Thermon Group Holdings, Inc.THRNYSE
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Operator: Greetings, and welcome to the Thermon Earnings conference call fiscal year 2026 quarter 2. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you, Ivonne. You may begin.
Ivonne Salem: Good morning, and thank you for joining Thermon Group's Second Quarter Fiscal 2026 Results Conference Call. Leading the call today are CEO, Bruce Thames; Chief Financial Officer, Jan Schott; and Chief Operating Officer, Tom Cerovski. 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 in our IR website under News & Events, IR Calendar, Earnings Conference Call Q2 2026. 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 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 Thames, who will provide a review of our recent business performance, including an update on our strategic initiatives. Following Bruce, our Chief Operating Officer, Tom Cerovski, will share an update on our progress and opportunities in the data center market, which is a key component of our business diversification strategy. After Tom, our CFO, Jan Schott, will provide a financial update and review. 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 it over to Bruce.
Bruce Thames: Thank you, Ivonne, and good morning to everyone joining us on the call today. I'll begin my commentary with our second quarter highlights, which you can find on Slide 4. As we committed in our Q1 call, the Thermon team delivered exceptional second quarter results with solid incoming orders, strong revenue conversion, and robust profit capture that exceeded expectations across the board. Our reported revenues were up 15% from last year, which combined with our strong margin execution and operating leverage resulted in a 29% increase in adjusted EBITDA. These second quarter results, combined with a backlog that is up 17% year-over-year and improved visibility position us well for the balance of the year. On a trailing 12-month basis, our revenues and adjusted EBITDA have reached records of $509 million and $114.1 million, respectively. We believe our performance reflects the strength of our strategy, the resilience of our business model, and the outstanding execution by our global team despite a volatile macroeconomic backdrop. I'm incredibly proud of our team's ongoing efforts to execute our margin improvement initiatives, including tariff mitigation measures, demonstrating steady progress towards our longer-term EBITDA margin objectives. Together, these actions enabled us to generate 23.2% adjusted EBITDA margins in the second quarter with adjusted EBITDA margins growing to 22.4% on a trailing 12-month basis. While we've been pleased with the steady progress, additional opportunities to drive further EBITDA margin expansion remain. This quarter is illustrative of the earnings power of our business, and we remain committed to driving EBITDA margin expansion over the longer term. Our unwavering commitment to our strategic growth initiatives has us well positioned to benefit from a strengthening macro backdrop and several favorable secular demand trends, including reshoring, electrification, decarbonization, and rising power demand. This is evident when looking at our total bid pipeline, which was up 11% at quarter end with nearly 80% of the opportunities coming from our diversified end markets, including power generation, renewables, commercial, and data centers. I'm also very excited to report that this update will include details of our first order for the new Poseidon liquid load bank. We're seeing extremely strong quoting activity for our data center solutions and expect order activity to accelerate in the coming quarters. Tom Cerovski, our Chief Operating Officer, will provide a more detailed update on the data center market later on this call. The team continued to demonstrate disciplined financial management during the second quarter, and we ended the period with net leverage at 1x with total liquidity of $129 million. Our M&A pipeline remains active, and we're excited by our strong capital position, which provides us with the capacity and flexibility to act decisively on opportunities to deploy capital in alignment with our strategic priorities. We are encouraged by the strengthening trends in our business and anticipate this momentum continuing into the third quarter. During the first half, we've established a new global engineering center in Mexico to handle the increased project workload driven by the backlog growth we experienced coming into this fiscal year. During the second quarter, we saw a 41% increase in large CapEx revenues, driven by 2 large North American LNG projects as these move through the design phase into execution. Based upon these factors, we are well positioned to deliver strong second half results and are pleased to raise our full year 2026 financial guidance, which I will cover in more detail in my closing remarks. Before I turn it over to Tom, I'd like to take some time to provide an update on our strategic growth initiatives, which are centered around our 3D strategy of decarbonization, digitization, and diversification shown here on Slide 5. We believe