Thermon Group Q3 2025 Earnings Call Transcript

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Provided by Quartr
February 6, 2025
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Operator

Greetings and welcome to the Thermon Group Holdings Third Quarter Fiscal Year twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A A question and answer session will follow the presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Yvonne Salem, Vice President of FP and A and Investor Relations.

Operator

Thank you. You may begin.

Ivonne Salem
Ivonne Salem
Vice President of FP&A and Investor Relations at Thermon Group Holdings

Thank you. Good morning and thank you for joining Thermo Group's fiscal twenty twenty five third quarter results conference call. Leading the call today are CEO, Bruce Stane and Chief Financial Officer, Jan Schock. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form eight 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 and Events IR Calendar Earnings Conference Call Q3 twenty twenty five.

Ivonne Salem
Ivonne Salem
Vice President of FP&A and Investor Relations at Thermon Group Holdings

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 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.

Ivonne Salem
Ivonne Salem
Vice President of FP&A and Investor Relations at Thermon Group Holdings

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, further developments or other ones, except as might be required by law. Today's call will begin with remarks from our CEO, Bruce Stains, who will provide a review of our recent business performance, including an update on the progress we have made to our strategic investments, followed by a financial update and review from our CFO, Jan Schott. Bruce will then wrap up our prepared remarks with an 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.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Thank you, Yvonne, and good morning to everyone joining us on the call today. I'll begin my commentary with the third quarter highlights, which we detail on Slide three of our presentation. The third quarter was another period of solid execution by our global team, which resulted in continued strength in our OpEx related revenue, bookings momentum, strong margin capture and efficient free cash flow converting. Based on our disciplined execution against our strategic priorities, the cash flow generation of this business and our strong balance sheet, we are strategically positioned to benefit from the improving demand drivers, which we expect will translate to an improved growth trajectory in the coming quarters. We continue to benefit from our strategic focus on diversifying our revenue base and increasing our exposure to short cycle projects and MRO related recurring revenue.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

This has resulted in a revenue base that is both more stable and more profitable. We were also encouraged by the continued momentum in order trends during the third quarter and our strong backlog growth. Our orders increased 11% on a reported basis and grew up modestly organically on constant currency basis. This resulted in another quarter with a positive book to bill. Importantly, our backlog increased nearly 48% on a reported basis and was up 9% organically.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

The strong backlog growth is being driven by the solid order trends as well as the slightly extended backlog conversion I discussed last quarter. While the slower backlog burn has been a bit of a headwind to our near term revenue growth, the higher backlog and heavy workload in engineering gives us increased visibility and growing confidence in our growth trends moving forward. The Favorable business mix was a key driver that enabled us to generate an adjusted EBITDA margin of nearly 24% during the third quarter, which came despite a modest margin drag from our recent acquisitions. While mix was a key factor in the improvement, we also benefited from the cost savings and productivity initiatives we've instituted across the business. We were very pleased with our margin capture during the quarter and believe our third quarter profitability highlights the overall margin potential for the business, providing confidence in the ability to achieve our long term profitability targets.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

And finally, our strict financial discipline resulted in strong free cash flow conversion during the quarter. During the first nine months of fiscal twenty twenty five, we generated $23,000,000 in free cash flow, which is up $3,000,000 from last year despite slightly lower EBITDA. As a result, we paid down $12,000,000 in debt during the third quarter, bringing our net leverage at quarter end down to just over one times. So with that, I'd like to turn to the third quarter results starting on Slide four. Jan will cover the financials in more detail, but I want to highlight a few key items.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

While we are focused on growing our diversified end markets, oil and gas remains an important end market for our business and we are seeing improving trends in the sector. As I already discussed, we continue to experience improved oil intake volume during the third quarter, which was driven by broad market strength, including solid trends in chemical and petrochemical, transit, general industrial, in addition to a rebound in oil and gas. We're still seeing extended decision cycles on larger capital projects, where we believe customer confidence is improving and we remain encouraged by the growing opportunities pipeline and strong quoting activity. The recent aggressive and broad approach to tariffs has unfortunately created additional uncertainty in the business. With the proven nature of the trade talks underway, the final outcomes are in question and we have not yet fully contemplated the potential impact on customer behaviors and the business.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

