Greetings, and welcome to the Thermon Earnings Conference Call for Third Quarter Fiscal Year 2023. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you, Ivonne, you may begin.

Thank you, John. Good morning, and thank you for joining today's fiscal 2023 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. Additionally, the slides for this conference call can be found in our IR website under News and Events IR calendar Earnings Conference Call Q3 2023. 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 might 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 might differ materially from those contemplated by these forward-look statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Now I would like to introduce you to Bruce Thames, our President and Chief Executive Officer, for the - for his opening remarks.

Thank you, Ivonne, and good morning, everyone, and thank you for joining us today. I wanted to begin by setting the stage with a quick overview of Thermon. For those of you who might be new to the story. As a 68-year-old company, we've been tested and proven resilient across many economic cycles. We're a world leader in providing safe, reliable and innovative mission-critical industrial process heating solutions to customers in 85 countries from facilities on four continents. Our over 1,300 employees have an industry leading safety record, and are dedicated to creating value for our customers and by executing our long-term strategic plan, and I will provide a few examples of our strategy and action during this morning's update. I'd like to thank all of our employees for contributing to our very strong performance this quarter and for your ongoing commitment to Thermon [ph] I would like to note that in the lower left of the page where you see revenue by type for clarity and simplicity, beginning this quarter, we've changed how we are showing this data. We previously presented this data as point in time versus over time. Kevin Fox, our CFO, will provide more detail on this revised sort of our sales and the rationale for doing so later in the presentation. On slide four, you can see our strategic. In order to create value for our shareholders over the long term is on three key areas. First, profitably [ph] in our installed base, second, diversification and decarbonization and third, capital allocation [Technical Difficulty] but from a very large global installed base, which provides significant opportunity to capture recurring revenue while driving growth across our traditional end market verticals. We're driving additional growth through diversification into attractive adjacencies, such as commercial, rail and transit, food and…

Thanks, Bruce. Before we get into the detailed results, I would like to highlight that we have announced our decision to withdraw from our operations in Russia. We have a dedicated slide later in the deck to walk through the impact to our financial performance, and we will present the financials in the upcoming slides on an adjusted basis. Additional information will be available in our 10-Q filed later today. Next, I would like to describe the change in revenue reporting that Bruce touched on briefly at the beginning of the call. As you recall, we previously reported revenue broken into two categories, point-in-time and over time. We found that these categories could be even more valuable to the investment community. And in our view, it is important to understand whether our sales are derived from our customers CapEx budgets or instead from ongoing maintenance and repair spending which is typically operating expense dollars. The value of our installed base is more closely tied to spending in less volatile operating budgets that sustain and optimize customer production whereas customer capital spending is what builds that installed base over time, but can be more volatile as macroeconomic conditions cycle. So for this reason, we will now show over time large projects defined as over time revenues greater than $500,000, which we believe are typically funded through CapEx budgets. A second category will now be presented as over time small projects which are over time revenues less than $500,000 and we believe are typically funded through OpEx budgets. There is no change to point-in-time revenue reporting. For a point of reference, the average size of an over time order capturing both the small and large categories in our fiscal 2023 year-to-date is approximately $70,000, well below the $500,000 threshold we've established. We…

All right. Thank you, Kevin. I'd like to turn now to slide 18 and our long-term revenue goals. Our goals for fiscal 2026 remain unchanged, and we're very pleased with our performance through the first 2 years of our 5 year plan is on the upper range of our initial expectations. The sheer size and scale of the decarbonization opportunity that we believe will be a secular tailwind for next two or more decades creates real opportunities for long-term growth. The progress on diversification is also encouraging with meaningful growth across a number of diverse end markets. And finally, our advancements in new product development and the digital platform give us a competitive advantage in the marketplace. The momentum across all three of these strategic initiatives underpinned by solid installed base of customers in our traditional end markets, gives us confidence that our fiscal year '26 financial goals are well within reach. We continue to place a high priority on diversifying our end market exposure, specifically targeting industrial markets outside of the oil and gas sector to represent 65% to 70% of revenues by the end of fiscal year '26. Last but not least, our operational excellence, combined with leverage on our fixed cost will yield EBITDA margins in the low to mid-20% range over that same period. Turning now to slide 19 and our updated guidance for the fiscal year 2023. We are pleased with Thermon's strong performance through the third quarter of this fiscal year. In spite of the number of areas of uncertainty in the macro environment, the positive momentum we are seeing in quotations, bookings and backlog give us confidence to raise our fiscal year '23 full year revenue and adjusted EPS guidance. We are raising fiscal '23 revenue to a range of $429 million to…

Hi, good morning. Thanks for taking my question.

