Greetings and welcome to the Thermon First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Thank you, Darren. Good morning and thank you for joining today's fiscal 2024 first 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 on our IR website under News and Events, IR Calendar, Earnings Conference Call Q1 2024. 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 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 might differ materially from those contemplated by these forward-looking 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 Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Thank you, Ivonne. Good morning, everyone, and thank you for joining us today. I'll start today with a quick overview of Thermon. 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 4 continents. Our almost 1,400 employees have an industry-leading safety record and are dedicated to creating value for our customers and shareholders by executing our strategic long-term plan, which I'll cover in more detail on the next slide. In order to create long-term value for our shareholders, we're guided by our 3 strategic pillars: first, profitably growing our installed base; second, decarbonization, digitization, and diversification to drive additional growth; and third, disciplined capital allocation. As the global leader at the forefront of applying innovative process heating technology to solve critical thermal engineering problems for our customers, we benefit from a very large installed base. This enables us to capture recurring revenues and drive growth across our traditional end market verticals, while our culture of continuous improvement supports margin expansion. In addition to capturing share across our traditional end markets, we're also pursuing 3 new areas to drive additional growth around decarbonization, digitization, and diversification. We're expanding our sales and marketing efforts in these areas that utilize our core heating technologies to diversify our end markets with a goal of having approximately 65% to 70% of our revenues come from end markets outside of oil and gas by the end of fiscal 2026. Our digitization strategy is progressing well as we continue to expand our range of digital solutions that help our customers to optimize monitoring and maintenance across their facilities. We're also enabling the energy transition as we supply our customers with products and solutions that help them achieve their sustainability goals around electrification and…

Thank you, Bruce, and good morning to all. Turning to our Q1 fiscal 2024 financial performance on Slide 11. Performance this quarter was once again outstanding as the global Thermon team continues to successfully execute our plan. Customer demand remained strong in the quarter. We reached $120 million in incoming orders, up 16% year over year. Book to bill was a very robust 1.12x. Spending remains strong across the U.S. and Latin America, and we continue to see signs of a rebound in Asia Pacific. In terms of our end market orders, we saw the most growth in the power sector during the quarter with customer demands expanding across the renewables, food and beverage, and commercial end markets. Trailing 12-month orders reached $475 million, which we believe supports our raised full year revenue guidance. Revenue in the first quarter was $107 million, a year-over-year increase of 12%, primarily driven by midstream and downstream oil activity across the U.S. and Latin America. The renewables, food and beverage, and power end markets also contributed to revenue growth in the quarter. Revenue from large projects was $27 million, up 21% versus prior year, while revenue from small projects and maintenance and repairs totaled $80 million, up 9%. On a trailing 12-month basis, 77% of our revenues were derived from customer OpEx spending and that is indicative of our business shifting away from more volatile capital budgets. Adjusted EBITDA for the first quarter was $22 million, up 33% year over year with adjusted EBITDA margin expansion of approximately 330 basis points. On a trailing 12-month basis, adjusted EBITDA was $99 million, or 21.8% of revenue, representing a year-over-year increase of 48%. As we take a step back and think about the evolution of adjusted EBITDA over the past few years, it is important to…

