Sidoti Emerging Growth Research Institutional Investor Forum

Transcription

1 NYSE:GHM March 16, 2015 Sidoti Emerging Growth Research Institutional Investor Forum James R. Lines President & Chief Executive Officer

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, goal, outlook, priorities, 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 revenue, backlog and expected performance of Energy Steel & Supply Co., and expected expansion and growth opportunities within the domestic and international nuclear power generation markets, anticipated revenue, the timing of conversion of backlog to sales, profit margins, foreign sales operations, Graham Corporation s strategy to build its global sales representative channel, the effectiveness of automation in expanding engineering capacity, the ability to improve cost competitiveness, customer preferences, changes in market conditions in the industries in which Graham Corporation operates, changes in general economic conditions and customer behavior and Graham Corporation s acquisition and organic growth strategies 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 presentation Graham Corp

3 Business & Strategic Overview 2015 Graham Corp

4 Graham Corporation Market Data Q3 FY 2015 TTM Sales $123.8 million Founded: 1936 IPO: 1968 Market capitalization NYSE: GHM $239 million Asia 7% Middle East 5% Other 21% Recent price $ week range $36.24 $20.58 Avg. daily trading volume (3 mos.) 59 thousand Common shares outstanding: 10.1 million Annualized dividend/dividend yield $0.32 / 1.4% Ownership: Institutional 77.5% Insider 4.2% Fiscal year end March 31 United States 67% Q3 FY 2015 TTM Orders $112.6 million Middle East 7% Asia 10% Other 30% United States 53% Note: Market data as of March 9, 2015 [Source: Bloomberg]; ownership as of last filing date 2015 Graham Corp

5 Executing Our Strategy to Expand Earnings Leverage capacity to capture market share Expanding predictable base business Use of capital to diversify & strengthen revenue streams Key markets: Refining Power Short-term objective: Double business Longer-term objective: Leverage competencies and financial strength to diversify and provide further growth Petrochemical U.S. Navy 2015 Graham Corp

6 A Successful Track Record Top-tier operating performance 10% revenue CAGR (FY2006 to Q3 FY2015 TTM) 16% net income CAGR (FY2006 Q3 FY2015 TTM) EBITDA margins of mid 20% at last peak Strong cash flow >90% of net income converted to cash (FY2006 to present) Debt free balance sheet Capital allocation focused on growth Organic growth Acquisitions Dividends, Share repurchases 2015 Graham Corp

7 More Markets, More Customers Stronger earnings, less volatility Prior Cycle Mix Recent Mix Projected Near-Term Mix Power 5% Other 22% Chemical/ Petrochemical 27% Refining 46% Power 17% Navy/ Other Chemical/ 17% Petrochemical 36% Refining 30% Power 15%-25% Other 10%-15% Refining 20%-30% Navy 10%-15% Chemical/ Petrochemical 20%-30% ~ $100 million ~ $100 million ~ $200 million Acquisitions present incremental growth potential 2015 Graham Corp

8 Addressing Key Markets Key Markets Graham Share* Outlook Actions Share* Goals Global Refining Opportunities more plentiful Assertive pricing strategy >40% >$150 million annually ~ 25% Sound long-term growth drivers Take market share Further expand execution capacity Global Chemical/ Petrochemical >$150 million annually ~15% Strong domestic market Sound long-term growth drivers 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% Submarine programs advancing Next carrier bid late CY 2015 Secure position in both submarine programs Win CVN80 40 to 50% Power >$250 million annually <10% Nuclear MRO market rebounding Renewable power steady Four U.S. reactors under construction on-line Strengthening management team Align sales, engineering and operations for growth Double share Pricing is steady * Market share data are management estimates Secondary markets are not noted 2015 Graham Corp

9 Increasing Predictable Base Business Reduce earnings volatility and achieve top-line growth Short-term growth objective will be achieved through expansion of predictable base business: Nuclear market MRO Executing Naval strategy Aftermarket strategy Short-cycle product strategies Annual Predictable Base Business (Base revenue: $ in millions) $60 $52 $45 $45 $42 $33 $31 $29 $25 $25 $21 $18 Expected to exceed $60 million in near-term, through organic growth strategies 2015 Graham Corp

10 Diverse Bidding Pipeline $800 Million to $1 Billion Power 20%-25% As of December 31, 2014 By Industry Other 10%-15% Navy 5%-10% Refining 35%-40% Chemical/ Petrochemical 20%-25% $800 million to $1 billion TTM bidding pipeline Pipeline includes bids to multiple EPCs or OEMs for one opportunity Pipeline is double compared with 2004, indicative of higher level of activity in this stage of the cycle Recent drop in oil prices has not impacted near-term bid activity Long-term fundamentals remain intact 2015 Graham Corp

