Post on 07-May-2018
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Jefferies Global Industrials Conference
James R. Lines President & Chief Executive Officer
Jeffrey F. Glajch Vice President & Chief Financial Officer
NYSE:GHM • August 11, 2015
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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.
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Business & Strategic Overview
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Financial Goals
Organic Revenue Growth
Profitability
Capital Stewardship
Double Revenue Across a Cycle
>17% Average EBITDA Margin*
>12% Average ROIC*
FY14 to FY15 32% Growth
FY15 EBITDA Margin 18.9%
FY15 ROIC 13.3%
Goals Performance Measures Recent Results
* Average Cycle performance
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• Leverage assets to capture market share
• Expanding predictable base business
• Use of capital to diversify & strengthen revenue streams
• Key markets:
Refining
Petrochemical
Power
U.S. Navy
Executing Our Strategy to Expand Earnings Short-term objective:
Drive top-line growth through greater market share
Near-term objective: $200 million revenue
Long-term objective: Leverage competencies and
financial strength to diversify and provide further growth
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(1) as a percent of revenue
Near-Term Expansion Targets
Revenue(1)
Gross Margin(1)
Adjusted EBITDA Margin(1)
$135 million
31%
19%
>$200 million
Mid to Upper 30% Range
Low to Mid 20% Range
Operating leverage and pricing drive EBITDA margin expansion
(1) Base year fiscal 2015 is shown; margins are as a percentage of revenue
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Stronger earnings, less volatility
Refining 46%
Acquisitions present incremental growth potential
Diversification Strategy
~ $200 million
Refining 46%
Chemical/ Petrochemical
20%-30%
Other 10%-15%
Navy 10%-15%
Refining 20%-30%
Power 15%
Navy
Other Chemical/
Petrochemical 35%
Refining 32%
Projected Near-Term Mix
Power 15%-25%
18%
~ $100 million
Power 5%
Other 22%
Refining 46%
Chemical/ Petrochemical 27%
Prior Cycle Mix Recent Mix
~ $135 million
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Targeted Path to $200 Million Revenue
($ in millions)
50
70
90
110
130
150
170
190
210
FY 2015 Sales Refining Chemical /Petrochemical
Other Power Navy Near-Term SalesGoal
CORE GRAHAM
DIVERSIFICATION STRATEGY
$135
$200
$10 – $15 $5 – $10
$5 – $10
$15 – $20
$10 – $20
Diversification Strategy Drives Growth
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Strengthening Stable Revenue Base
• Expect to exceed $60 million in near-term, 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
Annual Predictable Base Business (Base revenue: $ in millions)
$51
$18
10
Other 4%
Power 12%
Navy 48%
Chem/ Petrochem
12%
Refining 24%
($ in millions) Backlog by Industry June 30, 2015
Projected Backlog Conversion
Backlog Remains Strong
• Strong backlog mix with high percentage of U.S. Navy projects
• 55% from markets or customers not served by the Company five years ago
– Reducing the impact of more cyclical sales in the energy industry
$54.2
$75.7
$48.3
$94.3 $91.1 $94.9 $85.8
$112.1 $113.8 $110.1
3/31/07 3/31/08 3/31/09 3/31/10 3/31/11 3/31/12 3/31/13 3/31/14 3/31/15 6/30/15
Backlog
June 30, 2015
Within 12 months
45-50%
Beyond 24 Months 40-45% 12-24
Months 5-10%
Reflects benefits of diversification strategy
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Diverse Bidding Pipeline
By Industry
Chemical/ Petrochemical
20%-25%
Power 15%-20%
Other 5%-10%
Navy 2%-5%
Refining 40%-45%
As of June 30, 2015
$800 Million to $1 Billion • $800 million to $1 billion TTM
bidding pipeline – Pipeline includes bids to
multiple EPCs or OEMs for one opportunity
– Pipeline is indicative of diversification strategy & opportunity
– Recent drop in oil prices has impacted recent bid activity Long-term fundamentals
remain intact
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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
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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
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Financial Overview
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Batavia Expansion (~65% in FY14 and FY15)
$1.7
FY13 FY14 FY15 FY16E
Capital Expenditures
$5.3 $5.3
11.7% 10.0%
15.6%
FY13 FY14 FY15
Working Capital Utilization(2)
$51.7 $61.1 $60.3 $62.6
3/31/13 3/31/14 3/31/15 6/30/2015
Strong Balance Sheet Cash, Cash Equivalents
and Investments
($ in millions)
(1) Guidance confirmed on July 30, 2015 (FY16E capex between $2.0 million - $2.5 million) (2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual revenue
$12.4 $15.2
$6.3
FY13 FY14 FY15
Operating Cash Flow
$2.0 - $2.5(1)
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Strong Financial Results (Revenue in millions)
(1) See supplemental slide for Adjusted EBITDA reconciliation and other important disclaimers regarding Graham’s use of Adjusted EBITDA (2) Source: Bloomberg (3) FY2011, FY2012, FY2013 and FY2015 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of GAAP EPS to
Adjusted EPS.
