Thermon Group Holdings' (THR) CEO Bruce Thames on Strategic Acquisition of CCI Thermal Technologies (Transcript)

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Thermon Group Holdings Inc (NYSE:THR)

Strategic Acquisition of CCI Thermal Technologies Conference Call

October 04, 2017 08:30 AM ET

Executives

Sarah Alexander - General Counsel

Bruce Thames - President and Chief Executive Officer

Jay Peterson - Chief Financial Officer

Jim Pribble - Senior Vice President of Corporate Development

Analysts

Jeff Hammond - Keybanc Capital Markets

Scott Graham - BMO Capital Markets

Brian Drab - William Blair

Bhupender Bohra - Jefferies

Patrick Wu - SunTrust Robinson Humphrey

Scott Graham - BMO Capital Markets

Operator

Good day, ladies and gentlemen. And welcome to the Thermon Announces the Acquisition of CCI Thermal Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operation Instructions]. As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ms. Sarah Alexander, General Counsel. Ma'am, you may begin.

Sarah Alexander

Thank you, Andrew. And thanks everyone for joining today's conference call. We have an accompanying slideshow presentation that's being simultaneously webcast from our Web site, and it can also be downloaded from the Upcoming Events section of our IR Web site at ir.thermon.com. I will pause for just a moment to allow you the opportunity to navigate to our Web site if you haven't already done so.

This presentation and conference call as well as the accompanying press release announced this morning contain forward-looking statements within the meaning of the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995 concerning Thermon, CCI, the proposed acquisition and other matters.

All statements other than statements of historical fact are forward-looking statements, including, among others, statements we make regarding the intended acquisition of CCI, future revenues, future earnings, future cash flows, target leverage ratios, acquisition synergies, regulatory developments, market developments, new products and growth strategies, and the effects of any of the foregoing on our future results of operations or financial conditions.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the control of Thermon and CCI. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect and our actual results and financial condition may differ materially from the views expressed today.

These are discussed in the press release and in more detail under the caption Risk Factors in our Annual Report on Form 10-K filed with the SEC. Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations and cash flows and could influence whether any forward-looking statements contained in this release ultimately prove to be accurate.

Disclosure of adjusted EBITDA and other non-GAAP financial measures as defined under the SEC rules are intended as supplemental measures of our financial performance that are not required by or presented in accordance with, U.S. generally accepted accounting principles. We believe these non-GAAP financial measures are meaningful to our investors to enhance their understanding of our financial performance and are frequently used by securities analysts, investors and other interested parties.

These non-GAAP financial measures should be considered in addition to and not as substitutes for measures of financial performance reported in accordance with GAAP. For a description of how such non-GAAP financial measures reconcile to the most comparable GAAP measure, please see the table included in the appendix of the presentation and the press release.

Now, it's my pleasure to turn the call over to Bruce Thames, our President and Chief Executive Officer.

Bruce Thames

Thank you, Sarah. And thanks to everyone who has joined the call this morning. Today, we're pleased to announce the signing of a definitive agreement to acquire CCI Thermal Technologies Incorporated, a leading provider of advanced industrial process heating solutions. Joining me today to discuss the details of the transaction are Jay Peterson, our CFO and Jim Pribble, our Senior Vice President of Corporate Development.

Turning now to slide three. I would like to begin and just reiterate this acquisition aligns extremely well with our strategy, and is an exciting step forward in realizing our vision to become the world's leader in industrial process heating solutions. And it expands our business into an attractive adjacent market. CCI Thermal also reinforces many of the pillars of our strategy in differentiating our leadership position, expanding our markets, providing more comprehensive solutions for our customers and growing our team.

A softer but more important point to reinforce related to any acquisition, CCI Thermal's management and employees align with our culture and share our core values, a key success factor in any integration.

Turning now to slide four. As you can see, CCI Thermal is a compelling strategic fit for our business and creates real value for our customers, employees and our shareholders. Seeing here some of the key highlights of the transaction include, this combination creates a leading process heating platform and expands the addressable market into an attractive $800 million adjacency. This represents a significant step toward our stated goal of growing our addressable market 2 to 3 times by 2021. It also enhances Thermon's engineering technology and product capabilities to deliver comprehensive process heating solutions to our customers.

While many of the core customers and end markets are shared, it also provides diversification across end markets, products and geographies, and enhances growth opportunities for both businesses. The business also has a very strong MROUE sales profile at approximately 90% of revenues.

It also enhances our financial profile overall by adding approximately 30% to revenues, grows our EBITDA by 50% and improves our EBITDA margin by over 200 basis points on a pro forma basis. It's immediately accretive to margins, free cash flow and EPS, excluding one-time expenses and is expected to exceed our WACC by over 200 basis points in year three.

I would now like to turn the call over the Jay to provide some details on this transaction. Jay?

