It's great to see you here this morning, and a heartfelt welcome to those of you listening online. We have a great day prepared for you this morning, and we hope that you will walk away with a deeper understanding of our business model and our strategy to grow our shareholder value for the long term. Before we start, I would like to remind you that during this presentation, 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, future developments, or otherwise, except as it might be required by law. As I said before, we have a great morning prepared for you. We're gonna start with Bruce Thames, our President and CEO, who's gonna give you an overview of our business model, our strategy, and long-term goals. He's gonna be followed by Candace Peterson, Vice President of Human Resources, who is going to talk about how our people and our culture are enabling our growth. Then we're gonna hear from Roberto Kuahara, Senior Vice President of Operations, who's gonna talk about our operational excellence program and its impact on our long-term goals.
Then we're gonna hear from Tom Cerovski, Senior Vice President of Global Sales, about how we are going to continue to profitably grow our our install base. We're then gonna have our first Q&A section. For those of you listening online, you can send your questions at any time, and we'll read them at this point. We're gonna have a short break, and after the break, we're gonna hear from Mark Roberts, Senior Vice President of Thermon Heating Systems and Engineering, and he's gonna tell you of Thermon's role on the energy transition. Then we're gonna hear from David Buntin, Senior Vice President of Thermon Heat Tracing, who is going to talk about our innovation and new product development program.
And then we're gonna hear from Kevin Fox, Senior Vice President and CFO, who is going to talk about our financial overview and dig deeper into our long-term outlook. Bruce will come back to the stage for closing remarks, then we're gonna have our second Q&A session. We hope that all of you here in the room will join us for lunch after the presentation and spend more time with our management team. Also in the room, not presenting today, we have Ryan Tarkington. He is our Senior Vice President and Corporate Counsel. With that, we're gonna play a short video, and then we're gonna turn it to Bruce Thames. Thank you.
At Thermon, we transfer the warmth needed to make life work, needed to make food and beverage work, needed to make pharmaceuticals work, needed to make data centers work, needed to make petrochemicals work, needed to make commercial buildings work, needed to make power plants work, needed to make rail and transit work, needed to make renewable energy work. We transfer the warmth needed to make life work. A degree above, Thermon.
All right. Well, good morning. Well, thank you all for joining us here today, and thank you all for joining online. I'm Bruce Thames. I'm President and CEO of Thermon. I've been with the company since April of 2015. I've got over 35 years in the industrial space, the last 20 of which I've really spent building and growing businesses. So very pleased to have you all here today. You know, and as we start the day, I kinda wanted to communicate, our vision is really to build a diversified industrial technology company, and with a differentiated position in the marketplace, with a wide range of end market verticals that really are well positioned with secular growth trends to drive shareholder value over time.
I think after you, I hope after you attend this presentation and hear from the team today, you'll see that we are well on our way to making that a reality. You know, today there's five key takeaways I wanna make sure that you get, and you'll hear from this throughout the day. But first is really, we're using the breadth of our portfolio, innovation, technical capabilities to extend our leadership position as a provider of industrial heat. Second, we're making meaningful progress in really building sustainable positions across a diverse range of end market verticals with solid secular growth trends. Third, we've consistently delivered growth and profitability by executing our strategy, and are now driving meaningful gains with our operational excellence programs.
Fourth, we're enabling our customers to achieve their sustainability goals while focusing on driving sustainability in our own business. Then last but not least, we have and will continue to be very disciplined and drive long-term shareholder value through a really very disciplined capital deployment program. So, hopefully, as you go through the materials today, you'll see that throughout. You know, I'm very fortunate to really have assembled a very capable team. Many of you, it'd be the first time you really had the opportunity to meet them. But this team has really been built really looking at making sure that we have the skills and experiences that we need to be able to execute on our strategy.
And I'll start with people like Tom or David and Mark, and they have the commercial skills. They really have the new product development and technical services skills to drive our organic growth. If I look to team members like Kevin and Ryan, they have experience in M&A, in finance, in risk management to help us execute on our inorganic growth strategy. We have team members like Mark and Roberto that are very process-oriented, that help us build a scalable business and really are driving operational excellence in our operations. And then we also have, last but not least, we have Candace, who really has those capabilities to help us build a very strong culture to be able to attract, develop, and retain the talent that we need to grow this business as we go forward.
So really, we are very well-positioned with a very capable management team. I think you'll see that throughout the day. I'm also really very fortunate to have a very distinguished board of directors. You know, they have really the skills and experiences needed to help us drive strong governance and really help management navigate understanding and managing risks, and go through kinda thinking about how we can execute on our strategy going forward. And just recently, you probably have heard the announcement. I'm very-- I'm looking forward to working with Jon Clarke, who's our newly announced Chairman of the Board. Jon is a, a former public company CEO and CFO. He's got a lot of great experience. He's been on the board for about four years now. Certainly understands our strategy, and he will be a great partner.
I also want to take the opportunity to thank John Nesser for his leadership as Chairman of the Board over the last several years. You know, kinda looking at Thermon. Thermon was established 69 years ago by Dick Burdick, and it was an innovation that really established the company. And if we look at that, since that time, over the last seven decades, the company has continued to evolve and transform itself to meet changing customer needs in a changing environment and a changing world.
You know, from the first steam tracing compound till we moved into the electrical heat tracing space in the 1970s, we were the first to develop software for heat tracing in the 1980s, you know, to more recently, the expansion of our addressable market through the acquisition of CCI Technologies, and the fact that that brought us process and and environmental heating to expand that portfolio. And then building best-in-class new product development capabilities, which led to the innovation around the Genesis platform and network, which really gives us the ability to provide better information real time to our customers, and certainly has helped us achieve that 20% Vitality Index the by the end of our year 2023.
Then looking forward, we've really positioned this business to be able to take advantage of some long-term secular growth trends around and grow our business above and beyond kind of the base market growth, using our decarbonization, digitization, and diversification initiatives. If we look at where we are today, we made a lot of progress since 2017. You know, we've grown our revenues by 80%, and we've expanded EBITDA margins by 700 basis points during that time. In doing so, we've really created, we've been able to diversify, create a much more diverse and resilient business that's that's less dependent on the CapEx cycle and is really much more dependent upon operating expenditures. Our diversification moved from 42% in non-oil and gas to 64% in non-oil and gas over that time period.
Our OpEx now represents 76% of revenues versus 61% of revenues in 2017. We've made tremendous progress, but we're not done yet, and you'll see that with our goals going forward. So if we look at Thermon today at the highest level, we are an engineered solutions company. We don't just sell widgets, and we have the technical expertise in heat transfer in electrical heating and hazardous areas, and we're very solid operators. We've demonstrated that over the several decades. We have a global footprint, which really gives us market access. We have the technical competence to deliver those solutions with over 200 engineers globally. We have a 22% EBITDA margin profile that continues to grow.
We have an asset-light model, where we use about 2% roughly in CapEx per annum, which really enables us to generate cash to reinvest in the business for growth. We have innovation with that 20% vitality index, and we have a strong market demand we've seen over the last year with a book-to-bill that exceeds 1x. If you look, all of this really gives us access to a broad range of diverse markets and applications. If we look here, first and foremost, I want you to understand our technology is agnostic. It can play across a wide range of applications, and that's what you see here. It's really that breadth of solutions. It's not just heat tracing, it's the process heating, it's the environmental heating.
It's really all of those things we can bring together to effectively solve customer problems. And if you can see here, there are many things that you take for granted today that without Thermon's technology, you wouldn't be able to put fuel in your vehicle. If you got on the subway this morning, the heat in that subway cab is probably related to Thermon and our products. Your phone, your computer, the chair you sit in, all of those products need our heating to be able to produce those, to convert something from a raw material to a finished good. To turn on your power during a cold snap or a winter storm. All of those things, you really rely on Thermon's technology.
So if we look here and look at our product portfolio, 60% is really tied to that legacy heat tracing business. And, you know, we have a very strong position, really a leading position, in critical industrial applications. That's where we really have played best through the history of the company. Next, we see kind of 20% heating solutions. That really came to us with the CCI acquisition. And, and really, that's process and environmental heating, and it's the largest, if we look at it, the total addressable market, but it's highly fragmented. It really creates some opportunities for us to grow, and it's also the fastest-growing that we see with this trend in electrification.
And then kind of if we look at the remaining 20% of our business, it's really spread across some very high-value niches where we have, really, some unique positioning with our, you know, our transportation heating with rail and transit, with temporary power solutions, with our tubing bundles business, and then certainly with, our heating blankets, with Powerblanket. So really, we're very well positioned. If we look at this collectively, you know, there's about $5.1 billion-$7.2 billion in total addressable market, which gives us a lot of room to build and grow this business above and beyond the FY 2026 goals that you'll hear here today, which is only a short two and a half years away.
If we look here at our customers, I'd like to first begin and say, you know, our first customer, 69 years ago today, or 69 years ago, is still a customer today. And that really speaks to the depth and the enduring relationships that we have built over almost seven decades. And these are blue-chip customers, and they're across a wide range of different end markets and verticals, chemical, oil and gas, power, EPCs, rail and transit, Class I rail, food and beverage. All of these really are our customers, very strong customers, very well-positioned in their end markets, and certainly have been key to our success over the last many years. I wanna take a minute now and really pause and talk about our mission, vision, purpose, and values.
You know, if we look at our mission, we provide mission-critical solutions to our customers. And I think it's important for you to understand and kinda go without Thermon's technology, many of the things you take for granted, you wouldn't have. But we represent less than 1% on average of the CapEx spend. And yet, if our technology is not reliable, if it doesn't work, operations, systems, things go down. So we are actually critical to those day-to-day operations that our customers have, and we position ourselves to be able to serve those needs. And we have built this clear and concise vision. We wanna be the world leader in industrial process heating solutions.
It really provides us a guide as a management team, as a company, as to where we're going, and our purpose really begins to speak to why Thermon exists, what is the greater good? And it really connects our people and anchors them with really delivering the, we transfer the warmth needed to make life work. You saw that in the video. And then kind of if we look at our values: care, commit, collaborate. A lot of companies will speak to those, we live them. And we really, those really define how we treat each other, how we treat our customers, and how we treat our suppliers, and certainly how we interface with the communities in which we work and live. You'll hear more about this from Candace just in a few moments.
You know, taking a moment here to talk about sustainability and where we are. You know, we strive to be good corporate citizens. It's really anchored in our core value of care. And we're focused on helping our customers achieve their sustainability goals, while we're looking at our own business and saying: How do we drive our sustainability in our own business? And if I kinda think externally, we're helping our customers drive that electrification of industrial heat, carbon capture and storage, renewable energy. Those are the types of solutions we bring to the industry. And then looking kinda inwardly, we are working on establishing those Scope 1 kinda baselines, and working towards setting targets for improvement on a go-forward basis. We're also socially responsible. You know, we're creating an inclusive and diverse workplace.
You know, it's changed dramatically since I've been with Thermon over the last 8.5 years, and our compensation as a senior leadership team is tied to our ability to drive that diversity in our, in our company. We also are a safety-first culture, and we really take that really to heart. It's important that, you know, there's nothing worth doing that to be able to achieve a productivity target or a deadline that would put, you know, any of our employees or our customers at risk. So I think that that's where it starts. Then we have adopted a philosophy of zero incidents. Every incident is preventable. You'll see that this is actually reflected in our safety record.
We are, we are many times safer than the average company in our industry, and in fact, we just received an award last month of being the safest employer in Canada. So something we're very proud of. We appreciate the contributions our employees have made to that success. And then corporate governance. Last but not least, we have a very strong values-based ethics and compliance program, and we have a very robust risk management and oversight. And if you look kinda here along the bottom, you'll see our areas of focus going forward, to really we're going to work on to help achieve these goals in the coming years. Turning now here to operational excellence, and really it has been a core value and it's been embedded in our culture.
You see here a purpose-driven framework, really to empower our employees to drive continuous improvement, and it's accelerating our ability to drive results. It really begins on the factory floor, and it starts with those people and the engagement and the involvement. It's really a culture, it's really building a culture. You know, we've got Roberto Kuwahara, who you'll hear from later. He's really brought in the Toyota Production System and Lean principles, and is working on developing that knowledge base within our organization. And really, he and the team have been able to really deliver some meaningful results over the last 18 months, and it's really helping us to build a competitive advantage in our service levels, and certainly drive productivity to improve our operating margins.
I'd say, you know, we are closer to the beginning of this program than we are to the end, and so we're really looking forward to the positive impact this will make, really for years to come. You know, taking a moment here, as you see, we've really positioned this business to be able to take advantage and benefit from some key secular growth trends that you see here, whether that's really energy transition to developing markets, to chemical and petrochemical growth, to really the industrial internet of things and digital transformation. You know, we really see multiyear growth potential that significantly exceeds GDP. Certainly, if we think about it, we really have established some very structural and sustainable competitive advantages that really create a differentiated position in the marketplace that's very defensible.
We have a solutions approach. You know, I told you, we don't make widgets, we build solutions for customers. We have longstanding customer relationships that I shared with you. We have a breadth of solutions, from products, to services, to software. We have a global installed base that we built over the last seven decades, and we're well recognized and a respected brand with hundreds of industry certifications, which really create a significant moat for our business. And then certainly, as we look at where we are today, we'll benefit from the energy transition. And if it takes longer, we're well positioned to serve the hydrocarbon industries as well, if they're needed to bridge that energy transition for longer. So we really see that as opportunities in both, whether it takes us longer or moves faster.
If you look here at our strategic pillars, you know, we kinda start by, hey, growing the installed base and recapturing revenues. You know, it's about growing that installed base and then capturing recurring revenues. Tom Cerovski will talk more about this later, but, you know, we've got some great examples of how we've been able to do this over time. And then we've got our three Ds. It's really decarbonization, digitization, and diversification. We'll dig into these more as well, but these are really enabling us to drive growth above and beyond that core, and then really focusing on that disciplined capital allocation. You'll hear more about that from Kevin Fox, but certainly using that to deploy capital to drive both inorganic growth and really advance our strategy.
If we look here at kind of our key initiatives to drive that profitability grow that installed base, you know, I bring your attention here to the left side of the chart. And you can see here, the vast majority of our growth has been driven in that kind of OpEx range. In fact, it's almost 90% of the growth that we've seen since 2017 is really tied to those operating expenses, really building more resilience in the business. And certainly, in doing so, you know, we find that our margin profiles are much better in kind of the MRO part of our business than in the project side of the business, and we've but become much less dependent upon CapEx spending. Now, however, we are still very well positioned to be able to execute on capital projects.
