Good morning ladies and gentlemen and welcome to the Thermon Q3 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference call over to Ms. Sarah Alexander. You may begin ma’am.

Thank you. 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 express 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 filed that was filed with the SEC in May. We would also 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 a substitute for, measures of financial performance reported in accordance with GAAP. And 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 and your continued interest in Thermon. Today, we have two of our Senior Vice Presidents joining me on this earnings call. Jay Peterson, our CFO, will follow me and present the financial details of our FY 2015 third quarter; George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session. While Jay will discuss the financial details in a moment, I would like to go over some of the highlights of our third quarter. As noted in the press release, we are quite pleased with our Q3 results. Our revenues were almost $88 million was an historical record for Thermon. Our revenue grew 23% over prior year. Our revenue mix for the quarter was 67% MRO/UE and 33% Greenfield. The resulting product mix produced gross margins that were 52% of sales. This strong margin quarter was driven by a favorable product mix, in the revenues from the USA and Canadian business units. Our EPS grew to $0.48 per share which is up 29% year-over-year. Our backlog was approximately $97 million at the end of Q3. This was an increase of $6 million over the prior year’s Q3. Purchase orders received were almost $82 million with the increases over prior year primarily attributable to an increased activity in the USA and the Asia Pacific regions. Thermon’s updated pipeline of future projects increased to 578 indentified opportunities for heat tracing with an estimated total value of $1.1 billion. Foreign exchange rates negatively impacted our revenue by $4.4 million, and this was primarily attributable to the depreciation of the Canadian dollar and the euro against the US dollar. Based on the positive momentum, stemming from our year-to-date results, we believe that our FY 2015 revenue will…

Thank you, Rodney. Good morning. This morning I will discuss our first quarter results, starting with top-line revenue. Revenue this past quarter amounted to a record level of $87.6 million, an increase of 23% relative to the prior year’s quarter. Orders for the quarter totaled $81.9 million relative to $70.1 million in Q3 of last year, a growth rate of 17%. Main drivers to order growth were the US growing orders by 67% and Asia Pac by 37%. Our backlog of orders ended December at $97 million net 7% higher than December of the prior year. On a pro forma basis excluding the impact of the Kearl Lake project, our backlog grew 15% year-on-year. Also our backlog was negatively impacted by $5 million year-on-year due to currency and recall that only typically about 40% of our orders are ever resident in our backlog. Currency gross margins, margin dollars this past quarter, totaled a record $46 million and compared to Q3 of fiscal year 2014, our margins increased by 150 basis points to 52%. This margin increase was due to the high mix of MRO/UE at 67% of revenues, were as Greenfield totaled 33%. Greenfield revenue grew 70% this past quarter, with all geographies except Europe growing Greenfield revenues in the high double digits. And MRO/UE grew 8% this last quarter against a very difficult comp, due to our ever increasing installed base. Turning to OpEx and headcount, core operating expenses for the quarter that is SG&A, excluding D&A and transaction related expenses totaled $18.8 million, an increase of 20.7% over Q3 fiscal year 2014. And spending excluding our incentive accrual actually grew only 5% year-on-year, net growth is to support our growing revenue. Our operating expense as a percent of revenue this past quarter was 21%, again excluding depreciation and…

[Operator Instructions]. Our first question comes from Scott Graham with Jefferies.

Hey, guys, good morning, very nice quarter in fact.

Good morning, Scott.

Good morning, Scott.

Good morning.

I was hoping you could give us a little bit more detail on your oil and gas exposure, obviously you don’t have a ton of upstream, but you do have a fair amount in sands and I think that’s why people including myself are wondering about so. If oil and gas is roughly 60% of our your sales, could you kind of tell us how that breaks down geographically and within the geographies kind of what is upstream within there?

Hello Scott, this is George. I think our what we report is our oil and gas being about 45% of our business and that admittedly doesn’t count the revenue that goes through distribution that we can’t really earmark. But in that 45% the revenue that we have in Canada is largely associated with the sands and we do - we do categorize that as upstream, as we’ve reported in previous calls most of that these days are in the SAGD environment as oppose to the upgrader or mining environment. Conversely in the US much of our, most of our revenue is in the downstream sector focused in the refining petrochemical arena. We do give some bump from the shale gas, short shale oil and gas play in the US, but that was that wasn’t significant in terms of total revenue. So, rough estimate globally is that our oil and gas is 45% is split about 50-50, between upstream and downstream.