Jay Peterson

Thank you, Bruce. First off, I would like to talk about some high level deal considerations. Thermon is going to acquire CCI Thermal for CAD258 million in cash and it will be a cash free, debt free transaction. And that's approximately $211 million. The implied total enterprise value to EBITDA, based on fiscal year 2018 estimates, is a multiple of 8.2x and that includes synergies. And the synergies in that assumption are rather modest at 2 million. We believe the timing is right for the acquisition of this business and that it is exiting a trough and is demonstrating clear signs of recovery over the last 12 months.

In terms of timing and approvals, this transaction was unanimously approved by our Board of Directors of both companies. There are no regulatory approvals required. We have obtained fully underwritten financing by JPMorgan, and we expect to close this transaction in our fiscal Q3 of this year. In terms of financing considerations, it is funded with a $250 million, seven year senior secured term-loan B. Our pro forma net leverage at close will be 3.4x. And lastly, this is a high cash generating business that will allow Thermon to operate the business very comfortably, while concurrently deleveraging the business.

Now, I'd like to turn the call over to Jim Pribble.

Jim Pribble

Thanks Jay. The strategic and financial benefits of this combination are compelling. On page six, there are three key takeaways. First, the combination makes Thermon a leading provider of industrial process heating solutions globally. We’ll accomplish this through adding an assortment of robust brands that comprise of high quality products and services offerings that significantly expands our capabilities. Second, we’ll give these well established brands access to new geographies through Thermon's channels to the global market. And lastly, we’ll diversify our end markets through increasing our exposure to natural gas and power, and also through introducing products that service the transportation sector. And as Jay mentioned, our financial profile will change considerably as the deal is accretive to margins free cash flow and earnings.

To page seven, CCI Thermal is a leading provider of advanced industrial heating and filtration solutions. The company is headquartered in Edmonton Alberta, Canada. We view CCI as a true platform for expansion into the highly fragmented process heating market. The Company has filled its reputation in the space through delivering high-quality reliable products into classified locations and hazardous areas, where Thermon has traditionally plagued. CCI offers best-in-class customer service and a combination of these facts create strong brand equity that has resulted in large installed base throughout North America.

Let's look at historical performance. Note that revenues were CAD97 million Canadian for the LTM period, ending 8/31/17, with 24% adjusted EBITDA margins. It's important to note the growth trends here from 2016 to LTM 8/31. CCI realized the trough associated with the recent oil and gas market downturn in November 2016, after which they've seen a steady stable recovery in both revenue and EBITDA. We think that based on this notion, the timing for the acquisition is quite favorable. While we are at a transaction multiple today of 11.2 times LTM EBITDA, this is 8.6x normalized EBITDA, which is an average from fiscal year 2014 to fiscal year 2017 and 8.8 times fiscal of 2018 budget EBITDA. Jay will expand on this point in his comments.

Now, the geography and end markets. As mentioned, the Company has a large installed base in Canada, and has seen recent expansion in the U.S. on the back of its strong brand equity and best-in-class customer service. Thermon sees considerable opportunity to expand further in the U.S. and another regions as well, which we’ll cover in coming comments. The addition of CCI Thermal provides end market diversification to Thermon with strong market positions in natural gas, power, rail and transit end markets among others. Note that we view the increased exposure to gas as a positive since microeconomic forecast indicate demand for gas will increase the twice the rate of the demand for oil in the coming years.

Transitioning now to page eight. You'll note the strong North American presence for CCI Thermal, three Canadian facilities and two in the U.S., will facilitate the integration effort by virtue of proximity. But it happens at a good amount of opportunity for CCI revenue expansion exists here in the U.S. as well. As we think about the broader process heating industry, we know that it’s highly fragmented and right for consolidation. On this basis, we strongly believe that Thermon can provide true leadership to the industry through the combination by bringing our capabilities, experience and increased scale to bear in a consolidation effort. This will ultimately benefit our customers as a quality of products and the ability to service increase scope from one supplier improves.

Thermon industry leadership notwithstanding, note that CCI Thermal, has a very reputable long-tenured customer base as well. Yet, due to high volume MRO style business that characterizes CCI’s operations, we see no customer concentration issues. Heavy industrial process heating is niche, high barrier to entry and highly technical. That leads to high margin business. Of all the firms we’ve looked at in the space, this is certainly the best performing financially and actually improves our already strong financial profile.

To slide nine. CCI differentiates its offering in several ways. First, the Company maintains deep engineering capabilities and expertise, leading to significant IT in a sizable patent portfolio. Further, CCI has the capability to perform in-house while many integrator type companies outsource. This vertical integration serves as both a profitability enhancer and a lead time reduction mechanism. Lastly, I'll mention that all of the above has lead CCI to be significantly ahead of its competition in terms of global certifications. These highly technical certifications are required in order to conduct business inside the hazardous and classified areas within which Thermon currently plays. Typically, the certification process is long cycle and costly but fortunately, it's an art that Thermon has mastered over time and we’re pleased to note that CCI has as well.

