Q2 2021 Graham Corp Earnings Call
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It is now my pleasure to introduce your host Chris Gordon Investor Relations for Graham Corporation. Thank you Sir you may begin.
Thank you Christine and good morning, everyone. We appreciate you joining us today to discuss Grahams fiscal 2021 second quarter results you should have a copy of the news release that was distributed crossed the wire. This morning. We also have slides associated with a commentary that we are providing here today if.
If you do not have the release or the slides you can find them on the company's website at www Dot Graham Ehm F G Dot com on.
On the call with me today are Jim lines, our President and Chief Executive Officer, Jeff like our Chief Financial Officer, and Alan Smith, Vice President and General manager of our Batavia, New York facility Jeff.
Jeff will start with the financial overview of the period. Alan will then provide an overview of our operations and Jim will wrap up the prepared remarks with a strategic overview of our business and provide our outlook for the rest of fiscal year 2021.
We will then open the lines for today.
As you are aware, we may make some forward looking statements. During this discussion as well as during the Q when any of these statements apply to future events and are subject to the risks and uncertainties as well as other factors, which could cause actual results to differ materially from what is stated in the call. Please.
These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as other documents filed by the company with the Securities and Exchange Commission fees documents can be found on our web site or at Www Dot S. E C Dot Gov.
I also want to point out that during today's call. We will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance you should not consider the presentation of this additional information in isolation or as a substitute for the results prepared in accordance with GAAP.
We have provided reconciliations of our comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release.
If you will turn to slide four I will hand, the call over to Jeff CLYC.
Thank you Chris.
Hi, This is Chris mentioned, the sorry, we're starting on slide four I. It was very nice to operate Uh huh.
In Q2 and normal capacity after running at approximately 50% capacity in Q1 due to COVID-19.
Q2 sales were 28 million up from 21.6 million in Q2 of last year.
Sales in the defense the Navy market were 9.4 million in the quarter.
In the quarter, we had a quick turn material order, which made up approximately a half.
How about a little over half of the revenue.
In the Navy we expected this to occur in the quarter.
While it is not a repeatable type sale it was not a surprise.
Year to date defense sales.
Were 12.9 million or 29% of sales. This is slightly higher than we expect for the full year, we would expect around 25% of our sales to be for the Navy for the full fiscal year.
The quarter also benefited from an acceleration of some work at one of our Asian subcontractors. They had available capacity and pulled some work from Q3 into Q2.
Q2, net income was $2.7 million or 27 cents per share up from 1.2 million or 12 cents per share last year strong.
Stronger revenue and margins drove the improvement.
Cash is still good at nearly $68 million.
Finally orders in the quarter were $35 million driven by strong international refining So awards in Asia and defense in the United States, our backlog improved to $114.9 million.
The conversion of a portion of our backlog provides the foundation for our improved guidance.
For the for the fiscal year moving.
Moving on to slide five.
I discussed the sale detailed on the last slide with the quarter at $28 million.
Sales in the second quarter was 62% domestic 38% in international last year second quarter was 73% domestic 27% international.
Gross profit in the quarter was increased to 7.7 million up from 4.9 million last year, primarily due to volume growth.
Gross margins were 27.5% up from 22.9%.
EBITDA margins were 14.2% up from 7.8% last year second quarter.
Finally, net income was $2.7 million up from 1.2 million last year.
On to slide six.
For the first half of fiscal 2021 sales were 44.7 million compared with 42.2 million in the first half of last year.
This increase was despite the challenging Q1, when our production capacity was at 50% due to COVID-19.
Year to date sales were 60% domestic 40% international compared with 71% domestic and 29% International last year grew.
Gross profit was 9.3 million slightly off the $9.7 million last year and gross margins were down 20.7 versus 22.9 last year again impacted by COVID-19 in the first quarter.
Year to date, EBITDA margins were 4.9% versus 4.5% in the first half of last year.
Net income was $900000 or nine cents per share down from 1.3 million or 13 cents per share last year.
Again, the first quarter loss due to COVID-19 was substantial but we have more than recover that in the second quarter.
Finally, moving on to slide seven cash is at 67.9 million down from 73 million at the end of fiscal 2020, but this is simply timing of working capital, namely accounts receivable and accounts payable we are expecting this to come back and in the third quarter.
Our quarterly dividend remains firm at 11 cents a share.
Capital spending has been light in the first half of the year or $800000 compared to 700000 last year as we have seen in the last few years, our capital spending will increase in the second half of the year and we still expect the total spend for the year to be between two and $2.5 million.
