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Thermon Group Holdings, Inc. (THR) Q3 2024 Earnings Call Transcript

Thermon Group Holdings, Inc. (THR)

Q3 2024 Earnings Call Transcript

Company Participants

Ivonne Salem - Vice President, FP&A and Investor Relations

Bruce Thames - President and Chief Executive Officer

Kevin Fox - Senior Vice President and Chief Financial Officer

Conference Call Participants

Brian Drab - William Blair

Jonathan Braatz - Kansas City Capital Associates

Presentation

Operator

Greetings and welcome to the Thermon Group Holdings Third Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.

I will now turn the conference over to Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Ivonne Salem

Thank you, Dan, and good morning, and thank you for joining today's fiscal 2024 third quarter conference call. Earlier this morning, we issued earnings press release, which has been filed with the SEC on Form 8K and is also available on the Investor Relations section of our website. Additionally, the slides to this conference call can be found in our IR website under News and Events, IR calendar earnings conference call, Q3 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 reporting reported in accordance with GAAP.

I'd like to remind you that during this call, we might make certain important 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, future developments or otherwise, except as may be required by law.

Now I would like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Bruce Thames

Well, thank you, Ivonne, and good morning, everyone, and thank you for joining us here today. I'd like to start with a quick introduction of thermal and especially for those of you who might be new to our story as a diversified industrial technology company, 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 for continents, our technology is agnostic and our solutions are instrumental in enabling a wide range of applications across diverse end markets, including the energy transition through decarbonization and electrification.

As we begin this call, I'd like to thank our thermal team around the globe for their commitment to serving our customers with excellence and another quarter of strong performance. I would also like to welcome the vapor power employees to the thermal team and look forward to their contributions to our success going forward.

Let's turn now to slide 4 on our strategic pillars. As we discussed at our inaugural Investor Day in November, we are creating sustainable value through the execution of our long-term strategy that is based on three pillars. First, profitably growing the installed base. Second, decarbonization, digitization and diversification. And third disciplined capital allocation.

Over the past 69 years, we've developed a substantial global installed base by delivering mission critical industrial process, heating technology and solutions to our customers. Although these solutions represent less than 1% of the initial capital costs of a process facility. They are critical to ensuring safe, reliable and efficient operations. This enables us to drive growth across our traditional IT market verticals, increased recurring revenues and expand margins through operational excellence.

We're generating additional growth through our long-term strategic initiatives of decarbonization, digitization and diversification serving as a key enabler of the energy transition through electrification and decarbonization. Our innovative solutions drive energy efficiency, facilitate a circular economy and assist our customers in achieving their sustainability objectives through our digital solutions, we also help our customers optimize maintenance through enhanced controls and monitoring. Our core technologies, coupled with our decarbonization and digitization solutions, are supporting our efforts to diversify our end markets, and we're making meaningful progress towards our goal of having approximately 70% of our revenues come from outside of oil and gas by the end of fiscal 2026.

Our commitment to a disciplined capital allocation strategy. It's foundational to the first two pillars. Our strong balance sheet gives us the flexibility to reinvest in our business for organic growth and positions us to pursue strategic bolt-on acquisitions that align with our financial objectives. Vapor power is a great example of that strategy in action, which we'll discuss more in more detail later after completion of that acquisition, our leverage remains on the lower end of our stated goal of 1.5 times to 2 times net debt to EBITDA.

Turning now to slide 5, you can see our continued progress in executing our diversification strategy with approximately 66% of our trailing 12 months revenue coming from diversified end markets. On a TTM basis, oil and gas revenues up 9%, while revenues from diverse end markets are up 26%. Most notably, we've seen significant success in the food and beverage end market with revenue growth of 209% over the past year.

Our market share in rail and transit has also expanded significantly with revenue up 28% year over year, along with commercial market where revenue was up 18%. Of particular note is the 55% year-over-year growth in the renewables end market, underscoring Thermon's role in facilitating the energy transition. The expansion in the renewables market reflects increasing activity across alternative fuels, hydrogen and ammonia applications.

This quarter, approximately 4% of revenues were associated with decarbonization applications with the pipeline of opportunities growing to over $200 million. We continue to see strong activity in the US power sector, particularly across the southern states as power generations as power generators winterize their assets, Genesis' network has become the system of choice that power generators used to provide operational awareness during winter weather events. In fact, the most recent winter storm here in Texas had a very different outcome from Winter Storm Uri back in 2021, as utility companies were able to remain operational with no significant disruptions to service. This is a testament to the work our teams have done to help our customers operate safely and reliably during extreme weather conditions.

Turning now to slide 6, I'd like to discuss a great example of our third strategic pillar in action where we were able to use the strength of our balance sheet to fund inorganic growth to augment and accelerate our organic growth initiatives.

Our recent acquisition of Weber power marks a significant step forward in advancing our strategy for profitable growth through decarbonization and diversification. As we outlined at our Investor Day, we evaluate potential acquisition opportunities based on four criteria and vapor power needs all first, it aligns with our long-term strategy by diversifying our addressable markets with approximately 75% of revenues from the food and beverage, commercial and general industrial sectors and very little exposure to oil and gas.

Second, it expands our portfolio to include electrical resistance, electrode and supercritical coal to blowers as well as steam generators. The electric boilers and electrode steam generators provide customers the ability to generate hot water and steam with improved control and efficiency in a compact footprint while eliminating greenhouse gas emissions on site. the supercritical CO2 borrowers are used in specialty applications such as plastics recycling for processes require extremely high temperature and pressure steam. By incorporating these products into our portfolio, we're enhancing our exposure to high-growth electrification and decarbonization opportunities over the next 20 years to 30 years.

As you can see here, this business has grown at an 18% compounded annual growth rate over the last five years with an adjusted EBITDA margin profile of approximately 20%. In addition, the business had over 70% of calendar 2024 revenue per day projections in backlog as of January first, at a level significantly above historical average. By implementing the thermal business system, we believe we can further improve the EBITDA margin profile to meet our stated goal of 24% over the next 24 months. As importantly, we anticipate the acquisition to have a near-term positive impact to results and be accretive to GAAP EPS in the first 12 months....

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