Greetings and welcome to the First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kevin Fox, Vice President, Corporate Development. Thank you. You may begin

Thank you, Maria and good morning, and thank you for joining today's fiscal 2021 first quarter conference call. Earlier this morning, we issued an earnings press release which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. During the call, we will 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. Before I turn this call over to Bruce, I'd like to remind you that during this call we may make certain forward-looking statements regarding our company. Please refer to our Annual Report and most recently filed Quarterly Report with the SEC for more information regarding our forward-looking statements including the risks and uncertainties that could impact our future results. Our actual results may differ materially from those contemplated by these forward-looking statements and we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise except as may be required by law. With that said, I'll ask Bruce Thames, our President and CEO to begin with his opening remarks.

Kevin, thank you and good morning. We hope everyone listening is staying safe and in good health. We appreciate you joining our conference call today and for your interest in Thermon. Jay Peterson, our CFO is with me and will provide additional information on our financial performance following my remarks. Since our last update in June, the Thermon team has remained focused on the safety and security of our employees, customers, suppliers and the communities in which we live. As a supplier to critical infrastructure, we have remained open for business and have continued to focus on supporting our global customers. We have experienced temporary facility closures due to local or regional restrictions in locations such as India and Russia during the quarter, although both of these locations have begun to see an easing in restrictions and are now operational. As we look across the globe, many of our teams in Asia where the virus first struck have begun to resume more normalized business activities where the virus has been controlled. We view this as a positive sign of what we may expect in the West as the virus is contained. In many of our other locations, we continue to suspend business travel, work-from-home where possible and follow the applicable WHO and CDC protocols. I would like to thank our Thermon employees around the globe for their commitment to our customers and our shareholders through these challenging times. Our employees are incredibly resilient and have quickly adapted to a new way of working. I especially, want to thank our frontline employees that have continued to be on-site serving our customers each and every day throughout this pandemic. Their demonstration of our core values of care, commitment and collaboration as well as our industry-leading safety performance is both admirable and appreciated.…

Thank you, Bruce. Good morning. As we highlighted in our last call, as we face the challenges presented by the COVID virus and the disruption in the global oil market, our focus has been on value preservation. And during the quarter, we recorded $2.9 million of severance cost related to the cost-out actions outlined in June. This reduction in force, among other cost reductions, will reduce SG&A by $16 million in the fiscal year. And we believe approximately 75% of these reductions are structural in nature and will provide incremental operating leverage as growth returns. Also during Q1, our Canadian subsidiaries qualified for and received a $2.4 million benefit from the Canadian Emergency Wage Subsidy program. And approximately $1.7 million of this benefit was recorded under cost of sales while the remainder impacted SG&A. And while we face significant challenges in our P&L related to COVID-19 and the decline in oil prices, our balance sheet remains strong and our cash and investments balance at the end of June improved to $48.2 million. And also, we generated $1.3 million in free cash flow during the quarter. And we have access to a $60 million revolver line of credit, subject to a consolidated leverage ratio of 4.5:1 that, steps down to 3.75:1 in December of this year. In June, we were able to amend our revolver credit agreement from a gross debt basis to a net debt basis, providing measurement credit for all cash on hand in excess of $60 million, affording us additional liquidity as we manage through these difficult times. Our CapEx spend, for the first quarter, totaled $2.1 million inclusive of both growth and maintenance capital. We expect fiscal 2021 CapEx to be $4.0 million. Our net debt to EBITDA ratio is currently at 2.5x. And lastly, our capital…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Scott Graham with Rosenblatt Securities. Please proceed with your question.

Hi, good morning all. Thank you for a lot of information behind the scenes there. I do have two primary questions. And the first is as I look back over the last call it five years because we've been through very rapid oil and gas and chemical cycles as you know and kind of stack up the order rate comp over that period. Kind of looks like the comparison in the first half of last year was pretty equal 1Q-to-1Q last year. So, I guess, my point would be with July bookings down 33 being worse than the first quarter. Why is that exactly? Why are bookings actually on our -- I know that the minus 33 is better than what we just saw. But on a sort of like a five-year stacked comparison it's actually a little worse. So, I'm just wondering what that means.

Yes. Scott, this is Bruce. This is what we've observed in the month. I mean, let's face it bookings are lumpy, but we have also seen this second wave of COVID-19 outbreak. And what we haven't seen is that recover as maybe quickly as we might have originally anticipate. So we still see really limited access to facilities and things like that. And we do believe that is slowing or having a negative impact on the sequential improvements we might have otherwise expected.

Okay. Okay. So the fact that the July bookings are on a year-over-year basis weaker than the first quarter. I guess, I'm just maybe fishing a little bit more -- for more than that Bruce is there. You did say that you were expecting some sequentially weaker something in oil and gas. You said a lot of things about your end markets. But was that item that you were referring to maybe part of the July bookings being a little weaker like that?