Finally, as we can as we continue to work on our acquisition pipeline activities covert has not had an adverse effect on our efforts as we have built some very good relationships overtime and these conversations continue however, many of them are remote as opposed to a person but.
But there's there's still a they are still occurring.
And still very active.
Alan will complete our present.
Bill will provide a presentation by providing more depth on our operations in Q2, and then Jim will provide a market update as well as our updated guidance for the rest of fiscal 2021.
Alan.
Thank you Jeff Good morning, everyone I'd ask that you refer to slide nine.
Sales for the second quarter were $28 million as Jeff mentioned in his remarks, the company completed a large material only order for our defense customers, which are quite very little conversion resources.
Shelters event defense industry were up 6.8 million year on year due to prior due to the prior mentioned materials order and greater extent conversion as we continue to grow our enable workforce.
Lastly, and importantly.
Due to the strength of our.
Backlog annual guidance has been increased from 90 to 95 million to 93 to 97.
Please move on to slide 10.
Well COVID-19, it impacted demand for our product. There are several actions that are being implemented to ensure that we maximize the margin of the work that is expected to convert during this financial year.
During the first quarter conference call I outlined several initiatives that the company was pursuing in order to maximize the real life realized margins.
Particularly we are focused on reducing our material cost.
Hiring and quickly Onboarding welders.
Differentiating our company from our competitors in the defense industry through superior execution, and leveraging it tools to increase the productivity of our team.
On the material procurement for the team has had success reducing our costs.
Graham is a relatively small buyer of carbon steel stainless steel plate. Therefore, we typically.
Kara plate.
From distributors.
However, we are finding in this time of low demand the mills that were willing to sell directly to less thus reducing our cost.
We're also focused on growing our workforce in order to increase production volume to this end. We recently completed an expansion of our wealth school. We now have the capacity to train up to 10, while others.
Up from five.
The work for the Navy has higher welded content, then doesn't arc welding is a critical skill set for the company and we must expand our capacity.
Let's go on a campus is a terrific addition for workforce development.
Currently we are prioritizing improving our productivity in the Navy production areas now that the company has completed many of the first time operations.
Activity and anticipate data from improved Bill flows employee training creation of jigs and fixtures.
And lastly, applying lessons learned.
I teach department continues to develop tools, which will improve our ability to manage our global fabrication partners a.
Management dashboard is being developed to track all aspects of our outsourced projects.
Cash flow to aggregate information that is stored on several ideas platforms and will improve the productivity of our project managers.
With that I'll turn the presentation over again.
Thank you Alan and good morning, everyone.
I'll begin my remarks, starting with slide 12.
Order level in the quarter was strong, especially given the state of crude oil refining and petrochemical markets let's.
Strong order level in the quarter is the result of implementing effectively diversification strategy.
We discussed during the past couple of years actions taken to be successful in the more price conscious segment of refining and chemical markets.
Well participation and market share were low which afforded an opportunity to address this segment differently.
Opportunity generation and bid management structure were modified and also execution strategy changed.
Replicating the success in China subsidiary structure was established in India.
It is necessary within India as an example to localize selling certain technical resources and quality control personnel.
We have the best chest to secure large project orders when they are supported and followed for a long time.
Local presence permits that.
This then allows for pulling a customer torgrim, rather than Graham having to move toward its competition.
Also fabricating certain components locally within India is important.
As a result of the strategy $10 million of new orders for India were secured in the quarter.
These orders were for both customers and end users that had not used grab before.
I am pleased with our success in India.
We plan to pursue principally large project work.
And as of today the company secured two of the three most recent large projects.
I commend the team that initiated and drove the strategy and those now executing the orders.
Excuse me.
Another highlight was securing additional work for the U.S. Navy.
The strategy is about 10 years old.
A large order in the quarter confirms the shipyards and the U.S. Navy find value in our engineering and fabrication capabilities pro.
Program management strengths.
Willingness to listen to feedback and implement improvements our quality program and also about we will invest in facilities modern machine tools personnel and employee development.
General conditions in our crude oil refining and petrochemical markets is weak.
While the pipeline for the U.S. Navy is strong.
This was noted by orders.
Orders for crude oil refining and petrochemicals being down compared with last year.
Let's move on to slide 13.
I want to discuss briefly market outlook and what we're seeing in our key markets.
I plan to go clockwise beginning in the upper left quadrant.
The sales team did well to secure a significant amount of work that is for Asia.
The Indian work mentioned, a moment ago, plus approximately $10 million and additional orders fiscal year to date that are for Asia.
The pipeline must rebuild and move from early stage activity to procurement stage.
