Greetings and welcome to the Thermon Group Holdings Fourth Quarter 2022 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] Please note that this conference is being recorded. I will now turn the conference over to our host Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Thank you, Diego. Good morning and thank you for joining today’s fiscal 2022 full year conference call. Earlier this morning, we issued an earnings press release which has been filed with the SEC on Form 8-K and it’s also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website on their News and Events, IR calendar earnings conference call Q4 2022. 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 would like to remind you that during this call, we might make certain forward-looking statements regarding our company. Please refer to our annual report and most recently, 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 might 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. Now, I would like to introduce Bruce Thames, our President and Chief Executive Officer for his opening remarks.

Thank you, Ivonne. Thank you all for joining our call today. We appreciate your interest and investment in Thermon. Following my remarks, Kevin Fox, our CFO will provide more detail on the financial results for our fourth quarter of fiscal year ‘22 and full year. I’d like to begin by turning to Slide 3 to reflect on our full year fiscal ‘22 results. Fiscal year ‘22 marked a year of recovering top line with solid leverage on the bottom line underpinned by strong execution by our team. Top line revenues grew 29% in the year, while adjusted EBITDA growth of 61% expanded at more than twice the rate. Free cash flow for the year was $24.2 million, which represented 120% of net income. More importantly, we advanced our long-term strategic initiatives of diversified end markets, developing economies and technology enabled maintenance. During the year, we are able to achieve 44% growth in diversified end markets to achieve 60% of revenues in non-oil and gas verticals. We also saw continued to – solid continuation of market uptake of the new Genesis Network with 6 system purchase orders to-date, as customers seek to streamline and more effectively manage their assets. In addition, we launched numerous new products and software, ranging from a market leading 3D design software to products for commercial, rail and transit and environmental heating applications. These new products were instrumental in driving the growth seen in the diversified end markets during the year. I also want to thank our teams around the globe for their commitment to safety. Fiscal year ‘22 marked the second consecutive year of zero lost time incidents and we were recently awarded best-in-class and recognized as a mentor company for our commitment to safety out of over 1,500 contractors. Thermon also advanced our commitment to…

Thank you, Bruce. Turning now to Page 7, revenue in the fourth quarter was $102.6 million, up 40% versus prior year. The large one-time contracts contributed $12 million in the quarter, so excluding that project, Thermon revenues were up 24% versus prior year. Drivers this quarter remained consistent with previous periods where we are seeing strong growth in the Western Hemisphere, with APAC slowly recovering from lockdowns and EMEA showing a year-over-year decline due to some larger projects in the prior year and partially due to the impact of the war in Ukraine and our decision to suspend new orders and investments in our Russian operations. Fiscal 2022 revenues totaled $355.7 million growth of 29% versus prior year. Excluding the one-time contract of $24 million, year-over-year growth was still an impressive 20%. The remaining work at year end has already been completed in our first quarter. Point-in-time revenues grew 34% in the quarter and 33% in the full fiscal year, which underscores the strength in maintenance spending across our global installed base. As a reminder, point-in-time revenues are aligned with our product or material sales while overtime revenues which were up 51% in the quarter and 23% year-to-date both including the one-time contract are representative of project work where we have engineering and installation services. Point-in-time revenues are generally reflective of material sales. These revenues traditionally carry higher margins than the overtime revenues making the faster growth in that revenue stream a key driver of profitability today and in the future. Over time, our project revenues represented 40% of total revenue this quarter versus point-in-time or material revenues of 60%. Excluding the large one-time contract, this split was 31:69 versus 36:64 in the previous year. This will be the final quarter of disclosing the MRO/UE versus Greenfield construct. Historical information…

Thank you, Kevin. I would like to now direct your attention to Slide 11 on our strategic initiatives. As highlighted earlier, we made significant advancements in our strategic initiatives in fiscal year ‘22. Looking forward to fiscal year ‘23, there are number of areas where we are investing to position the company for long-term success. First, we are expanding our manufacturing capabilities in the Eastern Hemisphere to meet lead time requirements and price points to improve our ability to profitably grow our business in developing economies. We are also adding key business development resources in these geographies to expand both our direct and channel presence to better serve. Second, our efforts on diversification have really begun to gain traction with approximately 60% of our end markets now outside of the oil and gas sector. In fiscal year ‘23, we continue to invest R&D dollars for new product development in rail and transit, commercial and electrification in light industrial applications. We are also advancing our marketing efforts, growing direct sales, expanding our channels, and adding specialized business development resources in these areas to build on the momentum we have. Finally, Thermon is very well positioned to enable the energy transition with solutions that address a wide range of applications from biofuels to renewable energy. Our control and communication platform which is central to our digital transformation around the technology enabled maintenance initiative continues to lead in our space. We are making continued investments in R&D to expand software capabilities for operations and business intelligence, combined with new product launches to complement the current hardware platform. We are encouraged by the very positive response by the market with six systems sold to-date, and goals of achieving 3x to 5x the system adoption in fiscal year ‘23, fueled by growing quotation log. It’s…

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

Good morning. This is Tyler [indiscernible] on for Brian, could you discuss in more detail how a cyclical shift in gold demand could affect the recovery in Thermon’s end markets for large projects? And are they continuing COVID restrictions in the East still pushing out pent-up demand even more?

