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Good afternoon. My name is Trip Caldwell with Wells Fargo on the banking side. Here today with Bruce Thames and Jan Schott, CEO and CFO respectively of Thermon Holdings. Thermon is a billion-dollar market cap company that's focused on custom heating solutions for process industries. Maybe, Bruce, for those that are less familiar with Thermon, you can take us a layer deeper and talk a little bit more about the business, its key product categories, and key markets.
Excellent. Yeah, thanks, Trip. It's great to be here. Yeah, Thermon, it's a 70-year-old business. Excuse me. We're in a space that essentially we created by our founder, Dick Burdick , and it began with process heating and heat tracing. Essentially, today we're about $500,000,000 in revenues. We have 26 locations in 18 countries on four continents. Really a leader in the space that we serve, really provide engineered solutions. So we have engineering teams, over 200 engineers around the globe that really work to solve customer heating problems and be able to provide unique solutions to meet their operating needs. We really serve a broad range of industries. Traditionally, had been very exposed to oil and gas. Now that's less than 30% of our revenues. And more broadly, we're exposed to other industries, general industrial applications, chemical, petrochemical, power.
We have a position in food and beverage, rail and transit, commercial, as well as in some semiconductor and other, again, adjacent end markets. Really very broad range of end markets. The great thing about our technology is it's agnostic. We really are able to apply our heating solutions to a wide range of different applications across a wide range of industries. Looking at the margin profile, about 22% EBITDA margins on a trailing 12 basis. Our gross margins in the 44.7% for our fiscal 2024, or excuse me, fiscal 2025. Very strong margin profile. Have been able to demonstrate that over the last, say, 30 years. Really have a strong market position, a differentiated offering, and a defensible moat around the business. It gives you a general idea.
Great. Thank you. Let me start with maybe a two-part question. If we were in a time capsule, went back to December of 2024, and we were addressing this group talking about the setup for the coming year, 2025, what would you have said then? The second part of the question is, what has changed since then?
Yeah, so actually the setup for the year has been quite good. Our fiscal year actually ends March 31st. What we've been seeing is what we would consider a building backlog and capital cycle. We actually, through the 31st, had three consecutive quarters of positive book to bill and a growing organic backlog. Actually, if we threw on the first quarter, a fourth consecutive quarter, our book to bill for FY 2025 was 1.8 times. Our backlog at the end of the fiscal year was up organically 20%, 29% overall. Very strong momentum in the business and really what we believe is be a very strong coming into the current calendar year. The second part of the question is, what's happened since? We had Liberation Day. Certainly, I think the breadth and magnitude of the tariffs that were enacted exceeded most people's expectations.
Certainly, while there has not been a huge direct impact thus far, it certainly made us much more cautious as we entered our fiscal year and provided guidance really with some concerns around the impact this could have with a decrease in demand in the back half of the year. I mean, when we think about what has happened there, from a cost side, we estimate $16 million-$20 million in direct costs to the business, either through tariffs or through higher input costs, which are the secondary impact of tariffs. What is really hard, and we believe the net impact of that, we are able to reconfigure supply chains. We are able to shift some manufacturing to minimize the impact of those tariffs. Then we have pricing power, which we have demonstrated over decades that we are able to pass on the residual piece to the market and our customers.
The concern we have is the questions would be around what's the demand impact going forward. Certainly, coming into a year with this kind of a momentum, we would have a much more bullish guide. It has certainly made us a lot more cautious as we've got to come into what is our fiscal 2026.
Bruce, on I think May 22nd, your last earnings release, you did provide some financial framework guidance for 2026 revenue, $495 million-$535 million, EBITDA of $104 million-$114 million. As you said, presuming at that time that the then announced tariffs would be in place and that you would have some, you would anticipate some slowing growth due to the demand destruction. We are now several weeks past that. This market continues to evolve and be dynamic. Has anything changed to the environment on the ground that would have you recharacterize the environment or more of the same? How would you?
