Good day ladies and gentlemen, and welcome to the Thermon Earnings Conference Call, Third Quarter (sic) 2017. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to your host for today, Sarah Alexander, General Counsel. You may begin.

Thank you, Sonya. Good morning and thank you 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 Web site at www.thermon.com. A replay of today's call will also be available via webcast 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 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 May. We also would like to advise you that all forward looking statements made on today's call are intended to fall within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance, revenue growth, profitability, leverage ratios, acquisitions, acquisition synergies, and various other aspects of our business. During the call, we will also discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP. And now it is my pleasure to turn the call over to Bruce Thames, our President and Chief Executive Officer.

Thank you, Sarah. Good morning everyone. Thank you for joining our conference call, and for your continued interest in Thermon. Today, I have Jay Peterson, our CFO, joining me on the conference call. Jay will present the financial details of our fiscal 2017 second quarter. To begin with the positive news for the quarter, revenue was consistent with our expectations, at $68.8 million, and we finished the first half just 2% below the prior year revenues. Gross margins remain under pressure, but improved by 80 basis points over Q1 of this year, to 42%, as anticipated in the call last quarter. Our backlog ended the quarter at $85.7 million, a 4% increase over prior year. In Q1 of this year we delivered a book-to-bill ratio of 122%, and have enjoyed five consecutive quarters at 98% or greater in a very challenging market. This quarter our book-to-bill ratio fell to 86%, and our backlog declined sequentially by 10% from Q1 on bookings of $59.1 million, a 22% decrease from prior year. We believe this lower incoming order rate was related to continued delays and deferrals of both projects and maintenance spending, and is reflective of the overall market. We continue to have visibility on the orders in our pipeline, but customers are holding on to capital dollars, and are performing the minimum required maintenance to sustain operations. Additionally, gross margins remain under pressure, and are 5.7% below prior year, and 3% below our historical averages predominantly related to mix and price. Greenfield projects represented a higher revenue mix of 36% versus MRO/UE at 64% relative to a mix of 34% to 66% respectively in Q2 of fiscal 2016. In the quarter, gross margin impact of all acquisitions combined had no affect on historical margins. Finally, we also continue to see near-term…

Thank you, Bruce, good morning. I'd like to start off by discussing our Q2 financial results and then conclude with updated guidance for the balance of the fiscal year. First off our revenue this past quarter totaled $68.8 million and that's a decrease about 2% over the prior year's quarter. In this last quarter from a revenue perspective three of our geographies performed as expected. However our U.S. business experienced a double-digit revenue decline due to a strong comparable and lower than anticipated MRO/UE activity. Our Canadian business experienced slight revenue growth in the quarter and this is the first time this has occurred in the past six quarter. Our MRO/UE mix for Q2 was 64% of revenues whereas Greenfield totaled 36% and Greenfield revenues grew 3% over the prior year quarter due to a strong performance in Europe where as MRO/UE revenue declined by 4% due to a double-digit decline in the United States. Orders for the quarter totaled a disappointing $59 million versus $76 million in the prior-year quarter for decline of 22% and our book-to-bill for the quarter was 86%. It is our expectation that our book-to-bill will be positive in the current fiscal quarter. Our backlog of orders ended September at 86 million versus 82 million at the end of September 2015, and that's an increase of 4%. We are experiencing a protraction in the turns in our backlog. Several years ago our backlog we typically turn within 12 months, at present due to the press spending our turns have increased to 15 to 18 months. Gross margins margin dollars this past quarter improved over the last 90 days by 80 basis points versus the prior year quarter our margins decreased by 570 basis points due to several factors including reduced profit margins in our construction…

Thank you. [Operator Instructions] And our first question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is now open.

Hi, good morning guys.

Good morning, Jeff.

Good morning, Jeffery.

Okay, so just on the cost takeout. So you're taking out $3 million out of SG&A and $3.4 million out of cost to goods sold, and we would get $3 million of that in fiscal '17, and the balance in '18, is that the way to think about it?

Yes, about $1.6 million in each SG&A and COGS during the current fiscal year, and then the other numbers we provided were the full-year impact.