We expect the next.
A few quarters to be about building the pipeline.
We are seeing cove, it having an impact in Asia.
As one large project in the bid pipeline that was teed up to be placed.
In order to be placed had to be postponed due to workforce impact from the disease.
We believe it will be activated again once the country doesn't spread of the disease back under control.
Our team in India.
Our team in China, and those overseeing southeast Asia 0.2 coal that is on the rise again, resulting in slowing of activity along with heightened uncertainty.
In the Americas, It was quite slow for bolt revamp retrofit and also routine spare parts Rick.
Refiners.
They are focused on preserving cash right now and are postponing MRO.
Or capital projects.
We don't see those picking up until demand recovers following having colgate under control.
Most projects that May proceed we are carefully following.
On a positive note and engineering only order for a large crude oil refinery revamp was secured that we hope proceeds within the next 12 months.
Well that case, the refiner could fund only upfront engineering at this stage. So that detailed layout is done enabling the project to proceed quickly once it is ultimately released for fabrication.
If and when it proceeds into fabrication.
We anticipate that a change order will exceed $5 million.
Crude oil below $40 a barrel.
And pandemic driven goal global disruption have resulted in an activity being pulled.
And by most national integrated and independent oil refiners.
Moving over to U.S. Navy.
Navy in particular.
And defense overall is active.
We have a solid pipeline of activity. Some of it is for new components that we have not done before while others are repeat components for upcoming vessels.
Submarine programs are vital for national defense and other strategic missions for our country.
There was terrific visibility into multiple year, new vessel requirements that underpin this segment continued to be strong.
We have identified and are pursuing $40 million to $60 million of opportunities for the Navy.
And they should.
Be pleased with the selected vendor over the next nine months.
We have M&A target identification and development concentrated in the defense segment due to its strong long term fundamentals.
As Jeff noted relationships in certain cases were established prior to co bid and we continued to nurture them with a combination of remote interactions along with selective visits.
Short cycle work is off 20% to 30%.
Crude oil refining and petrochemical markets are where the majority of spares revenue spare parts revenue was derived.
These markets as I mentioned, our and cash preservation mode until the global economy is back on its feet and demand subsequently recovers on an upbeat note.
There is a step up in short cycle inquiries, however that has not translated into.
And improved order level just yet.
Chemicals and petrochemicals.
Are also down.
Projects have been shelved or delayed.
The pandemic sent a demand shocked that has not yet fully abated.
Getting covert behind in most regions throughout the world as the catalyst for demand returning.
Let's now move on to slide 14.
Backlog is a healthy $115 million split evenly between commercial and defense.
The staging of backlog or work in process already provides an ability to state guidance at this extraordinary time when many companies cannot.
60% to 65% of backlog has plans to convert during the next four quarters with approaching 40% of backlog plans to convert during the next two fiscal quarters.
Please go onto the next page.
As Jeff and Alan mentioned, we are updating our guidance.
We've increased the revenue range to between 93 and $97 million.
Implying the second half should be between 48 and $52 million for revenue.
Gross margin is expected to be between 21 and 23%.
SGN I spend between 17 and $17.5 million.
And we're projecting the effective tax rate is approximately 22%.
With that Christine I would ask that you open the line for questions.
Thank you.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.
Hi, guys good morning.
Good job our job.
So I was wondering if you could let us know what the gross margins for the quarter looked like if you exclude the defense material order.
It would have been comparable because that wasn't materials only order.
So it wasn't mature wasnt appreciably different.
Comparable to.
What quarter either at all.
Quarter overall.
Oh, Okay. So the 25.9% to 27.5% ex excluding that order they would have been 27.5 or around there if not materially different from that correct.
Okay, and then just as far as sort of.
What you can see in terms of work in sort of the the bookings pipeline over the next I guess for maybe the rest of the fiscal year. It sounds like things are are relatively slow in the past or in this past quarter you saw some strength in the orders and some of that was Asia.
Related but you sort of mentioned that Asia is maybe you're expecting or a rebuild the pipeline and so.
Does that indicate that that age of strength that you saw in the quarter, you know will be lighter than its you know lighter than what we saw in the second quarter and it sounds like Americas is pretty weak. So just overall it seems like from my vantage point that bookings, maybe maybe comparable to the.
Four quarter trailing average or could you just talk about sort of what you're seeing in the pipeline.
At a qualitative level I think your assessment as you as you take the information that we've shared with you today into account is generally correct.
There is a an overall slowness.
Notwithstanding the region.
In refining and petrochemicals.
