Good day, ladies and gentlemen, and welcome to the Thermon Earnings Conference Call Quarter 2 2013. [Operator Instructions] I would now like to turn the call over to Sarah Alexander.

Thank you. Good morning, and thanks for joining us for today's earnings conference call. We issued an earnings press release this morning, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website at www.thermon.com. A replay of today's call will be available on our website beginning 2 hours after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the express written consent of the company is strictly prohibited. During this call, our comments may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and our actual results may differ materially from the views expressed today. Some of these risks have been set forth in the press release and in our annual report on Form 10-K filed with the SEC in June. We also would like to advise you all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions and various other aspects of our business. During the call, we will also discuss some items that do not conform to Generally Accepted Accounting Principles, including adjusted EPS and adjusted EBITDA. We have reconciled those items to the most comparable GAAP measures in the earnings release. Adjusted EPS and adjusted EBITDA should not be considered in addition to, not -- should be considered in addition to, not as substitute for income from operations, net income, net income per share and other measures of financial performance reported in accordance with GAAP. And now it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone, and thank you for joining our conference call and your continued interest in Thermon. Today, we have 2 of our Senior Vice Presidents joining me on this earnings call. Jay Peterson, our CFO, will follow me and present the financial details of our FY 2013 second quarter and year-to-date results. George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global markets and industry trends. For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical and power generation industries. Our heat tracing systems provide freeze protection and temperature control for piping, vessels and instrumentation. These mission-critical systems ensure the continuous and safe operation of industrial facilities. While Jay will discuss our financial details in a moment, I'd like to touch on some of the highlights. First of all we had a good quarter. Once again, we achieved strong gross margins this quarter at 48.5%. This was due to margin growth in our Greenfield projects as well as our MRO business. Our earnings set another all-time high of $0.26 per share adjusted EPS. Our adjusted EBITDA came in again very strong at 29% of sales, which was another all-time record at Thermon. Q2 backlog remained high at $113 million versus last year at $87 million as Greenfield project activity continued on its robust pace. We successfully completed an upside secondary offering of 11.5 million shares of common stock, which increased our public float by 2x. Also Standard & Poor's raised its rating on Thermon senior secured notes 1 notch, from B+ to BB-. Our strong gross margins, coupled with prudent management of operating expenses, drove our bottom line performance.…

Thank you, Rodney. Good morning. Thermon demonstrated another solid quarter in fiscal Q2. And as we move into our busy season, the momentum in our business is increasing. This morning, I will focus on the results of our core operating business and exclude those expenses relating to the recent refinancing of our bank line of credit in past optional bond redemption expenses. First off, our revenue this past quarter was essentially flat at $67.4 million relative to the prior year quarter's level of $68 million. Note that the strong dollar negatively impacted our revenues this past quarter by approximately $3 million. And major currencies impacting us this quarter were the euro, the Canadian dollar and the Korean won. Had we experienced constant currencies relative to prior year, we would have actually grown 4%. Our backlog of orders ended September at $113 million versus $87 million at the end of Q2 from the prior year, and that's an increase of 29% with both hemispheres showing backlog growth. Gross margins. Our gross margin dollars grew this past quarter by 150 basis points, up to 48.5%, and that's up from last year's level of 47%. And this growth was driven by a strong MRO/UE mix of 62% of revenues this quarter, whereas Greenfield totaled 38%. And I'd like to note that we did experience a negative impact to gross margins from currency in the quarter by approximately $1.3 million. In terms of operating expenses, our core OpEx for the quarter, that is, SG&A, and this excludes amortization of intangibles and transaction-related expenses, totaled $14.5 million. And that's down slightly from the prior year period. And our operating expense as a percent of revenue this past quarter was a competitive 21.5%. The number of full-time employees at the end of September was 777. That's…

[Operator Instructions] The first question comes from Charles Brady from BMO Capital Markets.

My first question is, I was wondering what was the margin impact for Greenfield and MRO?

Both of those were solid for the quarter. Our mix was favorable. But in addition to that, we saw an uptick in Greenfield margins. A little bit higher than we have seen historically.

