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DATE
Thursday, August 7, 2025 at 11 a.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Bruce Thames
Chief Financial Officer — Jan Schott
Vice President, Investor Relations — Ivonne Stark
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RISKS
President and Chief Executive Officer Thames stated, "We do expect there to be some margin headwinds in Q2 and beyond," as pricing actions may lag behind input cost increases resulting from tariffs in the near term.
Chief Financial Officer Schott reported organic revenue decreased 11% in fiscal Q1 2026 (period ended June 30, 2025), driven by delayed backlog conversion, supply chain challenges, and tariff uncertainty.
Thames said, "we continue to see some margin risk for the balance of the year as the full impact of the tariffs is felt and we gain clarity on the most recent announcements," indicating ongoing uncertainty regarding input costs and customer demand.
Orders in the Asia-Pacific (APAC) region declined sharply, with Schott citing that "APAC revenue was $6.6 million, down from $9 million in the prior year period, reflecting softer demand in the region."
TAKEAWAYS
Revenue-- $108.9 million, a 5% decline in fiscal Q1 2026 (period ended June 30, 2025); organic revenue, excluding Fatih, decreased 11% due to delayed backlog conversion and supply chain issues in fiscal Q1 2026.
OpEx Revenue-- $93.3 million, a 4% decrease in OpEx revenues in fiscal Q1 2026, accounting for 86% of total revenue in fiscal Q1 2026; Organic OpEx revenue declined 11% in fiscal Q1 2026.
Large Project Revenue-- Large project revenue was $15.6 million, down 11% year-over-year in fiscal Q1 2026, as projects remain in engineering and are expected to convert later in the fiscal year.
Backlog-- Backlog up 27% year-over-year at fiscal Q1 2026 quarter-end, with organic growth of 13% year-over-year, plus additional impact from Fatih; backlog growth attributed to bookings in multiple end markets.
Total Bid Pipeline-- Total bid pipeline increased 43% at fiscal Q1 2026 quarter-end, driven by the Vapor Power acquisition and expanding end-market activity.
Gross Profit-- Gross profit was $48 million, down 5% year-over-year in fiscal Q1 2026 (GAAP). Gross margin (GAAP) increased to 44.1% from 43.8% last year driven by improved revenue mix and tariff mitigation efforts in fiscal Q1 2026.
Adjusted EBITDA-- Adjusted EBITDA was $21.2 million in fiscal Q1 2026, a 9% decrease from $23.2 million in fiscal Q1 2025, Adjusted EBITDA margin declined to 19.5% from 20.1% last year as SG&A increased in fiscal Q1, partly due to acquisition integration.
GAAP EPS-- $0.26 GAAP earnings per share in fiscal Q1 2026, a 4% increase;Adjusted EPS-- Adjusted earnings per share was $0.36, down 5% in fiscal Q1 2026, with the decline attributed to lower sales volumes and higher expenses.
Bookings and Orders-- Orders decreased 5% overall, with a 19% organic decline, in fiscal Q1 2026, but showed recovery in June and continued order momentum in July.
Backlog Conversion Delays-- Approximately $10 million revenue impact in fiscal Q1 2026, with 60% attributed to supply chain and capital project issues; all resolved as of the call.
Geographic Performance-- U.S. LAM, and Canada sales were down 17% and 8%, respectively, year-over-year in fiscal Q1 2026; EMEA revenue more than doubled, driven by Fatih’s $6.8 million contribution in fiscal Q1 2026.
Working Capital-- Working capital increased by 9% to $172 million in fiscal Q1 2026, reflecting Fatih integration and higher inventories for seasonal demand and tariff pre-buys.
Free Cash Flow-- $8.3 million in free cash flow in fiscal Q1 2026, modestly below $8.7 million in the prior year.
Share Repurchases-- $9.8 million returned in fiscal Q1 2026, with $44.5 million remaining under current authorization as of quarter-end after a May 2025 refresh.
Net Leverage-- Net leverage ratio was 1.0x at fiscal Q1 2026 quarter-end, with total net debt of $102.8 million as of quarter-end; $240 million credit facility extended to July 2030.
Liquidity-- $130.8 million in total cash and available liquidity as of quarter-end, supporting both growth investments and opportunistic repurchases.
Data Center Market Entry-- Launch of Pontus and Poseidon liquid load banks on July 28 targets the projected $386 million liquid load bank market by 2032, with expectations to build a 20%-25% long-term share, as discussed by management during the fiscal Q1 2026 earnings call.
