spring investor summit ’19 - graham-mfg.com relations...2019/04/01 · fy16 fy17 fy18 fy19e $2.1...
TRANSCRIPT
© 2019 Graham Corp. 1
Spring Investor
Summit ’19
NYSE: GHM • April 1, 2019
Jeffrey F. Glajch
Vice President & Chief Financial Officer
© 2019 Graham Corp. 2
Safe Harbor StatementThis 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.
© 2019 Graham Corp. 3
Business & Strategic Overview
© 2019 Graham Corp. 4
Introduction to Graham Corporation
Engineered-to-Order (ETO),
custom fabricated equipment and solutions provider
Key markets:
Refining
Petrochemical
Power
U.S. Navy
TTM Q3 2019 Sales
$90.4 million
Note: Market data as of March 20, 2019 [Source: S&P Capital IQ]; ownership
as of last filing date
Founded: 1936
IPO: 1968 NYSE: GHM
Market capitalization $198.7 million
Recent price $20.21
52-week range $19.48 – $28.98
Avg. daily trading volume (3 mos.) 21.4k
Common shares outstanding: 9.83 million
Annualized dividend/dividend yield $0.40 / 1.78%
Ownership:
Institutional 77.0%
Insider 3.1%
Fiscal year end March 31
Refining
49%
Chemical/
Petrochemical
15%
Power
12%
Other/ Navy
24%
© 2019 Graham Corp. 5
Process-Critical Equipment
High Cost of Failure
Low Fault Tolerance Performance Specifications
Difficult or Impossible to Replace
Low Relative Cost
Customers Require Quality, Complex Engineered-to-Order Equipment
© 2019 Graham Corp. 6
Graham End Market Key Differentiators
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.
Consultative Selling Platform
Complex Project Management
Aptitude
Graham provides unique value before and throughout project life cycle
Custom Fabrication to
Tight Tolerances
Responsive Operating Model
Ability to efficiently and effectively stop and start, as needed,
throughout project life. Must have this capability.
Low volume / high mix operations model where engineering
change orders occur frequently while in fabrication.
Unique capability to custom fabricate large weldments, in special
metallurgy to exacting tolerances. Strong quality control with
objective quality evidence.
© 2019 Graham Corp. 7
Wide Range of Projects
Project Types% of GHM
SalesASP* 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
© 2019 Graham Corp. 8
Strategically Addressing Key Markets
Key End MarketsMarket Size
% of
GHM
Sales
GHM
Share
New
Capacity
Revamps/
Retrofits*
Spares/
Replacements*
Crude Oil Processing/
Refining
>$150 million annually
25-35% ~ 25% Significant Significant Significant
Chemical/
Petrochemical
>$150 million annually
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
Relative importance
© 2019 Graham Corp. 9
• Global refining, U.S.
petrochemical and U.S.
Navy orders driving
record backlog levels
• GHM FY2018 Q2 - Q4
represented cycle bottom
sales and profitability
Core Markets Recovering
Strong Recovery/ Revenue Growth
>17% Average EBITDA Margin*
>12% Average ROIC*
Cycle Recovery Goals
* Average Cycle performance
© 2019 Graham Corp. 10
Adjusted EBITDA margin
Growth and Pricing Power Drive
Margin Expansion
Based on midpoint of FY2019 guidance provided January 30, 2019
See supplemental slide for Adjusted EBIDTA reconciliation and other important disclaimers regarding Graham’s use of Adjusted EBIDTA
(2)
(2)
(1)
(1)
(Revenue in millions)
$77.5
~$92.5
FY 2018 FY 2019E Mid-Cycle
5%
Upper
teens
Gross margin
(2)
(2)
© 2019 Graham Corp. 11
Navy 50%
Chemical/Petrochemical
20%
Refining 23%
Other 2%Power
5%
($ in millions)
Backlog by IndustryDecember 31, 2018
Projected Backlog ConversionDecember 31, 2018
Within next
12 months
50-55%
Beyond
24 Months
30-40%
Backlog Level Supports Continued Growth
Increasing traditional projects in backlog
expected to drive commercial growth
High percentage of U.S. Navy projects in
backlog provides stability
Within 12 to
24 Months
10-20%
Mix highlights importance of diversification strategy
$107.8
$82.6
$117.9 $114.9 $127.8
3/31/2016 3/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018
Backlog
Backlog Backlog expected to convert within 12 months
$133.7
© 2019 Graham Corp. 12
Acquisition Strategy
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
Diversify products, markets, and/or geographic presence;
reduce earnings volatility
© 2019 Graham Corp. 13
Financial Overview
