Thank you and welcome to the Thermon Group Holdings Fourth 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 hope everyone is staying safe and healthy during the global pandemic and appreciate your interest in Thermon.

Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. 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 would like to remind you that during this call we may make certain forward-looking statements regarding our company.

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 and we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise except as maybe required by law.

I will now turn the call over to Bruce Thames, our President and Chief Executive Officer for his opening remarks..

Thank you, Kevin and good morning. We hope everyone listening is staying safe and in good health. We appreciate you joining our conference call and for your continued interest in Thermon. Jay Peterson, our CFO was with me and will provide additional information on our financial performance after my remarks.

Since our last update in February, a lot has changed, but the safety and security of our employees, customers, suppliers and the communities in which we work and live remains a top priority. As a supplier to critical infrastructure, we remained open for business and to continue to support our global customers.

Our crisis response team has been operating since February, leading our global response in coordination with local site management to ensure that we are able to safely operate our manufacturing locations, while being responsive to our customers’ needs.

Like many others, we have suspended business travel, adopted work from home policies, where possible and implemented staggered shifts, additional PPE, frequent sanitation of common areas and enhanced our health and safety communications for all employees.

Before I address the environment in our results, I wanted to take the opportunity to thank the global Thermon team for how they are exemplifying our values of care, commitment, and collaboration during these challenging times.

I know they will continue to serve our customers with industry leading safety and innovation and a very big thank you for everything you do for the company and our customers. In the early stages of the COVID-19 pandemic, our focus has been on value preservation.

We took steps to ensure access to cash if needed and have an active broad-based cost reduction to align our cost structure to the level of incoming business. These cost-out actions will reduce SG&A by $16 million in the fiscal year and just over $17 million on an annualized basis.

In addition, we have cut capital budgets by over 50% to $4 million in fiscal year 2021. We have also modeled a range of scenarios that give us confidence. We have the cash and financial strength to weather this contraction while positioning the business for growth in the recovery.

While the COVID-19 crisis has had an acute near-term impact to our business in late Q4 of 2020 and now in Q1 of fiscal year 2021, the supply demand imbalance in the old markets and reduced capital and operating budgets will have a lasting impact over the next 18 months to 24 months.

Despite the uncertainty in our current operating environment, it’s important to remind the investment community that the long-term strengths of Thermon’s model remain intact. We are leading global brand and the breadth of our solutions are well-positioned within the high value niche of industrial process heating.

As an example, we have recently launched our USX heat trace and ultra-high temperature self-regulating trace heater, which extends our industry leading performance and quality standards in addition to three other new product introductions in our fourth quarter.

Over the 65 plus years of our existence, we have built a global installed base and have long-lasting relationships with loyal customers around the world.

In order to ensure we maintain and grow our installed base, we have initiated key account management programs as well as established global sales councils to facilitate the collaboration across our regions and product lines for both our Greenfield and MRO/UE revenue streams.

For the process heating business, we continue to invest in both our people and our product offerings and we are starting to see the impact of those investments bear fruit with positive revenue growth year-over-year and sequentially in the fourth quarter.

The combination of our recent investments in research and development and the expertise of our engineering team results in mission-critical technology with high barriers to entry, especially in hazardous locations.

While operating and maintenance budgets maybe challenged by the current COVID-19 restrictions and commodity pricing, our customers supply the world with the transportation, energy and chemicals, just to mention a few that are the foundation for modern life.

As the world begins to reopen and maintenance activity resumes, so too will our MRO/UE business. This business combined with low capital intensity is the key to resilience of our business model that has enabled us to generate cash during prior downturns and will allow us to continue to generate positive cash flows over the next 12 months.

Our current net debt to adjusted EBITDA ratio of 2.1x means we are entering this difficult period from a position of strength. In FY 2020, we generated $61 million in free cash flow, paid down $38 million in debt, and finished the year with $43 million in cash, with an additional $60 million in revolving credit.

While we observed weaker discretionary spending beginning in our fiscal Q3, the unprecedented impact of COVID-19 on the global economy as well as the dislocation in oil and gas markets starting in March has combined to reduce our customers’ capital and operating budgets for at least the next 12 months.

