Good day, ladies and gentlemen and welcome to the Thermon Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Ms. Sarah Alexander, General Counsel. Ma'am, you may begin.

Thank you, Brian. Good morning and thank you all for joining today’s 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 also be available via webcast 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 quarterly and annual reports filed with the SEC. 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, revenue growth, profitability, leverage ratios, acquisitions, acquisition synergies 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 have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP. And now, it’s my pleasure to turn the call over to Bruce Thames, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone and thank you all for joining our conference call and for your continued interest in Thermon. Today, we have Jay Peterson, our CFO, joining me on the conference call. Jay will follow me and present the financial details of our fiscal 2018 fourth quarter, and our full fiscal year. I’d like to just take a moment here to reflect back on some key accomplishments in fiscal 2018. In Q1, we began production in our operation in Russia, to provide access to a large growing market for industrial process heating. We continue to invest in research and development to lead the industry with products that differentiate our solutions in the marketplace. During the year, we added key talent to the team and build robust processes to accelerate the pace, and improve the overall success rate of new product launches. We also invested in processes, systems and tools to build a scalable business globally, that improved operations, productivity, and project execution, all of which had a positive impact profitability in the year. Finally, we acquired CCI Thermal now known as Thermon Heating Systems to grow our addressable market, enhance the solution set we provide to our customers, and create an expanded platform for growth. All of these investments are beginning to show a very positive impact on the overall performance of the company. We were very pleased with the overall operating results the team delivered in Q4. We saw revenues of $102.6 million exceed our expectations for the quarter and increased 51.8% year-over-year. Organically this represented the second consecutive quarter of double-digit growth with revenues of $77.6 million, up 15.1% year-over-year. Margins also improved by 380 basis points year-over-year on a Greenfield mix of 42% versus MRO/UE of 58%. Inorganic margins had 130 basis points positive…

Thank you, Bruce. Good morning, I will start by discussing our Q4 results, then turn to a summary of our fiscal year results and finally conclude with high-level guidance for fiscal year 2019. First off, revenue and orders. Our revenue this past quarter totaled $102.6 million and that’s a record for Thermon and an increase of 52% over the prior year’s quarter. Organic revenue and constant currency grew 9% in the quarter, FX contributed 6% to revenue growth and M&A revenue contributed 37% in the quarter. And on a pro forma basis, our total revenue grew by 15%. In the quarter, we continued to experience positive signs in our organic Canadian business with revenue up 55% in the quarter, followed by Asia Pac at 50%, and Thermon Heating Systems revenue increased by 16% and that’s on a pro forma basis. Our organic MRO/UE mix for Q4 was 58% of revenues, whereas Greenfield totaled 42% of revenues, and total orders for the quarter were $94.5 million versus $69.4 million in the prior quarter, and that’s an increase of 36%. And we did see double digit order growth in both Canada and in the U.S. and that is on an organic construct. Our backlog of orders ended March at $159.6 million versus $106.9 million at the end of fiscal year 2017, an increase of 49% with the thermal heating systems acquisition contributing 30% of the growth and our organic business 19%. And on a pro forma basis, backlog grew 20% from $133.5 million to $159.6 million. And our book-to-bill for the quarter was $0.92. Moving to gross margins, margin dollars this past quarter totaled $46.8 million or 45.6% of revenue and they grew by 66% versus the prior year quarter our margins increased by 380 basis points due primarily to an increase…

Thank you, sir. [Operator Instructions] And our first question will come from the line of Scott Graham with BMO Capital Markets. Your line is now open. Pardon, Mr. Graham your line is now open for Q&A session.

Thanks. I'm here. So we've got – I've got a couple of questions here for you. You're looking at a year of organic growth of 3% to 5%. How much of that is being -- how much are you not getting from Canada this year? So, what is that costing you based on your comment, Bruce?

