Thermon Group Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 29, 2024

There are 7 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to turn the call over to Yvonne Salem, Vice President, FP and A and Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Dara. Good morning, and thank you for joining today's fiscal 2024 Q4 conference call. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8 ks 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 Q4 2024. During the call, we will discuss some items that do not conform to generally accepted accounting principles.

Speaker 1

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. 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 reports 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 might be required by law.

Speaker 1

Now, I would like to introduce Bruce Thames, our President and Chief Executive Officer, for his opening remarks.

Speaker 2

Well, thank you, Yvonne, and good morning, everyone, and thank you for joining us today. I'd like to start today by thanking our global Thermon team for delivering another record year in fiscal 2024. Your dedication to advancing our strategy, serving our customers with excellence and creating value for our shareholders is greatly appreciated. I'd also like to thank our employees for their unwavering commitment to safety. In recognition of these efforts, Thermon received the award for Canada's Safest Manufacturing Employer of the Year in 2023.

Speaker 2

Turning now to the results. We ended the fiscal year with growth across a wide range of financial metrics, including revenue, gross margin, adjusted EPS and free cash flow compared to fiscal 2023. Throughout the year, we continue to see revenue growth on our installed base from OpEx activity associated with recurring maintenance. And as I'll cover in more detail shortly, we continue to diversify our end markets with 68% of our revenue now coming from end markets other than oil and gas. We also continue to invest in new product development, multiple new product introductions for commercial heat tracing and heating technologies such as our new Thermon Quantum True Fill heater and medium voltage boilers to further enable the electrification of industrial heat.

Speaker 2

At the end of our Q3, we completed the acquisition of Vapor Power, which further diversified our end markets, while increasing our exposure to decarbonization and digitization growth strategies, which I'll discuss in more detail later. Turning now to Slide 4 and our strategic pillars. We continue to navigate some near term macroeconomic uncertainty. We remain confident in our long term strategy and the ability to drive profitable growth by focusing on our strategic pillars of profitably growing our installed base, decarbonization, digitization and diversification and disciplined capital allocation. While we are growing our global installed base and then generating recurring revenues by expanding the products and services for mission critical industrial process heating solutions that we provide to our more than 10,000 customers.

Speaker 2

Our technology enabled end to end solutions and industry leading portfolio give Thermon a unique, highly defensible position with the ability to capture additional market share. Additionally, we're creating long term value by executing our strategic initiatives of decarbonization, digitization and diversification. We've made significant progress across each of initiatives throughout fiscal 2024 by enabling the energy transition, helping our customers optimize maintenance through the enhanced controls and monitoring provided by our digital solutions and continuing to diversify our end markets to reduce cyclicality and position the company for long term growth. Our commitment to disciplined capital allocation underpins the first two strategic pillars and is key to creating sustainable shareholder value. The acquisition of Vapor Power is expected to drive inorganic growth with anticipated returns in line with our stated M and A objectives.

Speaker 2

In addition, our Board recently approved a $50,000,000 share repurchase authorization as another way to return value to our shareholders. This is our 1st share repurchase program and is indicative of the Board's confidence in the company's strategy and ability to deliver growth over the long term. Turning now to Slide 5, you can see more detail on the progress we've made over the last year on advancing our decarbonization strategy as well as a recent example of how Thermon is providing sustainable decarbonization solutions. Over the past year, we have grown decarbonization revenue to $34,000,000 an increase of 48% over fiscal 2023. During fiscal 2024, 7% of incoming orders were related to de carbonization opportunities with the sales pipeline tripling to over $250,000,000 by year end.

Speaker 2

One of the ways in which we are growing our decarbonization business is by supplying existing Armand solutions to the growing carbon capture and storage industry. Of the current pipeline, carbon capture and storage applications represents approximately 25 percent of the $250,000,000 in opportunities. The example on the right highlights our participation in a project that will capture up to 18,000,000 metric tons of carbon dioxide per annum from biofuel facilities across the Midwest. The captured CO2 will then be transported via pipeline to permanent geologic underground storage locations. Vermont is supplying 31 flange heaters and control panels, which will enable the carbon dioxide to be compressed for transportation.