Transitioning now to slide 10. The global certification that CCI has already earned will serve the combined entity well as this will allow CCI products to be sold immediately into foreign markets. We can accomplish this through Thermon's well developed sales channels, where local content is a consideration, Thermons global footprint can serve as a spring board for revenue generation. Our new manufacturing facility in Russia is a great example of this concept.

In summary, this combination brings Thermon a broader set of products and services to offer the marketplace but of course CCI products access the Thermon Global sales channels, which is an immediate revenue expansion opportunity.

So, let’s focus on what it is that we’re actually adding to the Thermon product family. On slide 11, you will see a multitude of industry-leading products that use various methods to heat processes and spaces where environments are characterized as hazardous locations. The breadth of products offered here, in combination with the current Thermon offering, should paint a clear picture for investors and customers alike that our more robust ability to provide thermal management solutions is where we begin to immediately provide additional value to our customers.

On to slide 12. Now, let's consider the merger in terms of product offering. Thermon is a premium brand in a niche within process heating known as heat tracing. Simply put, we've been using steams since 1954 and electricity since 1963 to heat the exterior of process flow transfer lines, and we're one of best in the world of doing so.

With CCI's product, we can cover more ground in a typical facility. Now, wherever process fluid is resident, be it in a vessel, tank or transfer line, we now have the opportunity to heat these fluids, both internally and externally. Couple this with the advanced controls platform we offer, it becomes clear how the combined entity will be able to offer a complete thermal management solution to the market.

I'll now hand it back to Bruce and Jay for further comments.

Bruce Thames

Jim, thank you. If you would now turn the slide 13, viewing this slide we can see that CCI Thermal brings Thermon access to the heavy industrial process heating market with a particular strength in classified environments, valued at an estimated 800 million globally. With Thermon's access to the global market for the design and supply of industrial heat tracing valued at 1.5 billion, the combined total market grows by 50% to 2.3 billion. This addressable market expansion provides ample opportunity and a foundation for a differentiated competitive positioning to enable the combined businesses to exceed the end market growth rates.

If you would now please to slide 14, looking hear, as we began this process core to our philosophy and acquisition criteria is a key question. Are we stronger together? And the more involved and educated we became on CCI Thermal and this opportunity, the more convinced we were as a management team that the answer was, yes. The opportunity to diversify our end markets, expand the breadth of our customer solutions and provide attractive global growth opportunities for CCI Thermal's product portfolio is extremely exciting as we think about the combination of these two respected names in the industry.

I'd like to now move this and hand this call over Jay to review more of the details of the transaction and the associated financing. Jay?

Jay Peterson

Thank you again Bruce. We are now on slide 15 please. In terms of some high-level valuation metrics, again, the transaction consideration totals CAD258 million in terms of the specific metrics looking back trailing 12 months on EBITDA performance of 23 million. The multiple ex synergies is 11.2. Looking forward, over the next 12 months with 29.3 million in EBITDA, the enterprise value to EBITDA is 8.8x. Now, pro forma, inclusive of synergies, the trailing 12 months is 10.3 as a multiple. And looking forward, again with very conservative synergies, the multiple is 8.2x.

I'd now like to turn to page 16 please. And there are six key financial points relating to this transaction I would like to discuss, and then I will conclude with some high-level guidance for the balance of this fiscal year. First off, in terms of revenue, CCI provides a growing platform business with top line revenue growth of 12% in their last fiscal year and 16% trailing 12 month growth as of August.

Turning to headcount and operating expenses. There are approximately 375 total headcount in the Company and their current to run rate operating expense is approximately $5 million per quarter. In terms of profitability and EBITDA, CCI has demonstrated solid EBITDA performance over the last seven years and their average EBITDA to revenue is 29.4% and that's a full 5 percentage points higher than Thermon's performance in that same period.

Turning to the financing. JPMorgan Chase is providing fully committed financing with a term loan B for $250 million and also $60 million revolver. And proceeds from this term loan B will be used to complete the purchase and pay-off our existing debt. And also, I'd like to add, we do not anticipate any near term borrowings on the revolver and further details of the financing will be provided once it is consummated.

In terms of our tax, our U. S. entity will lend part of the term loan B proceeds to our Canadian organization to complete the acquisition. And this inner company loan will allow our combined Canadian operations to make both principal and interest payments back to the U. S. on a tax efficient basis. And going forward, over the next 12 months, we anticipate our worldwide tax rate to be approximately 28%.

Now, in terms of our balance sheet and debt. Post acquisition, our net debt to EBITDA leverage will be at 3.4x and we will have approximately $40 million in worldwide cash on our balance sheet. And our annual debt service will actually decrease from the current levels by 20% or more.

Today, we are paying approximately $23 million and this will drop down to approximately $16 million. And concurrent with that, we'll be having 50% pro forma increase to our EBITDA. Strong cash flows from the combined businesses will create the financial capability to comfortably operate the combined businesses and the associated debt levels, while concurrently de-levering our business. And we anticipate our net debt to EBITDA leverage to approach 2.5 within the next 24 months, and that's very similar to the historical de-levering we accomplished post IPO.