11 Created Capability to Drive Higher Sales Operations Process Sales Process Facilities enlarged Execution capacity expanded Subcontracting certain production Built stronger opportunity pipeline Management process sharpened Improving Market Fundamentals Strong, Sustained Growth Take market share Capture new customers Grow and diversify revenue Expand profit People Process Attracting and hiring talent Performance management Employee engagement 2015 Graham Corp

12 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 2015 Graham Corp

13 Financial Overview 2015 Graham Corp

14 Strong Balance Sheet ($ in millions) Cash, Cash Equivalents and Investments $41.7 $51.7 $61.1 $62.5 Operating Cash Flow $15.2 $12.4 $8.2 $2.6 3/31/12 3/31/13 3/31/14 12/31/2014 FY12 FY13 FY14 Q3 FY15 TTM Capital Expenditures $5.8 (1) $5.3 $3.2 $1.7 Working Capital Utilization (2) 10.7% 11.7% 12.2% 10.0% FY12 FY13 FY14 FY15E Batavia Expansion (~60% in FY14 and FY15) FY12 FY13 FY14 Q3 FY15 TTM (1) Guidance confirmed on January 30, 2015 (FY15E mid-point between $5.5 million - $6.0 million) (2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual revenue 2015 Graham Corp

15 Strong Financial Results (Revenue in millions) Annual Trends $86.4 $74.2 $65.8 $62.2 $55.2 $127.5 $101.1 $103.2 $105.0 $ % 41% % 32% 29% 29% 30% 31% 31% 26% 25% 27% % 19% 15% 17% 17% 18% 11% 11% 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E Revenue Gross Margin EBITDA Margin (3) (1) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EPS $0.38 $0.45 (2) $1.49 $1.71 $0.69 (2) $0.64 (2) $1.10 (2) $1.01 (2) $1.00 (1) Guidance confirmed as of January 30, 2015 (FY15E mid-point). (2) FY2007, FY2010, FY2011, FY2012, and FY2013 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of adjusted EPS to GAAP EPS. (3) See supplemental slide for EBITDA reconciliation and other important disclaimers regarding Graham s use of EBITDA 2015 Graham Corp

16 Solid Cash Generation ($ in millions) March 2004 Cash and Investments, net $ 3.8 FY 2005 thru Q3 FY 2015 cumulative cash flow items: Net income $ 95.1 Depreciation and amortization 15.2 Working capital change (6.2) Capital investments (23.5) Dividends (8.2) Financing/Other 4.8 Subtotal 81.0 Energy Steel acquisition (18.5) December 2014 Cash and Investments, net $ Graham Corp

17 Diverse and Strong Backlog Level Backlog by Industry December 31, 2014 Power 11% Other 8% Refining 37% Navy 21% Chemical/ Petrochemical 23% $33.1 $54.2 $75.7 $48.3 Backlog $94.3 $91.1 $94.9 ($ in millions) $112.1 $103.8 $85.8 Projected Backlog Conversion December 31, 2014 Within 12 months 70-75% Months 20-25% Months % Beyond 24 Months 5-10% 3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 3/31/11 3/31/12 3/31/13 3/31/14 12/31/14 Backlog declined due to refining market uncertainties Strong backlog mix with high percentage of refining projects Approximately 1/3 of backlog is from non-cyclical Nuclear and U.S. Navy strategies Supporting continued growth of predictable base business 2015 Graham Corp

18 Acquisition Strategy Diversify products, markets, and/or geographic presence 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 Will pay fair price, but will not overpay 2015 Graham Corp

19 Returning Value to Shareholders Recent dividend increases 100% increase on January 29, % increase on February 25, % increase on February 11, 2013 $18 million stock repurchase program approved January 29, 2015 Institutional ownership 9/30/14: 76% 9/30/09: 54% 9/30/06: 42% 2015 Graham Corp

20 Near-Term Expansion Targets Revenue (1) $102 million >$200 million (1) as a percent of revenue Gross Margin (1) EBITDA Margin (1) 31% 17% Mid to Upper 30% Range Low to Mid 20% Range (1) Base year fiscal 2014 is shown; margins are as a percentage of revenue Operating leverage and pricing drive EBITDA margin expansion 2015 Graham Corp

21 Strong Revenue Expectations and Visibility on Shipment Timing Fiscal 2015 Guidance: (1) Revenue Upper half of $125 million - $130 million Gross margin 30% - 31% SG&A 14% % of sales Effective tax rate 32% - 33% Near Term Target: Exceed $200 million in organic revenue (1) FY2015 Guidance confirmed as of January 30, Graham Corp