Speaker 2

Additionally, our heat tracing solutions are used to prevent damage to valves and piping after the CO2 is compressed. This is just one of the many examples of how Thermon is leveraging our existing solutions to meet customers' de carbonization and electrification needs. Turning now to Slide 6, I'd like to provide an update on the progress we made during fiscal 2024 on our digitization strategy. As you see here, the adoption of our Genesis network continues to be strong with the installed base growing by over 200% during fiscal 2024 as customers look for ways to improve efficiency, productivity, safety and reliability in their operations. The capabilities of this platform enhance our operational awareness, which creates real value for customers and differentiates Thermon in the marketplace.

Speaker 2

As you can see on Slide 7, we made tremendous progress on our end market diversification strategy, which will help to reduce volatility through the cycle.

Speaker 3

At our

Speaker 2

1st Investor Day in November, we introduced an updated fiscal 2026 target of reaching 70% diversified revenue or revenue from non oil and gas related end markets. As a result, at the end of fiscal 2024, we nearly achieved that target with 68% of our revenue derived from diversified end markets, which includes the impact of our Vapor Power acquisition in Q4. We continue to grow our share across key markets such as power up over 170%, food and beverage up nearly 120% and commercial up almost 20%, all on a year over year basis. Turning now to Slide 8 and our Q4 fiscal 2024 results, which were in line with our expectations. Despite strong quotations of $250,000,000 in Q3, our orders decreased 12% year over year $117,000,000 as larger CapEx spending moves to the right.

Speaker 3

On a positive note, more

Speaker 2

than 70% of incoming orders were related to diverse end markets. In the quarter, we grew revenue 4% to 128,000,000 dollars driven by an increase in decarbonization and diversified revenue in the organic business that were offset by a 12% contraction in large CapEx spending in the quarter. Our short cycle business tied to customer OpEx spending was up 8% year over year, inclusive of Vapor. Organically, OpEx spending was down 3%, largely related to slower activity in Canada. Vapor Power also met expectations delivering $10,900,000 in revenue at 20 percent EBITDA in the quarter with a positive book to bill as demand for their solutions remains robust.

Speaker 2

Our record Q4 cash flow of $35,100,000 enabled debt pay down of $41,000,000 reducing our operating leverage to 1.2x, down from 1.5x in the prior quarter. This level of leverage remains below our stated operating range of 1.5 times to 2 times, giving us a strong balance sheet and the ability to pursue growth opportunities should they arise. Importantly, while the operating environment continues to be dynamic, we are focused on driving structural cost reductions so that we are positioned to improve profitability across a wide range of macro environments. At Investor Day, we introduced the Thermon Business System, which we are applying across the entire enterprise to sustainably deliver results and unlock value. As part of this effort, we are optimizing our manufacturing footprint to improve asset utilization through a consolidation of our Denver facility.

Speaker 2

In line with our center of excellence concept, our rail and transit business will be consolidated into our San Marcos facility to increase productivity to meet growing demand. While we never take these decisions lightly, we also implemented a reduction in force during the Q1 of fiscal 2025 to align SG and A and overhead costs with business volume. Greg will discuss more about the associated Q1 restructuring charges and anticipating savings in FY 'twenty five. Turning to Slide 9, our full year fiscal results. Our strategy and strong execution enabled Thermon to achieve record revenue, adjusted EBITDA and EPS in fiscal 2024.

Speaker 2

Much of the growth was driven by our focus on diversifying markets where revenue was up 21% year over year, while revenue from oil and gas market was down 3%. Revenue, adjusted EBITDA, adjusted EPS and free cash flow were all up double digits for the year. Geographically, U. S. And Latin America drove strong growth and large CapEx revenues during the 1st 3 quarters, up 22% year over year.