All right. Thank you, Kevin. I'd like to turn now to Slide 13. We're raising our full year revenue and earnings guidance for fiscal 2024. As we look ahead to the coming quarters, we're conscious of the ongoing macroeconomic volatility even as we continue to see growth across our business. At this time, we're raising the lower end of our revenue guidance from $455 million to $462 million, and increasing the upper range to $488 million for the full year, which at the midpoint represents approximately 8% top line growth over fiscal 2023. GAAP EPS is now expected to be in the range of $1.48 per share to $1.62 per share, which represents 55% year-over-year growth at the midpoint. Adjusted EPS guidance has also been raised to $1.69 to $1.83 per share. We'll continue to evaluate this outlook as we progress through our fiscal year. We expect to continue to generate significant [free] cash flow through the year to maintain a strong balance sheet, giving us the flexibility to reinvest in our business and evaluate bolt-on M&A opportunities. On Slide 14, you can see more details about our capital allocation priorities. As our top priority, we are committed to maintaining a healthy balance sheet across economic cycles with a leverage target of 1.5x to 2x under normal conditions. Our next priority is to fuel organic growth in our business by reinvesting in people, technology, and continuous improvement. These investments enable us to pursue our 3 strategic initiatives of decarbonization, digitization, and diversification. We also pursue inorganic growth by continually evaluating M&A opportunities. Our focus is on bolt-on acquisitions that meet our strategic and financial criteria, and we have a healthy pipeline of opportunities. Finally, we continue to evaluate opportunities to return capital to our shareholders when appropriate. As we wrap…

[Operator Instructions] Our first questions come from the line of Brian Drab with William Blair.

This is Tyler Hutin on for Brian. Congrats on the solid results, by the way. Orders and backlog are looking really healthy. And just starting out, I want to know just what factors went into your full year guidance raise and then just any general comments that you have on the view of the balance of the year.

So as we look at the order intake and where we are, I think a key thing that we anchor on is our trailing 12-month orders sitting right at $475 million, and that's at the midpoint of our guide. And I think then as you kind of turn and look to the EPS side of the guidance, we're looking at margins and backlog and a lot of our continuous improvement efforts as well as just what we've seen as moderation of some of the input costs, they give us confidence that we have earnings power going forward.

Got it. And then just moving some more of end market commentary. I think it'd be good to hear any update that you have on your renewables opportunity. Do you have any comment on what the annual revenue opportunity could be and how that's been trending?

Yes. So we're developing and improving our ability to track these types of opportunities, but we continue to see nice growth. In fact, within the quarter, we booked somewhere north of $8 million in those opportunities, and so we continue to see the opportunities grow there and the pipeline continue to grow. And we'll provide updates on those opportunities as well as the incoming order rates on a go-forward basis. So overall, we continue to see investments that are moving in the direction of these new opportunities, and certainly, some of the new product launches, like we referred to as the Quantum Heater, improves our ability to be able to provide differentiated solutions in this space and win share.

And Tyler, this is Kevin. Maybe just to build on Bruce's response as well. It's not just the revenue growth on the top of the funnel that we like, but when we look at the profitability on the decarbonization initiative in particular, that profitability is quite strong, generally above the company average as well. So it's something I think as we look at the earnings power of the business, we feel pretty confident about the profitability with those revenues as well.

Great. Yes, above $8 million sounds like a great quarter for that end market. And I'm just wondering, as your pipeline grows, what goes into transitioning the opportunities into wins for those end markets.

Yes. So I think some of the wins are just timing, but certainly on the competitive front, we've done a lot. New technology, we're launching that, to give us a differentiated position. But a lot of what we're doing is making investments in capacity because, quite frankly. the industry is pretty supply constrained at this time, and so we're making some pretty sizable investments, which is why our CapEx is up. Over a typical year, we're up 3.5%, 4% of revenue, and a lot of that is really being directed towards growing our capacity and reducing lead times in the marketplace. So we see all of those as really ways in which we can win and convert.

And Tyler, technology is agnostic at the end of the day. So if you think about the sales cycle, if you will, the front end of our business understands that technology really well. And so it's really just applying that to end markets and making sure we're putting those leads in front of the right people to get them converted. So yes, there's not a huge investment on that technology side. It's more on the capacity side, as Bruce alluded to, so we can meet the demand in the market.

And one last comment about that. Really the key differentiator we have in the marketplace is in our technical competence particularly around electrification and being able to work with customers on applications that have traditionally been hydrocarbon fired and converting those to a very different heating process, electrical heating. And we have not only the technical knowledge and competence, but also all of the software tools and the capabilities to be able to help them make that transition successfully. So I think those are the key things that are driving our ability to win in this space.

