Fiscal 2025 Third Quarter Results Conference Call. Leading the call today are CEO, Bruce Thames, and Chief Financial Officer, Jan Schott. 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 Q3 2025. 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 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, further developments, or otherwise, except as might be required by law. Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance, including an update on the progress we have made to our strategic investments, followed by a financial update and review from our CFO, Jan Schott. Bruce will then wrap up our prepared remarks with an update on our business. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Bruce.

Thank you, Ivonne, and good morning to everyone joining us on the call today. I'll begin by commentary on third-quarter highlights, which we detailed on slide three of our presentation. The third quarter was another period of solid execution by our global team, which resulted in continued strength in our OpEx-related revenue, bookings momentum, strong margin capture, and efficient free cash flow conversion. Based on our disciplined execution against our strategic priorities, the cash flow generation in this business, and our strong balance sheet, we are strategically positioned to benefit from the improving demand drivers, which we expect will translate to an improved growth trajectory in the coming quarters. We continue to benefit from our strategic focus on diversifying our revenue base and increasing our exposure to short-cycle projects and MRO-related recurring revenue. This has resulted in a revenue base that is both more stable and more profitable. We were also encouraged by the continued momentum in order trends during the third quarter and our strong backlog growth. Our orders increased 11% on a reported basis and were up modestly organically on a cost and currency basis. This resulted in another quarter with a positive book-to-bill. Importantly, our backlog increased nearly 48% on a reported basis, and NIM was up 9% organically. The strong backlog growth is being driven by the solid order trends as well as the slightly extended backlog conversion I discussed last quarter. While the slower backlog conversion has been a bit of a headwind to our near-term revenue growth, the higher backlog and heavy workload in engineering give us increased visibility and growing confidence in our growth trends moving forward. Our favorable business mix was the key driver that enabled us to generate an adjusted EBITDA margin of nearly 24% during the third quarter, which came…

Thank you, Bruce, and good morning, everyone. I will review financial results for the quarter, give an update on working capital and free cash flow, and conclude with comments on the balance sheet and liquidity. Moving now to slide seven, revenue in the third quarter was $134.4 million, a year-over-year decrease of 1.5%. Vapor Power and ThoughtView combined to contribute $13 million in revenue during the third quarter. Acquisition revenues coupled with continued resilience in OpEx revenues mitigated the impact of the ongoing headwinds in our large project business. Excluding Vapor Power and ThoughtView, third-quarter organic sales decreased 11% versus record results last year, mostly from large project sales. Large project revenue was $18.6 million during the third quarter, down 45% from last year, as customers continue to delay decisions on large capital projects. Geographically, this weakness was primarily in the US Latin America region and was fairly consistent across our various verticals. Our OpEx revenues were $115.8 million during the third quarter, an increase of 12.6% compared to last year, as our customers continue to prioritize maintenance and repair spending. Excluding the contributions from Vapor Power and ThoughtView, our OpEx revenues were essentially flat. We believe that the stable results in our OpEx revenues, despite the challenging capital spending environment, demonstrate the benefits of our long-term customer relationships, deep installed base, and the resilience that MRO spending provides for our customers. Demand in Canada remains favorable, with sales of $43.5 million, up 6% year over year. EMEA sales were $13.8 million, up 11%. APAC sales of $9.8 million declined 3%, and US Latin America sales of $67.2 million declined 8%, driven by the continued contraction in large project sales. As we are discussing our geographic exposure, I will take a quick minute to build on Bruce's comments regarding tariffs.…

