Investor Presentation

Transcription

1 NYSE: GHM November 13, 2018 Investor Presentation Jeffrey F. Glajch Vice President & Chief Financial Officer 2018 Graham Corp. 1

2 Safe Harbor Statement This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by words such as expects, estimates, confidence, projects, typically, outlook, anticipates, believes, appears, could, opportunities, seeking, plans, aim, pursuit, and other similar words. All statements addressing operating performance, events, or developments that Graham Corporation expects or anticipates will occur in the future, including but not limited to, expected expansion and growth opportunities within its domestic and international markets, anticipated revenue, the timing of conversion of backlog to sales, market presence, profit margins, tax rates, foreign sales operations, its ability to improve cost competitiveness, customer preferences, changes in market conditions in the industries in which it operates, changes in commodities prices, the effect on its business of volatility in commodities prices, changes in general economic conditions and customer behavior, forecasts regarding the timing and scope of the economic growth in its markets, its acquisition and growth strategy and the expected performance of Energy Steel & Supply Co. and its operations in China and other international locations, are forward-looking statements. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties. These risk factors and uncertainties are more fully described in Graham Corporation's most recent Annual Report filed with the Securities and Exchange Commission, included under the heading entitled Risk Factors. Should one or more of these risks or uncertainties materialize, or should any of Graham Corporation's underlying assumptions prove incorrect, actual results may vary materially from those currently anticipated. In addition, undue reliance should not be placed on Graham Corporation's forward-looking statements. Except as required by law, Graham Corporation disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this slide presentation. This presentation will discuss some non-gaap financial measures, which Graham Corporation believes are useful in evaluating its performance. You should not consider the presentation of this additional information in isolation or as a substitute for results compared in accordance with GAAP. Graham Corporation has provided reconciliations of comparable GAAP to non-gaap measures in tables found in the Supplemental Information portion of this presentation Graham Corp. 2

3 Business & Strategic Overview 2018 Graham Corp. 3

4 Introduction to Graham Corporation Engineered-to-Order (ETO), custom fabricated equipment and solutions provider Key markets: Refining Petrochemical TTM Q Sales $90.5 million Power 11% Refining 48% Power U.S. Navy Other/ Navy 25% Chemical/ Petrochemical 16% Founded: 1936 IPO: 1968 Market capitalization NYSE: GHM Recent price $24.75 $243.3 million 52-week range $17.97 $28.98 Avg. daily trading volume (3 mos.) 22.8k Common shares outstanding: 9.83 million Annualized dividend/dividend yield $0.36 / 1.45% Ownership: Institutional 77.1% Insider 3.1% Fiscal year end March 31 Note: Market data as of November 5, 2018 [Source: S&P Capital IQ]; ownership as of last filing date 2018 Graham Corp. 4

5 Process-Critical Equipment Customers Require Quality, Complex Engineered-to-Order Equipment High Cost of Failure Low Fault Tolerance Performance Specifications Difficult or Impossible to Replace Low Relative Cost 2018 Graham Corp. 5

6 Graham End Market Key Differentiators Graham provides unique value before and throughout project life cycle Consultative Selling Platform Complex Project Management Aptitude Provide engineering and equipment scope analysis regarding Capex, Opex, and best way to achieve user s operating objectives. Able to provide fast, accurate and detailed analysis. Value provided to market before order is placed. Ability to efficiently and effectively stop and start, as needed, throughout project life. Must have this capability. Responsive Operating Model Low volume / high mix operations model where engineering change orders occur frequently while in fabrication. Custom Fabrication to Tight Tolerances Unique capability to custom fabricate large weldments, in special metallurgy to exacting tolerances. Strong quality control with objective quality evidence Graham Corp. 6

7 Wide Range of Projects Project Types % of GHM Sales ASP* ASP* Range Lead Time Large Orders ~ 2/3 $800,000 $250k-$10 million (Navy: up to $30 mil) 9-18 months (Navy: 2-5 years) Short Cycle Orders ~1/3 <$10,000 $500-$250k 1 week - 6 months * ASP: Average Selling Price 2018 Graham Corp. 7

