Thermon Group Holdings, Inc.

At the same time, we are also excited to have Roberto Kuohara join the team as the new Senior Vice President of Manufacturing. Roberto brings a wealth of knowledge and experience in international manufacturing operations, Six Sigma, the Toyota production system, and operational excellence. Moving forward, he will be instrumental in expanding the capabilities and competencies within the senior leadership team that are needed to execute our strategy. I'd like to now turn to slide three and the third quarter results. There are a lot of positive things we're seeing across the business this quarter highlighted by growth in the top line, net income, bookings, and backlog. We saw solid execution by the team in the third quarter with strong top line growth as we see in markets continuing to recover. Revenue for the quarter was $100.6 million, up 26.4% over prior year, with growth largely driven by North America. In the eastern hemisphere, the market recovery has lagged in a more challenging business environment, particularly in Asia, due to COVID-19 restrictions in many countries. Net income of $11.3 million was up 82.3% over the prior year quarter, also showed strong growth. Adjusted EBITDA of $20.6 million was up 11% over prior year as supply chain challenges persisted, contributing to higher input costs. With gross margins finishing at 40.5%, a large one-time project was diluted in the quarter by approximately 250 basis points. Prices had a positive impact of 200 basis points, and we anticipate further price realization in the fourth quarter of this year. Inflation was a 300 basis point headwind as both labor and material costs continue to rise. The team has been very adept at navigating supply chain disruptions, which we believe have peaked in Q3 and appear to be improving in Q4. However, we see continued risk in both the availability of labor and material through the middle of the calendar year. The team has also done an excellent job around managing costs with SG&A at 19.2% of sales for the quarter and trending below the projected run rate for the year. Gap EPS and adjusted EPS were 33 and 37 cents per share respectively, with adjusted EPS up 23.3% from the prior year quarter. Our commitment to investing in our three long-term strategic platforms remains steadfast. And I will address these in more detail later in our call. We continue to see a strong broad-based recovery in our end markets. As a result for the third consecutive quarter, we are raising full year revenue guidance to 342 to 350 million. Turning now to the external environment and our end markets on page four. As we look across our geographies and end markets, we see activity in certain areas approaching pre-COVID levels, but we also see additional room for further recovery in Q4 and throughout fiscal year 23 as other areas lag. As we look on the chart on this page of the presentation, I would like to reinforce a couple of key points. First, roughly 52% of our end markets are outside of the oil and gas sectors. Second, greater than 55% of our end markets are tied to chemical, petrochemical, natural gas, and power. With natural gas as a bridge fuel and the chemical, petrochemical, and power markets being driven by the emergence of the middle class in developing economies, the growth outlook across these sectors is much more robust than upstream oil, which now represents just 16% of our revenues. The chemical and petrochemical sector has shown a nice recovery in maintenance spending year to date, and we are seeing capital projects that had been shelved now moving forward. In the power sector, bookings were up 60% over prior year, led by activity in the Texas Gulf Coast following winter storm Uri. We continue to win business in the rail and transit sector, with bookings up 20% over the prior year quarter. We also have a line of sight to several multi-million dollar transit opportunities in this space. As we look to strategic adjacencies, Thurmond is well positioned to play a key role in the energy transition. From wind power to biofuels to hydrogen power, our solutions are critical to safe, efficient, and reliable operation. While nascent, hydrogen power is particularly exciting with many opportunities for both blue and green hydrogen processing in our pipeline today. Moving on to slide five of the presentation. On a trailing 12-month basis, orders finished at 360 million, a level not seen since Q4 of FY20. During the current quarter, orders of 90.2 million grew 27% over the prior year period, but were down 25% sequentially due to a large one-time project secured in Q2. Backlog is up 32% year over year, and book-to-bill finished the quarter just above one when adjusting for the impact of the one-time project. As a note, we have had a positive book-to-bill in six of the last eight quarters. I'd like to now hand it over to Kevin Fox, our CFO, to provide a more detailed review of the third quarter and year-to-date financial results. Kevin?