We anticipate challenging market conditions until oil supply and demand reach equilibrium and commodity prices recover. I would like to turn now to our Q4 results. As a reminder, before COVID-19, we began to see a slowdown in discretionary spending, combined with lower capital spending that began in our late in our second quarter.

We anticipated a weak Q4 relative to a historical revenue quarter in our fiscal year 2019, but expected this to be a short-term slowdown that would begin to reverse and gain momentum late in the first half of fiscal year ‘21.

Thermon’s revenue of $88 million in fiscal Q4 was down 23% and at the lower end of our forecasted rage due to the impact of COVID-19 in the Western Hemisphere in Mach.

While our gross margins were up 90 basis points year-over-year, they were negatively impacted by 390 basis points by one-time adjustment associated with operational execution in the quarter.

Adjusted EBITDA of $9 million was down significantly due to lower volume and a cost base that does not yet reflect actions we have taken to address the lower volume environment we see moving forward. Europe’s Q4 was largely responsible for the revenue decline, which was down 38% from prior year.

The combination of adjustments to our cost base, including a new leader in the region and a stronger starting backlog, shift result and modest growth in Europe, Middle East, Africa in fiscal 2021.

Asia-Pacific was down 16% in our Q4 due to the early impact of the coronavirus in the region, but was able to show growth in fiscal 2020 despite the Q4 decline. Turning now to discussion of our end markets, our end markets are bifurcated into those related to transportation fuels and other industrial markets.

We see upstream and downstream refining most greatly impacted by COVID-19 and the price of oil. We anticipate the recovery of demand for transportation fuels to be protracted and the oil supply overhang will take 18 to 24 months to rebalance with many factors impacting the timing.

We have repositioned the business such that upstream is a smaller percentage of the portfolio that during the last downturn, representing approximately 14% of fiscal 2020 revenues, with capital budgets being cut by 20% to 30% or more in certain markets or geographies, the bulk of those cuts by international oil companies have been focused on upstream capital budgets.

The downstream capital budgets have been less impacted, but we foresee numerous projects that have not yet passed FID being delayed or cancelled. Downstream refining and petrochemical is our largest end-market exposure and where we have grown our business since the downturn primarily in the petrochemical sector.

Here we are seeing a sharp contraction in the first quarter spending due to the inability to access facilities from maintenance due to COVID-19 restrictions and decline in demand for transportation fuels.

As restrictions are lifted and demand recovers, we expect budgets to be released and deferred spending to follow with maintenance budges recovering first and capital spending emerging later. We anticipate the petrochemical markets to recover more quickly as the overall economy rebounds.

The midstream sector is better positioned to weather the current economic environment with a number of LNG projects in various stages of planning and execution. The chemical market maintenance spending has slowed due to COVID-19 restrictions.

However, there are number of new projects that remain more than a year away from reaching our backlog, especially given current dynamics within their end-markets. These end-markets are wide-ranging and include agriculture, paint, polymers, etcetera which stand to recover more quickly as restrictions are lifted.

Power and renewable markets have suffered a short-term impact and should continue to offer steady opportunities in the mid-term. Transportation and nuclear continue to offer an opportunity to diversify our revenue, especially in the global process heating markets.

The large order in light rail we mentioned last call was booked in our fourth quarter and demonstrates a multiyear opportunity we have to expand the installed base in the U.S. and Canada. We do expect mass-transit projects to be negatively impacted in the short-term.

Given the backdrop of the external markets, I wanted to provide an update on our operations. We have taken the following proactive actions to right-size our cost profile with current market conditions while continuing to invest in the future of our business.

With a focus on operating expenses, executive salary and director fee reductions were implemented effective April 1. Other discretionary expenses like travel contractor and other third-party services were significantly reduced or eliminated.

While we continue to invest approximately 2.5% of our revenues in research and development and expect to release 3 to 5 new products in fiscal 2021, we delayed spending on lower priority projects in the pipeline.

And unfortunately after other levers were exhausted, we made the difficult decision to execute a reduction in force in North American in May, which follows a similar decision made in Europe, Middle East Africa in our fiscal Q4.

We believe the above actions will reduce expenses for fiscal 2021 by over $16 million and helped us right-size the business for the demand environment that we see over the next 18 to 24 months. In addition to these cost actions around operating expenses, variable costs have been reduced to align capacity with the level of our incoming business.