For next fiscal year.

For next fiscal year.

Okay, great. And then can you give -- I know there is like a stub for IPI, but can you give the acquisition revenue contribution in the quarter, and any kind of FX impacts. And then maybe for the full year how you're thinking about core growth within this mid singles decline?

Yes, we had M&A revenue of $861,000, and that was for the one-month stub period for IPI. And then going forward, after this quarter we will not have organic or inorganic revenue in that we define it for as businesses that we've owned greater than 12 months is now part of organic. I can tell you though that we are quite happy with our M&A performance in three data points. We are achieving our EBITDA plan for the three acquired companies. We're definitely growing EBITDA year-on-year, and we're definitely growing revenue year-on-year. But going forward those will be melded together, but we will give some higher level perspective on the health of those businesses.

Okay. And then FX?

FX, from a revenue perspective was actually positive for the quarter, at $252,000. And this is the first time this has been positive for us for several years now.

Okay, and then just lastly, Bruce, I think you gave some statistics about targets, 55-some targets, can you just talk about how the near-term pipeline is looking, and what you see the likelihood you get something done over the next six to 12 months? Thanks.

We have -- again, we've noted 55 different targets. Some of those obviously are more active than others. It is our intent to move ahead with M&A, so we're pursuing that aggressively. As you know, with deals, it's -- predicting timing can be challenging, so the opportunities are binary. I guess the main thing is that our strategy has actually expanded the arbitrary and given this more opportunities.

Okay, thanks guys. I'll get back in queue.

Thanks Jeffery.

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

Hi, good morning all.

Good morning, Scott.

So, would you guys be able to rank for us pricing mix and the construction mix in terms of importance to the gross margin decline in the quarter?

Yes, a couple of data points there. Our construction was impacted in the quarter by about 5% relative to the comp period a year ago. The balance of the basis point reduction is approximately 50% related to product mix, and 50% of the balance related to pricing pressure.

Well in perspective though, the construction -- I don't think anyone knows what the construction margins were, so -- a year ago. So that 500 basis points year-over-year, how does that -- does that make that the largest of the three?

No, it's actually the smallest of the three. Somewhere in range of 10% to 20% of the basis point erosion. So let's say 40% of it was related to continued pricing pressure, 40% of it related to an unfavorable product mix, and then the balance would be construction.

Right, got you. Thank you. Just a question for you on the book-to-bill, but what you said in the third quarter, you expect to be up. Isn't it the case that kind of this cycle or this point in the cycle that book-to-bill is becoming a little bit less important, not for the long-term, but certainly for the intermediate term with these push outs. So what do you think that will mean to you because if -- a north of one book-to-bill has really not helped -- is really not helping a ton given the change in the guidance.

Scott, this is Bruce. What we saw in the weak book-to-bill in the quarter, it really -- it created a bit of a gap in our backlog. What we have seen is those projects timing has moved out. And so we still see them, the projects are still there. And our quote activity has actually improved. So it does have an impact particularly as it relates to the quick turn business or our MRO business, and that's where we've really been most negatively impacted. We have the least visibility on that and in our U.S. business particularly, which has really been the challenge in fiscal 2017. Those MRO sales are off by about 23% year-to-date.

Okay. Two other questions, when we talk about the company's exposure to oil and gas, could you maybe frame for us what your exposure is to upstream U.S. not sands, but just sort of upstream U.S?

Yes. Certainly the exposure in the upstream sector in the U.S. is less than in Canada. However, we do have business in the Marcellus and the -- basically in the Dakota. So those are the two areas, where we really had the most business. That has been down, but as that recovers we would expect to see some improvement in our U.S. business there.

Got you, thank you. Last question, the M&A pipeline, it's very impressive, the number, targets and you guys have really gotten to work there calling in some resources, could you kind of tell us maybe, frame out, Bruce, what are some of the themes within that pipeline product-wise? Is it moving more into dry away from liquid versus -- is it steam versus electric? Just give us some ideas on what those 55s look like.