8 Strategically Addressing Key Markets Relative importance Key End Markets Market Size % of GHM Sales GHM Share New Capacity Revamps/ Retrofits* Spares/ Replacements* Crude Oil Processing/ Refining >$150 million annually Chemical/ Petrochemical >$150 million annually 25-35% ~ 25% Significant Significant Significant 25-35% ~15% Significant Moderate Significant U.S. Navy ~$50 million annually 15-25% >50% Significant Not meaningful Not meaningful Power >$250 million annually 15-20% < 10% Moderate Significant Significant Other ~10% Significant Not meaningful Significant * Revamps/retrofits and spares/replacements are derived from the installed base 2018 Graham Corp. 8

9 Core Markets Recovering Global refining, U.S. petrochemical and U.S. Navy orders driving record backlog levels GHM FY2018 Q2 - Q4 represented cycle bottom sales and profitability Cycle Recovery Goals Strong Recovery/ Revenue Growth >17% Average EBITDA Margin* >12% Average ROIC* * Average Cycle performance 2018 Graham Corp. 9

10 Growth Drives Margin Expansion (Revenue in millions) FY18 (1) Based on midpoint of FY2019 guidance provided November 8, 2018 (2) See supplemental slide for Adjusted EBIDTA reconciliation and other important disclaimers regarding Graham s use of Adjusted EBIDTA 2018 Graham Corp. 10 Mid-Cycle

11 Record Backlog to Feed FY2020 Backlog by Industry September 30, 2018 Other 3% Power 6% Refining 24% Mix highlights importance of diversification strategy Navy 51% ($ in millions) $ Backlog $82.6 $117.9 $114.9 $127.8 Chemical/ Petrochemical 16% Projected Backlog Conversion September 30, 2018 Within 12 to 24 Months 10-20% Within next 12 months 55-60% Beyond 24 Months 25-35% 3/31/2015 3/31/2016 3/31/2017 3/31/2018 6/30/2018 9/30/2018 Backlog Backlog expected to convert within 12 months High percentage of U.S. Navy projects in backlog provides stability 2018 Graham Corp. 11

12 Acquisition Strategy Diversify products, markets, and/or geographic presence; reduce earnings volatility Engineered-to-order products for energy industry Strong management team with customer and quality focus $20 million $60 million in annual revenue Cash return exceeds equity cost of capital Strong pricing discipline 2018 Graham Corp. 12

13 Financial Overview 2018 Graham Corp. 13

14 Invested for Diversification Strategy & Energy Market Recovery (Revenue in millions) $150 $120 $90 $ % $90.0 $91.8 $77.5 $98-$105 (3) 40% 35% 30% 25% 20% $60 $30 12% 10% 5% 15% 10% 5% $0 EPS FY15 FY16 FY17 FY18 FY19E Revenue Adj. EBITDA Margin $1.57 (2) $0.61 $0.56 (2) $0.18 (2) (1) 0% (1) See supplemental slide for Adjusted EBITDA reconciliation and other important disclaimers regarding Graham s use of Adjusted EBITDA (2) FY15, FY17 and FY18 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of GAAP EPS to Adjusted EPS. (3) Based on guidance provided as of November 8, Graham Corp. 14

15 Strong Balance Sheet ($ in millions) Cash, Cash Equivalents and Investments Operating Cash Flow $65.1 $73.5 $76.5 $78.9 $18.8 $12.4 $8.5 $5.1 3/31/2016 3/31/2017 3/31/2018 9/30/2018 Capital Expenditures FY16 FY17 FY18 Q2 FY19 YTD Working Capital Utilization (2) 10.8% $1.2 $0.3 $2.1 $2.0 $2.5 (1) 5.7% 2.1% 1.3% FY16 FY17 FY18 FY19E FY16 FY17 FY18 9/30/2018 (1) Guidance provided as of November 8, 2018 (2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue 2018 Graham Corp. 15