Why is that important? Because it enables us to grow that installed base. Then we use those, the three Ds to really drive growth above and beyond, that core. You know, another key piece of that growth is really in this energy transition, and it's early, but we see really some very positive progress. We try to give you updates on that on a quarterly basis, and if you'll focus here on the left-hand side of this slide, you know, I'd like to bring your attention, if you're excited about EVs. You know, if you look at here, transportation's about 27.5 quads. Well, industrial, electrical or industrial energy is roughly the same size.
And if you look at these, kind of the lines, the red lines coming out of each of these, that's really representative of how much will be electrified or converted to other energy sources. And if you look at transportation, it's just a small fraction as compared to the industrial space, which is significantly three, two or three times larger. So the opportunity really to convert industrial heating to, or industrial energy consumption to other cleaner sources is significant. I think that gets missed too often. And again, I wanna reinforce our technology is agnostic, and we're well positioned in things like biofuels, hydrogen, ammonia. We do battery manufacturing plants. We do battery recycling.
There is a number of areas where we can play, and thermal energy storage is actually one of the largest, and that's gonna be important as we look at the use of renewables like, like solar or wind, and being able to store that energy so that it's available when the power is not being generated and demand is high. So all of those, and today, if we look at this, you know, about 95% of the energy used in industrial heating is actually hydrocarbon-based. And of that, about, you know, so only 5% is electrical. Of that 95%, 80% of that can be converted to electric with today's technology. So there's a big opportunity out there to convert.
And if we look here, you can see we've got the portfolio of solutions that exist today to be able to play across a wide range of these kind of decarbonization and energy, energy transition opportunities. And you'll hear more about this from Mark Roberts today, but, you know, we have that broad portfolio. We have the solutions approach to solving customer problems, and we're really well positioned to help our customers meet their carbon emission reduction goals. Mic went out. Oh, there it is. We look at another area, and is digitization. And, you know, we've really worked on this platform for probably the last six or seven years, and it really led to the, to the, the launch of the Genesis platform, the Genesis Network. You hear all this. We've really built a leading position here in our space.
You'll hear a lot more about this from David Buntin, but we certainly are seeing traction and market adoption of the Genesis Network. It really helps our customers drive improved efficiency, reliability, productivity, and safety in their operations, and it helps them increase operational awareness. That's important so that they can address issues before they become a problem, before they take that facility down or negatively impact operations. Again, as you see here on the right-hand side, we're seeing very strong market adoption, and it's improving our ability to win. Here, we kinda move to diversification, and this is really around really creating that portfolio effect, and we're making some real progress.
And if you think about the breadth of our solutions, from heat tracing to process and environmental heating, it really creates an opportunity to build some meaningful positions across a wide range of end markets. And, you know, I look at rail and transit, commercial, food and beverage.... And, you know, while that's been our initial focus, and we're making some real progress here, and again, Tom will talk a little bit more about this later. But there's additional opportunities. Those are certainly not exhaustive. There's other opportunities we have in mining and materials processing, in the semiconductor space, where we benefited from, you know, a lot of the CHIPS Act and some of the fabrication facilities that are being constructed here in the U.S., pharmaceuticals and other areas.
What we're seeing in our business is giving us the confidence to raise our fiscal year 2026 goals to that $600 million-$700 million in revenue range. And here you see really our approach to capital deployment, and again, Kevin will cover this in a lot more detail, but you know, we start with organic growth, and that's really around. It's our first priority, and it's reinvesting in the business, whether that's research and development, whether that's market development and developing our channels, our product portfolio and CapEx. And CapEx usually ranges somewhere between 2%-3% of our spend. You know, this year it's closer to 3%. On average, about 1% of that is really tied to maintenance, and then the balance is really tied to growth.
And then we kind of begin to look at the inorganic growth opportunities, and we really view this as an extension of our organic growth strategy. And it really, we use this, and we look for opportunities. We're not gonna go buy businesses just to buy businesses. We're going to be very disciplined, and we're going to focus on those that really advance our strategy. And there's a lot of, there's a number of make versus buy analysis out there that we can look at. Certainly, there's some industry fragmentation that enables us to do some, a number of bolt-on acquisitions there. Our pipeline is really robust, and certainly, we're focused on meeting our financial objectives and providing those returns to exceed WACC by year three and certainly being accretive to the business in year one.
And then last but not least, we'll evaluate returning the capital to shareholders when appropriate, but throughout all of this, our goal is really to maintain the strength of our balance sheet to give us that optionality. So as we look here, you know, we are well on our way to achieving our fiscal 2026 strategic objectives. You can see the progress that we've made since 2017, and what we're doing here is we're increasing our revenue range by $50 million to that $600 million-$700 million range. We're pushing those diversification targets from 65%. We're actually 64% on a trailing 12-month basis, so we're moving the goalpost to that 70%. And then our EBITDA margins, today they're around 22%.
We're raising those by 200 basis points, and we'll drive that through our operational excellence, our new product development and innovation, and certainly operating leverage on the business. So we feel very good about the goals that we're setting here, and hopefully, as the team talks here and throughout the morning, you'll see that we've got a great plan to be able to achieve it. So with that, I'm going to hand it over to Candace Peterson, our Vice President of Human Resources. Thank you.
Great. Thank you, Bruce. Well, good morning. Happy to be here with you all today. I'm Candace Peterson. I'm the Vice President of Human Resources for this great company, and I joined Thermon in 2017, so coming up on seven years, and I have over 20 years' experience in the HR field. My expertise and specialty is really in building high-performing teams and culture transformation. So it's been a neat journey, and I'm happy to share with you more about our people story and the culture and how that's helping to enable business results for us. So there are a few key messages I want to leave you with today. First and foremost, and as Bruce mentioned, we have a great culture. This is anchored on our foundational values of care, commit, and collaborate.
These were shared with you by Bruce, and you'll hear throughout the day the theme and the criticality that these values play for us and how they aid in decision-making and also in how we think and feel about our customers and suppliers. Number two, we're an employer of choice. We have the ability to hire and retain great people. We have a neat value proposition when folks talk to us, and our best sales opportunity when bringing in new talent to our organization are our people, and they love talking to new talent about the opportunities and impact people can have at Thermon. Next, we are best positioned to serve and support our customers, and it goes back to that strong safety record, our industry-leading safety record that Bruce talked about, and also our deep technical expertise.
And in just a minute, I'll talk to you a little bit more about our tenure and how our strong tenure helps to equip us to solve problems with our customers, right, you know, real time, if you will, in each one of our sectors. And then finally, we have a compelling purpose and strategy. People love working for us. They love to tell their friends and family about what they do. They love to tell their neighbors about how they're transferring the warmth needed, and it's a pretty neat and special je ne sais quoi that we have in our company.
So let's start first with our people, and when we think about the talent that we've hired over the last year, because as Bruce mentioned, we have grown over the last year, and our employee population has increased. We've been incredibly intentional about where and who we've hired. We've built on our existing skill set and strengths, and we've hired new technical roles and new folks with different experiences and background that we've had. And the reason we've done that is we are entering new markets, we are exploring new technology, and there are skill sets that we've, we've been incredibly deliberate about going out to market and finding, and we've had success with that. Also, because of our global footprint, we're not limited to where we hire, so we're not limited to a geographic space.
We're able to target that talent in other countries, in Canada, the U.S., Europe and Asia, and that also gives us an advantage when you're looking for a very niche skill set in the market space. In addition to that, and the fact that we've grown, I mentioned our tenure. We have incredibly strong tenure, despite the fact we've grown in our population over the last three years. That speaks to the fact that people like to come and work for Thermon. There's growth opportunities for them, and they can feel and experience the impact they have on a daily basis. In fact, in a moment, I'll share some experiences with you about how our deep technical expertise and this tenure is helping us win in the market. Some fun stories about our folks.
On diversity, Bruce mentioned to you, diversity is incredibly important to us, so much so that we've aligned our management team's annual bonus targets to a set of diversity goals. Four years ago, when we took a plan to increase diversity in our company, we've seen an increase from a starting point of 31% for our USA ethnic diversity. We started at 31%, and today we're at 53%. Again, a very deliberate approach to how we've taken a goal, and we've gotten results against that plan. We still have work to do on gender, something that is very passionate to me and a number of us in this room, and we're committed to our ESG diversity goals, and I'm confident we'll see that needle move as well.
Then finally, we listen to our employees, and our recent employee engagement survey tells us folks are happy. So we feel that when we're traveling and meeting our folks, but we also see that in the results, receiving a score of an average engagement score of 8 out of 10, which is slightly above benchmark. We'd like to see that grow as well, and I'm confident we'll do that. Turning now to culture, you're going to hear this throughout the presentation. You've heard Bruce talk about how important it is to us, but I want to leave you with a very clear and strong belief about us, and that is we are extremely focused on our culture. It's more than a plan, it's more than a set of initiatives, it's more than an investment case for us.
This is the very essence about how we can attract and retain the best and brightest people. And that is so key, as you know, when you're looking to scale a business, because the momentum that you need to have, the momentum that you create with growth and your ability to deliver a solid culture aligned to that strategy, is what people look for. And ultimately, it's what our customers and our suppliers experience with us. So if I leave you with nothing else, if you are somebody who loves to take a note, write it down. Thermon is extremely focused on culture. I talk about the momentum, and I talk about the momentum about us getting culture right because of the ability for us to align the way people think, feel, and act with our long-term strategy.
We're very clear on what we need to achieve. You've seen that from Bruce. You'll hear that from the rest of my, my friends here today, but our ability to align the thinking, the objective setting, the actions, and the belief systems, that is by definition, culture. That's what we're working to do in order for us to achieve that strategy. So what are we actually doing about it then, to ensure there's stickiness in it? We've invested in our culture program. We call it Thermon Core, and Thermon Core is a multi-year program that aligns our global management base, so regardless of where you are in our organization, to our key results, our continuous improvement mindset, to our deep, And it also develops deep finance strategy and business acumen.
We develop that finance and business acumen through the use of business simulation engagement. So this is where we're bringing our people together, and we're ensuring that we're building a pipeline of high-potential talent, emerging leader development, and all of that feeds our robust internal pipeline for succession. As you all know, having that strong pipeline of talent for succession is key when scaling a business. So we're incredibly thoughtful about how or what skills we need, the behaviors we want and require, and then how we design the delivery of those skills, so we're preparing our future talent for the roles as we move forward. Okay, so that's our culture program. Underpinning all of this is our values, and you've heard them: care, commit, and collaborate.
Before you leave today, I hope you're all talking to us about our three Cs. Our people talk about this, and they are so embedded in our company, and I can't express this enough. No matter where you go, what office, whether it's Korea or Australia, if you're in Houston or you're in Orillia, if you've ever been to Orillia in wintertime, you will feel the three Cs on display. We embed them in everything we do, from hiring and promoting to decision-making. When we talk about our M&A pipeline, that's at the forefront of our conversations about opportunities. Our performance reviews are aligned, as are our merit increases, and we've designed a full recognition program called Thermon Difference around our values as well.
So we're recognizing, promoting, and showcasing when our people are modeling these values with each other, our customers, or our suppliers. So it's important to us. People feel it. So I wanna do a bit of a deeper dive into our values, and I'll start with care. There are so many of these examples, our care examples, on display in our company. I'll pick one, and a lot of you in this room, as I look around, might remember the devastation that Hurricane Sandy caused in 2012. You'll remember how life was suspended for people during that time. People were not able to get to work, homes. There was massive destruction or devastation, if you will. Well, our employees experienced something similar in the Gulf Coast region in 2017 when Hurricane Harvey hit.
As you know, it upended lives for a protracted period of time. We have a program at Thermon called Heart of Thermon. It's our charitable donation fund, which, among other things, provides financial relief to employees and families in times of need. So when the hurricane happened, our employees around the globe donated to this program, and because of the scale of devastation, Thermon increased our typical match of 1-to-1 to 2-to-1, resulting in a total fund of $193,000 that we then delivered to our employees and families to help and support them with getting their lives back in order.
Moreover, our construction employees in the Gulf Coast were not able to go back to work because maintenance programs had been suspended at plants, so they weren't able to make pay. So what we did for our construction crews, especially because so many of our employees' homes were, you know, experienced damage, we put them to work in our employees' homes. So our construction employees were able to earn pay while giving back to their friends and coworkers, and our employees were able to receive safe, trusted, and skilled labor at no cost to them. This matters to people. It matters to people, the company that they work for cares for them, and we show up for each other. We call this our Thermon Difference. It's the recognition program I mentioned, and our people are what make the Thermon Difference.
Our folks are proud to tell their neighbors, their friends, and their family that they work for us. So this value to us takes on many forms, but at the base of most people's preference, they want to know they work for a company who cares. All the people you'll see on this stage today will be able to share, if you're interested, their own stories about this value in action at our company. It's pretty cool. Turning now to commit. So we mentioned our industry-leading safety record. So commit for us, this means we do what we say we will do, that we bring passion and energy every day. We actually measure our people in their performance reviews about bringing passion and energy every day because it's a mindset toward our customers.
And then finally, we get results, and we don't let obstacles stop us. So Bruce mentioned we have a safety or a commitment to safety and a belief, and that belief is there is never anything worth doing that would ever result in anyone getting hurt, period. We live that, our people know it, they also believe it, and our best-in-class safety record of 0.28. Our safety record is 0.28. Compare that to industry, which is 1.4. So we live and model this value on a regular basis. This is also important to our customers. This is also what gives Thermon a unique advantage when bidding a project.
Our customers, our operators, know that when we show up to a plant, we are going to have a stop exercise anytime we see that there is ever an unsafe condition. In fact, a major chemical operator in the Gulf Coast, just last month, recognized Jose and Robert, two of our construction service employees, for stopping work in a Class I, Div 2 area. That's an incredibly hazardous area. Because our employees knew what to look for, they were able to prevent what could have otherwise been a major unplanned event for this operator. And so we take a lot of pride in that. In fact, Robert and Jose don't know this yet, but they'll be on Bruce's quarterly Thermon Difference here in a month. Turning to collaborate.
So if commit is how we show up, if care is how we think and behave, collaborate is how we get all of it done. This is a value for us that means we solve problems, we collaborate with our customers, we find innovative solutions that ensure success. Whether your customers are internal, as is the case for many of our functional groups, or external with suppliers, customers, investors, we think about problem-solving in a very collaborative way. And you've heard Bruce mention this, you'll hear Tom and David spend more time talking about the rail and transit business. But the rail and transit business has grown significantly in the USA in the last few years. And this industry, customers and suppliers alike, they're experiencing the shortage of the deep technical expertise in this space.
