Hello and welcome to the Thermon Q1 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 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 turn the call over to Ivonne Salem. Please go ahead, Ivonne.

Thank you, Diego. Good morning and thank you for joining Thermon's fiscal 2025 first quarter results conference call. Leading the call today are CEO, Bruce Thames; and Vice President and Corporate Controller, Greg Lucas. Earlier this morning, we issued an earnings release -- press release which has been filed with the SEC on Form 8-K and it's 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 & Events IR Calendar Earnings Conference Call Q1 2025. 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 might 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. Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance, including an update on the progress we have made on our strategic initiatives, followed by a financial update and review from our Vice President and Corporate Controller, Greg Lucas. Bruce will then wrap up our prepared remarks and update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Bruce.

Thank you, Ivonne and good morning to everyone joining us on the call today. I'm extremely proud of the team's hard work and disciplined execution during the first quarter against the backdrop of a weaker global growth environment where we were able to deliver top line and adjusted EBITDA growth and strong cash flow. The quarter was highlighted by continued favorable momentum in our diversified end markets, the successful integration and positive contribution from our Vapor Power acquisition and disciplined financial management leading to solid free cash flow conversion. But most importantly, this quarter demonstrated our successful execution on a couple of our key strategic pillars, namely our focus on growing our installed base as well as diversifying our revenue and end market exposure. Starting at Slide 4. We generated nearly 8% revenue growth during the first quarter which was driven largely by the contribution from our Vapor Power acquisition. The integration of Vapor Power is on track and we're excited by the revenue synergies we have quickly identified that were not contemplated in our initial strategy. However, excluding Vapor Power, our revenues declined roughly 5% on an organic basis. While we're disappointed by the organic revenue decline, it's important to note that our organic revenues declined only modestly despite a 34% decline in our large project revenue during the quarter. This type of performance would not have been possible if not for our focus on diversifying our end market exposure and growing our installed base of customers. In addition, consistent with the trends noted during our last earnings call, our Canadian business grew 9% in the first quarter on a year-over-year basis after a weak second half of fiscal '24. The continued pressure on our large project revenue which is generally tied to our customers' capital spending budgets, was…

Thank you, Bruce and good morning, everyone. I will provide some additional details on the quarter and give an update on our working capital and free cash flow and conclude with a commentary on our balance sheet and liquidity. Moving now to Slide 7 and our first quarter performance. Revenue in the first quarter was $115 million, a year-over-year increase of 8%, primarily driven by the inclusion of Vapor Power which contributed $13.9 million of revenue during the first quarter. Excluding Vapor power, first quarter organic sales decreased 5%, primarily related to the softness in large CapEx projects that Bruce has already discussed. Large project revenue was $18 million during the first quarter, down 34% from the same period last year as customers continue to delay decisions on large capital projects. The weakness was more pronounced in our oil and gas end markets but the weakness was broad-based. While large project spending was weak, our OpEx revenues were $98 million during the first quarter, an increase of over 20% compared to last year as our customers shifted their priorities to maintenance and repair spending. Excluding Vapor Power, our OpEx revenues increased 4%, demonstrating the benefits of our balanced revenue model and the strength of our long-term customer relationships and deep installed base. From a geographic perspective, we saw sales improved 9% year-over-year in Canada and 7% in APAC. While sales in our U.S.-LAM segment, excluding Vapor Power, declined 14% and sales in our EMEA region declined 19%. Adjusted EBITDA was $23.2 million during the first quarter, up from $22.1 million last year due to the contribution from Vapor Power. Adjusted EBITDA margin was 20.2% during the first quarter, slightly down from 20.7% in the same period last year. Our margins benefited from an increased mix of materials revenue during the…