16 Strong Cash Generation March 2005 to September 2018 ($ in millions) (1.3) (27.6) (13.6) (21.2) (18.5) >100% of Net Income converted to cash or returned to shareholders March 2005 Cash & Investments, Net Net Income D&A, Intangibles Impairment Working Capital Change Capital Investments Financing/Other Treasury Stock Repurchases Dividends Energy Steel Acquisition September 2018 Cash & Investments, Net Sources of Cash Uses of Cash 2018 Graham Corp. 16

17 Graham Capital Allocation Priorities Cash from Operations Cash from Balance Sheet Organic Growth Acquisition Strategy Dividend Payments Invest in current operations to drive organic growth Continue consistent dividend payments and increases Stock Repurchases Seek opportunistic acquisitions with cash return that exceeds equity cost of capital Return value to shareholders through stock repurchases Maintain a strong, prudently managed balance sheet 2018 Graham Corp. 17

18 Shareholder Focus Annualized Dividends Per Share $0.40 $0.36 $0.32 $0.16 $0.12 $0.08 Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016* 8/2/2018* * Reflects date of dividend increase Institutional Ownership 77% 63% 36% Board increased dividend on 8/2/18, to $0.40 per share annualized Paid $1.9 million of dividends YTD Q2 FY2019 Sustainable dividends reflect stability of operating cash flows across business cycle 3/31/2007 3/31/2010 6/30/ Graham Corp. 18

19 Narrowing FY2019 Guidance (1) Revenue $98 million $105 million Gross margin 25% 27% SG&A $18.5 million $18.75 million Effective tax rate ~20% (1) FY2019 guidance updated as of November 8, Graham Corp. 19

20 Investment Highlights Expected long-term global energy demand growth drives opportunities Leading market position and worldwide brand recognition Sales model based on early engineering involvement Expanding addressable market opportunities Strong and flexible balance sheet Acquisition opportunities Results-oriented management team Top quartile financial performance Solid operating leverage and powerful cash generation 2018 Graham Corp. 20

21 NYSE: GHM November 13, 2018 Investor Presentation 2018 Graham Corp. 21

22 NYSE: GHM November 13, 2018 Supplemental Information 2018 Graham Corp. 22

23 Global Oil Refining Industry Leading Supplier of Vacuum Systems and Surface Condensers Refining 48% Chemical/ Petrochem 16% Power 11% Navy/Other 25% Total expected market demand ~$150 million to ~$200 million annually Market share: high 20s to low 30s Tactics for growth Going after more projects Build the capacity to execute the opportunities Percents based on Q2 FY 2019 TTM sales of $90.5million Market demand drivers New capacity Revamp/upgrades, debottlenecking, feedstock changes Statutory regulations; ULSD, clean gasoline, etc. Replacement equipment Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity 2018 Graham Corp. 23

24 Chemical/Petrochemical Industry Natural Gas Growth Trend Refining 48% Chemical/ Petrochem 16% Power 11% Navy/Other 25% Total expected market demand ~$150 million annually Market share: low to mid teens Tactics for growth Capitalize on customer relationships and strong brand Early engagement on projects Expand foothold in Asia Percents based on Q2 FY 2019 TTM sales of $90.5million Market demand drivers New capacity Revamp and debottleneck Replacement equipment Monetization of domestic natural gas resources Key Metric: 1mmTPY of new capacity $5mm to $8mm of opportunity 2018 Graham Corp. 24

25 Power Industry Support Nuclear Power Industry with Value-Add Equipment and Materials Refining 48% Chemical/ Petrochem 16% Power 11% Navy/Other 25% Percents based on Q2 FY 2019 TTM sales of $90.5million Tactics for growth Pipeline for replacing and upgrading equipment at existing power facilities Expanding addressable opportunities for replacement via Energy Steel & Graham synergies Capture opportunities at new build/restarts Access China and India markets Market demand drivers MRO New capacity Nuclear Renewable Cogeneration 2018 Graham Corp. 25 Rerate, power augmentations Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity

26 Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy Refining 48% Chemical/ Petrochem 16% Power 11% Navy/Other 25% Percents based on Q2 FY 2019 TTM sales of $90.5million Aircraft carrier program ~$35 million to ~$40 million per carrier; bid CVN 80 in 2017 Submarine program ~$15 million to ~$20 million per Virginia Class; 45 subs, building one to two subs per year ~$20 million to ~$25 million per Ohio Replacement Class; 11 to 13 subs planned with construction scheduled to begin in 2021, building one every ~18 months Tactics for growth Certifications Capital investments Foot in the door Market demand drivers Build out of Virginia Class sub program Ohio Replacement Class sub program Carrier fleet Replacement equipment 2018 Graham Corp. 26

27 Diverse Bidding Pipeline $600 Million to $800 Million Power 15%-20% By Industry* Refining 40%-45% As of September 30, 2018 Other 5%-10% Chemical/ Petrochemical 20%-25% $600 million to $800 million TTM bidding pipeline Pipeline includes bids to multiple EPCs or OEMs for one opportunity Pipeline is indicative of diversification strategy & opportunity Oil price has impacted bid activity and general level of pipeline for extended period Long-term fundamentals remain intact * Excludes Navy 2018 Graham Corp. 27

28 Geographic Revenue Breadth Q2 FY19 TTM Sales $90.5 million Q2 FY19 TTM Orders $140.1 million Middle East 3% Asia 10% Other 27% Middle East 10% Asia 6% Other 17% United States 60% United States 67% 2018 Graham Corp. 28

29 Strengthening Stable Revenue Base Expect to exceed $60 million of predictable base revenue through organic growth strategies to capture greater market share: Nuclear market MRO Executing Naval strategy Aftermarket strategy Short-cycle product strategies Stronger predictable base of sales reduces earnings volatility Reducing Volatility $18 Annual Predictable Base Business (Base revenue: $ in millions) $21 $25 $29 $33 $25 $31 $42 $51 $45 $45 $41 $50 $46 > $ Graham Corp. 29

30 Invested to Strengthen GHM Performance Lead time reduction Strengthen 1 st pass yield quality Continuous improvement Sales structure CapEx M&A 4Ds of execution Quick response office cells Performance management Topline Growth Improvement Lever Profit Reduce Earnings Greater Improvement Volatility Customer Value 2018 Graham Corp. 30

31 Graham s Channel Management Structure Lapeer, MI Operations North America 30* Batavia, NY HQ & Operations Gulf Coast LA Perf Improvement Ctr EMEA 15* Asia 4* Suzhou, China Sales Office Houston, TX Sales Office Latin America 7* * Number of independent sales representatives in region 2018 Graham Corp. 31

32 Value Enhancing Sales Cycle Year 1 Year 2 Year 3 Year 4 Year 5 Concept FEED* EPC Bid Purchase Construction * Front End Engineering Design Cradle to grave support Graham Competitive Advantage: Early Involvement Year 1 Year 2 Graham establishes competitive advantage during first 24 months Understanding pipeline, developing design options, identifying decision makers, understanding timing, creating strong relationships to Gain advantage, optimize margin and win business 2018 Graham Corp. 32

33 Executive Compensation Shareholder Alignment Base Salary Reviewed annually by our compensation committee and determined based on company performance, individual performance, job responsibilities, and internal pay equity Provides compensation that is not at-risk to compensate executive officers Annual Incentive Cash Compensation Based on achievement of threshold, target and maximum levels of net income and order level targets as well as personal goals Long Term Equity Incentive Compensation Performance-Vested Restricted Stock Relative Total Shareholder Return ( TSR ) measure Relative profitability measure [EBITDA vs. BICC (Baird Industrial Index)] Time-Vested Restricted Stock Designed to retain executives and align their interests with those of our shareholders 2018 Graham Corp. 33