We have set goals for continuous improvement initiatives to deliver an annual incremental 100 basis point improvement in gross margins. While we don’t intend to provide formal guidance for fiscal 2021 at this time, I did want to provide an update on our first quarter.

Our primary customers in the broader oil and gas, chemical and power sectors have significantly reduced capital and operating budgets in the last 90 days, which in turn limits the demand for both our Greenfield and maintenance solutions. Since the pandemic took hold in early March, Thermon has not seen any significant cancellations from our backlog.

Orders in the first fiscal quarter to-date are down approximately 40% to 45% with our Greenfield business less impacted than our MRO/UE business.

The quick turn business has been particularly impacted due to the current health and safety precautions in place at many of our customer sites with only a minimum amount of work being conducted at this time.

As those health restrictions are loosened and local economies get back to work, we expect deferred or delayed maintenance repair and upgrade spending will return and be completed on site. Our plan for fiscal 2021 assumes a weak first quarter in line with the lower incoming order rate.

We expect the cost out actions we have executed will begin to moderate the impact of lower volume on adjusted EBITDA margins and our reduced CapEx budget will contribute to a positive free cash flow for the year. As the year progresses, we will reevaluate market conditions versus our internal plans and continue to update you as appropriate.

Before I turn the call over to Jay to cover the specific financial items, it’s important to emphasize that we manage the business to generate value through this cycle.

I firmly believe that despite the current external pressures, Thermon is well-positioned to control cost, generate cash and manage liquidity in the near-term and we will emerge a stronger, more profitable business as commodity markets adjust to the next normal.

We have a great team that is committed to delivering for our customers and shareholders and are hard at work executing those plans, while continuing to meet the high standards of health and safety that our current environment demands. I will pause there and hand it over to Jay for the financials.

Jay?.

Thank you, Bruce. Good morning. First off, given the backdrop caused by the unprecedented times with the impact of COVID-19 and the dislocation in oil and gas markets, I would like to start by addressing our liquidity, cost management and provide some color around scenario planning.

This last quarter, we were able to both grow our cash and pay down debt. Our cash and investments balance at the end of March improved to $43.2 million and we generated $14.4 million in free cash flow in the quarter and we are able to pay down $5.6 million in debt.

And year-to-date, we have generated $60.7 million in free cash flow and paid down $38 million in debt and we have access to a $60 million revolver line of credit subject to a consolidated leverage ratio of 4.5 to 1, that steps down to 3.75 to 1 in December of this year.

The debt pay down will reduce our interest expense next fiscal year by $0.04 a share, that’s after tax and the reduction in amortization expense due to the previous private equity transaction, coupled with the interest expense savings will be accretive to our fiscal year ‘21 EPS by $0.23 a share and that’s after tax with potential additional interest expense savings forthcoming.

Our gross debt amount at 3/31 was $176 million and net debt of $133 million with a net debt to EBITDA ratio of 2.1x. And as Bruce just mentioned, we have executed cost reduction actions in Europe in January to better align our expenses with our incoming European order rate.

In addition, last month, we took actions to reduce our run-rate spending by $17 million by reducing personnel costs, discretionary spending and consultant and contractor costs.

And before we get to the quarter’s results, I would like to provide some context on the scenario planning we have recently completed and would emphasize that this does not reflect our current expectations for the business.

After accounting for the impact of the cost out actions that we have already executed, we believe our annualized breakeven revenue by which we mean the revenue levels where free cash flow is breakeven is between 35% and 40% lower than our fiscal year 2020 results.

And again, we do not believe this to be representative how our results for the next 12 months and we will continue to stay close to our customers and monitor leading indicators for any changes to our plan. And we are continuing to manage discretionary spending, but at this point, we do not believe further cost-out actions are necessary.

Turning to revenue and orders, our revenue this past quarter totaled $88.4 million and that’s a decline of 22.6% against the prior year quarter. The decline was driven by our exceptional revenues in Q4 of ‘19, the weaker demand we had previously forecasted and the decline in oil prices that began 6 months ago.

The legacy revenue mix between MRO/UE and Greenfield was 60% and 40% respectively versus a 50:50 mix in Q4 of fiscal year ‘19. And FX nominally decreased total revenue by $1.3 million and in constant currency, our revenue declined by 21%.