Good morning, Brian.

Could you go back to slide 17, just to spend another minute on this in clarifying because there wasn't -- you didn't talk about Russia, you didn't talk about Russian this way in the second quarter. I'm just wondering if you can just clarify what the adjusted numbers are here. So is the - and how would it compare with the third quarter, for example, a gross profit margin? And what's apples-to-apples with - between third quarter and second quarter? So are we looking at the 41.3 and then in Russia, was a 400 basis point headwind in the third quarter. Is that what you're saying?

Yes, Brian, this is Kevin. So I think when we look at the second quarter on a gross margin basis, you were at about 45.7, I believe. And so on an adjusted basis, third quarter was 45.3 on a like-for-like. So margin sequentially was slightly down once you back out the impact to COGS that we had to take related to the Russia exit. I think that's the question you're asking, but just numbers...

Yes. No, I'm just a little confused by it, as you can tell. So the 41 – the 45.3 is comparable to that adjusted number. And did you make an adjustment for low-margin business in Russia, I guess, in the second quarter as well when you talked about adjusted gross margin?

No. There's no impact in our fiscal '23 second quarter given the Russia exit. This was approved by the Board this week. So there was no impact to our second quarter fiscal results.

So - but you did business in Russia in the second quarter. So I'm just wondering, if you take Russia out of the picture completely for all of – you know, any quarter in fiscal '23, how was gross margin in this most recent quarter relative to the second quarter? Was it about consistent sequentially? Or did it go down?

Yes. I think the question you're asking is if we would back out Russia from the second quarter, what would the results look like?

Yes.

Yes. We can get you that walk off line in - you would see given the business on an EBITDA basis, Brian, has been slightly negative year-to-date. So if you would take Russia out of any of the previous quarters in the fiscal year, you would see a slight improvement to profitability, I believe on both the gross and EBITDA lines. I think that - I think that's the question.

Yes, I'm just trying to get a sense for what - I think everyone would be interested what - a real sense for what direction gross margin is going, because this looks obviously like an outstanding quarter. There's so many - every headline number is positive, the stocks up 2%. I'm just curious, I'm trying to - I'm just curious why the stock will have 2%? I'm thinking maybe - the only issue I see is that it looks like gross margin, maybe some of the business that you had in the third quarter was a lower margin business than you had in the second quarter? And then how do we think about the trajectory of gross margin from here? That's all. I'm just trying to get a sense for second quarter gross margin in the third quarter and where we're going from here.

Yes. Brian, I think that's fair. I think we can look at gross profit or EBITDA, as you mentioned, any of those metrics are increasing pretty substantially on a year-over-year basis. If you want to look at things sequentially Q1, Q2, Q3, I think we certainly feel like the business is getting better. That mix in the business is still very much oriented towards those smaller projects and the point in time or product or materials revenues. That certainly has a positive impact as well. Pricing 260 basis points in the quarter. So difficult for us to see with how the business is performing. A lot of positive momentum in the business today really from a gross margin basis and a lot of that's falling through down to EBITDA and the profitability line as well. So I certainly won't speak to what the investment communities do. But internally, I think we feel very good about where the business is positioned, not this today, but for the future as well, raising the revenue and profit guidance I think for the third quarter in a row here, I can't imagine that would be perceived negatively by the Street.

Yes. Got it. Okay. And then can you - I don't know if you can give any more detail on the wins that you've had in renewables. There's obviously a lot of momentum there. And two specific questions. So what types of projects, if you can give any sort of breakdown or granularity, what types of projects are in that $20 million in orders? And secondly, what can you tell us about the margins for those renewables projects, given that's going to be a growing part of the business?

Yes, Brian, this is Bruce. So the project wins, I gave a couple of examples here of some carbon capture and storage projects. Those kind of size of those were - the project in the Midwest was about a $900,000 order in process heaters with about another $900,000 opportunity this quarter and about a $3 million opportunity for heat tracing. The project was a pilot project in a Canadian refinery for CO2 capture. It was a little smaller because it was a pilot project, but it was a few hundred thousand dollars. As we kind of look at the types of opportunities, we're a leader in biofuels and there's quite a bit of that bookings in our backlog for biofuel plants, particularly, there's a lot of growth we're seeing in biodiesel. For example, there is also some hydrogen projects. Most of those are where there's a mix of blue and green hydrogen and a lot of the ones, particularly for green hydrogen, are pilot projects, certainly, as they prove out those technologies begin to scale those, the order size will go up pretty dramatically. The other area we've seen some wins is in the nuclear space. We've had some nice wins with some nuclear refurbishments in Canada. We're one of only six companies in our space globally that have the instant. So we see that as a significant opportunity. And again, those are just illustrative. As far as the margin profile, they're consistent with kind of what we've seen with our historical business in this space. So certainly, we think it's supportive of our current margin profile going forward. And certainly, we will have some opportunities on some of our operational excellence programs and continuous improvement to drive margin expansion over time.