However, I would like to take a moment to reinforce Thermal's manufacturing strategy. We would like to be close to our customers with our people, our services and our manufacturing operations. Our footprint in both The U. S. And Canada allow us to produce in countries that be responsive to customer needs.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Our acquisition of FAPI was a further move in this direction. While improving our competitive position, this approach also serves as a natural hedge to fluctuations in currency and import duties. We'll be monitoring these trade negotiations closely as the magnitude, breadth and duration of tariffs becomes clearer. Jan will talk more about the potential exposure later in the call. Our reported revenues declined by 2% during the quarter, driven by the ongoing pressure in large CapEx projects.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

However, our short cycle revenues remain resilient. Turning to Slide five. Our OpEx revenues increased 13% during the third quarter and were essentially flat organically despite the challenging CapEx spending environment in our business. On a trailing twelve month basis, our OpEx revenues represented 84% of our total revenues, up from the low 70% range just a few years ago. We do anticipate a rebound in large capital expenditures, which will have an impact on the mix.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

But the increased exposure to OpEx revenue should continue to provide a more predictable and profitable revenue stream going forward. In addition to improving our revenue stability, our evolving business mix is driving enhanced margin performance. Our 23.7% adjusted EBITDA margin during the quarter was our highest quarterly margin performance in two years and has enabled us to grow our third quarter EBITDA despite the modest revenue decline. Now turning to Slide six and our strategic pillars. We continue to make important progress on our strategic priorities during the third quarter as evidenced by our favorable FX revenue trends, margin expansion and backlog growth.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

And a key aspect of our strategy has been our goal to reduce exposures in the oil and gas sector. As I discussed last quarter, we achieved our FY twenty six goal of generating at least 70% of revenues from diversified end markets. While we remain committed to maintaining or further improving this metric, oil and gas is still an important end market for Thermon, so we've been encouraged by the recent momentum we've seen in this business. In particular, we've seen a pickup in our Canadian oil and gas business driven by an increased maintenance activity and drilling programs to support LNG export and additional export capacity with the new commission, Trans Mountain pipeline. I will discuss our end market outlook in more detail later in my remarks, but we are encouraged by some of the pockets of strength we're seeing in oil and gas and expect we could see further momentum due to the priorities of the new administration.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We remain focused on our disciplined capital allocation strategy, which is based on a balanced approach between investments in organic growth, strategic M and A, maintaining financial flexibility and opportunistic return of capital. We continue to successfully integrate the recently acquired Draper Power and Fatke businesses. Fatke generated solid financial results during our first quarter of owning the business. At Vapor Power, we continue to see strong backlog trends and are focused on expanding capacity to convert the current backlog while building on the strong market momentum. We purchased 6,200,000.0 of our shares thus far during fiscal twenty twenty five and have approximately 43,000,000 remaining under our $50,000,000 share repurchase program.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We continue to see a robust M and A pipeline and with our current leverage comfortably below our 1.5 to two times net leverage range, leaving us in a strong position to continue to execute on our capital allocation priorities. With that, I'll turn it over to Jan, who will provide a more detailed review of our third quarter results before I wrap up with some remarks on our financial outlook. Jan?

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Thank you, Bruce, and good morning, everyone. I will review financial results for the quarter, give an update on working capital and free cash flow and conclude with comments on the balance sheet and liquidity. Moving now to Slide seven, revenue in the third quarter was 134,400,000 a year over year decrease of 1.5%. Safeco Tower and Fotke combined to contribute $13,000,000 of revenue during the third quarter. Acquisition revenues coupled with continued resilience in OpEx revenues mitigated the impact of the ongoing headwinds in our large project business.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Excluding Vapor Power and SAFI, third quarter organic sales decreased 11% versus record results last year, mostly from large project sales. Large project revenue was $18,600,000 during the third quarter, down 45% from last year, as customers continue to delay decisions on large capital projects. Geographically, this weakness was primarily in The U. S. Latin America region and was fairly consistent across our vertical our various smart verticals.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Our OpEx revenues were $115,800,000 during the third quarter, an increase of 12.6 compared to last year, as our customers continue to prioritize maintenance and repair spending. Excluding the contributions from Vapor Power and Fosse, our OpEx revenues were essentially flat in the quarter. We believe that the stable results in our OpEx revenues despite the challenging capital spending environment demonstrate the benefits of our long term customer relationships, deep installed base and the resilience of MRO spending by our customers. Demand in Canada remained favorable with sales of $43,500,000 up 6% year over year. EMEA sales were $13,800,000 up 11%.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

