Good day, ladies and gentlemen, and welcome to the Thermon Q1 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Sarah Alexander, Director of Investor Relations. Please begin.

Thank you, Latoya. Good morning, and thank you for joining us for today's earnings conference call. We issued an earnings press release this morning, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website at www.thermon.com. A replay of today's call will be available on our website after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the expressed written consent of the company is prohibited. During this call, our comments may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties and our actual results may differ materially from the views expressed today. Some of these risks have been set forth in the press release and in our annual report on Form 10-K that will be -- that was filed with the SEC in June 2013. We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions and various other aspects of our business. During the call, we will also discuss some items that do not conform to Generally Accepted Accounting Principles. We've reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to, and not as substitute for, income from operations, net income, net income per share and other measures of financial performance reported in accordance with GAAP. Now it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone. Thank you for joining our conference call today and your continued interest in Thermon. Today, we have 2 of our Senior Vice Presidents joining me on this earnings call. Jay Peterson, our CFO, will follow me and present the financial details of FY 2014's first quarter. George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global market segments and/or industry trends. For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical and power generation industries. Our Heat Tracing systems provide freeze protection and temperature control for piping, vessels and instrumentation. These mission-critical systems ensure the continuous and safe operation of industrial facilities. While Jay will discuss the financial details in a moment, I'd like to take this opportunity to touch on some highlights. Q1 of our fiscal year 2014 produced very solid results for us. During our last earnings call, we stated that, historically, our Q1 revenues were typically the lowest of a fiscal year. We believe that the trend will hold true for this year, as we build momentum throughout the fiscal year. In fact, I believe this Q1 was the second largest in our history. Gross margin for the quarter was at 47%, which is up 2 percentage points over the previous 2 quarters. MRO/UE sales were at a 61% for the quarter, which is above our historical average of 60% of revenue. It was also an increase over the 57% split with Greenfield projects that we achieved in the prior quarter. Another positive indicator was our earnings, which was posted at an adjusted EPS of $0.23. Our backlog also remains strong in just over…

Thank you, Rodney. Good morning. This morning, I will discuss our first quarter results starting with top-line revenue. Our revenue this past quarter amounted to $65.6 million, a decrease of 3% relative to the prior year's quarter. Note that Q1 is typically our lowest quarter. We are not in the heating season and we anticipate revenue to grow throughout the balance of the year. Orders for the quarter totaled $63 million relative to $67 million in Q1 of last year. Our backlog of orders ended June at $92 million, down slightly from March of 2013. Relative to the end of Q1 fiscal year '13, our backlog decreased by 21% from $117 million. The reduction was due to the high level of Greenfield revenues over the past 12 months. And also, recall that only 40% of our business is ever resident in our backlog. In terms of gross margins, margin dollars this past quarter totaled $31 million. And relative to Q4 of fiscal year '13, our margins increased by 275 basis points to 47.3%. And this margin increase was due to the high mix of MRO/UE at 61% of revenues, whereas Greenfield revenues totaled 39%. Let me turn to operating expense and headcount. Core operating expenses for the quarter, that is SG&A, and this excludes depreciation and amortization and any transaction-related expenses, totaled $15.4 million this last quarter, and that was flat with the prior year. Our operating expense, as a percent of revenue in the quarter, was a competitive 23%, and again, that excludes depreciation and amortization. The number of full-time employees at the end of June was 814, up from the 772, as of 1 year ago. And note that over 95% of these additions were in production, sales, research and development and engineering, and relate directly to managing…

[Operator Instructions] First question is from Jeff Hammond of KeyBanc Capital.

So just on gross margins. How are you thinking about mix through the rest of the year, and how sustainable are the margins we just saw in the first quarter?

Yes, Jeff, this is Jay. We were obviously very happy with our margins in Q1. We had a very healthy mix of Greenfield and the mix within Greenfield was strong -- I'm sorry, within MRO, was strong. However, going forward, we are planning, again, the 45% number. If you look over our last 10-plus years, our average has been 45%. We will endeavor to do better than that, but right now we're planning at 45%.

Okay. As you look at your mid single-digit growth for the year, though, how are you thinking about MRO growth versus Greenfield growth? Is that both growing kind of similarly or is Greenfield slow because you have a tougher comp there?

This is George, Jeff. Our heating season is approaching and so we do anticipate growth in our -- and an uptick in our MRO business. Because our installed base has been growing over the last 5, 6 years, we are forecasting and do believe our MRO business will increase. But we're still modeling a 60-40 split as far as MRO at Greenfield. So to date, we're not seeing a significant change in that percentage mix.

