cfa society cleveland - graham-mfg.com relations...jun 22, 2016 · income d&a working capital...
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© 2016 Graham Corp. 1
Midwest Investment Conference 2016CFA Society Cleveland
NYSE: GHM • June 22, 2016
Jeffrey F. GlajchVice President & Chief Financial Officer
© 2016 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,” “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.
© 2016 Graham Corp. 3
Business & Strategic Overview
© 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 Measures Recent Results
* Average Cycle performance
Operating leverage and pricing drive EBITDA margin expansion
Near-term investments currently include $1.5 million to $2.0 million of incremental personnel expense to support longer-term growth objectives
© 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 EarningsShort-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
© 2016 Graham Corp. 6
Stronger earnings, less volatility
Refining46%
Acquisitions present incremental growth potential
Diversification Strategy
~ $200 million
Refining46%
Chemical/Petrochemical
20%-30%
Other10%-15%
Navy10%-15%
Refining20%-30%
Power16%
NavyOther
Chemical/ Petrochemical
33%
Refining32%
Projected Mix
Power15%-25%
19%
Recent Mix
~ $90 million
© 2016 Graham Corp. 7
Addressing Key Markets Key Markets Graham
Share* Actions Share Goals*
Global Refining>$150 million annually
~ 25% Assertive pricing strategyTake market shareFurther expand execution capacity
>40%
Global Chemical/Petrochemical>$150 million annually
~15% Dominate U.S. marketTake market share; retain price disciplineWin in AsiaFurther expand execution capacity
>30%
U.S. Navy~$50 million annually
~10% Secure position in both submarine programsWin CVN80
40 to 50%
Power>$250 million annually
<10% Strengthened management teamAlign sales, engineering and operations for growth
Double share
* Market share data are management estimatesSecondary markets are not noted
© 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
COREGRAHAM
DIVERSIFICATIONSTRATEGY
$90
$200
$30 – $35
$25 – $30$5 – $10
$15 – $20$15 – $20
Diversification Strategy Drives Growth & Reduces Volatility
Anticipated market recovery
© 2016 Graham Corp. 9
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
$18
© 2016 Graham Corp. 10
Navy 47%
Other4%
Power17%
Chemical/Petrochemical
11%
Refining 21%
($ in millions)
Backlog by IndustryMarch 31, 2016
Projected Backlog ConversionMarch 31, 2016
Months 12-24
10-20% Within 12 months
45-50%
Beyond 24 Months35-45%
Backlog Remains Stable
$94.9 $85.8
$112.1 $113.8 $108.0
$‐ $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 $110.00 $120.00
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2016
Backlog
Backlog Backlog expected to convert within 12 months
• Predictable base supports future growth; high percentage of U.S. Navy projects in backlog
• ~60% from markets or customers not served by the Company five years ago– Reducing the impact of more cyclical sales in
the energy industry
Reflects benefits of diversification strategy
© 2016 Graham Corp. 11
0
20
40
60
80
100
120
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Core GHM Naval Commercial Nuclear Converts within 12 months
Backlog Mix Illustrates Impact of Diversification Strategies($ in millions)
Diversification strategy impact
Year End Backlog
© 2016 Graham Corp. 12
Diverse Bidding Pipeline
By Industry*
Chemical/Petrochemical
20%-25%
Power15%-20%
Other5%-10%
Refining40%-45%
As of March 31, 2016
$600 Million to $800 Million • $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
© 2016 Graham Corp. 13
Process-Critical Equipment
High Cost of FailureHigh Cost of Failure
Low Fault Tolerance Performance Specifications Low Fault Tolerance Performance Specifications
Difficult or Impossible to ReplaceDifficult or Impossible to Replace
Low Relative CostLow Relative Cost
Customers require quality, complex engineered-to-order equipment
© 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 DesignCradle to grave support
© 2016 Graham Corp. 15
Financial Overview
© 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) 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.
