Hello, and welcome to the Thermon Q4 2023 Earnings Conference Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Ivonne Salem, Vice President, FP&A and Investor Relations. Please go ahead, Ivonne.

Thank you, Kevin. Good morning, and thank you for joining today's fiscal 2023 fourth 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. Additionally, the slides for this conference call can be found in our IR website under news, event, IR calendar, earnings, conference call Q4 2023. 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. I would 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 recent quarterly report filed 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 might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Now I would like to introduce Bruce Thames, our President and Chief Executive Officer for his opening remarks.

Thank you, Ivonne. Good morning, everyone, and thank you for joining us today. Before we talk about a record quarter and year, I'd like to start today by setting the stage with a brief overview of Thermon. As a 68 year-old company, we've been tested and proven resilient across many economic cycles. We're a world leader in providing safe, reliable and mission-critical industrial process heating solutions to customers in 85 countries from facilities on four continents. Our almost 1,400 employees have an industry-leading safety record and are dedicated to creating value for our customers by executing our long-term strategic plan. And I'd like to thank all of them for contributing to our record performance in fiscal 2023. I'm looking forward to seeing what we can achieve together in the years to come. On Slide 4, you can see our strategic pillars. In order to create long-term value for our shareholders, we remain focused on three key areas. First, profitably growing our installed base. Second, diversification, digitization and decarbonization. And third, disciplined capital allocation. In our first pillar, we benefit from a very large global installed base, which provides a significant opportunity to capture recurring revenues, while driving growth across our traditional and market verticals. In our second strategic pillar, we're driving additional growth through expansion into attractive adjacencies across diverse end markets. Our solutions are also enabling decarbonization through electrification and through long-term transition towards sustainable energy sources. In addition, we're expanding our digital solutions with products that utilize the industrial Internet of Things and support customer demand for enhanced productivity, reliability, efficiency and safety. Underpinning our first two strategic pillars is our commitment to disciplined capital allocation. Given the strength of our balance sheet, our current priorities include inorganic growth through bolt-on acquisitions with returns that exceed WAAC by…

Thank you, Bruce. Turning to revenue on Page 12. Performance this quarter was outstanding as the global Thermon team continued to drive profitable growth, while meeting strong customer demand. Revenue in the fourth quarter was $123 million, up 19% versus prior year and exceeding internal expectations. We delivered strong growth in all geographies due to sustained demand and maintenance activity and we are seeing green shoots in Asia with the improvement from reduced travel restrictions. While maintenance spending in the oil and gas market is the leading driver, growth in general industrial and renewable markets was robust and we are still focused on executing against our long-term goal of market diversification. By the end of fiscal 2026, we expect that at least 65% of total revenues will come from diversified markets other than oil and gas, up from 61% today and approximately 45% in fiscal 2017. FX negatively impacted revenue by $4 million due to the stronger U.S. dollar. Reported results also include Powerblanket financials were $5 million in revenue this quarter and $17 million in revenue since the acquisition in June of 2022. We are pleased that our integration of the Powerblanket deal is largely complete with the team now shifting focus to driving incremental growth through our shared channels to market and capitalizing on new product launches. Large project revenues were roughly flat in the quarter. As a reminder, we believe large overtime project revenues are aligned with customer capital spending budgets and are more cyclical in nature. Small projects and maintenance and repair revenues, which were up 31% and 24% in the quarter, respectively, and 17% and 29% on a TTM basis are representative of maintenance, repair and small upgrades on our installed base that help our customers maximize production, uptime and efficiency. Small projects and maintenance…