Speaker 2

Our channel expansion efforts also helped drive broad based growth across the installed base in our short cycle business, which was up 9% year over year. With that, I'd like to turn the call over to Greg Lucas. As we announced on April 3, Greg has assumed the interim roles of Principal Financial Officer and Principal Accounting Officer of the company as we conduct a search for a new CFO. Greg joined Thermon in 2020 as Corporate Controller and has been instrumental in improving our control environment and financial reporting during his tenure. Greg will now share a more in-depth review of our financial results for the quarter and the fiscal year.

Speaker 2

Greg?

Speaker 3

Thanks, Bruce. Moving to Slide 10 and our 4th quarter performance. Revenue in the 4th quarter was $128,000,000 a year over year increase of approximately 4% primarily driven by our acquisition of Vapor Power on December 29, which contributed 10,900,000 dollars Organic sales decreased nearly 5% primarily related to the decline in large CapEx projects and weaker economic heater sales in Canada during the quarter. Large project revenue was $23,000,000 down 10% from last year impacted by less activity related to oil and gas CapEx projects which decreased by 26%. This reduction was partially offset by an increase of 6% in large CapEx project activity within our diversified end markets.

Speaker 3

Separately, small projects plus maintenance and repair revenue totaled $104,000,000 an increase of 8% compared to the prior year. Excluding Vapor Power, small projects plus maintenance and repair revenue was down 3% which was driven by a decline in oil and gas sales of approximately 8%. The lower oil and gas activity was largely related to the Canadian market and was significantly offset by growth in our diverse end markets, which provide more stable earnings through any economic cycle thus underscoring validity of our growth strategy. Adjusted EBITDA was $23,600,000 in the quarter, a year over year decrease of 6% with an adjusted EBITDA margin of 18.5%. Adjusted EBITDA margin was largely due to product mix in the quarter combined to higher planned spending to support our long term investments around decarbonization, digitization and diversification.

Speaker 3

Adjusted EPS for the Q4 was $0.34 per share, down 17% compared to the prior year period due to lower volumes, product mix, spending and incremental interest expense which were partially offset by improved pricing. Turning now to Slide 11 and our full year fiscal 2024 financial performance. Fiscal 2024 revenue was a record $495,000,000 a year over year increase of approximately 12% or 10% organically, primarily driven by growth in our power, commercial, food and beverage, and chemicalpetrochemical end markets, in line with our diversification strategy. Moreover, while oil and gas related sales or down 3%, sales from our diversified non oil and gas end markets were collectively up 17% year over year. Sales were up year over year in U.

Speaker 3

S. Land, EMEA and APAC all flat in Canada. Large project revenue was $120,000,000 up 22% from the prior year, while small projects plus rent to venture repair wells totaled 375,000,000 dollars an increase of 9% compared to the prior year. 76% of our sales were derived from OpEx spending which was comparable with last year. Our backlog grew to $186,100,000 up 14% year over year.

Speaker 3

However, excluding vapor power, our backlog contracted 10% relative to the same period last year due to weaker large CapEx activity in Sanza in APAC in Q4. On another note, U. S. Land and EMEA regions were both up year over year with expansions of 3% and 18 percent respectively. Adjusted EBITDA was $104,000,000 a year over year increase of 12% an adjusted EBITDA margin of 21.1%.

Speaker 3

This adjusted EBITDA margin improvement was largely driven by higher volume in price. Adjusted EPS for the full year was $1.82 per share, up 17% year over year. Moving to Slide 12. Free cash flow was a record $35,000,000 in the quarter, a near record $56,000,000 for the year driven by higher sales and sound working capital management. As a result of our continued strong cash generation and in line

Speaker 4

with our

Speaker 3

capital allocation strategy, we paid down $41,000,000 of turn debt during the Q4 or nearly 40% of the borrowings associated with the PaperPower acquisition. At the same time, we ended the year with cash and cash equivalents balance of $48,600,000 dollars Our net debt to adjusted EBITDA ratio improved from 1.5x last quarter to 1.2x@yearendbelow our target range of 1.5x to 2x. This gives us the flexibility to advance our strategic pillars through targeted investments including bolt on M and A that meets our strategic and financial criteria. Working capital was $162,200,000 at year end or 33% of revenue down from 35% last year as we continue to optimize our supply chain while also improving lead times and on time delivery to our customers. Net income in the Q4 was $10,100,000 up 31% year over year.