Customers need, and they require a partner who has that bench, and Thermon has this expertise. We have some of the best and brightest engineers in this space, partnering with our customers and suppliers upfront in the bid process, which is not always the case. But our team gets in upfront in the bid process and finds ways to solve the problems to their unique needs, especially in the comfort heating space. What's more, this engagement that we have with our customers has endeared us to them, and we've become a partner of choice. And what's really cool, business is up 86% year-on-year in this business alone. So among other things, that collaborative value is working.
All right, so in closing, what I want to leave you with, a belief I'd like you to take away from my portion of this for the rest of the day you're going to spend listening to our folks, is that in addition to our strong financial performance, in addition to our growth story and the opportunities we have in the market, we have an incredibly strong and engaged culture that's committed to this plan. We've been deliberate, and we continue to be deliberate with our culture program to ensure we have that alignment across our management base, and it's through our management base that we cascade those beliefs down into our organization. People know that they have the opportunity to have a real impact in Thermon.
We're at a perfect size and a perfect place in our company's history and evolution, and folks are fired up for what we do. They love what they do, they love the customers that they get to work for, and what's more, our customers, they love our people, too. So with that, I'm going to turn the time over to my friend, Roberto Kuwahara, who will spend more time talking about our operations transformation.
Thank you, Candace. Okay, good morning again. So my name is Roberto Kuwahara. So I'm the Senior Vice President of Global Operations. I joined Thermon 1 year and 9 months ago, so I coming from Caterpillar. So prior to Caterpillar, I worked for Weir Group PLC, as I was the Divisional Vice President of Global Operations. And then, but I have an extensive background in the automotive industry. I worked for several car makers, including Ford Motor Company, and later I was a resident at Toyota Motors, where I was trained at the... And worked in U.S. and Japan. That's when I became the Toyota Production System trainer, and then I also have a strong background in Six Sigma.
So with that, then, I'll be sharing today a little bit about the operational excellence journey that Thermon has embarked to support the growth as well as to maximize and expand the markets. So our focus is to take and become a, take a competitive advantage by reducing the lead time and by increasing our capacity in our operations, at the same time, by creating resilience in our supply chain. So if this combination allow us to respond quicker to our customers, and then provide the best-in-class lead time. So we have embraced the operational excellence. So starting with engaging the voice of the customer, understanding their requirements, then mapping our cross-functional team end-to-end, so that's what we're linking. And then, while developing the harness of our employees.
Candace alluded a lot about the employees, so that's how we are embracing, that's the foundation for our operational excellence. So we have already achieved several improvements, especially in productivity. We are taking costs out, and then at the same time, we are increasing the customer satisfaction. So now we are introducing the Thermon Business System to continue expanding this value chain, as well as continue supporting the margins expansion. So where we are? So we are still in the early stages of our operational excellence journey. So it is, we are moving from traditional operations to high-performing operations. That's the journey that we're embarking.
So our inspiration is to become best in class in the industry from the lead time perspective, while to bring innovation, as well as at the same time, empowering our people, as Candace alluded again, and then we are introducing the Thermon Business System. So where we are? 18 months in this journey. So we have already reduced significantly our lead time. For many of product lines, we already became the industry lead in lead time, and then we have, we developed a much more solid supply chain, and then we have the people engaged into this transformation. So Bruce alluded a little bit about the introduction of the Thermon Business System. So we have been in this journey of the operational excellence. So we have the team engaged into this transformation.
As we continue expanding the value chain end-to-end, so we are now introducing the Thermon Business System to ensure that we can sustain the results as well as we have a process developed to standardize globally the development that we're making. So that's how we are bringing this Thermon Business System. So we strive to be the best in class through the foundation of our core values, that drives our behaviors, mold our culture, and they deliver results that will increase the value to our stakeholders. So everything starts with the three Cs... Kevin, so Kevin mentioned about this as well. Care, commit, and collaborate. So going inwards, then everything starts with the empowerment. So we emphasize our commitment to safety of our employees, and then with that, there is a very strong feedback back from the employees embracing this transformation, embracing these changes that we're going through.
The other aspect is that we are embracing the initiatives to support the sustainability across. After going through the empowerment, we went to quick respond to our customers. It's really our ability to empower our people. That's the people are the heartbeat of our organization. They bring the knowledge, the skills, the enthusiasm, and then that's how we can differentiate ourselves. Then after that is quick responded to our opportunities, is really to anticipate the market's need. Then moving on, we have the innovative products and the process, so allow us to stay ahead of the technology, while we continue bringing the state-of-the-art solutions to our customers. And then it's important then, moving to the speed and agility, is how quick we react and execute the changes.
Everything converges then to the delivering exceptional results that will maximize the value to our stakeholders. So we are driving this, all driving to a profitable growth with expanded margins, as well as supporting the sustainability. So let's explain a little bit how we are doing this. So a little bit on the execution. So the first step is really about the strategy. Understanding the market need, and then we develop the strategic plan. So that's the what in a very high level. We use the PDCA model. That's, that is, plan, do, check, act. So that's a continuous improvement process. So in this, after designing the strategy, then we go for the transformation, where we need to understand where we are.
So really, we map our our entire process, and then we design a future state in order to meet the customer requirements. Then the third piece then is the Kaizen events. That's when we start to execute. So that's when you bring a cross-functional team, the main stakeholders, that have a specific scope determined to execute this design. Then following is the sustaining. So everything starts with the shop floor. So we have developed a daily management system that is standardized, we have it globally, that at every beginning of the shift, we have the management team together for the shop floor. We have what we call the SQDC boards, safety, quality, delivery, cost, and inventory board, where then we review our performance versus the goals that we have. So that continuously, that support globally all the value streams, all our predictions.
And then lastly, we have the evaluation. So we have the four levels of governance that ensure that our results are maintained, and then our progress continues to be improving. So that's how we created this PDCA, that we are continuously improving our processes. So now a little bit about how the operational excellence supports the strategy. So there are four pillars on this. The first one is obviously performance. We need it to execute. There's a customer requirement. We need to exceed their expectation. So with this operational excellence, while with this improvement in the lead time, improvement in this customer response, we have increased our on-time delivery by over 20% during this period. And at the same time, the quick return bookings also increased by over 20%.
That means that, okay, we can quickly react once we get the booking, so if the shorter lead time allow us to get another revenue stream of revenue. So then next is the cost. As we continue pursuing increase the productivity, streamlining our process, we continue to minimize the overall operations cost. People is our core, so by untapping the people's potential, bringing them together with our core strategy, our core definitions, together with your cross-functional teams, then we have a very high engagement from them, which is helping us from the efficiency and productivity. And then the next one is the supply chain. Supply chain basically have three main elements. One is the buy the material, so then the other is the make, and then the move.
So from buying, we are extending the suppliers in our value chain, and then sharing the forecast and bringing them on board while we develop our dual sourcing. And then from the making is our ability to create a quick flow within the manufacturing. And then the move is really to distribute to our customers. So if it is four pillars, basically are supporting our operational excellence to support the overall strategy. So in summary, we are bringing resiliency in supply chain by engaging our suppliers in this entire value chain. So now I'd like to share one case study. This case study was in the Thailand plant. So the situation that happened is that we had a high booking in the market, high demand in this from the customers.
In such a way that, in addition to that, we had a supply chain disruption, because we're coming out from the COVID. So both scenarios together made our backlog increase to over three times more than the healthy backlog. So this extend our lead time and then impact our ability to respond quickly to our customers. So we had to do something completely different. So then, we committed to a transformation, and then we started for the voice of the customer. So when we met with the customers, the sales team, for the sales team, the three pieces here that the customers are willing. One is they would like to have some cables exactly in the warehouse, ready to be shipped as they would order. So there are a series that would be this Make to Stock.
There is another piece that was more the Make to Order, which means that they are very specialized cables with special material. Then okay would produce as upon to their order. There was in the middle, the Assemble to Order, in which you would keep some material in-house and get the order, then do the process at a much shorter lead time. There are three main categories. Again, then we brought the team together as a cross-functional team for a Kaizen event, and then we mapped our current process and then developed the future state. Back to one of the slides I presented earlier, we are moving our operations from traditional operations to highly performing operations. This happened here. Traditionally, we had been producing in a Push System.
means we have the material, we process, move to the next station, process, go to the next station, and keep it going up to the point that get to the customers. So now we invert it. We establish the Pull System. That's what the best in the industry are. So we connected these orders to the customers. When the customers pull the order, then triggers the whole process to replenish what was pulled. So that's much more efficient. We eliminate all this cost associated from the, from these operations by doing this. So and then it was a huge transformation from this aspect by inverting this, from push to pull. And then, at the same time, we are bringing resilience in the supply chain to by strengthening our supply base. Our results were great.
We increased our volume by over 30%. Our backlog came back to the healthy levels. On-time delivery exceeds the 90%, and then we became the industry leader in the lead time. And that - the whole process from beginning to the end, to become the best in class, took us six months. So now, let's talk a little bit of driving operational excellence, driving the increase in margins. So again, four main aspects here. The first is the center of excellence. So Thermon had a nice job defining the center of excellence, which are basically some business units that are specialized in a product family or in a value stream. So why this is important? Because of this concept, the business can excel its excellence. This concept, we have the expertise that's in that location, that provides the higher productivity.
We can converge the investments, at the same time, we streamline the inventory. So that's how this concept is critical, and that's what we have been reinforcing. Next one is creating flow. So think about the car industry, assembly line, everything moves in a conveyor, so therefore, there's a pace. That's what we are doing exactly the same at Thermon. We are moving from static to movement. We need to create this flow, this pace. Why it's important? Because walking the floor, we understand if you are ahead or behind. If you are behind, it's cost. If you are ahead, okay, is we can continue to improve it. So that is important. That's what we have been doing. We have been creating this flow across our operations. And then, next one is engaging our people.
So as we emphasize, safety is, priority number one that Thermon has. And they believe this, they perceive this in such a way that their engagement in making improvements in their working areas has increased by over 850%, and they know better than anyone else, the improvements that can be made. So we supported them, and then they know that they can respond because then we are, we're all taking the actions based on that. So the engagement level has been phenomenal. And the next is the supply chain. Okay, the cost of the, the product, the majority comes from material. So therefore, it's critical that we really work in the reduction this overall cost. So we are consolidating all commodities, and then, allowing us to streamline our sourcing. At the same time, we expanded some of them to low-cost countries.
So with all this combination, allow us to take some nice cost out coming from material. So all these initiatives, all these four pillars, allow us to support and extend, expand our adjusted EBITDA to 24%+. So now let me share another case study that's in the control panels. So in this situation, we had a new product, the Genesis, was introduced in the market, as David is going to mention later in his presentation. The launch was very successful. What happened is that the booking, it started to become much more than the capacity that we had. So it extended our backlog again. We started to suffer for the lead time. Then we started to slow down the reaction to the customers. So then it was imperative.
We had to do, again, this transformation, and then starting again for the voice of the customer. So here is what happened. For the control panels, yes, we were known for high technology and then with innovation. So our products were Engineered to Order, really designed for, to meet every particularity of our customers. So one panel was different from the other. So that's the Engineered to Order. The customer said, "Well, we need to continue for this." But they also needed to have some panels that are standard, that if they have a failure in their operations, then they have a need in their operations, the customer's operation, they can't shut down the entire operations. So we would have some panels in the shelf, we would call and we would ship, and then you could back install in their operations, it continue running.
So there is the second category. But then there is a third category. The third category, what's called the Configure to Order. Yes, the standard is not necessarily what they need, but they don't want to wait for the whole lead time for the engineered order. So comes the Configure to rder. So if you think, the LEGO is a good example for that, which our kids, we played with LEGO. They have standard bricks. So similarly, similar concept, we have standard components, and based on these standard components, we can customize and build what the customers are needing. So that save us half of the lead time for the engineered to order panels.
So then we have those three offerings, so expanded this offering, that allows us to continue even growing even more the bookings, but now with our increased capacity, then we can absorb. So, so again, let's think a little bit about the automotive again, the, the assembly line. So have the assembly line, you can see that they have the feeders. So they bring, let's say, the instrument panel attached to the car, they bring the, the doors panel, attached to the car. So they have this concept. That's the concept that we are using for the control panels as well. Because if the control panel was taking that length of lead time, then we could shrink this lead time by building these feeders, these subassemblies.
Similar concept, and with that, again, with the concept of centers of excellence, we were able to reduce by 80% those systems when building in the specialized cells and bring to the floor. Then we have to reorganize our layout. I, I'll talk a little bit about creating flow. So in this aspect, it's the same. So we organize the way that we were operating our plant layout in such a way that we reduced by over 95% the walking distance from the operator to build a panel. So they had to build a panel, they had to bring some components and looking for some tools. So by 95%, we reduce this walking distance, and we reduce the time to build the panel from this perspective. That's the time to look for those parts.
So now, the builders, they started to become so fast, then we had to work with the warehouse, how to bring those materials. And then imagine the warehouse, we have the picker go, take one component, one aisle, go to another aisle, take another component, one other aisle, take another component. So then we arranged the way that we were sequencing the picking. So we arranged it and put the components in a sequence that the picker goes and pick it, and, and keep pick-picking. So in this way, we reduced by 40% the time, that their travel distance, the walking distance, and then reduced by 30% the pick time for the components. So if all this combination allow us to increase our productivity, so we reduce by 60% the build hours for the panel, per panel, and then we increase our throughput by 75%.
Most importantly, we were able to reduce the total manufacturing cost by 6%, despite inflation, despite wage increase, and despite benefits increase. Okay, so in summary, we are still in the beginning of our journey, of our operational excellence journey. We are connecting end-to-end cross-functional teams that allow us to increase the agility, the speed. We don't have that, the time that we spend those communications, but there's really a lot of focus in some specific goals. We have been using the Kaizen events in order to harness the power of our employees. And then we are redesigning all our operations. I gave you two examples based on the voice of the customers, but it's not just two. We are basically moving all our operations in parallel.
I just shared the two here, but similar concept, we are working all of them. Then we are engaging our suppliers to bring resilience in the supply chain. Then we are expanding our operational excellence across our value chain... and then we are introducing the Thermon Business System in order to support this growth while expanding our margins. So with that, thank you for your time, and then I'll turn to Tom Cerovski to talk about profitably growing the installed base.