our focused commitment to our strategic pillars has us well positioned to benefit from several strong secular drivers to generate sustained organic growth moving forward. Turning now to Slide 6. I will begin with an update on our digitization opportunity. Since launching the Genesis Network, we've received extremely positive customer feedback with over 86,000 installed circuits, up from 58,000 at the end of fiscal '25. We are now beginning to leverage our digital technology capabilities across a broad spectrum of Thermon Solutions, including commercial heat tracing, rail and transit, and data center product offerings. Our customers need real-time operational awareness and analytics to more effectively manage their business and provide actionable insights to help unlock predictive maintenance, enhance performance, and energy efficiency. This differentiated hardware and software platform helps create value for customers, which drives growth and improves retention while delivering enhanced returns. Turning now to Slide 7. I'd like to provide an update on an exciting area of growth in the decarbonization space represented by medium voltage heaters. The electrification megatrend is driving momentum to replace hydrocarbon-fired heating systems with electrical solutions, especially in Europe. Medium voltage heaters offer a compelling alternative with higher efficiency, zero emissions, lower initial capital costs, and lower maintenance expenses, all while providing a higher level of control. Our Quantum medium-voltage heater product line was launched in 2024, offering voltages from 3,600 volts to 7,200 volts. Our first 2 orders totaling nearly $10 million are now being produced for customers in the U.S. and the Middle East. This market is estimated to be growing at a 17% compounded annual growth rate to $263 million in 2030 with a very short list of competitors. Given Thermon's differentiated capabilities in heat transfer analysis and design, we are leveraging legacy customer relationships in the chemical, general industrial, oil and gas, and food and beverage end markets to grow share. We are seeing strong order momentum with a solid pipeline of high probability opportunities as we work to scale our capacity in both North America and Europe. I would now like to turn the call over to Tom Cerovski, our newly appointed Chief Operating Officer, who will provide an update on diversification into the data center market. Tom?
Thomas Cerovski: Thank you, Bruce, and good morning to everyone. Moving on to Slide 8. I'm excited to share updates on a key end market that is now central to our overall business diversification strategy. As we've discussed on prior calls, the unprecedented investments in data centers driven by AI adoption represent a significant and long-term growth opportunity for Thermon. The recent shift to liquid cooled data centers has created a rapidly accelerated demand for liquid load banks to validate critical cooling systems and power infrastructure. Thermon is uniquely positioned to capture this opportunity, leveraging our legacy solutions. Given the pace of this market, we are proud of how quickly our team has executed. In just 4 months from project kickoff, we completed prototype builds for our Poseidon and Pontus liquid load bank solutions and customer demonstrations are already underway. The response has been outstanding. Our quote log now totals roughly $30 million and continues to grow, and we've secured our first order for 20 Poseidon units. Based on management estimates, the liquid load bank market is projected to grow at a 21% CAGR from $84 million in 2024 to $386 million by 2032. We are targeting a 20% to 25% market share within the next 24 to 36 months, and this early traction gives us confidence in achieving that goal. Customers are excited about our differentiated design, which offers clear advantages over our competitors, including compliance with the ASME pressure vessel code, Canada Registration or CRN number for Canadian customers and industry-leading power density or kilowatt to weight ratio and our pursuit of UL and cUL product certification. The combination of these features and benefits position Thermon well to emerge as the trusted partner for mission-critical data center applications. Beyond liquid load banks, remember that Thermon also has significant pull-through opportunities for our traditional product solutions in data center applications, including electric heat tracing, environmental heaters, immersion heaters, tubing bundles and removable heat blankets. As data center growth accelerates, our commercial team is actively developing channels with owners and operators, HVAC contractors, commissioning firms, and rental houses to ensure Thermon is top of mind for these data center projects. Capitalizing on these opportunities in the data center market is a great example of our strategy in action, creating value for customers and shareholders through innovation and disciplined execution. We look forward to sharing more updates on this exciting growth opportunity in the quarters ahead. With that update, I'll turn it over to Jan for a detailed review of our second quarter results. Jan?
