Greetings. And welcome to the Thermon Group Holdings, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Thank you, Latonia. Good morning and thank you for joining today to fiscal 2024 second 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 our Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News & Events, IR Calendar, Earnings Conference Call Q2 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 may 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 might be required by law. Now I would like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Well, thank you, Ivonne. And good morning, everyone, and thank you for joining us today. I'd like to begin the day with a quick overview of Thermon for those of you who may be new to the story. 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 technology is agnostic and many of our solutions enable the energy transition through decarbonization and electrification. Our approximately 1,400 employees have a best-in-class safety record and are dedicated to creating long-term value for our stakeholders by executing our strategic plan, which I'll cover in more detail on the next slide. Turning now to slide 4, Thermon's strategic pillars. We're generating sustainable value by implementing our long-term strategy that is based on three pillars – first, profitably growing our installed base; second, decarbonization, digitization and diversification; and third, disciplined capital allocation. We've developed a large global installed base over the last 69 years by providing our customers with mission-critical industrial process heating technology and solutions. These solutions typically represent less than 1% of the initial capital cost of the process facility, but are critical to ensuring safe, reliable and efficient operations. This enables us to increase recurring revenues and realize growth across our traditional in-market verticals while expanding margins through operational excellence. In addition, we're driving growth through our long-term strategic initiatives of decarbonization, digitization and diversification. We are a key enabler of the energy transition through electrification and decarbonization of industrial inc. Our innovative solutions drive energy efficiency, facilitate a circular economy and help our customers achieve their sustainability goals. Through our digital solutions, we also help our customers to optimize maintenance through enhanced controls and monitoring. Our core technologies, plus our decarbonization and digitization solutions,…

Thank you, Bruce. Turning to the Q2 fiscal 2024 financial performance on slide 9. The global Thermon team continued to deliver strong results in the second quarter. Customer demand remained healthy. We reached $116 million in incoming orders in the quarter, up 22% year-over-year. Demand remained strong across US and Latin America, while spending was flat in Canada. In terms of our end market orders, we saw the most growth in the chemical and petrochemical sector during the quarter with customer demand expanding across the renewables, food and beverage, and rail and transit end markets. Trailing 12-month orders reached $489 million, which we believe supports our updated full year revenue guidance range. Revenue in the second quarter was $124 million, a year-over-year increase of 23%, primarily driven by the growth in renewables, power and food and beverage end markets in the quarter. Revenue from large projects was $36 million, up 54% versus the prior year, while revenue from small projects and maintenance and repairs totaled $88 million, up 14%. On a trailing 12-month basis, 76% of our revenues were derived from customer OpEx spend. Adjusted EBITDA for the second quarter was $28 million, up 27% year-over-year, with adjusted EBITDA margin expansion of approximately 60 basis points. On a trailing 12-month basis, adjusted EBITDA was $105 million, representing a year-over-year increase of 35% with adjusted EBITDA margins increasing to 22.0%. Adjusted diluted EPS was $0.49 per share in the second quarter, a year-over-year increase of 30%. On a quick modeling note, we are currently estimating a $0.21 per share impact from amortization in fiscal 2024. Through the first half of our fiscal year, we have delivered profitable growth by continuing to execute our strategic plan in an uncertain macroeconomic and geopolitical environment while simultaneously controlling our fixed costs and investing in…

