Greetings and welcome to the Thermon Group Holdings Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I 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 fiscal 2021 third quarter conference call. 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 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. I'd 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 may be required by law. With that, we will turn to the opening comments from Bruce Thames, our President and Chief Executive Officer.

Thank you, Kevin and good morning. We hope everyone listening is staying safe and in good health. And we appreciate you joining our conference call and for your continued interest in Thermon. Jay Peterson, our current CFO; and Kevin Fox, our future CFO are both with me to provide additional information on our Q3 financial performance, following my remarks. Before we begin today, I really want to take this opportunity to thank Jay for his service to Thermon since 2010. You know, Jay was instrumental in taking this company public and has really made significant contributions to this business and its shareholders since that time, and Jay leaves us in a very good position. We wish him and his wife, Laura all the best in their future endeavors. With that, I'd like to now turn to the quarter. And since our Q2 call, the Thermon team has placed the safety and security of our employees, customers, suppliers and the communities in which we live as a top priority. As a supplier to critical infrastructure, we have remained open for business and are dedicated to serving our customers around the world. I continue to be inspired by our team and would like to thank each and every Thermon team members around the globe for their commitment to our customers, our shareholders and each other through these challenging times. With the uncertainty surrounding this pandemic, our team has remained focused on the five priorities outlined in earlier calls. They are: first, the safety of our employees and customers, second, aligning cost structure to the level of incoming business, third, driving continuous improvement programs to achieve the targeted $3.9 million in savings during the fiscal year, fourth, cash management and fifth, investing for future growth. As we review the results of this quarter,…

Bruce, thank you for the kind words. Good morning. Given the currently depressed capital spending in our end markets, our focus continues to be on valued preservation. And during the quarter, we recorded a $3.8 million restructuring charge on a pre-tax basis related to the Q3 cost out actions. We expect these cost out actions, including the reduction in force in the first half of this year to reduce our SG&A to less than $79 million in the fiscal year. And we believe approximately 80% of these reductions are structural in nature, and will provide incremental operating leverage when growth returns. Also during Q3, our Canadian subsidiaries qualified for and received a $1.7 million pre-tax benefit from the Canadian Wage Subsidy program. And $1.4 million of this benefit was recorded under cost of sales, while the remainder impacted SG&A. Moving on to revenue and orders. Our revenue this past quarter totaled $79.6 million. That's down by 21% against the prior year quarter and in line with our expectations for the quarter, and revenues were up sequentially by 20%. The legacy revenue mix between MRO/UE and Greenfield was 62% and 38%, respectively and this is the same split as in fiscal year '20. And foreign exchange decreased total revenue by $200,000. And in constant currency, our revenue declined by the same 21%. Orders for the quarter totaled $71 million and relative to the prior year quarter, our orders declined by 28%. Our trailing 12-month order rate currently sits at $298 million and that is down 22% versus the equivalent metric from the prior year. Our backlog of orders ended December at $110 million, which is $8 million or 7% higher than at December 31st of 2019. And our book-to-build for the quarter was negative at 0.89 and this is the first…

Thank you, Jay. Our balance sheet remains strong, and we paid down $5.6 million in debt and generated $2.3 million in free cash flow, marking our 10th consecutive quarter of positive free cash flow. Our cash balance ended just under $50 million and our net debt to adjusted EBITDA ratio was 3.0 times at the end of the quarter. Our revolver remains undrawn, and we have over $55 million in total capacity available. As a reminder, the net debt to adjusted EBITDA covenant on the revolver debt stepped down to 3.75 times as of December 31st. As we believe this quarter represents a trough of trailing 12-months EBITDA, we feel confident in our current position versus that metric. Bruce and Jay both mentioned the South Africa disposition, and I wanted to briefly comment on that transaction. As part of our restructuring analysis, we determined Thermon's ownership was limiting the entities' potential and sold the operations in December to a local consortium led by the existing General Manager. We signed a long-term distribution agreement for Thermon Solutions and believe this new structure will better allow that entity to serve its customers and provide incremental opportunity for future growth. We booked a restructuring charge of approximately $2.2 million which includes a currency translation adjustment of $0.8 million. Quickly on CapEx, our spend for the third quarter totaled $0.6 million inclusive of both growth and maintenance capital. We now expect fiscal '21 CapEx to be approximately $6 million which includes $1.5 million for new equipment necessary to complete confirmed orders for upcoming turnarounds in Canada. We are still on track to hit our core budget number of approximately $4.5 million. Our capital allocation priority is to continue to reduce our debt through optional debt repayments. We remain confident in our current liquidity and…

Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Brian Drab with William Blair. Please state your question.