Yes. So, I think kind of the latter part of your question. We do see that COVID restrictions, particularly in China have delayed recovery there. India, we actually see in the very early stages. In South Korea, we are seeing some very positive signs, Japan – but we are seeing China lagging. And the first part of your question, if you don’t mind repeating.

Yes. I was just wondering if there is a slowdown in global demand. I am just wondering, like, how do you see that affecting your end markets for large projects? But do you see it as being more defensive, or do you think it would have a large impact? I know you mentioned the Europe recession, but I am just wondering on a more global scale, if activity slows down, how it would affect your large projects?

Yes. So, well, first of all, I mean other than this one large one-time project we have spoken to all year, which was really labor didn’t have any materials. We – our business has been heavily weighted towards kind of the maintenance and really pent-up demand and maintenance on the installed base. So, we really haven’t seen a big return in CapEx since kind of the recovery this past year from COVID. So, I don’t really – all I would see is that maybe the CapEx would move out further. As we look at our end markets and our end market mix is changing. I think it’s important to note like in certain areas power, that installed base would expect that to remain fairly strong, utilities, things like that. If we think about food and beverage, some of the wins we have had recently were in areas like food oils, candies, different types of food processing, bulk food processing. And so, there is still a demand. And I would – and then also in the commercial space, where we have done a lot whether that be for new buildings for fire sector, fire sprinkler safety systems, whether that be for hot water heaters, boilers, things of that nature, we are seeing some – really some changes that are driving the transition from natural gas or other means of firing boilers to electric and we think those will kind of continue. So, I think in some of the other diverse end markets where we focused, they would be more resilient during a downturn. As we look at oil and gas, we really only saw about 15% growth in oil and gas this year. And so we haven’t really seen a strong rebound. What we have seen, it was stronger pricing. We have seen begin – really some spin around maintenance. But we really have seen a shift in kind of capital deployment. As we have seen a lot of that has been more focused on return of capital to shareholders rather than investing CapEx dollars. And so we are still kind of awaiting that expenditure. So, some of that then could move to the right, depending on seeing what might happen.

And Tyler, this is Kevin here, maybe just to build on that for a second, if we think about our orders and our backlog. TTM orders were about $366 million last year. I think once you exclude the large contract that’s supportive of a strong growth even over the next 12 months as well. And, again, if we think about where the business is performing today, excluding the contract, 69% of the revenues were on the materials or the point-in-time revenues, as well. So, I think we got a few of those facts that are kind of stacking up, they give us confidence in the business over the next 12 months even in an uncertain environment given raising rates in the U.S. and etcetera.

Okay. Thank you for that. And just following up, so do you see point-in-time sales having an even larger allocation of revenue than over time sales in fiscal year ‘23?

I think it would be consistent with the historical average. But certainly, we think about the relative growth rate, it would probably be biased to maybe be in a touch higher. But I think that historical average is a fair point to start.

Okay, appreciate the color on that. And just last for me for more modeling purposes, on the last call, you mentioned a target run rate of SG&A of $80 million excluding depreciation. Just wondering if global growth does slowdown, do you still expect that run rate to stay around $80 million operating expenses, or is there some headwinds to top line? Do you expect operating expenses that come down a little bit?

Yes. Tyler, appreciate you asking the question. I think the $80 million was a target around fiscal ‘22, not anything going forward. Clearly, for a business that’s growing 30% of revenue, you would expect incremental SG&A in the business just on a normal course basis. We ended the year with SG&A at about 23% of revenue. I think that’s the right type of mark on a baseline basis. But you heard in a lot of Bruce’s comments, we are investing in this business to grow. Our strategic initiatives require us to be building out capabilities in the Eastern Hemisphere, to be bringing in resources from a commercial standpoint to help drive growth in these new markets. And we certainly have some investments that we are going to be making in our operations that have a payback period, but do require some of those upfront investments as well. So, I think as we look at SG&A, $80 million was not a run rate, that’s an FY ‘22 number. We came in just a touch higher than that, because of investments we are making in these strategic initiatives. So, we very much see the cost line, as focused on value added profitable growth, trying to generate those incremental returns on capital. I think if your question is, okay, if the markets going to roll over here, we have got a very tight list of what those investments are. And if the external environment changes, we would certainly recalibrate those expectations. But, again, given what we are seeing in our backlog, given what we are seeing in our customer spending, the quotation log that Bruce quoted, I think we feel pretty good about where the business is today and obviously would be seeing SG&A at certainly higher than we did in fiscal ‘20 [ph].