Orders for the quarter totaled $90.5 million versus $105.7 million in the prior year quarter for a decline of 14%, again two factors previously mentioned. Our backlog of orders ended March at $105.7 million versus $120 million as of March of ‘19 and that’s a decrease of 12%.

And gross margins in our backlog improved to 33% versus 32% at the end of March ‘19. And our book-to-bill for the quarter was slightly positive at 1.02. Moving on to gross margins, margins were 40.3% and that’s a 90 basis point improvement versus the comp period and it was mainly driven by a favorable Greenfield MRO mix.

And our gross profit declined by 9.4% due to the double-digit revenue decline or by 20.9% versus the record comp period. And gross margins were impacted in the quarter by 390 basis points due to a one-time charge related to operational execution.

Operating expenses for the quarter, that is SG&A and this excludes depreciation and amortization of intangibles totaled $26.4 million versus $24.3 million in the prior quarter, which includes $1 million of expenses relating to the restructuring in EMEA.

Our OpEx as a percent of revenue was 29.9%, again excluding depreciation and amortization and that’s an increase of 860 basis points from the prior year level of 21.3%. And we expect to take a one-time charge of approximately $2.8 million for cost reductions that occurred during May in our Q1 income statement.

Moving on to earnings, GAAP EPS for the quarter totaled a negative $0.09 compared to the prior year quarter of $0.20 and that’s a decline of $0.29 per share. Adjusted EPS as defined by GAAP EPS less amortization expense and any-one time charges totaled $0.01 a share relative to $0.32 a share in the prior year quarter.

Adjusted EBITDA declined by 57.6% versus the comparison quarter and adjusted EBITDA as a percent of revenue was 10.2% and that’s a decline of 880 basis points versus the comp period and adjusted EBITDA totaled $9.2 million this past quarter.

And our EBITDA conversion ratio and that’s defined as EBITDA less CapEx divided by EBITDA for the last 12 months was 84.4%. Our CapEx spend for the fourth quarter totaled $3.9 million and that is inclusive of both growth and maintenance capital with fiscal year 2020 CapEx totaling $10 million.

And we expect fiscal year ‘21 CapEx to be reduced by 60% to $4.0 million. Free cash flow per share for fiscal year ‘20 was $1.83 and that’s a non-GAAP measure, but it reinforces our ability to generate cash. Taxes, the tax rate for the year was 30% and was impacted due to the non-deductibility of interest expense due to the GILTI tax provision.

Moving on to full year highlights, revenue for the year totaled $383.5 million and that’s a decline of 7.1% over the prior year driven mainly by our EMEA, where we have taken significant measures to adjust our cost structure and position the region for modest growth in fiscal year ‘21.

Gross profit for the year was $161.6 million, a decline of 81% over the prior year. Gross margins were 42.1% and that’s a 50 basis point decline over the prior year. And SG&A was $100.8 million and that’s a 3.4% increase over the prior year and that excludes the cost of our cost-out actions throughout this year.

Adjusted EBITDA for the year was $64.3 million and that’s a decline of 22.9% over the prior year and 16.8% as a percent of sales. GAAP EPS for the year was $0.36 and that’s a decline of $0.33 and adjusted EPS was $0.75 or a decline of $0.44.

And in closing due to the current global economy and the uncertainty in our end-markets, we are not providing any formal guidance at this time. We will continue to evaluate this as the year unfolds and provide you with an update on our next call.

And lastly, our capital allocation priority is to continue to reduce our debt through continued optional debt repayment. Our balance sheet is strong and we remain confident in our current liquidity and ability to generate cash this fiscal year which we expect will provide valuable flexibility in the future.

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

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

Hi, good morning. Thanks for taking my questions..

Good morning, Brian..

Good morning. I know you are not giving guidance, but Bruce and Jay, you talked a little bit about this first fiscal quarter seeing the impacts of not just the end-markets, but just facility shutdown from COVID, is it is safe to say or can we presume at this point that probably that this first fiscal quarter is the low watermark.

Can you kind of crawl out from there or and maybe build through the year or not, is it too early to make that kind of presumption?.

Well, Brian, I mean there obviously is a great deal of uncertainty as it relates to this virus and does it come back in the fall and all of those factors..

Yes..

Assuming that, that does not happen, yes, we would assume this would be the low watermark and we are seeing customers beginning to open up construction sites – but in a more restricted way and we anticipate maintenance activity will begin to resume.