Well, thank you, Kevin. I'd like to turn now to slide 11. As we look to the back half of our fiscal year, we're raising our full year revenue and earnings guidance for fiscal 2024. This revised guidance balances the positive growth we continue to see in the first half of our fiscal year, while acknowledging the ongoing macroeconomic and geopolitical uncertainty and potential impact of global monetary policy. In light of this, we continue to be prudent with spending while investing for growth. We are raising the lower end of our revenue guidance from $462 million to $478 million and increasing the upper end from $488 million to $498 million, which at the midpoint represents 11% organic growth year-over-year. GAAP EPS is now expected to be in the range of $1.59 per share to $1.69 per share, which represents 64% growth at the midpoint. Adjusted EPS guidance has been raised to $1.84 per share to $1.94 per share, which at the midpoint represents 21% year-over-year growth. Turning now to slide 12. I'm pleased to invite you to join us for Thermon's first Investor Day, which will be held on Tuesday, November 14 in person in New York City or via webcast. Joined Kevin and me, plus other members of the senior leadership team, for more in depth detail about our long-term strategy, financial outlook and live Q&A. We hope you'll be able to join us. As we wrap up today on slide 13, we'd like to leave you with the following messages. Thermon is a leading global brand that provides mission-critical process heating technology and solutions to a variety of diverse end markets. Our operational excellence, innovative products and differentiated solutions are significant competitive advantages and create sustainable value for our customers and shareholders. Our large global installed base with longstanding customer relationships drives a resilient aftermarket franchise that generates high-margin recurring revenue. Through our existing technology, we believe that we're well positioned to capitalize on the vast opportunity associated with the energy transition and decarbonization through the electrification of industrial heat. Our healthy balance sheet with low leverage and high gross margins as well as our capital-light business model enable Thermon to remain resilient across economic cycles and provide significant optionality. I'd like to end today by thanking the entire Thermon team for their outperformance, unwavering commitment to safety and dedication to meeting our customers' needs. As we look ahead to the second half of fiscal 2024 and beyond, I'm eager to see what we can accomplish together as we continue to deliver sustained profitable growth and value for our shareholders. Latania, we'd like to now turn it over to you to take questions.

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

I usually don't spend time on these conference calls congratulating management. But I just want to point out 12 out of the last 12 quarters, you guys have beat consensus revenue estimates. So very impressive and congratulations. Well, it's really an impressive execution. So congrats. And I will be at the Analyst Day, so looking forward to that. I was wondering actually regarding the Analyst Day, can you perhaps give any sort of preview of – not numbers, but like what investors, analysts can expect there, maybe will you be laying out some longer-term financial goals?

Brian, what we'll do is we'll be focused still on our kind of our 2026 objectives, but we'll do it deep – first of all, you get to meet the broader management team that's really behind driving these results. And I think that's a great opportunity. And we'll be taking a deeper dive on really talking about our strategic objectives as well as our financial goals and providing more detail around just what is the path to achieve. And so, I really look forward to you attending and hope other existing and prospective investors will join us as well.

It seems first, with this quarter, that you're ahead of schedule in getting that mix to be more diverse – the revenue mix to be more diversified getting – I guess, the goal is to get to 70% non-oil and gas or 70% diversified as you say. How are you thinking about that longer-term goal? It seems like maybe you could go beyond 70 with today's report.

That's a great question. I'd like to kind of start and say we were guiding to a 65% to 70% range. So now we're kind of targeting it more towards that 70% because we think we can get there by 2026. And certainly, as we begin to approach that 2026 time line and achieving that 70% goal, we'll further extend that to look at where we'd like to go in just overall diversification of our end markets.

And then speaking of end markets, food and beverage, you reported outstanding growth during the quarter. Can you talk a little bit about that segment of the business and remind us where you're seeing the most success with types of projects, what geographies? And how is the outlook there and runway for that type of growth to continue potentially?

Yes. So in food and beverage, first of all, the great thing about that is, geographically, it's extremely diverse. It's really global. And we actually – f you think about the mix of our business in the Eastern Hemisphere, particularly across Asia, we actually see a much higher mix of more diverse end markets, including food and beverage than we do kind of maybe in some of the traditional oil and gas end markets that we see more in North America and Western Europe. First of all, it really began with a focus on that end market. The expansion of our product portfolio really gives us more opportunity than just heat tracing. But as we look at emergent heating and boilers and steam and other things like that, it really gives us an opportunity to build a much larger, more sustainable position. So, certainly, the 219% is really strong growth. It's on a fairly small base, but we feel like we've got a lot of room to run there just given the size of the market and kind of our existing share. So we feel good about the progress we're making there and the increased focus with our front-end sales teams.