All right, but that wouldn’t also dismiss 45%, I guess I’m little curious on that, because I have seen you guys publish a handout at 60. But let’s go with the 45, but there is a non-US and non-Canada piece to oil and gas right/

Yes. There is certainly is, that the Middle East…

All right.

The EPC business, global EPC business it comes from Korea and again much of our business in Europe is also related to the downstream aspect of oil and gas.

Right. So of the 45, George are you seeing that the US and Canada, the US and Canada comprise how much of that 45?

The U.S. and Canada comprise of about two-thirds of our global revenue. So without having those specific numbers in front of me as far as oil and gas, I would imagine that it’s a - that percentage [indiscernible].

I got you. And then the one third of oil and gas that’s not North America is that mostly downstream or is that upstream as well?

Mostly downstream, there is some upstream present in Russia, but most of it is downstream.

Got you.

And then the other - the other significant portion of our revenue that we don’t categorize as, in terms of end markets is the revenue that goes through distribution channels and we do know that the certain, significant percentage of that 20% that, as 20% of our revenue, we at one its directed at the MRO portion of our business, but it’s we do know that it some portion of that goes to the oil and gas sector in both upstream and downstream.

So it’s entirely possible that this 20% that’s distribution that kind of bridges the gap between the number that I have seen of 60% and the 45%. So, a lot of that distribution in ores is oil and gas, yes?

I believe that’s correct, and but again we don’t categorize the distribution part of our revenue, because honestly we don’t - we don’t track that in terms of parts we can, and I would agree with that Scott.

Right, right. Got it.

Thank you, right.

Okay. But that is mostly MRO within that piece, that’s interesting I didn’t know that. Okay, great. The other question I had was on the gross margin where, it with you guys its becoming a matter of how high is, how high the percentage of MRO declined on year-over-year basis. Yet the margin went up and you said exclusively on your, in your press release that it was equipment mix. Can you guys talk a little bit to that, because, when the MRO percentage declines that usually is a gross margin pressure yet your margin was up again. So, could you help us understand what the equipment mix meant to the gross margin this quarter?

Yes, Scott. There is several things that are all working in favor at present. We did have a favorable mix and let me get little details on that. Over the last several years there has been many initiatives to add efficiencies into the company. In this past quarter we realized cost productions in our cable manufacturing operations. We also have invested in project management capabilities over the last 18 months. We’re better at managing projects today than we were let’s say year and a half ago. We also 9 or 12 months ago made some investments in our panel shop fabrication in terms of bringing more talented people into that process and adding process efficiencies. And lastly we’ve been able to hold prices in the market place. And when you melt all those different dynamics together, we have - we’ve been able to see an increase in our gross margins.

So if your MRO sales as a percent of total were higher than your OE, would the gross margin have theoretically been higher?

Yes.

Yes.

At 60% this quarter.

Well, okay, great that’s all I had. Thank you guys.

Thank you, Scott.

Thank you, Scott.

Our next question comes from Charlie Brady with BMO Capital.

Actually Patrick who is standing in for Charlie Brady. How are you guys doing/

Good, how are you.

Hi, Patrick.

Thanks for taking my question, very good quarter. I want to touch on Greenfield for one second, is there a 70% increase year-over-year, are there any in large projects in there that, that might have driven now that’s pleasing that we can increase for the quarter?

No they are - they are, this is George. There are some projects and that obviously that are above a million dollars that’s because that’s how we define Greenfield. But there is not any mega projects in that. So, we - one of the good news stories here is that we’ve been able to make up the difference of not having a mega project in our performance data with more smaller projects, which are generally more profitable than that mega project. The other thing, I think you have to take into account is that we did have an easy comp on Greenfield. So to outperform that comp was not terribly difficult and the MRO comp on the other hand was tough, but it also outperformed our expectations.

Got it. And for the quarter was there a material contribution on the revenue side from Unitemp.

No there was not.

Okay, going back to last quarter, I think you guys mentioned that $70 per barrel is really the threshold that makes most of your project economical, has that dynamics changed in the given the sudden drop in oil and now that we are closer to the $50 barrel mark. What kind of actions are you guys taking to reconcile pursuing these projects to keep an active pipeline versus actually understanding and keeping the economics of it?

