Sidoti & Company Fall 2017 Convention

Transcription

1 NYSE: GHM September 28, 2017 Sidoti & Company Fall 2017 Convention James R. Lines President & Chief Executive Officer Jeffrey F. Glajch Vice President & Chief Financial Officer 2017 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 recovery in its markets, its acquisition and growth strategy and the expected performance of Energy Steel & Supply Co. and its operations in China, 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 news release. This presentation will discuss some non-gaap financial measures, which Graham Corporation believes are useful in evaluating our 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 2017 Graham Corp. 3

4 Financial Goals Operating leverage and pricing drive EBITDA margin expansion Performance Measures Prior Year Results Goals Organic Revenue Growth Profitability Capital Stewardship FY17 Revenue $92 million FY17 EBITDA Margin 11% FY17 ROIC 4.4% Organic & Inorganic Revenue Growth >17% Average EBITDA Margin* >12% Average ROIC* * Average Cycle performance Note: Fiscal Year ends March Graham Corp. 4

5 Executing Our Strategy to Expand Earnings Leverage assets to capture market share Expand predictable base business Diversify & strengthen revenue streams Reduce earnings volatility Short-term objective: Drive top-line growth through greater market share Key markets: Refining Petrochemical Power U.S. Navy Long-term objective: Leverage competencies and financial strength to diversify and provide further growth 2017 Graham Corp. 5

6 Managing Through the Downcycle Focused on positioning to capitalize on eventual market recovery Sales personnel increasing focus on plants with existing Graham installations to increase service to current customers and proactively identify additional opportunities Investing in internal process improvement Proactively seeking acquisitions to complement organic activities 2017 Graham Corp. 6

7 Addressing Key Markets Key Markets Graham Share* Actions Share Goals* Global Refining >$150 million annually ~ 25% Assertive pricing strategy Take market share Further expand execution capacity >40% Global Chemical/ Petrochemical >$150 million annually ~15% Dominate U.S. market Take market share; retain price discipline Win in Asia Further expand execution capacity >30% U.S. Navy ~$50 million annually ~10% Secure position in both submarine programs Win CVN80 40 to 50% Power >$250 million annually <10% Strengthened management team Align sales, engineering and operations for growth Double share * Market share data are management estimates Secondary markets are not noted 2017 Graham Corp. 7

8 Diversification Strategy Stronger earnings, less volatility Projected Mix Refining 46% Power 15%-25% Navy Other 10%-15% 10%-15% Refining 20%-30% Chemical/ Petrochemical 20%-30% Acquisitions present incremental growth potential 2017 Graham Corp. 8

9 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 2017 Graham Corp. 9

10 FY2018 Challenges Reflected in Backlog Mix highlights importance of diversification strategy Backlog by Industry Other 3% Refining 18% Chemical/ Petrochemical 9% June 30, 2017 Power 6% Within Within months 45-55% Navy 64% Projected Backlog Conversion June 30, 2017 Months % Beyond 24 Months 35-40% $ $ $80.00 $60.00 $40.00 $20.00 $ Graham Corp. 10 ($ in millions) $112.1 $113.8 Backlog $108.0 $82.6 $72.9 3/31/2014 3/31/2015 3/31/2016 3/31/2017 6/30/2017 Backlog Backlog expected to convert within 12 months High percentage of U.S. Navy projects in backlog provides stability during extended energy downturn ~70% from markets or customers not served by the Company eight years ago Reducing the impact of more cyclical sales in the energy industry

11 Backlog Mix ($ in millions) 120 Illustrates Impact of Diversification Strategies Year End Backlog Diversification strategy impact 20 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Core GHM Naval Commercial Nuclear Converts within 12 months 2017 Graham Corp. 11

12 Diverse Bidding Pipeline $600 Million to $800 Million Power 15%-20% By Industry* Refining 40%-45% As of June 30, 2017 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 Drop in oil prices has impacted bid activity and general level of pipeline Long-term fundamentals remain intact * Excludes Navy 2017 Graham Corp. 12

13 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 2017 Graham Corp. 13

14 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 2017 Graham Corp. 14

15 Financial Overview 2017 Graham Corp. 15

16 Invested for Diversification Strategy & Energy Market Recovery (Revenue in millions) $160 40% $140 $ % $120 $100 $80 $ % 19% $90.0 $91.8 $85.0 (3) 30% 25% 20% $60 $40 12% 11% 15% 10% $20 5% $0 FY14 FY15 FY16 FY17 FY18E Revenue GHM Adj. EBITDA Margin (1) 0% EPS $1.00 $1.57 (2) $0.61 $0.56 (2) (1) See supplemental slide for Adjusted EBITDA reconciliation and other important disclaimers regarding Graham s use of Adjusted EBITDA (2) FY2015 and FY2017 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of GAAP EPS to Adjusted EPS. (3) Based on mid-point of guidance provided as of August 4, Graham Corp. 16

17 Strong Balance Sheet ($ in millions) Cash, Cash Equivalents and Investments $60.3 $65.1 $73.5 $75.3 Operating Cash Flow $18.8 $12.4 $6.3 $2.9 3/31/2015 3/31/2016 3/31/2017 6/30/2017 Capital Expenditures FY15 FY16 FY17 Q1 FY18 YTD Working Capital Utilization (2) $ % $1.2 $0.3 $2.5 $3.0 (1) 10.8% 5.7% 4.3% FY15 FY16 FY17 FY18E Batavia Expansion (~65% in FY15) FY15 FY16 FY17 6/30/2017 (1) Guidance provided as of August 4, 2017 (2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue 2017 Graham Corp. 17