Rail & Transit Market-- Backlog in this segment doubled year-over-year as of quarter-end, benefitting from federal infrastructure funding and ongoing capacity investments.
Fatih Acquisition-- Fatih’s backlog doubled in the six months following the October acquisition. Bookings in fiscal Q1 2026 exceeded $17 million, with activity focused on European and Middle Eastern electrification projects and LNG applications.
Fiscal 2026 Guidance-- Revenue projected between $495 million and $535 million in fiscal 2026; Adjusted EBITDA guided to $104 million-$114 million in fiscal 2026, with outlook unchanged despite trade uncertainty.
SUMMARY
Thermon Group Holdings(THR -11.44%) navigated revenue and order declines in fiscal Q1 2026 (period ended June 30, 2025), driven by temporary backlog conversion delays, supply chain disruption, and tariff-related uncertainty, with management reiterating the fiscal 2026 outlook by leveraging backlog strength, gross margin resilience, and operational discipline. A new product line for liquid-cooled data centers was introduced, aiming for substantial market share in a rapidly expanding segment, while the Fatih acquisition and rail and transit markets saw backlog double and contributed to positive order momentum. Balance sheet flexibility was enhanced via low leverage, robust liquidity, renewed share repurchase authorization, and a long-term credit facility, supporting both organic and inorganic capital deployment and sustaining stakeholder returns as the company adapts to volatile global trade conditions without changing its guidance.
President and Chief Executive Officer Thames described the entry into liquid load banks for data centers as a “nascent” but rapidly growing opportunity, intending to capitalize on long-term secular drivers such as AI adoption and electrification.
Chief Financial Officer Schott noted the company’s capital allocation priority remains on growth, with flexibility to alternate between M&A, organic investments, and share buybacks depending on opportunity set and market conditions.
Thames confirmed all short-term supply chain disruptions and capital project delays affecting backlog conversion were fully resolved by quarter-end, positioning deferred revenues for recognition during the remainder of the fiscal year.
Management stated that tariff mitigation actions, including material pre-buys, sourcing shifts, and pricing, had begun to offset input cost pressures, and expect pricing initiatives to be fully effective by the second half of the year.
INDUSTRY GLOSSARY
OpEx Revenue: Ongoing revenue largely from operations, including maintenance, parts, and service contracts, distinct from large capital project revenue.
Fatih: Thermon’s October-acquired business, expanding their European electrification and LNG offerings; referred to as the fastest-growing acquisition within their portfolio.
Liquid Load Bank: Equipment used in data centers to simulate both thermal and electrical loads for testing and commissioning of liquid-cooled power and cooling infrastructure.
Book-to-Bill: Ratio of orders received (bookings) to product shipped and billed (revenue), indicating future sales pipeline health.
Full Conference Call Transcript
Bruce Thames, and Chief Financial Officer, Jan Schott. Earlier this morning, we issued an earnings press release which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found on our IR website under News and Events, IR Calendar, Earnings Conference Call Q1 2026. 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 might 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 our strategic initiatives, 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 will turn the call over to Bruce.
Bruce Thames: Thank you, Ivonne, and good morning to everyone joining us on the call today. At a high level, I'm pleased to report that the team delivered resilient performance in the first quarter as they navigated a complex and rapidly evolving market landscape. The outcomes we achieved underscore the strength of our long-term vision and strategic initiatives, which are intentionally focused on driving a higher quality, more profitable revenue mix. Combined with proactive tariff mitigation efforts, these actions enabled us to achieve gross margin improvement over the prior year, affirming the effectiveness of our operational framework and the agility of our organization.
However, the strength in our margin was offset by a year-over-year decline in revenues that was largely attributable to temporary delays in backlog conversion and project execution timing. Factors we fully expect will translate into realized revenue in the upcoming quarters. Additionally, we experienced some softness in our incoming order rates following Liberation Day, which we anticipated as a risk coming into our fiscal year and factored into our full-year guidance. As we tracked our bookings trends through the quarter, we saw a sharp decline in the daily order rate in late April through May, followed by a notable recovery to more normalized levels in June. On a positive note, order momentum has continued to build through July.