Okay, great. And then just a couple of cleanup items. What's the tax rate you're looking for the year and how -- and what's the interest expense we should kind of model on a quarterly go-forward basis?

The tax rate, Jeff, will fluctuate a little bit over the year. I would plan at the, let's say, 28% range.

Okay. And interest expense?

Interest expense? Right now, I would plan our balance at -- I would be conservative, $135 million at 3.62%. And it should come in slightly under that as we amortize a bit over the year.

The next question is from Charley Brady of BMO Capital Markets.

This is Andrew Dunham on for Charley Brady. In your press release, you mentioned some kind of weakness in Europe and I was wondering, what part of Europe was weak and kind of what percentage of revenues is that and what kind of end markets in Europe are weak as well?

This is George. Our performance in Europe was a little weak. And it wasn't concentrated in any one geography. It was affected in several of the areas. Our business is focused heavily in both the oil and gas industry, upstream and downstream. So again, in a couple of areas, we had some pretty tough comps as it relates to Q1 of fiscal year '13. But again, we are expecting and forecasting a strong second-half performance in Europe. So we do see positive signs there. The quoting activity is up, so we're expecting a rebound in the second half of the year.

Okay, great. And in terms of kind of your backlog, understanding that it's mostly Greenfield. Just wondering, is the margin level on that getting any better or worse?

I think it's remaining pretty consistent. There are some differences across the globe in terms of margin production. But again, our Greenfield business is remaining consistent in terms of margin production. We're not seeing any significant erosion at this point.

All right. And one last question. Have you guys been seeing any impact from raw material costs, either positively or negatively?

We have seen a slight positive impact due to a reduction in copper, although that's a rather small component. And also, some of our polymer raw material prices have gone down slightly.

The next question is from Scott Graham of Jefferies.

So I was wondering what you guys are thinking about on the rest-of-the-year sales forecast. So the orders are, year-over-year, down and the sales are down, so you kind of start a little bit in the hole. How do you see the order progression? I know that you're expecting sort of mid single, I think, from what your customers are telling you, quoting activity, what have you. We've seen that before. What makes you feel a little bit different as we -- a couple of quarters ago, we were expecting something, didn't actually come through. But you seem to be a little bit more upbeat on your -- supporting your mid single-digit organic sales guidance. And just kind of wondering kind of how you get there? What are the indicators that are telling you with first quarter now behind us, with the sales decline, what changes and what are the tenets of your view? And even if you could, maybe you can, by region.

Scott, this is George. We -- one of the things that we use for our projections and forecasts is the schedules that we build into our Greenfield projects, so that comes from our backlog. So that is a component of the forecast that we have going forward and the basis for why we're still comfortable with our mid single-digit growth guidance. In addition to that, again, just repeating a little bit here, the significant portion of our business that comes from the heating season, that comes from preventive maintenance and the business that is directly related to our installed base are -- the feedback we're getting from our channels and our direct sales force is that we're still very excited about this coming year. We're active. This is the time of the year where we have to be front and center and be prepared. We are with, we think, with our inventory levels are positioned well and our pipeline is full and we are excited about the opportunities coming up in the heating season. And again, in all regions, we are expecting a strong second half of the year, pretty much across the board. And then to -- just one other area by region, as Rodney mentioned in his opening remarks, we're seeing a significant uptick in activity in the U.S. market. So that is different this year from last.

Okay. So I think what I hear you saying, George, is that the second quarter could be a little slower than the mid single-digit that you're projecting for the full year. But after that, it should kind of be a second-half loaded, the sales orientation.

I think that's a fair characterization, Scott, yes.

Okay, great. I have 2 other questions. Number 1, is I guess a question I often ask is, priority for uses of cash. We haven't seen anything on the M&A side. Would you -- are you contemplating the implementation of a dividend? And then secondly, along these same lines, AMETEK purchased one of your competitors earlier this week in an announcement. I was kind of wondering what your thoughts on -- was that an asset of interest?

Okay. Scott, it's Rodney. In terms of acquisitions, as we continue to generate cash before -- we're still reinvesting in our business model and we're going to continue doing that because we believe the global footprint is one of the dominant tenets of our plan, and we plan on continuing to do that. But as we continue to generate cash above that, our priority for mergers and acquisitions is rashed up a bit. And we're going to continue to look at that because the only other use of the cash immediately would be to pay down debt and that's -- with the new refinancing, that's not really the best option. Are dividends an option? Yes, it could be. But at this point, we're still looking at reinvesting in strategic acquisitions, again, based on technology and geography that we think would fit Thermon. We're looking for acquisitions, but obviously we are looking for good acquisitions that fit our model. I think the last thing you brought up was the AMETEK purchase. We saw that yesterday, haven't had any time to digest it at this point.