Speaker 3

CapEx was $3,100,000 during this quarter, bringing the full year CapEx to $10,900,000 or just 2% of sales consistent with our disciplined capital allocation strategy. As Bruce mentioned, we remain focused on optimizing our cost structure so that we can continue to create value for our shareholders in any macroeconomic environment. To that end, we are consolidating our rail and transit production line into our sand markets facility and we carried out a reduction in force in the Q1 of fiscal 2025 that will result in a charge of approximately $2,800,000 to $3,500,000 We expect this restructuring to deliver $5,700,000 annualized in annualized run rate savings, of which $4,300,000 will be realized this fiscal year. This impact is factored into our full year fiscal 2025 GAAP EPS guidance. On another quick modeling note, in line with our capital allocation priorities, we anticipate an optional debt pay down during the year in the range of $20,000,000 to $40,000,000 and our interest rate will remain consistent at our current variable rate.

Speaker 3

As we wrap up fiscal 2024, we are pleased with our global team's execution which resulted in strong financial performance, robust cash flows, improved diversification and a sizable acquisition in the electrification space. And as we look ahead to the coming year, we will continue controlling costs while prudently investing in our strategic pillars for long term growth. With that, I will turn the call back over to Bruce.

Speaker 2

Thank you, Greg. Turning now to Slide 13 and our outlook for fiscal 2025. We are pleased with the positioning of our business and the success we are seeing in the execution of our strategy. As we noted in earlier calls, we expect the rate of organic growth to moderate weighted towards the second half of this year. Looking forward, we're seeing some positive signs in Canada following the slowdown in the second half of last year.

Speaker 2

With the completion of the Trans Mountain pipeline this month, we expect an increase in drilling activity to fill the incremental 590,000 barrels of oil a day of takeaway capacity. Additionally, the spring turnaround season in Canada is off to a solid start. Globally, our short cycle MRO business remains robust, but we are experiencing some delays and deferrals in large CapEx spending, particularly in North America that we expect to make organic growth challenging in the first half of fiscal twenty twenty five. In this quarter, we secured wins for large capital projects in diverse end markets like semiconductors, pharmaceuticals and nuclear power that will help build the backlog, but timing of execution will lag. Our Vapor Power acquisition is performing well with revenues and profitability in line with our expectations for Q4 fiscal 2024 and several large shipments are scheduled in Q1 of fiscal 2025 that will help drive inorganic growth.

Speaker 2

We also had a positive book to bill in this business in Q4, including a sizable synergy sale to a large public university from Thermon's traditional channels. For the full year, revenue guidance is projected to be from $527,000,000 to $553,000,000 which at the mid point represents approximately 9% growth over fiscal 2024. We anticipate that Vapor Power business while creating the processes and capacity to drive scale. This represents roughly 15% organic growth for vapor at the midpoint of the range. The guidance for fiscal 2025 also assumes low single digit organic growth when adjusting for the disposition of Thermon's Russian business.

Speaker 2

We're initiating adjusted EBITDA guidance with a range of $112,000,000 to $120,000,000 representing 11% year over year growth at the midpoint. GAAP EPS EPS is expected to be in the range of $1.57 per share to $1.73 per share, which represents 9% year over year growth at the midpoint. Adjusted EPS is projected to be in the range of $1.90 per share to be up $2.06 per share, which represents 8% year over year growth at the midpoint. Finally, we remain focused upon delivering our fiscal year 'twenty six objectives. This guidance does not contemplate additional M and A activity.

Speaker 2

However, we expect to continue generating cash to further strengthen our balance sheet throughout the fiscal year, providing the ability to capitalize on inorganic opportunities that advance our strategy. As we wrap up today on Slide 14 and look ahead to fiscal 2025, we'd like to leave you with these key points. Vermont is a leading global brand providing mission critical process heating technology and solutions to customers across the world in a wide variety of end markets. Our strategy enables us to create long term value for our shareholders across any type of operating environment and is focused on the 3 pillars of profitably growing our installed base, decarbonization, digitization and diversification and disciplined capital allocation. Our operational excellence driven by the Thermon Business System and differentiated products and solutions are significant competitive advantages.