Patrick, this is George again. We’re staying very close to our customers, as it relates to what they are saying about their capital budgets and the good news is that most of our customers are, their business plan models their investments over a long period of time, over years not months. And they, I think the general consensus is that the prices that we’re seeing right now are not sustainable because of the demand, growing demand for energy in the global market. As Rodney said in his script, we can’t predict how long. Our customers are telling us that their business plans are modeled over a long period of time and they are not going to change their plans, their long-term plans based on a momentary or short change in the price performance of the price of oil. So, we but we are keenly aware of the fact that, that there are some pressures being put on capital budgets and the - hence particularly the longer term outlook for capital spends are going to be cautious until this trend starts to go up again.

Right. And just the project management sort of efficiency skills that you guys have been just talking about, has that comprised that 70 barrel threshold a bit for you guys, or is that still the talk that you guys are still holding on to in terms of…

I’m sorry Patrick, could you repeat the question, kind of broke up on us on the telephone line.

No problem, no problem. You just mentioned in an earlier question and answer that you have guys have been doing very well in terms of our project management efficiencies. In terms of those type of cost reduction measurements, has that sort of compressed the $70 per barrel threshold that makes your project economical a bit or is that still a figure that you guys are comfortable with/

No. I think if you look at certain cost initiatives and project management capabilities that we have today that we didn’t have 2 years ago that would reduce that number, but I can’t tell you exactly what that number would be Patrick.

Okay, okay that’s fair. And, I know you guys might not close order growth for MRO Greenfield, is that can you guys maybe give a little color there in terms of the growth for this quarter for the MRO and Greenfield?

That is something we do not track Patrick, but I can tell you that if you look at our current backlog the - the orders pertaining to MRO are de minimis okay. So, it’s almost better to track the revenue growth of the MRO and Greenfield and that virtually all of our backlog is in fact Greenfield.

Got it, got it. And just one very last one if I may, any color on Russia, since last quarter it’s just for the week, which is still more politically related or politically driven?

Yes, Patrick, this is George. The - we are stilling seeing some headwinds in Russia primarily FX headwinds and then obviously the local economy in Russia is still struggling and the price were well and the sanctions are contributions to that. We believe that there is still significant growth opportunity in Russia, but we have certainly tempered our expectations for the moment, because of the headwinds that we are seeing there. But we still believe that over the longer term, Russia represents a significant growth opportunity for us. But, we are going to, we will have to exercise unlevel of patience till the environment becomes more positive.

Thank you so much for taking my questions. Thank you. Great quarter.

Our next question comes from Brian Drab with William Blair.

Hi good morning congratulations on that great quarter.

Thanks

Thanks Brian.

Hey first question is just on the guidance and what it implies for the fourth quarter. So that your revenue guidance, I believe implies you are on $68 or $70 million in revenue for the fourth quarter. Historically we’ve seen the last couple of years we’ve seen a 5% or 7% sequential decline from the third quarter to the fourth quarter. And this, the 68 to 70 implies more like a 20% to 22% sequential decline. So can you comment on that and are you being conservative or did some business get hold into the third quarter from the fourth quarter. Can you just comment on that please?

Brian, this is George. That the level of MRO growth that we saw in Q3 was, as I said it outperformed our own expectations. So, we believe that’s going to be a tough comp going into Q4, and it’s the seasonality of our business is something that that is not unusual and that the level of change from Q3 to Q4 can vary not only by as a result. Some of the capital pressures that are out there, but also the mix of business that between the Greenfield and MRO, we do think in Q4 that we’re going to have a higher mix of Greenfield compared to MRO.

Okay, so…

We are still expecting growth Q4, quarter over, the Q4 of this year over last year.

Okay. I guess would you be, how do I phrase this, have you would you be shock spell if you saw there is more typical seasonality in the end and if it is a little more conservative - conservatism in that number or is it, is there something in the backlog and orders that’s driving it, the model that’s down there, that’s significantly sequentially? Is the third quarter sort of an anomaly in your mind at this point, you are just going to wait and see how, if, the world continues to work this favorably for you?

Well again, Q3 was a very strong quarter for us in the MRO segment of our business. And so as a result of that, we would expect a larger than normal drop off in Q4, because we’re not going to see that level of MRO again in Q4.

Okay. And then if you could maybe breakdown a little bit more the 17% percent order growth that you saw in the third quarter, I guess you commented that, strong growth in the US and can you give us a little more granularity in terms of order growth within the different product segments and then also within the different geographies and if I can tack on one more thought there, what you are seeing in the petro-chem market and if you are getting any benefits from the beginnings of the petro-chem build?