Yes. So the things that we are looking at are certainly additional products and services that complement our core. And so, those are things in and around us being able to provide a more comprehensive thermal solution to our end-markets. Other areas that we are looking at would be technology-based that would complement our offering and improve our competitive position in the space. So those are the kind of two of the overriding themes. And again, as we looked at our strategy, it has really opened up the types of opportunities we have been able to pursue.

You are saying here -- I think you said $2.9 billion.

Right, 55 different companies, $2.9 billion and…

If I may that sounds like there are a number of them that are a lot more than just product add-ons, could you maybe talk about some of the larger ones what they look like?

I would really not get into that specific detail at this time. Certainly there are other opportunities, some platform businesses that would complement our existing offering with our current core customer base.

Good enough. Thank you.

All right.

Thank you, Scott.

Thank you. And our next question comes from Charlie Brady of SunTrust Robinson Humphrey. Your line is now open.

Thanks, guys. I just wanted to ask you about your commentary about your duration of the backlog being pushed out to longer than 12 months now to 18 months in some cases, does that look to you as though that has stabilized, or do you see it kind of continue to move to the right? And I guess along with that, within that backlog have you looked at -- is it potential for anything to get -- I think it pulled out because of a cancellation that's in the backlog today.

Yes, I will answer the latter question first, Charlie. Historically, when we receive a purchase order or a contract, in very, very rare occurrences do we ever see a cancellation, and I can almost count on one hand or less how many cancellations we have had over the last four or five years. So we really have not experienced any increase in cancellations, nor do we expect to receive or experience any cancellations. And this increase in the backlog duration is something that we have seen over the last, let's say, nine to 12 months. At present, we are not seeing it become any protracted.

Thank you.

Thank you. And our next question comes from Bhupender Bohra of Jefferies. Your line is now open.

Hey, good morning guys.

Good morning, Bhupender.

Hey, just a question on your outlook here, you mentioned in your release like the project execution delays and the deferral of CapEx, can you give us some color in terms of like the execution delays you have been talking about like from a geographic standpoint or from end-market standpoint?

Yes, we have seen delays in -- you know, in the tendering process we have also seen delays in execution, particularly in petrochemical we have noted that last quarter where we continue to see that there are delays in execution of some pretty large projects that are still out there. Those are, a lot of those are in the U.S. We have also seen some delays internationally in the Middle East as well as in Asia. So it's been fairly broad-based, where we have seen these delays and deferrals and a lot of them particularly we have seen the slowdown has been probably most pronounced in the petrochemical sector, it was really a lot more active and still those projects are out there, but we just see a pace of execution slow.

Okay, got it. And can you remind us how big is petrochemical for you in terms of revenue mix?

Today if you say petrochemical, it's around 17%.

Okay, that's excluding oil and gas right you are talking about like upstream and downstream.

Yes this petrochemical, if we look at downstream which you do get some crossover downstream is probably somewhere in the range of about 25% of our business, which is…

Okay got it. The next question on the backlog duration, you know which we have been talking on the call here, now you know when you see a backlog kind of stretch to you know 15 to 18 months from historical like 12 months, are you doing anything differently or you plan to do in terms of you know the near term or the short term or small projects, your sales force or you are looking at you know any difference channel wise or you know sales funnel, you are plant to increase, anything differently?

Well, we focused a lot on the power sector, it's been stronger, we have been very successful in the U.S. and we are beginning to drive opportunities in Latin America and Asia as well, so that would be an area beyond you know we focused on, the, certainly with the sales organization we are beginning to look at broader opportunities particularly for our tubing bundle lines and we have made investments there to really focus more in the eastern hemisphere, we have had a lot of success there in the western hemisphere. And there are certainly a number of other sales initiatives that we are driving to look at opportunities beyond some of maybe our core customers that we have had in the past.

Okay got it. And lastly on the cost cuts here, which are happening or which happened like in October, and will be happening for the rest of the year, are those, I mean you did say that it was in your SG&A, are you taking out any like on the sales force or has it more on the R&D side or engineers, like you know what kind of headcount reduction would be?