Thanks, Roberto, and good morning to you all. My name is Tom Cerovski. I have been with Thermon for just over 4 years. I have a background selling engineered components into the industrial space in many markets for over 25 years. The majority of my career has been spent with the General Electric Company and also with Dover Corporation, again, selling very highly engineered products into these markets. What I'm most excited about today is to talk to you about Thermon and the things that are happening at Thermon around growing our installed base in a profitable way. So a couple of key messages to make sure you walk away with. Number 1, as Bruce stated, we are gonna continue to elevate our industry-leading position in this market space.
We've got the right solutions, we've got the right team, and we're gonna continue to lead. We are executing our business model. Just as Roberto said, we have the Thermon Business System, we are on track, we've got industry-leading team lead times, and we are executing. Number three, we're gonna talk about some of our diversification, digitization, decarbonization, and diversification. We're innovating, we're investing. That includes CapEx, it includes commercial resources, new products. Diversification also includes not just into new spaces and markets, but a geographic diversification. So we're gonna wrap this all together and talk about how that impacts the installed base. So how do we describe our installed base at Thermon? It's an exciting opportunity. The company has operations, or excuse me, installed assets in over 85 different countries. We've got almost 600 different levels of certifications.
As we have spoken about, the products that we sell are highly engineered. They're put in classified locations, they have safety protocols, and these certifications are a key barrier to entry from a competitor's perspective, and it also provides us that moat in a defensible position. These certifications require resources, they require time, they require money, and they require technical expertise that other companies just don't have. We also have over 200 engineers, designers, and project managers that have that type of technical expertise, unmatched in the industry. You know, by the numbers, we have over 10,000 active customers around the world, and as Bruce said, the first customer that Thermon ever had, almost 70 years ago, is still a customer today. We've got over 200 global channel partners, third-party agreements.
This allows us to have a focus and a distributed sales team beyond the Thermon headcount that gives us access to markets and places and positions unmatched in the world. And then last, over the period of consideration, we've done almost $500 million worth of large projects and executed them in a profitable way. So our global installed base is definable, it's defensible, and it is an exciting part of our future. We are uniquely positioned in many ways to continue to grow this installed base in a defensible way. Number one, we're positioned with decarbonization. Mark Roberts is gonna spend some time after our break today talking about how our products and our strategy fit into that whole evolution. We have a one-stop shop with our products. We have the ability to sell end-to-end the heating solutions that our customers need.
We do have competitors in Heat Tracing, and we do have competitors in process heating. We also have competitors in other parts of engineered systems, but there is no competitor that matches us across the board, across our entire portfolio as a one-stop shop. That's how we win and one of the solutions we have. We also provide our solutions through the life cycle. So whether it's an early budgetary or FEED study, whether it's a design, supply, installation, aftermarket services, an audit, commissioning, MRO maintenance over the life cycle of the decades of an asset, we provide the entire end-to-end solution through that whole life cycle. Our best-in-class reputation, easily referenced by customers externally. Candace spoke about that internally, how our reputation, as a team of winners in the marketplace, recognized by our competitors and recognized by our customers. Mentioning one more time, our certifications.
This is a key takeaway. Again, we do work in hazardous locations, classified locations. 600 certifications around the world, unmatched by our competitors, the moat that we need in a defensible position. And then last, we're gonna talk about this whole energy transition, decarbonization, how our initiatives match up. We're well positioned as the world change and as our markets change. So the installed base, how do we take advantage of that? This is a quick look at the difference between how we go to market in terms of CapEx and OpEx. On the CapEx side, that represents approximately customer CapEx spend is about 25% of our business. OpEx, the other 75%, broken up by small projects, materials, MRO, and services. In this particular case, we consider large projects anything over $500,000 in scope.
You can see, the gross margins associated with these. As Bruce mentioned earlier, this gives us a chance to win CapEx on a selective basis, build the installed base, and over the life cycle of decades and decades of these being in service, we take advantage of the OpEx, increasing and growing margins over time. We also have digital solutions now that David Buntin is going to spend some more time talking about, and that spans the entire aspect of our business model. This is not just selling hardware, it's not just selling services and software, but this is the additional materials and pull-through that we get when we have a control system in place that's best in class, that's unmatched and can be differentiated. That allows us to get our unfair share of some of our customer spend with respect to the MRO.
As we mitigate and we work on growing our business, we have actually grown this part of the MRO business. As Bruce said, this has been 90% of the growth of the business since 2017, has been on the OpEx side, and that's been part of the lift associated with margins over the profile. It also impacts our forecast as we move forward. I'd like to take you on a brief journey to one of our customer sites, and this is a U.S. customer. It's one of our Gulf Coast operations, a very large petrochemical customer. It gives us a good example of how our products are mission-critical to all of our customers' applications. You know, as we talked earlier, if our products, when called to perform, do not perform, power plants fail, chemical facilities fail, pharmaceutical plants fail.
Our customers need the reliable products, and this is a good example of how that relationship has been built over time. Mission-critical products over the life cycle of a customer. So in the 1970s, we actually had our first CapEx project on this site. Relatively small project. Seems like, it would be a relatively simple and straightforward relationship. Today, we now have tens of thousands of heat Thermon circuits on site and hundreds of control panels over the decades of this relationship. So as we take this journey with the customer, it wasn't just the CapEx that started it, but we've had additional CapEx, heat tracing upgrades, additional MRO. As our customer's footprint expanded, we expanded with them also. That's how you continue to build that relationship over the life cycle of a customer.
We added additional OpEx and solutions from our new product portfolio, whether it was process heating, emissions bundles, or environmental heaters. This was also one of the first customers that we took to market with our Powerblanket acquisition from 18 months ago. And then we also took advantage of our new Genesis platform. It was our first Genesis panel install, the beta, and it was also our first Genesis network site. So over the life cycle of this mission-critical relationship, a very small but still profitable CapEx opportunity can turn into an MRO annuity over a very long period of time. And today, we currently stand with an embedded team of 12 people on site, badged as the customer, that do maintenance on a regular basis, and they continue to drive.
So this is one example, but one thing I want you to walk away from is this is a playbook that we can replicate, and we do around the world. The CapEx model over time, driving MRO and OpEx. This is how we call operationally entangled with our customers, so that even if they wanted to displace us for one way, shape, or form, we are part of their business, we're part of their process, and we are part of their solution. We're gonna talk more about how this installed base will continue to serve us well. So we have our long-term strategic initiatives, diversification, digitization, decarbonization. Our solutions continue to provide organic growth for our company. I talked about earlier, geographic expansion. We have a whole new part of our world that is an emerging middle class, whether it's in Asia or parts of India.
There's a newfound wealth there, and they are buying the products that our customers produce, whether it's cars or cell phones, televisions, furniture, as Bruce talked about. There's a whole new wealth of the middle class that will provide us lift because these are the markets that we participate in. These are the markets that are growing. There are also new parts of the world that no longer take for granted their environmental impact. So regulatory requirements around emissions controls and other, regulatory tailwinds are also a benefit for us. And then last, differentiation, not just through digitization, but market-level diversification, which we're gonna talk a little bit more on some of the targets and markets that we focused on. The three Ds, as Bruce mentioned, decarbonization, digitization, diversification. We're gonna bring this home. I'm gonna let Mark talk more about decarbonization later.
David Buntin will talk more about digitization, and I'm gonna go take a deeper dive right now on diversification. We focused on three segments that we believed were adjacent, that our current products would serve, and that were also at growth rates that were GDP, GDP plus level profiles. So they were the commercial, food and beverage, and rail and transit. This is approximately about a $2 billion TAM for us, where our current products were all ready to play. What we did, the playbook is investing in people, commercial resources, engineering, technical talent, project managers. We've aligned our compensation plans for our commercial teams to go after these types of opportunities, to give them the right products, to help them win where they want to win.
And then this is something that we measure as a management team all the way through the organization on a monthly basis, our progress into these three markets. So again, commercial, food and beverage, rail and transit. Diversified market segments that allows us to grow faster than our legacy growth rates in GDP plus level growth segments. So taking a slightly deeper dive into this, one good example is, a customer we have. So this is a U.S.-based seed oil plant. So we take seed oil, we process it, it turns into an end product. Could be vegetable oil, cooking oil, something along those lines. You know, in this particular case, a customer needed Thermon's help, not just in products, but engineering and technical expertise, to get the right process flows for their food and beverage process solution.
What they were looking for is a chance to get the flow rates right, the heating system right. It reduces waste, it improves quality, and overall product cost starts to drop. Our customized heat tracing solution included not just the FEED study, but design, supply, full turnkey installation of this with one of our proprietary temperature control solutions. This also had an opportunity for us on our process heating side, that our actual storage tanks, before delivery to the customers, were heated by Thermon solutions, too, making sure that the final product was ready to go. So the customer outcome was quite clear. They had energy savings, higher product throughput, better flow rates, reduced waste, reduced cost. All of this, at the end of the day, also extended the life of their assets because they were operating in the right conditions.
For Thermon, quite selfishly, the outcomes for us is we had fantastic customer feedback. We now have another blue chip reference customer out there. This has allowed us to do work scope changes. It's allowed us to increase our margin profile with the customer, and this is fully in line with our strategic direction around revenue diversification. It's a good way to take away. Lots of companies have long-term strategic initiatives. Lots of companies have strategies. We have them at Thermon, we're implementing them, and it's working. Couple key takeaways. First, as Bruce said, we are gonna continue to elevate our industry-leading position. We're in the right place at the right time with the right products. We're gonna take advantage of it. We are executing our business model.
As Roberto said, we now have industry-leading lead times, we've got the cost profiles we need, we've got the products in the right place. We are gonna continue to invest with strategic initiatives. It's working. We're winning. We're gonna continue to run the playbooks that I talked about here today. They are providing a strategic expansion. We're continuing to grow in the right places. It gives us the margin profile that we're looking for. And then last, revenue diversification. We know the markets that we can participate in. There are more. We can continue down the path in semiconductor. It could be pharmaceutical. We have other opportunities. We're gonna focus where we're focused. We're winning where we wanna win. So the revenue profiles that we have in place are achievable, the margin profiles that we have make sense, and our installed base helps us serve that.
So thank you very much for your time. We're gonna do a little bit of a transition here, and we're gonna do our first round of QA. So, I'm gonna ask the first four speakers to come back up on stage. Now, we haven't gone through all of the presentations, and we haven't gotten into a deep dive of financials with Mr. Fox. So what we would like you to do, if you could, hold some of the deeper financial questions until the second set of Q&A. So if you would, maybe focus your question and answers for the team and the first four presenters today. We'll do a few Q&As, and then we'll take a quick break right after this. So I think Ivonne has a microphone if someone's got a question.
All right, thank you. I know you know who I am, but for the record, Brian Drab at William Blair. Just a couple questions. You know, Tom, you just talked about the commercial food and beverage, rail, and transit. Can you tell us what percentage of revenue, roughly, or how much revenue you're doing in each of those segments? And then also, you know, it sounds like, or my impression is that there's been an increased focus on those end markets in recent years. You know, when was that step up in focus, and why did the company maybe not take advantage of those opportunities in the past? I'm just trying to paint a picture of, like, how big this opportunity is going forward.
No, good question. So from an overall TAM perspective, those represent about a $2 billion addressable market for us. We really focused in on those, because we believed they were 3 of the key, most adjacent spaces that we could take our products. So if you wanna follow the strategy of taking existing products into new markets, they were key. We also had, from an engineering perspective, some of the best technical talent that could address those. And the third piece is we had many of the certifications in place, that would allow us to grow into those in a defensible way. Our goals, with respect to getting in FY 2026, was to get to at least a 10% market share in each of those.
That was our goal. So roughly speaking, without going into detailed numbers, 10% of $2 billion is right around $200 million of total incremental revenue over the time period we're discussing.
Maybe if I could just ask one more right now. You talked about energy storage. I think, Bruce, it was in your presentation, within the renewables industry. Can you just help us picture some of the applications? You know, how does that work? I've done some reading about this, that, you know, the energy storage that you need for solar and how there's heating technologies around that and wind. Could you elaborate on that?
Yeah, sure. So, as you can imagine, you have solar and wind. If the sun's not shining or the wind's not blowing, you don't have electricity, yet you have demand. And so, there's been a number of ways that have been developed to store that energy, so it's available for use, when they're not generating. And thermal energy storage is actually the most efficient means of doing so. And, probably the leading technology today is around molten salt, and they need heaters to be able to. When they're generating electricity, they use heaters to heat the molten salt, and they use heat tracing to maintain those temperatures in that molten salt. Whenever they want to bring that online and convert that, they can generate steam. So they run, steam lines or water lines through it to create steam.
The steam is then used to generate power whenever they're not generating with these, you know, with the wind or solar, the renewables. And so that's a big space. If you look at the energy mix, you know, whether it's IEA, EIA, renewables are going to be a big part of that in the future, and so thermal energy storage is going to have to be installed to be able to make that a reliable energy source, kinda out in that 2050 timeframe. And so we make the heaters as well as the heat tracing associated with that.
Do we have any other questions in the room?
For Tom, distribution, you talked about new markets, semiconductor, life sciences, manufacturing. What does that mean for the sales force and the supporting engineering team?
Yeah, great, great, great question, John. So we have existing channels that have traditionally sold into traditional markets with our existing products. In certain geographies, we have expanded our channels. We've had a unique focus in Southeast Asia, so we've had good success with new partners in China, Korea, India, Australia, New Zealand. Those are other areas where food and beverage has also had an uptick in customer spend. From a sales force perspective, we and I mentioned it earlier, but we actually changed our commission plan for our Thermon salespeople. They now have, in addition to revenue and margin goals, they also have diversification goals. So it doesn't mean we're going to walk away from oil and gas industries. We're not gonna walk away from...
There's no such thing as really bad revenue, but what we are doing is we're giving them targets and goals so that they will proactively seek out diversification markets and also diversification channel partners.
Thanks.
You're welcome. Thanks, Jon.
I'll ask a couple more questions, if you don't mind. Roberto, you talked about the initiative moving from the push to pull-
Yes.
- and how that brought the backlog down. Is that something that we would have seen? What was the time frame around that? I was just curious. Would we have seen a step down materially in the company's backlog at that time, or is it just that particular wire plant?
No, no, we are expanding this globally. So for all the operations, that was the wire plant, was just one example that I pulled, but that's a much more efficient way to produce.
We increase productivity in this aspect and eliminate a lot of wastes. Once you create the flow, and then we move from push to pull. That's why we look at the automotive. It's all pull. The pull, it flows.
Okay.
So, it's a concept that will keep cascading.