No, not really necessarily. I think my comments around both the first quarter we started out really low in April and May. We saw some improvements. We did see some nice actually greenfield orders that landed in the quarter that contributed to the overall bookings rate and the impact year-over-year. And, I mean, we did have a fairly strong bookings quarter last year in Q2. So I do think it's got to do overall with the impact we're seeing due to the COVID-19, as well as what we're seeing in our end markets in oil certainly and the impact that's then had on our customers. And then I think also it's relative to prior year comparisons that were fairly robust overall. First half of our last year was record.

Got it. Okay. Understood. So the other question is surrounding SG&A and really kind of maybe two parts to that. Number one, I'm assuming that Bruce when -- I'm sorry Jay when you said the $88 million is sort of the new run rate that that is exclusive of depreciation and upbeat. What is the trigger for SG&A being brought back the 25% that you're going to bring back in orders? Is that sort of like one quarter of orders year-over-year up? Is that two quarters? What's maybe a little bit more color on the trigger there?

Yes. To answer your first question, it is exclusive of depreciation and amortization. And was your question relating to when the leverage will occur or…?

No, no. You talked about the $16 million this year, you talked about a full run rate of $17 million next year. What I'm wondering is you said that you're going to bring 75% of them are structural out of the $17 million. And so that does suggest that 25% is sort of more variable and will be brought back on to the books. And I'm wondering what the order rate trigger is for that to begin.

Yes. Scott, this is Bruce. We would need to see some stabilization in the end markets and some sequential improvements and improved overall visibility before we would consider bringing back some of those temporary cost reductions.

That's great. Thank you.

Hey, Scott, let me just clarify one thing before you ask this in a following question. Our revolver is $60 million and the amendment that we were able to garner gives us measurement credit for all cash on the balance sheet in excess of $20 million. I think I might have said $60 million and $60 million, but it should have been $20 million and in excess of cash on the balance sheet at that level.

Yes. Thank you.

Our next question is from Brian Drab with William Blair. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions. First one is just the…

Good morning, Brian.

Hi. Good morning. Jay on the last call you mentioned that a scenario analysis right you said, I believe if revenue was down 35% to 40% that's the level where you'd be cash flow breakeven. Can you just tell us is that still the expectation? Do you have updated thoughts on that? And is that -- and I'm trying to remember that takes into account all the cost cutting that's been contemplated as well right?

It does. But one thing I would like to clarify that 35% to 40% revenue reduction has kind of double conservatism in that. It has rather depressed gross margins and rather depressed working capital management assumptions in that. So we think that's a very conservative number for us to be free cash flow breakeven.

Understood. So that's just a worst-case scenario and all it is a scenario just for frame of reference of course.

Exactly.

Yes. And then just to be clear, I believe Bruce that you said that with the orders down 33% in July. That that would be your best guess for us to use that as the proxy for what might translate to revenue -- the revenue decline for the September quarter. Is that correct? I know that's not guidance but I want to clarify.

Yes, it's not guidance but that's what we're seeing in the incoming order rate. We would expect our revenues to be in line with the incoming order rate for the quarter.

Okay. And in those orders and in the backlog, can you talk a little bit more about what you're seeing in terms of the margins and whether you expect the first quarter gross margin level to be the trough for margins as well as the trough for revenue?

Yes. So the revenue question, we think sequentially revenue will improve and the worst is behind us, also due to the volume increase. We think we'll have a positive impact on fixed cost absorption. And also, to clarify that the costs that were taken out we really only had one full month of the costs that were taken out of the impact to gross margins. And then we have the favorable seasonality. In terms of the backlog, we do see backlog margins typically lower than typical right now but they really vary from month-to-month depending on what projects are in the backlog.

Okay. Jay, can I just press you with one follow-up on that lower than typical and typical is what? And is it -- are they lower than what you saw in the first quarter?

They are.

In terms of what's the reported margin in the first quarter.

So three -- I would say 300 to 400 basis points probably closer to 300 basis points lower. But again, that is at just one point in time and it would change literally every week or every month.

Okay. Good. I'm kind of walking away with the impression that maybe gross margin steps down before it comes back up then.

No not necessarily. For projects possibly. But again, it's all predicated on timing. And with some of the cost actions, with some of the cost absorption due to increased volumes and the seasonality aspect is typically relating to maintenance. Those would all be accretive to market.

Yes. And everything in the backlog or most of what's in the backlog is the greenfield obviously and...

Correct.

Those are the big in there and all these other factors. Okay. Okay. I got it. Thanks very much.

[Operator Instructions] Our next question -- it appears that there are no further questions at this time. I would like to turn the floor back over to Bruce Thames, President and CEO.

Maria, thank you. Again, I would like to thank all of you for joining us on our call today and enjoy the rest of your days. Thank you.

Before we conclude I do have one more question.

Okay. We're happy to take it.

Okay. It does look like they have been disconnected. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.