Thanks, Greg. Now if you'll turn to Slide 9, we'll wrap up with our outlook for fiscal 2025. While trends in the large project market remain depressed, so far, the year is tracking roughly in line with our expectations. Our OpEx revenues are benefiting from a shift in our customers' priorities to MRO spending and our more diverse end market exposure is helping us overcome the weakness in the oil and gas markets. We are continuing to execute on our operational excellence priorities, including our supply chain initiatives and manufacturing rationalization program. These efforts helped drive savings in the first quarter and we expect more progress from these and other operational efficiency programs over the balance of the year. As a result of these factors, we are maintaining our full year 2025 guidance that calls for revenue in the range of $527 million to $553 million which includes expected revenue from Vapor Power of $55 million to $59 million, adjusted EBITDA in a range of $112 million to $120 million and adjusted EPS in a range of $1.90 to $2.06 per share. Historically, the seasonality in our business has resulted in roughly 55% to 56% of our revenue being generated in the back half of the year. And given the expected ramp in our large project revenue through this fiscal year, we have communicated and anticipate revenue to be more heavily back-end weighted to around 57% to 59% in fiscal 2025. The team remains laser-focused on executing to achieve our FY '26 goals and objectives. Finally, just to wrap up things on Slide 10. We were pleased with our first quarter results which we think demonstrate the progress we've made in developing a business that is more stable, profitable and durable across a cycle. We're not nearly as reliant on large projects or the CapEx cycles in the oil and gas markets. Our large and growing installed base of loyal customers provides us with a resilient aftermarket franchise which gives us access to a steady stream of predictable and highly profitable MRO revenues. We also remain well positioned to benefit from several powerful secular growth drivers. These include the energy transition and decarbonization, onshoring in North America and infrastructure spending. While the recent macro uncertainty has delayed some of this spending, we don't think that anything has changed to impact these long-term drivers and we remain confident that this only serves to create pent-up demand when customer confidence improves. Lastly, we benefit from a high margin, low capital intensity business that yield significant cash flow. This enabled us to quickly delever following the Vapor acquisition and leaves us in a strong financial position. We have ample flexibility to pursue our capital allocation priorities which include investment in growth, both organic and through acquisition, capital returns and debt paydown, all with a focus on creating long-term shareholder value. That completes our prepared remarks. We're now ready for the question-and-answer portion of our call.

[Operator Instructions] Our first question today is coming from Brian Drab from William Blair.

Could we just start off by, Bruce, maybe you giving us a little more detail around your visibility to the project revenue recovering later this year? And which -- are there certain projects that you have line of sight to? And what needs to happen for that revenue to come in?

Yes, it's a great question, Brian. So I'll start with our pipeline of sales and project opportunities. That's all the opportunities that are 100,000 and greater. That pipeline is over $1 billion in revenue opportunities and it's grown about 9% year-over-year. And so if I start there and then I'll look at our quoting activity, it's up 12% to 13% year-over-year. So that's been quite strong. And then I look to just our incoming order rates with the positive book-to-bill which this is the first positive book-to-bill we've had in a couple of quarters. So some of those trends are leading indicators. We'll need to continue to see book-to-bill being positive in Q2 but we feel like we have the pipeline of opportunities. The quote volume is there and our win rates are flat to improving. So we feel like we're very well positioned to capitalize on these opportunities as these projects move forward.

Okay, great. Can you -- I mean, I'm still trying to sort through all the numbers. So maybe you just help us reconcile -- that positive move -- up 9% for the pipeline, up 13% quoting activity with what you're actually seeing in the backlog.

Yes. So as I look at backlog, if we look year-over-year, backlog was down year-over-year, 10% but it was up 5% sequentially. And I'll just remind you that as we look at backlog, we're talking about these are the large projects in backlog. Typically, our flow business, our MRO business that we referenced in OpEx spending is in and out of backlog very quickly. And the fact that we had 85% of our revenues in our first quarter were tied to these types of revenues really speaks to the flow and the velocity. It comes in and out of backlog within the period. So I think 2 things to note. One is the backlogs have risen sequentially based on the positive book-to-bill. Second, the change in mix to more OpEx spending which we're very well positioned with our large installed base to be able to capitalize on. Those 2 things are the dynamics that we're looking at as -- in backlog year-over-year and sequentially.

Got it. So at the moment, when you have a mix like this, the backlog kind of becomes less relevant, it really does.

Yes. Particularly, when we're talking about OpEx revenues.

Yes. Maybe just one more question for now. And I may have missed but did you mention what percentage of orders coming in or what percent of the backlog is tied to decarbonization and renewables and how is that trending?

Yes, it was $9 million in orders during the quarter and 7% of total bookings.

Got it. Okay. Okay...

The pipeline has grown to $320 million, up from roughly $250 million at the end of our fiscal '24.

That's good to know.

Our next question is coming from Justin Ages from CJS Securities.

Can you unpack the diversified end markets a bit, good progress on that but I wanted to get your thoughts on food and beverage, transport, what trends you're seeing in those end markets?