Good morning. Thanks for taking my questions. And Jay, yeah, it's been good working with you. And we'll see if Kevin can match your sense of humor going forward, we're going to miss working with you.

Hey, thank you, Brian. It's been a treat. Thank you.

So back to business here. So you know, the gross margin, I'm wondering if you could give a little more color just to help model in the near-term. Do you expect that the, and sorry, if I missed this, but that gross margin should be up sequentially in the fourth quarter or not? And then can you talk a little bit more about how it should trend from there? You know, especially I guess, given the cost cutting, you said that there should be some upside to gross margin as we get into fiscal '22? But any more specific color there would be helpful.

Yeah, Brian, this is Kevin. I don't think we're going to comment on gross margins going forward. But what I'd direct you and others back to is, if we think about this sequence of the margin evolution through the year, we certainly expected and even have delivered on that improvement. If you think about the mix, that's always the biggest factor when we look at gross margins. But really, it's focused on the continuous improvement efforts, we targeted $3.9 million in savings, we've achieved, I believe $3.8 million of that, will be achieved in the current fiscal year. And certainly with the cost reductions we've made structurally in certain regions, we do expect those gross margin improvements to be sustainable. The questions are going to be around the relative mix over time. So overall, I think the execution leads us to believe we're in a good spot, but not going to be providing any comments on the specifics going forward.

Okay, excellent. All right. You know what, one thing that I'm curious about, and this might you know not be the question you're expecting, but the tubing bundles business and, you know, if I'm just, you know, if I look back in my notes over the years with Thermon, this was, you know, 10% to 15% of revenue, you know, really benefiting from increased focus on pollution control, you know, these like the heat, right, the heating systems that are keeping the analyzers that are detecting you know pollution of the smokestacks, you know, keep - keeping those operational. I'm wondering is that something, you know, a business that could perform better potentially under the new administration? And, you know, how sizeable is that and what kind of growth are you seeing in that business today and going forward?

Yeah, Brian this is Bruce. Yeah, that's exactly what I was referencing in my comments around end markets, tubing bundles.

Okay -

Are one of the solution sets that are relevant to, you know, that benefit from stricter environmental regulations. You know, that business, roughly $40 million, you know, kind of in a more of a normal year, but certainly opportunities to grow. This year will be significantly off of that just due to a lot of the capital deferrals and some of the maintenance deferrals and things like that, but still a nice segment of our business with a very healthy margin profile.

Okay. And then just in terms of the large projects that are out there. I know some things are being pushed out. But any really, you know, important projects on the horizon that you could talk about that you're bidding on or you know, might be coming up for bid that could, you know, help revenue materially?

For us on the project, you know, as we look at our pipeline going forward, we have seen an increase in overall quote activity, I'll tell you, the type of projects, you know, would not be classified in, you know, as we might have said - we might have characterized in the past as mega projects, things of $10 million or greater. We see the project - the types of projects we're quoting today are more, you know, $1 million to $5 million is more common. So I don't see any big mega projects in the next 12 months. But we are seeing some activity in quotations in kind of more of those smaller to midsized projects. And so we do expect the capital environment to be challenged, particularly in the fourth quarter and into next year. But we do believe that we start - should start seeing some of those projects being lit. And as you know, we're fairly late cycle. So I would expect to see some backlog growth in the coming fiscal year. And then see that converted to revenue, maybe late in the fourth quarter, but probably more likely in fiscal '23 and beyond.

Okay, thanks very much. I might have a couple more questions, but I'll get back in line. Thank you.

No problem. Thank you.

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

Yeah, well I was polite and I guess I'm back. So -

The floor is yours.

I'm gathering that. Hey, I'm just curious, you know, the CCI, you know, business has historically been, you know, pretty cyclical I guess and exposed to industrial trends and coming out of the pandemic. I'm just wondering, you know, this is a material part of your business that I imagine is rebound, it has the potential to rebound quite nicely and have some benefit from operating leverage as well. Is that fair? And can you just talk a little bit about, you know, what you're seeing specifically for CCI?

Yeah. And absolutely, Brian, this business, I think a couple of things to note, it turns down more quickly. So it's earlier cycle. And so we saw that business actually began to slow really in Q3 of fiscal year '20 and then really obviously declined with the pandemic. But historically, what we see is that, it recovers more quickly. It also gives us a better ability to provide a solution set to some of these other end markets that we've touched in the past, but we've never really focused on you know, and I would say, commercial, food and beverage, the transportation sector that I noted, there are several others that with this now, this complete solution set that, you know, those products, those environmental and process heating products really give us the ability to have more critical mass in some of these end markets and we see that as opportunities for growth going forward. You know, as to your question around leverage, yeah, absolutely that is a very high margin business and with some of the cost out actions, it's really delivering very attractive overall gross margins and EBITDA margins for the business. And so we see that as being part of the operating leverage story going forward.