© 2019 Graham Corp. 14
$135.2
$90.0 $91.8
$77.5
$90-$95 (3)
19%
12%10%
5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$30
$60
$90
$120
$150
FY15 FY16 FY17 FY18 FY19E
Revenue Adj. EBITDA Margin
EPS
(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 January 30, 2019
Invested for Diversification Strategy &
Energy Market Recovery (Revenue in millions)
(1)
$1.57(2) $0.61 $0.56(2) $0.18(2)
© 2019 Graham Corp. 15
FY16 FY17 FY18 FY19E
$2.1
Capital Expenditures
$1.2
10.8%
5.7%
2.1%
-2.2%FY16 FY17 FY18 12/31/2018
Working Capital Utilization(2)
Strong Balance Sheet
Cash, Cash Equivalents and Investments
($ in millions)
$18.8
$12.4$8.5 $8.5
FY16 FY17 FY18 Q3 FY19YTD
Operating Cash Flow
$0.3
$65.1$73.5
$76.5 $80.4
3/31/2016 3/31/2017 3/31/2018 12/31/2018
$2.0–$2.5(1)
(1) Guidance provided as of January 30, 2019
(2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue
© 2019 Graham Corp. 16
Strong Cash Generation
($ in millions)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
March 2005Cash &
Investments,Net
NetIncome
D&A,IntangiblesImpairment
Working CapitalChange
CapitalInvestments
Financing/Other Treasury StockRepurchases
Dividends Energy SteelAcquisition
December 2018Cash &
Investments,Net
0.8
111.5
39.4 1.2 (28.7)
10.5 (13.6)
(22.2)
80.4
Uses of CashSources of Cash
March 2005 to December 2018
>100% of Net Income
converted to cash or
returned to shareholders
(18.5)
© 2019 Graham Corp. 17
Graham Capital Allocation Priorities
Dividend Payments
Organic Growth
Stock Repurchases
Acquisition Strategy
Maintain a strong, prudently managed balance sheet
• Invest in current operations to
drive organic growth
• Continue consistent dividend
payments and increases
• Seek opportunistic acquisitions
with cash return that exceeds
equity cost of capital
• Return value to shareholders
through stock repurchases
Cash from
Operations
Cash from
Balance Sheet
© 2019 Graham Corp. 18
Shareholder Focus
• Board increased dividend
on 8/2/18, to $0.40 per
share annualized
• Paid $2.9 million of
dividends YTD Q3 FY2019
• Sustainable dividends
reflect stability of
operating cash flows
across business cycle36%
63%79%
3/31/2007 3/31/2010 9/30/2018
Institutional Ownership
$0.08 $0.12
$0.16
$0.32 $0.36
$0.40
Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016* 8/2/2018*
Annualized Dividends Per Share
* Reflects date of dividend increase
© 2019 Graham Corp. 19
• Revenue $90 million – $95 million
• Gross margin 25% – 27%
• SG&A $18.25 million – $18.75 million
• Effective tax rate ~20%
(1) FY2019 guidance updated as of January 30, 2019
FY2019 Guidance(1)
© 2019 Graham Corp. 20
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
Investment Highlights
© 2019 Graham Corp. 21
Spring Investor
Summit ’19
NYSE: GHM • April 1, 2019
© 2019 Graham Corp. 22
Supplemental
Information
NYSE: GHM • April 1, 2019
© 2019 Graham Corp. 23
Global Oil Refining Industry
• 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
Leading Supplier of Vacuum Systems and Surface Condensers
Refining
49%
Chemical/
Petrochem
15%
Power
12%
Navy/Other
24%
Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity
Percents based on
Q3 FY 2019 TTM sales of
$90.4 million
© 2019 Graham Corp. 24
Refining
49%
Chemical/
Petrochem
15%
Power
12%
Chemical/Petrochemical IndustryNatural Gas Growth Trend
• 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
Navy/Other
24%
Percents based on
Q3 FY 2019 TTM sales of
$90.4 million
© 2019 Graham Corp. 25
Power Industry
• 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
• Rerate, power augmentations
Refining
49%
Chemical/
Petrochem
15%Power
12%
Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity
Navy/Other
24%
Support Nuclear Power Industry with Value-Add Equipment and Materials
Percents based on
Q3 FY 2019 TTM sales of
$90.4 million
© 2019 Graham Corp. 26
• 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
Refining
49%
Chemical/
Petrochem
15%
Power
12%
Navy/Other
24%
Naval Nuclear Propulsion ProgramBecome Lead Supplier of Surface Condensers and Ejectors for U.S. Navy
Percents based on
Q3 FY 2019 TTM sales of
$90.4 million
© 2019 Graham Corp. 27
Diverse Bidding Pipeline
By Industry*
Chemical/
Petrochemical
20%-25%
Power
15%-20%
Other
5%-10%