Okay, and I guess, on that point, like I guess, why did Greenfield margins go up?

Product -- this is Rodney, Charlie. Product mix, whether it's Greenfield or MRO, our margins -- average margin percentage are driven by the products. So when we have a margin uptick in Greenfield, we had a higher percentage of heater cable as compared to control panels and boxes and other buyout items.

And Charlie, we plan the business at 60% MRO content, 40% Greenfield. Our MRO is up a couple of points from that mix in the quarter, but just as important, we had a very strong mix within our Greenfield activity with more Thermon representative product that carries higher gross margins than buyout items.

Yes, Charlie, I think the mix this quarter was 62-38, 62 MRO.

Okay, were any shipments kind of pushed out this quarter, like any lumpiness?

Yes, there were some. It was spread out over several more projects than like the last quarter, which we had a very identical -- identifiable 2 or 3 projects that had a $3 million to $4 million impact. But there wasn't 1 or 2 this quarter. But every quarter we have, we have some sort of push out to the right. This one was not just as easily identifiable as previous quarters.

Okay. And you guys have been seeing any weakness in the chemical market at all?

Not specifically in the areas where -- this is George Alexander. Not specifically in the areas where the growth is concentrated, which is mainly in Asia. That business is still robust. But yes, in Western Europe and the U.S., it continues to be a bit on the weak side, yes.

Okay, and one last question. Have you guys had any changes or anything for guidance?

I guess, the comments on that, Charlie, would be we're moving into the second half of our fiscal year. And historically, that has been a strong part of the calendar for us. Our heating season is in full season in the October, November, December, January months. The only issue that we are seeing is FX. But we are still holding to our low double-digit growth, albeit challenging with FX, but that is still our goal.

The next question comes from Brett Linzey from KeyBanc Capital Markets.

Could you just talk about how revenue results came in relative to your expectations in the quarter? And then any more color on the cadence for the balance of the year in terms of revenue run rate results to meet that double-digit expectation?

Yes. We believe that, historically, looking at Q3 and Q4, there's usually a foot race as to whether Q3 outstrips Q4. So we're definitely moving into the sweet spot of the heating season. And we are very optimistic in terms of the order activity, our backlog and the invoicing activity over the next several months. And we think that will yield some pretty strong results.

Okay, and then you guys mentioned robust order activity. I mean, was that on a consolidated basis? Could you maybe just talk about activity in bookings across your different market segments? And then any color geographically would be helpful as well.

Sure, this is George. The order bookings or the order rates generally do track the time period as we approach the heating season. So as you might expect, starting in the more northern climates, that's where it's -- the order trend starts picking up first. So our order activity in Canada and in the Arctic regions has already started. And as we move into the heating season through October and November, it will, we believe, it will also be reflected in a significant up trend as that's what history has shown us in the past throughout the rest of our Northern Hemisphere markets.

Okay, I guess, last one here. Are you able to quantify the contribution from your San Marcos additions in the quarter? Maybe how is that ramping versus expectations? And then you talked about a buildout for some -- the new panel shop. Is that contribution going to be incremental to what your previously stated outlook was?

This is Rodney. In terms of the plant expansion, we're still -- I mean, it's fully operational. But we haven't been able to have enough time yet to generate efficiencies and so on. We're still moving buildings and getting things going, we're still starting up. We started up a new production line that handles our long-distance heating, very important to our Middle East development. So we're still a little too early to put some hard numbers behind efficiency gains. But we do believe that within this fiscal year, we will have gotten all the tweaks out of startup operation, the cable manufacturing facility by that time. But just as a note, we are already using some of the increased capacity now. That's good news to us. We feel very positive about it because, again, if you look at our gross margins, when you see our gross margins at the elevated numbers that they are, you know that we're shipping a lot of heater cable, and that heater cable is made here in San Marcos. So that we're already using a significant amount of that production capacity. And it will be, say, 6 months, give us another 2 calls and we'll probably have some hard numbers to go over on production efficiency gains. As it relates to the panel control shop, that's kind of a multi-functional expansion we're doing. We -- that will cost us about $1.2 million. We believe we'll see cost savings on 3 campuses that total at least $400,000 a year. But most importantly, it adds to the capacity capabilities. So as we build out and continue to be successful on Greenfield projects, which is what funnels that particular shop, we see that capacity being in line and necessary to do that previously stated buildout of $400 million to $500 million over 4 to 5 years that we stated with the heater cable. We need the control and panel production capacity to grow as well, and this is the second phase of that buildout.