Yeah, and what I'd say there is, that occurred last summer, not this summer, but the summer before. And what we're seeing is higher velocity in our operations. And so, he, he's really put the pressure back on, Tom and the commercial team because of the velocity he's creating in the operations. So that was a record level of backlog in our Heat Tracing product lines, mainly in our Heat Tracing cable. And the team was able to draw that down in the summer of 2022. And so you would have seen that drawdown in our backlog. And fortunately, they were able to get that out before September so that we were well positioned for the heating season last heating season.
And so it's illustrative, as he says, of what we're doing across the business. So you will see backlogs come down because velocity is improving and continues to improve.
Okay. That's good to understand-
Yeah.
Because I do get some questions from investors who are asking: "What, you know, how worried should I be, given, you know, particular quarter, a given move in backlog up or down?" It's always project timing, but this is another factor to keep in mind.
One more quick question regarding the slide that you put up around the Genesis rollout, and there was a significant step up. I think it was measured in circuits, went from 2022 to 2023. What's the revenue model for the Genesis, and was there a substantial step up in revenue? Can you talk at all about the revenue that was associated with that step up?
Yeah. So we use circuits as a, as a measurement, and I'll, I'll... David will have an opportunity to, to show a little bit more about that in the future. And our revenue model around the software is, look, we have a base, a base software as a service fee, and then there's a per circuit charge. And so all facilities are not created equal, so we use circuits as a proxy, because one facility may have 15 circuits, another may have 15,000 circuits, and so that's why we use that to really measure the growth in the install base. I would like to caution you, the software is really not the opportunity there.
It's really that connection with the customer and the pull-through that we get on the MRO side, which we showed the kind of growth in our OpEx, and it also improves our ability to win. So it increases our ability to win and grow the installed base, and it's the recurring revenues on that installed base is where the real value is. But we're also positioned in the future to be able to provide additional services on that IoT platform, and so we really want to encourage adoption by our customers.
We have a question from Jon Braatz from Kansas City Capital. Bruce, as you further diversify your revenues into areas such as electrification, IoT, et cetera, does this mix shift inherently have a positive impact on profitability?
Yeah, that's, that's a great question. So, you know, we've gotten a lot of questions: How does that compare to your traditional, oil and gas business? And I'll tell you, the margin profile in these new end markets, and with the products and services that we're providing, is actually equivalent to, if not, slightly above our historic margin levels. And so, when we think about that, the overall profitability is actually improving, and I come back to, the new product development, the innovation, and the differentiated position that we're establishing there.
One more question from John. Tom, are there products or product lines that if you had, could very much accelerate your growth profile? To put it another way, are your customers asking you to do more?
That's a good, good question. Mark Roberts is actually gonna spend a little bit more time this afternoon talking about, our, our true product portfolio, especially on the THS side. Here's, here's what our customers are gonna consistently ask for. They want, reliable products, they want reliable lead times, and in our particular case, what they're going to ask for is higher temperatures. So as the world gets bigger, they're looking for larger heaters that run at higher temperatures for longer periods of time. You know, Mark is gonna spend some more time talking about that. I, I think our current product portfolio is quite sound. I mean, our customers are not pointing out gaps. I think what they're looking for is incremental product improvements, especially around the temperature profiles.
We have one more question online. Why does Thermon win in a competitive bid or situation?
You wanna take that, Tom?
Sure. Great question. So why does Thermon win? Maybe I can think of four or five reasons. Let's maybe set price aside for a second as an unfair metric. But if I were to think about why we win when we're in a direct competition with a customer on a competitive bid, I would say when we are involved early, that gives us an advantage. That gives us a chance and room to maneuver in terms of our design expertise. It gives us room to influence a customer in a certain direction. A design, by definition, has an infinite number of solutions, and the earlier that we can be involved, the better. And so we coach our customers to get us involved as soon as they can.
And many of our competitive bids include NDAs, so that we can be involved earlier without sharing critical information. Number two, in my mind, I would say, the larger the scope, and I don't mean that in terms of the revenue associated with it. I talked earlier about how we have competitors in heat tracing, we have competitors in engineered systems, and we have competitors in environmental heating, but if we can properly scope an opportunity large enough where we are the only provider of heaters that covers that entire scope, we're essentially sole source or very close to it. So the larger the scope that fits into our product portfolio, the better. Maybe number three, I would say, from an engineering perspective, the more engineered or custom this is, the better.
I think we've got the best engineers in the world. We've got one of the best R&D teams you'll ever find. And so the more of that horsepower we can bring to bear, clearly, that's the best. Certifications would be another one. Again, we talked about 600 certifications around the world, clearly defensible, and in many cases, there are competitors that don't have that same list of hazardous location certification. Again, it gives us essentially an unfair advantage. And then, I think, those are four fantastic ways where we're gonna win or get an unfair advantage, whenever we can. So we usually do.
All right. Well, thank you for the questions. We'll have another session later today. We're gonna take a quick break, and we'll be back 10 minutes before the hour to hear from Mark. Thank you.
Thank you.
Good morning, and thank you for taking the time to learn a little bit more about Thermon and how we're helping to change the world for the better by enabling the energy transition. My name is Mark Roberts, and I'm Senior Vice President of our Heating Systems business line, as well as Global Engineering and Project Services. To add a bit of color to my background, I hold a BS degree in Chemical Engineering from the University of Texas, and began my career as a process engineer at a refinery in Louisiana. I quickly transitioned into technical sales for Amoco, Exxon, and other companies associated within the energy industry. For the past 20 years, I've held various general management roles, including President of Audubon Engineering, an EPCM firm with a focus on upstream, midstream, and downstream energy. For the past 7 years, I've been with Thermon.
My initial focus within the company centered around creating a low-cost engineering operation in Mumbai, which has turned out to be quite successful. In 7 years, we've been able to grow the team, both in quantity and quality, and in fact, over 50% of all engineering hours are executed from this facility, allowing us to reduce the cost of our our engineered product by nearly 80%. 3 years ago, I assumed the additional responsibility of leading the heating system business. In that 3-year period, we've accelerated both revenue, revenue growth, and ROI, ROIC expansion, while positioning the business to take advantage of the energy transition. A few key messages I'd like to take away... For you guys to take away today. Number 1, Thermon is perfectly positioned to capitalize on the rapidly expanding sustainability trends going across our key end markets.
Whether it's the drive to reduce emissions, increase energy efficiency, or embrace cleaner technologies, we are at the forefront, ready to deliver innovative solutions that meet the demands of a rapidly evolving world. Our status as a technology leader, combined with our global reach, places us at the forefront of this change. We're not just keeping pace with times, we're setting the standards. We understand that the key to sustainability lies in decarbonization and electrification. That's why we're committed to continually expanding our comprehensive portfolio of products and solutions in these areas. Our dedication to innovation ensures that we're always one step ahead, delivering cutting-edge technologies to meet our customers' evolving needs. Our mission is to empower our customers to achieve their sustainability goals through our decarbonization and electrification solutions. We're not just selling products, we're delivering a greener, cleaner future....
We're enabling industries to reduce their carbon footprint, lower their energy costs, and lessen their environmental impact, all while thriving in a sustainable prosperous world. Beyond being a catalyst for customer sustainability, we're also driving our own long-term success or strategic initiatives. Decarbonization, digitization, and diversification are not just buzzwords for us, they are our roadmap to success. So just what is the energy transition, and where is it taking place? Well, energy transition itself refers to the shift from fossil-based energy sources like oil, natural gas, and coal, to more sustainable energy sources like wind, solar, and hydrogen. Where is it taking place? Well, virtually everywhere, as you can see from this graphic. The transition is occurring in places that we experience every day, such as our homes and our places of work, to heavy industries such as petrochemicals and refining, and we're involved in each one of these.
Take petrochemicals, for example, where Thermon got its start nearly 70 years ago with the application of a compound which aided the transfer of heat generated via fuel. Jump forward to today, we are working with the same customer to decarbonize through that application of electric heat. Moving up to rail and transit, interesting market benefiting from the energy transition, and one we are already well-positioned to take advantage of. Here we provide electric heating for passenger cabins, as well as for keeping rail switch points clean and free of ice and snow. With our strategic focus, this business has more than doubled, has double-digit growth, which we expect to continue for the foreseeable future. Now on to food and beverage. This is a market which is leading the adoption of electric alternatives.
These industries are large consumers of heat, used in everything from sterilization to drying, and the vast majority of this heat is generated via combustion of natural gas or oil. As most of the heat is in the form of low-pressure steam, the switch from fired boilers and superheaters to electric is fairly straightforward. The transition is also creating a brand-new industry, such as biofuels, blue and green hydrogen and ammonia, as well as within novel and rapidly developing technologies such as thermal energy storage. Each of these industries is dependent on heat to run their processes. Heat, which in many cases, can be generated via Thermon products. These markets represent a significant portion of our overall decarbonization pipeline and is where we have secured some of our most recent and largest wins. As mentioned, the transition is very real. It's happening right now, and it's big.
Regardless of which study you read or which prognosticator you listen to, the total addressable market for industrial electric heating is accelerating, and we're growing near, if not higher than double-digit rates for the foreseeable future. Enabled by the rapid growth of renewable energy, and support, and supportive policies such as the Inflation Reduction Act and innovative and breakthrough technologies, our analysis indicates a TAM in excess of $15 billion by 2050. And we are well-positioned to both enable and exploit this transition via our current capabilities and capacity, while simultaneously expanding both. Our increased R&D investment will result in new products, which will expand the operating envelope of our technology, allowing us to unlock even more markets and growing the TAM to even higher levels.
We're also on the lookout for M&A opportunities, which will complement our strategy, our culture, expand our TAM, and our EBITDA-accretive. To give you a sense of what these products are and what they do, I'll touch on a few here. First product highlighted is our electric immersion and circulation heaters. These 100% efficient heaters are used in everything from providing hot water in hotels and hospitals to complex thermal energy storage systems. 50% of the energy consumed within the industry is used to generate heat, and this technology is at the forefront of this energy transition. Next, we have our core heat tracing product line. As you know, heat tracing is a technology critical in keeping fluids flowing in pipes, vessels, and tanks.
You may recall from the most recent earnings call, we just recently landed two very large decarbonization heat tracing products, projects, one for sustainable aviation fuels and one for a net zero hydrogen generation facility. Next, we have a product line many of you may be familiar with, electric boilers. We manufacture a full line of both steam and water boilers for use in industrial and institutional environments, think schools, concert halls, and stadiums, as well as commercial and industrial applications where gas or oil-fired boilers have been the mainstay for decades. Moving on, we have our EnviroDyne line of methane destruction units or MDUs. Methane is a highly potent greenhouse gas. In fact, it's up to 75 times more potent than CO2, and unfortunately for a warming world, methane emissions have never been higher than they are now.
One way to manage these emissions is by destroying them at the source, which is exactly what the MDU does, converting more than 95% of the methane to the less potent greenhouse gas of CO2. Lastly, we have our Tubing Bundle product line, which, among other things, allows our customers to monitor and then control their greenhouse gas and other emissions. Now, I'd like to turn your attention to some features and aspects of our company which we feel create a sustainable competitive advantage. The first of which is our position as the technology leader in the industry. By this, I don't mean just our products, but more holistically, how we go about developing and applying these solutions.
We have a very focused engineering approach, which we'll discuss in greater detail on the next slide, which leads to high quality, high performing, both technically and financially, products and solutions. Complementing this, we benefit from having built significant barriers to entry, including our extensive portfolio of global certifications, which you've as you've already heard, number almost 600, as well as our presence on hundreds of AVL or approved vendors lists. Adding to this, we possess best-in-class times, which are maintained thanks to our focus on operational excellence, as already talked about by Roberto. And then these competitive advantages are enhanced via our global installed base, as Tom just discussed, providing unprecedented access to a tremendous volume of decarbonization opportunities and our one-stop shop with the fullest suite of products and services of any supplier.
As noted on the previou slide, we have a very systematic approach to developing new products, as illustrated here. We start with a well-defined market need, and progress that through a series of well-defined phases, which allows us to move efficiently from engineering concept through modeling and testing, and culminating in a product that has been both optimized from a technical and a financial perspective. Allow me to discuss a few aspects of the model, which are key differentiators for us. First is our relationship with Heat Transfer Research Institute, or HTRI. We have formed a tight bond with this advanced technology firm, giving unparalleled access to customers as well as helping shape industry standards and specs. As a matter of fact, our head of R&D was recently selected to lead the technical session covering electric process heaters at their annual meeting.
Second, is our validation step, which involves building actual working prototypes and putting these through rigorous testing, a step that many companies skip. This not only allows us to validate the models, but gives us a built-in advantage of understanding where the models struggle, and then generating empirical correction factors to that model. Lastly, I want to highlight a few comments we have recently received from our customers. The first from a heat transfer engineer at one of the world's largest integrated oil companies. When asked, "What do you expect from Thermon?" His responses were: "To be an industry leader for electric heaters and drive the industry forward.
Continue your collaboration with HTRI to develop electric heater software, develop new electric heater technology, and participate in development of an industry-based electric heater standard." Second, a large global engineering and technology company recently recognized us with a vendor grade of A, an achievement which has only been granted to four other companies. In this real-world example, a customer of ours was looking for a reliable and cost-effective solution for replacement of a steam superheater. They weren't pleased with the performance of the existing electric heater supplied by another company, and additionally, they wanted to increase their throughput by 50%. It quickly became apparent that our recently developed Quantum TruFlow heater, which was developed via the process I just discussed, was a perfect fit for the application.
Our engineering team worked with their customer and showed them our product development and validation process, which resulted in a superior electric heater and one that was best set, best solution for their needs. We were not only able to achieve the higher heat duty that they needed, but we were also able to assure them of longer bundle life at lower cost, lower cost for them and a higher margin for us. We're now building on the success of the Quantum TruFlow heater with an expanding product line designed to overcome process challenges while delivering superior financial returns. Moving to another success story, this one involving more of a traditional design. Here, our customer, a large European refiner, was looking for a way to quickly and easily reduce its carbon footprint.
They had identified an area within the plant that they thought was well-suited for substitution of a gas-fired, gas-fired heater to an electric heater. The only challenge was they wanted the electric heater to fit within the existing shell while increasing its heat duty to accommodate future growth. The solution was a custom-designed heater, which fit into the existing shell, as well as extending the life of the heater. In addition to those expressed needs, we were able to provide them with more consistent heat transfer, as well as a more precise temperature through modern process management and control. These are just a couple examples of a rapidly expanding market propelled by the need to decarbonize. We see opportunity for our opportunity pipeline growing at 20%+ through FY 2026, with revenue attributed to decarbonization growing at or above this rate within that same period.
