Thermon Group Holdings, Inc.

Greetings and welcome to Thermon Group Holding Inc's earnings call for the second quarter 2025. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yvonne Salem, Vice President, FP&A and IR, thank you. You may begin.

Good morning, and thank you for joining Thermal Group's Fiscal 2025 Second Quarter Results Conference Call. Leading the call today are CEO Bruce Sainz and Chief Financial Officer Dan Schott. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8K, and it's also available on the next 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, Q2 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 gap 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 of 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 recently 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 might be required by law. Today's call will begin with remarks from our CEO, Bruce Baines, who will provide a review of our recent business performance. including an update on the progress we have made on our strategic initiatives, followed by a financial update and review of our CFO, John Schott. Bruce will then wrap up our prepared remarks with an update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Bruce.

Well, thank you, Yvonne, and good morning to everyone joining us on the call today. Before I begin my comments, I'd first like to start by welcoming our new Chief Financial Officer, Jan Schott. Jan is a proven public company finance executive who brings significant financial expertise and deep capital markets experience to Thermod. We're very excited and fortunate to have her joining our team. Jan, welcome aboard. I and the rest of the management team are looking forward to working with you. Turning now to slide three. During the second quarter, we remained laser focused on executing against our strategic priorities, highlighted by improved bookings momentum, further progress on our operational excellence initiatives, and another quarter of financial discipline leading to strong free cash flow generation. In addition, we executed against our stated capital allocation priorities with the acquisition of FOTI and the return of capital through our share repurchase program. I think it's important to highlight that while we continue to effectively manage costs to the current level of demand, we've not wavered on our capital allocation to advance strategic initiatives while augmenting our organic growth. Since the start of the calendar year, we've acquired vapor power, which increased our exposure to more diverse end markets and electrification. This integration is going well, and we're pleased with the strong level of market demand that we're seeing for these products. Just last month, we announced the acquisition of Fati, significantly expanding our geographic footprint in the Eastern Hemisphere. In spite of some short-term weakness in capital spending, we have continued to invest in our organic growth initiatives to further strengthen our competitive positioning over the long term. So with that, I'd like to turn to the second quarter, starting on slide four. We were very pleased with the improved order momentum we're experiencing during the second quarter, with orders up nearly 13% on a reported basis and 3% excluding the benefit from vapor power, resulting in an organic look-to-bill of almost 1.17 times. The strength was generally broad-based, and while we're still seeing extended decision cycles, and some uncertainty from customers, primarily on larger capital projects, we are encouraged by the growing opportunities pipeline and improved order momentum. As a result of the improved order trends, our quarter-ending backlog increased 29% on a reported basis and was up 3% organically. The timing of our backlog remains somewhat extended with many of the project wins currently in engineering with execution planned in fiscal 2026, which is a positive trend going forward. After generating 23% year-over-year organic growth in a record FY24Q2, our revenues declined by 7.4% year-over-year, which was in line with our expectations as the contribution from vapor power and stability from our materials revenue were offset by continued weakness in large project revenues and the timing of revenue recognition. Excluding vapor power, our revenues declined roughly 17% on an organic basis, driven by a 51% decline in our large project revenue during the quarter. Our short cycle OPEX revenues, which consist of our materials revenues and small project business, remained a stabilizing force during the second quarter, with revenues down only modestly as customers continue to focus on maintenance and repair spending. This balance in our model is a function of our focus on diversifying our in-market exposure and growing our installed base of customers. The result is a more resilient and stable revenue base through the cycle. As we detail on slide five, our materials and small project revenues represent over 80% of our revenues on a trailing 12-month basis, while our large project revenues were only 20% of the total. Our current mix provides a more stable and predictable revenue stream, as well as a more profitable mix, given our OPEX revenues consistently generate higher gross margins. Our OPEX revenues have grown nearly 11% on a TTM basis and have increased over 1% organically, while our large project revenue has declined 20%. The growth in our OpEx revenue, despite the uneven demand environment over the last several quarters, highlights the benefit of our deep installed base and recurring revenue exposure. Another key aspect of our strategy you've heard me discuss has been our goal to reduce exposure to the oil and gas sector. As I discussed last quarter, we have achieved our fiscal year 26 goal of generating at least 70 percent of revenues from diversified in markets. We remain committed to maintaining or further improving this metric, and while we did see a slight rebound in oil and gas bookings during our Q2, we still generated just over 70% of orders from diversified end markets during the period. It's important to note that we're not moving away from large projects, and large projects will always be an important driver of our business to enable growing the installed base. We have begun to see some signs of movement in large capital projects this quarter. In fact, we secured a large multi-year transit order in excess of $8 million driven by infrastructure investments and a large Canadian carbon capture polyethylene unit valued at over $8 million as well. Our pipeline of sales opportunities has now grown to over $1.2 billion and with roughly 320 million in decarbonization opportunities, and we believe that we are well-positioned to benefit as large project spending trends improve. We don't believe there are any longer-term factors driving the recent project weakness. With the elections behind us, we're optimistic that sales cycles will start to normalize as customers gain more clarity moving forward. Turning now to slide six and our strategic pillars. Since I've already given you some color on our installed base and our diversification efforts, I'd like to take a moment to update you on our most recent acquisition, followed by an example of a nice energy transition market opportunity we're seeing. Turning now to slide seven. On October 2nd, we completed the acquisition of FATI, an industrial heater business based in Milan, Italy. FATI has a 79-year history a list of loyal customers, and is a very well-respected brand for high-quality heaters and demanding industrial applications. Their certifications and customer approvals are key in accelerating our ability to serve growing markets for electrification and decarbonization in Europe and across the Eastern Hemisphere. Revenues on a trailing 12 basis were roughly $13 million. The business is also experiencing strong demand growth and they currently have a backlog in excess of 15 million with a robust pipeline of incoming opportunities. The purchase price of 12.5 million euro is roughly equivalent to one year of sales. We're excited to welcome the Fatih team to Thermont and are already engaged to drive operational improvements to increase capacity to grow the business while expanding operating margins. Turning now to slide eight. As various technologies compete to provide a more sustainable energy future and electrification and data centers are driving increased electricity demand, we're seeing nuclear reemerge as a key piece of the future low carbon energy mix. Historically, Thermon has supplied heaters and filtration systems to the nuclear market through our CalorieTech heater line and 3L filtration systems. Base loaded power generation stations are now required to operate more flexibly with frequent shutdowns and restarts on short notice. While new assets can start quickly, they require staying warm during downtime for rapid startup, often using auxiliary steam to maintain high temperatures and pressures. Here's an example where we're delivering an 8.2 megawatt precision electrode boiler that can quickly deliver high-pressure, high-temperature steam to enable rapid startup for a nuclear power plant. Other opportunities we see in this space are for refurbishment of existing facilities and small modular reactors known as SMRs. With that, I'd like to turn it over to our new CFO, Jan Schott, who will provide a more detailed review of our second quarter results before I wrap up with some remarks on our financial outlook. Jan?