Thank you, Kevin. And I'd like you all to turn to Slide 16 for our guidance for fiscal year 2024. We are very pleased with the strength of our business as we move into this fiscal year. We believe the record results in fiscal 2023 have set a new baseline for us going forward. In order to continue to grow and execute our strategic initiatives, our fiscal 2024 plan includes an incremental $7 million in key investments, new product development, sales and business development. In addition, we anticipate investing approximately 3.5% to 4% of revenues in CapEx to fund strategic growth initiatives, capacity expansion and operational excellence. Looking forward, we're mindful of the higher interest rates that could lead to a slowdown in spending that may result in a recession. However, our backlog is at or near record levels, is up 5% year-over-year, and our quote volumes and incoming order rates remain robust. Based on these factors, revenue guidance for FY24 is projected to be from $455 million to $485 million for the full year, which at the midpoint represents approximately 7% growth over fiscal 2023. No M&A activity is included in these projections. For the full year, we anticipate GAAP EPS to be in the range of $1.45 a share to $1.61 a share, representing a 53% year-over-year growth at the midpoint. We expect to maintain a strong balance sheet throughout the year. Moving to Slide 17 and our long-term revenue goals. Our growth goals for fiscal 2026 remain unchanged. We're very pleased that our performance through the first two years of our five year plan is in the upper range of our initial goals with fiscal 2023, significantly exceeding our expectations. We're encouraged by the ongoing advancements we're making around diversification with important growth across multiple end markets.…

Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from Brian Drab from William Blair. Your line is now live.

Good morning. This is Tyler on for Brian. Just to start out, looking at your gross margin in the fourth quarter, I know you explained the headwinds, but is there any reason it was down sequentially from the other quarters? Were the headwinds larger than previous quarters?

Yes, Tyler, this is Kevin. Maybe a few things to call out on the gross margin side of things. Obviously, the volume was quite strong. Pricing was still positive in the quarter. But if we really kind of reflect internally some of those inventories for the higher cost purchases in previous periods, really start to get consumed at the end of the heating season. So that was a little bit a headwind. We had some adjustments for year-end inventory. But as we think about the continuous improvement side of things, we've really been investing in the business there. We completed over 47 Kaizen events in the last year. And as you pivot from a push to a pull model through the plant, you take a look at the inventories, and there's a little bit of hit there we had in the quarter. But I think the good news here is a lot of that is behind us. And if you think about the opportunity sequentially going forward, we still have pricing power in the market. We think we've got some of those higher cost input items more or less behind us. And we certainly, given the guidance for fiscal '24, I think volume is going to be higher in the years ahead. So I think we still feel fairly positive about margins improving going forward.

Sounds good. Yes, that kind of just leads into my second question, like with the strong revenue guidance, like is there a reason that the EPS guidance is any higher? Or is there a potential for upside throughout the fiscal year?

Yes. Tyler, I think we take a look at what's going on in the world and whether it's geopolitical events in Europe or some of the discussion that's going on in Washington. There's elections up in the Western province in Canada. There's just a little bit of maybe hesitation, I think, that we're seeing from a customer standpoint that we wanted to factor into the bottom line. So I think at the end of the day, where we are here in May that would be the expectation for the year. But I think generally speaking, the guide feels good for where we are today.

Sounds good. And just touching on the maintenance spending, do you have pretty good visibility of that throughout fiscal '24 as opposed to the CapEx projects?

Yes. We get a good sense for our customers' budgets. The vast majority of them are on an annual kind of the calendar year as they look at their budgets. Particularly, if you look at some of the more traditional end markets, commodity pricing is high, the overall margins are good. They've got money to spend. And right now that we haven't seen huge CapEx spending. So what we've seen is kind of a shift of investment in -- kind of current asset base to improve throughput, uptime, reliability and maximize the assets they have in place to be able to meet kind of volume demand. So we believe the environment for ongoing maintenance is robust and expect those levels of spend to continue into this year.

And Tyler, maybe to bring it full circle then, if we think about that mix that Bruce is alluding to, as you guys are aware, that's obviously generally a higher-margin business than some of the more project-based activity.

Got it. Yes, that's all I have. Thanks for taking the questions.

Thank you.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Bruce for any further or closing comments.

Thank you, Kevin, and thank you all for joining us today. We appreciate your interest and your investment in Thermon, and enjoy the rest of your day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.