Maybe I'll ask just one more before I pass it on. But several years ago, you made the focused effort to diversify the product portfolio and get into process heating, expand the addressable market relative to the historical focus primarily on heat tracing. Where are you seeing the growth and the orders coming in in terms of process heating versus heat tracing? Are they both growing at the same rate? Or are you having more success in one area or the other at this point?

Well, first of all, we're seeing growth really across all of the product portfolio. But I will say that, as we look at process heating, the growth there is almost 2x that of the heat tracing business. And we see that really in a number of areas, but particularly as you look at the opportunities around energy transition and decarbonization, there are some really big opportunities for that process heating business. Some of the areas of investment we've talked about this year is really expanding our capacity to be able to increase production in those product lines. And we've made some really great progress. We hope to exit this year with basically about 50% in increasing our capacity around process heating, so that we can really supply the growing demand for really the transition from traditional hydrocarbon fired heaters to electric heating technology.

Brian, this is Kevin. If I could just add in. If we think about heat tracing versus process heating or those diversified end markets versus oil and gas, as we go into this expanded addressable market, it's not just the top line growth, but it's the bottom line profitability as well. We generally see those gross margins in those addressable markets that we're targeting as at, if not slightly better from a profitability perspective as well. So it's growing. It's attractive. And clearly, the products that we're providing our customers are creating value for them given the growth we're seeing in the business.

[Operator Instructions]. We have a follow-up from Brian Drab with William Blair.

I was trying to be polite, but you never know. Kevin, that was good detail. A good comment on the margins there, an important one. How are you looking at the gross margin trajectory here for the balance of this year? I'd just leave it at that for now.

There's kind of a short term and then a longer-term component to that. I think when we look at the balance of the year, we don't necessarily give that gross margin guidance. If I could talk about the quarter specifically for a second, it's really about the mix at the end of the day. We're continuing to see price outweigh cost, right? So managing that value gap, the team continues to execute on that front. And if you look at the mix of the business, clearly, the large projects were growing a little more faster this year. We had some really nice wins, particularly in the power segment down in Texas here related to some winterization efforts that are driving the growth there. But again, really nice margins, even though it's project-based, still attractive margins for us. So that mix, however, as you guys know, is slightly dilutive on the projects versus the maintenance and repair side of things. Even if you look at it geographically, the strength in the US, EMEA and APAC, but Canada just growing, but not quite at that same rate. That's a little bit dilutive as well as we think about the geographical dispersion there. The last thing I'd mention just on margins. We look at the margins in backlog really closely, and that continues to trend well. So if we kind of think about where we are today versus where we can go into the future, the combination of growth in these diversified markets where there is margin expansion, the operational excellence program that were underway that Roberto is going to talk more to the investment community about during Investor Day, continuous improvement. We feel like we've really got a few levers in front of us that can continue to drive gross margin improvement in the future.

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

Bruce, on the sort of the renewable front and your diversification efforts, obviously, there's been a lot of noise recently over the last three or four weeks about higher interest rates and maybe impact on some of these programs, utilities maybe cutting back spending and so on and so forth. When you look at the project pipeline out there, have you seen any movement in the pipeline of activity because of higher interest rates. Have you see anything that would suggest that maybe there's some softness in the opportunities ahead in your diversification efforts?

That's a great question. Actually, I've kind of seen a bit of the opposite most recently. And I wanted to highlight the 92% growth in just the renewables opportunities we're seeing. Those are some significant investments that we're seeing growing. The thing that I think stands out most is, a year ago, I might have told you that kind of hydrogen was going to be an opportunity, but it was several years out. The thing is we booked over $9 million this quarter in hydrogen opportunities alone. And these are projects that are funded, that are moving ahead. And we're really seeing a lot around alternative fuels, particularly renewables, the sustainable aviation fuel, there's global opportunities around this, whether hydrogenating those fuels and making those from biofuels so that they're sustainable. So we're seeing some big investments in there in ammonia. So I've been actually really surprised and pleased at just the rate of investment there. And I think the ones that we're seeing move ahead are economically viable projects. I think some of the other areas where there may be more reliance upon government subsidies, particularly maybe around some wind and solar power type projects, I think those certainly could be at risk where payback periods may be longer. But I think the thing to reinforce here is that our technology is agnostic. And as we look at energy transition, we can all debate the pace at which this could occur, but I think we all would agree that this is the direction the world is moving. Should it take longer to transition, our technology is there to meet the needs of increased investments that may be required to sustain production levels in hydrocarbons to basically enable energy during that transition period. Conversely, if it moves more rapidly, we're seeing our technology playing in these new emerging alternative energy sources and it creates a lot of opportunity for us there. So, I really feel very good about how we've positioned our business with our solution set and with our customer relationships and market access to grow this business going forward.

