Investor Presentation

Transcription

1 NYSE:GHM February 2016 Investor Presentation Jeffrey F. Glajch Vice President & Chief Financial Officer 2016 Graham Corp. 1

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, 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 Graham Corp. 2

3 Business & Strategic Overview 2016 Graham Corp. 3

4 Financial Goals Performance Measures Recent Results Goals Organic Revenue Growth Profitability Capital Stewardship FY14 to FY15 32% Growth FY15 EBITDA Margin 18.9% FY15 ROIC 13.3% Double Revenue Across a Cycle >17% Average EBITDA Margin* >12% Average ROIC* * Average Cycle performance 2016 Graham Corp. 4

5 Executing Our Strategy to Expand Earnings Leverage assets to capture market share Expand predictable base business Diversify & strengthen revenue streams Reduce earnings volatility Short-term objective: Drive top-line growth through greater market share Near-term objective: $200 million revenue Key markets: Refining Petrochemical Power U.S. Navy Long-term objective: Leverage competencies and financial strength to diversify and provide further growth 2016 Graham Corp. 5

6 Near-Term Expansion Targets Operating leverage and pricing drive EBITDA margin expansion Revenue (1) $135 million >$200 million (1) as a percent of revenue Gross Margin (1) Adjusted EBITDA Margin (1) 31% 19% Mid to Upper 30% Range Low to Mid 20% Range (1) Base year fiscal 2015 is shown; margins are as a percentage of revenue 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. 6

7 Diversification Strategy Stronger earnings, less volatility Prior Cycle Mix Recent Mix Projected Near-Term Mix Power 5% Other 22% Chemical/ Petrochemical 27% Refining Refining 46% 46% 18% Power 15% Navy Other Refining 32% Chemical/ Petrochemical 35% Power 15%-25% Navy 10%-15% Refining 20%-30% Other 10%-15% Chemical/ Petrochemical 20%-30% ~ $100 million ~ $135 million ~ $200 million Acquisitions present incremental growth potential 2016 Graham Corp. 7

8 Addressing Key Markets Key Markets Graham 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 2016 Graham Corp. 8

9 Targeted Path to $200 Million Revenue Diversification Strategy Drives Growth & Reduces Volatility 210 ($ in millions) $10 $20 $ $15 $ $135 $10 $15 $5 $10 $5 $ CORE GRAHAM DIVERSIFICATION STRATEGY 50 FY 2015 Sales Refining Chemical / Petrochemical Other Power Navy Near-Term Sales Goal 2016 Graham Corp. 9

10 Strengthening Stable Revenue Base Reducing Volatility 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 $18 Annual Predictable Base Business (Base revenue: $ in millions) $21 $25 $29 $33 $25 $31 $42 $45 $45 $51 > $ Graham Corp. 10

11 Stable Backlog Supports Outlook Months % Other 4% Backlog by Industry December 31, 2015 Refining 24% Power 15% Chemical/ Petrochemical 13% Navy 44% Projected Backlog Conversion December 31, 2015 Beyond 24 Months 40-45% Within 12 months 45-50% Reflects benefits of diversification strategy $ $ $80.00 $60.00 $40.00 $20.00 $ Graham Corp. 11 ($ in millions) $94.9 $85.8 Backlog $112.1 $113.8 $108.1 $ /31/2012 3/31/2013 3/31/2014 3/31/2015 9/30/ /31/2015 Backlog Backlog expected to convert within 12 months Continuing to build predictable base; high percentage of U.S. Navy projects in backlog ~55% from markets or customers not served by the Company five years ago $ $ $ $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- Reducing the impact of more cyclical sales in the energy industry

12 Diverse Bidding Pipeline $800 Million to $1 Billion Power 15%-20% By Industry Navy 2%-5% Refining 40%-45% Other 5%-10% Chemical/ Petrochemical 20%-25% $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 Drop in oil prices over past year has impacted bid activity, but not general level of pipeline Long-term fundamentals remain intact As of September 30, Graham Corp. 12

13 Process-Critical Equipment Customers require quality, complex engineered-to-order equipment High Cost of Failure Low Fault Tolerance Performance Specifications Difficult or Impossible to Replace Low Relative Cost 2016 Graham Corp. 13

14 Value Enhancing Sales Cycle Year 1 Year 2 Year 3 Year 4 Year 5 Concept FEED* EPC Bid Purchase Construction * Front End Engineering Design Cradle to grave support Graham Competitive Advantage: Early Involvement Year 1 Year 2 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 2016 Graham Corp. 14