And I'd also like to note that CCI has a very capital efficient business model and their future CapEx requirements will be in the 2% of revenue ballpark, and that is inclusive of expansion capital. And I'd like to conclude with some high level guidance. First off, we believe CCI will generate $37 million to $40 million in revenue from November to March 31st, and that's the end of our fiscal year. And that's having EBITDA margin of 24% to 25%. And over the next 12 months, we believe the transaction will be accretive to earnings on both the cash and GAAP basis. And note that we will be taking a one-time charge for transaction related expenses between $5 million and $6 million in our third fiscal quarter.

And now, I would like to turn the call back over to Bruce for concluding remarks.

Bruce Thames

Jay, thank you. If you would now turn to slide 17, and just in summary, Thermon is very excited about the acquisition of CCI Thermal and this opportunity to further strengthen our position as a leader in the global industrial process heating market. As illustrated here, CCI Thermal aligns well with our values, our strategy, our financial objectives, and will ultimately create substantial shareholder value for our investors going forward.

With that, I'd like to thank you all very much for your time this morning. And I would like to turn it back over to Andrew to open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you [Operator Instructions]. Our next question comes from Jeff Hammond with Keybanc Capital Markets. Your line is now open.

Jeff Hammond

Can you just -- I mean, you laid out that the competitive landscape nicely. Can you just highlight some of the bigger competitors in the space?

Bruce Thames

The two largest competitors in the space are Chronolox and Watlow.

Jeff Hammond

And then can you just talk about the process, was it an auction privately negotiated what's the ownership structure was the ownership structure of CCI? And then just hit on the cost of the debt financing?

Bruce Thames

It was a tightly controlled process. The ownership was essentially largely under – well, there were a couple of different holding companies, but it was really largely an individual that own it with about 10% to 15% employees. What were some of the additional questions you had?

Jeff Hammond

Just walk through the interest cost?

Bruce Thames

I'll hand that over to Jay to answer that question.

Jay Peterson

Jeff, we will be going to market the debt, the term loan B starting next week. We believe it will conclude at the end of October or possibly the first half of November. The exact amount will all be predicated on the receptivity of the investment. But I can tell you, it will be quite competitive in terms of where we believe we will end, and the work we have done with the rating agency certainly supports that.

Jeff Hammond

And just one another question, I understand the international growth opportunity. Can you walk me through, domestically the channel overlap and how you’d go-to-market together with the suite of products from a revenue synergy standpoint? And I'll get back in queue. Thanks.

Bruce Thames

So this is Bruce. From a channel perspective, there is some overlap in Canada. There is very little to none in the U.S. About 45% of revenues are in the U.S. and we do see significant opportunities to leverage our sales network to gain access to customers and in markets that they don’t access today. We also have a very strong direct presence in the Gulf Coast that I think will really be beneficial and growing the position in the U.S. Internationally, they really -- about 4% of sales are international.

So we will really -- that’s where we’ll really most leverage our access to the international markets, particularly our position in EMEA and the opportunities that we see there for growth and some of the colder climates, Scandinavia, The Caspian, Russia. And then also there is some significant opportunities in the Middle East as well.

Operator

Thank you. And our next question comes from Scott Graham with BMO Capital Markets. Your line is now open.

Scott Graham

I have a couple of housekeeping questions, and then maybe one or two maybe larger ones. The tax rate, the new tax rate pro forma going forward for the combined company, it seems to imply that the tax rate on the acquired business is in the low-30s. Is that fair to say?

Bruce Thames

Yes, but let me caveat that. In that, going forward, there will be fluctuations in our revenues across the globe. And depending on how well we do in Canada, depending on how well we do in U.S. and Europe, it's really hard to give more specific guidance than that. But I think one of the keys is that the way this will be structured, it will be quite tax sufficient and that the overall rate in Canada will be very similar to where the guidance rate I gave just now.

Scott Graham

But I mean, you'll agree that if your tax rate is essentially going to go up, that that's a debit to the accretion, right?

Bruce Thames

No, the guidance we’ve given for this last year is that the rate would be 26% to 28%. And I think the 28% number we’re giving is a little accretive, or is a little conservative.

Scott Graham

I must have missed that along the line. I apologize. Can you talk about the $5 million to $6 million worth of cost? What is that charge, what does that include?

Bruce Thames

Rating agencies, it includes legal, it includes the tax advisory fees, the actual financing fees will be amortized. They'll be capitalized and then amortized. There were some audit due diligence and the M&A advisory fees. So there was a whole host of different fees.

Scott Graham

But it does not, obviously, include the cost that you would incur purchase accounting and similar upon closure, right?

Bruce Thames

Correct.

Scott Graham

When we -- have you put -- you're head around your yet, Jay, the incremental amortization that would be added here?