Thanks, Jan. Before I wrap up with our financial outlook, I thought it might be helpful to provide some updated thoughts on what we're seeing in some of our key end markets as we enter the new calendar year, particularly with the new administration taking over. Over the last several quarters, the industry has faced headwinds due to the pause in large project capital spending, particularly in US land. We believe that the late investment decision timelines over the last year were due in large part to the uncertainty surrounding interest rates, the presidential election, and the overall economy. While the timing and magnitude of further Fed easing is yet to be determined, and the macroeconomic environment is still uncertain, customer confidence appears to be improving, particularly with the election now behind us. While our order momentum in Q4 remains robust, we haven't yet been able to assess how the threat of tariffs may impact customer behavior going forward. The improved order momentum and quoting activity we've witnessed over the last couple of quarters have been broad-based. I'd like to provide some color on some of the key areas of strength. First, while we are focused on growing our diversified end markets, oil and gas remain an important end market for our business, and we're seeing improving trends in this sector. Energy project activity has notably increased following the lifting of the hold previously placed on new LNG export permits. Given our technical capabilities and customer relationships, we are well-positioned to benefit as project activity resumes. We continue to see favorable trends in our power business, due in large part to increasing demands on the grid driven by growth in population, data centers, and EVs. The current administration recently announced Project Stargate, which will provide up to $500 billion in…

And at this time, we'll conduct our question and answer session.

If you would like to ask a question, our first question comes from Brian Drab with William Blair. Please state your question. Hi, good morning. Thanks for taking my questions. The point-in-time revenue of $99 million, that was, I think, an all-time record. And I'm just wondering if you could talk about that number a little bit and the dynamic. I mean, I know it's obviously the heating season that drives this time of year to be strong, but is there anything else in there that was unusual in the quarter? And are we reaching kind of a new baseline level? I mean, again, acknowledging that this is a seasonally strong period, but like a new baseline level of point-in-time revenue going forward?

Yeah, Brian. So a couple of things to note. First of all, we have seen a more normalized heating season, and so that has certainly contributed. And we have been focusing on driving recurring revenues on the installed base. It's been a key piece of the strategy, and we're seeing success in those efforts. And then also, we've had contributions from some of the new acquisitions with point-in-time revenue generated through those as well. And so when you think about those things combined, yes, I think the point-in-time revenues as far as volume levels we're seeing are really a step change in our business and something we'll continue to drive on a go-forward basis.

Okay. Great. And by the way, I guess I should round up to a hundred. It was $99.6 million. So following on to that, you know, I guess, Bruce, you can envision at some point, you know, maybe it's a few quarters from now, where the overtime large revenue lines have kicked back in, and then you have this point-in-time foundation that's larger. I mean, it seems like, you know, once that overtime large kicks in, you know, that's where your target is. That's your expectation, right? A few quarters from now?

Yes, Brian. And, you know, I think a couple of things to note. Our focus has been heavily on driving recurring revenues on the installed base, but we really can't lose sight of the fact that growing that installed base through overtime project activity is really how we continue to drive growth. So we are still very focused on the CapEx piece of our business as it needs to grow that installed base. Given the bookings momentum, given the backlog growth organically at 9%, given the load that we currently have in our engineering organization, and the overall quoting activity, it's pointing towards a return to capital spending and growth there. When we do see that, we would expect to see this revert back. I mean, we're at a very high mix of OpEx-related spending that would probably begin to move back towards the 75% to 80% range whenever we do see this CapEx cycle improve and customers begin to release larger CapEx spending.

And can you talk a little bit about the potential for the release of some of that large CapEx spending and, like, specifically, you mentioned LNG projects. What are other types of projects? I know you've talked about hydrogen and biofuel. How about also, you know, combined cycle natural gas plants? What is in the pipeline? What kind of big projects might we expect to hear you talking about in the next, you know, call it four quarters, you know, next year?

One of the big things that we've seen is really since the new administration has been in place and they've lifted the ban on the LNG export permits, there's been a big surge of activity around LNG. And so a lot of those projects, largely along the Gulf Coast, are moving forward. And as I had noted in prepared remarks, our technical capabilities, the breadth of our solution set, and our customer relationships position us well to take advantage of that. The other areas where we see the emphasis on subsidies around wind, solar, EVs, we do expect to see a pickup in combined cycle natural gas-fired plants. And that's really front and center for our market, and we're very well positioned to take advantage there. We've also seen a renewed interest in nuclear, and so we've seen some of those projects around refurbishments and expansions in North America. But one of the things we're really excited about, and it's a little further out, but we just won a very nice engineering award for small modular reactors for a customer in Europe. And so we're excited about that and being able to participate in the development of that technology for building some about three gigawatts capacity in Central Europe. So those are some of the areas we've seen movement. Petrochem remains strong. It's been a bright spot, general industrial as well. And, certainly, we'll see what happens with tariffs, and that's very fluid, but that could drive more onshoring in the US particularly, which would be a tailwind as well.