We did have some large project work gets secured by us in the quarter.
Those aren't always repeatable and then we can make our order patterns are lumpy or or quite.
Quite variable.
When those orders are 5 million $6 million and a quarterly order level might be $20 million to $25 million. As an example, so those could have a material impact, but as we look at the quarter.
Coming quarters from an order level.
We've seen some softness in deed for large project work.
We don't necessarily feel that from traces back to how Q4 and Q.
One at work.
And also on a more positive note.
Aggregating all of our end markets, we are anticipating a book to bill to be above one.
Well it would be for the year.
For the year I apologize for the full year industrial.
Okay, and then just relative to gross margins and looking at that backlog. Your gross margins have been sort of all over the place the last three or four quarters.
Could you help us maybe understand what that gross margin profile looks like in the backlog. It it looks like you're going to you're expecting some pretty decent gross margin actually in the back half of the year just relative to your guidance.
I guess, maybe you can comment on that and then sort of beyond that.
Beyond fiscal 21.
Yes.
I'm going to dissect it a little bit.
A marginal quality for that.
The naval work as we project forward.
We believe begins to average off.
And there's reasons that we had cited previously for that.
As Alan and his team have executed extraordinarily well.
On that strategy over the last decade.
We've been able to move from what was principally a 100% of the backlog at a point in time five years or so ago was all competitively bid.
Two today, maybe 20 ish percent of the backlog is competitive I'm, sorry, 80% is competitively bid 20% is under sole source contracting.
Projecting forward and how we're seeing the evolution of our relationship with the shipyards.
We think in a few more years, our backlog should be closer to 50% for the navy under sole source versus competitively bidding.
And that has a different margin potential than what's been running through backlog right. Now. So we would we would expect.
That backlog quality to continue to improve.
As we move through.
The next several quarters in the next several years and then of course that translates into.
An improvement we believe on our overall financial performance as a result.
As we look at our.
Americans are western Hemisphere work, we haven't really seen appreciable margin variation.
With what's going on in those end markets today, we've been able to win what was available at satisfactory margins.
Probably equal to or averaging up.
And then as we as we move into these previously underserved or under participated markets.
He may have caught that we referred to the expression of price sensitive reprise concerts segment of the market.
That can't happen does have a lower gross margin than.
Most of our other work however, the drop down to op profit in satisfactory. So therefore, we're not necessarily fixated on where gross margins going to go were fixated on where that profit goes.
Okay, and then it looks like the guidance is implying gross margins in the back half of the year of 23, 24% roughly what what is driving that relevant you know.
What is driving that because you you've seen other than the second quarter and I guess, you can't really count the first quarter. Because you were operating at low operating rates, but you know looking at the back half of last year.
You know you're implying some good very good improvement on what would be driving that in the back half.
Hey, Joe This is Jeff you know we've been communicating for probably the last three or four quarters that our backlog the margin in our backlog was improving obviously Q1 was.
Impacted by our or the fact that we are at half capacity, but I think if we went back to the middle of last year and forward. We've we've talked about our backlog was improving and we were seeing some improvement in the margins. There. So that's really what's driving it.
Okay and then just last question then I'll hop back in queue relative to covert could you just address sort of what you're seeing in your Buffalo market and you know.
Any anything that you have to say regarding the ramp up that we're seeing in cases in the country and just anything that you're anticipating potentially as we get into the winter months.
Sure I think in the local markets, we feel a little bit of an uptick but not not a dramatic uptick you know we've got some we've put in some very oh, good processes here at Graham to minimize the risk to our employees.
We are not allowing visitors onsite with were very minimal exceptions, and we've got a.
Cleanliness procedures across the company that we put in.
During the time period that we primarily shut down in late March early April and those have been very effective for us. So we're we're pleased that the fact that we've not been our employee base has not been impacted by covered but obviously, we continue to be very wary of what's going on in the community whats going on.
Outside of our community because as you know some of the Cove. It issues can be local and southern can can travel their way and but without seeing a a huge uptick locally, though as I think with a lot of places there there is a bit of an uptick there that are occurring but we're going to stay vigilant. Our employees are doing a great job and I leave.
To ship a team around the Cove. It has a has stayed focused on making sure that we don't take our eye off the ball.
Okay. Thanks, I'll hop back in queue. Thanks, guys. Thanks, Joe.
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Our next question comes from the line of Theodore O'neill, with which fully Litchfield Hills. Please proceed with your question.
Thank you congratulations on a great quarter.
Thank you for your yeah.
My first question is for Alan.