Okay. Thanks. And then last one, and this is, I guess, maybe not something you're prepared to comment on today. But I mean, you're only - you're less than 30 days away from the beginning of fiscal '24, have you gone through the budgeting process and forecasting process, give us any sense for what you're expecting in terms of growth, revenue growth in the next year? Even like a range? Yes.

Yes. So we're in the middle of that budgeting process right now. It's - we are seeing growth in the coming year. We're not at a point yet where we're prepared to set a range for that. We typically do that as normal course during our May kind of year-end earnings call. And certainly, we'll be prepared to share that with you at that time. However, we are seeing - you can see the momentum in bookings, I mean, 40% growth year-over-year, positive book-to-bill, we are seeing momentum in the business, and we foresee continued growth in our fiscal year '24.

Okay. Thanks a lot, Bruce and Kevin

Thanks, Brian.

Thank you. [Operator Instructions] The next question comes from Jon Braatz with Kansas City Capital. Please proceed with your question.

Good morning, Bruce, Kevin.

Morning, Jon.

Along the sort of lines of Brian's question. In your press release, you talked about - and you're benefiting this year from deferred maintenance spending. And I guess, by definition, it's deferred. So when - after they make those expenditures this year, is there a fall through next year? Or does that sort of become sort of a headwind when you look at maybe 2024 versus 2023. What - how important has deferred maintenance spending been for you this year? And how do you think about that next year?

Yes. So Jon, great question. I mean we certainly saw a really a significant contraction in maintenance spending during COVID. So we've seen that really begin to rebound. And we've seen that during the course of this year. Now as we look at this, I mean, we're seeing a lot of small projects and we believe that there's been a significant underinvestment in infrastructure over the last 7 or 8 years. And based upon that and kind of the change in the capital allocation strategy going forward, what we're seeing is reinvestment in existing assets rather than really building a new greenfield. So we don't expect to see a big surge of CapEx spending that maybe we would have seen in prior economic cycles. However, if you look at our global footprint and the installed base, it's actually very favorable for our business. One, is we're entitled to the recurring revenues where we have the installed base. Second, they tend to be higher margin profile and what we believe is these levels of spending going forward are more sustainable than what we may have seen in previous cycles where you had some very large peaks in CapEx spending. And I would kind of go back to our fiscal year '19 and fiscal year 2015. So going forward, we actually see a lot of the maintenance spending being stable to slightly increasing in the coming fiscal year.

Okay. Thank you. Kevin, two questions. Maybe you mentioned this, is the Russian charge all non-cash? And secondly, supply chain challenges have sort of a headwind, I think you mentioned 180 basis points. You were hearing a little bit of improvement on the supply chain challenges that we've seen over the past year. As you look into next year, do you see that begin to ease and the improvement on the - improvement on the gross margin front because of that?

Yes, Jon, maybe I'll take them in order. On Russia, there was about $3 million of cash on the balance sheet that we just reclassified. The rest of it from a P&L, it's a non-cash entry. We will see some additional impact to GAAP EPS once the exit is complete. Again, that was about $0.11 to $0.20 in GAAP, but a lot of technical accounting from the team there, but essentially, it's all a non-cash entry in Q3. With respect to supply chain, I think you're right. I think we see things getting better sequentially. I don't think we're prepared to say it's fixed and everything is back like what it was in 2019. But I think us like many others have built those buffers and the inventory at this point. And I think when we look at our inventory turns and that sequential improvement, I think we expect that trend line continue to go upwards in the quarters ahead. So yes, I don't think I'm quite ready to say we're out of the blue. There are certainly pockets that are still challenging, but it's much better today than where it was six months ago. And I think we expect those trends to continue going forward.

Okay. Thank you, Kevin.

Welcome.

And at this time, we have reached the end of the question-and-answer session. And I would like to turn the floor back over to Bruce Thames for any closing comments.

John, thank you, and thank you all for joining here today. I appreciate your interest in Thermon. Enjoy the rest of your day.

Thank you, everyone. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.