So we would expect this to be kind of the trough for the year and then we would see some improvement thereafter, but again that’s based [Technical Difficulty] don’t have further restrictions in the fall due to COVID..

Okay. And then you said that you are seeing obviously push-outs expecting more push-outs and cancellations, there is one obviously that pretty important project in Canada that you are working on it.

As far as I could tell, the project is still to some extent going forward is that still the case?.

That’s correct. None of the LNG projects that we have seen that have passed FID, there has been no cancellations to-date. So we have not seen anything impact those projects..

Okay. And then, I don’t know if – I don’t want to ask too many questions, but I am afraid that if I stop that it will end the call. So if you – I don’t know if there is any way I could know if there is someone behind me in line, but....

Brian, if you have any – you are all clear?.

Yes, go ahead..

Yes, okay. I just have like maybe three more that I would like to ask you and then I will follow-up more later.

But first of all, just to make sure I heard a few things right, what did you say is the cost savings related to some of the cost-cutting activity that you implemented, did I hear $16 million and what’s sort of the timing for that?.

It’s $16 million within the current fiscal year. Those cost-out actions were taken in May. And Jay had noted a $2.8 million restructuring charge for the first quarter. We believe those savings will generate in excess of $17 million on an annualized basis going forward and those are again SG&A reductions.

We have also taken additional cost-out actions for variable cost to align our capacity with the level of incoming demand that are above and beyond those SG&A reductions we have noted..

Okay.

So the $16 million is for fiscal ‘21, the $17 million would be a full year capturing a full year run rate, that’s correct?.

Correct..

Okay..

And obviously, not all of that would be realized in Q1 just due to the timing and then we have the one-time charge..

Got it. Okay, okay.

And one number that stuck out to me was the book-to-bill, can you just reconcile that for me that you had a positive book-to-bill in the quarter, but orders were down, I think it’s 35%, 40%, how did that work, Jay?.

So, we were speaking of our fourth quarter. We had a positive book-to-bill in the fourth quarter and that was due to the lighter shipments. We only shipped $88 million. It was down 14% from prior year, because we have booked in excess of $100 million, but it was more than our shipments. It was slightly over $90 million.

So, that was a fourth quarter comment. Pivoting now to our Q1, we have seen a sharp decline in our incoming order rate, particularly in April. We saw that bottom in April. It’s been improving modestly since, but it’s down in the 40% to 45% range. And we do anticipate our revenues to be in line with those lower incoming order rates in our Q1..

Okay. Okay, got it. And then I have just two more questions.

You mentioned earlier in prepared remakes that there is – I think it was a one-time item that was related to operational execution in the quarter, did I hear that correctly and what was that item or issue?.

Yes, that was – that impacted our cost of goods sold. It was operational execution issues and for the quarter, it totaled $3.5 million as incremental costs..

Is that freight cost, Jay or what – that’s a very broad term, I don’t know if you are able to give me any idea or not?.

It was related to project costs, cost overruns..

Okay, cost overruns. Okay, alright. Now that makes more sense.

And then just the last question and then I will follow-up more later, but Bruce, you said a couple of times on the call, 18 to 24 months, I don’t think anyone who is paying attention anything in the world in the energy markets is surprised to hear you say that, but I am just wondering lot of things are turning back on to some extent and consumer activity is increasing and people later this year, people are getting back on the roads and driving the cars again and activities turning back on more and more in the industry world.

I mean, is there a chance though you think that maybe the outlook is a little more positive than that and then calendar ‘21 [indiscernible] again?.

Yes. What I was trying to do is really separate the demand recovery. And I do think that will happen more quickly. So, you are going to see demand recovery for transportation fuels as people go back to work and you begin to see air travel resume things like that. So that will happen.

And then demand for other products if you think about petrochemicals, particularly, those are plastics and think about chemicals, paints, other things like that. That demand will recover.

My comment around the 18 to 24 months is really related to the lower commodity pricing for oil and the fact that it’s going to take time for that market to rebalance and us begin to see commodity prices recover. And there are many factors.

So I don’t want to sit here and somehow think I can project that, but we do believe based on the information we have available now that it will take longer for those commodity prices too – for the markets to rebalance commodity prices to recover and that will have an overhang effect on a number of our customers and end-markets.