$74.2
$103.2 $105.0 $102.2
$135.2
15%
19% 17% 17%
19%
9% 9% 8% 8% 8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$20
$40
$60
$80
$100
$120
$140
$160
FY11 FY12 FY13 FY14 FY15
Revenue GHM Adj. EBITDA Margin US Industrials Median Adj. EBITDA Margin
EPS
(1)
$0.64(3) $1.01(3) $1.10(3) $1.00 $1.57(3)
(2)
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Strong Cash Generation ($ in millions)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
March 2005Cash &
Investments,net
Net Income Depreciationand
amortization
Working capitalchange
Capitalinvestments
Financing/Other Dividends Energy Steelacquisition
March 2015Cash &
Investments,net
0.8
100.4
15.0 (9.7) (23.6)
4.4 (8.7) (18.5)
60.1
Uses of Cash Sources of Cash
March 2005 to March 2015
Approximately 90% of Net Income converted to
cash or returned to shareholders
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Graham Capital Allocation Priorities
Dividend Payment
Organic Growth
Stock Repurchase
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
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Shareholder Focus
• Sustainable dividends reflect stability of operating cash flows across business cycle
• $18 million stock repurchase program approved January 29, 2015
36% 63% 77%
3/31/2007 3/31/2010 3/31/2015
Institutional Ownership
$0.08 $0.12
$0.16
$0.32
Prior 2/11/2013* 2/25/2014* 1/29/2015*
Annualized Dividends Per Share
* Reflects date of dividend increase
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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
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Uncertain Near-Term Market Impacts FY2016 Revenue Expectations
• Revenue $95 million – $105 million
• Gross margin 26% – 28%
• SG&A 17% – 18% of sales
• Effective tax rate 32% – 33%
(1) FY2016 Guidance provided as of July 30, 2015
Fiscal 2016 Guidance:(1)
Strategic Target: Exceed $200 million in organic revenue
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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
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Jefferies Global Industrials Conference NYSE:GHM • August 11, 2015
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Supplemental Information
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Graham Corporation – Market Data
Note: Market data as of August 3, 2015 [Source: Bloomberg]; ownership as of last filing date
United States 64%
Asia 8%
Middle East 8%
Other 20%
FY 2015 Sales $135.2 million
FY 2015 Orders $136.5 million
United States 67%
Asia 6%
Middle East 5%
Other 22%
Founded: 1936 IPO: 1968 NYSE: GHM Market capitalization $192 million
Recent price $19.26
52-week range $34.65 – $17.11
Avg. daily trading volume (3 mos.) 46,000
Common shares outstanding: 10.1 million
Annualized dividend/dividend yield $0.32 / 1.8%
Ownership:
Institutional 77.4%
Insider 4.2%
Fiscal year end March 31
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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
• 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
Shareholder Alignment
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Professional Development &
Improved Training
Redefined Traditional Roles
& Addressed Organizational
Constraint
Increased Decision Rights
Added New Skills to our Bench
Performance Management &
Increased Accountability
• Empowerment
• Direct labor as value creator vs. cost
• Unlocked potential of human capital
PEOPLE
Culture Transformation: Power of Engagement Human capital is our most critical asset
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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 32%
Chemical/ Petrochem
35%
Power 15%
Navy/ Other 18%
Percents based on FY 2015 sales of
$135.2 million
Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity
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Refining 32%
Chemical/ Petrochem
35%
Power 15%
Chemical/Petrochemical Industry Expansion Natural 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 18%
Percents based on FY 2015 sales of
$135.2 million
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Power Industry Expansion
• 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
Refining 32%
Chemical/ Petrochem
35%
Power 15%
Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity
Navy/ Other 18%
Percents based on FY 2015 sales of
$135.2 million
Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials
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• 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
Refining 32%
Chemical/ Petrochem
35%
Power 15%
Navy/ Other 18%
Percents based on FY 2015 sales of
$135.2 million
Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy
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Investments in Capacity for Organic Growth
• Invested $15 million in facilities and equipment in last 5 years
• Added 40,000 ft2 of additional manufacturing space • New machines and technology
Expanded/Upgraded Facilities
• Established dedicated facility for U.S. Navy • Flexibility to address other demand
Supports Diversification
Strategy
• Increased workforce by 40% 31 welders, 7 machinists, 20 engineers
• IT processes • Human resource processes • Brand: Employer of Choice
People Investments
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Adjusted EBITDA Reconciliation – Annual
Adjusted EBITDA is defined as consolidated net income before acquisition related expenses, non-recurring restructuring charges, interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA is not a measure determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Graham believes that providing non-GAAP information such as Adjusted EBITDA is important for investors and other readers of Graham's financial statements, as it is used as an analytical indicator by Graham's management to better understand operating performance. Graham’s credit facility also contains ratios based on EBITDA. Because Adjusted EBITDA is a non-GAAP measure and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be directly comparable to other similarly titled measures used by other companies.
