Roth 24 th Annual Growth Stock Conference

Transcription

1 N Y S E A MEX: G H M Roth 24 th Annual Growth Stock Conference March 12, 2012 James R. Lines President and Chief Executive Officer Jeffrey F. Glajch Chief Financial Officer N Y S E A M E X : G H M Executing our Strategy Driving Sustainable Growth Diversifying Improving Expanding

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, projects, anticipates, believes, could, 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, statements relating to anticipated revenue, the timing of conversion of backlog to sales, profit margins, foreign sales operations, its strategy to build its global sales representative channel, the effectiveness of automation in expanding its engineering capacity, its ability to improve cost competitiveness, customer preferences, changes in market conditions in the industries in which it operates, changes in general economic conditions and customer behavior and its acquisition strategy 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 and Quarterly Reports filed with the Securities and Exchange Commission, including 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 presentation. 2

3 Graham Corporation Founded: 1936; IPO: 1968 NYSE Amex: GHM Recent Price $21.27 Common shares outstanding 9.9 million Market capitalization $210.6 million 52-week price range $26.30 $14.36 Avg. daily trading volume (3 mos.) 64,541 Ownership: Institutional 71.5% Insider 3.9% ESOP 3.2% Employee Stock Purchase Plan (ESPP) 40% Participation Annual dividend $0.08 Fiscal Year End March 31 Note: Market data as of March ; ownership as of most recent filing 3

4 Our Vision Our vision is to be the world leader in the design and manufacture of ENGINEERED-TO-ORDER (ETO) products for the ENERGY MARKETS Executing our Strategy Driving Sustainable Growth Diversifying Improving Expanding 4

5 ETO Products and Energy Markets Products Condensers 20% Heat Exchangers 7% Q3 FY2012 TTM Sales $108.9 million Ejectors 29% Nuclear 18% Pumps 13% Aftermarket 13% Markets Chemical Processing 13% Other 20% Refining 38% Power 29% 5

6 Growth Drivers Oil Refining Industry Chemical and Hydrocarbon Processing Power Generation Power for Defense Industry Accelerating demand in emerging markets Aging infrastructure in developed markets Feedstock changes Expanding addressable opportunities Middle class expansion in emerging markets Growing world population Expanding addressable opportunities Edible oil/oleochemicals Industrial gases Aging nuclear power infrastructure New power plants International nuclear power expansion Alternative energy Biomass Geothermal Solar Naval nuclear propulsion program Submarine fleet Aircraft carriers 6

7 Diversification Drives Recovery Markets and Geography Revenue ($ in millions) $101.1 $106.5* FY 2006 FY % CAGR Driven by oil refining and petrochemical markets $ % $ % $ % 37% $ % $ % Q4 Est. 48% YTD FY 2010 FY 2012E 30.8% CAGR Oil refining, petrochemicals, Navy and power markets driving growth FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY 2012E Domestic Revenue International Revenue * Midpoint of guidance provided on January 27, 2012 ($105-$108 million) 7

8 Geographic Diversification Revenue by Geographic Market: 3Q FY2012 TTM U.S. 52% Asia 15% Middle East 18% Asia (China) Refining, petrochemical, coal-to-liquid, fertilizer, renewable energy Other 15% Selling into the opportunities Middle East Refining, petrochemical South America Refining, petrochemical Revenue by Industry: 3Q FY2012 TTM Chemical / Petrochemical Processing 13% Oil Refining 38% Other 20% United States Nuclear power, renewable energy and refining Defense (Navy) Power 29% 8

9 Major Project Cycle Year 1 Year 2 Year 3 Year 4 Year 5 Concept FEED* EPC Bid Purchase Construction * front end engineering design Graham Competitive Advantage: Early Involvement $150 million pipeline consistent with past few years 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 9

10 Energy Steel Nuclear Power Focused Superior quality processes are barrier to entry Custom critical equipment fabricator Nuclear-quality raw material supplier N, NPT, NS, U, and R Stamps and Certificates of Authorizations Opportunities Increase market penetration with existing nuclear power plants Integrate engineering and design expertise with certified manufacturing process New power plant designs: 4-6 new U.S. plants expected by Significant addressable opportunities per plant 1 World Nuclear Association, February 2012 Report 10