While the current market dynamics, particularly surrounding global trade, present near-term unpredictability, our strategic focus and operational discipline have us well-equipped to harness renewed momentum as conditions stabilize. We remain confident in our strategic positioning to benefit from several very long-term secular growth drivers. This positioning, when combined with our robust approach to gross margin enhancement, sets a strong foundation for sustained growth and value creation for our stakeholders. With that as a backdrop, I'll begin my commentary with the first quarter highlights. As I just discussed, our first quarter revenues were impacted by roughly $10 million in delayed backlog conversion, which contributed to the 5% decline from the prior year.
These delays stem from short-term supply chain challenges and an unanticipated production delay caused by a capital improvement project, which are not indicative of lost revenue opportunity. They're simply a matter of timing. Our robust backlog, which continues to grow, positions us well to recognize these revenues in the quarters ahead. While our bookings during the first quarter were down 5% versus last year, we remain confident in our growth outlook. Our strength in bookings over the prior several quarters, the backlog at quarter-end up 27% from last year, the delayed revenues in Q1, and strong order trends at Fatih all combine to provide a clear path to achieve our revenue plan for the year.
Additionally, our total bid pipeline was up 43% at quarter-end, boosted by the Vapor Power acquisition and driven by activity across several key end markets, including chemical, petrochemical, power and nuclear, LNG, and renewables. Based on these factors, we remain confident that we're well-positioned to generate solid long-term organic growth. As noted, I was very pleased with the team's execution to deliver strong gross margin performance during the quarter, which was up 30 basis points from last year despite the volume declines and impact of tariffs.
The gross margin improvement was a direct function of our strategic shift toward higher margin OpEx revenues across diverse end markets, as well as our tariff mitigation measures, which included actions like pre-buying of materials, shifting of sourcing and production, and price increases, which began to take effect very late in Q1. And finally, our disciplined financial management enabled us to maintain our strong balance sheet, with leverage of just one times at quarter-end, which provides us the flexibility to execute on our growth strategy both organic and inorganic, while opportunistically returning capital to our shareholders. Our M&A pipeline remains active, and we continue to search for opportunities to deploy capital to augment our strategic growth initiatives.
During the quarter, we returned nearly $10 million in capital through our share repurchase program, and we will continue balancing capital allocation between opportunistic share repurchases and growth investments, with a focus on driving returns for our shareholders. Before I turn it over to Jan, I'd like to take some time to discuss several strategic initiatives that we're very excited about and expect will be key contributors to our growth in the coming quarters and years. These include an emerging opportunity in the data center market, rail and transit, and our most recent acquisition, Fatih. Turning now to Slide 6. We believe unprecedented investments in the data center market represent an emerging growth opportunity for Thermon.
According to an independent study, the global load bank market was roughly $280 million in 2024, with growth projections to $445 million in 2032, representing a 4.8% compounded annual growth rate. With the advent of AI and liquid-cooled data centers, the demand for liquid load banks to provide both thermal and electrical loads to test critical cooling systems and power infrastructure has rapidly grown. Based upon management estimates, we believe the current market opportunity for liquid load banks will grow from an estimated $84 million in 2024 to $386 million in 2032, which represents a compounded annual growth rate of 21%. To serve this growing market, Thermon launched the new Pontus and Poseidon load banks on July 28.
As data centers shift from air to liquid cooling, we believe that the opportunity for Thermon legacy solutions like heat tracing, environmental heaters, immersion heaters, tubing bundles, and removable heating blankets grows accordingly. It's early, but we're already seeing a growing pipeline of project activity with new prospective customers that we anticipate will translate into meaningful growth in this segment for years to come. Turning now to Slide 7. The rail and transit market is another vertical that we're extremely excited about. The Infrastructure Investment and Jobs Act, representing the largest federal investment in public transportation in US history, has provided a very favorable demand environment, with higher levels of government funding to modernize public transit and passenger rail systems.
We're seeing strong order momentum with the rail and transit backlog doubling over the last twelve months. Based on these strong order trends and the longer-term opportunity in this market segment, we're deploying capital and resources to rapidly expand capacity to support this growing opportunity. And finally, the Fatih acquisition in October has quickly become our fastest-growing acquisition, and we continue to be very excited by the opportunity set for this business. Fatih strategically positions us to take advantage of the growing electrification market across Europe. While we've seen a shift in US policy that has stalled investment, the electrification market in Europe is experiencing solid growth.