$103.2 $105.0 $102.2
$135.2
$90.019% 17% 17%
19%
12%9% 9% 8% 8% 8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$20
$40
$60
$80
$100
$120
$140
$160
FY12 FY13 FY14 FY15 FY16
Revenue GHM Adj. EBITDA Margin US Industrials Median Adj. EBITDA Margin
EPS
(1) (2)
$1.01(3)$1.10(3) $1.00 $1.57(3) $0.61
© 2016 Graham Corp. 17
Batavia Expansion (~65% in FY14 and FY15)
$1.7
FY13 FY14 FY15 FY16
Capital Expenditures
$5.3$5.3
11.7% 10.0%
15.6%10.8%
FY13 FY14 FY15 FY 16
Working Capital Utilization(1)
$51.7 $61.1 $60.3 $65.1
3/31/2013 3/31/2014 3/31/2015 3/31/2016
Strong Balance SheetCash, Cash Equivalents
and Investments
($ in millions)
(1) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue
$12.4$15.2
$6.3
$18.8
FY13 FY14 FY15 FY16
Operating Cash Flow
$1.2
© 2016 Graham Corp. 18
Strong Cash Generation($ 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
March 2016Cash &
Investments,Net
0.8
112.1
18.4 3.0 (24.9)
10.4 (13.0)(12.3)
65.1
Uses of CashSources of Cash
March 2005 to March 2016
~100% of Net Income converted to cash or
returned to shareholders
(18.5)
© 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
© 2016 Graham Corp. 20
Shareholder Focus
• Returned $12.7million to shareholders in FY2016− Purchased ~539,000 shares for
$9.4 million under $18 million stock repurchase program
− Paid $3.3 million of dividends
• Sustainable dividends reflect stability of operating cash flows across business cycle36%
63%80%
3/31/2007 3/31/2010 3/31/2016
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
© 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
© 2016 Graham Corp. 22
• Revenue $80 million – $95 million
• Gross margin 24% – 26%
• SG&A $17.5 million – $18.5 million
• Effective tax rate 32% – 33%
(1) FY2016 Guidance provided as of May 25, 2016
FY2017 Revenue Guidance(1)
Strategic Target: Exceed $200 million in organic revenue
© 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
© 2016 Graham Corp. 24
Midwest Investment Conference 2016CFA Society Cleveland
NYSE: GHM • June 22, 2016
© 2016 Graham Corp. 25
Supplemental Information
© 2016 Graham Corp. 26
Graham Corporation – Market Data
Note: Market data as of June 17, 2016 [Source: Bloomberg]; ownership as of last filing date
United States63%
Asia10%
Middle East12%
Other15%
FY16 Sales $90.0 million
FY16 Orders$84.0 million
United States67%
Asia10%
Middle East5%
Other14%
Founded: 1936IPO: 1968 NYSE: GHMMarket capitalization $175.6 million
Recent price $18.29
52-week range $20.96 – $14.39
Avg. daily trading volume (3 mos.) 24.2k
Common shares outstanding: 9.6 million
Annualized dividend/dividend yield $0.36 / 2.0%
Ownership:
Institutional 79.8%
Insider 2.2%
Fiscal year end March 31
© 2016 Graham Corp. 27
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
© 2016 Graham Corp. 28
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
© 2016 Graham Corp. 29
Refining32%
Chemical/ Petrochem
33%
Power 16%
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 FY 2016 sales of
$90.0 million
© 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
Refining32%
Chemical/ Petrochem
33%Power 16%
Navy/Other 19%
Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity
Percents based on FY 2016 sales of
$90.0 million
© 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
Refining32%
Chemical/ Petrochem
33%Power 16%
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 FY 2016 sales of
$90.0 million
© 2016 Graham Corp. 32
• 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
Refining32%
Chemical/ Petrochem
33%
Power 16%
Navy/Other 19%
Naval Nuclear Propulsion ProgramBecome Lead Supplier of Surface Condensers and Ejectors for U.S. Navy
Percents based on FY 2016 sales of
$90.0 million
© 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
• Increased workforce by 40%31 welders, 7 machinists, 20 engineers
• IT processes • Human resource processes• Brand: Employer of Choice
People Investments
© 2016 Graham Corp. 34
Adjusted EBITDA Reconciliation – Annual(in thousands)
Fiscal Years Ended March 31 2012 2013 2014 2015 2016
GAAP operating profit $ 17,095 $ 15,262 $ 14,617 $ 21,574 $ 6,131
Restructuring charge - - - 1,717 -
Acquisition costs - - - - -
Depreciation & amortization 2,024 2,079 2,199 2,308 2,435
Adjusted EBITDA $ 19,119 $ 17,341 $ 16,816 $ 25,600 $ 10,914
Adjusted EBITDA margin 19% 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.
© 2016 Graham Corp. 35
Adjusted EPS Reconciliation(in millions, except per share data)
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
GAAP diluted earnings per share $ 1.06 $ 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 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 $ 1.10 $ 1.01 $ 1.00 $ 1.57 $ 0.61
© 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
© 2016 Graham Corp. 37
Market CompetitorsRefining 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
© 2016 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 SYSTEMCNOOC HUIZHOU REFINERY–CHINA240,000 BBL/DAY REFINERY
39