Although we continue to serve our oil and gas customer base, it now makes up less than 30% of our overall revenue. Indeed, as you may see from the graphic, our pipeline of opportunities span the spectrum from renewable fuels to battery and plastics recycling. Some of our largest wins have been in the areas of carbon capture and sequestration, and as noted earlier, we have secured significant wins within the hydrogen and ammonia industry, which are, which are seeing growing at 30+% . And it doesn't stop there.
Post FY 2026, we see emerging large opportunities with game-changing technologies such as small modular nuclear reactors, which we are well-positioned to take advantage of via our N-Stamp certification, which is a very difficult to obtain and even more difficult to maintain certification, allowing us to construct products which we place in service within nuclear facilities. As a matter of fact, we are one of only a few companies in Canada which have earned this designation. As customers decarbonize and electrify processes closer to their core, the greater the need for monitoring and control becomes. This is where we see a great opportunity to leverage the output of our digitization solutions.
For example, our Genesis Network platform can be easily adapted to monitor and control complex networks of railway switch heaters, saving switch yard operators time and money by ensuring heater integrity. Likewise, we see tremendous opportunities and synergies between our diversification and decarbonization initiatives, notably in the area of food and beverage, which, as mentioned earlier, is moving rapidly towards decarbonization via application of electric heating technology. In conclusion, Thermon is well positioned as a global technology leader to take advantage of the rapidly accelerating decarbonization trend across our expanding customer base. I'm confident that our growth and margin expansion goals for FY 2026 will be met, if not exceeded, as market enthusiasm for our core heat trace solutions, as well as our process heaters highlighted by our Quantum line, continues to grow as we introduce further enhancements to this and other product lines and service offerings.
Thank you for your time and attention. I'd like now to turn the floor over to David Buntin, who will talk to us about new product development process.
Thanks, Mark. All right, I want to talk to you guys about how new product development is been a transformative activity for Thermon, and something that we're leveraging going forward. So I'm David Buntin. I'm the Senior Vice President of Thermon Heat Tracing. I've been with Thermon for seven years. Before that, I was the Chief Operating Officer at a company called Enovation Controls that made custom electronics and display products for OEMs, for off-highway, recreational, marine, oil, and gas companies. And before that, I was on a founding team for a successful high-tech IT security startup called SecureLogix.
So today I want to show you that, and talk to you about, we've had a, we have a proven track record of successful product development in recent years to bring new products that give us differentiation and market expansion in the business. We have a very intentional and efficient process for new product development that makes us effective and gives us pace. And we're building a competitive advantage, that our capabilities in new product development makes a competitive advantage that other companies in the space need to match in order to keep up with the industry now. And we're using this capability and this capability in our to fuel our long-term strategic initiatives, the ones that you've heard Bruce and Mark, and Tom talk about today. So let me jump right into it.
Looking at recent history, back in FY 2017, at the end of that fiscal year, we had a planning session, and we decided to invest in new product development and make some strategic changes to the business because of it. So we started growing the business or growing our investment from, you see in the chart, from about $3.5 million in FY 2017 up to the $8.4 million in 2020, right before COVID. That was a major increase in our new product development investment. And we were doing that very intentionally to try to create a differentiator and a change in the business. It resulted in... What, what did we do with that investment?
Well, we, we hired a new dedicated teams of R&D first in San Marcos and Austin, and also added capabilities in Oakville. And we even though we were increasing the spend because of the revenue growth during that same time, our spend still stayed in that a very efficient range of 2%-3%. And the products we developed during that time, as a result of those investments, have resulted in significant revenue for the business and represent 20%. So the, the products developed in the last five years represent 20% of our revenue at the end of FY 2023. So, we have a great product vitality rate because of it. The investment resulted in a new controls and connected solution and software team, and we have new capabilities in, in, in IoT and smart connected solutions.
We also use that software team to develop automation tools to automate the creation of drawing, construction drawings in our largest projects. So we do projects where we make thousands of drawings for a customer, for a facility, and we automate that with software, automate the creation of those drawings. We also invested in a material science and, process development team, so we hired a new team of people that are material science experts. Heat trace is made of advanced polymers. These are polymers, plastics that can operate at over 400 degrees Fahrenheit or 250 degrees Celsius, just, you know, and without degrading, and, and perform well in that, in that temperature environment. In order to do that, you have to understand the latest and greatest of, of polymers and, and material science.
And there's been a lot of innovation in material science and polymers that we're leveraging and working on to try to advance the industry, to give us more performance and also better costs and margins. So what was the result of those investments, of those two teams? Well, in the last five or six years, we've launched a whole new line of industry-leading control and connected control and digital solutions. We have a new multi-point control panel we call the Genesis Controller. This is like replacing your old thermostat in your house with a new digital connected thermostat, okay? We did this for heating systems and plants. We also launched a new single point controller or dual point controller that can go out on a pipe that's also smart and connected.
And then we launched a supervisory monitoring system that can connect and communicate with all the other devices, all the other controllers in the plant, and bring that information back to the control room. We also launched a new line of industry-leading heating system, heaters as well. We launched USX, the highest temp and lowest cost heat trace. We launched USX, the highest temp heat trace, and we also launched another product, which is our lowest cost heat trace. We came out with a next generation of space heaters and rail heaters, and we also, like Mark talked about with the Quantum heater, we launched a new immersion heating technology that is a paradigm shift in power density. We also created a new set of tools for automating our large project construction drawing creation.
So our engineering teams, our application engineering teams, build drawings via automated software now, and that improved efficiency and output of that work and for those services. As I mentioned, we have a very intentional process to make our MPD activities very efficient and to get the most for the spend. It's a Stage-Gate process based on an automotive industry's, you know, best practices, and it involves multiple stages. One of the key tenets of it is that it drives cross-functional engagement. So every group within the company that's involved in the introduction of a new product gets involved and has an input, and and ensures they're ready to go as it's time to launch. At stage two, we focus on risk mitigation.
Learn what you don't know fast before the costs are high, and get that out of the way so that you don't waste a lot of time and waste a lot of money at the end of the process. And that really saves you time, that saves you a lot of, a lot of churn and makes you more efficient. At gate two, at the end of stage two, the team commits to the cost. So the sales team and the product management team does a market analysis and understands what the opportunity is and writes that on a piece of paper. The ops team and the R&D team puts what their best effort estimate is on what the cost to develop the product is, and they put that down, and we build an ROI.
We very formally track the ROI on each new product development project. We prioritize the project, we approve them, and we prioritize them based on that ROI, and that ensures that we're focusing our efforts on the things that have the most impact and are the best opportunities for us from a return point of view. At gate four, when the project's ready to launch, we revisit that ROI. We look at what we actually spent developing it and what the new market opportunity is, or what the market opportunity is at that time, and then we again prioritize and plan based on that ROI plan. So some examples of projects that we launched because of this process, I mentioned the Genesis multi-point controller, our new control panel.
That project was a 12-month project that resulted in a 20% margin increase over our previous generation controller, and it was very well successful and very well accepted in the marketplace, and now represents around 80% of our heat trace control panel sales. In a very short period of time, it just took over our offering. USX, our highest temperature heat trace, that was an 18-month project. We were able to increase our margins by focusing on costs while we were working on performance. And now, at gate four, we projected a certain amount of revenue, and now we're actually seeing the actual performance of USX sales exceeding that by 2.5x . And then the Hellfire 905 Blizzard Duty.
I'm gonna talk more about this project a little bit later, but that was also a very successful launch product. It was a 15-month project. It's a key enabler to our long-term strategic initiative for rail and transit that is allowing us to double our rail and transit revenue. And this has been so successful that we've had to create a new production line in San Marcos to keep up with demand. All right, so this capability is also a competitive advantage. The things we're doing now become a bar that other people in the industry have to match in order to keep up. In order to be in this industry and to compete and win projects, you have to have a smart, connected controls on the bid, and you have to have an IoT team and a software team that can keep up with that.
That's hard to do for a heating company that makes heaters. You have to have a materials science team and processes and lab equipment to be able to advance the limits of materials science. And if you're not doing that, you're not gonna have the same competitive advantage, you're not gonna have the same cost margins, you're not gonna have the same performance. You have to have these software tools that automate the creation of drawings, and that's a big investment that not any company can get into very easily. You have to have a disciplined process to be quick with your pace and get a lot of value out of your R&D spend in order to keep pace. You have to have a...
I mean, just to afford new product development and to do these things, you have to be a profitable company. So, you know, when you're trying to get into the business, you know, you have to have those extra dollars to be able to do the R&D, activities, and to do the development that we're doing. And then we talked about the certifications. Look, we put hot electrical things in an explosive environment. That's not a good idea in general, okay? So to do that, you have, there's a lot of government regulation around that. There's a lot of local and regional regulation in countries all around the world. So if you wanna compete on a global market in all these different locales, you have to have those approvals and certifications to be, prove you're safe, in those, in those environments.
So all of this makes a barrier to entry, and all this makes a moat that it makes it difficult to come in and take some of this business. So let me give you a couple of case studies. First of all, how are we using this capability? We have this capability, we have this process. What are we doing with it? Well, we're fueling our long-term strategic initiatives. We're fueling decarbonization. Mark already talked about the Quantum Heater, which is our biggest marquee product launch in decarb. It's a great development. Let me tell you about another one. So this is an example of a customer. It's an OEM that makes a multi-fuel boiler that runs on oil and natural gas.
Their customers were coming to them saying, "Man, we really gotta, we gotta lower our carbon footprint. We wanna take advantage of subsidies, and we wanna take advantage of, of best, you know, best fuel costs that happen at different off-peak hours. We want you to help us take, make our multi-fuel boiler into a, an electric option as well." So we developed a new set of heaters that can go into these, these, this OEM's boilers, and we helped them do the design work, integrate it into their boilers so that it can run fully on electric. And we also helped them with a control system that allows it to switch over based on the customer's needs and based on real-time rates.
And as a result, our—these OEMs now can take advantage of these, you know, best times, best, you know, best subsidies, best rate for electric, for electric heat. It's been a very successful project. We've gotten a lot of interest. The OEM has seen a lot of interest in the boilers, and we're seeing a really high, acceptance rate and quote activity because of it. Let me give you another example. So now we're also, supporting and fueling our strategic initiative behind diversification. One of the focus markets in our diversification as initiative is rail and transit, that you've heard about it. In worsening climate conditions, temperatures get colder and it's more difficult to keep, tracks and switches free of snow and ice. Our customers can't have a shutdown. We talk about the mission-critical thing.
If that one switch freezes, that shuts down the whole rail system, which is a huge cost and a huge inconvenience, right? So investing in that switch heater and making sure it works is a key thing. And it's, and they can't allow delays. And a particular problem in switch yards, where there are a lot of these heaters together, they can be loud and noisy, and a delighter is to be able to do it in a quiet with less ambient noise. So what did we do? We developed, using our process and our capabilities, a new switch heater. It's twice—it's the most powerful switch heater available in North America now. It has two times the airflow of our previous model. It uses these specially internally heated coiled components so that it guarantees it starts up.
Remember that mission-critical thing? Because we're using a very high-efficiency blower, it's more efficient than the previous generation models and the competitors, so it actually creates an ROI for our customers. The operating cost is lower, and because it's more efficient, it makes less noise, so it meets that delighter. It's quieter, and so customers love it because it saves them money, and it's less of a nuisance when it's running. You can see the picture on the left where the switches are kept free of snow and ice. So we were able to convert the largest U.S. rail operator over to our product line, and they're buying this heater now. And with using this heater, our customers are seeing a 35% lower total cost of ownership than our competitor product.
Finally, I wanna tell you, talk to you about how we're fueling our digitization, long-term strategic initiative. So customers in a refinery or a power plant or a big, a mill, or other processing facility might have thousands or 10,000 circuits, heat tracing circuits, that have to be running. Any one of them goes down, the plant shuts down. It's very mission-critical. They want a system that allows them to see all that in one place and be able to monitor and ensure that they know what's going on, so if something happens, they can go out there and repair and keep it running. So... And they have not just products from Thermon, they have products from other companies. They have Thermon old products, Thermon new products.
They have other heat trace manufacturers or other heater manufacturers running heaters in their plant, and they wanna see all of it in one view for the maintenance team. So what did we do? We developed the Genesis Network, which is a vendor-agnostic monitoring and control system. It's a locally deployed web technology that allows you, the customers, to walk around with a browser on a tablet or a computer and see what's going on in their network from anywhere.
It's the single source of truth for maintenance operations, and it gives them custom reporting to tailor to their operations, so that when they're doing their daily work, they can have the views and the reports to know exactly what they're gonna do each day for the maintenance work of that day. We're seeing a lot of excitement in this product. There's a lot of adoption of it. It's putting us in operational entanglement with our customers. Now we have the visibility. We are the providing the system that sees the problems in the plants. So think about that. MRO, that maintenance material spend, is the way that we get that recurring revenue and some great margin business. And this is the system that starts the repair operations behind any fault in the plant.
So we get the first look, and we are involved with the customer as they engage in this maintenance activity and able to gather that MRO revenue. And this is driving our LTSI, our long-term strategic initiative growth goals for this part of our strategy. So in summary, we've been. We've had a proven track record now of new product development, that we're launching new products that are effectively driving margins and helping us build a competitive advantage. We're deploying capital very efficiently, using a process, a disciplined process, that measures and understands the value of each project. We're building a competitive advantage. We're making it harder for other companies to be able to compete in this space because they have to have the similar capabilities to match.
Finally, we're using all this capability to drive those strategic initiatives that are gonna drive the growth that we're talking about today. So, with that, Kevin's gonna come up here and talk to us about our financial overview and our longer-term outlook. So...
Thanks, David. All right. Good morning. My name is Kevin Fox. I'm the Chief Financial Officer of the business. I've been with Thermon since 2019, and I've been the CFO since February of 2021. Earlier in my career, I worked for General Electric, did about a decade in strategy and mergers and acquisitions, then worked around the globe in finance and corporate audit for a couple of years before then. So if I think about what I want you to take away from today, the key message is, you know, first and foremost, this is a business that's been executing and generating that track record of delivering profitable growth. This is a business with an attractive margin profile, and we see a clear path to be able to improve that over time.