You know, I think there's still a lot of questions. I mean, I looked to last week and just in one breath, we had the court's ruling that the tariffs were unconstitutional. Then, of course, within hours, they were reinstated for at least 10 days. The next thing we saw was doubling the tariffs on steel and aluminum. I still think it's a very dynamic environment. I think the interesting thing is the market's reaction to all of that has been fairly benign compared to what we'd seen previously. I think generally people are just adjusting and moving forward. We've passed on price in the marketplace. We'll continue to monitor what's happening with input costs. Certainly, I don't think it's gotten any better, but I don't know that it's gotten any worse. The net impact.
Your guide, the range was higher than normal due to some of these very dynamic variables. Maybe the question could be, what has to happen? What does the environment, how does it have to unfold to perhaps hit the high side of that guidance?
Certainly, as I said, we have a lot of momentum with a strong backlog and our incoming order rates have been robust. I think as we're watching it closely through the course of this quarter to see how that transpires and if that momentum continues. What we'd like to see is as these deadlines for these trade agreements expire is to get some more clarity and have less volatility around tariff rates changing day to day. Certainly have some kind of clarity on what will those rates be on a go forward basis so we as business people can plan and operate accordingly. I think that gives us, and I think once that happens, you'll see my general sense is there's been a building capital cycle in many of our end markets and it's fairly broad based.
I think once we see some clarity there, I don't know why that wouldn't pick up and resume.
There is some muscle memory to supply chain disruptions. You have talked about how much you learned about your business during COVID. Maybe share some of those remembrances and how you are using those to navigate the current environment.
Yeah, so we definitely have an experienced team. I think COVID exposed weaknesses in everyone's supply chains. Certainly through that, we did a lot to build resiliency. In doing so, we have multiple sources. Our suppliers have multiple sources. A lot of that, everyone knows the playbook. I would say this is not nearly to the magnitude that we saw with COVID. We all have options, which we had to go find during COVID. I think this one is, back to your point, it's muscle memory. The reality is the magnitude is a fraction that we encountered in COVID. We're actually better prepared.
I think you mentioned publicly the group you've put together internally, sort of a tariff task force. Anything you want to highlight there about some of the initiatives of that group and how you?
You want to speak to that?
Yeah. I guess quickly after the new administration came in and there were hints of tariffs, we put together a tariff task force that was really a cross-functional team within the group. We had people from operations, finance, supply chain, purchasing, accounting, just to really be more researching what was going on. We also had legal representation to make sure that we were adjusting things. They were advising really the senior leadership team on how to mitigate the tariffs. I will say this was in addition to their normal day jobs, which when you're with a company our size, you have to do that. I mean, they really just embraced it and were quick to give us advice. Some of the things that came out of that, obviously, as Bruce mentioned before, were pricing power.
We instituted price increases really from March until May. One of the things we talked about on the earnings calls, we really will not see the impact of those pricing increases until the second half of the year, which for us begins really at the end of September. That is really because we have contracts that are 60-90 days. We have a lot of backlog as well. The supply chain optimization, which Bruce talked about, a lot of that team was there when we went through COVID. They knew how to react. I think, and then also our manufacturing footprint. We have manufacturing in the U.S., Canada, India, and then in Italy. We were able to kind of shift things to accommodate and kind of maybe be more proactive and not reactive to what was going on with tariffs.
I really think that's been instrumental to us in guiding us on having that team really studying the impacts and we really knowing what was going on. They did have the use of outside advisors as well.
Great. Thank you. Maybe on a more positive, pleasant note, just business fundamentals and Thermon's positioning in the current environment. Can you just talk us through some of the key elements of sort of the go forward business foundation that you're excited about?
