20161201 GHM Drexel Hamilton Emerging Growth Conference Relations... · 12/1/2016  · Drexel...

39
© 2016 Graham Corp. 1 Drexel Hamilton Emerging Growth Conference NYSE: GHM December 1, 2016 James R. Lines President & Chief Executive Officer Jeffrey F. Glajch Vice President & Chief Financial Officer

Transcript of 20161201 GHM Drexel Hamilton Emerging Growth Conference Relations... · 12/1/2016  · Drexel...

Page 1: 20161201 GHM Drexel Hamilton Emerging Growth Conference Relations... · 12/1/2016  · Drexel Hamilton Emerging Growth Conference NYSE: GHM ... 20161201 GHM Drexel Hamilton Emerging

© 2016 Graham Corp. 1

Drexel Hamilton

Emerging Growth

Conference

NYSE: GHM • December 1, 2016

James R. Lines

President & Chief Executive Officer

Jeffrey F. Glajch

Vice President & Chief Financial Officer

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© 2016 Graham Corp. 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, 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.

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© 2016 Graham Corp. 3

Business & Strategic Overview

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© 2016 Graham Corp. 4

Financial Goals

Organic Revenue Growth

Profitability

Capital Stewardship

Double Revenue>$200 million

>17% Average EBITDA Margin*

>12% Average ROIC*

FY16 Revenue$90 million

FY16 EBITDA Margin 12.1%

FY16 ROIC

5.6%

GoalsPerformance

MeasuresRecent Results

* Average Cycle performance

Note: Fiscal Year ends March 31

Operating leverage and pricing drive EBITDA margin expansion

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© 2016 Graham Corp. 5

• Leverage assets to capture market share

• Expand predictable base business

• Diversify & strengthen revenue streams

• Reduce earnings volatility

• 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

Financial goal:

$200 million revenue

Long-term objective:

Leverage competencies and financial strength to diversify and

provide further growth

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© 2016 Graham Corp. 6

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%

Power16%

NavyOther

Chemical/

Petrochemical

33%

Refining

32%

Projected Mix

Power

15%-25%

19%

Recent Mix

~ $90 million

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© 2016 Graham Corp. 7

Addressing Key Markets

Key MarketsGraham

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

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© 2016 Graham Corp. 8

Targeted Path to $200 Million Revenue

($ in millions)

0

50

100

150

200

FY 2016 Sales Refining Chemical /Petrochemical

Other Power Navy Sales Goal

CORE

GRAHAM

DIVERSIFICATION

STRATEGY

$90

$200

$30 – $35

$25 – $30$5 – $10

$15 – $20

$15 – $20

Diversification Strategy Drives Growth & Reduces Volatility

Anticipated market recovery

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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

Annual Predictable Base Business(Base revenue: $ in millions)

$51

$18

$51

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© 2016 Graham Corp. 10

Navy57%

Other 3% Power11%

Chemical/

Petrochemical

13%

Refining

16%

($ in millions)Backlog by Industry

September 30, 2016

Projected Backlog

ConversionSeptember 30, 2016

Months

12-24

5-10% Within

12 months

50-55%

Beyond 24 Months

35-40%

Backlog Remains Solid

$112.1 $113.8 $108.0

$99.9 $104.0

0102030405060708090100110120

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

3/31/2014 3/31/2015 3/31/2016 6/30/2016 9/30/2016

Backlog

Backlog Backlog expected to convert within 12 months

• Predictable base supports future growth; high

percentage of U.S. Navy projects in backlog

• ~60% from markets or customers not served

by the Company five years ago

– Reducing the impact of more cyclical sales in

the energy industry

Reflects Success of Diversification Strategies

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0

20

40

60

80

100

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Core GHM Naval Commercial Nuclear Converts within 12 months

Backlog Mix

($ in millions)

Diversification

strategy

impact

Year End Backlog

Illustrates Impact of Diversification Strategies

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Diverse Bidding Pipeline

By Industry*

Chemical/

Petrochemical

20%-25%

Power

15%-20%

Other

5%-10%

Refining

40%-45%

As of September 30, 2016

• $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

$600 Million to $800 Million

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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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© 2016 Graham Corp. 14

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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© 2016 Graham Corp. 15

Financial Overview

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© 2016 Graham Corp. 16

Invested for Diversification Strategy & Energy

Market Recovery (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) FY2013 and FY2015 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of GAAP EPS to Adjusted EPS.

(4) Based on mid-point of guidance provided as of November 1, 2016

$105.0 $102.2

$135.2

$90.0 $90.0

17% 17%

19%

12%

9% 8% 8% 8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$20

$40

$60

$80

$100

$120

$140

$160

FY13 FY14 FY15 FY16 FY17E

Revenue GHM Adj. EBITDA Margin US Industrials Median Adj. EBITDA Margin

EPS

(1) (2)

$1.01(3) $1.00 $1.57(3) $0.61

(4)

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© 2016 Graham Corp. 17

Batavia Expansion (~65% in FY14 and FY15)

FY14 FY15 FY16 FY17E

$0.5 - $1.0(1)

Capital Expenditures

$5.3$5.3

10.0%

15.6%

10.8% 11.8%

FY14 FY15 FY 16 9/30/2016

Working Capital Utilization(2)