Jay Peterson

Yes, but that's really a black card at this point in time, Scott. We are working concurrently with our auditors at present and we should have a better estimate when we talk about the earnings of this business in January. But at this point in time, it is very -- it is very difficult to provide guidance on that.

Scott Graham

Here's maybe my overarching questions that I certainly understand you can't time these things. It's just that I guess, there would have to be, at least in my mind, some questions about having come off of a quarter where we hit an all-time low of earnings of break -- essentially breakeven. And here we are one quarter later, making our largest acquisition ever, increasing the size of the company materially but also increasing the leverage ratio of the company materially. Is this something that we needed to do now?

Bruce Thames

Scott, this is Bruce. First of all, as you say you don't select the timing, this opportunity became available. It was one of the areas we've been looking at very closely. And we've actually been looking at this predates my joining the business and it's a very attractive space that had very attractive adjacency that really gets where we want to take the business. So let's just start there. Beyond that, yes, we did have a bad quarter. I think a couple of things just reflecting on that quarter, some of that was project timing and we are at a very high backlog. And we have seen, when we start talking about some signs of recovery, we have seen strengthening in Canada. We’ve seen our margins come off of a low and begin to strengthen.

So there is some positive signs despite the performance we've had. There is some positive signs we've had in the marketplace. As we’ve looked at this business, this business when you look at where they're cycle-wise, they're actually earlier in the cycle, in the purchasing cycle. And we've actually seen very clearly their recovery began in November of last year and their revenues were up 12% in their fiscal 2017 over '16. So we're seeing some very clear signs of recovery that aligned with some of the things we've seen in our Canadian business.

So that gives us some additional comfort. Beyond that, we've gone to great lengths and Jay has talked to you about the debt. The reality is we created a lot of operating room in this business. The term loan B that will have in place actually has lower debt service, it's covenant-light and gives us a lot of room to operate the business and we’re growing our EBITDA by 50%. And not only are we growing it by 50% the high margin, high value niche within the industry. And overall, the financial profile actually exceeds that of Thermon's.

So all of those were factors that we looked at as a management team. We don't share it lightly, but we feel pretty confident about this move, it's the right thing for the business, it’s the right thing for our customers and ultimately it's the right thing for our shareholders.

Scott Graham

That's a very comprehensive answer Bruce. I thank you for that and thank you Jay.

Operator

Thank you. And our next question comes from Brian Drab with William Blair. Your line is now open.

Brian Drab

So did you say when the deal is expected to close?

Bruce Thames

November, possibly earlier, but…

Jay Peterson

30 to 45 days.

Brian Drab

And I know the slides here available on the webcast, those will be posted on the site I assume as well. I don’t know if I saw them posted.

Bruce Thames

Yes, they're posted, Brian.

Brian Drab

I just don't want to lose this information after we hang up here. And then Jay the interest rate on the new debt, I know that you gave the standard answer, of course we don’t know yet. But that rate will be better or higher than the rate on the current debt?

Bruce Thames

It will be higher. There're no financial covenants. But by no means will it -- we do not foresee any issues with servicing the debt. And we can give you more specific but at the very worst case, it would be at a couple points higher than we're at today. So we just do not envision that being an issue.

Brian Drab

And then let's see -- the EBITDA for fiscal '18 versus '17. Can you talk about the visibility that you have for this business, and you're going from 23 million to 29 million is a pretty good step up.

Bruce Thames

They're off to a strong start in terms of their performance since the end of their fiscal year. Their backlog is also very supportive of this along with their pipeline. So we are cautiously optimistic that they will deliver a very robust year.

Brian Drab

And then Jay, what are you using for your weighted average cost of capital right now?

Jay Peterson

Good question, prior to the deal, our WACC was 11.3. Our post closing WACC on the date of closing would be 8.5 and we believe it will trend between those two numbers as we go forward in the year.

Brian Drab

So when -- I think you said in these slides, you expect within three years to be 200 basis points above your WACC. Should we think about that target then as 10.5?

Jay Peterson

We think it will be higher than that. As a matter of fact, we think our WACC will be post the inclusion of this deal, our WACC will trend up to 9 or 10 and we think will be a couple of points above that within three years.

Brian Drab

So it’ll be 8.5 post sales trend up slightly and you will be 200 basis points above that?

Jay Peterson

Yes, in three years. And we think that number is exposed upward as we look out in additional two years.

Brian Drab

So you are -- let me just summarize all of that but it just looks like the target ROIC within three years is like 12% plus target?

Jay Peterson

Correct, in that neighborhood.

Brian Drab

And then just ask maybe one or two more. But the business is heating in primarily is it primarily heating or I don’t know if I have just the pie chart here. But it is primarily heating or is it primarily filtration or equally balanced?

Bruce Thames

There is only above 5 million in revenues are related to filtration, and filtration is a really an integral part of some of the package solutions that they provide to the industry like they have fuel conditioning and things for gas turbines. And so they are really -- it's really an integral part of a broader solutions set. But it's only about five 5 million of revenues. This is the heating business.