Okay. And then the last question for now, could you comment on gross margin, which was obviously a function of strong point-in-time revenue, but, you know, comment on I think what it is. It's got to be the highest gross margin that we've seen for many quarters, at least maybe a few years. But, you know, how should we expect gross margin to look in the fourth quarter and maybe beyond if you give us a sneak peek at next year?

Yeah. So I think the assumption we've got in the fourth quarter is we are going to begin to see a stronger mix of projects in the fourth quarter. Now, I think one comment I would want to make is we've got to see the customer sentiment shift. If we don't see movement there, which we've seen some positive indications, and we don't see movement there, I think there could be some downside. We would probably land on the lower end of our revenue guidance, but gross margins would be quite strong and still put us in the midpoint of our EPS guidance. So I think that's an important thing to note. When I look at gross margins, mix is about half of the improvement year over year. The other half is related to productivity and continuous improvement initiatives as well as price. So it's pretty evenly balanced. And I would go on to say that, organically, those margins are quite strong. We've seen about 164 basis points dilution from the acquisitions, but we're very confident that we can bring those businesses up to a similar margin profile over, say, the next 18 to 24 months.

Okay. I am going to ask one more just because I think this is important to make sure that I and everyone has this clear. You're saying it's likely that you'd be for the full year, closer to the low end of the revenue range, but gross margin, although maybe down a little sequentially, solid. Margin overall solid, putting you at the midpoint closer to the midpoint of the EPS range for the full year. Is that right?

Yes. The risk, Brian, is just on project execution in the quarter. Should that continue to drag, we would expect to be on the lower end of the revenue guide but in the midpoint of the EPS guide given the margin profile of the business.

Yep. Thanks very much.

Your next question comes from Chip Moore with ROTH Capital Partners. Please state your question. Good morning. Hey. Thanks for taking the question. Bruce, you touched on some of this already, but maybe you can provide a little more color on, I guess, just the current bid pipeline and makeup since the new administration took over in January. And then you talked about some of the puts and takes for fiscal 2026. You know, maybe talk about the biggest things you're watching there. Obviously, M&A is time-independent, but any thoughts on 2026?

Yeah. So, you know, first of all, we'll give full guidance at our May earnings call for fiscal 2026. But I would say at this time, given the quote volume and what we believe is improving customer sentiment and optimism, I'd say we're cautiously optimistic about growth in FY26 returning to that organic growth. And then certainly, we'll have the contributions of the acquisitions in addition to that. So, you know, we're cautiously optimistic about an improving overall scenario, particularly as it relates to larger capital spending in the coming year. Since the new administration's been in place, we have seen a resurgence in quoting activity around a number of different projects. I would say, you know, oil and gas activity has picked up. In Canada, we've actually seen growth there year over year, which we've noted. And so that's been very positive. I think part of that is related just to a more normal winter, but also just MRO spending with our customer base.

Very helpful. And I guess, you know, a follow-up on tariffs. I think you did a great job outlining, you know, how those could impact you. Is the risk maybe more, you know, indirect around some of that, you know, that uncertainty? Is that something you're concerned about?

Yeah. I think, you know, we understand, you know, roughly, I mean, it depends on, you know, the magnitude, the breadth, and the duration of any types of tariffs and the impact on the business. Our approach to business and our manufacturing philosophy really in-country, for-country helps to insulate us from some of this. The real unknown is, you know, what impact might this have on customer sentiment. And so that gives us, you know, a little pause. We'd like to see where things land and really understand how customers may or may not react or respond.

Helpful. Maybe I could ask one last one. You know, liquid cooling in the data center is very interesting. I hadn't thought about that as, you know, they're usually trying to get heat out. So interesting opportunity for you. Is that a market you're, you know, still nascent, but is that a market you're active in already? Or how are you thinking about that opportunity? And then maybe, you know, you play two sides of it as well.