The next question comes from James West from Barclays.

Rodney, curious about your backlog outlook from here. You obviously -- you and Jay both commented that you're -- you do expect pretty significant revenue growth in the kind of second half of your fiscal year here. And that the low- to mid-double digits was still achievable x some of the currency issues you're having. Given that step up in output coupled with what you -- and I think George described as robust kind of order intake at this point, can backlog still grow or does backlog slide as we go through the second half of this year?

First of all, backlog that we report is the backlog we have on the last day of the quarter. And it looks like an EKG machine printout during those 90 days. We can't talk about October, but I mean, it's the same concept. But if you look at last year, we're up 20-some odd percent over prior year. But again, that's still just defining the difference in 2 days. And backlog being almost completely driven by Greenfield, the whole object is to get that thing up and then get it down, and get it up, and get it down. So we're very comfortable with the strength of our backlog at this time, very comfortable.

Okay, so you know -- in your mind, you don't necessarily -- it doesn't matter in your mind if it grows or not from here. You just want to get more output up in order to get the revenue and the earnings up.

Yes. We're remaining healthy as a result of that.

The next question comes from Tim Mulrooney from William Blair.

I apologize if you guys already answered this question. But did you give revenue growth by geography that is Eastern Hemisphere versus Western Hemisphere for the quarter?

We talked about it in terms of the backlog, but not in terms of the specific geographies' revenue contribution for Q2.

Tim, this is George Alexander. The Western Hemisphere, we're seeing a significant positive growth in our Canadian operation, which is a targeted growth area for us. The U.S. market is a little bit soft, which, again, is not completely unexpected. The -- in the Eastern Hemisphere, the growth is pretty solid in Asia. And we're pretty flat year-over-year in Europe. Last year was a difficult comp for our U.S. operation. It had -- we had some significant Greenfield projects that we're rolling off of now. So again, the softness in the U.S. market is not a significant concern for us at this point, but our growth markets are doing well. Our targeted growth markets are doing well.

Okay, along that same vein, is there any notable strength or weakness in any particular vertical? I assume you're going to say oil and gas in Canada. But I was just wondering if there was anything else.

No, our market sectors and targets are consistent with what we've reported in the past. And the power industry in some parts of the world are picking up maybe a little more than what we anticipated. But certainly, oil and gas is still, both upstream and downstream, is still our largest sector.

Okay, and do you guys have handy what the orders were last year? I'm trying to see what order growth was year-over-year.

This past quarter, Tim, came in at $63 million for Q2. In the year-ago, there was some lumpiness in the order and we actually -- in the order rate, and we actually did a little over $73 million. But the comment Rodney made on the backlog is also representative on the orders. Orders will go up and down. Backlog will go up and down. And it is impacted by Greenfield activity where we may or may not book an order in a current quarter. But in terms of where we're at today, the order rate is healthy. And we're moving into the heating season. And we're pretty optimistic about where we sit at present.

Okay, just lastly, Jay. Do you guys know what you expect for your CapEx for the full year?

Somewhere around 1.5% of revenues, Tim.

The next question comes from Martin Malloy from Johnson Rice.

You all have had another strong quarter in terms of gross profit margin in spite of -- based on your last call, I think you had some negative impact from inventories that you built up related to the plant expansion. Do you all foresee changing that guidance, the 45% gross profit margins that you've been able to generate historically? It seems like it's been well above that here for -- since really you've been public.

