John Braatz

John Braatz asked if Thermon's current project gross margins, independent of the favorable mix, are inherently better than those seen in previous years due to market strength. He also sought an outlook for the FATI acquisition in FY2027, including strategies to enhance its revenue and profitability.

Answer

CEO Bruce Thames clarified that while current project margins are healthy and improved, they are not necessarily above the 'super cycle' levels seen historically (e.g., 2013 oil sands). He attributed the improvement to both the 'design and supply' mix and overall market pricing conditions. Regarding FATI, Mr. Thames highlighted its exceptional performance, successful commercial efforts in Europe, and ongoing CapEx investments in Milan to scale manufacturing for medium voltage heaters. He expects to double FATI's business again within the next two to three years, driven by electrification and medium voltage heaters, unlocking new growth levels.

John Braatz from Kansas City Capital asked if Thermon's current strong gross margins in large CapEx projects reflect better initial margins compared to historical cycles, independent of the mix shift. He also sought an update on the FATI acquisition's performance, future revenue outlook, and profitability improvements for FY27.

Answer

CEO Bruce Thames clarified that while current project margins are healthy and improved due to the design and supply mix and market pricing, they are not at the exceptional levels seen during the 2013 oil sands super cycle. He highlighted the FATI acquisition's exceptional performance, noting commercial success in Europe, CapEx investments to scale manufacturing in Milan for medium voltage heaters, and an expectation to double the business over the next 2-3 years by serving electrification demand.

John Braatz asked if Powell Industries expects to achieve similar margins on new LNG projects as it did a couple of years ago.

Answer

Brett Cope, Chairman, President, and CEO, believes similar margins are possible, emphasizing the focus on the return on investment for these large capital facilities. He stressed the importance of seeking fair value for unique offerings, such as using their offshore facility to reduce site costs, without being 'silly about it.'

John Braatz asked about the potential increase in CapEx spending to support capacity expansion and product flow, and what revenue growth rate (e.g., mid-teens) this new capacity might enable. He also questioned the current competitive environment in the LNG market compared to three years ago and whether similar margins could be achieved on new LNG projects.

Answer

Brett Cope, Chairman, President, and CEO, mentioned evaluating a new $100 million facility for organic R&D and utility support, in addition to addressing new market dynamics. He believes double-digit revenue growth is possible, especially with increased data center engagement. Cope noted that the LNG competitive environment is different but no less intense, with changes in competitors' strategies, but Powell remains focused on complex industrial projects. He expressed confidence that similar margins could be achieved on new LNG projects by seeking fair value for unique offerings that reduce site costs.

John Braatz from Kansas City Capital followed up for a specific figure regarding the incentive compensation catch-up in the fourth quarter.

Answer

Mike Metcalf, Powell's CFO, confirmed that the fourth quarter included a catch-up in variable compensation due to strong results, specifying that approximately $3 million of the $5 million year-over-year increase in Q4 SG&A was attributable to variable compensation and headcount additions.

John Braatz asked if management was surprised by the delays in LNG projects reaching Final Investment Decision (FID) since the pauses ended. He also sought insights into active areas within the C&I segment beyond data centers and the drivers behind the significant increase in traction market orders. Furthermore, he questioned whether Powell could leverage SG&A costs going forward, given the robust revenue line, and inquired about the specific amount of the incentive compensation catch-up in the fourth quarter.

Answer

Chairman and CEO Brett Cope acknowledged the delays in LNG projects but expressed continued confidence in the sector's strong activity and the timing of their JacintoPort investment. He identified mining and occasional pulp and paper cycles as other active C&I areas, in addition to data centers. Cope attributed the traction market's growth to a broader set of projects reaching market simultaneously across various regions. CFO Mike Metcalf anticipated SG&A leverage going forward, noting that the fiscal 2025 year-to-date SG&A as a percentage of revenue was only 20 basis points higher than 2024. Metcalf confirmed the incentive compensation was a Q4 catch-up due to strong results, with variable compensation contributing approximately $3 million to the $5 million year-over-year SG&A increase.