15 Financial Overview 2016 Graham Corp. 15

16 Strong Financial Results (Revenue in millions) $160 $140 $ % 35% $120 $100 $103.2 $105.0 $102.2 $92.5 (4) 30% 25% $80 19% 17% 17% 19% 20% $60 15% $40 $20 $0 EPS 9% 8% 8% 8% FY12 FY13 FY14 FY15 FY16E (1) Revenue GHM Adj. EBITDA Margin US Industrials Median Adj. EBITDA Margin $1.10 (3) $1.01 (3) $1.00 $1.57 (3) (2) 10% 5% 0% (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. (4) Based on mid-point of guidance provided as of January 29, Graham Corp. 16

17 Strong Balance Sheet ($ in millions) Cash, Cash Equivalents and Investments $51.7 $61.1 $60.3 $73.2 Operating Cash Flow $22.2 $15.2 $12.4 $6.3 3/31/2013 3/31/2014 3/31/ /31/2015 Capital Expenditures $5.3 $5.3 $1.7 $1.5 - $2.0 (1) FY13 FY14 FY15 Q3 FY16 YTD Working Capital Utilization (2) 11.7% 10.0% 15.6% 7.0% FY13 FY14 FY15 FY16E Batavia Expansion (~65% in FY14 and FY15) FY13 FY14 FY15 Q3 FY16 (1) Guidance provided on January 29, 2016 (FY16E capex between $1.5 million - $2.0 million) (2) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue 2016 Graham Corp. 17

18 Strong Cash Generation March 2005 to December ($ in millions) (24.5) 10.4 (9.5) (11.1) (18.5) % of Net Income converted to cash or returned to shareholders March 2005 Cash & Investments, Net Net Income D&A Working Capital Change Capital Investments Financing/Other Treasury Stock Repurchases Dividends Energy Steel Acquisition December 2015 Cash & Investments, Net Sources of Cash Uses of Cash 2016 Graham Corp. 18

19 Graham Capital Allocation Priorities Cash from Operations Cash from Balance Sheet Organic Growth Acquisition Strategy Dividend Payments Invest in current operations to drive organic growth Continue consistent dividend payments and increases Stock Repurchases Seek opportunistic acquisitions with cash return that exceeds equity cost of capital Return value to shareholders through stock repurchases Maintain a strong, prudently managed balance sheet 2016 Graham Corp. 19

20 Shareholder Focus Annualized Dividends Per Share $0.32 $0.16 $0.12 $0.08 Institutional Ownership 63% 74% 36% $0.36 Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016* * Reflects date of dividend increase Returned $8.3 million to shareholders in YTD FY2016 Purchased ~328,000 shares for $5.9 million under $18 million stock repurchase program Paid $2.4 million of dividends Sustainable dividends reflect stability of operating cash flows across business cycle 3/31/2007 3/31/2010 9/30/ Graham Corp. 20

21 Acquisition Strategy Diversify products, markets, and/or geographic presence; reduce earnings volatility 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 2016 Graham Corp. 21

22 Lowered FY2016 Revenue Guidance (1) Maintained gross margin and SG&A margin guidance Revenue $90 million $95 million Gross margin 27% 28% SG&A 17% 18% of sales Effective tax rate 30% 31% Strategic Target: Exceed $200 million in organic revenue (1) FY2016 Guidance provided as of January 29, Graham Corp. 22

23 Investment Highlights 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 2016 Graham Corp. 23

24 Investor Presentation NYSE:GHM February Graham Corp. 24

25 Supplemental Information 2016 Graham Corp. 25

26 Graham Corporation Market Data Founded: 1936 IPO: 1968 Market capitalization Recent price $17.08 NYSE: GHM $168.2 million 52-week range $25.76 $14.39 Avg. daily trading volume (3 mos.) Common shares outstanding: 49k 9.8 million Annualized dividend/dividend yield $0.36 / 2.1% Ownership: Institutional 74.3% Insider 2.2% Fiscal year end March 31 Note: Market data as of January 28, 2016 [Source: Bloomberg]; ownership as of last filing date Q3 FY16 TTM Sales $105.2 million Middle East 13% Asia 8% United States 64% Other 15% Q3 FY16TTM Orders $114.3 million Asia 10% Middle East 3% United States 73% Other 14% 2016 Graham Corp. 26

27 Executive Compensation Shareholder Alignment 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 2016 Graham Corp. 27