11 Operating Performance Principles Use disciplined product pricing and order selection process Apply continuous improvement and targeted capex to gain capacity and reduce lead time Employ flexible cost model to accommodate cyclical demand Align manager and employee compensation with profit and cash management objectives Focus on cash management and operating working capital Strong, debt free balance sheet Dramatic improvement in financial results, both at top and bottom of cycle A business poised for organic and inorganic long term growth 11

12 Financial Performance D I V E R S I F Y I N G I M P R O V I N G E X P A N D I N G Executing our Strategy Driving Sustainable Growth 12

13 FY1993 FY1994 FY1995 FY1996 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E Raised the Floor on Margins ($ in millions) $101.1 $ ,3 $86.4 $65.8 $51.8 $55.2 $46.4 $ $48.9 $40.3 $41.0 $34.9 $40.7 $41.1 $44.5 $37.5 $41.3 $62.2 $ % 4.5% 7.7% 10.1% 11.1% 7.0% 3.3% 1.6% (1.3)% (0.7)% (3.3)% 1.4% 11.3% 10.5% 25.4% 27.0% 17.9% 15.0% EBITDA Margin was a three-month transition year and is excluded from this comparison; 1996 reflects a 12-month period 2 Midpoint of guidance provided on January 27, 2012 ($105-$108) 3 $19.2 million attributable to Energy Steel; midpoint of guidance provided on January 27, 2012 (16-20% of $ million) Note: See supplemental slides for EBITDA reconciliation and other important disclaimers regarding EBITDA. 13

14 Profitable Through Downturn ($ in millions) Net Income $15.0 $17.5 $10.1 $5.8 $6.4 $6.4 FY07 FY08 FY09 FY10 FY11 YTD FY2012 $ $1.49 $1.71 $0.64 $ $1.01 Earnings per Share 1 Includes R&D tax credit of $ Excludes $0.5 million, or $0.05 per diluted share, in acquisition costs Note: All earnings per share amounts adjusted for stock splits Five-for-four stock split on November 30, 2007 Two -or-one stock split on September 5,

15 Early Stage Recovery Well-Positioned for Growth and Margin Expansion ($ in millions) Orders by Quarter Net Sales by Quarter $17.8 $26.8 $19.0 $23.5 $21.9 $19.2 $25.9 $25.0 $33.6 $ % 17.9% 20.0% 26.3% 13.0% Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 EBITDA Margin Note: See supplemental slides for EBITDA reconciliation and other important disclaimers regarding EBITDA. 15

16 High Quality Pipeline Expected to Build Order Rate ($ in millions) Orders Backlog $107.1 $108.3 $94.3 $91.1 $73.9 ~$50.0 $63.2 $64.4 $75.7 $48.3 $50.0 $41.0 $72.6 $24.1 $58.3 $44.3 $50.1 $48.5 FY08 FY09 FY10 FY11 FY12 YTD FY08 FY09 FY10 FY11 FY12 YTD Reflect major multi-year projects, including U.S. Navy and major Middle East refineries 16

17 FY 2012 EXPECTATIONS FY 2012 Expectations Revenue $105 to $108 million Organic growth 25% to 30% Gross margin 32% to 33% SG&A 15% of sales Effective Tax Rate 34% Varied order rates by quarter Guidance provided as of January 27,

18 Strategy & Outlook D I V E R S I F Y I N G I M P R O V I N G E X P A N D I N G Executing our Strategy Driving Sustainable Growth 18

19 STRATEGIC ACTIONS TO DRIVE GROWTH Strategic Actions to Drive Growth Expand market opportunities: Create larger addressable market Win in rapid growth economies Advance Naval Nuclear Propulsion Program (NNPP) opportunities Expand nuclear power involvement Capitalize on renewable energy projects Expand variable cost model Broaden subcontractor network: Increase flexibility with shorter supply chain Qualify additional North American and international subcontractors Strengthen core business for margin retention Shortened lead times Reduced errors IT improvements in production and office Continuous improvement process (CIP) Investments in personnel to expand capability and capacity 19

20 Acquisition Strategy: Three Elements Geographic Expansion Asia, especially China Middle East South America Product Diversification Specialty heat exchangers Process vacuum equipment Packaged systems Process vessels Environmental Market Diversification Power Nuclear Alternative energy Government / DOD projects 20