Yes. So, we really are seeing the growth in Canada begin to plateau with really a lack of pipeline, takeaway capacity, so some further investments there unlikely at a level above about what we've been seeing. We do see some very modest growth. But if you look – I mean that had a significant impact to our growth in the second half of the year, just some recovery and maintenance spending and has some pent-up demand. So we expect that to flatten a bit. We do see other parts of the globe growing in the coming year, particularly the U.S. is well-positioned with the backlog growth we've seen there and the project timing, so that -- Canada is having a significant impact on just the rate of growth that we are projecting going forward.

Understood. Thank you. Another question I had for you is, I think first there was a comment about materials inflation being a headwind. And then there was a comment that, pricing would exceed materials inflation, unless I misunderstood. Can you kind of tell me which that is? What's the takeaway there?

Yes. My comment was that it would offset. So that's – I didn't say it would exceed my words were it would offset. So I think we'll offset it. I don't see -- the level of margin expansion that we experienced in fiscal 2018, I don't see the opportunities to expand as we had seen in going forward into 2019.

Fair enough. Sorry for misquoting you there.

You're welcome.

Hey. This is a question for you maybe on the gross margin. So, we have offsetting price cost according to Bruce. I thought I heard you guys say that you're expecting this CCI, the thermal business to for those margins to maybe come in a little bit, maybe I misheard that as well. I don't know. It sounds to me like gross margin sounds like ominously flat or lower in 2019. Could you help me triangulate around some math there?

Yes. We see flat. There maybe some modest upside. I think our comments around Thermon Heating Systems is really important point. We saw really healthy margins during the heating season. If you look at that business that's because of the volume effect on the fixed cost basis, so EBITDA margins were really good. What we see in the off season is lower volumes. The actual product margins remain very consistent. But the real difference there is just the leverage on the volume. And so we see compression during the first half of the year in margins and then we see that expand in the second half. And so that's probably what you're picking up on and the messaging that we're giving you about a full year. We owned them during the five-month heating season and the margins were exceptional on the volume. But we do expect that to be significantly lower in H1, particularly Q1 as we have that on the lower volume.

Understood. And here's my last question. I don't mean to hog up the line, but the 3% to 5% organic that you refer to for next year kind of back to that, that is pure organic, that does not include FX, right?

That is correct. We don't speculate on FX, so absolutely.

Very good. Thank you.

Thanks Scott.

Thank you.

Thank you. And our next question will come from line of Brian Drab with William Blair. Your line is now open.

Hey, good morning. Thanks for taking my questions.

Good morning, Brian. How are you?

I'm all right. Hey. So can you given on this fourth quarter report, we're always about two months into the next quarter. Is there anything that you can tell us about? And I know it's the seasonally least interesting period, but April and May I think you talked little bit about the momentum continuing in some of the geographies, but what are you seeing in April and May so far?

Yes. So, just some comments I made around the first half and also around Q1. We do see -- year-over-year we see a much healthier mix of Greenfield and certainly given the year we had in Q1 last year we see significant volume growth in Q1 year-over-year. We do expect that mix to be dilutive to margins, but we are seeing some very healthy growth in the first quarter.

So, Bruce, if you do better than – I assume really healthy growth given that we just did double digit organic growth, really healthy growth probably means above 3 to 5 in the first quarter?

Yes.

Is there -- as you look at the back half of the year though, does that mean we're going to be materially below 3 to 5 for 2Q through 4Q? Or is there just a conservatism and you know you don't want to make a call on the back half of the year so much at this moment?

Yes. So, first of all, overall we see positive momentum going into year. And I don't want to reiterate that. The last two quarters if you look, quarter-over-quarter our bookings are up by about 5%. And we did see some drawdown in backlog in Q4. This is a first quarter we haven't had a positive book-to-bill. But I want to emphasize that the bookings we had organically in the fourth quarter were the highest – was the highest fourth quarter we've had since 2012. We booked a very large project in Canada. So we are seeing a healthy booking environment. And the reality is, we're seeing a lot more projects. Our concern is just over project timing. It's important to reiterate. We're fairly late cycle. So we see a lot of positive momentum. The project timing is likely to be later in the year and can move. We have seen some movement to begin to accelerate projects, but we'd like to see a couple of quarters of that before we get more aggressive on our forecast. And I'd say finally, there is a lot of price volatility in oil. And I think that's probably having some impact on the rate of spending increases as we are seeing in our end customers.