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 2015 Graham Corp

23 Supplemental Information 2015 Graham Corp

24 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 Revenue level 3 years out 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 2015 Graham Corp

25 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 2015 Graham Corp

26 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 Increased workforce by 40% 31 welders, 7 machinists, 20 engineers IT processes Human resource processes Brand: Employer of Choice 2015 Graham Corp

27 Global Oil Refining Industry Leading Supplier of Vacuum Systems and Surface Condensers Refining 30% Chemical/ Petrochem 36% Power 17% Navy/ Other 17% Percents based on Q3 FY2015 TTM sales of $123.8 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 2015 Graham Corp

28 Chemical/Petrochemical Industry Expansion Natural Gas Growth Trend Refining 30% Chemical/ Petrochem 36% Navy/ Other 17% Percents based on Q3 FY2015 TTM sales of $123.8 million Power 17% 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 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 2015 Graham Corp

29 Power Industry Expansion Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials Refining 30% Chemical/ Petrochem 36% Navy/ Other 17% Percents based on Q3 FY2015 TTM sales of $123.8 million Power 17% 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 2015 Graham Corp

30 Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy Refining 30% 2015 Graham Corp. Chemical/ Petrochem 36% Navy/ Other 17% Power 17% Percents based on Q3 FY2015 TTM sales of $123.8 million Aircraft carrier program ~$35 million to ~$40 million per carrier; bid CVN 80 in 2016 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 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

31 EBITDA Reconciliation Annual ($ in thousands) Fiscal Years Ended March E (1) GAAP operating profit $ 20,900 $ 14,617 $ 15,262 $ 17,095 $ 8,775 Acquisition costs Depreciation & amortization 2,400 2,199 2,079 2,024 1,648 Adjusted EBITDA $ 23,300 $ 16,816 $ 17,341 $ 19,119 $ 11,099 Adjusted EBITDA Margin 18% 17% 17% 19% 15% GAAP operating profit $ 10,042 $ 26,328 $ 21,088 $ 6,013 $ 5,454 Acquisition costs Depreciation & amortization 1,119 1, Adjusted EBITDA $ 11,161 $ 27,333 $ 21,973 $ 6,900 $ 6,247 Adjusted EBITDA Margin 18% 27% 25% 11% 11% Adjusted EBITDA is defined as consolidated net income before acquisition costs, interest, taxes, depreciation and amortization Graham believes that when used in conjunction with GAAP measures, adjusted EBITDA, which is a non-gaap measure, assists in the understanding of Graham s operating performance (1) 2015E GAAP operating profit based on the midpoint of FY 2015 guidance: revenue $128.8 million, gross margin 30.5% and SG&A 14.25% of sales; guidance updated as of January 30, Graham Corp

32 Adjusted EPS Reconciliation (in millions, except per share data) FY 2007 FY 2010 FY 2011 FY 2012 FY 2013 GAAP diluted earnings per share $ 0.58 $ 0.64 $ 0.59 $ 1.06 $ 1.11 Acquisition costs after tax, per diluted share - - $ Adjustment of historical R&D tax credits after tax, per diluted share $ (0.13) $ $ Reversal of Energy Steel earn-out after tax, per diluted share $ (0.10) Adjusted diluted earnings per share $ 0.45 $ 0.69 $ 0.64 $ 1.10 $ Graham Corp

33 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 Defense Gardner Denver Competitors Croll Reynolds; Schutte Koerting; Gardner Denver Ambassador; SPX (Yuba); KEMCO; Donghwa-Entec; Oeltechnik Holtec; Babcock Thermal Engineering; SPX (Yuba); KEMCO; Maarky Thermal Systems Alfa Laval; APV; Xylem; Ambassador Joseph Oats; DCFAB Dubose; Consolidated; Tioga; Nova; Joseph Oats; Energy & Process DC Fabricators, Triumph Aerospace, Xylem, PCC 2015 Graham Corp

34 International Competition Market Refining vacuum distillation Chemicals/Petrochemicals Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer Competitors GEA Wiegand; Korting Hannover; Edwards, Gardner Denver Croll Reynolds; Schutte Koerting; GEA Wiegand; Korting Hannover; Edwards, Gardner Denver Donghwa-Entec; Bumwoo; Oeltechnik; Mazda (India); Hangzhou Turbine Equipment; Chem Process Systems; KEMCO Holtec; Babcock Thermal Engineering; SPX (Yuba); Mazda (India); KEMCO; Chem Process Systems 2015 Graham Corp

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

36 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