Yeah, absolutely. I will start and say we really have positioned the business thinking about the electrification of industrial heat and a transition that we believe is underway and will continue for the next 10, 20 years. We are really positioned to be able to lead that transition. While we have seen current policy under the current administration really present a bit of a headwind, there are a lot of other opportunities we are seeing. We just acquired a business, F.A.T.I., in the Milan area. It is in Cusago. Business was about EUR 12.5 million in revenue when we acquired it, had a $15 million backlog. Since acquiring the business by the end of April, we plugged it into our sales organization, we have doubled it. Our backlog is now at $30 million. We are busy at work, increasing capacity. We are making capital investments.
We're completely reconfiguring our manufacturing flow in the factory, adding a second shift, doing all those things we need to build and scale that. We've got another $30 million in high probability opportunities behind that that we're trying to figure out how can we scale capacity to be able to win that, not have lead times that are really unacceptable to the marketplace. That's a really exciting bright spot. We also have capacity in our Oakville plant in Canada to be able to shift some of that work. We're actively figuring out how we can do that. That's really a nice area for our business and growth. The other thing is with our process heating side of our business, we just developed a new technology called medium voltage heating. We launched that just in the past year.
Traditionally, resistance heaters are in the 300 V-600 V range. These go from about 3,600 V-7,200 V. These are higher voltage, higher power, much larger heaters for more robust industrial applications. They reduce the need for step-down transformers. They reduce the initial capital cost to convert from traditional hydrocarbon-based heating to electrical heating. We have secured our first two orders. One was for an LNG plant in the Middle East. The other one is for a petrochemical plant here in the Gulf Coast. Each one of those was about $5 million a piece. These are really nice opportunities for our business and at very, very healthy margin profile. We are excited about that and the demand we are seeing for these medium voltage heaters.
We have to work on how do we scale our manufacturing capacity to be able to meet the market demand there. I think that's another real bright spot. Our acquisition of Vapor and Precision, we actually with that, we got what's called these electrode boilers. It's one of the reasons we acquired the business. These are the best technology for very high pressure, high volume steam applications for industrial processes. These boilers are very large. They're 15,000 V and up to 50 MW in capacity. We're seeing very strong demand for those, not only in the U.S., but also in Europe. We're trying to figure out how can we scale our U.S. manufacturing and how can we build capabilities in Europe to be able to support that market demand.
I would say last but not least, the other bright spot is we've uncovered this opportunity in data centers for load banks for startup and commissioning. We stumbled across it. As we've done more research, there's a pretty significant demand, particularly with liquid load banks, excuse me, with liquid data centers for load banks for startup and commissioning to simulate the heat and electrical loads that those facilities will experience as they begin to ramp up all of the data, the racks in the data center, and they begin to produce heat. They're actually using these load banks to simulate that to ensure the electrical systems as well as the cooling systems are operating as intended. That is another exciting opportunity we're getting out in the marketplace. We're launching some new products that'll come out probably in the next quarter.
We are already bidding work and opportunities in that space. Those are some bright spots we see in the market and different opportunities where we play.
You've previously talked about the decarbonization opportunity. Maybe spend a minute reminding folks how Thermon participates in that market. What is the current outlook on that segment of the opportunity set?
If you think about the carbon emissions globally, we talk a lot about transportation. In the U.S., I think transportation is about 27 quadrillion BTUs per annum of heat. If you look at industrial process heating, it is about 26.7 quadrillion BTUs. We talk about decarbonization as it applies to transportation. Industrial process heating is an equivalent source of CO2 emissions because 95% of that heat is hydrocarbon-based. Of that 95%, 80% of it can be converted to electrical heating with existing technologies. It is a big opportunity. We build electrical heating equipment that enables that. We have the software tools and engineering expertise to be able to show customers how you move from hydrocarbon-based heating to electrical heating. That is the size and scale of the opportunity.
We have those capabilities because of our heat transfer expertise and expertise in electrical heating and hazardous areas.
Onshoring is another theme we've heard a lot about and one you've referenced as a bright spot going forward. Again, where are you participating in that market? What is the current state of that market and your view of sort of future prosperity for Thermon?