Brian Drab

And then just a high level comment/ question. And I need to look at this business more closely here, obviously. But it seems like a really good acquisition for you. And I know you said you've been looking at it for a while, but it seems like a really acquisition, and given the prices in the market today at a really good price. And just wondering if you can talk about why we didn’t do this acquisition earlier, and why there wasn’t more competition for this? I mean we’ve got 90% MROUE and recovering off of trough, and this looks like a really good acquisition. So why didn’t we get this done earlier?

Bruce Thames

Brian, so just to start I mean you have to have a willing selling. And so the owner of business felt like now is the time. And so previously, they held the business for many years owned and operated and it grew, and it did a fantastic job of building the brands and building the reputation in the industry. And we’re really -- we're excited about this opportunity. We think the brand equity that CCI Thermal and Thermon have in the industry are exceptional. So we’re very excited. So if we can't select timing, if the owners can, this was the competitive process.

However, this was a privately held business. And so it was a private process. They were only about a half of dozen companies that were even considered as potential acquirers. And Thermon was a competitive process but ultimately Thermon was selected because of our strategic direction and the cultural fit. And so, I don’t if I've fully answered your question. It is very difficult to tell you. But I think that's the overarching why now and why Thermon.

Brian Drab

Yes, I know I think do I have ask questions sound a little flipping or naïve there. But from the outside, we’re all just curious about that process and those just started off asking where I was just curious how many bidders were there? And so it sounds like half a dozen and it still seems like even -- I guess were there half of dozen bidders or were there half of dozen people that were even considered. Is that how you phrased it?

Bruce Thames

I mean we’re half of dozen selected, I mean we weren’t proving to all of the information it was the close bidding process. So that’s about all I have to provide at this time.

Operator

And our next question comes from Bhupender Bohra with Jefferies. Your line is now open.

Bhupender Bohra

My question was around, if you look at what you have provided on the CCI. I think it’s like 90% of the business is MROUE. Could you just give us some color how the MRO businesses -- when I looked at like the Chronolox acquisition, I think they mentioned if you are an industrial heat tracing, I think your average invoice or the average ticket price within the MRO business is like twice the size of the heat tracing ticket price. So can you give us some color on that, what the size on the average ticket price is?

Jim Pribble

Bhupender, this is Jim, it’s a good question. Look, when we talk about CCI thermals revenues being 90% MROUE, we define that in accordance with how Thermon has traditionally defined it. So the short cycle projects under $1 million. They are very high volume lower price per order business. So that’s how the math works out. The thing to point out here is that it's on the back of an installed base. So typically you see lower competition in high repeat business there. So that gives us a lot of confidence and the integrity of the revenue streams moving forward.

Bhupender Bohra

And on the cost synergy side, which will be pretty quick here like the $2 million. Could you give us some color where they would come from?

Jim Pribble

Yes, we still see some opportunities with just the manufacturing footprint and we also see some opportunities just in back office processes and OpEx so.

Bhupender Bohra

And is this a pretty capital-intensive business or will it be pretty similar to what Thermon has been over time?

Bruce Thames

It will be very similar to what Thermon has experienced over the last several years, Bhupender.

Bhupender Bohra

And lastly, I just want to -- when you look at the -- this business essentially gets something like 6% of the revenues from international markets and you plan to expand that. Should we think about any capacity expansion internationally you would need to grow this business? Or we’ll talk about like not much capital spending over the next few years?

Bruce Thames

Near term, I would model 2% and that is both maintenance and growth capital, 2% of revenues.

Bhupender Bohra

And then lastly, I just wanted to get a sense from Bruce. I think Bruce you’ve been talking how you want to expand Thermon's addressable market like 2 to 3 times when we look at this acquisition. I think you talked about $800 million fragmented market n the industrial heating side. That still doesn't get you to expanding your overall market twice. So can we just talk about the mismatch here? Or am I thinking wrong here?

Bruce Thames

No, that's correct. This is the first step. And again the timeframe we gave was by 2021. And so there're -- we do have additional plans in our strategy that we will execute on going forward to continue to grow that addressable market, to achieve those -- the 2 to 3 times.

Jim Pribble

This gets us the half way to two. I would expect by 2021 we’ll exceed that to be somewhere in between two to three.

Bhupender Bohra

And lastly, on the revenue expansion opportunity, have you sized internally what kind of revenue opportunities you would have from this acquisition in the near term?

Jay Peterson

Yes, we will be going through a budgeting process with them, starting in December. And we will give you additional guidance when we provide our normal outlook for fiscal year, the coming fiscal year.

Operator

Thank you. And our next question comes from Charley Brady with SunTrust Robinson Humphrey. Your line is now open.