Yes, we certainly have had a very attractive mix since our IPO but you look -- if you were to look back on a more protracted time period, our gross margins have been around that 45% plus or minus a point or 2. We're obviously doing 3 to 400 basis points above that at present. However, that is predicated on a certain mix. And it is possible that in a future quarter or even a future protracted period of time, our margins could go down due to Greenfield activity. So that is the real key there. Two other things to note, what we do not fully have experienced, at this point in time, is whether there is any upside cost reductions, upside to our margins that is, due to cost reductions from additional throughput with our new manufacturing process. That will take us a quarter or 2 to better understand and if we were to provide additional guidance or revised guidance on margins, it would probably be after we understand that for a couple of quarters.

Okay, and second question. Lately we've seen a couple of announcements regarding front-end engineering design studies for chemical, petrochemical plants in the U.S., taking advantage of NGLs and lower natural gas prices. What would be the timing that we might see inquiries for the type of equipment that you all manufacture to be -- or orders to be placed related to those facilities?

Martin, this is George. It would be anywhere from 1 to 3 years depending on the size of the project, but we're active in that field. That's certainly one of our target areas. But by definition of the fact that it's front-end engineering, that the project then has to be evaluated, funded and then the bids go out to the various EPCs, awards are made to the EPCs and, at that point in time, hopefully, we are engaged with them and in the detailed design for the infrastructure that's going to support the heat tracing system. So what I would say it's 1 to 3 years.

The next question comes from Andrew Gadlin from CJS Securities.

Just following up on the questions regarding gross margin. As you think about the Greenfield mix that you expect to have in the second half of this year, is it also a favorable mix?

Well, we're moving into the heating season. And MRO is, as you know, has gross margins anywhere from 10 points to 50 points, maybe even higher, than a typical Greenfield. So as we move into that area, that one event in isolation would indicate that we would, in fact, have upside to gross margins.

I understand. But you also highlighted that within Greenfield, there are lower-margin projects, such as the planning stage and then there's the higher margin portion of Greenfield where you're actually shipping cable. As you look to the second half, is it -- what kind of a mix do you expect to have within Greenfield?

This is George. We do have a significant amount of Greenfield projects that we are scheduling in the second half of the year and notwithstanding the fact that it's in our -- that that's occurring in our heating season, it would normally have some downward effect on our margin. But we believe that that's probably going to be offset. But because of the fact that our highest -- our busiest season as far as MRO is the second half of the year. So again with Greenfield projects, it's difficult to control or project exactly when those projects are going to be invoiced. But we are -- we do have a significant amount of Greenfield projects, so that we're in the detailed design phase on now. And we will be invoicing in the second half of the year. But because it is our heating season, our MRO business is expected to be strong as well.

I'm actually asking something a little different. I'll follow up after the call on that, I guess. Also, you've talked in the past about once you get the San Marcos facility up to speed, there might be an opportunity in commercial heat tracing? Do you have any thoughts on that right now?

Yes. That is an adjacent market that we've been pursuing now for over a year. And we've had some successes in that market. And we're actually active in our planning process to increase our activity in the commercial or adjacent markets.

Excellent. Do you have any sense on timing?

We are active in that as we speak, yes.

The next question comes from Jon Braatz from Kansas City Capital.

Jay, I got a question. When we talked a couple of months ago, I can't remember the term you used, but when you look at your business beyond 6 months, 9 months, there's some quoting activity and just preliminary work that you're doing on maybe initial work on some Greenfield projects that are beyond, far beyond putting anything in the backlog. How does that business activity look at this point? Business that might arrive 18 months, 24 months from now?

Yes. Probably a good example of that kind of activity, one that everybody is aware of, it's well publicized, is the Sadara project in Saudi Arabia. That's a huge Greenfield project. And those kinds of projects -- we have to -- if we're going to do our job well, we have to start at least 3 years before that project that we realize, actually realize revenue or invoicing out of that project. And the number of those projects that are in our pipeline that we're working on is encouraging. It's healthy. Our activity is strong, especially, again, in our growth areas -- in our targeted growth areas. So we still remain optimistic and encouraged about the future.

The next question comes from Gregory Macosko from Lord, Abbett.