APAC sales of $9,800,000 declined 3% and U. S. Latin America sales of $67,200,000 declined 8% driven by the continued contraction in large project sales. As we are discussing our geographic exposure, I will take a quick minute to build on Bruce's comments regarding tariffs. At this point, the tariff situation is very fluid and it is clearly too early to predict what the ultimate impact might be on the business.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Importantly, as Bruce already highlighted, our manufacturing strategy to be close to our customer helps insulate us from any potential tariffs. Our total cost of goods sold exposed to U. S. Canada tariffs is roughly 10% and our products were not impacted by the initial counter measures Canada had proposed. We believe that our Mexico and China exposure is limited given we have no manufacturing presence and the combined markets represent roughly 5% of revenue.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Adjusted EBITDA was $31,800,000 during the third quarter, up from $30,700,000 last year, an increase of 3% due to strength in our short cycle revenues and the contributions from Vapor Power and Fatih. These were partially offset by declines in our project revenue and continued investments in growth initiatives. Adjusted EBITDA margin was 23.7% during the third quarter, up from 22.5% last year due to a more favorable revenue mix and productivity gains from operational excellence initiatives. Orders during the third quarter were $139,000,000 compared to $124,000,000 in the same period last year, an increase of 11.4%. We saw broad momentum in our order trends, highlighted by notable strength in petrochem, transit and oil and gas.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Importantly, nearly 70% of our incoming orders in the quarter were once again from diverse end markets. As a result of the solid order momentum, backlog was $235,600,000 at the end of the third quarter, up 48% compared to the third quarter last year. Excluding Vapor Power and SAUTI, backlog increased 9% on an organic basis only. Moving to Slide eight for an update on our balance sheet and liquidity. Working capital decreased 7% by 7% to $177,200,000 at the end of the quarter as we continue supply chain optimization efforts, while improving lead times and on time delivery to our customers.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

CapEx was $1,400,000 during the third quarter of $25,000,000 down from $2,200,000 last year. As a result of our strict financial discipline, free cash flow was $8,500,000 in the quarter, bringing our year to date free cash flow to $24,000,000 up $3,000,000 or 14% from the same period last year. We believe our focus on working capital management and solid operating results will deliver another year of strong free cash flow conversion. We paid down $12,000,000 of debt during the quarter, bringing our net debt balance to $115,000,000 Net leverage was 1.1 times at the end of the third quarter, down from 1.5 times last year. This past October, we completed the consolidation of our Denver facility and the sale of the property, which brought in net cash of $5,800,000 and a gain of about $3,000,000 in the quarter.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

In summary, we are pleased with our financial execution during the quarter as we made further progress on operational excellence initiatives and we generated strong free cash flow, which enabled us to reduce our leverage. Based on our total cash and available liquidity of $136,000,000 we remain well capitalized and have ample flexibility to continue to support our capital allocation needs, which will be a balance of investments and growth, debt pay down and opportunistic share repurchases. With that, I will turn the call back over to Bruce.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Thanks, Jan. Before I wrap up with our financial outlook, I thought it might be helpful to provide some updated thoughts on what we're seeing in some of our key end markets as we enter the new calendar year, particularly with the new administration taking over. Over the last several quarters, the industry has faced headwinds due to the pause in large project capital spending, particularly in The U. S. Land.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We believe that the late investment decision timelines over the last year were due in large part to the uncertainty surrounding interest rates, the presidential election and the overall economy. While the timing and magnitude of further Fed easing is yet to be determined and the macroeconomic environment is still uncertain, customer confidence appears to be improving, particularly with the election now behind us. While our order momentum in Q4 has remained robust, we haven't yet been able to assess how the threat of tariffs may impact customer behavior going forward. The improved order momentum and quoting activity we've witnessed over the last couple of quarters have been broad based. I'd like to provide some color on some of the key areas of strength.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