Patrick Wu

This is actually Patrick Wu standing in for Charley. Thanks for taking my questions. Just you've touched upon it very briefly in your last answer in terms of additional possible M&A. At the current level of -- actually the target of 2.5 net debt to -- net debt to EBITDA target. How comfortable are you within that range? And it seems like obviously the market is pretty fragmented with CCI being 11% player in the market. And I think there is one point at the end of the slide where it says it gives you guys the opportunity to be a consolidator within this industry. Is this the market that you potentially can look more into in terms of opportunities, or are there other areas that you want to sell in terms of the portfolio gap filler?

Bruce Thames

Yes, this is Bruce. First of all, this is certainly an area of focus. But we do have other opportunities that would include M&A. The thing here is to be a consolidator, we're very comfortable with this leverage range. However, we'd like to operate the business closer to 2 times. And the thing that this does give us is very strong cash flows to de-lever very quickly. So we estimate within 24 months we can de-lever to that 2.5 times, which gets us a lot better in the range. We would expect to lever up to a similar leverage ratio to what we see here, maybe for future acquisitions.

So it gives us -- it gives you an idea of a banded comfort level with our leverage ratio. So I think again this is a very high value, it's a fragmented market in many ways it parallels electrical heat tracing, but it does offer us some significant opportunities to diversify into other industries, semiconductor, pharmaceuticals, aircraft and other areas to provide some counter-cyclicality to our core oil and gas and the energy market. So that's how we're viewing this space and how we're viewing growing going forward.

Patrick Wu

And maybe can you talk a little bit about your pipeline right now for M&A like the size of that, that'll be helpful.

Jim Pribble

Yes, this is Jim. We have a very robust -- we spent the last year really building out the M&A pipeline, and we're attracting approximately 50 companies that we divide into various areas, both where we play currently and in future potential expansion opportunity type areas. In terms of revenue that pipeline is roughly around 2 billion. And look I mean this is an area where, like you stated and like we covered on the slide, there's a lot of opportunity right here where we're playing today.

So first things first, we're going to integrate and operate this business. We're going to grow this business. And then in the process of doing so, continue to look in the areas that we've described previously, while keeping an eye over the horizon in a more strategic nature towards what gets us to that 2 to 3 times by 2021 figure that Bruce discussed earlier.

Patrick Wu

And then on the gross margin side, can you talk a little bit more about CCM gross margin? I guess a little -- fiscal year and where it has been historically given the outsize I guess composition from MROUE.

Jim Pribble

Yes, ballpark, their margins will be very similar to Thermon's, possibly slightly higher, but in that very similar neighborhood.

Patrick Wu

And that's the latest fiscal I guess was historically?

Jim Pribble

Yes, that is correct.

Patrick Wu

And just one last one from me. Obviously, you guys get a little bit of -- get on new markets that you enter into. I guess, it was transit industrials and I think there was one other one just added to your end market portfolio. Can you talk a little bit more about these new markets? And I guess your excitement level for each and what you're seeing in those as you're doing more due diligence in those markets?

Jim Pribble

Look, industrial process heating, the thing that's most attractive about it. The same physics govern the operation of our products and the products of everywhere where we're looking. I mean, especially through today when you look at the -- you go back to the slide you look at those products, it's heat transfer. We're experts in that area. So there's a lot again. There's a lot to do in that space. But heat transfer applies across a myriad of industrial applications. And like Bruce said before, whether that's transportation, food and beverage, pharmaceutical, agri, there's just a whole heck of a lot of opportunities.

So the way I always couch it is as follows. You have to balance strategy with opportunity. We have some short term goals, like I said before, of doing an exceptional job of integration, running and growing this business. While we're doing that, we'll be looking over the horizon towards those opportunities that I talked about before. Everything that we look at is in terms of adding value to our customers and shareholders. And to the degree, those opportunities present themselves and can do what I just mentioned, we'll prosecute this.

Bruce Thames

And one thing to add. One of the areas that we were really intrigued and excited by is the exposure to natural gas. Now, it's within energy so it's not diversification away from energy. But today, Thermon is heavily focused in oil and petrochemical. This actually gives us a lot more exposure to the gas markets and midstream, a couple of interesting things there. Gas is demand growth is 2x that of oil. And so we would expect a lot of the infrastructure and investments to be directed that towards gas as a bridge for fuel over the next 10 to 15 years.

In addition to that, we really see that the position in midstream, which is much more volume based than it is really dependent on commodity pricing, it tends to be the most stable and they are well positioned in that space as well. So I think even within energy, there is a diversification play and there is a positioning that's favorable for Thermon and I think this is exciting for us going forward and create some real opportunities for growth, not only in North America but certainly in the Eastern Hemisphere as well.

Operator

Thank you. And our next question comes from Scott Graham with BMO Capital Markets. Your line is now open.