We have not taken any real action on the sales organization, our focus has been more in particularly around projects, as the pace has slowed, the need for capacity has been less. So those have been some areas certainly there have been other overheads, you know SG&A back office type positions where we have reduced staff just because the volume of business has been lower.

Got it, thank you.

Thanks, Bhupendar.

Thank you. And the next question comes from Brian Drab of William Blair. Your lines are open.

Good morning. Bruce, you just mentioned the tubing bundle business and this is one that we get a quick update on you know what's the size of that business in terms of revenue now and are you still seeing a double-digit growth rate in that business?

It's about $40 million business force, it has not been double-digit growth this year but our sales have been strong, it's been a bright spot, but we expect that rate of growth to slow although we are making some investments as I just noted in the eastern hemisphere with direct sales force there and we would expect to see some benefit in the current fiscal year from those efforts.

Did you see anything in the regulatory environment more recently that is either a positive or negative for that business in terms of the emission control?

Certainly, environment emissions are the largest divers for that business. So those overall have been positive. Some of the new fuel CAFÉ standards in the U.S. are going to drive another round of investment in refining just to have lower sulfur fuels for to be able to hit a certain emission standards. And so we do expect domestically to see some benefit but that's still a couple of years out and we've talked to customers about their plans on retooling some of their crew trains in and facilities to be able to meet those new standards. Certainly in Europe we've seen some significant spending particularly in Eurasia to upgrade those plants to be able to meet new fuel emission standards and as we've made investments there we're beginning to see more opportunities for our tubing bundled line there as well.

Okay and thanks. And shifting gears to construction services. This hasn't been talked, this line of business hasn't' been talked about much since the company IPOed. Can you just give us a quick summary of what percent of revenue has construction services accounted for historically? Is that higher year-to-date than it had been historically?

So the answer is yes. So construction services and there is a thing Brian, it really is within the Greenfield that we've historically reported in two types of projects in Greenfield. There's design and supply and then there is a turnkey construction. We predominantly provide turnkey construction in the U.S. and we do it on a limited basis in the Middle East but it's predominantly in the U.S. When you have turnkey construction you have a lot more labor content so it's dilutive to margins. So within Greenfield is can provide some margin headwind. So just when we talk about construction we are seeing a higher mix of construction versus a more product -- higher product mix of our traditional design and supply within Greenfield. And so we talk about that that's what we're discussing. The 28% of our business today is above historical levels by three to five points something in that range.

Okay, I had missed. What is the 28% exactly?

It's the mix of construction services.

And in labor I mean, the reason I am asking because I understand as you just pointed out, it's lower margin business and historically one of the, really one of the differences between you and your primary competitors that they have a much higher percentage I believe of labor in the overall mix. And is it kind of sustainable – do you think that this is a sustainable kind of shift that will be a longer-term headwind for margins that you're going to have percentage of total revenue that is labor higher than historically?

I do think that we are -- as with the acquisition of the IPI certainly that has had an influence in our overall margins. The mix particularly in the U.S. has been heavier on the construction side. And the construction enables us to be able to provide turnkey and position to win Greenfield. So in that respect it's positive, but it has had a negative overall impact. Really the bigger issue is the fact that we're not selling as much products through our MRO sales and that's been the greater impact to overall margins.

Okay and I could just ask one more, on the backlog we talked about the 12-month historical period going to 15 to 18. I am trying to reconcile that with the fact that your projects are in general much smaller on average; much smaller than they had been historically it seems like the lead times on some these large projects that you had four or five years ago would have had the longer lead times. The question I guess is, are you seeing the current backlog that you have collected over the past several periods just those orders getting pushed out and those particular projects getting pushed out or are you seeing orders coming in just with lot much longer lead times at your customers. I mean, are you getting orders where the customer saying, we don't expect to receive shipment for 15 months.

We're seeing actually both of those Brian, both the smaller sized projects and the middle sized projects existing backlog and new orders. It has become more protracted.

Can you talk a little bit about why -- I don't understand why the customer even comes to you 15 months ahead of time. Why don't they just keep that on the back burner and I don't understand that dynamic exactly?