We're seeing strong order momentum with our backlog doubling in just the last six months, with a solid pipeline of high-probability opportunities going forward. We're extremely encouraged by these opportunities, which highlight the strength of our diversification strategy. Looking ahead, our ability to leverage our technologies across high-growth verticals, such as data centers, transit systems, and electrification, highlights the ingenuity and dedication of our team, whose relentless pursuit of excellence allows us to consistently deliver safe, reliable, and innovative thermal solutions for our customers. The successes we see today underscore our differentiated position in the industry and reinforce our confidence in the path forward.
With that, I'll turn it over to Jan, who will provide a more detailed review of our first quarter results before I wrap up with some remarks on our financial outlook.
Jan Schott: Thank you, Bruce, and good morning, everyone. I will review the 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 8, I will start with our first quarter operating highlights. Revenue in the first quarter was $108.9 million, a year-over-year decrease of 5%. Excluding revenue contributed from Fatih, first quarter organic revenue decreased 11%. Our OpEx revenues were $93.3 million during the first quarter, a decrease of 4% compared to last year.
Excluding the contributions from Fatih, OpEx revenues decreased 11% from the same period last year due to the delayed backlog conversion as well as the impact of the tariff uncertainty. OpEx revenues represented 86% of total revenues for the quarter. Large project revenue was $15.6 million during the quarter, down 11% from last year. While we noted some improvement in large project bookings last quarter, many of these remain in the engineering phase, and we continue to see project schedules shift to the right. Based upon the current schedules, we anticipate that execution will begin in quarter two, carrying through the balance of the year.
Our gross profit was $48 million during the first quarter, a decrease of 5% compared to the first quarter last year, as the revenue decline was partially offset by more favorable revenue mix and tariff mitigation measures. Including gross margin was 44.1% during the first quarter, up from 43.8% last year, owing to improved profitability in OpEx sales, price, and productivity enhancements. Adjusted EBITDA was $21.2 million during the first quarter, down from $23.2 million last year, a decrease of 9% due to the revenue decline combined with continued investments.
Adjusted EBITDA margin was 19.5% during the first quarter, down from 20.1% last year, as the improved gross margins were offset by lower volumes and a modest increase in SG&A due in part to the Fatih acquisition. GAAP earnings per share for the quarter was $0.26, up 4% from $0.25 in the prior year. Adjusted earnings per share was $0.36, down 5% from $0.38 last year. The decline was primarily driven by lower sales volumes and increased SG&A expenses, partially offset by improved gross margins and reduced orders decreased 5% on a reported basis, were down 19% organically. Orders were down across each geography, particularly in APAC due to tariff uncertainty.
While bookings were generally weaker across the board, we did see some pockets of strength in commercial, LNG, and as Bruce already discussed, rail and transit. Due to the positive book-to-bill in the quarter combined with project execution timing. Turning to performance by geography, year-over-year sales in US, LAM, and Canada declined by 17% and 8% respectively, primarily due to delayed backlog conversion and reduced customer demand amid ongoing market uncertainty related to tariffs. In contrast, EMEA delivered strong growth with revenue more than doubling, driven by solid performance in our organic business and a $6.8 million contribution from the Fatih acquisition.
APAC revenue was $6.6 million, down from $9 million in the prior year period, reflecting softer demand in the region. Moving to Slide 9, for an update on our balance sheet and liquidity. Working capital increased by 9% to $172 million at the end of the quarter, primarily driven by the Fatih acquisition and higher inventory as we built stock for the fall heating season and purchased materials in advance of tariffs. CapEx was $2.4 million during the quarter compared to $3.9 million last year, which included capital investments to support growth initiatives in the prior year. Free cash flow during the first quarter was $8.3 million, down modestly from $8.7 million last year.
We repurchased $9.8 million in shares during the first quarter, bringing our total shares repurchased since the start of fiscal 2025 to $30 million. As a reminder, in May, we refreshed our repurchase authorization back to $50 million, so we currently have $44.5 million remaining under our current authorization. We ended the quarter with net debt of $102.8 million and a net leverage ratio of 1.0 times. We recently closed our $240 million credit facility, which extends the maturity to July 2030. In summary, we maintained our strong financial discipline during the first quarter and continued to execute our balanced capital allocation strategy.
We remain focused on maintaining a strong balance sheet and ended the quarter with total cash and available liquidity of $130.8 million. This liquidity provides us with ample flexibility to support our capital allocation needs, and we will continue to prioritize investments in organic and inorganic growth while balancing opportunistic share repurchases and debt reduction. With that, I will turn the call over to Bruce.