Okay. Thank you. That’s all for me. I will pass it along.

Thanks Tyler.

[Operator Instructions] Our next question comes from Jon Braatz with Kansas City Capital. Please state your question.

Good morning Bruce, Kevin.

Good morning, Jon.

Let’s talk a little bit about – on the gross margin front as we go forward. Obviously, a lot of moving parts, you got China issues, you have got maybe the Russian business influencing March, the absence of the Russian division, business influencing margins. And the intention or the aim is to get the margins back up to sort of the mid-40% area. But I get a sense, it’s going to be a little bit of a struggle here with the cost pressures and some of the other things going on. How do you see the margin, the gross margins in 2022…?

Yes. Jon, good question. Yes. Obviously, a lot of noise over the past five quarters here. We hope we will be on that. There will be a little bit of this new contract in the first quarter of fiscal ‘23 – excuse me, the large contract in fiscal ‘23. But that’s behind us as of this call. If we think about looking forward, certainly the fourth quarter when you looked on the core, if you will, 45.8%, I think that’s the highest it’s been in 4 years. I think it’s indicative of things to come, obviously, that’s a little bit of a higher volume, quarter versus normal. But if we think about the cadence of those gross margin increases, 200 basis points to 300 basis points on the EBITDA line, I think that probably translates to gross margin pretty fairly. We might not be back all the way to 45% in the next year, given some of the challenges that we know everyone is facing around supply chains. But we certainly expect sequential improvement on the base on a year-over-year basis if that makes sense.

Okay. So, really, if you look at the margin, the operating margin, if you want to call it pressure, it’s really the investments that you are making on the SG&A line, and that’s accelerating. And maybe, again, I hate to use word pressuring, but limiting the margin improvements, it’s these investments that you are making, that maybe that were, that you weren’t making a couple of years ago, or maybe last year, am I thinking of that, right?

You are – Jon, I noted in my comments about $6 million of incremental investments, that’s in sales resources, and R&D. And all of those investments really sit in SG&A expenses. And so that’s a significant piece of that kind of year-over-year. And certainly, as Kevin said that, we would moderate the pace of those investments, if we see, if and when we see the growth picture change. I can tell you right now, the signals we are getting in our business haven’t shifted, and we are really still seeing strong demand overall. And but we are watching it very closely, we are keeping our finger on the pulse of a lot of leading indicators. And while there are some challenges looming, the really only impact we have seen has been more due to Russia war and Ukraine, and the impact on Europe. And in some of the issues in China, I think they haven’t necessarily gotten any worse. But certainly we haven’t seen the recovery begin there yet. So, those would be the two kind of things that we are seeing and experiencing. Beyond that, we are seeing a pretty robust demand environment across a wide range of industrial verticals.

Jon, I would just add to that, if we think longer term, the goal is to get this business north of $550 million of revenue. Clearly, that’s going to require investments organically and organically, etcetera. We think we are in a position where we can make those investments now to have a payoff certainly in the future. We don’t think it’s 5 years, we have to wait. But in order to drive that growth, to drive that change in the end markets, these are absolute investments that we feel comfortable making at this time.

Okay. Specifically, when you look at your end markets, specifically, the oil and gas end market, is there a possibility that you get a pleasant surprise in that and that given the way energy – given level of energy prices that you might see that end market a little bit stronger than maybe what you might be anticipating and maybe some additional CapEx spending coming from that sector?

Yes, I think there could be upside there, Jon, from what we are currently forecasting. I think some of the quote wall is indicative of the potential upside there. We only saw a bounce of about 15% last year. Overall, those end markets were down 30%, 35% kind of post-COVID. So, they have not by any means fully recovered. And we certainly have not seen the CapEx spending that we would typically see at commodity prices at these levels. So, I think that is one of the potential upsides that we might see in the coming fiscal year.

And Jon, it might not be on the project side, either. I think as we look at maintenance and utilization, I think our bias would be, that’s probably where the dollars are going to get spend, just given the capital allocation priorities of those customers that have been articulated. So, it might not necessarily be on the long-term project of lower margin types of sales that we see.

Alright. Thank you.

Thank you. There are no further questions at this time. I will now turn the floor back to Bruce Thames for closing remarks.

Again, thank you all for joining us. 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.