And, Brian, I would just add as we look forward to the future, we've talked about globalizing that business in the past, having those resources now sitting in the eastern hemisphere, having those dialogues with customers, the process heating conversations happened earlier than generally the electric heat tracing as well. So as Bruce talked about that solution, that's an opportunity for us to have a different, more wholesome, but also an earlier dialogue with our customers. So it does give us insight into the heat tracing upcoming business as well. And we still see plenty of opportunity to globalize that business. And as demand shifts to the eastern hemisphere, we feel like we're pretty well positioned to take advantage of that in the coming years.

Got it. Okay, all right. Well thanks very much for answering my question.

Thank you.

Thanks, Brian.

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

Good morning, everyone and, Jay, I want to wish you the best of luck too in your retirement. It's been great working with you and nothing but the best.

Hey, Jon, thank you. I really enjoyed working with you over the last 10 plus years.

Well, thank you very much. Bruce, when you look at your, let's say, your core customers, your legacy customers, legacy clients, when you chat with them about or when it's time to, when will it be time to unleash their - unleash your capital spending programs is, what's really - what might be the tipping point of those clients when they begin to spend again? Is there some type of macro factor that they're looking at that might call them to open up their wallets?

Jon, I've tried to communicate this in the last couple of calls. And the reality is, when we look at our traditional end markets and end customers, you know, they're not all seeing the same types of, really, the impact of the pandemic, and certainly the energy downturn is not impacting them all the same. So when we look at integrated oil companies, you know, I think what we've seen is just the stabilization in commodity pricing has certainly helped, but there's still a number of them that that are still, you know, running net operating losses. And so I think some stability in the price of oil and some increase there, you know, I see, you know, high $50, $60 a barrel as being kind of an inflection point for spending. Clearly, many of them are significantly reducing costs and overhead and are positioning themselves for a different environment going forward, I would suspect that will lower that overall price level going forward. At what point that will be, I'm not certain. When we look at other end markets, you know, and the chemicals, petrochemicals, we actually see a very different situation. You know, with the pandemic, certainly the impact to demand has been less. But - and we see a really pretty healthy growth over the next 5 years to 10 years in many of those end markets. We've also seen really - resin prices being really more buoyant. And we believe that that will translate into more spending when we see some of the case counts come down a little more stabilization and just the global infection rates associated with COVID-19. So I think that's another example of the end markets' power. Power markets, we expect to have strong growth over the next 20 years, we've actually benefited from quite a lot of that power transition from coal to natural gas. We're going to benefit less from the move to renewables, but the reality is, is natural gas as a bridge fuel, a lot of power plants are going to be built in Asia and other geographies. And so we think that's actually a pretty positive momentum even now and going forward. You know, some of that demand growth is industrial. So certainly as industry recovers, that's going to drive more need for increased power supply and should - we should see these capital projects move ahead. But those are kind of our three key end markets.

Okay. Thank you. Kevin, do you or Jay, do you expect the Canadian - Wage Subsidy to continue into 2022?

Jon, fiscal '22 or calendar '22?

Fiscal 2022.

We'd have to double check. But when we go through our planning with items like that, we generally don't consider that something like ongoing obviously, it's a government program. And you know, I think we all hope it will have an end date, I can get back to you on when exactly it's supposed to. But we certainly don't count on those types of programs that continue. As a reminder, we adjust them out of the results as well.

Yeah, yeah. Do you expect it - do you expect some benefit in the fourth quarter here?

I believe we do expect some results in the fourth quarter. But I don't want to quantify that, we can probably look at past four quarters is prevalent for what it might look like though.

Okay. And then one final question, Kevin, your stock compensation expense was materially less than that what it has been. Is - it will remain at that level or something unusual in this quarter?

There was a one-timer related to some prior year PSUs that were adjusted out. So I think there's a special event in the quarter, the quantum of that, I can get back to you on but that was the driver for the difference between prior quarters.

Okay, all right. Thank you very much.

Hey, Jon, if memory serves, it was in the 600k range or so.

Okay.

Certain prior grants that will not be in the money, if you will.

Okay, all right. Thank you, Jay.

Thank you, Jon. Appreciate it.

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

Thank you, Diego. I'd like to thank everyone today for joining our call. Thank you for your interest in Thermon and enjoy the rest of your day.

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