Bruce Thames: Thank you, Jan. And now if you'll all turn to Slide 10. We remain focused on navigating a dynamic global trade environment with discipline and agility. We're very pleased with our results during the first quarter as our tariff mitigation efforts were a key factor enabling us to drive gross margin improvement despite the revenue weakness and tariff headwinds. With the announcements on August 1, and questions regarding the details about how these new tariffs will be applied, we're currently assessing the impact on our business. As we gain clarity, I'm confident in our team's ability to quickly respond and minimize and mitigate any impacts going forward.
As you can see here, our outlook for fiscal 2026 remains unchanged from our initial expectation. We continue to operate in an uncertain market, created by the volatile and rapidly changing trade environment, which makes it very challenging to predict the second and third-order impacts from the tariffs, particularly as it relates to customer behaviors impacting demand. Our guidance continues to assume the most recent and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment, and the recovery we've seen in order trends is sustained.
While we were able to mitigate the impact of tariffs during the first quarter, we continue to see some margin risk for the balance of the year as the full impact of the tariffs is felt and we gain clarity on the most recent announcements. Based on these factors, we're reiterating our fiscal 2026 financial guidance that calls for revenue in a range of $495 million to $535 million and adjusted EBITDA in a range of $104 million to $114 million. While ongoing global trade dynamics present challenges, we remain highly focused on effectively managing factors within our control.
We've made significant progress in our diversification growth strategy in recent years and are now strategically positioned to benefit from several powerful secular growth drivers, including reshoring, electrification, decarbonization, and power and data centers. We're in an extremely strong financial position with more than enough financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating long-term value for our shareholders. That completes our prepared remarks. And we're now ready for the question and answer portion of our call.
Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. One moment, please, while we poll for questions. Thank you. The first question comes from the line of Brian Drab with William Blair. Please proceed.
Brian Drab: Hi, good morning. Thanks for taking my questions. First, I just wanted to ask, I think you said there was a capital improvement and productivity improvement project that led to some production delays. Did you say is that in the past now or the timing of getting that resolved and then the orders that were delayed when those would ship?
Bruce Thames: Yes. Yeah, Brian. We did have a capital improvement project that took one of our value streams down about twice as long as we had anticipated in the first quarter. It's now up and fully operational, and it's back to running at historical throughput levels. And, again, we would expect those revenues to convert in Q2 and the balance of the year. We also did have some supply chain disruption that impacted another value stream, and those have been fully resolved as well.
Brian Drab: Got it. And so I know you talked about $10 million in delayed revenue. Is that a different issue or what's the amount of revenue that's associated with that capital improvement delay?
Bruce Thames: The supply chain improvement and the capital, excuse me, the supply chain disruptions and the capital project are roughly 60% of that $10 million. The balance is more in project execution and timing in the quarter.
Brian Drab: Got it. Okay. Perfect. Thank you. And can we talk a little bit about the liquid load bank opportunity in data centers? I guess, maybe just at the moment, could you spend a little time just describing what the product is that you're shipping? I know you had a press release on this recently, but just maybe it'd be worth just explaining briefly what the product is. I don't think it's super intuitive for everybody. And how what is your order book looking like and or pipeline looking like for that type of activity and like, going in, you know, a year from now, like, what's sort of the revenue opportunity for that business line?
Bruce Thames: Yeah. Great question. So first and foremost, liquid load banks are actually based on a boiler technology, but essentially, they are used to provide both thermal and electrical loads to test the effectiveness of the cooling systems in these new liquid-cooled data centers. They also provide an electrical load so that our customers can test the electrical power distribution systems in those data centers. So historically, they had largely just used inductive and resistive load banks. Our technology allows them to test not only the electrical load but the thermal loads on those systems as well. And the move from air-cooled to liquid-cooled has created the demand for these systems. As we look forward, the pipeline of opportunity is building.
We just now have launched these products only a couple of weeks ago, so it's still very early. But we're building that pipeline of opportunities. We're out talking to customers and different types of end users and channels in the market. But we would expect over time to be able to build a 20 to 25% market share in this growing opportunity. And those numbers I covered in the prepared remarks and are outlined in the slide we had in the investor materials.
Brian Drab: Okay. Thanks very much. And then maybe just one more question. Can you comment more specifically on gross margin expectations for the next quarter and the balance of the year?