Yes, that sounds great. Just moving on from the renewables end market and just finishing my last question just being besides renewables, what end markets and geographies are you seeing the most unexpected upside?

The U.S., we expected to see growth, but it was really quite strong in this first quarter. And we're seeing some recovery in Asia as well, which I would say it was expected. But as we look at the bookings, I think it's important not to be lost that bookings this year were up 16% over prior year. Now if you go back to our prior year, that was a record in incoming orders as well and that was up 43% over the prior year. So we just look at the bookings growth, it's pretty significant, and that's not to be lost. And so we're seeing a lot of activity and investments in the U.S. Particularly we've had some nice petrochemical wins. There's a lot of LNG opportunities. Just as a reminder, we're a little later cycle, so we have won some of those, but we see additional opportunities in the pipeline for both. And then certainly the opportunities that we've seen around renewables, whether that's carbon capture and storage or the ammonia and hydrogen that we've highlighted today, those are driving additional upside and growth above and beyond what we would traditionally see in our space.

Got it. And that's all I have for today. Congrats on the quarter again and solid work.

[Operator Instructions] Our next questions come from the line of Jon Braatz with Kansas City Capital.

Just a point of clarification. I think, in the press release, you mentioned that organic growth was 11%. But if I'm not mistaken, last year you had $7 million -- about $8.5 million from a combination of a large -- completion of a large contract and some revenue from Russia. Am I correct in that?

Yes. So, Jon, maybe to rewind it back a year. We had about a little over $7 million from that large onetime project that would be in the organic number. The [acquisition] was about $1 million of revenue and then Russia was about $1 million as well, so a few pieces on each side of the line there to factor in.

Okay. So ex those items, Kevin, it looks like you're, what I would call it, adjusted organic growth rate was near 20%. Do you look at it that way?

That's about right, Jon.

Okay. So it looked from that -- using that as a reference point, going forward into the next 3 quarters, you're looking obviously for a little bit of a moderation from that. Was there something in the first quarter that was unexpected or somewhat transitory in nature if you want to call it that?

Yes, Jon, this is Bruce. No, not really, and I'll tell you the incoming order rate was quite positive. So that actually gives us some confidence going into the year. It's early, and certainly, we like to get a couple of quarters under our belt before we call the full year. I'll tell you, though, it certainly gives us confidence and I'll point you back to the midpoint of our revenue guide being that $475 million, which is right on our trailing 12-month incoming order rate. So I'd point to that. And then it was a modest move certainly in the EPS guidance, but I think it's important to note that we see some strength in margins and backlog and, quite frankly, a lot of our continuous improvement efforts that we began probably in the fourth quarter of '22 are really beginning to yield some very positive results and give us some performance and productivity gains. So that would be how I would frame our views, but there was nothing just onetime in the first quarter, and we're cautiously optimistic about the balance of the year.

Okay, that's fair. Kevin, the operating expenses were quite heavy in this quarter. And obviously, you're investing in resources, personnel, and infrastructure to reach these new markets. But let's say as we look forward, maybe even a year from now, let's say, does that spending begin to moderate? Do we just see that buildup this year and then maybe some easing next year?

Yes, Jon, I think you're thinking about it the right way. If you look at the SG&A line, call it, maybe close to $4 million, that's primarily driven by the resources that you're alluding to. And I think as the business continues to grow, we look at that on a TTM basis as a percentage of revenue, and targeting that in the, call it, mid-to-low 20s is where we're really going for as we think about the model of getting this business to 23%, 24%, potentially 25% of EBITDA. Given the historical gross margins of the business, that's a pretty easy math problem to back solve for what we're shooting for over time. So I think the way you're thinking about it is right. Will that investment decelerate as the business continues to scale? That's absolutely the plan.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Bruce Thames for closing comments.

All right, Darren. Thank you. And thank you all for joining here today. Appreciate your interest in Thermon, and enjoy the rest of your day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.