28 Culture Transformation: Power of Engagement Human capital is our most critical asset Professional Development & Improved Training Empowerment Performance Management & Increased Accountability PEOPLE Redefined Traditional Roles & Addressed Organizational Constraint Direct labor as value creator vs. cost Unlocked potential of human capital Added New Skills to our Bench Increased Decision Rights 2016 Graham Corp. 28

29 Chemical/Petrochemical Industry Expansion Natural Gas Growth Trend Refining 32% Chemical/ Petrochem 35% Navy/ Other 21% Power 12% Percents based on Q3 FY 2016 TTM sales of $105.2 million 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 2016 Graham Corp. 29

30 Global Oil Refining Industry Leading Supplier of Vacuum Systems and Surface Condensers Refining 32% Chemical/ Petrochem 35% Navy/ Other 21% Percents based on Q3 FY 2016 TTM sales of $105.2 million Power 12% 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 Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity 2016 Graham Corp. 30

31 Power Industry Expansion Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials Refining 32% Chemical/ Petrochem 35% Navy/ Other 21% Percents based on Q3 FY 2016 TTM sales of $105.2 million Power 12% 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 2016 Graham Corp. 31 Rerate, power augmentations Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity

32 Naval Nuclear Propulsion Program Become Lead Supplier of Surface Condensers and Ejectors for U.S. Navy Refining 32% Chemical/ Petrochem 35% Navy/ Other 21% Power 12% Percents based on Q3 FY 2016 TTM sales of $105.2 million 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 2016 Graham Corp. 32

33 Investments in Capacity for Organic Growth Expanded/Upgraded Facilities Invested $15 million in facilities and equipment in last 5 years Added 40,000 ft 2 of additional manufacturing space New machines and technology Supports Diversification Strategy Established dedicated facility for U.S. Navy Flexibility to address other demand People Investments Increased workforce by 40% 31 welders, 7 machinists, 20 engineers IT processes Human resource processes Brand: Employer of Choice 2016 Graham Corp. 33

34 Adjusted EBITDA Reconciliation Annual (in thousands) Fiscal Years Ended March GAAP operating profit $ 17,095 $ 15,262 $ 14,617 $ 21,574 Restructuring charge ,718 Acquisition costs Depreciation & amortization 2,024 2,079 2,199 2,308 Adjusted EBITDA $ 19,119 $ 17,341 $ 16,816 $ 25,600 Adjusted EBITDA margin 19% 17% 17% 19% 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 Graham Corp. 34

35 Adjusted EPS Reconciliation (in millions, except per share data) FY 2012 FY 2013 FY 2014 FY 2015 GAAP diluted earnings per share $ 1.06 $ 1.11 $ 1.00 $ 1.45 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 Reversal of Energy Steel earn-out after tax, per diluted share - (0.10) - - Adjusted diluted earnings per share $ 1.10 $ 1.01 $ 1.00 $ Graham Corp. 35

36 North American Competition Market Refining vacuum distillation Chemicals/Petrochemicals Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer HVAC Naval Nuclear Propulsion Program Nuclear Defense Gardner Denver Competitors Croll Reynolds; Schutte Koerting; Gardner Denver Ambassador; SPX (Yuba); KEMCO; Donghwa-Entec; Oeltechnik Holtec; Babcock Thermal Engineering; SPX (Yuba); KEMCO; Maarky Thermal Systems Alfa Laval; APV; Xylem; Ambassador Joseph Oats; DCFAB Dubose; Consolidated; Tioga; Nova; Joseph Oats; Energy & Process DC Fabricators, Triumph Aerospace, Xylem, PCC 2016 Graham Corp. 36

37 International Competition Market Refining vacuum distillation Chemicals/Petrochemicals Turbomachinery OEM refining, petrochemical Turbomachinery OEM power and power producer Competitors GEA Wiegand; Korting Hannover; Edwards; Gardner Denver Croll Reynolds; Schutte Koerting; GEA Wiegand; Korting Hannover; Edwards; Gardner Denver Donghwa-Entec; Bumwoo; Oeltechnik; Mazda (India); Hangzhou Turbine Equipment; Chem Process Systems; KEMCO Holtec; Babcock Thermal Engineering; SPX (Yuba); Mazda (India); KEMCO; Chem Process Systems 2016 Graham Corp. 37

38 Products: Surface Condenser Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power Graham Corp. 38

39 Vital Processing Components A condenser supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power. 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. REFINERY EJECTOR SYSTEM CNOOC HUIZHOU REFINERY CHINA 240,000 BBL/DAY REFINERY 39