21 ACQUISITION CRITERIA Acquisition Criteria Engineered-toorder products for Energy Industry Up to $60 million in revenue Geographic Expansion and/or Diversify Products/Markets Strong management team / quality culture Return exceeds cost of capital 21

22 Strategic Priorities Advance market share in oil refining and petrochemical markets Gain share in Asia and South America Maintain strong position in Middle East Continue to dominate North American market Expand Energy Steel capabilities to increase sales and profit Exploit synergies of Graham engineering and fabrication capabilities Aggressively pursue sales to U.S. nuclear utilities Capitalize on opportunities in new construction Nuclear certification for Batavia operation in process Continue to develop Naval Nuclear Propulsion Program sales channel Continue to evaluate acquisitions Executing our Strategy Driving Sustainable Growth Diversifying Improving Expanding 22

23 Investment Highlights Expected long-term energy demand growth resulting in capacity expansion Worldwide brand recognition Sales model based on early engineering involvement Expanding addressable market opportunities Strong balance sheet Acquisition opportunities Results-oriented management team 23

24 N Y S E A MEX: G H M Roth 24 th Annual Growth Stock Conference March 12, 2012 James R. Lines President and Chief Executive Officer Jeffrey F. Glajch Chief Financial Officer N Y S E A M E X : G H M Executing our Strategy Driving Sustainable Growth Diversifying Improving Expanding

25 Supplemental Information D I V E R S I F Y I N G I M P R O V I N G E X P A N D I N G Executing our Strategy Driving Sustainable Growth 25

26 EBITDA Reconciliation ($ in millions) Fiscal Years Ended March GAAP operating profit $ 8,775 $ 10,042 $ 26,328 $ 21,088 $ 6,013 $ 5,454 Acquisition costs $ 676 $ - $ - $ - $ - $ - Depreciation & amortization $ 1,648 $ 1,119 $ 1,005 $ 885 $ 887 $ 793 EBITDA $ 11,099 $ 11,161 $ 27,333 $ 21,973 $ 6,900 $ 6, * 2004* 2003* 2002* 2001* 2000* GAAP operating profit $ (206) $ (1,969) $ (1,028) $ (1,296) $ (124) $ 332 Acquisition costs $ - $ - $ - $ - $ - $ - Depreciation & amortization $ 780 $ 745 $ 704 $ 774 $ 776 $ 827 EBITDA $ 574 $ (1,224) $ (324) $ (522) $ 652 $ 1, * 1998* 1996* 1995* 1994* 1993* GAAP operating profit $ 2,591 $ 4,932 $ 3,995 $ 2,818 $ 1,075 $ 662 Acquisition costs $ - $ - $ - $ - $ - $ - Depreciation & amortization $ 820 $ 804 $ 706 $ 732 $ 771 $ 807 EBITDA $ 3,411 $ 5,736 $ 4,701 $ 3,550 $ 1,846 $ 1,469 EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Graham believes that when used in conjunction with GAAP measures, EBITDA, which is a non-gaap measure, assists in the understanding of Graham s operating performance. * Data from FY1993 though FY2005 excludes discontinued operations and is unaudited; 1997 was a three-month transition year and is excluded from this comparison; 1996 reflects a 12-month period. 26

27 EBITDA Quarterly Reconciliation ($ in millions) Quarter Ended: Q3 FY12 Q2 FY12 Q1 FY12 Q4 FY11 Q3 FY11 Net Income $1.64 $5.47 $3.02 $2.68 $ Acquisition transaction costs $0.00 $0.00 $0.00 $0.00 $ Interest Expense $0.06 $0.18 $0.02 $0.06 $ Interest Income $(0.01) $(0.01) $(0.02) $(0.03) $(0.01) + Income Tax Provision $0.96 $2.77 $1.48 $1.30 $ Depreciation & Amortization $0.52 $0.42 $0.51 $0.64 $0.42 EBITDA $3.17 $8.83 $5.01 $4.65 $2.25 EBITDA is defined as earnings before interest, taxes, depreciation and amortization Graham believes that when used in conjunction with GAAP measures, EBITDA, which is a non-gaap measure, assists in the understanding of Graham s operating performance. 27

28 Energy Steel Acquisition (Dec. 2010) Acquisition Terms $18 million, all cash, no debt $2 million performance contingency for CY2011 & 2012 Acquisition costs expensed: $0.05/share impact to Q Energy Steel Financials Revenue of ~$18-$20 million Margins similar to Graham: GM: 30%-35+% OM: 13%-18+% Backlog of $12.8 million at 12/31/11 28