34 Adjusted EBITDA Reconciliation Annual (in thousands) Fiscal Years Ended March Net income (loss) $ 10,145 $ 14,735 $ 6,131 $ 5,023 $ (9,844) + Net interest income (93) (178) (251) (376) (594) + Income taxes 4,565 7,017 2,599 2,026 (3,010) + Depreciation & amortization 2,199 2,308 2,435 2,326 2,222 + Restructuring charge - 1, Impairment of goodwill and intangible assets ,816 + Bad debt charge on commercial nuclear power business Adjusted EBITDA $ 16,816 $ 25,600 $ 10,914 $ 9,629 $ 4,186 Adjusted EBITDA margin % 17% 19% 12% 10% 5% Non-GAAP Financial Measure: Adjusted EBITDA is defined as consolidated net income before interest expense and income, income taxes, depreciation and amortization, a nonrecurring restructuring charge, impairment of goodwill and intangible assets, and a charge associated with the revaluation of the nuclear business. Adjusted EBITDA margin is Adjusted EBITDA divided by sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Graham believes that providing non-gaap information such as Adjusted EBITDA and Adjusted EBITDA margin are important for investors and other readers of Graham's financial statements, as they are used as analytical indicators by Graham's management to better understand operating performance. Graham s credit facility also contains ratios based on EBITDA. Because Adjusted EBITDA and Adjusted EBITDA margin are non-gaap measures and are thus susceptible to varying calculations, Adjusted EBITDA and Adjusted EBITDA margin, as presented, may not be directly comparable to other similarly titled measures used by other companies Graham Corp. 34

35 Adjusted EPS Reconciliation (in millions, except per share data) FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 GAAP diluted earnings per share $ 1.00 $ 1.45 $ 0.61 $ 0.52 $ (1.01) Restructuring charge after tax, per diluted share Impairment of goodwill and intangible assets Bad debt charge on commercial nuclear power business Tax effect of above - (0.05) - (0.02) (0.31) Impact of new tax law (0.08) Adjusted diluted earnings per share $ 1.00 $ 1.57 $ 0.61 $ 0.56 $ Graham Corp. 35

36 North American Competition Market Refining vacuum distillation Competitors Croll Reynolds Company, Inc.; Gardner Denver, Inc.; GEA Wiegand GmbH Chemicals/Petrochemicals Croll Reynolds Company, Inc.; Gardner Denver, Inc.; Schutte Koerting Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer Nuclear Naval Nuclear Propulsion Program/Defense Ambassador; Donghwa Entec Co., Ltd..; KEMCO; Oeltechnik GmbH; SPX Heat Transfer Holtec; KEMCO; Maarky Thermal Systems; SPX Heat Transfer; Thermal Engineering International (USA), Inc. Consolidated; Dubose; Energy & Process; Joseph Oat; Nova; Nusource; Tioga DC Fabricators; Joseph Oat; PCC; Triumph Aerospace; Xylem 2018 Graham Corp. 36

37 International Competition Market Refining vacuum distillation Competitors Edwards, Ltd.; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG Chemicals/Petrochemicals Croll Reynolds Company, Inc.; Edwards, Ltd.; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG; Schutte Koerting Turbomachinery OEM refining, petrochemical Chem Process Systems; Donghwa Entec Co., Ltd.; Hangzhou Turbine Equipment Co., Ltd.; KEMCO; Mazda (India); Oeltechnik GmbH Turbomachinery OEM power and power producer Chem Process Systems; Holtec; KEMCO; Mazda (India); SPX Heat Transfer; Thermal Engineering International 2018 Graham Corp. 37

38 Products: Surface Condenser Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power Graham Corp. 38

39 Vital Processing Components A condenser supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power. An ejector system lowers the pressure in the distillation column to allow crude oil to boil at a lower temperature. This allows for more efficient and cost-effective separation of crude oil into valuable products, such as diesel, gas oils, kerosene, and other fuels. REFINERY EJECTOR SYSTEM CNOOC HUIZHOU REFINERY CHINA 240,000 BBL/DAY REFINERY 39