Thank you, Bruce. We had another great quarter on the top line on page six. Revenue was up 26% versus the prior year quarter and up 12% on a trailing 12-month basis. The current quarter's revenue includes less than $1 million of benefit from foreign exchange. Revenue growth was driven by both the U.S., Latin America, and Canada regions with strong materials growth due to an increase in maintenance spending concurrent with the easing of COVID restrictions. We continue to see companies in the U.S. Gulf Coast making investments to improve infrastructure, especially power infrastructure, after both the winter storm and hurricanes from the last year. The U.S. also benefited from the impact of the large one-time contract we mentioned last quarter with almost $9 million of revenue booked in the period. We will provide these revenue figures for comparability purposes given the size and nature of the contract. In the eastern hemisphere, both EMEA and APAC declined due to the continuing impact from the pandemic and the slower recovery in certain countries. In both regions, our project business has been more impacted than materials sales. On a TTM basis, revenues are up 12% as we pass the inflection point into year-over-year growth. We are realizing the impact of price increases put in place in the second half of 2021, and as a reminder, those are most applicable to our materials business. Pricing had a positive impact of about 200 basis points overall, with the impact accelerating from the first half of the fiscal year, which is a trend we expect to continue in the fourth quarter. Reported gross margins in the quarter were 40.5% versus 46.4% in the prior year period. If we exclude the impact of the large one-time contract, margins would have been 43%, so currently the contract is about 250 basis points dilutive. Pricing was a positive impact of 200 basis points on gross margins, and we expect the accretive impact from pricing actions to continue through the year. The global supply chain challenges continue to impact our business through higher input costs, extended lead times or limited availability of raw materials, and inconsistent labor availability. The cumulative impact of those factors on manufacturing productivity was approximately 350 basis points in Q3 slightly higher than anticipated as those headwinds persist. Finally, we have the combination of a significantly decreased benefit from the Canadian emergency wage subsidy that was reported in COGS this year versus last, plus the different margin mix within projects revenue that had an impact of approximately 200 basis points versus prior year. The team continues to diligently work with our customers and suppliers to navigate the challenging environment in our industry. While we expect certain input cost headwinds and the availability of qualified labor to continue to pose challenges, the pricing actions we've taken will help offset that impact in the P&L. Now on page seven, I'll continue to focus on the overtime versus point-in-time revenues and want to confirm we will no longer be disclosing the MRO-UE framework in fiscal 23. As a reminder, the new metric includes 100% of our revenues whereas the previous construct only incorporated the legacy heat tracing business. We believe this is a more accurate representation of the two unique revenue streams, and since it is derivative from GAAP revenue recognition standards, is also a more robust framework than the previous MRO-UE disclosure. Historical information remains available in our SEC filings for comparability. Revenues recognized over time are generally representative of project work where we have engineering and installation services, whereas point-in-time revenues are more aligned with product or material-only sales. Overtime or project revenues represented 41% of total revenue this quarter versus point-in-time or material revenues of 59%. Excluding the large one-time contract, this split was $36.64 versus $35.65 in the previous year. Point-in-time revenues grew 25% in the quarter and 29% on a year-to-date basis, which again highlights the strong increases of our customer maintenance spending and viewed over the longer term is representative of the value of the global installed base of our business. We will continue to provide the Greenfield versus MRO-UE mix through the end of the year, which was 39% Greenfield and 61% MROUE versus 36 and 64, respectively, in the prior year. On page 8, for this SG&A metric, we deduct depreciation from the SEC-reported selling, general, and administrative expenses. In the quarter, SG&A was $19.3 million, or 19% of revenue. On a run rate basis, we are below our target of approximately $80 million that we projected at the start of the year. The team continues to execute on our investment plans while managing controllable spend. We started the process of funding our strategic initiatives for diversification, technology-enabled maintenance, and developing markets, and we will continue to build our product development roadmaps for the heat tracing and process heating lines. Adjusted EBITDA was 20.6 million or 20.5% of sales. This includes a deduction for a Canadian emergency wage subsidy of $200,000, and we do not believe we will have any additional benefits from this program. Adjusted EBITDA is up $2.1 million from the prior year due to increased volume and pricing, but offset by the items we've previously mentioned that impact the cost of sales. GAAP EPS was 33 cents per share, an increase versus prior year of 18 cents. and adjusted EPS was 37 cents per share versus last year's 30 cents. On page nine, the balance sheet continues to trend in the right direction as we manage the growth of our business. Cash is down 17 million year over year