The next question is from Ian Drab of William Blair. Brian Drab - William Blair & Company L.L.C., Research Division: It's Brian Drab. Just 2 quick items to start off. FX impact in the first quarter, Jay?

It was not any -- it was a negligible impact, Brian, from a revenue perspective, maybe $100,000, and no impact to earnings. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And then I may have missed this, but the geographic breakdown, I know we'll get that in the queue, but at least maybe a percentage of revenue from Canada?

Just bear with me 1 second. I believe Canada was about $26 million.

$25 million.

$25 million in the quarter. And Canada did grow this last quarter. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. Can you give any other specifics as long as I made you turn to that page, just given -- regarding the geographic breakdown?

Sure. The U.S. also grew slightly to $20.7 million. Europe was down 25% to $13.1 million. But as George mentioned, we do see a rebound in Europe in the second half of the year. And lastly, Asia Pacific was down to $7 million. In the prior period, it was $8.5 million. And recall, we had an outstanding year in Asia Pac last year, specifically Korea, had just a banner year last year with a very difficult comp. Brian Drab - William Blair & Company L.L.C., Research Division: And Canada, it's safe to say, was up slightly or modestly down?

3% to 4%. No, I'm sorry, they were up 16% year-on-year with a very difficult comp in the prior year. So Canada is doing quite well, and we think will continue to do quite well for the balance of the year. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And, George, you mentioned that you're seeing a significant uptick in the U.S. market. Is that driven by a particular end market, maybe petrochem or -- can you talk about that?

Yes, it is driven by the activity from the shale oil and gas activity that is pushing some petrochemical activity. We're seeing a lot of activity as far as new projects, particularly along the Gulf Coast. And in addition to that, we are also seeing a significant uptick in the power industry, conversion of simple cycle, gas-fired power plants to combined-cycle units, as well as a continuing move to gas from coal. Brian Drab - William Blair & Company L.L.C., Research Division: Okay, great. And it looks like free cash flow is a little over $5 million in the first quarter? Were there any cash cost associated with the bond redemption, Jay?

Yes, there were. We ended up sourcing out of our treasury about $3 million or so for the various and sundry expenses. Brian Drab - William Blair & Company L.L.C., Research Division: Okay, so excluding that, free cash flow would have been about $8 million, $8.5 million in the quarter. Is that right?

I would have to double check that, Brian. But we did, in fact, use $3 million of our own cash through that cost. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. I'm just doing the $0.17 in the press release times the 32 million shares. I guess 5.5 and then back about 3. Okay. And then the last figure I heard from you regarding the size of the project pipeline was in April and you said, $1.16 billion. Where does that stand today?

A little over $900 million, $920 million, estimated value. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And the decline from $1.16 billion is related to -- can you talk about that?

Oh, sure. Some of it us scrubbing and cleaning the data to a formalized sales-reporting system out of CRM package that's allowed us to give, scrub our numbers a little bit. But some of it's just the nature of the business, that's a snapshot in time of what we do, as jobs are lost or as jobs are awarded. Then that number goes down. And then when they are posted either through internal sales, input or external publications, they're added to that pipeline. As before, we updated it on a quarter to a semi-annual basis. And today, it is go live and it's a dynamic number, accurate basically to the day. So that package cleaned up some data, but basically, it's just some projects have been added, some have been dropped off. Brian Drab - William Blair & Company L.L.C., Research Division: Did that bother you, Rodney, when you saw the $1.16 million revised downward after you implemented the new system or there's -- I guess, there is some double accounting. If you're saying scrubbing the data, was at least part of the reason of the decline?

I don't think the double accounting, some of it were projects that hadn't been awarded that we had not captured since the last update. But yes, your first question is did it bother me? No. Because I feel like that we're still on target for what we were going to do, and I feel like the data is much more accurate today than it was 1 year or so ago.

And Brian, one other comment there is we're also focused on continuing to be more active in mining the information that's out there relative to new projects. So we can -- we're very confident in the fact that, that number is dynamic. And we're focusing on in the emerging markets, we don't kid ourselves. We don't know everything that's out there, but we're putting more and more assets behind ensuring that we have the information in our system and that we're tracking it actively in an aggressive way. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And then, I just wanted to ask about the Suncor project that was pushed out about 6 months. Can you remind me, is that in your expectation -- is revenue from that Suncor project in the oil sands in your expectation for the mid single-digit revenue growth this year?

