Q1 2022 Graham Corp Earnings Call

Greetings and welcome to Graham Corporation's first quarter of fiscal year 'twenty 'twenty 2 financial results at.

At this time, all participants will be in a listen only mode.

And the answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll now turn the conference over to Deborah Pawlowski Investor Relations for Graham Corporation.

The last thing you may now begin.

Thank you Rob and good morning, everyone. We certainly appreciate your joining us today to discuss Graham's first quarter of fiscal 'twenty 'twenty 2 financial results.

We announced those results earlier this morning, and you should have a copy of that along with the slides that will accompany our conversation today.

If you do not have the releases or the slides you can find them on the company's website at www Dot Graham hyphen M F G Dot com.

We also simultaneously this morning announced the planned retirement of Jim lines, Our Chief Executive Officer, He's on the call today with us and won't be making from formal remarks.

Also joining us are Jeff Blake, our Chief Financial Officer, and Dan Thornton, Our President and Chief operating Officer.

Who has been named effect of with Jim's retirement, our new Chief Executive Officer.

Jim will start with his overview and then cover the brief results of the quarter. Jeff will then review details of the financial results and then we'll have Dan close out with his remarks.

As you are aware of we may make some forward looking statements. During this discussion as well as during the Q&A session. These statements apply to future events and are subject to risks and uncertainties as well as other factors, which could cause actual results to differ materially from what is stated on the call today.

These risks and uncertainties and other factors are provided in the release and in the slides as well as with other documents filed by the company with the Securities and Exchange Commission.

These documents can be found on our website or at SEC Gov.

I would like to point out that during today's call. We may also discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance you.

You should not consider the presentation of this additional information in isolation or as a substitute for the for the results prepared in accordance with GAAP we.

We have provided the reconciliations of comparable GAAP with non-GAAP measures in the tables accompanying today's release.

So with that it's my pleasure to turn the call over to Jim lines Jim.

Okay.

Thank you Debbie and good morning, everyone.

I will begin my remarks at slide 3 and provide a brief review of the financial results before discussing my planned retirement.

Revenue in the quarter was <unk>.

$22 million.

$16.7 million was organic and $3.5 million was due to the acquisition of Barbara Nichols The closed June 1st.

<unk> revenue was 35% of total revenue in the quarter.

We do expect that defense revenue will approach, 50% of total quarterly revenue with Barbara Nichols fully in future quarters.

This acquisition and the shift in revenue mix is a major transformation for Graham and measurably advanced our diversification strategy.

On an organic basis revenue was similar year over year.

However, it was for different reasons.

You might recall that our first quarter last year operated at nominally 50% capacity due to COVID-19, thus impacting revenue and profitability due to under absorption.

And the most recent quarter, our workforce utilization was that capacity, however mix was very different.

Orders from our crude oil refining and chemical petrochemical markets were very low during the third and fourth quarters last fiscal year, where non navy orders totaled $17.5 million for both quarters.

Consequently, greater production resources were pulled into navy backlog, which are lower margin due to first article work and also due to contract structure for a large order in backlog.

Those headwinds work out of backlog of across the next few quarters.

Largely behind us as we exit this current fiscal year.

Organic revenue and profitability are expected to improve across the fiscal year.

Yeah.

Orders in the first quarter were $29 million and were principally organic.

Barbara Nickels orders were $200000 for the month of June.

Somewhat encouragingly.

There were strong orders from our crude oil refining market in the quarter debt totaled $11.5 million.

We did have a significant win in the quarter 4 of domestic refiner of revamping of their facility to improve crude oil feedstock processing flexibility.

That particular, 1 was gratifying for me.

Still remember, losing the original of order 2 of domestic competitor in the mid 19 nineties.

And now 25 years later, 1 back of the installation and we placed the original supplier with our own vacuum systems.

Consolidated backlog at June 30th was $236 million of which 80% is for defense.

Importantly, as we worked through the more challenging margin backlog that impacts of the current fiscal year margin potential for our defence backlog improved measurably.

The Barbers Nichols acquisition provides additional market diversity to our profile as it also adds backlog for new markets, including space and advanced energy industries.

