Upload
others
View
7
Download
0
Embed Size (px)
Citation preview
Investor
Presentation
NYSE:GHM • February 2015
Jeffrey F. Glajch Vice President & Chief Financial Officer
Safe Harbor Statement
© 2015 Graham Corp. - 2 -
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.
© 2015 Graham Corp. - 3 -
Business & Strategic Overview
Graham Corporation – Market Data
Note: Market data as of January 29, 2015 [Source: Bloomberg]; ownership as of last filing date
United
States
67%
Asia
7%
Middle East
5%
Other
21%
Q3 FY 2015 TTM Sales
$123.8 million
© 2015 Graham Corp. - 4 -
Founded: 1936
IPO: 1968 NYSE: GHM
Market capitalization $229.6 million
Recent price $22.36
52-week range $36.80 – $22.17
Avg. daily trading volume (3 mos.) 39.5 thousand
Common shares outstanding: 10.1 million
Annualized dividend/dividend yield $0.32 / 1.4%
Ownership:
Institutional 75.6%
Insider 4.2%
Fiscal year end March 31
Q3 FY 2015 TTM Orders
$112.6 million
United
States
53%
Asia
10%
Middle
East
7% Other
30%
© 2015 Graham Corp. - 5 -
Short-term objective:
Double business
Longer-term objective:
Leverage competencies and financial strength to
diversify and provide further growth
• Leverage capacity 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
A Successful Track Record
© 2015 Graham Corp. - 6 -
• 10% revenue CAGR (FY2006 to Q3 FY2015 TTM)
• 16% net income CAGR (FY2006 – Q3 FY2015 TTM)
• EBITDA margins of mid 20% at last peak
Top-tier operating performance
• >90% of net income converted to cash (FY2006 to present)
• Debt free balance sheet
Strong cash flow
• Organic growth
• Acquisitions
• Dividends, Share repurchases
Capital allocation focused on growth
Stronger earnings, less volatility
Refining
46%
Acquisitions present incremental growth potential
More Markets, More Customers
© 2015 Graham Corp. - 7 -
~ $100 million ~ $200 million
Power 5%
Other 22%
Refining
46%
Chemical/
Petrochemical
27% Chemical/
Petrochemical
20%-30%
Other
10%-15%
Navy
10%-15%
Refining
20%-30%
Power 17%
Navy/Other 17%
Chemical/
Petrochemical
36%
Refining
30%
Prior Cycle Mix Projected Near-Term Mix Recent Mix
~ $100 million
Power
15%-25%
Addressing Key Markets
Key
Markets
Graham
Share* Outlook Actions
Share*
Goals
Global Refining
>$150 million
annually
~ 25%
Opportunities more plentiful
Sound long-term growth drivers
Assertive pricing strategy
Take market share
Further expand execution capacity
>40%
Global
Chemical/
Petrochemical
>$150 million
annually
~15%
Strong domestic market
Sound long-term growth drivers
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%
Submarine programs advancing
Next carrier bid late CY 2015
Secure position in both submarine
programs
Win CVN80
40 to 50%
Power
>$250 million
annually
<10%
Nuclear MRO market rebounding
Renewable power steady
Four U.S. reactors under
construction on-line 2018-2020
Pricing is steady
Strengthening management team
Align sales, engineering and
operations for growth
Double
share
- 8 -
* Market share data are management estimates
Secondary markets are not noted
© 2015 Graham Corp.
Increasing Predictable Base Business
• Short-term growth objective will
be achieved through expansion
of predictable base business:
− Nuclear market MRO
− Executing Naval strategy
− Aftermarket strategy
− Short-cycle product strategies
• Expected to exceed $60 million
in near-term, through organic
growth strategies
© 2014 Graham Corp. - 9 -
$18 $21
$25 $29
$33
$25
$31
$42 $45 $45
$52
$60
Annual Predictable Base Business (Base revenue: $ in millions)
Reduce earnings volatility and achieve top-line growth
Diverse Bidding Pipeline
© 2015 Graham Corp. - 10 -
By Industry
Chemical/
Petrochemical
20%-25%
Power
20%-25%
Other
10%-15%
Navy
5%-10%
Refining
35%-40%
As of December 31, 2014
$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 double compared
with 2004, indicative of
higher level of activity in this
stage of the cycle
– Recent drop in oil prices has
not impacted near-term bid
activity
Long-term fundamentals
remain intact
Created Capability to Drive Higher Sales
• Facilities enlarged
• Execution capacity expanded
• Subcontracting certain production
Operations Process
• Built stronger opportunity pipeline
• Management process sharpened
Sales Process
• Attracting and hiring talent
• Performance management
• Employee engagement
People Process
Improving
Market
Fundamentals
Strong, Sustained Growth • Take market share
• Capture new customers
• Grow and diversify revenue
• Expand profit
© 2015 Graham Corp. - 11 -
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
- 12 - © 2015 Graham Corp.