So if I would summarize, it sounds like you would characterize this transition as sort of a win-win situation for you. Whether it goes rapidly or slowly, it doesn't matter because you're covering all bases.

Absolutely.

Secondly, it sounded as if in your press release that you're seeing a little bit of improvement in Europe sales, I guess, up year-over-year, some sales gains. Europe has been weak for a while. Are you seeing any real changes there? Do you see this improvement in sales continuing in Europe?

Yes, we do see a positive trend there. And we're seeing the same in Asia as well. So they were – certainly, Europe a was a little slower to respond kind of after COVID. Asia even lagged that. And so, we're seeing signs of growth not only in just kind of the business and the incoming order levels, but also as we look to the pipeline of opportunities that we see going forward.

John, maybe just to put a little bit of color there too, I think when things were a little down, we took a pretty hard look at the channel. Particularly in the eastern hemisphere, the team's done a lot of really nice work over the last 12, 18 months to focus there. And we're starting to see some nice traction that's helping to drive that business forward. I think Europe was up about 40% in the quarter. I think APAC was 17% or so. So we're seeing really nice growth in both of those environments. And it's not just kind of waiting on large one-time projects. We're really doing a nice job of managing the channel in those regions as well. And that's what's helping to drive the growth.

Kevin, you spoke about it earlier about an improvement in free cash flow in the second half. And I was sort of thinking that maybe free cash flow for the year would be around 75% of net income. And I don't want to throw – I don't want to put you on a spot, but are you thinking that that's still a possibility to get that level of free cash flow?

I think maybe I'll avoid the relative percentage kind of answer. But I think when we look at where the business is today, particularly with the growth in the projects, there's some timing differences on the accounting, given we're in a percentage of completion mode there. You'll see in the other working capital, there was about, I think, a $10 million, $11 million negative in the quarter. All of that was invoiced in October, which is going to give us a chance to collect here in the third quarter. So there are a few of those just unique things from an accounting perspective that are maybe driving a little bit of the cash flow weaker this quarter. It could be a little stronger next quarter. I think [indiscernible] we feel really good about the ability to collect. Inventory turns are starting to trend in the right direction when we look at the velocity with which that is taking place. And then, certainly, when we think about the BPO side of things, that's going and trending in the right direction as well. Jon, it's important to keep in mind the seasonality of the business. Our second quarter is really where we've got that inventory built on a quarter-over-quarter basis, so it's roughly flat, right? We think we've got the right inventory in the right place at the right time to be responsive to customers there. And so, we try to look at that on a TTM basis, that working capital as a percentage of sales over a little bit of a longer time horizon as we're thinking about driving the productivity, the operational excellence in the business. Keeping that factored in is important. So I think we feel pretty good about the back half in summary. Obviously, we've got to execute, but the business is growing. It shouldn't be a surprise to anybody that there's a little bit of a build in net working capital here as we continue to grow plus 20%.

At this time, I would like to turn the call back over to Bruce Thames for closing remarks.

All right. Thank you, Latania, and thank you all for joining today and thank you for your interest in Thermon. We look forward to updating you again at our Investor Day and during our next quarter earnings call. Enjoy the rest of your day.

Thank you. This does conclude today's audio teleconference and webcast. You may disconnect your lines at this time and have a great day.