Bruce Thames: Yeah. So first of all, as I said earlier, we're pleased with the results in the first quarter. You know, our outlook had been a little more pessimistic given the impact we anticipated in tariffs. We do expect there to be some margin headwinds in Q2 and beyond. The good news is we're beginning to see pricing come through. By the end of the second quarter, our new prices should be in full effect. And we feel like those are adequate to position us well to fully offset the impact of tariffs as we know it today in the back half of the year. So overall, our view of performance in Q1 is positive.
We do see there could be some potential headwinds in Q2, and our expectations are that pricing will offset cost in the back half of the year. On a trailing 12 basis, I think we're sitting at about 44.8% gross margins. I would think by the end of the year, we should be trending in that same direction.
Brian Drab: Oh, okay. Alright. That's very helpful. Thanks, Bruce. Thank you.
Operator: Thank you. Our next question comes from the line of Justin Ages with CJS Securities. Please proceed.
Justin Ages: Appreciate the color on the data centers. Can you elaborate on the strong demand that you're seeing at Fatih? And what has changed since the fiscal fourth quarter, the last report?
Bruce Thames: Yeah. Justin, so first of all, we did on the fourth quarter, we talked about just the strong demand environment. We've seen that continue, as we noted in prepared remarks, the backlog there has literally doubled since we closed that deal on October 2 of last year. They had a very good first quarter in shipments, and bookings were quite strong, north of $17 million in the first quarter. So, you know, we're seeing very strong demand. The pipeline of opportunities there is quite strong as well. The bulk of this is really related to electrification opportunities in Europe and The Middle East.
The way their regulations there are moving forward, we are seeing significant investments in electrification to be able to convert historical heating sources that have been hydrocarbon-based to electric to reduce scope one emissions. So that has been a very positive trend on the European continent, and we're seeing the same in The Middle East. And a couple of these opportunities that they've secured have been related to LNG export liquefaction and facilities as well, very large heaters for those applications. So again, we're seeing quite strong demand due to a couple of different market drivers there for Fatih.
I think the big impact has been taking that business, plugging it into Thermon's global sales network, and being able to effectively develop and close opportunities through Thermon sales channels to really build that backlog over the last seven or eight months.
Justin Ages: That's helpful. Thanks, Bruce. And then Jan, maybe you could elaborate on the capital allocation priorities. I know you touched on it in the prepared remarks, but just hoping to see, you know, an update on if there's anything in the M&A funnel or how you're approaching share buybacks. Any more color there would be helpful, please.
Jan Schott: Sure. Thanks, Justin. The M&A pipeline is still very active. And as we've stated before, we'll continue to look for opportunities that complement our strategy. You know, besides, I think, you know, that'll be something that we're focused on. I think we have done some organic investments, so looking more for inorganic investments. We'll also continue with our share repurchase program that would be if we don't have opportunities to prioritize growth. So, you know, that's always something that we've done when we can buy back shares at attractive levels if there's nothing, or we don't have anything, you know, really that's attractive in the M&A pipeline or that we think we can execute on.
So we think we have lots of flexibility there. And then, you know, I think we're in a good spot with our debt. So the, you know, the last part of that would just be debt reduction. But at 1.0 times, it's really hard to allocate any free cash flow there.
Justin Ages: Thank you, Jan. I appreciate it. Sure.
Operator: Our next question comes from the line of Chip Moore with ROTHMKM. Please proceed.
Chip Moore: Hi, thanks for taking the question. Apologies. I hopped on a few minutes late, so not sure if you addressed it. Just Bruce, wondering on the Heat Trace side, pipeline on large projects, what you're seeing, you know, there's been some big FIDs out there and just any color there?
Bruce Thames: Yeah. Chip, good morning. Yeah. So on the pipeline of our opportunities, as I noted, you know, we've seen some nice growth year over year. It's about 43%. Of the large project bookings were weaker in the quarter, but as we had talked about, the cadence of bookings has improved, and we're seeing some very positive awards that we've received here, early in Q2. And the pipeline of opportunities, again, looks to be robust. We have secured some orders in rail and transit in Q1. There's been some key LNG wins that have been, you know, larger projects in scope, and certainly, we've had some opportunities in downstream oil, which we've secured in the first quarter as well.