Just with regard to the San Marcos, just looking out there, you're clearly ramping up. Is there anything to suggest that in terms of the market and your outlook, the orders that we've talked about, that there's anything to suggest that, that won't ramp up kind of as you've expected in terms of the volumes that come out of it, once you get the inefficiencies out and work it up?

No. Greg, this is Rodney. We're right on expectation. We built the facility in advance of the production so we could fill our industrial needs in the peak months of the year, which we're doing right now. We built it in anticipation of increasing commercial private label business. We've been successful in doing that. And I think almost outside of one blender piece of equipment having some warranty issues, it's almost been a perfect investment for us in terms of return. So nothing suggests at this time, that we're going to break the expensive piece of china.

Okay, and I know you -- I think what you said, the $400 million, $500 million in heater cable, I think, you mentioned earlier that. That's over -- kind of what kind of a timeframe?

Okay, the $400 million to $500 million, I apologize if I misstated it. That's our overall business. We previously stated and still stand behind that we have the ability, we think, to grow to the 4 to -- say, $450 million midrange in 4 to 5 years by adding that capacity expansion of heater cable. And Phase 2 would be to add the control panel, but we believe the total revenue of the company, globally, can grow to that $450-ish million level with these 2 capacity expansions.

And the control panel -- the controls that you talked about, the panel controls, that's not -- I mean, in terms of just slowing that down, that's a fairly easy phase to put in. And so that in terms of getting to that 4 to 5 years should not be an issue, I assume.

Yes, we have -- well I think we have built appropriately to stay on target with our long-term plan as our growth.

Okay, and then finally, with regard to -- you talked about the U.S. being "soft," but the point being that you're saying that last year was a pretty -- there was some big orders, there was some big shipments at that point. And that kind of with a few bumps here and there, you're continuing to see the U.S. kind of chug along?

Well again, you're right on, Greg. But the positive part is in the U.S., again, we are just now starting to enter the heating season. And again, this historically, this is when our business in the U.S. ramps up significantly. So there's no reason for us to believe that it's going to be any different this year. So the reason that we have a difficult comp from last year is because again, we do have a couple of very large projects that are rolling off the revenue side. But the -- some of the positive signs in the U.S. is that we're seeing a lot more activity in combined cycle power plant construction. And also the gas play, the GTL gas play in the U.S. is very active. So again, compared to last year, it's a little bit soft. But that doesn't mean that the -- the business activity is strong.

And so those projects began to roll off in this quarter then, is that the point? And they lasted -- those projects were a number of quarters as they were at strong volumes?

Yes, they've begun to roll off in the first half of this year.

Okay, and when are those projects on a comparative basis sort of out of the -- on a year-over-year basis gone, would you say?

Greenfield projects are pretty lumpy and unpredictable. I mean, we're -- that's kind of like our order trend. I mean, when we get one that -- when we land one, it's a significant uptick. But whenever we complete it, that's obviously the objective of getting it is...

But I mean, we're talking a couple of quarters to finish that? More than that, in terms of the time frame?

A couple of quarters to finish the effects of it rolling off?

Yes.

In Greenfield.

Yes, probably, that's about right.

[Operator Instructions] The next question comes from Scott Graham from Jefferies.

So the double-digit top line guidance, which as I understood it, includes negative impacts from FX, that you're still shooting for that number. Here's really my question framed. I suspect that you were not thinking that you would get there from a back-half loaded year. Therefore, with the sales number that you reported this quarter, what kind of came in below your expectations versus heading into the quarter?

Other than FX, Scott?

Well, FX was kind of a known quantity, I would probably argue. Just trying to say that I suspect you were thinking that the sales growth of 10% on a full year basis would be maybe a little more level-loaded 2Q to 4Q. And now with the 2Q number kind of coming up, again, in this lower range here, I'm just wondering, to get to the second half -- to get to a double-digit for the full year, you need quite the second half to get there. So my question is, I don't think that's what you are thinking. So what is sort of your expectations in the second quarter?

Well, we did in fact think it would be a little more level-loaded when we set the plan. We did not think we would have this level of business activity in the second half. But fundamentally, the business -- we're still very bullish on the business. Our goal of double-digit growth is challenging, but that is certainly still our goal. And we believe, for example, with the order activity, the backlog and what we believe will happen in Q3 and Q4, we think that is still an achievable goal.