No. Brian Drab - William Blair & Company L.L.C., Research Division: Is it in your expectation for growth in fiscal 2015 in Canada, to be better than the growth in fiscal 2014?

It's in our pipeline. It's definitely in the pipeline, yes. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. Have you won that business at this point, or any more clarity on that project?

That business has not been awarded yet, no.

The next question is from Jon Braatz of Kansas City Capital.

Rodney, your cash flows is building. You touched a little bit on potential use of cash flow. But internally speaking, your CapEx, I think this quarter with $600,000, you said. Are there some projects that you're looking at internally with high ROIs that could accelerate your CapEx? Are there things you can do within -- in terms of the using that cash?

Well, currently, we mentioned, I think, in previous, we're looking at some capacity expansions for some of our product lines. And so those decisions we'll be making, literally, in the next 30 to 45 days in terms of that. And I'll let Jay finish out the rest of your question.

Yes. Recall, we expanded our wire plant, I guess about 18 months ago. Since that point in time, we've seen a certain modest mix change where our 2 bundled products are selling at 20% growth rates or so. And that's new news relative to when we expanded the wire plant. So we might have to spend a modest amount, say $3 million or so, plus or minus, to expand that operation. But we're really at the point where we're studying it and just want to make certain that this growth rate is sustainable and will continue in the future, before we expend that money.

Okay. Anything beyond that then -- additional expansions?

At this point, no.

Okay. Okay. Jay, you talked about your rate on your debt, not a function of LIBOR, but the leverage ratio. Assuming your leverage ratios do improve, is there any substantial reduction in that interest rate?

Yes. We think that we could knock 50 basis points off the 3.62% over the next, let's say, 2 years or so. But yes, it is significant.

Okay. Okay, great. And then lastly, I saw that your share count in the first quarter was down, I don't know, 600,000, 700,000 from the fourth quarter. Why was that?

That had to do with -- from a GAAP perspective, we were showing a loss position. So we do not show their equivalents.

The next question is from Rich Wesolowski of Sidoti & Company. Richard Wesolowski - Sidoti & Company, LLC: Canada, taking a very long view here backwards, posted a mid-30s operating margin in the past couple of years, great number. The prior 3 years, was around 25%, on average. And I'm wondering, as you look ahead, not maybe to this year, but just the next 2 years, 3 years, should either one of these be viewed as a outlier as your pegging profitability in Canada?

Yes, we have experienced the benefits of scale in Canada over the last year or so. So I don't view their current performance as being an outlier. They will have deviations, period-to-period, based on gross margins, but I don't view it to be dramatically different where they've been at over the last, let's say, year or so. Richard Wesolowski - Sidoti & Company, LLC: There's been a lot of discussion around the oil sands and shifting from the past, more mines toward more a SAGD in-situ [ph] production. And I'm hoping you could clear the air and dive a little bit into how much of your production will be divvied to a SAGD project versus a mine project of a similar size?

This is George. The conventional methods don't attract as much spend on a per-project basis as the upgraders do. But the number of sites for well pads in the SAGD process is significant, and we're pretty bullish on our decision with the customers that are actively expanding in those areas, with the SAGD processes. So it is true that it takes more of those projects to come up with the same spend in a given time period, but there's a lot of them out there. Richard Wesolowski - Sidoti & Company, LLC: Right. Okay. I understand a portion of your MRO sales are influenced by how harsh the prior winter was in your customers' facilities. I'm curious if that will be, in your view, a positive or negative as we head into this year's winter season?

Well, we're hoping for record cold temperatures early and it always helps. And yes, it's true, that if we're coming off of a particular harsh winter, which we are in parts of Europe, so that should magnify the attention to the heating season. But also, to be fair, for instance in Canada, it really doesn't matter whether the winter's harsh or not. When there -- you have the freeze protection and the need for heat tracing is there when it's 0 or minus 20 or minus 40 or minus 60. So it's really -- in the very cold climates, it's not as much of an impact. In the U.S., for example, if we have brownouts in Texas again because of freezing temperatures for 4 or 5 days, that would enhance our business, more than likely enhance our business opportunity. Richard Wesolowski - Sidoti & Company, LLC: Right. And then lastly, I know it's a little bit smaller side of your business, but I haven't heard about the environmental gas sampling side in awhile. I was hoping you could relay any happenings there.