Jan Schott: Thank you, Tom, 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 to Slide 9. Revenue for the quarter was $131.7 million, a year-over-year increase of 15%. The growth this quarter reflects more favorable spending patterns following tariff uncertainty, improved trends in large project revenues and continued momentum from F.A.T.I. As expected, we also benefited from backlog conversion in the quarter, stemming from previous supply chain disruptions and delayed projects. Excluding F.A.T.I., organic revenue grew 9% year-over-year. Our OpEx revenues were $107 million during the second quarter, an increase of 10% compared to last year. Excluding the contributions from F.A.T.I., OpEx revenues increased 3% from last year. OpEx revenues represented 81% of total revenues for the quarter. Large project revenue was $24.7 million during the second quarter, up 41% from last year. As we highlighted in last quarter's call, we saw several CapEx projects move from engineering to execution early in the second quarter. We expect this momentum to continue through the balance of the year. Our gross profit was $61 million during the second quarter, an increase of 20% compared to last year. Revenue growth benefiting from pricing, combined with efficient execution and tariff mitigation measures contributed to the increase in gross profit. As a result, gross margin was 46% for the second quarter, up from 44% last year. The gross margin improvement was notable given the higher mix of large project revenue for the quarter. Adjusted EBITDA was $30.6 million for the quarter, up from $23.8 million last year, an increase of 29%. Volume growth, gross margin improvement, and disciplined cost management partially offset continued investments in growth initiatives. Adjusted EBITDA margin was 23.2% during the second quarter, up from 20.8% last year. GAAP earnings per share for the quarter was $0.45, up 61% from $0.28 in the prior year. Adjusted earnings per share was $0.55, up 45% from $0.38 last year. Second quarter orders were flat compared to the same period last year. On an organic basis, bookings declined 4% year-over-year, primarily driven by rail and transit following last year's significant surge. Momentum from F.A.T.I., where we continue to benefit from broader decarbonization trends helped offset the organic decline. Our overall book-to-bill ratio for the quarter was 1.0x, down modestly from the prior year, consistent with timing variability in project awards. Backlog increased 17% on a reported basis and was up 4% organically due to the positive book-to-bill in the quarter, combined with project timing. Turning to performance by geography. Year-over-year sales in USLAM were up 8% compared to the prior year, driven by the ramp in several large CapEx projects. Revenue in Canada increased by 10%. Trends in EMEA remained strong with revenue doubling, driven by solid performance in our organic business and contributions from F.A.T.I. In contrast, APAC experienced a 4% decline, primarily due to ongoing uncertainties surrounding global trade policies with China. Moving to Slide 10 for an update on our balance sheet and liquidity. Working capital increased by 10% to $172 million at the end of the quarter, driven by F.A.T.I. higher inventory in preparation for fall heating season and materials purchased in advance of tariffs. CapEx was $3.1 million during the quarter compared to $1.9 million last year, which includes capital investments to support growth initiatives. Free cash flow during the quarter was $4.4 million, down from $6.7 million last year as we invested working capital in inventory build, increased project activity, and the timing of shipments. We repurchased $6 million in shares during the second quarter, bringing our total shares repurchased since the start of fiscal '25 to $36 million. We currently have $39 million remaining under our current authorization as of the end of the quarter. We ended the quarter with net debt of $110 million and a net leverage ratio of 1.0x. In summary, we continued our financial discipline during the second quarter and remain focused on maintaining a strong balance sheet. We have $129 million in total cash and available liquidity as of quarter end, providing us with ample financial flexibility to execute on our balanced capital allocation strategy, which remains focused on driving growth, both organically and through strategic acquisitions, while balancing opportunistic share repurchases and debt reduction. With that, I will turn the call back over to Bruce.
Bruce Thames: Thanks, Jan. We're obviously very encouraged by our second quarter results and the accelerating momentum across our markets, particularly the move of several large projects from engineering to execution. I'm proud of our team's disciplined execution on margin initiatives, including swift and effective actions to mitigate the impact of tariffs, combined with meaningful progress on our margin expansion efforts. With this momentum continuing into our fiscal third quarter, we are on track to deliver a strong second half to our fiscal year. Based upon the improving visibility in our business, we are pleased to raise our full year 2026 financial guidance for both revenue and adjusted EBITDA. As we detail on Slide 11, our revised fiscal 2026 financial guidance calls for revenue in a range of $506 million to $527 million, representing 4% growth at the midpoint. We are raising adjusted EBITDA guidance to a range of $112 million to $119 million, representing 6% growth at the midpoint. Our guidance continues to assume that the current tariff structures remain in place and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment and the improved business trends we've seen are sustained. As I've outlined in the past, we remain highly focused on effectively managing the factors within our control. As you can see here on Slide 12, we've made significant progress in our 3D growth strategy over the last 5 years, driving double-digit top line growth with adjusted EBITDA growing at 2x the rate despite the contraction in large CapEx spending we experienced in fiscal '25. Turning now to Slide 13. We believe we are strategically positioned to benefit from several powerful secular drivers, including reshoring, electrification, decarbonization, power, and data centers. We're in an extremely strong financial position with more than sufficient financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating long-term value for our shareholders. That completes our prepared remarks. We are now ready for the question-and-answer portion of our call.