Okay, great. And if you could maybe -- I don't know if I could ask you to rank order, the oil and gas, PowerGen, petrochem in terms of potential contribution to growth in fiscal 2019. Could you take a stab at that for us?

Petrochem is by far the strongest. And I would say second would be oil and gas, and third would be Power.

Okay. And that's what I would thought you'd say. Okay. And I guess petrochem specifically within the U.S. is the – is it strongest in the U.S.?

Yes. And we are seeing a lot of opportunities continue in the Middle East as well.

Okay, great. And if I can just ask one more, have you seen impact from the tax policy that your customers are pulling forward projects to take advantage of full depreciation?

We haven't seen anything that we could tie directly back to the change in tax law.

Okay. Thanks very much.

Thank you.

Thanks Brian.

Thank you. And our next question will come from the line of Charley Brady with SunTrust. Your line is now open.

Hey. Thanks. Good morning, guys.

Good morning, Charley.

Just the question on the R&D expense, you talk about another investment year. I just wondering, can you give us the sense of what that might be doing to as far as the margin impact this year? And should be expect that to level out after fiscal 2019 or is it something that you know maybe a slower increasing on the percentage basis, but continues to move higher?

We are really pacing our levels on investment in research and development. They directly tied to our product and technology roadmaps and the market potential and opportunity we see there and in the pace at which would like to see those realize. So, I guess, to answer your question, we will likely see some increase in future years. I feel like historically, at least over the last few years we've been slightly increasing it, but historically we've under invested there. And we see some significant opportunities to bring new solutions to the market and we're going to invest accordingly. Now, I do we expect the pace of overall is SG&A spending to begin to plateau with the volume growth we're saying and we were down 200 basis points year-over-year. And so we should begin to get some leverage on the overall SG&A spend in the business as we continue to grow.

Thanks. And then just in terms of mix on fiscal 2019 with the project pipeline is coming through. I know you talked about some timing and stuff to get later timing wise. But I'm wondering from a Greenfield versus MRO/UE mix in the second half of fiscal 2019, it sounds like you're saying maybe Greenfield percentage could be higher than what it was in the second half of fiscal 2018. Am I interpreting that correctly?

It could be – it's really hard to anticipate that at this time. We do have a general sense of timing of projects, but they can move in and just movement of one or two projects can have a significant impact to that mix. For modeling purposes I would encourage you to use the historical 60/40, I mean, we're within plus or minus a couple of points to that in any given quarter there are some outliers, but its pretty consistent.

Understood. And just one more from me; I don't know if you mentioned it, interest expense expectation for 2019 with the debt paydown?

Yes. So, on a cash basis, it will be approximately $16 million and interest expense all in is at 6% including the amortization of deferred debt charges. So it would be 6% on the $225 million balance.

Thanks.

Thank you. And our next question will come from the line of Jon Braatz with Kansas City Capital. Your line is now open.

Good morning, Bruce. Good morning, Jay.

Good morning.

Good morning, Jon.

Bruce, when we look at THS and your expectations for next year, am I understanding correctly, revenue assumption is basically for THS sort of flattish year-over-year? And is that mostly because of the softness in the Canadian area?

Actually on a pro forma basis we have about 6% to 7% growth in that business.

Okay.

And they are much less tied -- those products are much less tied to oil and more in gas and I guess the other comment is earlier cycle. So we do see project opportunities there before they translate into heat-tracing opportunities. And we also see some opportunities with sales synergies as we plug those products into our market access in the Eastern Hemisphere. So all of those things are positively impacting the growth rates we see in the Thermon Heating Systems business on a pro forma basis.