Speaker 2

With our existing technology and expertise, we believe that we are well positioned to capture the enormous opportunity tied to the energy transition and decarbonization while also benefiting from secular growth trends in chemicals, power, on shoring and various forms of government stimulus. Our strong balance sheet and low capital intensity business model yields significant free cash flow, which provides us capital allocation optionality and most importantly allows us to deliver long term value for our shareholders. I'd like to close today by once again thanking the entire Thermon team for their contributions to a very successful fiscal 2024. I am excited about the opportunities ahead and look forward to seeing what we can achieve together in the coming year. Daryl, I'll hand it back to you and we're now ready to take questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Justin Ages with CJS Securities. Please proceed with your questions.

Speaker 5

Hi, good morning. Thanks for taking the question.

Speaker 3

Good morning, Justin. Good morning.

Speaker 5

Would you mind providing some more details on the restructuring effort? What drove the decision and some of the financial impacts into the 2026 targets? And then I'll have a follow-up after that, please.

Speaker 2

Yes. I'll start with maybe the rationale. A few things as we've been implementing our Thermal Business System and we've been implementing our really a concept around focused factories and value streams, it made a lot of sense to move our Denver location into our San Marcos facility to consolidate our rail and transit value streams there. So that was really a lot of the rationale behind that. In addition to that, we really drove broader some broader restructuring as we make improvements to our Thermon business system and improvements in operational efficiencies and productivity that really had broader implications, really rightsizing our capacity with the current business volume.

Speaker 2

So that's really the rationale. I'll hand it maybe over to Greg to talk a little bit more about the anticipated financial impact in the current year and on a run rate basis?

Speaker 3

Yes, great. So, good question. So, as I mentioned, we had $5,700,000 of anticipated savings on an annualized basis and $4,300,000 that should be recognized or realized in the coming fiscal year. I would weight that more towards the back half of the year with about say 1 to 1.4 or so in cost of sales and the remaining around SG and A. So I'll see those savings, but we're going to see them more back end loaded.

Speaker 5

That's helpful. Thanks. And then one more a bit different. Can you give us a breakdown by segment of the backlog? How much is point in time versus large project, small projects, if possible?

Speaker 2

Yes. So I think that's a great question and it's important to understand. When we think about point in time, we're talking about material sales and that is typically very short cycle business. So at any given time, there's less than 30 days on average of that sitting in our backlog. So what you see in our backlog is really representative of what we call large CapEx projects.

Speaker 2

That would be projects. It will be a combination of some small, but mostly large CapEx projects $500,000 or greater that are sitting in backlog and they take more time to execute. They typically include some engineering and in some cases will even include installation and commissioning type services. So the backlog you see again is probably largely, I'd say, in excess of 80% is the large CapEx projects. The other point in time business is flow business and it comes in and out of backlog very quickly.

Speaker 5

All right. That's super helpful. Thanks for taking the questions.

Speaker 2

You're welcome. Thank you. Have a good day.

Speaker 3

Thanks, Justin.

Operator

Thank you. Our next questions come from the line of Chip Moore with ROTH MKM. Please proceed with your questions.

Speaker 4

Morning. Thanks for taking the question.

Speaker 3

I wanted

Speaker 4

to ask on more and Bruce. I wanted to ask on the guidance for the year. You called out some larger project CapEx delays. Maybe just speak to what's contemplated in the low and the high end of that range?

Speaker 2

Yes. So just to give you some context, if you go back to Q3, we had really strong quotations of $250,000,000 which is very strong activity

Speaker 3

for our business.

Speaker 2

This quarter we had another $200,000,000 which is solid activity again sequentially. What we're seeing is just the placement of these orders is moving out. As I look at our conversion rates, they're actually flat to improving. And if we look at our CRM pipeline, we're tracking in excess of 350 opportunities that represent over $750,000,000 in larger CapEx projects between the balance of 25 and through fiscal 2026. So we're seeing a big a lot of opportunities sitting out there, but we're really not seeing those conversion rates.