First, while we are focused on growing our diversified end markets, oil and gas remains an important end market for our business and we're seeing improving trends in this sector. LNG project activity has notably increased following the lifting of the hole previously placed on new LNG export permits. Given our technical capabilities and customer relationships, we are well positioned to benefit as project activity resumes. We continue to see favorable trends in our power business due in large part to increasing demands on the grid driven by growth in population, data centers and EVs. The current administration recently announced Project Stargate, which will provide up to $500,000,000,000 funding for computing infrastructure in support of AI.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

This program has made $100,000,000,000 funding available immediately with 10 data centers already under construction in Texas. In Slide nine, we see an example of an electric board being used as load banks in liquid data centers to simulate both the heat and electrical load of these facilities during the startup phase. These systems are also used for maintenance and testing throughout the life of the data center. While liquid cooled data centers represent only 10% of the market today, they have the distinct advantages of being more cost efficient and allowing higher server densities. It was estimated that liquid cooled data centers represent as much as 40% to 50% of the new data centers planned for construction in 2025.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Another area of strength has been the chemical and petrochemical markets. Both projections for the sector range from 5% to 6% through 02/1934 and our sales pipeline shows this as the largest sector representing 16% of the total opportunities through FY 2027. Overall, we continue to be encouraged by the growing momentum in our business particularly in some of the markets that have been facing headwinds over the last year, such as LNG and Oil and Gas. This improved momentum combined with favorable secular trends we are benefiting from such as reshoring, electrification and decarbonization, we must increase confidence in our growth trajectory and we're beginning to see this in our improved quarterly activity, order rates and backlog growth. Before I discuss our FY 2025 financial outlook, I want to provide some brief comments on the fiscal twenty twenty six targets we provided in our twenty twenty three Investor Day.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We're currently developing our FY 2026 plan and will provide full year guidance when we report on our fourth quarter results in May. I do want to provide some additional color on our targets, which included $600,000,000 to $700,000,000 in revenue and adjusted EBITDA margin of approximately 24% and at least 70% of revenue to be derived from reversing markets. The team has made tremendous progress towards obtaining these objectives over the last four years, driving revenue growth, diversification and even our margin expansion. And while we remain confident in our ability to achieve these goals, there are two key factors outside our control that will affect timing. First will be the overall macroeconomic backdrop and second, the timing and magnitude of acquisitions in our M and A pipeline.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Without strength in both, the timeline for achievement will likely push beyond the fiscal year twenty twenty six. And now, if we turn to Slide 10, I'd like to discuss our outlook for fiscal twenty twenty five. Based on everything we shared this morning, we're maintaining our full year 2025 guidance that cost the revenue in the range of $495,000,000 to $515,000,000 adjusted EBITDA in the range from $105,000,000 to $110,000,000 dollars and adjusted EPS in the range of 1.77 to $1.89 per share. The potential impacts of tariffs have not been contemplated in this guidance. Finally, just to wrap things up on Slide 11, we're optimistic in our business outlook and the opportunities ahead remain as strong as ever.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We've made significant progress in developing a business that is more stable, profitable and durable across sites. We believe our large and growing installed base 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 secular growth drivers, including the energy transition and decarbonization, on shoring in North America and infrastructure spending. We remain confident in these trends and we believe that the recent spending delays only serve to create pent up demand when customer confidence improves. Lastly, we benefit from a high margin, low capital intensity business that yields significant cash flow.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We continue to maintain strong financial discipline and with leverage of just over one times, we have the flexibility to pursue our capital allocation priorities. We remain focused on following a disciplined approach to capital allocation and we will balance these priorities all with a focus on creating long term shareholder value. That completes our prepared remarks and we're now ready for the question and answer portion of our call.