I think the key thing to note is as our backlog is up 27% year over year, and we, you know, 13% organically, we've seen a big increase in our just the engineering load today, and we're staffing up to be able to respond and get those projects designed and be able to convert that to bills of material and ultimately drive revenue. So that has contributed to the revenue delays in Q1. We've seen that those projects begin to translate to revenue in Q2. And we would expect that through Q3 and Q4 in the back half of the year. I think coming in, we had made some assumptions around tariffs and demand and alike and time of projects.
We were thinking the year might be more front-end loaded based on what we're seeing today. It looks to be a more typical revenue distribution we would expect with roughly 44 to 45% of revenues in H1 and 55 to 56% of revenues in H2. And that's actually roughly around the five-year average for the business.
Chip Moore: Appreciate the color, Bruce. And maybe if I could sneak in one more on data center. You know, obviously, those growth numbers out there, we all know those are huge. So interesting to see that the opportunity. I'm just wondering, I have one on the load bank. I assume this is on later in construction when these facilities are coming online. And then any thoughts on go-to-market? Do you need a partner there or, you know, some proof points, or how are you thinking about working it more aggressively? Thanks.
Bruce Thames: Yeah. So first of all, you're right. These are used in two ways. One is they can be installed permanently in the facilities, and they're used not only for start-up and commissioning testing but they're used throughout the life cycle of the asset, as they do maintenance on their HVAC or the cooling systems. And also as they expand those facilities as new technologies come in, all of those are opportunities or requirements for additional testing. So you can see part of this could be earlier in the construction phase, and then there's a lot of these that are used temporarily in the commissioning phase, and we see that through rental houses as well as other big hyperscalers.
They'll have their own fleets of this equipment. So it is later in the commissioning phase where we see these really, it's used predominantly. So later in the build cycle. For the channels to market, we're going direct globally. But we do have a potential for new partners in both the rental and technology space that we're working on developing those relationships today.
Chip Moore: Appreciate the color. Thanks very much.
Bruce Thames: Thank you.
Operator: Thank you. Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed.
Jon Braatz: Good morning, Bruce and Jan. Good morning. Couple more questions on the data center market. And I think you maybe answered it. I'm not quite sure, but would the customer be maybe the data center or the manufacturer of the cooling system? Would you work potentially in conjunction with the cooling provider?
Bruce Thames: Yes. So it's really both, and it depends on the specific project. In some cases, it could be some of the hyperscalers. In other cases, it's the HVAC contractor that's responsible for the cooling system. And then in some cases, we're actually going through a rental channel to provide these assets on-site for the start-up and commissioning phase. So there are really different channels to market. And it depends on whether this is being installed permanently in the facility or being used just during the start-up and commissioning phase to test the asset.
Jon Braatz: Okay. You know, if they continue to use it during the life of the data center, is it one unit per data center, or do data centers require multiple units?
Bruce Thames: Hundreds. These are hundreds of units.
Jon Braatz: Okay. Okay. So what's out there now? What are the data centers using now? What's the sort of the competitive landscape in this product area?
Bruce Thames: So this is an emerging opportunity. It's nascent. And there are a few competitors out there globally for these liquid load banks. More traditionally, there have been resistive and inductive load banks, which are more strictly focused on power distribution testing. This is actually for thermal load testing as well as power testing. And this has really emerged with the advent of liquid-cooled data centers. So this is fairly new to the market.
Jon Braatz: Okay. Okay. Okay. Good. And I think you addressed this earlier, but, you know, in a best-case scenario, how quickly do you think we would begin seeing some meaningful revenues from this new product? Are we six months away, nine months? Any indication from you?
Bruce Thames: Yes. So, you know, our goals are to begin to generate revenues from this in the back half of the year and begin to build the backlog going into fiscal 2027.
Jon Braatz: Okay. Okay. Will you separately note some of those numbers? Give us an idea of how okay.
Bruce Thames: We will as we begin to develop the pipeline, close orders, and begin to ship, we'll highlight that on a go-forward basis.
Jon Braatz: Okay, Bruce. Thank you very much.
Bruce Thames: Thank you.
Operator: Thank you. There are no further questions at this time. I'd like to pass the call back over to Bruce for any closing remarks.
Bruce Thames: Yeah. Thank you, Alicia, and thank you all for joining today. We appreciate your interest in Thermon Group Holdings, Inc., and we look forward to speaking with you if we don't talk to you before the next call. So thank you all, and enjoy the rest of your day.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.