in the quarter.

Second, onetime charges and volume variances negatively impacted margins by about 225 basis points in the quarter. We are continuing to execute on our planned cost reduction initiatives, while also investing in new product development that will further enhance our margin profile over time.

We also take efforts -- we'll take efforts to rightsize our business, where warranted, while continuing to invest for growth. Turning now to bookings. Bookings of $99 million for the quarter were down 6% from prior year, and backlog was essentially flat sequentially.

On a positive note, globalization efforts resulted in solid bookings for our process heating products, up 4% year-over-year and 42% sequentially.

In addition, in a region that has been challenged for the last several quarters, we have secured a sizable project in Europe, Middle East, Africa that contributed to order and backlog growth during the quarter against an otherwise flat incoming order rate. I want to shift now to focus to cash, which has been a good story this year.

With a concerted effort on working capital, combined with a low capital intensity business model, we've been able to generate $19.9 million in free cash flow during the quarter and $46.3 million year-to-date. As a result, we were able to pay down an additional $23 million in debt during the quarter.

At this time, our net debt to trailing 12-month adjusted EBITDA stands at 1.9x. From an M&A standpoint, we continue to evaluate transactions each quarter, and the strength of our balance sheet positions us well for the right opportunity.

We will prioritize bolt-on acquisitions that help build upon our leadership position in key technologies, globalize the process and environmental heating platform or expand our addressable markets. In the absence of attractive M&A, we will prioritize debt reduction.

The savings from the year-to-date debt reduction and associated interest expense will translate to $0.04 a share in EPS on an annualized basis. Additionally, from an organic growth perspective, we are continuing to invest in technology that positions Thermon to win in the market.

We have several projects nearing completion in the new product development pipeline that will be announced in the coming quarters. These new industry-leading solutions will provide connectivity and enhanced performance while increasing safety and reliability.

Based upon the second consecutive quarter of weaker -- of our weaker incoming orders and the movement in project schedules, we are lowering our fiscal year 2020 forecast to $383 million to $390 million for the year.

While China only represents 2% of revenue and our supply chain has limited exposure, we have included additional uncertainty in the range to account for the timing of shipments in the quarter. While the near-term environment remains choppy, Thermon is well positioned within our market space.

The key market drivers for growth remain intact, as evidenced by our growing pipeline of opportunities. We see the emerging middle class in developing nations creating demand for chemicals and petrochemicals, tightening environmental regulations and natural gas as a bridge fuel, all creating opportunities to grow and service our installed base.

Thermon's resilient business model, in-market diversity, global footprint, decades of engineering design expertise and pipeline of new product and technology, all support our competitive position in this space. We will provide you guidance on our fiscal year 2021 during our next earnings call.

To the Thermon employees around the globe, thank you for all that you do for our customers each and every day. You are truly the Thermon difference. With that, I'd like to now turn it over to Jay Peterson, our CFO, who will address the details of our financial performance for the third quarter.

Jay?.

$4.5 million in cost reductions, with an anticipated realization of approximately $2 million in savings this current fiscal year and with additional cost reductions planned for next year; and we announced price list increases earlier this year for our maintenance-related products, and that has partially offset margin impact due to negative volume impact; and recent and planned product announcements that we anticipate will yield accretive margins.

In conclusion, due to growth in cash, our TTM EBITDA projection and reduction in our debt, we expect our net debt-to-EBITDA leverage to decline to 1.7 to 1.8x at the end of this current year, excluding any M&A transaction. I would now like to turn the call back over to Diego to moderate our Q&A session..

[Operator Instructions]. Our first question comes from Brian Drab with William Blair..

Did you say what THS revenue was in the third quarter?.

No. No, we did not. I've got that here. We will be talking about that both this quarter and the next quarter. But going into next fiscal year, due to the finalization of the integration into the legacy business, we will -- it will be unlikely that we will be discussing that going forward.

This current year, it was just under $22 million, $21.9 million for the quarter..

$21.9 million for the quarter. Okay. All right.

So that business is down somewhat from last year, but not really any different from the decline that you saw in the core business, I guess?.

Correct. That's correct..

Okay, okay. And then can you talk about the margins that you're seeing in greenfield now that had been under pressure somewhat.

Are those dynamics that are putting greenfield margins under pressure still in place, or what do you see there?.

Yes. We haven't seen a material change in the greenfield margins. They're still running in the upper 20% range for the year, and that will vary a little bit on the type of project and geography. But the average is in that range and has been for the last 2 or 3 years..

And then are the margins in your backlog then, I guess, is it safe to assume that those margins are about in that range as well?.

Yes. We see the margins, they're a little dynamic based on which certain projects are in near term versus the out term. And at present, the margins are essentially flat with the prior quarter down modestly..

Okay. Okay. And then on the last call, you talked about a couple of major project wins. Can you update at all on those projects? And I guess, what I'm wondering is, Bruce, I think you said that some projects have been pushed out.

Does that include some of these larger projects that we talked about last quarter?.

Yes. So that's a great question. First of all, we take a pretty conservative approach to how we book projects in backlog. And so we've received a number of awards that -- sizable awards that are not reflected in our bookings and backlog. My reference to those projects that could move are not the ones that are -- that have been committed.

The ones that are more in question around movement have yet to clear FID. And then we did see some in -- particularly in the Gulf Coast, but we saw some other project movement to the right by about 6 months. And that's -- there's various reasons that are driving some of that timing.

But Brian, to answer your question, no, there is no impact to the timing of those projects. We just get firm builds of material and hard POs before we enter those into bookings and backlog. I do know, for the large Canadian LNG project that we've mentioned previously, this fourth quarter, that will begin to impact backlog -- bookings and backlog.

And those will be led with a multiple purchase orders over the next 2 to 3 years. So it won't just be one big number, it will be bookings throughout the year at multiple quarters for multiple packages. So that's kind of what you should expect going forward..

So the Canada LNG project has not really shown up in the numbers yet.

That will start in the fourth quarter?.

That's correct. They have not shown up in the numbers at all, so..

Okay, at all? Okay, okay. I wasn't sure if there's any like early engineering work or something that hit. But it -- so it will start in the fourth quarter. I got it..

Correct..

[Operator Instructions]. Our next question comes from Joe Hanzlik with Confluence Investment Management..

Just looking at backlog over the last 2 years, it's steadily decreased over the last 8 quarters from $167 million down to about $102 million.

What's that expectation for backlog going forward, sort of with the LNG and sort of without the LNG?.

Yes. So Joe, thanks for your question. What we expect, we expected in the second half this year to really begin to see some backlog build and see a positive book-to-bill in the business for a couple of reasons. We've yet to see that materialize. Some of that is we have seen movement in project timing.

And some of that is just as we've secured these commitments, moving through the engineering phases to get to firm bills and material, those have yet to be let with firm POs to hit our backlog. So our expectation, excluding the large LNG project, would be that we would begin to see some backlog build.

And we did see that in Europe, which has been particularly weak and is largely responsible for the backlog decline you had referenced. Our Asia Pacific backlog remains strong. Canada has been fairly flat. And we've seen a drawdown in backlog from this time last year in the U.S. and Latin America as we've kind of completed some large ethane crackers.

But there are a whole another wave of projects online in various stages of planning and execution that we believe we are well positioned to win and we believe should hit -- begin to hit backlog in the next several quarters..

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks..

Thank you, Diego. And thank you, again, for joining this conference call today. We appreciate your interest and support for Thermon, enjoy the rest of your day..

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