Speaker 2

And what we anticipate is just the timing that's going to move to the right a bit, and we'll see some weakness in the first half. As I noted, we've had some nice bookings, but those would tend to materialize later in the year. And so we would expect that to show some more positive growth in the back half. If I roll the clock back to last year, we had very strong capital projects bookings in Q4 of 'twenty three and Q1 of 'twenty four. Those two quarters combined, we booked over $250,000,000 in opportunities that were heavily weighted towards large CapEx.

Speaker 2

A lot of that got executed, particularly in Q3 and Q2 and Q3. And so we're going to see some challenges, particularly in the first half of the year in driving organic growth based on just the timing of the backlog and what we're seeing.

Speaker 4

Got it. That's helpful. And maybe just a follow-up there on sort of quarterly cadence and margin trajectory. It sounds like maybe Q1 a little weaker. Obviously, we're a couple of months into it, but any more color you can give us on that?

Speaker 2

Yes. So my comments, as I said in the script, really Canada is we're seeing some positive signs there. I would say, as you look across our various end markets, our customers' business are fairly healthy and profitable and we're seeing the short cycle, quick turn, point in time type revenues. Those are very consistent and have been very resilient. Where we see weakness is really in CapEx.

Speaker 2

It's probably been more heavily weighted towards the oil and gas sector and some of that's really based more on capital allocation. And then some of that we're also seeing in just timing of some of the larger decarbonization projects and there's different reasons for those delays, whether it's customer decision. In some cases, we see permitting, in other cases it's really around government stimulus and other types of funding. So those types of activities we've seen contribute to those delays. But the good news is we're seeing solid turnaround business in Canada, so we're seeing that overall environment stabilize to slightly improve.

Speaker 2

But we do see there'll be some weakness in CapEx staying in the Q1. And as we look at the vapor business, I think it's important to understand that business is not as seasonal as our business has been traditionally. And so we might see a more equal cadence of that business quarter to quarter throughout the year as you're thinking about that on a quarterly basis.

Speaker 4

That's very helpful. And just on vapor, I guess if I could ask one last one, it sounds like integration is going very well and I think you've got even called out some projects in this quarter that are going to be delivered. But maybe on the cross selling side, I think you mentioned a nice synergistic sale already, but any more details to provide on synergies? Thanks.

Speaker 2

Yes. So on synergies, first of all, we have some supply chain synergies and some operational synergies that were factored into the financial returns and we're progressing those well. One of those is just the vertical integration of Thermon supplying all the heating elements. That transition has already been completed and we're moving really we're actually on pace or ahead of pace in realizing the other cost synergies that have been identified in the business. As we look at the sales synergies, again, I'll reinforce none of those were factored into the financial returns.

Speaker 2

But we had noted in the last call that we had a number of opportunities that had been identified through the traditional Thermol sales channels that were not on really in line of sight to the vapor power business and sales team. And we actually we converted a couple, but one is really notable. It's a very it's a large college, university, institution where they purchased the system and that's via Thermon's traditional sales channel. So that was over $2,000,000 in bookings and would be delivered this year. And so if you think about what was a $50,000,000 business, a couple of $1,000,000 synergy sale has a significant impact when you think about the growth profile.

Speaker 2

So we're really very pleased with what we've identified through our current channels and the ability to help find and close on what the vapor power sales team and channels may have provided previously. So it's really a good early indicator.

Speaker 4

Excellent. Great to hear. Appreciate all the color. Thanks.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Drab with William Blair. Please proceed with your questions.

Speaker 6

Hi, good morning. Thanks for taking my questions. Good morning, Brian. Morning. I just want to follow-up on one of the questions that was just asked a second ago on the margin trajectory through the year.

Speaker 6

So can you give a little more color specifically on gross margin? My sense is that if we're going to lean a little bit more toward MRO or small project type work that maybe that mix is favorable for gross margin? And can you just comment on that? And how does gross margin proceed as we go through the year here?