We are executing against those strategic initiatives, and they are gonna be critical to driving the long-term growth of this business. That value creation is not just limited to the P&L, but when we look at the strength and flexibility of our balance sheet, we see that as an asset to be able to continue to inorganically grow the business as well.... And last, but certainly not least, is the ability for a business like this with that high margin, low CapEx business model to sustainably generate cash through the cycle. So before we look forward, I wanted to take a little bit step backwards and think about where we've come over the past few years. You know, first and foremost, the revenue growth of the business was about $200 million over the last three years.
Book-to-bill remains positive, and that backlog is near record levels still today. If you think about the trailing twelve-month orders of the business, that's at about $489 million. That's indicative of continued growth in the time ahead as well. If we think about that $200 million of revenue growth, it's been very profitable revenue growth. So of that $200 million, we've been able to turn about 70 of that into incremental EBITDA, for an incremental margin of about 35%, and that's how you see gross margins, or excuse me, adjusted EBITDA margins going from 13% in fiscal 2021, to 22% in the trailing twelve months today. Last, but certainly not least, this is a business with an ability to generate a return on capital and an attractive return on capital.
And I think it's important to note that the board and management have recently changed the long-term incentive plan to align management's compensation with investors' returns on that ROIC metric as well. So when we think about our growth strategy and how that is going to enable long-term value creation, you've heard the team, you've heard Mark, David, and Tom talk about those growth enablers around decarbonization, digitization, diversification. We've got the M&A lever for bolt-on acquisitions that we can pull to drive that incremental growth, but exposure to those secular tailwinds as well. How do we drive above GDP type of growth in the business through the cycle? From a profitability perspective, this business has very attractive gross margins. It's averaged about 45% over multiple decades, so there's an opportunity there.
Manage that price cost equation on the value gap, have that scalable SG&A, be able to manage your cost base. That's really gonna generate that, that cash flow of the business, when we think about that asset light business model, and being able to maintain that strong and flexible balance sheet. You've heard Roberto talk about the transformation underway, but this is a relentless focus on continuous improvement. It's not just on the shop floor, it's in the accounting team, it's in the HR team, it's in the commercial team on the front end. This is part of what we do at the business every day when we get up in the morning. What does that lead to? That's gonna lead to our ability to deliver on the fiscal 2026 goals.
That's an attractive return on capital, that's Adjusted EBITDA margins at 24%, and that's the strong free cash flow of the business that we expect. So if we think about cash for a second, over the past three years, this business has done about $95 million. We think we've got the opportunity to double that over the next three-year period. Clearly, there are strong growth trends that this business is exposed to. And if we think about the scalability of the business, that growth is obviously gonna create incremental cash. There's a working capital opportunity as well. I would say, particularly on inventory, it is a place we're focused. And certainly, we have the ability, with our strong and flexible balance sheet, with our credit agreement, to be able to pursue inorganic growth opportunities as well.
All of that combines to create that flywheel effect, where you're generating cash, you're redeploying it at attractive returns to create more cash over time as well. So really nice opportunity here on free cash flow. What have we done with our cash over the past three years? Really, the prioritization here has been on paying down debt. In the depths of COVID, this business was levered a little over three times. As we have that focus on a strong and flexible balance sheet, wanted to make sure that was in a more comfortable range. So the priority here has really been paying down that debt. We did an acquisition last summer, a little business called Powerblanket, out in Salt Lake City, Utah.
That was about $35 million, and I think that's indicative of the type of opportunity, not necessarily the size, but the type of opportunity that we would pursue. It had about 85% of its revenues in diversified end markets. It had some proprietary heating technologies, just a really nice fit in, and a lot of commonality with the channel from a sales perspective as well. And last but certainly not least, there's about $20 million of CapEx. There was more of a focus, I would say, maintenance versus growth over the past couple of years, but really positioned the business well with that cash that we have generated to set ourselves up for success. So if you think about what are the future priorities for the business? Very similar to what we do today.
The first priority is organic growth. You know, we believe this is the highest returning investment we can make. That's in our people, that's in technology, that's in product investments as well, you know, and targeting that 2%-3% of R&D that David spoke to earlier. Inorganic growth, I would say the priority here would be bolt-on opportunities. Building that industrial process heating platform, expanding and diversifying end markets, maybe not just from a product exposure, but from a geographic exposure as well. Certainly maintaining that strong and flexible balance sheet, that capital structure that we have today, if we lever up to do a business, paying that down quickly over time, to get back in that comfortable range.
I would say last, but certainly not least, there's an opportunity to evaluate potentially returning cash to shareholders, whether that be through a repurchase or a dividend. But I would say we would kinda have that dialogue with the board vis-a-vis a lens of what is the highest returning opportunity. If we felt that was the case, something we'd be willing to do at the right point in time. I wanted to look at M&A for a second here, and give you a little bit of color on how we think about attractiveness of M&A opportunities. First and foremost, this is aligned with our long-term strategy. As Bruce mentioned, this is not growth for growth's sake. This is not financial engineering.
This is not just spending money because we have it, but really aligning with those secular trends, diversifying the business, continuing to build that global installed base. What are we looking for? We're looking for businesses with that industrial technology, right? We want that competitive advantage to be grounded in a technology solution, right? We're not making widgets. We're selling solutions at the end of the day. There's high barriers to entry as we think about that business model. Those are some of the factors that we certainly look at. Strong management teams. You heard Candace talk about that cultural alignment as well. As much as the numbers, guys like myself, like to think it's about the model.
Ultimately, the success of deals is about the people, and bringing on management teams that are aligned with our culture and values has been a critical, I would say, differentiator, for why Thermon is seen as a buyer of choice in the market as well. We want these businesses to be well positioned for future growth. How are they aligned to those secular tailwinds? What type of exposure do they have to the energy transition? Do they have that, again, strong management team that can be aligned with where we're trying to take the business? And certainly critical from a financial perspective, we're looking for deals where we can generate a return on invested capital, greater than our WACC by year three.
And ideally, be in a size where they're accretive in year one as well, so we can drive that improvement to the model over time. So wanted to look at the THS acquisition in a little bit more detail than maybe we've provided before, but this was a deal that we bought in October of 2017. Spent a little over $200 million on it. And THS, as you heard Mark speak to, this is a business that engineers and manufactures advanced industrial heating solutions, was headquartered up in Canada.
And so really the thought process at the time was it was gonna help to diversify the business, really expand that addressable market, and give us a, I, I would say a more than a toehold, but a foothold in those types of markets, where we are today. So this platform for growth, very consistent with what we saw in the heat tracing business, high-quality products, reliable, mission-critical solutions, that we could bring into the portfolio to expand that TAM. Diversification was an important, important point here. A little bit more exposure to gas than the oil side of things, but it also brought us into markets like rail and transit. Where are we today? Yeah, this is a business that, on a trailing twelve months, did about $105 million of revenue.
That's about 52% higher than when we acquired the business five years ago. But most importantly, as we think about profitable growth, this was a business that was quite profitable when we acquired it, but the management team has been able to increase those margins by about 450 basis points over the past five years as well. Really focused on that customer profile, really focused on that product, that cost, and then driving that operating leverage of the business as it's grown over time. So a really nice success story here, delivering a return on invested capital greater than WACC. So very nice job of the business to demonstrate that we cannot just buy businesses, but build businesses and create value over time. So I've talked about the balance sheet.
Wanted to look at it quickly here, but the business has about $30 million of cash. That's a pretty acceptable level for where we are. Don't expect that to change too, too much. Making sure we got cash in the right place at the right time all around the world. But what I would really focus or draw your attention to is that net debt to EBITDA. You can see that deleveraging over the past couple years. I think in dialogues with the investment community, we feel pretty comfortable running the business at a 1.5-2 times rate. In our credit agreement, we have the ability to lever up to about 3.5 times, but again, 2-2.5 is probably where we would take things today, given the environment.
But clearly, with the business at 0.8 times leverage, we feel like we've got the opportunity to leverage and use this balance sheet, to fund, inorganic growth in the future. So where does all that leave us today, and where are we going in the future? As you've seen earlier, we're increasing the targets to $600 million-$700 million of revenue, with about 70% of those revenues in non-oil and gas or diversified end markets. And most importantly, that EBITDA margin, we think we can achieve 24% Adjusted EBITDA margin by the end of our fiscal 2026 year. So how are we gonna get there? What are we gonna do to achieve the goals?
From a revenue perspective, if we dial the clock back about six months, the business was at $440 million. The first step in the journey is really the organic growth part of the business. This represents a little north of a 3% CAGR, but this is the continued growth of the business, that installed base. Where are we today? $45 million of incremental revenue opportunity there. In the middle section, you heard the team today focus on those strategic initiatives: decarbonization, digitization, and diversification. We think that can deliver about $80 million of incremental growth. And so when you put those two together and think about the organic growth of the business, that's about $125 million all in.
That's about a 6%-8% CAGR over the next couple of years, so really nice mid- to high-single-digit growth for the business. Inorganically, 85 is on the page. Clearly, we have a little bit more capacity to do that, but as everybody's aware, M&A is a little bit binary. That's dependent on timing. Should we be able to do a deal potentially earlier in this model, we'd be able to delever and hopefully do more within that period. But, I think we feel fairly confident that $85 million is an achievable target over the next 2.5 years. Add all that up, we believe that's a business that can do at least $600 million of revenue by the end of our fiscal 2026 year.
From a profitability perspective, while on the page is 21%, that's where we finished at the end of last year. We're currently at 22% today, so we're already moving the needle on these goals.... about 50 basis points between volume and mix. That's gonna be the lowest contributor for those of you that know the business, there's some swing factors in there with the projects and the relative profitability, depending on whether we're delivering turnkey projects or just design and supply. We're at a pretty good place of profitability of the project backlog at the moment, but we still feel like there's a little bit extra there that we can work into the profits over the next couple of years. About 100 basis points in continuous improvement.
Roberto gave you a couple excellent examples of what he's been able to do in the business so far, what the team's been able to do in the business so far. That's just a preview of coming attractions. We think there's at least 100 basis points due to those continuous improvements that we're executing against operationally. And then what's the last bit? That's the 150 basis points from operating leverage. As we grow the business organically, 6%-8%, put some M&A on the top of that, you're thinking about a double-digit CAGR business. We should not need to invest in our base costs at that same rate. So managing that investment in SG&A at a rate lower than your revenue growth, that's what drives that operating leverage of the business.
We think that's another 150 basis points, and that's how we're gonna be able to get to 24% EBITDA over the next couple of years. So we've talked about what we think we can do. You know, where are we today and what are the type of economic scenarios that we believe we could encounter? I, I think first and foremost, you know, we think about the, the global macro environment or geopolitical uncertainty, you know, to the downside, that could certainly impact the growth rates that we and others in the markets are exposed to. There's a belief on the team that the diversification that we've accomplished over the last few years should help mute the impact of that. It should help raise the floor, if you will, vis-à-vis what this business has experienced in previous cycles.
I think we've been very intentional when we think about the goals that we've set. $600 million is the minimum that we're going to achieve over the next couple of years. You know, how would we manage in a downturn? This is a leadership team that's been together through COVID. We've had to do that before, so we know what the playbook looks like. We've been able to execute it. This is really about that expense management. It's that focus on operational and commercial excellence, and it's just managing the timing of your costs because we have a real opportunity strategically to deliver. Making sure that you're pacing those investments in order to continue to deliver for your shareholders would be critical in that type of environment.
You know, however, there's some asymmetry here that I think we see vis-à-vis the downside versus upside. There are multiple paths to grow this business, forward. First and foremost, under the right circumstances, I think growth could accelerate. We have ample dry powder on that balance sheet. Even in a downturn, you could be executing against M&A. We think we've got the, you know, as an acquirer of choice, right culture, right products, right fit. That could be an opportunity on a downside. That could certainly be an even, bigger opportunity in an upside scenario. And certainly last but not least, when we think about our strategic initiatives and that $80 million, should those, themes continue to accelerate with our customers, there could be upside there as well.
So I think net-net, when we look about where we are in the world today versus what could happen over the next 2.5 years, I think frankly, we see a little bit more upside in the business than downside, but we're prepared and ready to manage should a downturn scenario present itself. So before we wrap up here today, I wanted to take a big look back at this company's journey as a public company. And I think it's critical for the investment community to understand the transformation that's gone on in this business, particularly over the last 5+ years.
So as an early publicly traded company, it was GDP-like growth, it was high profitability from the oil sands, but this was a business that was really dependent on a small number of large customers, particularly north of the border. In 2016 to 2020, there was a... let's just say a weak, if not any, recovery in those oil and gas markets, but obviously ended with COVID. But what did the business do to start to reposition itself? Right, in weaker commodity markets, you know, you shifted to LNG, you shifted to chemicals, you shifted to power. But most importantly, you've heard from the team today, we rebuilt the business. Candace has talked about the changes that were made to the culture of the company. David has talked about the changes that we made to the R&D process.
Mark has talked about the transformation that was made to the project engineering organization, Tom and his sales team. This business has been fundamentally repositioned during that period of, of let's call it low to no growth. And what has that enabled? That's enabled that exit velocity that you've seen in the business over the past few years. The ability to go from $264 million of revenue to $475 million today, bringing in about 800+ basis points of improved profitability. The foundation that we, we have today was really built during that, that interim time period, and I think, we're seeing the benefits of those investments that were made today. It's a fundamentally different business. It's more diverse, it's less cyclical, and it's got better exposure to secular growth trends.
So we're very proud of the work that's been done, but we think we've got brighter days ahead as well. So if we think about the takeaways, again, this is a business that's executing. We're creating that track record of financial execution, driving that profitable growth for the business. There's an attractive margin profile that we've got an ability to continue to improve over time. The strategic initiatives, the execution, these are plans that we built two and a half years ago. We look at them every year during the budget cycle. We look at the results every month when we sit down as a leadership team and think about where the business is and where we're going. That's a key key thesis and a key part to the story of the growth in the years ahead.
That value creation, the strong and flexible balance sheet, we've been able to show and demonstrate an ability to buy and build businesses over time, continuing down that path to execute on an inorganic growth strategy. But again, most importantly, from a cash perspective, managing through the cycle, using that asset light, low CapEx business model, to create the opportunity to generate cash and create that flywheel effect over time. So thank you-
It's a different business today than it was 10 years ago. We certainly believe that we've got the opportunity to continue to drive earnings growth in the future, but there's certainly an opportunity for that multiple to rerate to help create shareholder value as had. So maybe with that, I'll pause. I think Bruce will invite you back up for some closing thoughts before we go to Q&A.