Sure. That relates to the -- partly to the activity in the combined cycle power plant business, that opportunity. A big part of that opportunity is the emissions monitoring that is required. So the number of new builds in that area is certainly enhancing our 2 Trace sales, which is directed at the CEMS, or emissions monitoring markets. And then, of course, the process analytical is related to pretty much all of our downstream activities. So emissions monitoring continues to be very much a focus for us, as well as the process instrumentation market segment. And it's growing in both the downstream oil and gas, as well as chemical and power.

The next question is from A.J. Strasser of Cooper Creek Partners.

So could you maybe just help us think about when you expect the story to kind of resume growth? And maybe you could talk about it geographically. What were some of the issues, I guess, specifically, with Europe that caused some of the growth decline year-over-year in Q1? Is it fair to say that Q2 could be down year-over-year, but we should expect the back half to pick up from there? Just help us maybe think about the much of the kind of mid single-digit growth is back-half loaded, that will be appreciated.

This is George. And specifically in Europe, again, our Q1 in Europe wasn't one particular area that was off, it was -- we had a slower-than-expected Q1 in several areas. We also, though, had -- again, some of those areas are very tough comp from prior Q1 because of just the cycle of projects. This happens fairly often in the areas that are -- of -- have high concentration of EPC contracts. Because by definition, that's Greenfield projects and Greenfield projects cycle up and down. For the same reason, and kind of in reverse, is why we're bullish about the second half of the year is the Greenfield projects that we're involved in Europe are scheduled to be invoicing and shipping in the second half of the year. And then as I mentioned earlier, they are coming off of a pretty tough winter in Europe the last year, so we're expecting a strong MRO year in the second half of the year as well.

Could you help us think about whether or not we should have the same sort of growth profile in Q2 as Q1?

From a guidance standpoint, I think we're sticking with our mid single-digit growth for the year. And again, I think that the strongest part of our revenue will come in the second half of the year.

Which is -- this is Rodney, which is historically, that's how Thermon's fiscal year normally play out.

Sure. And you guys weren't the only ones. I mean, Pentair had a difficult quarter, I think, in their comparable business in Q1 as well. Have you guys seen any type of pricing dynamic changes at all in the last, call it, few quarters?

Nothing that I would say is consistent or out of the ordinary. I mean, again, Greenfield projects are competitively bid and most of the time those are won or lost based on the value package, not the unit rate that you quote.

[Operator Instructions] The next question is from Jeff Hammond of KeyBanc Capital.

Just a couple of quick follow-ups. So Canada, I guess, there seems to be this divergence between slower upgrader, slower CapEx and just some consternation that you guys continually to see growth. And I'm just wondering, is that project timing for you? Is that share gain? How should we think about that divergence?

Jeff, this is George. We're pretty bullish on our market share in Canada. We've done well there. And so we think we'll continue with that strong position. Again, a lot of that is driven by who's spending the money where. And unfortunately, in the conventional methods of extraction, many of our loyal and good customers are continuing with their investment plans. So that's what gives us the confidence in what we see in the future.

Okay, great. Do you have a free cash flow assumption for the year? How are you thinking about free cash flow? And then you mentioned, Jay, kind of dropping below one time debt to EBITDA. What do you guys view as your optimal leverage structure if you kind of were to be able to do deals? What you think is the right number for debt to EBITDA?

Yes, Jeff, I think we're comfortable going up to 3x from a net debt to EBITDA perspective. Not certain we would do that with our initial deal, though, because we don't have a history of doing acquisitions. And doing a sizable initial acquisition might put some integration risk back on the company, so it would be likely that our first deal, or so, would be on the smaller size. From a free cash flow perspective, I think our ability to get down below 1 is very likely, very doable. And from a key free cash flow perspective, historically, irrespective of any charges, our earnings per share from a cash flow basis have exceeded our GAAP earnings, and we don't see any reason why that would change for this coming year.

Okay, great. And then you mentioned, maybe I missed this part, but you mentioned M&A as kind of the preferred spend. Can you just talk about what's in the pipeline? It seems like the last -- the prior few calls, it had been pretty quiet, but what are you seeing just from a pipeline standpoint?

Jeff, this is Rodney. We are continuing to again stay narrowly focused in our wheel house area and still concentrating on acquisitions that enhance our technology or increase, from a geographical standpoint, market share and our install base. And so we're continuing to look at that. We have some things on the stove. But at this point, we're really not at liberty to talk much more than -- at this time about what current projects we're working on. But at the next earnings call, we'll probably have some more information for you.

There are no further questions at this time. I'd like to turn the call back over for closing remarks.

This is Rodney Bingham. Again, I'd like to -- Thermon is looking forward again to another growth year, and we look at building on this quarter and moving forward. I thank everybody for their interest in Thermon, and have a nice day.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.