Let me answer the last one first. The - as far as the petro-chem build is concerned yes, we are seeing benefit from that, that’s a key part of the growth activity that we see in the - in the US. And the order rate was up in the US, it was also up in Asia, both of those areas have strong order growth. And your third, you had three questions what was the third one.

I’ll just explain, you started to comment on in with the particular the product segment, I guess, I’m wondering what’s the main driver here, the petro-chem, SAGD projects how is power gen doing, how is the order growth in each of these project segment?

There all of those markets are doing well, and again the main driver in Q3 was MRO and all of those end market sectors we had strong performance as far as MRO is concerned.

Okay. And then maybe just one quick one for probably for Jay. Can you remind me what percentage of your cost of goods is raw materials and within raw materials what portion of that is accounted for by petroleum-based products, plastic?

Yeah rough numbers Brian, the overheads and actual labor for our cable operations its approximately 10%, the balance is material cost and the great driver of material cost is for products that are related to polymers.

Okay, so this is, I don’t know if you, you may have touched on this earlier in the Q&A, but that has been, it was a pretty good tailwind for you in terms of gross margin in the quarter and can you quantify that at all, or will it be going forward I guess given that we just saw the drop recently really in price of oil?

Yeah, I would say right now due to the inventories we had it’s a rather modest impact on margins in Q3, and it could add some favorable nature going forward. But I don’t have the exact numbers.

All right, okay great thanks.

Thank you.

Our next question comes from Kathryn Thompson with Thompson Research.

And obviously there has been a lot of focus on the impact to your company when oil prices drop. But could you also maybe clarify a little bit more about Thermon’s natural hedge when you see a decline in oil prices particularly to power cubical businesses? Thank you.

Yes Kathryn, we do have a natural hedge and we have seen an increase in activity there has been in the power industry, there is a good bit of activity that’s resulting in MRO and retrofit business in the power industry that the chemical petro chemical and chemical industry especially in the US and the Middle East is quite active than strong. We don’t see, we haven’t seen yet any evidence of that weakening for sure and actually believe that it maybe is actually gaining some momentum going forward. And we’ve also, we’re also presently surprised at the strength of our business in Canada, even though that is largely connected to the oil sands business, it’s held up quite well in this environment.

And are the margins on the hedge portion of business how do they compare to your other portion of your business or maybe your core business, maybe help me understand on the equal higher or lower relatively speaking?

They are comparable.

I may have missed this, but did you breakout the gross margins by segments the quarter?

By geographic segments?

More by your MRO versus Greenfield.

Yeah I got those here. Greenfield margins for the quarter, this is for the quarter, we’re 36%, MRO/UE margins for the quarter were 60%.

Great, thank you so much.

Thank you, Kathryn.

[Operator Instructions]. Our next question comes from Jeff Hammond with KeyBanc.

Hey good morning guys.

Good morning.

Good morning Jeffery

All right, so I think you gave us, US and Asia Pac order rates, can you give us EMEA and Canada for the quarter?

Sure. For Canada they were down slightly, and Europe was down as well.

And was that driven by Russia weakness or?

Yes.

Okay.

As well as FX, yes.

Okay. And then, so just and then just on the margins, good color there Jay on the split. I mean it seems like, here these margin improvements are structural and sustainable, is that fair to say?

Yes.

Maybe we should start thinking, moving away from that the 45…

There is some sustainability to these improvements and these efficiencies. And as we go through our budget process that we are about halfway through for next fiscal year. We will be able to comprehend and communicate those new gross margin directions in Q4 on our next earnings call.

Okay. Okay, great. And then, can you talk about, how you are as you talk to your Canadian customers what they are saying prospectively, I mean we’re seeing as lot of CapEx cuts, order of magnitude 25% to 50% up in the oil sands. And how you’ve seen past cycles play out with respect to some of the SAGD business?

Yes, Jeff. We have seen certainly some capital budgets that are impacting the projects again that primarily are longer term. So far we haven’t, that we haven’t seen any CapEx very little activity in terms of CapEx budgets that impact the projects that are underway. So, are we going to see the impact of six months to a year from now due to the delay or pull back of capital budgets in the longer term that is a possibility, because that’s certainly that’s going on and you read the same articles we read. But we haven’t seen an impact on the projects that are on our radar screens certainly for the near term and the near term being the next 6 to 12 months.

Okay thanks guys.

Our next question comes from Scott Graham with Jefferies.