All right. All right, well, thank you, Kevin. And, you know, as we kinda wrap up here today, hopefully, you'll see, really, you have a deeper understanding of who Thermon is, what we do, how we're positioned in our end markets, and some of our growth opportunities and our competitive advantages. And, you know, we're really a leading brand in a high-value niche space, and we're, we really, are differentiated, in, in our position in the marketplace, and we're expanding into more diverse end markets, which, is really underpinned by our operational excellence programs that'll help drive growth and increased and improved profitability. It's not to be, understated, just the importance of our large installed base that's been built over the last seven decades.
I mean, that creates a lot of value, and it's our aftermarket franchise and how we serve those customers with excellence that really creates those recurring revenues and that annuity in the business. You know, we have a great opportunity here as we position this business in some end markets with very strong growth trends that we believe will extend for the next couple of decades, particularly related to, you know, decarbonization and diversification. You know, the expanded portfolio we have now with not only heat tracing, but process and environmental heating, has created sizable, we can go build sizable, defensible positions in these areas like food and beverage, you know, in rail and transit, in the commercial space. And in addition to that, we've got other opportunities above and beyond that in some of the areas we mentioned.
Then last but not least, you know, we have a very strong and flexible balance sheet. It gives us some optionality going forward. We can deploy that capital in a way that is going to help augment and support our organic growth initiatives. And so, you know, as I kinda wrap all of that up today, we feel very strongly about just the goals that we put forward here today, our ability to achieve those, and the value that will ultimately create for you as our shareholders or prospective shareholders. So with that, I'd like to now turn to the Q&A session and invite the presenters up here to join me on stage.
Hi, just a question on the big growth areas, food and bev, rail and transit, and the commercial space. So in terms of the product portfolio and new product introductions, you had the rail heater. You know, are the new product introductions focusing on that area? And in terms of, you know, aftermarket, how does the profile for those businesses compare to the existing business?
David, why don't you take the new product development question there?
Yeah, I mean, so obviously, we are... I'm being careful not to disclose some of the things that are in the works. There are some proprietary things happening that we're excited about announcing and making product launch announcements. You think, if you look back in our materials just a few weeks ago, we announced a new heating system for fire sprinklers for commercial buildings. So that was part of that strategy. You know, we do have a roadmap and a portfolio of activity to support the strategic initiatives in the different diverse markets, and we're just excited about sharing some of that with you as it goes forward.
One thing I guess I can kinda say is that, you know, in the coming quarters, we're gonna have a few products targeting the commercial markets. We also, we're gonna have regular software releases. Why does that matter? Now that we have this platform of monitoring and control, we can bring new features that are targeted to our end customers and those industries that are specific and gives them very makes differentiation and makes it more compelling to buy and creates value. So, those are some of the things that you'll see coming out. Look for product announcements as they're coming out.
Do we have any?
You mentioned that one of the trends was towards larger heaters and more heat. What about tighter tolerances and more control? Is that also something that's happening in your markets?
Yeah, absolutely. You know, as I mentioned to you, as we get closer to the core process, whether that's an ethane furnace or whether that's, you know, where they actually make the money, it becomes even more important. So absolutely. Tighter temperature control, bigger heaters, higher temperatures are all coming into play. But yes, absolutely, the control side of things is becoming more and more important to our customers.
Does that come from the control systems, or are there things that you do with materials, or?
Both.
Okay.
So we are stretching material science, as David mentioned already. You know, we've hired-
... now two material scientists in the last couple years. So yes, the material side of things as well as the control side of things. So, and we're cross-pollinating between THS, from the work that David has already done on the THT side of the business, we are now bringing that technology and that know-how over into our process heating.
Great. Thanks.
You bet.
Hank D'Alessandro from Lansdowne Partners. First question for Kevin. When it comes to that $85 million targets, acquisition targets, you've been out there in the market for quite a while. Obviously, you did the heat blanket acquisition. But could you comment on what makes you sort of convinced that you can execute on $85 million in the next 2 years? And perhaps also comment on the latest trends in your current acquisition pipeline.
Yeah, thank you, Hank. Good question. So if we think about... I'll start with the pipeline. And you heard Tom and Bruce allude to the size of the markets, the fragmentation of the markets. So these are players from a competitive perspective that we know. These are relationships that we have. I think the pipeline's in a place today where it's probably better today than it's been in the last five years. So we're certainly out there, we're certainly looking. And then if I kind of translate that pipeline into our balance sheet, right, 0.8x levered, I don't necessarily think that's a bad thing. That's not burning a hole in our pockets. We're gonna stay disciplined as we think about deploying capital.
I mean, we want to make sure we're buying, you know, good businesses or great businesses at good prices at the end of the day, not just pursuing growth for growth's sakes, as I mentioned in my comments. So, you know, if you do some quick napkin math, $85 million of revenue, you can make some quick assumptions on what you've got to pay to, to get that. I think we've got that capacity or dry powder on our balance sheet today, without even accounting for cash that we're gonna generate over the next couple years. So I think you put all that together, whether it's the pipeline, whether it's the balance sheet, whether it's the cash generation of the business, I think it sets us up well to, to execute against that over the next couple years.
Okay, that's clear. And I think you also mentioned geographic, sort of strength in your geographical exposure. Which geography are you sort of thinking about?
Yeah, let me take that. So, yeah, geographically, as we look, our manufacturing is heavily focused towards North America today. And, you know, you heard about, from Tom, about developing markets. If you look at electrification, Europe is really leading the way. So the Eastern Hemisphere would be areas that we would be focused on, certainly to serve the European markets, and then also in developing countries in Asia. So those would be the areas we would be looking at growing into, to really hit a price point and a lead time and be competitive in those markets and take advantage of those growth opportunities.
Next question on your sort of diversification target of 70% non oil and gas sales. Is that excluding acquisitions or including acquisitions?
That would be inclusive of acquisitions. And depending on, on those acquisitions and the makeup, we, we certainly might have opportunities to exceed that. You know, actually, in the last quarter, our incoming order levels were in excess of 70% non-oil and gas. And, so, you know, we're seeing the mix just within our incoming business organically change pretty substantially based upon a lot of the incentives and things that have been put in place, and the increased focus that we've had and the channel development we've done. So, you know, there could be additional opportunities, but, you know, we do see the oil and gas sector in any kind of scenario being a still a significant part of the energy mix, even through 2050.
You know, it's, it's hard to say exactly maybe how much we could get as far as overall diversification over that time frame.
Yeah. So in your sort of target framework, you don't model in a, let's say, a lower growth in the oil and gas business compared to the rest of the group?
Well, actually, we do. In fact, if you look at just year-to-date incoming orders, oil and gas is down 13%, whereas our overall order intake is up 16, 16%. So we are getting it in these more diverse end markets, and the mix is changing.
Mm-hmm. Last question. I think you mentioned at the very beginning of this, this presentation that you are looking to sort of further measure your Scope 1 and 2. I think you mentioned Scope 1, but could also be Scope 2 Emissions. Can you comment on your thinking about sort of, yeah, target setting around that? And also, how important is that sort of becoming for your client base?
You know, there's increasing demand for that, but it's still early for smaller companies like ours. We're not an emitter. We have, you know, very minimal. We don't really have air emissions and things like that. So, you know, some of this is just coming in and establishing baselines, and a lot of our emissions are below kind of those threshold levels. So really setting those baselines first and foremost, and then coming back and beginning to set goals for energy usage, water consumption, things like that, really to begin to set targets. So, you know, we're working towards that, and we would expect, you know, in the next 12-24 months to make some real advancements down that path.
Okay. That's clear. Thank you.
Any more questions at this time?
Just a question in terms of the aftermarket. So, earlier in the presentation, it was discussed, like, 12 people embedded in a customer site. Is that normal in terms of service and aftermarket, or are there truck rolls, just in terms of the mechanics of that service and aftermarket parts of the business?
I mean, do you want to take it, Dave?
Sure, I'll take it. Yeah, this is a great question. We love to talk about the way we get that recurring revenue at a site. You know, it's a mix. Some facilities, you know, in the north and even big facilities on the Gulf Coast, have tens of thousands of heat trace circuits in the facility. They may have a team of 5 or 12 people that work there, and we like to provide that service or work with the customer's team to provide that service, and oftentimes, we do in those very large facilities. You may have a small facility that has only 1,000 or 2,000 or 500 heat trace circuits. In that case, we can provide a truck roll, send a field service team out there, do commissioning, do auditing.
A big one that's going on right now is in down in Texas, we have power regulations that require audit services to ensure readiness for winter storms, and that's a truck roll to go out there, do an audit, and verify the operation and provide a report that gives confidence that the power systems are ready to go. So we have the gamut, depending on the facility size and the customer need, and all of it generates identified areas where there's MRO and maintenance spend. "Hey, you need to fix this, you need to replace that," and that generates that recurring revenue that would come from that.
We have a question online. Kevin, how has the opportunity seen pacing in Europe impact your expectations for 2023?
Yeah, good question. I think if we think about how the, I'll say, business has evolved and grown over the past couple years, there's been a little bit more growth driven by the US in particular. But I think it looks like Europe and APAC are starting to pick up momentum, maybe a little bit of a late recovery coming out of COVID, and some of the supply chain complexities there. But if you recall some of the comments that were made, I believe it was from Tom, you know, just growing GDP in those markets, that's what kinda kickstarts. That's a trigger for a lot of those products that our customers produce, which really ends up helping us from both the greenfield and an MRO standpoint.
So I think if we look at, you know, longer-term trends in markets like APAC in particular, I think those long-term trends for growth are gonna be quite healthy for our business and very well positioned with those customers. We've been in the region for decades as well, so I think we've got a fairly healthy secular tailwind as we think about that GDP per capita growth, being able to deliver growth in a region like APAC over time.
Okay. Given your success in recent quarters, is the revenue target ambitious enough?
I guess I'll take that one. Oh, we raised—we only raised it $50 million, so. No, I mean, you know, I think our revenue targets really contemplate a wide range of outcomes. I think we're very comfortable with the ranges that we've put forward here. Certainly, as you've heard some of the opportunities and just the total addressable market, and depending on the pace at which some of these trends move, you know, we could have upside to the numbers we've put forward. But certainly, we feel confident in the ranges that we've presented here today, and we feel like we have a clear path to achieve. And we believe in doing so, we can generate some real shareholder value in the process.
No more questions in the room? Okay.
All right.
Out of your competitive advantages and strategic capabilities, what is truly differentiated for Thermon?
What is truly differentiated for Thermon? You know, I go back to, we're not just a product business, and we are solutions oriented. And it starts with our people, that technical expertise and that Thermon difference, they truly are the difference. But it's really in the combination of the breadth of the portfolio. It's the technical services that we provide, and that supports the early involvement. It is the services on the backside and really, the support that we provide through the life cycle. It's those software tools that they use from both design and operational, you know, implementation. So it's really all of that combined, and then kind of that backdrop of all the certifications that we have. I mean, that really sets us apart in the marketplace and really, gives us that competitive advantage.
So...
Great. Next one online. Do you expect your decarbonization pipeline to grow above the market? If so, how much?
Mark?
Yeah, we do expect it to grow above the market. The market, first of all, is very difficult to, at this point, to estimate. You know, as I mentioned, you know, everybody's got a number out there, and a lot of it depends on how quickly things develop. So 2030, there's a Paris Treaty, the Paris Agreement, excuse me, has a solid date of 50% reduction in CO2 emissions. 2050 is the other key date. So how quickly companies wake up to the reality that 2030 is not that far away, will depend, and that will create momentum around decarbonization. Can we pick up the growth? Absolutely. I mean, we are looking at, you know, 20% increase in pipeline. I have no question that we'll be able to defeat that.
Maybe, Mark, I might add to that just a little bit. There's economic reasons why our customers are making those decisions. It's not purely subsidies or regulations, you know, particularly in areas where there's an arbitrage between cost of electricity and other input costs. It's not just those types of, you know, call it regulatory or government type of reasons as well. There's real economic reasons why our customers are making those decisions to electrify and why they're choosing Thermon with our products and solutions as well. So that's a key piece, I think, of what we've seen over the last 2-6 quarters and some of the growth there.
Absolutely.
... Okay. What does your M&A pipeline looks like?
Yeah, good, good question. I think similar to, to what we described earlier, the pipeline's strong. Relationships are in place, we're continuing to actively have those types of dialogues. And again, with the, the position of the balance sheet, you know, 0.8 times levered today, we think we've got dry powder to be able to deploy. But again, I, I think it's the key here is being disciplined, right? You can get out over your skis pretty quickly and maybe overpay for something less than perfect. That's the situation we're trying to avoid, right? And how do we find the THSs? How do we find the Powerblankets of the world?
How do we, and then not just buy those businesses, but retain the management teams, identify those growth trends, and I think, you know, build those businesses, not just buy businesses. You know, the winning isn't in the decision, you know, the winning is in the execution at the end of the day. So the pipeline's good. I think we've got the cash to spend. I think we've got a team with a proven track record of executing. So I think we feel good about our ability to create value, through M&A going forward as well.
Great. David, if you increase your R&D spend by 1%-2%, what impact would that have on revenue?
So, great question. We actually have a roadmap, where we've kind of looked at the different markets, the different strategic initiatives, and where we need to invest in order to support them. And we're doing a bottoms-up analysis of that, and we're investing where needed to achieve those plans. So, you know, I wouldn't think about it in terms of, you know, what could you do with more spend? I think we're supporting and we're funding those initiatives that we identify using our disciplined process to get the best return for that spend. And where it's needed, we're putting upon the resources to get the most impact, so.
You know, David, I'd go on to say, if we saw opportunities for new product development above and beyond those spend levels that could drive additional value, we would absolutely entertain those, evaluate those through a disciplined process, and we'd invest accordingly, so.
Okay, next one. Should we think about the energy transition initiatives as incremental to current revenue, or is there an overlap with other initiatives outside of the energy transition?
All right. You want to take... you know, there, there with all of our initiatives, decarbonization, diversification, and digitization, there, it's a Venn diagram. There are intersection points between all of those, so I don't think you you can't think of those in isolation because there's decarbonization in the oil and gas sector. There is, you know, there is digitization that enables other things in the diversification initiative. So I think of them more in a Venn diagram and kind of there are intersection points between each one of those and between all three in some cases. So I think that's more collectively how you might envision this, not in isolation, but there are intersections.
Do we have any more questions in the room? Okay.
Listen, thank you all again for attending here in person, and certainly thank you all for attending online. We'd like to invite you all here today to join us for lunch, and have an opportunity to maybe interface with the management team. So with that, this concludes our first inaugural Thermon Investor Day. Thank you again for your investment or your interest in the company. Have a-