Last quarter, Alan you talked about expanding the welding school to up to eight welders and now you're saying, it's going up to 10, what's driving that and and how's it going.
What's driving that is as we completed the project I. It appeared that we had more room than we thought so we are able to locate two more two more wells those the project's going very well where the.
Well the teaching and training portion of the building is that complete we're finishing up I cant chain and restrooms that the restaurants that can change should be completed by the by the end of November and we'll be ready to accept all 10.
Hey students.
Right and Jim <unk> on slide 13.
Maybe I'm not sure I understand this bullet point here under the U.S. Navy certain bids are new components and what what are what are those components that you're talking about there.
[noise] that terminology feel is it's a new fabrication for costs that we have not done before and we wanted to cite that because it it confirms our ability to continue to grow within.
The three programs that we're involved in organically by winning new equipment new components.
I see.
Yeah.
Great. Thank you.
You're welcome.
Thank you and our next question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.
Hi, guys just a couple of follow up questions. So thanks.
On that same slide slide 13 in the bottom.
Bottom left quadrant I'm talking about the petrochemical markets.
You cited about the next wave of ethylene capacity in the Middle East and Asia.
Could you give us a sense of sort of more or what's going on there and what kind of timing of when.
Whereas some of these projects that you are seeing are out right now and maybe when they would they.
Maybe start to convert into orders for you guys is this a multi year type of thing or next year.
I would say, it's more of a multi year type of thing Joe and the perspective today is different than I would have had six to nine months ago pre co bid.
The middle East projects, we would contend need.
Stability in the <unk> and the global markets.
And also likely some improvement in the price of oil these are integrated.
Typically integrated refining projects.
Where there are a couple of <unk> crude oil.
Fighting with petrochemical production.
So we think that's a couple of years out however that was quite a clear mission bye bye.
By several countries or Saudi Arabia in particular.
About diversifying into petrochemicals.
And doing that via integrated refineries.
In Asia, China in particular, they'll probably be ahead of.
Other regions with the investment in and new petrochemical capacity.
There are two they're building integrated refineries.
That that a couple petrochem production with crude oil refining massive opportunities for us.
We're we're we're going through the execution of one of those orders right now.
For China, where Iran, whereas before we would have thought of China incremental or new capacity in China might be a three to 5 million dollar opportunity for us.
We are now running through backlog.
$13 million for an integrated a refinery work that we've secured.
So going through the execution phase right now.
And we anticipate China in particular and also other regions around the world will be moving toward.
Crude oil to chemicals.
As they transition from less of a barrel for fuels.
To more of a barrel toward petrochemicals.
Okay and.
And.
As far as your short cycle business is that mainly North America. Given your installed base is so big or is that beyond that and you know <unk> based on your answer I'm. Just wondering you mentioned inquiries are up I was just really specifically wondering where specifically what markets or geographies.
That those inquiries are up.
We tend to think of our short cycle work as 80 20, 80% domestic some of its international but the vast majority is domestic.
And so those inquiries are then mainly domestic them.
That's correct I'm, sorry, yes, yes, yes.
And then lastly, wondering if you could just sort of update us sort of you know typical quarterly update on your balance sheet and M&A and any updates there.
Sure Hi, Joe This is Jeff again on the balance sheet I mentioned, our cash is around $68 million, which is fairly consistent to where it was the last quarter I would expect in this quarter, we should see that improving we've got a quite a bit in receivables right now that should be coming into the next.
A couple of months and so I would expect our cash position will step up during this quarter and the rest of the balance sheet nothing nothing out of the ordinary everything else is in a good place.
With regard to M&A.
As both Jim and I mentioned, we continue to remain active where we're primarily focused on the defense sector.
And the Navy sector and.
And the fact that we are process is such that we you know we reach out we start to build relationships over time, a lot of those relationships have been in place for a for for a while and so they are they predate covidien. So we've been able to continue those primarily remotely though.
We've had a couple of in person visits over the last quarter. So those will continue and the pipeline on the acquisition side continues to be strong and even with some of the challenges. We're doing this through the the virtual environment, because we have those relationships its.
And.
It hasn't hasn't had to slow down at all so we're pretty a pretty pleased about where the pipelines out right now and hopefully we can continue to move things forward.
Okay, great all right. Thanks, a lot thank.
Thank you Joe.
We have no further questions at this time Mr. lines I would now like turn the floor back over to you for closing comments.
Thank you Christine and thank you Joe and feel for your questions. This morning, we appreciate everyone listening in to our conference call.
And we look forward to updating everyone again in January.
Have a great day stay safe.
But.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[noise].