Does that make sense?.

Okay. Yes, it makes a lot of sense.

And then I lied and I am going to ask Jay just one more, what are you modeling Jay for interest expense at this point for this fiscal year ‘21?.

Let me – it’s related to some of the pay-downs that we are as I mentioned that we are anticipating. Let me do the math on that and get back to you discreetly..

Okay. Okay, sounds good and good luck with everything. Thanks for taking my question..

Thank you, sir..

Thank you. [Operator Instructions] Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question. Yes, Graham, your line is open..

Yes I was muted, sorry. Hi good morning you guys..

Good morning, Scott..

So the gross margin – so if we were to look at the up 60 and then we were to add the 400 that’s on let’s just call it for rounding purposes, an up 450 on the gross margin. And I know that your gross margin, the comparisons from last year was a rough year for gross margin. But that’s still a big number, a big jump.

And I guess my point is that when I see the like a 10% shift in the mix, I am just kind of hoping you could maybe tell us is so was that entirely the mix factor, because I know that you are also working behind the scenes on improving manufacturing, but was the improvement in gross margin entirely on that, because I am just trying to triangulate here on that and the fact that your sales were down as they were?.

Yes, Scott, we have been focused on continuous improvement activities and they did have a positive impact. Actually, our price increases that we passed earlier in the year also favorably impacted those numbers, but a big impact we obviously saw was that one-time charge in the quarter that we noted..

Right.

But I guess my question Bruce is more along the lines of if the gross margin was essentially up 450 basis points without that charge, was that entirely – would you say that, that was entirely mix? Is it – did you get 400 basis points from mix this quarter do you think?.

We don’t think so. We don’t have that exact number in front of me, Scott..

Okay, that’s fair. Because obviously that’s a lot of things going on with gross margin volume decline as well as your continuous improvement. So okay the other question I have is around on MROs so obviously that’s a huge portion of your sales and even when you exclude that THS piece, because that’s probably a little bit higher ASP than your core MRO.

Wouldn’t that be – are you – how closely are you watching that number? So in other words, I know you have sort of walked back your statements about the 18 to 24 months, you are referring more specially to oil prices.

I guess I would think that the MRO – the core MRO number would actually start to be climbing now almost every week with [Technical Difficulty]?.

We did – as I mentioned in Q&A here, we did see a downturn in the bottom kind of in April and we begin to see that improved since, but quarter-to-date, those bookings are down 40% to 45% and we believe it’s largely related to restricted access to COVID-19.

We would expect as operations return to normal that, that maintenance activity will resume and we should see that business come back to more normalized levels..

Yes, hard to imagine that. It wouldn’t. Okay. So, another question I had in the past conversations I have had with you guys, you were kind of talked about how your – you have a keen focus on SG&A, you really want to make sure of that sort of SG&A, exclusive of depreciation kind of held for it versus the sales.

I just kind of wanted to make sure that, that’s still what you are thinking, because it looks like the cost reductions that you are putting through here in SG&A, it really looks like you are getting head of things on what versus sales are or is that what you think you need to keep SG&A in line with the sales? You follow the question?.

Yes. So, albeit a very uncertain environment, the reductions we have taken, we believe are appropriate based on what we believe the order flow in our revenues will be. So it’s consistent..

Okay. Because that’s a big number, that’s 400 basis points which means that you are kind of going back to cost levels in that line that predate 2015. So, is that the….

That’s correct..

Thinking that those could be right, is that because you are thinking that sales could be like really wicked bad? I know bad this quarter, but I mean maybe at that level for a couple of quarters, is that the implication?.

Again, we believe when we get past the pandemic, we should begin to see some orders recover, but we do anticipate this downturn to be equivalent to what we experienced in our fiscal 2017 in the similar range. And so we have aligned cost accordingly..

Got it. Okay, that’s all I had. Thank you..

Thank you, Scott..

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

Good morning, everyone. Jay, I didn’t….

Good morning, Jon..

Good morning. I didn’t quite get it when you did your scenario planning, you said revenues plan on – let’s say plan on revenues being down 35%.

Did you say you are going to be at that point you would be breakeven cash flow, breakeven operational help me out there, I missed that?.

Yes, between a reduction of 35% and 40% lower than this last year’s results we believe that we would be free cash flow breakeven..

