spring investor summit ’19 - graham-mfg.com relations...2019/04/01 · fy16 fy17 fy18 fy19e $2.1...

© 2019 Graham Corp. 1

Spring Investor

Summit ’19

NYSE: GHM • April 1, 2019

Jeffrey F. Glajch

Vice President & Chief Financial Officer


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.


Business & Strategic Overview


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%


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


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.


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


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


25-35% ~15% Significant Moderate Significant

U.S. Navy

~$50 million annually

15-25% >50% Significant Not

meaningful

Not meaningful

Power


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


• 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


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)


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


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


Financial Overview


$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)


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


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)


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


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


• 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)


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


Spring Investor

Summit ’19



Supplemental

Information



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


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


– Capitalize on customer relationships

and strong brand

– Early engagement on projects

– Expand foothold in Asia


– New capacity

– Revamp and debottleneck


– Monetization of domestic natural gas resources

Key Metric: 1mmTPY of new capacity $5mm to $8mm of opportunity

Navy/Other

24%

Percents based on


$90.4 million


Power Industry


– 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


– 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


$90.4 million


• 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


– Certifications

– Capital investments

– Foot in the door


– Build out of Virginia Class sub program

– Ohio Replacement Class sub program

– Carrier fleet


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


$90.4 million


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


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%


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


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


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*


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


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


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%


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.


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


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


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

spring investor summit ’19 - graham-mfg.com relations...2019/04/01 · fy16 fy17 fy18 fy19e $2.1...

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