Financial Overview
© 2015 Graham Corp. - 13 -
Batavia Expansion (~60% in FY14 and FY15)
$3.2
$1.7
FY12 FY13 FY14 FY15E
Capital Expenditures
$5.8 (1)
$5.3
10.7% 11.7% 10.0%
12.2%
FY12 FY13 FY14 Q3 FY15 TTM
Working Capital Utilization(2)
$41.7 $51.7
$61.1 $62.5
3/31/12 3/31/13 3/31/14 12/31/2014
Strong Balance Sheet
© 2015 Graham Corp. - 14 -
Cash, Cash Equivalents and Investments
($ in millions)
(1) Guidance confirmed on January 30, 2015 (FY15E mid-point between $5.5 million - $6.0 million)
(2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual revenue
$2.6
$12.4 $15.2
$8.2
FY12 FY13 FY14 Q3 FY15 TTM
Operating Cash Flow
Strong Financial Results
© 2014 Graham Corp. - 15 -
(Revenue in millions)
(1) Guidance confirmed as of January 30, 2015 (FY15E mid-point).
(2) FY2007, FY2010, FY2011, FY2012, and FY2013 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of
adjusted EPS to GAAP EPS.
(3) See supplemental slide for EBITDA reconciliation and other important disclaimers regarding Graham’s use of EBITDA
(1)
$55.2
$65.8
$86.4
$101.1
$62.2
$74.2
$103.2 $105.0 $102.2
$127.5
29% 26%
40% 41% 36%
29% 32% 30% 31% 31%
11% 11%
25% 27%
18% 15%
19% 17% 17% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E
Annual Trends
Revenue Gross Margin EBITDA Margin
EPS $0.45(2) $1.49 $0.38 $1.71 $0.69(2) $0.64(2) $1.01(2) $1.10(2) $1.00
(3)
Solid Cash Generation
• March 2004 Cash and Investments, net $ 3.8
• FY 2005 thru Q3 FY 2015 cumulative cash flow items:
– Net income $ 95.1
– Depreciation and amortization 15.2
– Working capital change (6.2) 104.1
– Capital investments (23.5)
– Dividends (8.2)
– Financing/Other 4.8
• Subtotal 81.0
• Energy Steel acquisition (18.5)
• December 2014 Cash and Investments, net $ 62.5
© 2014 Graham Corp. - 16 -
($ in millions)
Navy 21%
Power 11%
Other 8%
Chemical/
Petrochemical
23%
Refining
37%
($ in millions)
Backlog by Industry December 31, 2014
Projected Backlog
Conversion
12-24
Months
20-25% Beyond 24
Months
5-10% Within 12
months
70-75%
Months 12-24
15-20%
Diverse and Strong Backlog Level
- 17 - © 2015 Graham Corp.
$33.1
$54.2
$75.7
$48.3
$94.3 $91.1 $94.9 $85.8
$112.1 $103.8
3/31/06 3/31/07 3/31/08 3/31/09 3/31/10 3/31/11 3/31/12 3/31/13 3/31/14 12/31/14
Backlog
December 31, 2014
• Backlog declined due to refining market uncertainties
• Strong backlog mix with high percentage of refining projects
• Approximately 1/3 of backlog is from non-cyclical Nuclear
and U.S. Navy strategies
– Supporting continued growth of predictable base
business
Acquisition Strategy
© 2015 Graham Corp. - 18 -
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
Will pay fair price, but will not overpay
Diversify products, markets, and/or geographic presence
Returning Value to Shareholders
© 2015 Graham Corp. - 19 -
• Recent dividend increases
– 100% increase on January 29, 2015
– 33% increase on February 25, 2014
– 50% increase on February 11, 2013
• $18 million stock repurchase program
approved January 29, 2015
• Institutional ownership
– 9/30/14: 76%
– 9/30/09: 54%
– 9/30/06: 42%
(1) as a percent of revenue
Near-Term Expansion Targets
© 2015 Graham Corp. - 20 -
Revenue(1)
Gross Margin(1)
EBITDA Margin(1)
$102 million
31%
17%
>$200 million
Mid to Upper 30% Range
Low to Mid 20%
Range
Operating leverage and pricing drive EBITDA margin expansion
(1) Base year fiscal 2014 is shown; margins are as a percentage of revenue
Strong Revenue Expectations and
Visibility on Shipment Timing
• Revenue Upper half of $125 million - $130 million
• Gross margin 30% - 31%
• SG&A 14% - 14.5% of sales
• Effective tax rate 32% - 33%
© 2015 Graham Corp. - 21 -
(1) FY2015 Guidance confirmed as of January 30, 2015
Fiscal 2015 Guidance:(1)
Near Term Target: Exceed $200 million in organic revenue
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
© 2015 Graham Corp.