Operator

Thank you. And our first question comes from Brian Drab with William Blair. Please state your question.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

Hi. Good morning. Thanks for taking my questions. Good morning. Good morning.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

The point in time revenue $99,000,000 it was I think an all time record. And I'm just wondering if you could talk about that number a little bit and the dynamics. I mean, I know it's heating season that drives this time of year to be strong, but is there anything else in there that was unusual in the quarter? And are we reaching kind of a new base line level? I mean, again, acknowledging that this is a seasonally strong period, but a new baseline level of point in time revenue going forward?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes, Ron. So a couple of things to note. First of all, we have seen a more normalized heating season. And so that has certainly contributed. And we have been focusing on driving recurring revenues on the installed base.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

It's been a key piece of strategy and we're seeing success in those efforts. And then also, we've had contributions from some of the new acquisitions with point in time revenue generated through those as well. And so when you think about those things combined, yes, I think the point in time revenues as far as the volume levels we're seeing are really a step change in our business and something we'll continue to drive on a go forward basis.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

Okay, great. And by the way, I guess I should round up to $100,000,000 it was $99,600,000 And following on to that, I guess, Bruce, you can envision at some point, maybe it's a few quarters from now, where the over time large revenue lines has kicked back in and then you have this point in time foundation that's larger. I mean, it seems like once that overtime large kicks in, that's where your that's your target or that's your expectation, right, a few quarters from now?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes, Brian. I think a couple of things to note. Our focus has been heavily on driving recurring revenues on the installed base, but we really can't lose sight of the fact that growing that installed base through overtime project activity is really how we continue to drive growth. So we are still very focused on the CapEx piece of our business as a means to grow that installed base. Given the bookings momentum, given the backlog growth organically of nine percent, given the load that we currently have in our engineering organization and the overall quoting activity, it's pointing towards a return to capital spending and growth there.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

When we do see that, we would probably begin to move back towards the 75% to 80% range. Whenever we do see this CapEx cycle or improve and customers begin to release larger CapEx spending.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

And can you talk a little bit about the potential for the release of some of that large CapEx spending? And like specifically, you mentioned LNG projects. What are other types of projects? I know you've talked about hydrogen and biofuel projects. How about also combined cycle natural gas plants?

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

And what is in the what kind of big projects might we expect to hear you talking about in the next, call it, four quarters, next year?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

One of the big things that we've seen is really since the new administration has been in place and they've lifted the ban on LNG export permits is there's been a really a big surge of activity around LNG. And so a lot of those projects largely along the Gulf Coast are moving forward. And as I had noted in the prepared remarks, our technical capabilities, the breadth of our solution set and our customer relationships position us well to take advantage of that. The other areas where we see the emphasis on subsidies around wind, solar, EVs, we do expect to see a pickup in combined cycle natural gas fired plants. And we are that's really front and center for our market and we're very well positioned to take advantage there.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We've also seen a renewed interest in nuclear. And so we've seen some of those projects around refurbishments and expansions in North America. But one of the things we're really excited about and it's a little further out, but we just won a very nice engineering award for small modular reactors for a customer in Europe. And so we're excited about that and being able to participate in the development of that technology for building some about three gigawatts capacity in Central Europe. So those are some of the areas we've seen movement.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Petrochem remains strong. It's been a bright spot, general in industrial as well. And certainly, we'll see what happens with tariffs and that's very fluid, but that could drive more onshoring in The U. S. Particularly, which would be a tailwind as well.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

Okay. And then the last question for now, could you comment on gross margin, which was obviously a function of strong point in time revenue, but comment on I think what it's got to be the highest gross margin that we've seen for many quarters, at least maybe a few years. But how should we expect gross margin to look in the fourth quarter and maybe beyond, if you give us a sneak peek at the next year?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes. So I think the assumption we've got in the fourth quarter is, we are going to begin to see a stronger mix of projects in the fourth quarter. Now, I think one comment I would want to make is, we've got to see the customer sentiment shift if we don't see movement there, which we've seen some positive indications, but we don't see movement there. I think there could be some downside. We would probably land on the lower end of our revenue guidance, but gross margins would be quite strong and still put us in the midpoint of our EPS guidance.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

So I think that's an important thing to note. When I look at gross margins, mix is about half of the improvement year over year. The other half is related to productivity and continuous improvement initiatives as well as price. So it's pretty evenly balanced. And I would go on to say that organically those margins are quite strong.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We've seen about 164 basis points dilution from the acquisitions, but we're very confident that we can bring those businesses up to a similar margin profile over, say, the next eighteen to twenty four months.