Scott, this is George. A couple of things that did happen in the first half of the year that we didn't project is that, as I mentioned before, some of the business that we had anticipated in the U.S. didn't happen in the first half of the year. And we see the activity, but it's going to happen, we think, in the second half of the year. And then the other thing is that, we talk about this a lot, but it's just a fact of life that some of the schedules as far as the Greenfield projects that are -- that at one point in time were slotted for the first half of the year, and this is the international part of it, that were slotted for the first half of the year has slipped. So like I said in one of the previous questions, we do have a significant amount of Greenfield activity slotted for the second half of the year. Part of that peak, if you will, is because there's been some in the first half that has slipped forward. So that has affected our revenue forecast a little bit and made it weighted towards the second half of the year. But we didn't see that or project that going in, that's right

Got it, okay. So the other thing is in the past, you've been kind enough to give us the orders number for the quarter, both organic and total. Would you be able to give that to us again?

Yes, the orders for Q2 were $63 million for fiscal Q2. And I'm not certain of the organic distinction.

That -- well, I'm just talking about what the currency negative was impacted that number. And if you wouldn't mind also, Jay, can you remind us what the year-ago quarter number was as well?

Yes, the year-ago order number was $73 million, a little over $73 million. One of the difficulties with attributing FX to orders, is that it is very difficult to measure that. You have to measure your orders virtually every day relative to the currency from a year ago. We do, do that for our revenue, however. And we do know revenue was impacted by a little over $3 million in the quarter and about $7 million for the first half.

Got it, okay. So then just a final question would be that the decline in orders for the quarter versus the year-ago, that looks like it's more than 10%. Is that something that is -- it sounds like it's something that's concerning you. But I was maybe kind of hoping you could give us a little bit more color on why that would have been the case for orders?

Scott, this is George. Again, we are, at the end of Q3, we're basically just starting the -- our peak season. So we anticipate a significant upturn. That's not unusual. That happens most of the time. But thanks to every year, so that's consistent. The thing that is -- that does vary is when the orders for Greenfield projects come in and when they hit. And if they hit on September 30, then your orders at the end of the quarter look good. If they hit on October 3, then they don't look so good. So it all depends on when these Greenfield projects come in and hit because we do anticipate. And we're, historically, we're very confident that the order intake rate during our busy season is -- we're going to see a significant uptick. And that's mainly the MRO side of our business.

Right, got it. Here's my last question, but it's sort of in the same category. So if you are this optimistic about the second half, could you -- is that stemming from just seasonality or are you actually seeing that in your order book in the month of October?

Yes and yes. And again, I think that the back-end load -- anytime you have a back-end loaded forecast, if you will, I mean, it's going to be challenging. But we think it's -- it's something we can still achieve, we do, but it's going to be challenging.

Okay, got it. Just kind of wondering if you can give us any color on October at all, quarters or sales, if you could.

No, this is Rodney. I don't think we want to get into specifics of a quarter we can't discuss, but it's -- last year's orders for October compared favorably to September and August. Scott, historically, we talk about -- and we do this as we get our feet wet and get to know each other in this public environment. But there's another historical fact is that our slowest order period is in the late summer, early fall. Again, Greenfields take on their own timing. But in terms of seasonal business, we have a lot of less orders in August and September typically than we do in October, November and December. And I think we'll have a lot more color for you in the next earnings call. But obviously, to that question, did we anticipate or do we feel good or bad or stressed, we're still feeling very positive about our position at this point. I'll let go what Jay and George have both said. The FX is giving us some headwinds, that's a big challenge, but right now we still have -- we still have a very stout feeling that our business is going to continue to go upward through the end of the second half, which is very historically typical for us in years past.

And I am showing no further questions. I would now like to turn the call back over to the presenters.

Okay, well, first of all, for those still left on the call, thank you very much for attending. I look forward to our next earnings call, and everybody, have a safe day and a good weekend.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.