29 Diverse Markets & Expanded Customers OIL REFINING OTHER APPLICATIONS CHEMICAL PROCESSING POWER GENERATION Conventional crude oil Oil sands Extra-heavy crude oil Sour crude Lube oil Edible oil / Oleochemicals Biofuels: Ethanol Biodiesel HVAC Industrial gases Cryogenic Ethylene Ammonia Nitrogen Methanol Styrene Polystyrene Ethylene glycol Detergent alcohols Plastics, resins, fibers Coal-to-liquids (CTL) Gas-to-liquids (GTL) Urea / fertilizer Cogeneration Waste-to-energy Heat, power and light Geothermal Nuclear In situ EXPANDED CUSTOMER BASE End Users (Exxon Mobil, Chevron etc.) - Original Equipment Manufacturers (Dresser Rand, GE etc.) - EPC Contractors (Jacobs, Fluor etc.) - With Energy Steel Acquisition: 104 Nuclear Power Plants in U.S. 29

30 North American Competition Market Refining vacuum distillation Chemicals/Petrochemicals Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer HVAC Naval Nuclear Propulsion Program Nuclear Gardner Denver Competitors Croll Reynolds; Schutte Koerting; Gardner Denver Ambassador; SPX (Yuba); Krueger Holtec; Babcock Thermal Engineering; SPX (Yuba); Krueger Alfa Laval; APV; ITT; Ambassador Joseph Oats; DCFAB Dubose; Consolidated; Tioga; Nova; Maxim 30

31 International Competition Market Refining vacuum distillation Chemicals/Petrochemicals Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer Competitors GEA Jet Pump; Korting Hannover; Edwards Croll Reynolds; Schutte Koerting; GEA Jet Pump; Korting Hannover; Edwards Donghwa-Entec; Bumwoo; Oiltechnik; Krueger; various local fabricators Holtec; Babcock Thermal Engineering; SPX (Yuba); Krueger 31

32 Catalysts Changing Financial Performance A Company-wide Approach to a Better Graham Today and in the Future Selling Process Re-branding Adding value VacAdemics VacWorks Technical support Redefining profit metrics Decision rights & disciplined approach Gain market share Not every order is a good order People Process Accountability Policy deployment Performance management Change agents: Alignment IT, HR, OPS & executive Engagement Improved Operating Performance Throughout Cycle Operational Excellence Capital plan Graham production system Focus on lead time reduction First time, every time Training Safety culture Continuous improvement Creating scale IT Outsourcing Variable costs Sustainability Leadership commitment Long-term vision Balance financial results with investing in the future Graham management system Succession planning 32

33 Differentiators Specialized manufacturing capability Stringent, highly-controlled quality processes Low-volume / high-mix business model Complex order execution Selling model Expanding opportunities for ETO products in critical applications Value-based purchasing decisions High cost of failure Limited competition Long-term growth trend 33

34 PRODUCTS: DIRECT CONTACT CONDENSER Products: Direct Contact Condenser An 11 MW turbine-generator set at a geothermal power producing plant in Papua New Guinea. 34

35 Products: Surface Condenser Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power. 35

36 VITAL PROCESSING COMPONENTS Vital Processing Components CONDENSERS AND EJECTORS 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 36

37 Anatomy of a Nuclear Reactor Products 1. Heat exchangers 2. Vessels 3. Piping 4. Systems 5. Raw materials 6. Vacuum products Growth Options 1. Increase ability to serve existing U.S. nuclear power plants 2. Capitalize on planned U.S. new nuclear power plant construction 3. Expand company to access and service international nuclear power plants 37

38 Nuclear Renaissance Country Operating Under Construction Planned Proposed USA France Japan Russia South Korea India UK Canada China Ukraine Sweden Other Total Future Expansion: This data represents a more than 50% increase in planned and proposed reactors since the 2007 WNA report Operating = Connected to grid Under Construction = First concrete for reactor poured, or major refurbishment under way Planned = Approvals, funding or major commitment in place, mostly expected in operation within 8-10 years Proposed = Specific program or site proposals, expected operation mostly within 15 years Source: World Nuclear Association, as of February 2012 and updates as of March 1, Two plants have been suspended, but not yet abandoned 38