Operator: [Operator Instructions] And the first question comes from the line of Justin Ages with CJS Securities.
Justin Ages: I wanted to start on the large CapEx side, which was a nice surprise there. In the prepared remarks, you mentioned a couple of LNG projects in North America and some momentum. Are you expecting more in the same business, more in LNG there? Or is there some other large CapEx projects that are kind of coming into focus?
Bruce Thames: Yes, Justin, last quarter, we spoke about 5 projects we won in LNG. And certainly, that's an area where we're seeing growth. And so we really focused when we came into the year on about -- our backlog was up about 29% year-over-year. We really were -- had a big backlog of work in engineering. Since we've established a global engineering center in Mexico and have staffed that up, and that team has begun has become productive. And what we're seeing there is those projects move from the design phase into execution, and we saw a couple of those move forward in the second quarter of this year, which led to our CapEx -- large CapEx revenues being up 41% year-over-year. So we do expect that flow to continue through the back half of the year. And as we look forward, our LNG pipeline is up 140% year-over-year when we look at those opportunities. So we are seeing some robust activity in the LNG market.
Justin Ages: And then shifting to the digitization. Nice update you guys hit that 50% growth that you laid out from the 58,000. Can you just give us a little more detail on what drives those efforts? Is it additional sales? Is it really the tip of the spear that differentiates your product from competitors?
Bruce Thames: Yes. So I think it's actually a few things. One is, it is the tip of the spear, and it really helps differentiate us from the competition and improves our win rate so that we can grow the installed base. It also increases really the customer engagement throughout the life cycle of the asset, which really helps us to capture those recurring revenues over time. So that's one of the big benefits that we see from the digitization effort. And the things we highlighted this quarter is we built this platform of both software and hardware, and we're now leveraging that across a wide range of Thermon solutions in the marketplace. So thus far, we've really introduced it into the industrial heat tracing end markets and product lines. It's also now being offered in our commercial line of heat tracing products, which we just launched in the last year with the EVO controller. And then we're also moving that into rail and transit for switch heating, particularly around our Hellfire units. And then our most recent launch of the Pontus and Poseidon load banks include these software and hardware tools in these units as well. So we really see this as being an enabler across a wide range of our solutions in the marketplace.
Operator: And the next question comes from the line of Brian Drab with William Blair.
Brian Drab: Gross margin is really solid in the quarter, obviously. But that was also in a quarter where you had some of the CapEx projects stepping up. Can you talk about that dynamic, maybe the margins in some of the bigger projects that are coming through? And I mean, is everything else that you're doing offsetting maybe some lower margin big projects? Or do these projects have really good margins?
Jan Schott: Brian, this is Jan. I'll take that question. Yes, you're actually spot on. We did have, I guess, large projects, as you know, typically don't have as good a margins as our rest of our projects. And so we did have an unfavorable impact from those. But offsetting that this quarter were just we had increased volumes, so operating leverage from that. We also had our Thermon Business Systems productivity gains that we continue to see really help our margins really be solid. We had pricing that we saw flow through in the quarter. So we did see a benefit from that. Our tariff mitigation efforts are absolutely helping. And obviously, those work in tandem with price and then new product introduction. And so I think you'll continue to see -- we're very focused on, I would say, the adjusted EBITDA margin, not so much the gross margin. And as you saw, I think on Slide 3, our trailing 12 months gross margin is at 45%. We did see higher this quarter, and it was really due to all those contributing factors. But we'll continue to push for continued expansion in our margins. And I think our aspirational goal is to get to 24%. The midpoint of our revised guidance is at 22.4%.
Brian Drab: So in terms -- I know you said to focus on EBITDA margin, but can I ask though, for the second half of the year, directionally how to think about gross margin? And I guess the 22.4%, it looks like for EBITDA margin, that means kind of sustaining this -- at least sustaining this 23% level is probably the goal for the second half of the fiscal year?