Speaker 2

Yes. So good question, Brian. Certainly, as we would see weaker CapEx spending, we would anticipate some improvement in the gross margin profile. And certainly, some of the type of activity we're seeing in Canada, particularly around turnarounds would support that. So in a weaker CapEx environment, we would typically see some expansion in gross margins and that should flow through to EBITDA margins as well.

Speaker 6

Okay. And then Bruce, you commented on the Trans Mountain pipeline completion. And I was wondering if you could elaborate a little bit on the potential impact on your business from that and also the timing of any potential impact?

Speaker 2

Yes. Well, when you think about our oil and gas business, we've got the greatest exposure in Canada. And certainly that 509,000 barrels of oil per day of incremental takeaway capacity is significant with the oil sands and they'll have to ramp up production to be able to fill that capacity. And so certainly as they look at drilling particularly in some of the SAGD sites, we will benefit from that. They'll use our heat tracing as well as they'll use our environmental heaters on some of the rigs and in some cases for equipment and various things out in the field.

Speaker 2

So those tend to help support our revenues there in Canada where we see improvement or increase in drilling activity.

Speaker 6

Is that something that impacts fiscal 'twenty five then or does that take some time to ramp up?

Speaker 2

I would think we'd begin to see it this year, but certainly, I'm not certain maybe what the timeline is for the ramp up in that capacity, but we would see that really should be fairly well correlated to that ramped up in capacity to fill that pipeline.

Speaker 6

Great. And then I guess just the last question for now is based on your comments toward the end of the prepared remarks, you talked about the quoting activity. I think you mentioned a figure of $750,000,000 in potential projects. Can you provide some frame of reference for everyone regarding that $750,000,000 and some of those other numbers that you gave it relative to history? I know those are really healthy levels, but if you could kind of quantify it.

Speaker 6

Yes, sure.

Speaker 3

Just overall,

Speaker 2

our sales pipeline, our CRM pipeline for opportunities is in excess of $1,000,000,000 right now, which is very robust. And we've seen growth year over year. I think that the thing that I'm noting here is that it's pretty heavily loaded towards the next 24 months. In fact, 3 quarters of that pipeline is loaded towards the next, well, I would say more less than 24 months, probably more in the 20 month timeframe. So it's pretty heavily weighted over the balance of 25 through 26.

Speaker 2

So that is pretty significant. And as I look forward, the question is when will we see those begin to convert. And so we're watching that very closely. And we would anticipate that to begin to convert through the first half of the year and then begin to positively impact backlog. And then, of course, with larger capital projects, there will be some delay in timing of execution, which is factored into our guide for the fiscal year.

Speaker 6

So just to be clear, when you're saying convert from pipeline to actual orders and then convert to revenue is another step. I mean, it sounds like I don't want to put words in your mouth, but I mean, it seems like the view is that it's going to be maybe fiscal even fiscal 'twenty six before you really meaningfully start to benefit from the revenue from that pretty significant pipeline?

Speaker 2

It will be the latter part of this year and into fiscal 'twenty six when we will benefit. So yes, there's 2 conversions. 1, convert from the pipeline to orders, which we would expect to start over the next couple of quarters. And then second, to convert from backlog into revenue, which would then begin to follow that. And on average, our backlog takes around 12 to 15 months to execute.

Speaker 2

So it gives you a sense for maybe the timing associated with that.

Speaker 6

Yes. Again, very helpful. Again,

Speaker 2

that backlog being heavily weighted towards large capital projects.

Speaker 6

Yes, understood. Okay. Thanks for the detail.

Speaker 2

Thank you.

Operator

Thank you. We have reached end of our question and answer session. I would now like to turn the floor back over to Bruce Thaines for closing remarks.

Speaker 2

All right. Well, thank you all for joining us today and for your interest in Thermon. Have a good day.

Operator

Thank you. On behalf of the Thermon team, this does conclude today's teleconference. Thank you for your participation. Have a great day and you may disconnect at this time.

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Earnings Conference Call
Thermon Group Q4 2024
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