I will say Brian we do have one project in backlog that is sizable. It is in excess of $10 million we expected to grow. But that project particularly the execution has been slow and so that is certainly having an impact on the overall pace of execution that we're seen in backlog.

Okay, got it. Okay. Thank you very much.

Thank you. And our next question comes from Jon Braatz of Kansas City Capital. Your line is now open.

Good morning, Bruce, Jay.

Good morning.

I can't speak for everybody but we haven't seen much cold weather here in Kansas City and I guess my question is if there is a persistently warm winter what kind of risk does that have on your revenue guidance and your expectation for the second half of year. How important is whether induced, cold weather reduce the sales?

We believe that we've factored in a warmer winter already into the revised forecast that we just provided. And it's really important that you get cold early. It can have a significant impact so that's already been factored in that we're anticipating a warmer winter and we don't see MRO sales at average levels during the balance of the fiscal year.

Okay. All right, thank you.

Thank you.

Thanks, Jon.

Thank you [Operator Instructions] And the next question comes from Joe Hanzlik of Confluence. Your line is now open.

Good morning guys. I was just curious to see as far as when you talked about the MRO sales being down on a volume basis as well as the pricing pressure on that. If you can us a little more color on pricing why this pressure on that, if it's a smaller cost of the building materials?

The reality is customers have huge impact on their revenue particularly anyone with upstream exposure their capital budgets have been slashed, there we see a lot of rest about gaining efficiencies they're taking out of the cost base. So they are squeezing every penny. What we've seen in the tenders, and we're seeing things 21 rounds in various revisions and tenders as they are looking to reduce cost through design and reduce cost through squeezing the supply base. And so that that's been the biggest impact granted it's a small percentage of spend and it's really been a strength for the business because it is mission-critical. They really left no stone unturned given the current market environment.

Okay that's helpful. And as far as -- obviously you gave us updated guidance for the rest of the fiscal year; looking out more long-term as far as the long-term sort of revenue growth rate how much do you expect the cycle to rebound as far as for you to get back to your previously stated growth rates.

If you look back at our business over the last 10 years we've had growth rates around at the 10% level. That was in a much higher oil price environment and so we anticipate given a weaker oil price environment maybe somewhere in the 50 to 60 range we would expect somewhere near around 3% organic growth. And then we would expect is that would begin to approach $80-$90 a barrel we would begin to see growth levels in that 10% range organically. Now to offset that big part of our strategy is to pursue M&A opportunities and really look at expanding our addressable market through M&A. And so we anticipate being able to execute on some M&A opportunities that over the next three to five years our goals are to essentially grow the business to $500 million in revenue and a $125 million in EBITDA. So that's M&A will be a key piece of our growth strategy going forward in a low oil price environment.

All right, thanks.

Thank you. And we do have a follow-up question from Jeff Hammond of Key Banc Capital Markets. Your line is now open.

Hey guys, just wanted to get a little more clarity on that the mid single-digit decline how you're thinking of MRO which has been kind of weak year-to-date, is that down mid single digits or down worse and then how you're thinking about Greenfield which I guess you've seen maybe some stuff push, but you know, it's been growing in the first half, trying to -- how to think if we can split those two out that would be helpful.

Yes, at this point in time it's really hard to discern what will occur during the next two months, Jeffery. As you recall, in terms of what we've seen this far this year especially in the second quarter we've seen a small uptick in Greenfield and a small downturn in MRO, and I don't think we will see great swings from those percentages in the second half of the year.

Okay. And then so if you're seeing a little slide in MRO and an uptick in Greenfield the confidence level that margins are up sequentially is that a function of the cost saves coming through or just seasonality or where might we see some rest to that -- that gross margin?

It's actually both of those, Jeffery.

Right.

The cost reductions, the cost of goods sold reductions and the fact that we are going into the prime time heating season from a historical perspective.

Okay, thanks guys.

Thank you.

Thank you and ladies and gentlemen this does conclude the question-and- answer session. I would now like to turn the call back to you President and CEO, Bruce Thames for any further remarks.

Again, I'd like to thank you all for joining us on the conference call today. Thank you for your interest in Thermon. Have a good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.