as we've paid down debt and improved our global cash management processes. You can see the impact on our total debt with a 22% reduction versus prior year, resulting in net debt to adjusted EBITDA of 2.2 times. We expect this to further decline to approximately 1.5 times by the end of the fiscal year, excluding the impact of any potential acquisitions. The M&A pipeline remains robust, and we have ample capacity under our new debt agreement to execute when attractive opportunities are available. Networking capital is down 4 million year-over-year, or six points as a percentage of revenue. The cash conversion cycle is down to 130 days, a year-over-year improvement of over 60 days. This is a great result given the external environment, especially around suppliers, and we're focused on continuing to improve the cash flow of our business. We continue to generate positive quarterly cash flows with free cash flow of 2.6 million in the quarter as we invested in the networking capital along with the growth of our top line. CapEx was only $700,000 and predominantly focused on maintenance, and we will likely see incremental investments in our strategic initiatives in the quarters ahead. Overall, another good quarter of financial results as we continue to grow the business. I'm pleased with the top line performance and expect we will continue to see price realization in our fourth quarter. The global team continues to respond to rising input and transportation costs while keeping our facilities operating safely and delivering for our customers. Our balance sheet is strong, our technology is winning in the market, and our people make a difference every day. I want to say a special thank you to our employees across the globe for their commitment and all the fantastic work they are doing for our customers and shareholders. And with that, I'll turn it back over to Bruce for an update on the progress we're making with our strategic initiatives.

Thank you, Kevin. I'd like to turn now to slide 10. The team is making progress in advancing our three strategic platforms to achieve our goal of $550 million in revenue by the end of fiscal 2026, while driving operational excellence to achieve EBITDA margins in the low to mid-20% range. Beginning with the developing markets, the team has built a detailed analysis by customer and in-market identifying the specific needs by country or region. We've established an initial localization roadmap that would be instrumental in growing share in these emerging economies. On our next call, we'll provide more on our plans for fiscal year 23 to meet local requirements, market lead times, and regional price points. While we have seen a delay in the overall market recovery in the eastern hemisphere, we believe there is pent-up demand that will return as economies emerge from COVID-19 restrictions. We continue to advance our diversification of end markets in the quarter as well. Recently, we have added a new business development manager for rail and transit and have launched a new Hubby Hellfire Blizzard Duty rail switch heater that has been well received by our Class 1 rail customers. We've also launched our zero halogen low smoke commercial heat tracing cable that is gaining momentum, particularly in Europe. Based upon feedback from our channel partner, we expect sales to double in the coming year. During the quarter, we have secured wins in two data centers for our commercial products. And finally, we've lost the marketing campaign in food and beverage that is yielding early results with key wins in some new applications. As you prepare to watch the Super Bowl next weekend, you may be interested to know that Thermon plays a role in providing those much needed game day essentials with 1.1 million in orders for potato chip, dressing and food oils, and brewing production operations. Our third strategic platform, technology-enabled maintenance, continues to gain momentum in the marketplace. The Genesys network, a self-healing mesh network that enables centralized control, has been successful in early customer pilot programs. The quote backlog is growing, and early adopters are seeking to expand the installations across their operations. We also have new product introductions to augment this solution set that will be announced during the first half of fiscal year 23. Looking forward to page 11, we are very pleased with the continued momentum we are seeing in our business. The Thermon team has done an excellent job in positioning this business for success during the recovery and in the energy transition that is underway. Thermon solutions are mission critical in the majority of the diverse end markets we serve. We see additional recovery in our traditional end markets in Q4 and throughout fiscal year 23 that will be augmented by our efforts to grow and expand our addressable markets. As a result, for the third consecutive quarter, we are raising our full year revenue guidance to $342 to $350 million from $330 million to $345 million, representing 24% to 27% year-over-year top line growth. While input costs continue to be a headwind on EBITDA margins, we anticipate some of these costs to be transitory and that our operational excellence programs will drive productivity gains combined with price increases to mitigate the residual impact over the next several quarters to further expand EBITDA margins. I'm personally excited about the opportunities that lie ahead. We have a resilient business model that generates strong cash flow at attractive margins, a very capable team, a sound strategy, and with covering in markets that position us well to create shareholder value over time. With that, I would like to hand it back over to our moderator for the Q&A portion. of our call.