Yeah. So, yeah, that's a great question. So we've been trying to highlight where we play in some of these opportunities. This is a very nascent, very new market. But I'll tell you, we've won three orders that have totaled around $10 million. And we've identified a very large market opportunity, we believe, that will be developing on a go-forward basis. And so we're excited about the application. And, you know, it's one illustration of how we play. Certainly, when we think about, you know, demand growth for power, much of that's driven by data centers, EVs, population growth. We're very well positioned to benefit from that. And especially any changes in environmental regulations that will make natural gas-fired power plants more in favor certainly is going to be an area of benefit, but this is another area we've identified, and we've won some nice business just in the last two quarters.

Very good call. Appreciate it. Thank you.

Your next question comes from Jonathan Braatz with Kansas City Capital. Please state your question. Morning, Bruce. Good morning, Jan.

Morning.

Just some commentary if you could on your SG&A spending. It continued to be pretty high, and I know you're investing in growth initiatives and so on. But as we look ahead, will that begin to ease a little bit, and will we begin to see some leverage on that line?

I think, you know, in the near term, we would expect it to be relatively flat going forward. I mean, that's, you know, really a function of just, you know, if you look historically, the M&A that we've added on with ThoughtView and then Vapor Power. But I would say, you know, kind of where we were for the third quarter, probably staying flat for the near term going forward at that rate.

Oh, at that dollar rate or the ratio?

The total rate.

I'm sorry. What?

Dollar rate.

Oh, okay. Okay. All right. Okay. And the acquisition, dollars $13.3 million contribution in the quarter. I was, I guess, I was looking for a little bit more, but can you parse it out a little bit between Vapor and the Italian acquisition? And is Vapor continuing? It has been. Is Vapor continuing to perform in line with your expectations?

Yeah, Jonathan. So a couple of things. One is revenues from acquisitions were below our expectations. ThoughtView, in our first quarter of ownership, actually performed exceptionally well. Just as a reminder, there's about a €12.5 million trailing twelve revenue business with a backlog of $15 million. So very strong backlog. The challenge there is really around growing capacity. In fact, this week, we've got teams there doing content events, reorganizing the factory floor, and working to improve throughput. Vapor is the business that really fell short. We had some a couple of major projects or major orders that were going through production and did not convert in the quarter. And so we fell fairly short in revenue, and we expect to pick up some of that in the fourth quarter, but our big focus there is on increasing capacity both on the factory floor as well as in the supply chain. And in order to convert what is roughly a $45 million backlog in that business, and we've seen really strong market momentum. We had another quarter and positive book-to-bill on that business. And so we're excited about the market potential for growth, but we really got to work through some of the capacity constraints to take full advantage of it. And I will add just, you know, even with that, what Bruce said, you know, our measure for kind of evaluating our M&A on first-year accretive. We were about flat with Vapor Power, and we expect that trend to kind of reverse out and be accretive going forward with the next quarter.

Okay. Thank you. And Bruce, on the LNG front, obviously, there's a big opportunity there. And, you know, in December, the DOE came out with their LNG report, and it wasn't that flattering. And I know the Trump administration has to come up with a rebuttal, so to speak. And I guess I am concerned, and I don't know how concerned the industry is, that now that the pause has been lifted, you know, if the rebuttal report, so to speak, isn't all that strong, are we just going to see some additional lawsuits filed and things just get further pushed to the right in the LNG area? And I guess, how is the industry thinking about that?

Yeah, Jonathan. I'll tell you just from our customer engagement, it feels like they're very positive on the outlook of being able to secure permits on a go-forward basis. We've also seen a number of customers take existing permits and use those and expand the plans for the capacity for export. So we've seen some of that type of activity. And I'll be honest, I don't really have an opinion or any insight or information as to any litigation or legal actions that may happen.

Alright, Bruce. Thank you very much.

Thank you. And there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Thank you, Diego, and thank you all for joining on the call today. We appreciate it. We hope to speak to you between now and the May time frame. We look forward to reporting out on our full year at the end of May.

Thank you. With that, we conclude today's call. All parties may disconnect.

Have a good day.