Refining
40%-45%
As of December 31, 2018
• $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
$600 Million to $800 Million
© 2019 Graham Corp. 28
Geographic Revenue Breadth
United
States
64%
Asia
8%
Middle East
3%
Other
25%
Q3 FY19 TTM Sales
$90.4 million
Q3 FY19 TTM Orders
$123.1 million
United
States
70%
Asia
13%
Middle East
11% Other
6%
© 2019 Graham Corp. 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
$21
$25 $29
$33
$25
$31
$42
$45 $45
> $60
$50 $46
Annual Predictable Base Business(Base revenue: $ in millions)
$41
$18
$51
© 2019 Graham Corp. 30
Invested to Strengthen GHM Performance
CapEx
Sales structure
Continuous improvement
Strengthen 1st
pass yield quality
Topline Growth
ProfitImprovement
Greater Customer Value
Lead time reduction
Reduce Earnings Volatility
4Ds of execution Quick response office cells
M&A
Performance management
Improvement Lever
© 2019 Graham Corp. 31
Graham’s Channel Management Structure
Lapeer, MI
Operations
Batavia, NY
HQ & Operations
Houston, TX
Sales Office
Suzhou, China
Sales Office
North America
30*
Gulf Coast LA
Perf Improvement Ctr
Latin America
7*
* Number of independent sales representatives in region
EMEA
15*Asia
4*
© 2019 Graham Corp. 32
Year 1 Year 2 Year 3 Year 4 Year 5
Value Enhancing Sales Cycle
Year 1 Year 2
Graham Competitive Advantage:
Early Involvement
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
Concept FEED* EPC Bid Purchase Construction
* Front End Engineering Design
Cradle to grave support
© 2019 Graham Corp. 33
Executive Compensation
• 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
Shareholder Alignment
© 2019 Graham Corp. 34
Adjusted EBITDA Reconciliation – Annual(in thousands)
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.
Fiscal Years Ended March 31 2014 2015 2016 2017 2018
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 - 1,718 - 630 316
+ Impairment of goodwill and
intangible assets- - - - 14,816
+ Bad debt charge on commercial
nuclear power business - - - - 280
Adjusted EBITDA $ 16,816 $ 25,600 $ 10,914 $ 9,629 $ 4,186
Adjusted EBITDA margin % 17% 19% 12% 10% 5%
© 2019 Graham Corp. 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 - 0.17 - 0.06 0.03
Impairment of goodwill and intangible assets - - - - 1.52
Bad debt charge on commercial nuclear power
business- - - - 0.03
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 $ 0.18
Non-GAAP Financial Measure:
Adjusted EPS is defined as GAAP EPS adjusted for a nonrecurring restructuring charge, impairment of goodwill and intangible assets, a
charge associated with the revaluation of the nuclear business, the tax effect of the above and the impact of a new tax law. Adjusted EPS
is not a measure 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 EPS is important for investors and other
readers of Graham's financial statements, as it is used as an analytical indicator by Graham's management to better understand operating
performance. Because Adjusted EPS is a non-GAAP measure and is thus susceptible to varying calculations, Adjusted EPS, as
presented, may not be directly comparable to another similarly titled measure used by other companies.
© 2019 Graham Corp. 36
North American Competition
Market Competitors
Refining vacuum distillation 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
Ambassador; Donghwa Entec Co., Ltd..;
KEMCO; Oeltechnik GmbH; SPX Heat
Transfer
Turbomachinery OEM – power and power
producer
Holtec; KEMCO; Maarky Thermal Systems;
SPX Heat Transfer; Thermal Engineering
International (USA), Inc.
Nuclear Consolidated; Dubose; Energy & Process;
Joseph Oat; Nova; Nusource; Tioga
Naval Nuclear Propulsion Program/Defense DC Fabricators; Joseph Oat; PCC; Triumph
Aerospace; Xylem
© 2019 Graham Corp. 37
Market Competitors
Refining vacuum distillation 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
International Competition
© 2019 Graham Corp. 38
Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.
Products: Surface Condenser
Vital Processing Components
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.
A condenser supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.
REFINERY EJECTOR SYSTEM
CNOOC HUIZHOU REFINERY–CHINA
240,000 BBL/DAY REFINERY
39