Scott Graham

Just one or two follow ups -- by the way, Bruce, your last point about increasing exposure to midstream and gas is really welcome versus a portfolio that I thought -- I think we all thought was a lot less cyclical than the reality. The cost synergies, so that kind of sketches out to about like 2% to 3% to sales. And I know that this is a higher-margin company, but it's a higher-margin company more off of the mix of sales as opposed I would argue versus the cost side of benefits there. So my simple question is, is there an opportunity to push up that number? It looks like they have a number of facilities, which not too dissimilar from the count that you guys have, yet a much smaller company. So is there a facility consolidation opportunity? What can we do to boost that $2 million number going forward?

Bruce Thames

Yes, so again that’s conservative. We are looking at that. There are some facilities consolidation opportunities. Their manufacturing is fundamentally different and they are very vertically integrated, which Jim had touched on really does two things from them. It enables them to lower their cost basis to some of their competitors and actually has contributed to the strong margin profile that you see in the business. Second, it really shortens lead times. So some of that is just the manufacturing intensity and the type of products is part of that. There is a lot more fabrication and things than what you see in the Thermon product lines. So it brings actually a new capability to Thermon, which would apply in some other areas of our business, steam would be one of those. But there are some additional facility consolidation opportunities, but it has a lot less to do with the manufacturing footprint. We view this as a platform business and so some of them synergies were really not there that you might have seen had this been electrical heat tracing business.

Scott Graham

Now, I understand. That's helpful. That does beg the question now, if I may, is that if they have a bit of a different manufacturing requirement behind their products. Is that something that you can absorb internally at Thermon? And perhaps synergies doesn't necessarily mean it's at that company, it could be within your company as well. Is there an opportunity there to import some of what they do?

Bruce Thames

Potentially. And keep in mind too, this is as we consider what we’ve got in front of us today, we’ve been fairly conservative with our cost synergy estimates and there are some opportunities. But this starts to make even more sense as we go back into the market when we look at some of those fragmented opportunities. And as those roll up, you start to realize a lot of that synergy that you are talking about now.

Scott Graham

And last question is -- whenever a company talks about sales synergies, I think typically the sales side looks at that with some scrutiny, because it's not as if that customer is not being served and when they -- you make an acquisition, you guys go knocking on -- play to peers on new customers. It’s not as if they open the door and say, oh thank god, you're here. We weren’t able to operate. So there's someone else servicing that need right now, and you would need to bump them. So, has there been any discussions with your customers about hey what if we had this in our portfolio, what if we had that in our portfolio? Because that would really I think kick start a potential realization of synergies as oppose to the whole four synergies, which I think a lot of companies base their sales synergy thinking around?

Bruce Thames

Let me begin by saying that the numbers we’ve given you are based upon the cost synergies only. And so, we recognize what you just articulated. And yes, we have begun to engage the customer base. It's fairly early. It’s a concept that we have entertained for some period of time. We see some direct application for it today, because of some of the inquiries we get for certain types of heating, tank heating and some other things. So there is some things that we haven’t even engage the customer, we just get inbound inquiries for.

So we do believe that is there. And I think some of the things that Jim touched on earlier, the certifications don’t -- the stake is that that is a high barrier to entry. It’s a high cost and it takes a long time to get. This company has done a lot of heavy lifting to open that door, so that as we begin to look at taking this solution set internationally, we’ve got the certifications to carry it. So there is some work that we have done, Scott. Are we finished? Absolutely not. But the numbers we provided to you have been based upon cost synergies, and we see some significant sales opportunities. We haven’t fully vetted all of them, but we know that some of those can be realized.

Operator

Thank you. And our last question of the day is from Brian Drab with William Blair. Your line is now open.

Brian Drab

I'm just looking at slide 19, and I have two items that I just wanted to see if you could comment on. But this related party rent, it actually seems pretty material and pretty recurring that’s adjusted out $2.8 million. Can you talk about that? And then the footnote, I don’t know if this means related party rent expense given Thunder’s acquisition of Canadian Real Property. What does that mean? And then also, are you inheriting an aircraft here and is that something that will be sticking around or is that part of the cost synergy?

Sarah Alexander

Brian, this is Sarah. The related party rent, the weighted -- the real estate transactions -- was structured prior to the transaction, it was actually owned by a separate but related party and had structured rent payments under that. We are acquiring all of the real property necessary to run the business. They also had some redundant real estate that was used for storage and other uses that we will not be acquiring. So all of the real estate is included in the total consideration of 258 million so those rent payments will not be recurring. And the aircraft is being transferred to another related entity and will not be a part of the deal, so all of those expenses will go away.

Brian Drab

And was Thunder just some codename for Thermon or something during this, what is that?

Sarah Alexander

Yes.

Operator

Thank you. I would now like to turn the call back to President and CEO, Bruce Thames for any further remarks.

Bruce Thames

Thank you, Andrew. Thank you all for joining the call. We appreciate the interest in Thermon. We appreciate the questions this morning. We're very excited about this acquisition and what it represents for the Company, our customers, our employees and our shareholders. So thank you again. We look forward to our next earnings call here in after several weeks. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may disconnect. Everyone, have a great day.

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