Okay, okay. Okay, thank you. Okay. Bruce, on a longer term basis some people might argue that oil prices maybe in the range of $30 to $40 from a longer term perspective and that there is some permanent damage done to the oil and gas market as a result of what we have seen over the last three, four months.

And when you look out from a longer term perspective, how do you view some – if we are in a prolonged period of low oil prices $35 to $40.

How impactful that can be on the business from a longer term perspective and from a strategic purpose, how do you view looking to grow the business in other markets sort of at the expense of the oil and gas market if it’s going to be weaker from a longer term standpoint?.

Right. Yes, absolutely. So as we look at all, I do want to reinforce that we have done a lot to reposition the business to be less exposed to oil since the last downturn in 2014/2015. The THS business is significantly exposed to natural gas. We obviously have the opportunities within the L&G midstream.

We continue to have significant opportunities in chemicals and petrochemicals, which have fundamentally different drivers. And so those are the areas that we will continue to grow.

We are also looking at diversification into other end markets, I mentioned transportation and nuclear, but there are certainly others that would provide opportunities for growth given a protracted downturn or lower oil price environment going forward.

And independent of oil price, it is our strategy and desire to continue to diversify into some of those other industrial markets such that the oil and gas energy exposure is reduced to 35% of our revenues rather than 55% of our revenues..

Bruce, given the thinking about that diversifying elsewhere given the opportunity, would you be willing to make some acquisitions at this point, or if indeed, it’s the right acquisition or would you look to defer that until things begin to improve?.

We are working now to position the business and the balance sheet such that as we begin to see things stabilize and improve that we are well-positioned to be able to action any opportunities that may arise.

At this immediate time, if we were to consider anything, it would have to be quite small and we would have to have a confidence level just around our cash, balance sheet and liquidity..

Yes. Okay, that makes sense.

Jay, in the fourth quarter last question, there was a $1.6 million other expense charge in the fourth quarter, what was that?.

There were three components relating to that, Jon, one related to FX for the quarter. Also, there was a loss on some disposal of equipment..

Okay..

And then there was a charge relating to a deferred comp plan..

Okay, so nothing – nothing out of the ordinary, really?.

No, no..

Okay, okay, alright thank you much..

Thank you, Jon. Appreciate it..

Our next question comes from Brian Drab with William Blair. Please state your question..

Hi, just one more.

Jay, in your scenario, where your sales are down 35% to 40% breakeven free cash flow, is it safe to assume that in that scenario you are not breakeven in terms of net income just given you are going to have some benefits probably from working capital etcetera?.

Okay..

Is that breakeven in that scenario? Are you – go ahead sorry..

There would be specific add-backs for depreciation, amortization, working capital, etcetera..

Are you breakeven in that scenario in terms of EBITDA or not?.

No. No, we are not..

Okay, alright.

Can I just ask are you breakeven in that scenario in terms of operating profit?.

No, no..

Okay..

And Brian, I do have your answer – your previous question, the answer to that interest expense this past year was slightly over $14 million and it’s going down to $9.2 million this year. And again as I mentioned before that is without any additional debt repayment..

Which there might be – which there should be..

Which there might be, yes..

There might be. Okay, thank you..

Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question..

Yes, hi.

Can you help me understand, I think I am going to have another question on the sort of follow-up to previous – the response to the previous question, but was this gross margin item, this operational issue, was that essentially a charge-off because that was a big number?.

We took a charge for future project rework. It has not yet been executed, but we hit our P&L as an increase to cost of $3.5 million for anticipated future expenses related to this particular project. So, it was P&L only and non-cash..

Got it.

And then I think you said in SG&A, there was a charge for the restructuring, Jay, I am sorry, what did you say that number was?.

It was resident in our SG&A. But due to the rather minor amount, we did not call it out as an add-back..

Okay..

And it was approximately $1 million related to the EMEA restructuring..

And then last question if you could the – you said earlier this year you did a realignment outside of North America EMEA, could you tell us what the savings you expect to realize from that?.

That’s included in the $16 million that we are talking about on a go forward basis..

Understood. Okay, thank you..

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

Alright. Thank you, Diego and thank you everyone again for joining us on the call. We appreciate your interest in Thermon and enjoy the rest of your day..

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day..