Brian Drab
Equity Research Analyst at William Blair & Company, L.L.C

Okay. I am going to ask one more just because I think this is important to make sure that I and everyone has this clear. You're saying it's likely that you'd be for the full year closer to the end closer to the low end of the revenue range, but gross margin, although maybe down a little sequentially solid, margin overall solid, putting you at the midpoint closer to the midpoint of the EPS range for the full year. Is that right?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes. The risk will be, Brian, is just on project execution in the quarter. Should that continue to drag, we would expect to be on the lower end of the revenue guide. But in the midpoint,

Operator

Your next question comes from Chip Moore with ROTH Capital Partners. Please state your question.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Good morning. Hey, thanks for taking the question.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Bruce, you

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

touched on some of this already, but hey, Bruce, you touched on some of this, but maybe you can provide a little more color on, I guess, just the current bid pipeline and makeup since the new administration took over in January. And then you talked about some of the puts and takes for fiscal 'twenty six. Maybe talk about the biggest things you're watching there, obviously, M and A is timing dependent, but any thoughts on 'twenty six?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes. So, first of all, we'll give full guidance in our May earnings call for fiscal twenty twenty six. But I would say at this time, given just the quote volume and what we believe is improving customer sentiment and optimism. I'd say we're cautiously optimistic about growth in FY 'twenty six returning to that organic growth and then certainly we'll have the contributions of the acquisitions in addition to that. So we're cautiously optimistic about an improving overall scenario, particularly as it relates to larger capital spending in the coming year.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Since the new administration has been in place, we have seen a resurgence in quoting activity around a number of different projects. I would say oil and gas activity has picked up. In Canada, we've actually seen growth there year over year, which we've noted. And so that's been very positive. I think part of that is related just to a more normal winter, but also just MRO spending with our customer base.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Very helpful. And I guess a follow-up on tariffs, I think you did a great job outlining how those could impact you. Is the risk maybe more indirect around some of that project capital spend? Is that uncertainty? Is that something you're concerned about?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes. I think we understand roughly and it depends on the magnitude, the breadth and the duration of any types of tariffs and the impact on the business. Our approach to business and our manufacturing philosophy really in country, for country helps to insulate us from some of this. The real unknown is what impact might this have on customer sentiment. And so that gives us a little pause.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

We'd like to see where things land and really understand how customers may or may not react or respond.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Helpful. Maybe I could ask one last one. Liquid cooling in the data center, very interesting. I hadn't thought about that as they're usually trying to get the heat out. So interesting opportunity for you.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Is Is that a market you're still nascent, but is that a market you're active in already or how are you thinking about that opportunity and then maybe you play two sides of it as well?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes. So, yes, that's a great question. So, we've been trying to highlight where we play in some of these opportunities. This is very nascent, very new. But I'll tell you, we've won three orders that have totaled around $10,000,000 and we've identified a very large market opportunity, we believe, that we'll be developing on a go forward basis.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

And so, we're excited about the application and it's one illustration of how we play. Certainly, when we think about demand growth for power, much of that's driven by data centers, EVs, population growth. We're very well positioned to benefit from that and especially any changes in environmental regs that will make natural gas fired power plants more in favor. That's certainly going to be an area of benefit, but this is another area we've identified and we've won some nice business just in the last two quarters.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Very good color. Appreciate it. Thank you,

Operator

Bruce. Your next question comes from John Braatz with Kansas City Capital. Please state your question.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

Good morning, Bruce. Good morning, Jan.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Good morning.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

Jan, just some commentary if you could on your SG and A spending. It continued to be pretty high and I know you're investing on growth initiatives and so on. But as we look ahead, will that begin to ease a little bit and we begin to see some leverage on that line?