Yeah, actually general industrial applications have been quite strong post-COVID. A lot of that had to do with reconfiguration of supply chains, onshoring and nearshoring. General industrial applications are about 25% of our revenue, so it's pretty significant, second only to kind of collectively oil and gas, which is 28%-30%. We've seen some strong demand there. I suspect when some of the dust settles with the tariffs, we may see more of that happening. It's a little too early to tell. I think people are still trying to figure out if it's going to last and do I do anything. I think that could continue to provide some opportunities on a go forward basis depending on what industries are impacted and how tariffs land ultimately.
Implied in some of the onshoring are big projects. I know your business mix has been evolving from project-based CapEx to OpEx oriented. How are you driving that mix shift in the business? Are you just, is it just sort of the way the revenue is unfolding or are you actually driving business initiatives focused on OpEx opportunities in the markets?
Yeah, there's a purposeful strategic focus on growing our install base and those recurring revenues. As I think about our business, it's really grow the install base, capture the recurring revenues. I think about how are we going to drive growth above and beyond that. That's our 3D strategy: decarbonization, diversification, and digitization, and then ultimately kind of capital allocation. That's whether that's organic growth or inorganic or returning capital to shareholders. Thinking about the first pillar of our strategy, we do have to capture those capital projects to be able to grow the installed base. Above and beyond that, our digitization strategy is really rooted in how do we increase the operational entanglement engagement with our customers to be there and be able to capture recurring revenues.
The other thing we've done is really where we have large concentration of customers and assets, we tend to serve that directly. There are a lot of areas where, particularly as we get into more diverse end markets, those customers are much more sparse and distributed. We have really done a lot around channel development to have those value-added partners in our channel that are able to service and support the installed base. Whereas we've historically been heavy oil and gas and industrial, when you start getting into food and beverage or commercial or other types of industries, those channel partners differ. We have done a lot to develop those channel partners across the globe. In the U.S., we've pretty well covered, but there's still pockets of opportunity.
Certainly in the Eastern Hemisphere, particularly in Asia, we continue to have opportunities to improve our coverage of a lot of those customers globally.
You mentioned digitization. I know Genesis is a foundational piece of that. How's it going? What's the uptake like? How much are you selling into the install base versus the stickiness attachment to new projects?
Yeah, so the Genesis, it's been a journey. Roll the clock back 10 years ago, and I would say our control platform was sorely lacking. It was at a time when really the digital transformation was heavily underway and customers were really wanting better information to manage their asset base. We invested in research and development, launched what is now known as the Genesis platform. It started out with hardware and operational software, and it evolved, but with the intent of building this ecosystem. It's all IoT enabled. We have what's now called the Genesis Network, which gives the ability for our customers from a single point to be able to view and manage their universe of Thermon assets, particularly as it relates to heat tracing. In doing so, it gives them a better operational awareness.
It helps them really prioritize different types of feedback and alarms, which ones are critical, which ones are nuisance. It really helps in that regard. It certainly gives them better information, as I say, to manage the efficiency, the safety, and reliability of their assets. We've found that customers that now have this actually, it increases our engagement, that operational entanglement. Actually, we find that those recurring revenues are around 3x what we see with other customers that are in more of a run-to-failure mode. The results of that is they have higher reliability operations and overall their costs are lower. That's the exciting part about it. When we look at the Genesis platform, it now represents about 12% of our overall revenues for heat tracing, which is roughly $300 million a year in revenue. About 12% of that.
The Genesis Network, which has been out about three years, I think we saw about 90% circuit growth last year. While the percentage is projected to be about 50% this year, it's on a much larger base. The rate of growth is similar, maybe even greater if I'm on an absolute numbers basis. It has really done a few things. It has really increased our ability to win the opportunities, the capital projects to grow the install base. It has also increased our connection with our customers as they own and operate our assets or their assets.