Jan Schott: Yes, absolutely. I think that would be the goal. For gross margins, I think we'll continue to see strong margins. If you look at that historical rate, I think that should be instructive for what we would expect for the balance of the year.
Brian Drab: And then maybe I'll just ask one more for now. It's great to see these larger projects releasing or moving to execution in the LNG industry. I think you said 2 moved to execution, but there's 5 in the pipeline. What is the potential timing for the other 3 to move to execution? And then secondly, are there other large projects in the funnel that might release outside of LNG?
Bruce Thames: Yes, Brian, I don't want to over-index on LNG. Those were the 2 larger projects we saw move forward this quarter. But if you look, and I would say more broadly, our business was up about 15% year-over-year. Our diverse end markets were up roughly 15% equivalent and oil and gas was up similarly. So this is not an outsized move in oil and gas. And so I'd like to make sure we don't over-index on that. So yes, there are a much broader range of projects that are beginning to move through execution, and they include a whole host of other end markets, whether that's -- we do have some in the chemical, petrochemical. We have some also in power, certainly in other areas around our other end markets as well. So we are seeing -- it's more broad-based move. And when we looked at last year, we did see a contraction in CapEx spending, and that was not in any given sector. It was fairly broad-based. And so the shift we're seeing now is also fairly broad-based when we see these projects coming back and moving to execution in the back half of the year.
Brian Drab: And just really quickly, the data center opportunity and the medium voltage center opportunity are really new and building. How much of that impact the second quarter results? Or is that, that's really more just coming in the next few quarters, really?
Bruce Thames: Right. That's a great question. There's 0 impact in the second quarter. And these projects -- this -- we're just beginning to book orders, which Tom had noted in the prepared remarks. So we won our -- secured our first order, which we're excited about. We've got a growing quote log that we feel we've got some high probability opportunities there. And then with medium voltage, we've secured our first 2 orders. Those are being built as we speak. And we're working to scale capacity in both North America as well as in Europe, so we can grow that business going into our fiscal '27. So we're excited about both of those areas for growth, and we're really well positioned with a differentiated product offering and a fairly narrow range of competitive -- when we look at the competitive landscape, we're really well positioned.
Brian Drab: All right. Congratulations on the great results.
Bruce Thames: Thanks, Brian.
Jan Schott: Thanks, Brian. One clarifying thing I just want to point out is, obviously, the gross margin going forward will be dependent upon the mix. So that's kind of the -- if there were any headwinds, that would be it.
Brian Drab: Understood. Not surprising, yes.
Operator: And the final question comes from the line of Chip Moore with ROTH.
Alfred Moore: Congrats as well. Bruce, I guess, I think we've addressed most of the key items. I guess for me, just maybe following up on your last comments around scaling capacity for medium voltage heaters and the opportunity in data center. Just how -- it seems like you have a lot of organic opportunity in front of you. How are you thinking about organic investment versus inorganic? And are you still tracking bolt-ons? And just what are your priorities here?
Bruce Thames: Well, Chip, great question. First and foremost, our priority is investment in organic growth initiatives, and that has not and will not change. But we are fully funding that really through additions in our SG&A to be able to support the growth in that business as well as through CapEx spending to enable that growth by scaling our capacity in our factories. So that is all embedded in our guidance and underway. As Jan had noted in her prepared remarks, our balance sheet is in a really great position, and we have a strong pipeline of opportunities that we are very focused on really looking for those -- that next inorganic growth opportunity that will augment our 3D strategy going forward. And so we are very focused on really moving forward and looking at those inorganic growth opportunities. So really thinking about the business driving that organic growth, which we've identified these couple of key areas, but also really the inorganic piece is going to be important to continue to drive growth in the business going forward.
Alfred Moore: And maybe one last one that just popping my head, Bruce. The government shutdowns out there, is there any risk of delays at all on projects or anything like that or any impact at all?
Bruce Thames: Yes. We really don't have any exposure to government contracts. So it's really a nonevent for us. So it's really not a problem.
Operator: And ladies and gentlemen, that does conclude the question-and-answer session. I would like to turn the floor back over to Bruce Thames for any closing remarks.
Bruce Thames: Thank you all for joining us here today. We appreciate your interest in Thermon and looking forward to giving you an update for our third quarter in the January, February time frame. Thank you.
Operator: Thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.