Yes. The areas we've seen the most activity have really been in chemical -- petrochemical power has been very strong as we look there. Certainly, some of the opportunities that we've seen around infrastructure and rail and transit as we look forward, those are all significant opportunities. And I did note some of the building pipeline of opportunities we have in decarbonization and electrification opportunities that is really spread across a wide range of end markets.

I appreciate that color. And then -- sure. Go ahead.

Yes. One other thing to note, we do have a significant number of opportunities in the LNG liquefaction facilities in -- particularly in North America.

Okay. And then on capital allocation strategy, can you give us an update on what you're seeing in the M&A market, especially as it pertains to reaching that $600 million to $700 million kind of revenue target for fiscal '26?

Yes. First of all, we have a -- really a healthy pipeline of M&A opportunities that we believe are actionable within the next 12 to 18 months. So I think that's very positive. Certainly, our balance sheet is in good shape. These things are binary. So certainly, it's a win or lose scenario but we think we're very well positioned and we see a number of opportunities that really fit squarely within our strategic initiatives.

[Operator Instructions] Our next question is coming from Jon Braatz from Kansas City Capital.

Bruce, just back on the -- when we look at the big project and the prospects for business in that area. Should the spending on the CapEx budgets begin to increase, let's say, after the election with some interest rate cuts, would you see a cut in sort of the operating expense budgets? I mean is there a given -- what kind of give and take between those 2 budgets are there for your clients?

I really don't believe they're closely related. Operating expenditures are much less susceptible to economic cycles. And I really view those as being fairly stable. It's one of the reasons we've really focused to have that be a larger part of our incoming revenue stream. So I'd start there. As far as the CapEx, as I look at this, the customers that we've spoken with haven't had significant cuts in CapEx budgets. In fact, in most cases, they're flat. And in some cases, they're even projected to increase this year. But what we've seen, particularly in the last 2 quarters, our fourth quarter of '24 and into this quarter, we have seen a slowdown in decision-making. So we continue to see that pipeline of opportunities grow but the time between when that's quoted and when we actually receive orders has become more protracted. So our hope would be in the latter part of this year, we get through and maybe get some clarity from the Fed around interest rates as well as around the election that customers would feel more comfortable in moving forward with some of that spending.

Sure. Any sense on your part that there was some catch-up in the maintenance spending by your clients?

No, that's long in the rearview mirror from like 2 years back.

Yes. Yes. Okay. Okay. Good. And then on Vapor, I think that's going to be a very nice acquisition. Are you seeing things fall into place for Vapor as you expected? And secondly, maybe is there an expectation that maybe Vapor will contribute more and growth at Vapor can accelerate a little bit because of these electrification trends that we're seeing?

So Vapor, it's -- first of all, strategically, it has really -- we're beginning to see that it's probably even a little better as far as the opportunities in the marketplace that we're seeing, particularly around electrification. And I would highlight particularly the electrode boiler line as well as our resistance electric boilers. And really that shift from hydrocarbon-fired heating and industrial processes to electric. So that trend has been positive. I think the other thing that's really surprised us to the upside is just the number of inquiries we've received in our sales organization and our traditional channels having added Vapor to the mix. So we're really getting better market coverage and we're seeing more opportunities. Quite frankly, right now, our biggest challenge is scaling capacity and we're focused on implementing the Thermon Business System in the Vapor Power operations, both in Franklin Park and Morristown. And so we're heavy at work trying to unlock capacity there that would give us the ability to deliver upside to the current plan. I can tell you there's work to be done. Our teams are busy, really working on those opportunities to debottleneck and improve both the supply chain as well as manufacturing capacity in our facilities. And so certainly, that would be our hope, maybe if not in this year, to see upside in the coming years as we build capacity in that operation.

Would you envision an increase in your cap spending to support the growth at Vapor? A new facility or expanded facility beyond improving supply chain and other things?

We believe our current estimates for CapEx include capital to debottleneck and increase capacity within those operations. And -- but on a go-forward basis, as things evolve, certainly, in subsequent years, we might see that there could be additional CapEx depending on if demand ramps faster than what we had originally contemplated.

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

Kevin, thank you. And again, I'd like to thank our Thermon employees around the globe for serving our customers with excellence each and every day. And I'd like to thank all of you for your time and interest in Thermon. If we don't speak during the quarter, we look forward to speaking to you again on our next quarterly call. Have a good day.

Thanks, everyone.

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.