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

I think on the near term, on the near term, we would expect it to be relatively flat going forward. And that's really a function of just the if you look historically, the M and A that we've added on was spotty and then vapor power. But I would say, kind of where we were for the third quarter, probably staying flat for the near term going forward at that rate.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

At that dollar rate or the ratio?

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

The total rate.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

I'm sorry, what?

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

The dollar rate.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

Okay, okay. All right, okay. And the acquisition, dollars 13,300,000.0 contribution in the quarter, I guess I was looking for a little bit more, but can you parse it out a little bit between Vapor and the Italian acquisition? And is Vapor continuing it has been, is Vapor continuing to perform in line with your expectations?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes, John. So couple of things. One is, revenues from acquisitions were below our expectations. Fatih in our first quarter of ownership actually performed exceptionally well. They just as a reminder, there's about a €12,500,000, trailing $12,000,000 revenue business with a backlog of $15,000,000 so very strong backlog.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

The challenge there is really around growing capacity. In fact, this week, we've got teams there doing Kaizen events, reorganizing the factory floor and working to improve throughput. Vapor is a business that really fell short. We had some a couple of major projects or major orders that were going through production and did not convert in the quarter. And so we fell fairly short in revenue and we expect to pick up some of that in the fourth quarter.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

But our big focus there is on increasing capacity both on the factory floor as well as in the supply chain and in order to convert what is roughly a $45,000,000 backlog in that business. And while we've seen really strong market momentum, we had another quarter and a positive book to bill in that business. And so we're excited about the market potential for growth, but we really got to work through some of the capacity constraints to take full advantage of it.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

And I will add just even with that, what Bruce said, our measure for kind of evaluating our M and A on first year accretive, we were about flat with vapor power and we expect that trend to kind of reverse out and be accretive going forward and for the next quarter.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

Okay. Thank you. And Bruce, on the LNG front, obviously there's a big opportunity there. And in December, the DOE came out with their LNG report and it wasn't that flattering. And I know the Trump administration has to come up with a rebuttal, so to speak.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

And I guess I am concerned and I don't know how concerned the industry is that, now that the pause has been lifted, if the rebuttal report, so to speak, isn't all that strong, are we just going to see some additional lawsuits filed and things just get further pushed to the right in the LNG area? And I guess, how is the industry thinking about that?

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Yes, John. I'll tell you just from our customer engagement, it feels like they're very positive on the outlook of being able to secure permits on a go forward basis. We've also seen a number of customers take existing permits and use those and expand the plans for the capacity for export. So we've seen some of that type of activity. And I'll be honest, I don't really have an opinion or any insight or information as to any litigation or legal actions that may happen.

Jonathan Braatz
Equity Analyst at Kansas City Capital Associates

All right, Bruce. Thank you very much.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

Thank you.

Jan Schott
Jan Schott
Senior VP & CFO at Thermon Group Holdings

Thank you.

Operator

Thank you. And there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Bruce Thames
Bruce Thames
President & CEO at Thermon Group Holdings

All right. Thank you, Diego, and thank you all for joining on the call today. We appreciate it. We hope to speak to you between now and the May timeframe. We look forward to over reporting out on our full year at the May.

Operator

Thank you. With that, we conclude today's call. All parties may disconnect. Have a good day.

Executives
    • Ivonne Salem
      Ivonne Salem
      Vice President of FP&A and Investor Relations
    • Bruce Thames
      Bruce Thames
      President & CEO
    • Jan Schott
      Jan Schott
      Senior VP & CFO
Analysts
    • Brian Drab
      Equity Research Analyst at William Blair & Company, L.L.C
    • Chip Moore
      Managing Director & Senior Research Analyst at Roth Capital Partners, LLC
    • Jonathan Braatz
      Equity Analyst at Kansas City Capital Associates
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Earnings Conference Call
Thermon Group Q3 2025
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