Okay, okay. And then Jay, on the amortization expenses for 2019, will that decline a little bit as you work -- reduce the amortization charges associate with the backlog? Or will that be sort of constant with it? I think it was about 3700?

Yes. It will be a nominal impact, a very modest impact, so the 5.7 million is the operating expense impact per quarter. There was a slight impact to gross margins based on the backlog, but it's negligible when we look at the impact for next year.

So, 5.7 million continuous per quarter?

Yes. It does. It will move slightly based on FX. That would be $5.7.

Okay. All right. Thank you.

Thank you.

Thanks, Jon.

Thank you. [Operator Instructions] Our next question will come from the line of Scott Graham with BMO Capital Markets. Your line is now open.

Hi, guys. I have a couple of more if you don't mind. Do you have an estimate on the percentage of backlog that you'd ship in fiscal 2019?

Yes. Rough numbers, Scott, would be 80%. Recall earlier in years we guided that we saw our backlog burn per track to the 15 to 18 month period. We're seeing a slight improvement on that. So I would model 15 months or approximately 80% of our starting backlog to be invoiced next year.

Hey. And could you also tell us the dollars of THS that are in your split of Greenfield versus MRO/UE?

Yes. So the numbers we gave were the organic construct only.

Well, okay.

And virtually all of THS's backlog would be considered MRO/UE based on that same definition.

We did have a couple of nuclear projects that shipped; represent about 10% that would be considered Greenfield. The balance would've been -- another 19% would've been MRO/UE.

Got you. And then finally on the orders which look sort of mid-single digit for a couple of quarters now; is that Canada as well, or is there something else that's restraining that number?

Yes. Canada, the incoming order rate has again kind of plateaued. And I think that's largely it. We have as I said, well, let me say this, we do – we have seen a slowdown in orders in the Eastern Hemisphere. Although, we have line of sight to some significant bookings and they tend to be fairly lumpy in that part of the globe. So, while our order -- incoming order rates have been down particularly in EMEA and that contributed to that slower order growth. We do have a line of sight to some significant projects that we expect to close in the coming months.

Okay. So then, from what -- I don't want to put words in your mouth, Bruce, but it sounds to me like the pace of orders growth should continue at least to this level with Canada having pulled it down?

That sort of expectation.

America should be better, a couple of things weak here, including Canada. But we should to be able to stay in this sort of mid single digit organic going forward do you think?

That's our expectation and that influence our growth rates that we projected for the organic business in the coming year.

Very good. Thanks a lot.

All right.

Thank you. And our next question will come from the line of Brian Drab with William Blair. Your line is now open.

Hey. Just one more question. On the five new products, I'm curious if you could tell us anything about those products and maybe what categories they would fall into, and if there could be any material revenue generation either this year or in fiscal 2020 from those new products? Thanks.

Well, I'd like to wait until we've launched [ph] those products, but there actually a fairly wide range of products. They are again following execution of our product and technology roadmaps that we'll focus on expanding the solution set around controls, communication and connectivity, as well as in some other products and accessories in our heating line. So I'd really prefer to give more details about that in retrospect following launches and we'll tell you our expectations for those at the time of announcement.

Can you say, Bruce if there's anything that, any ideas you have that came as a result of the acquisition and synergies between THS and the legacy business [Indiscernible] synergies?

There are some technology synergies. It will take us longer to realize those. These would be more consistent with the organic business and plans that we have laid out for growth of that business.

So, all five of these new products would be within the legacy business and not within THS. Is that a fair conclusion?

Yes.

Okay. Thanks a lot.

Thank you.

Thank you. And I'm showing no further questions at this time. So now it's my pleasure to turn the conference back to Mr. Bruce Thames, Chief Executive Officer for some closing comments and remarks.

Again, we're pleased with the overall results of the fourth quarter and really pleased with the accomplishments that this team has made in fiscal 2018. We're enthusiastic about what lies ahead in the coming year. We thank you all for your interest in Thermon and thank you for joining us on the call today.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and you may all disconnect. Everybody have a wonderful day.