18 Strong Cash Generation March 2005 to June 2017 ($ in millions) (25.3) (13.5) (16.7) (18.5) ~100% of Net Income converted to cash or returned to shareholders March 2005 Cash & Investments, Net Net Income D&A Working Capital Change Capital Investments Financing/Other Treasury Stock Repurchases Dividends Energy Steel Acquisition June 2017 Cash & Investments, Net Sources of Cash Uses of Cash 2017 Graham Corp. 18

19 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 2017 Graham Corp. 19

20 Shareholder Focus $0.08 Annualized Dividends Per Share $0.12 $0.16 $0.32 $0.36 $0.36 Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016* 1/31/2017 * Reflects date of dividend increase Paid $0.9 million of dividends Q1 FY2018 Sustainable dividends reflect stability of operating cash flows across business cycle Institutional Ownership 36% 63% 74% 3/31/2007 3/31/2010 3/31/ Graham Corp. 20

21 FY2018 Guidance (1) Revenue $80 million $90 million Gross margin 22% 24% SG&A $16 million $17 million Effective tax rate 30% 32% (1) FY2018 guidance provided as of August 4, Graham Corp. 21

22 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 2017 Graham Corp. 22

23 Sidoti & Company Fall 2017 Convention NYSE: GHM September 28, Graham Corp. 23

24 Supplemental Information 2017 Graham Corp. 24

25 Graham Corporation Market Data Founded: 1936 IPO: 1968 Market capitalization Recent price $20.56 NYSE: GHM $200.8 million 52-week range $17.19 $25.00 Avg. daily trading volume (3 mos.) 32.6k Common shares outstanding: 9.8 million Annualized dividend/dividend yield $0.36 / 1.8% Ownership: Institutional 75.3% Insider 2.8% Fiscal year end March 31 Note: Market data as of September 18, 2017 [Source: Bloomberg]; ownership as of last filing date Q1 FY18 TTM Sales $90.3 million Asia 9% Middle East 3% United States 75% Other 13% Q1 FY18 TTM Orders $62.6 million Asia 17% United States 75% Middle East 6% Other 2% 2017 Graham Corp. 25

26 Global Oil Refining Industry Leading Supplier of Vacuum Systems and Surface Condensers Chemical/ Petrochem 26% Refining 23% Power 21% Navy/Other 30% Percents based on Q1 FY 2018 TTM sales of $90.3 million 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 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 2017 Graham Corp. 26

27 Chemical/Petrochemical Industry Expansion Natural Gas Growth Trend Chemical/ Petrochem 26% Refining 23% Power 21% Navy/Other 30% 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 Q1 FY 2018 TTM sales of $90.3 million 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 2017 Graham Corp. 27

28 Power Industry Expansion Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials Chemical/ Petrochem 26% Refining 23% Power 21% Navy/Other 30% Percents based on Q1 FY 2018 TTM sales of $90.3 million 2017 Graham Corp. 28 Tactics for growth Strong 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 Rerate, power augmentations Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity

29 Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy Chemical/ Petrochem 26% Refining 23% Power 21% Navy/Other 30% Percents based on Q1 FY 2018 TTM sales of $90.3 million 2017 Graham Corp. 29 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

30 Strengthening Stable Revenue Base Reducing Volatility 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 $18 Annual Predictable Base Business (Base revenue: $ in millions) $21 $25 $29 $33 $25 $31 $42 $45 $45 $51 $41 $50 > $60 Short-cycle product strategies Stronger predictable base of sales reduces earnings volatility 2017 Graham Corp. 30

31 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 2017 Graham Corp. 31

32 Culture Transformation: Power of Engagement Human capital is our most critical asset Professional Development & Improved Training Empowerment Performance Management & Increased Accountability PEOPLE Redefined Traditional Roles & Addressed Organizational Constraint Direct labor as value creator vs. cost Unlocked potential of human capital Added New Skills to our Bench Increased Decision Rights 2017 Graham Corp. 32

33 Investments in Capacity for Organic Growth Expanded/Upgraded Facilities Invested $15 million in facilities and equipment in last 5 years Added 40,000 ft 2 of additional manufacturing space New machines and technology Supports Diversification Strategy Established dedicated facility for U.S. Navy Flexibility to address other demand People Investments Engineering process IT processes Human resource processes Brand: Employer of Choice 2017 Graham Corp. 33

34 Adjusted EBITDA Reconciliation Annual (in thousands) Fiscal Years Ended March GAAP operating profit $ 15,262 $ 14,617 $ 21,574 $ 8,479 $ 6,673 Restructuring charge - - 1, Acquisition costs Depreciation & amortization 2,079 2,199 2,308 2,435 2,326 Adjusted EBITDA $ 17,341 $ 16,816 $ 25,600 $ 10,914 $ 9,629 Adjusted EBITDA margin 17% 17% 19% 12% 11% Non-GAAP Financial Measures: Adjusted EBITDA is defined as consolidated net income before interest expense and income, income taxes, depreciation and amortization and a nonrecurring restructuring charge. 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 2013 FY 2014 FY 2015 FY 2016 FY 2017 GAAP diluted earnings per share $ 1.11 $ 1.00 $ 1.45 $ 0.61 $ 0.52 Acquisition costs after tax, per diluted share Adjustment of historical R&D tax credits after tax, per diluted share Restructuring charge after tax, per diluted share Reversal of Energy Steel earn-out after tax, per diluted share (0.10) Adjusted diluted earnings per share $ 1.01 $ 1.00 $ 1.57 $ 0.61 $ 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 2017 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 2017 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