Investment Highlights
- 22 -
Supplemental Information
© 2015 Graham Corp. - 23 -
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
© 2015 Graham Corp. - 24 -
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
© 2015 Graham Corp. - 25 -
PEOPLE
Culture Transformation: Power of Engagement Human capital is our most critical asset
Investments in Capacity for Organic Growth
© 2015 Graham Corp. - 26 -
• 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
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
30%
Chemical/
Petrochem
36%
Power
17%
Navy/
Other
17%
Percents based on
Q3 FY2015 TTM sales of
$123.8 million
Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity
© 2015 Graham Corp. - 27 -
Refining
30%
Chemical/
Petrochem
36%
Power
17%
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
17%
Percents based on
Q3 FY2015 TTM sales of
$123.8 million
© 2015 Graham Corp. - 28 -
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
30%
Chemical/
Petrochem
36%
Power
17%
Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity
Navy/
Other
17%
Percents based on
Q3 FY2015 TTM sales of
$123.8 million
© 2015 Graham Corp. - 29 -
Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials
• 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
30%
Chemical/
Petrochem
36%
Power
17%
Navy/
Other
17%
Percents based on
Q3 FY2015 TTM sales of
$123.8 million
Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy
- 30 - © 2015 Graham Corp.
EBITDA Reconciliation – Annual
Adjusted EBITDA is defined as consolidated net income before acquisition costs, interest, taxes, depreciation and amortization
Graham believes that when used in conjunction with GAAP measures, adjusted EBITDA, which is a non-GAAP measure, assists in the understanding of
Graham’s operating performance
($ in thousands)
- 31 - © 2015 Graham Corp.
(1) 2015E GAAP operating profit based on the midpoint of FY 2015 guidance: revenue $128.8 million, gross margin 30.5% and SG&A 14.25% of sales;
guidance updated as of January 30, 2015
Fiscal Years Ended March 31 2015E(1) 2014 2013 2012 2011
GAAP operating profit $ 20,900 $ 14,617 $ 15,262 $ 17,095 $ 8,775
Acquisition costs - - - - 676
Depreciation & amortization 2,400 2,199 2,079 2,024 1,648
Adjusted EBITDA $ 23,300 $ 16,816 $ 17,341 $ 19,119 $ 11,099
Adjusted EBITDA Margin 18% 17% 17% 19% 15%
2010 2009 2008 2007 2006
GAAP operating profit $ 10,042 $ 26,328 $ 21,088 $ 6,013 $ 5,454
Acquisition costs - - - - -
Depreciation & amortization 1,119 1,005 885 887 793
Adjusted EBITDA $ 11,161 $ 27,333 $ 21,973 $ 6,900 $ 6,247
Adjusted EBITDA Margin 18% 27% 25% 11% 11%
Adjusted EPS Reconciliation (in millions, except per share data)
- 32 - © 2015 Graham Corp.
FY 2007 FY 2010 FY 2011 FY 2012 FY 2013
GAAP diluted earnings per share $ 0.58 $ 0.64 $ 0.59 $ 1.06 $ 1.11
Acquisition costs after tax, per diluted share - - $ 0.05 - -
Adjustment of historical R&D tax credits after tax, per diluted share $ (0.13) $ 0.05 - $ 0.04 -
Reversal of Energy Steel earn-out after tax, per diluted share - - - - $ (0.10)
Adjusted diluted earnings per share $ 0.45 $ 0.69 $ 0.64 $ 1.10 $ 1.01
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
- 33 - © 2015 Graham Corp.
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
- 34 - © 2015 Graham Corp.
Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.
Products: Surface Condenser
© 2015 Graham Corp. - 35 -
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