Hey, just a couple of follow ups here, the 70% increase in Greenfield, I understand that was an easy comp, but that’s still a pretty big number. How is that shipment basis kind of how did that progress through the quarter, and in fact was there anything at the end of the quarter when oil prices were really struggling where maybe there was some push outs or what have you just trying to get a sense of the tone of business shipment wise from the beginning of the quarter versus the end of the quarter on that piece of your business?

Yeah we didn’t see any more slippage than typical in past quarters. We always have that dynamic, in terms of the geographies we nearly doubled Greenfield in the US at 95% growth. We had exponential growth in Asia Pac against a very, very small comp and Canada grew 76% in terms of Greenfield activity for the quarter. And we didn’t really see any skew from the beginning of the quarter to the end of the quarter, it was pretty much level loaded.

Interesting, thank you. As you think about your - your fiscal next year, and truth is there any reason to believe why your SAGD sales, your sand sales which is mostly SAGD, any reason to believe why that won’t decline 30% to 40%, is there anything that mitigate that in that portion of your business?

Well Scott again the projects that are on our radar screen that we’re tracking for the short term. We are not getting any feedback yet that those - those capital spends are being pushed out or delayed. The longer term beyond the, this next fiscal year is certainly we’re seeing pushouts for projects that are - that are not yet started and remember that we are on the tail end of the process. And while, we’re not saying that’s impossible, because we understand the volatility that exists in the marketplace. But we our customers so far have not told us that the projects that, that we are tracking and that we are looking at that they are being delayed or pushed out.

Fair enough, fair enough. This is a question for Jay, you guys have built your SG&A level little bit in the last couple of years as you’ve built out the infrastructure, made some of these investments, its - what you are doing is obviously working. The question now is that, is the stale start to go in the other direction or for some of the things that we all, know about it and have discussed, what are the levers that you guys can pour on the SG&A line to protect your earnings?

Yes, good question, Scott. If we look at that quite closely at present year-to-date 64% of our total operating expense is related to compensation that include salaries, stock comp, contractors and incentive. So its 64%, so if we were to see a dramatic drop in demand or a protracted decrease in orders that would be the primary lever that we would have to manage - to manage our spending in profitability.

Understood. And I do promise this is my very last question. The MRO number this quarter, taken in the context though last year, because there was tough comp, although last year benefited from an easy comp in 2003, if you sort of stack them up its still on an MRO basis, a fairly tough comp and you kind of did an 8% on what I would argue would be let’s say as stack comp of about 10 and you’ve done 15% and 10% in the first two quarters of the year, what is changed in the dynamic of the MRO business where you guys are growing that not at the typical rate of production. But actually, three or four terms on top of that, what is changed in that business, where your MRO business sales are just running at this, near 10% level and is that a sustainable situation and by that I mean, maybe not a 10, but obviously as capital spending comes off and I’m not talking about the upstream in the downstream and the midstream, as capital spending comes off in these areas one would think that MRO would need to replace some of that. So in that sort of context and framework, where can you sustain why is MRO running at the level that its running and how sustainable is this particularly if you start to get some shutdowns and otherwise, in the next let’s say 18 months?

Scott, one of the thing, one of the areas that we know that we noticed a significant increase in the MRO sector is our revenue that goes through distribution. And as we talked earlier, we don’t know exactly what is that sending out from a market sector perspective, but we acknowledge that a lot of it probably is in the oil and gas and a lot of it is in the downstream sector in the oil and gas which is still very active. So, or the other thing that we talk about all the time is the effect of our growing installed base, as we when we see significant growth in our overall revenue that’s creating a larger installed base and that it is in and out itself driving MRO growth. Now we’ll significant restrain capital budgets a fact that in the future, it’s possible yes. But the MRO with heat tracing, as we’ve again as we’ve talked about with heat tracing keeping materials from freezing and pipes is not a, it’s not a arbitrary process. So you can’t put it off for a year, because if the material freezes you can’t pump, you can’t get anything out of the pipe and you get damage control. So, it’s not like painting or cosmetic improvements in the plan, it has to be done if you are going to continue to operations.

You see just things yours that you are MRO sales in oil and gas can stay up in the weaken CapEx environment?

The portion of our - of our MRO/UE, the UE portion of our business could be impacted by again significantly restrained or reduced capital spending budgets. But the MRO portion of our business, I believe is sustainable and like you say unless there is plants that are shutdown or bald or taken out of the commission.

Great, thanks a lot.

Thank you.

And I’m not showing any further questions at this time. I would like to turn the conference back over to our host.

Well, again, thank you for your interest in Thermon. We look forward to our next earnings call. And everybody have a nice day.