Excellent. Maybe just change gears and Jan, a couple of things for you. Walk us through the capital allocation playbook, if you would, just update the group on how you're thinking about capital.
We have historically spent about 2%-3% on capital projects. That is R&D or equipment. That is really regardless of economic conditions. That is still our plan for this coming year. We also look at our acquisitions and divestitures. That is something that we are also focused on. We have some metrics for how we are looking at something that fits into our strategy. The 3Ds that Bruce mentioned before. It also has to be industrial tech as well. Then meet kind of financial measures where we think it will be accretive in year one. By year three, it will exceed WAC or WAC is about 8%. We want it to be about in the, say, 9.5%-10% by year three. I think one of the things that we have noticed is we do have a lot of incoming.
We have seen that kind of intake increase on opportunities. Our pipeline for M&A is pretty robust right now. We are focused on, just like we added a manufacturing footprint in Europe with the acquisition of F.A.T.I. last fall. We are looking at kind of adding another manufacturing footprint in APAC. That is something that I think would be highly attractive to us. We have participated in more projects on M&A that I will say come through relationships. They can tend to be family-owned when they are in a smaller footprint. Those are obviously easier to get done. It is just an easier process. I think they come to Thermon because we are a 70-year-old company. We have been around. We have that relationship in place with us. We tend to keep all of their staff and management teams.
It is just as long as they kind of fit with our culture, that tends to be successful. We will also look at process-based acquisitions maybe in a larger range. I think Vapor Power, the acquisition that we did at the end of 2023, was about $107 million. One of the things that we did step away from last year, we were involved in a process with a European target that the pricing just got really out of where the bid-ask spread was just too much. We stepped away from that process. We are disciplined enough that we do that. The other thing that we do in light of not having M&A opportunities is we have a share repurchase program. We instituted that in March of 2024 and have bought back $24 million of our shares since then, $20 million this last year.
Our board just refreshed that total to $50 million. That is something that we will continue to look at opportunistically. We think that as our share price maybe dips, obviously the tariff noise. I think we had $14 million in share repurchases in the fourth quarter. For us, our fourth quarter is January 1 to March 31st. A lot of that was the tariff noise. That is something that we will continue to do.
The balance sheet is sort of where you want it?
Balance sheet is very strong. Yes, coming from oil and gas. I've been with the company for eight months and had previously been in oil and gas. And if anybody knows oil and gas, I mean, that's very difficult from the debt side. We're under one times levered at the end of the calendar year. We're 0.9 times. Had $137 million of liquidity exiting. We had strong cash flows. I think we came in at $52 million last year.
$53 million.
Yeah, it's nice to be with a company that actually pays taxes. So because that means you're making money. It's a very strong position.
Maybe Jan, for a group that may not know you well yet, what have been your priorities here in your first nine months in the seat?
You know, I think one of the things, obviously getting up to speed on M&A, because I think that is something that I've done a lot of, and just understanding our process and how we can really improve that and be more scalable going forward. A big part of that is we have an ERP implementation that's ongoing right now. That's really just moving from a Microsoft Dynamics platform from one version to the next. We are moving from on-prem to a cloud-based ERP system. You have to have that to be scalable as you buy different companies. I mean, that really is a game changer. I've been very focused on that. I think also learning about the company, learning about the industry. Obviously, I have not been in manufacturing ever in my career. Also learning the culture.
We have a very unique culture. We have the 3Ds. We have the 3Cs, care, commit, and collaborate. That really drives, I think, a lot of the behaviors and how people work together. I mean, it is meaningful for the company. It was one of the things that attracted me to join.
Awesome. We've got about a minute left. Any questions from the cheap seats?
Those are the expensive seats. These are the cheap seats.
Yeah, true. All right. Great.
Thank you.
Thank you, Bruce.
Thank you, guys.
Thank you. Thanks, everyone.
Appreciate it.