(in thousands)
Fiscal Years Ended March 31 2011 2012 2013 2014 2015
GAAP operating profit 8,775$ 17,095$ 15,262$ 14,617$ 21,574$
Restructuring charge - - - - 1,718
Acquisition costs 676 - - - -
Depreciation & amortization 1,648 2,024 2,079 2,199 2,308
Adjusted EBITDA 11,099$ 19,119$ 17,341$ 16,816$ 25,600$
Adjusted EBITDA margin 15% 19% 17% 17% 19%
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EBITDA Reconciliation – Quarterly
EBITDA is defined as consolidated net income before interest expense and income, income taxes, and depreciation and amortization. EBITDA 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 EBITDA 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. Graham’s credit facility also contains ratios based on EBITDA. Because EBITDA is a non-GAAP measure and is thus susceptible to varying calculations, EBITDA, as presented, may not be directly comparable to other similarly titled measures used by other companies.
2014 2015Net income 2,392$ 2,361$
+Net interest income (43) (49)
+Income taxes 1,234 1,087
+Depreciation & amortization 574 621
EBITDA 4,157$ 4,020$
EBITDA margin % 14.6% 14.6%
June 30,Three Months Ended
(in thousands)
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Adjusted EPS Reconciliation (in millions, except per share data)
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
GAAP diluted earnings per share $ 0.59 $ 1.06 $ 1.11 $ 1.00 $ 1.45
Acquisition costs after tax, per diluted share 0.05 - - - -
Adjustment of historical R&D tax credits after tax, per diluted share - 0.04 - - -
Restructuring charge after tax, per diluted share - - - - 0.12
Reversal of Energy Steel earn-out after tax, per diluted share - - (0.10) - -
Adjusted diluted earnings per share $ 0.64 $ 1.10 $ 1.01 $ 1.00 $ 1.57
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North American Competition Market Competitors
Refining vacuum distillation Gardner Denver
Chemicals/Petrochemicals Croll Reynolds; Schutte Koerting; Gardner Denver
Turbomachinery OEM – refining, petrochemical
Ambassador; SPX (Yuba); KEMCO; Donghwa-Entec; Oeltechnik
Turbomachinery OEM – power and power producer
Holtec; Babcock Thermal Engineering; SPX (Yuba); KEMCO; Maarky Thermal Systems
HVAC Alfa Laval; APV; Xylem; Ambassador
Naval Nuclear Propulsion Program Joseph Oats; DCFAB
Nuclear Dubose; Consolidated; Tioga; Nova; Joseph Oats; Energy & Process
Defense DC Fabricators, Triumph Aerospace, Xylem, PCC
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Market Competitors Refining vacuum distillation GEA Wiegand; Korting Hannover;
Edwards, Gardner Denver
Chemicals/Petrochemicals Croll Reynolds; Schutte Koerting; GEA Wiegand; Korting Hannover; Edwards, Gardner Denver
Turbomachinery OEM – refining, petrochemical
Donghwa-Entec; Bumwoo; Oeltechnik; Mazda (India); Hangzhou Turbine Equipment; Chem Process Systems; KEMCO
Turbomachinery OEM – power and power producer
Holtec; Babcock Thermal Engineering; SPX (Yuba); Mazda (India); KEMCO; Chem Process Systems
International Competition
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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
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