Strong Balance Sheet

Cash, Cash Equivalents and Investments

($ in millions)

(1) Guidance confirmed on November 1, 2016 (FY17E capex between $0.5 – $1.0 million)

(2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue

$15.2

$6.3

$18.8

$3.3

FY14 FY15 FY16 Q2 FY17YTD

Operating Cash Flow

$1.2

$61.1 $60.3 $65.1

3/31/2014 3/31/2015 3/31/2016 9/30/2016

$66.3

FY17E

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© 2016 Graham Corp. 18

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

NetIncome

D&A Working CapitalChange

CapitalInvestments

Financing/Other Treasury StockRepurchases

Dividends Energy SteelAcquisition

September2016 Cash &Investments,

Net

0.8

113.5

19.6 (2.9) (25.1)

6.3 (13.3)

(14.0)

66.3

Uses of CashSources of Cash

March 2005 to September 2016

~100% of Net Income

converted to cash or

returned to shareholders

(18.5)

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© 2016 Graham Corp. 19

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

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© 2016 Graham Corp. 20

Shareholder Focus

• Paid $1.7 million of

dividends in 1H FY2017

• Sustainable dividends

reflect stability of

operating cash flows

across business cycle

36%

63%74%

3/31/2007 3/31/2010 9/30/2016

Institutional Ownership

$0.08 $0.12

$0.16

$0.32 $0.36

Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016*

Annualized Dividends Per Share

* Reflects date of dividend increase

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© 2016 Graham Corp. 21

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

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© 2016 Graham Corp. 22

• Revenue $85 million – $95 million

• Gross margin 21% – 23%

• SG&A $15 million – $15.5 million

• Effective tax rate 30% – 31%

(1) FY2017 guidance provided as of November 1, 2016

FY2017 Guidance(1)

Strategic Target: Exceed $200 million in organic revenue

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© 2016 Graham Corp. 23

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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© 2016 Graham Corp. 24

Drexel Hamilton Emerging Growth Conference

NYSE: GHM • December 1, 2016

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© 2016 Graham Corp. 25

Supplemental Information

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© 2016 Graham Corp. 26

Graham Corporation – Market Data

Note: Market data as of November 22, 2016 [Source: Bloomberg]; ownership as of last filing date

United

States

67%

Asia

11%

Middle East

7%

Other

15%

Q2 FY17 TTM Sales

$83.1 million

Q2 FY17 TTM Orders

$78.8 million

United

States

74%

Asia

10%

Middle East

6% Other

10%

Founded: 1936

IPO: 1968 NYSE: GHM

Market capitalization $209.4 million

Recent price $21.53

52-week range $21.56 – $14.39

Avg. daily trading volume (3 mos.) 21.1k

Common shares outstanding: 9.7 million

Annualized dividend/dividend yield $0.36 / 1.7%

Ownership:

Institutional 74.2%

Insider 2.8%

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

• 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

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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

CultureTransformation:PowerofEngagementHuman capital is our most critical asset

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© 2016 Graham Corp. 29

Refining

34%

Chemical/

Petrochem

25%

Power

22%

Chemical/Petrochemical Industry ExpansionNatural 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

19%

Percents based on

Q2 FY 2017 TTM sales of

$83.1 million

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© 2016 Graham Corp. 30

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

34%

Chemical/

Petrochem

25%

Power

22%

Navy/

Other

19%

Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity

Percents based on

Q2 FY 2017 TTM sales of

$83.1 million

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© 2016 Graham Corp. 31

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

34%

Chemical/

Petrochem

25%Power

22%

Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity

Navy/

Other

19%

Deepen Reach into Nuclear Power Industry with Value-Add Equipment

and Materials

Percents based on

Q2 FY 2017 TTM sales of

$83.1 million

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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

34%

Chemical/

Petrochem

25%

Power

22%

Navy/

Other

19%

Naval Nuclear Propulsion ProgramBecome Lead Supplier of Surface Condensers and Ejectors for U.S. Navy

Percents based on

Q2 FY 2017 TTM sales of

$83.1 million

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© 2016 Graham Corp. 33

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

• Engineering process• IT processes

• Human resource processes

• Brand: Employer of Choice

People Investments

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© 2016 Graham Corp. 34

Adjusted EBITDA Reconciliation – Annual(in thousands)

Fiscal Years Ended March 31 2013 2014 2015 2016

GAAP operating profit $ 15,262 $ 14,617 $ 21,574 $ 8,479

Restructuring charge - - 1,718 -

Acquisition costs - - - -

Depreciation & amortization 2,079 2,199 2,308 2,435

Adjusted EBITDA $ 17,341 $ 16,816 $ 25,600 $ 10,914

Adjusted EBITDA margin 17% 17% 19% 12%

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.

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© 2016 Graham Corp. 35

Adjusted EPS Reconciliation(in millions, except per share data)

FY 2013 FY 2014 FY 2015 FY 2016

GAAP diluted earnings per share $ 1.11 $ 1.00 $ 1.45 $ 0.61

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 - - 0.12 -

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

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© 2016 Graham Corp. 36

North American CompetitionMarket 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

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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

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Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.

Products: Surface Condenser

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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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