While we put considerable cash toward acquiring Barbara nickels to strengthen and diversify revenue along with the earnings our balance sheet remains strong and our opportunity to drive our return on assets improves.

As announced earlier today and is W had mentioned.

Very pleased to confirm that I will retire effective August 31 at the end of this month.

And then Zoran who will succeed me as president and CEO of the Corporation.

It also will join our board of directors at that time.

It has been a tremendous honor and great privilege for me to serve Graham shareholders and the Corp. As its principal executive officer since 2006.

I believe I have the party on the high note.

As this is an incredibly exciting time for the company considering first the.

The strength of our organic defense strategy, having advanced 2 preferred supplier status for many of the products of the company provides to the U S. Navy.

And in some cases, we're not bidding on the sole source basis.

The credit goes to Alan Smith, and his team for executing well our defense strategy.

Secondly, the progress we have had innovating execution to become successful and price focused international crude oil refining of petrochemical markets.

The sales team has proven we can take market share and also the operations team of show and we were able to realize or beat target margins.

Thirdly, the investments we've made in I T tools systems and resources to Redwood to leverage our installed base.

And the expected benefit that will provide.

I believe crude oil refining and chemical petrochemical customers 1 of the best in existing facilities, the greater throughput before investing in new capacity I feel we are ahead of competitors regarding commitment to the installed base.

Lastly, the transformational acquisition of Barbara Nickels creates a new strong growth platform for both organic and M&A expansion.

I've had the opportunity to work with Dan through the acquisition process for Robert nearly 3 years and most recently the last 2 months as we on boarded with the Graham team.

I believe that debt is well equipped to lead Graham and has a terrific and broad vision for the next phase of growth for the company.

I'm thrilled this acquisition has proved to be on transforming as we had envisioned.

And part of that transformation is building out the bench strength of our leadership team.

Ultimately over the last couple of months it became more clear to me. The dose has provided for my succession plan as well.

I'm thrilled that the board saw the same potential in Dan that I have seen.

Okay.

That's the Graham shareholder.

Looking forward the benefiting from the value of Dan the strategic direction.

Gratulation debt you have my full support the only through this transition, but well into the future.

I also want to take a moment as well to thank our shareholders.

I have enjoyed our many conversations all these years.

Very much appreciated your ongoing support.

With that I will turn the call over to Jeff for his review of the financial results.

Jeff.

Yeah.

Thank you Jim and good morning, everyone. If you could move to slide 4 as Jim mentioned, we had a very rough first quarter.

As I discussed that first quarter I would like to be the keep in mind that our full year guidance is unchanged.

We therefore, we expect to see improvements as the year goes on and we expect sequential quarterly improvement across each quarter for the rest of the fiscal 'twenty to 'twenty 2.

Sales in the quarter improved by $3.5 million, which was due to the 1 month that we owned Barbara Nichols the comparable quarter last year was early on during the Covid pandemic and as Jim mentioned, we ran the company at half capacity during that quarter.

However in the quarter, we did have a $5 million project, which was recognized on the completed contract basis and because of Covid had shifted.

From the fiscal 2020 into Q1 of 2021.

Gross profit and EPS were dramatically affected by a very poor mix of projects and some and some timing on call. It some cost items.

Namely we are losing some liquidated damages due to COVID-19 in the quarter and some of the timing of expenses, which were pulled into Q1.

We also had a small amount of acquisition expenses of about $169000 pretax and the first month of purchase price accounting related costs for Barbara Nichols.

To clarify the latter of the purchase accounting amortization costs were $225000 before taxes in June.

Before we move on I want to mention that we expect.

Approximately $2.7 million pretax and $2, $1.5 million after tax related to acquisition purchase accounting.

90% of this is the amortization costs with the rest of being a step up in depreciation and inventory.

We will be filing the 8-K later this week with much more detail on the purchase accounting and pro forma pro forma income statements.

We expect the among.

Out of amortization will be similar in fiscal 'twenty to 'twenty 3 as fiscal 'twenty to 'twenty..2 since we will have 12, rather than 10 months of amortization in fiscal 'twenty to 'twenty 3.

It will decrease in future years and level off at approximately 1 point of $1 million pre tax.

On to slide 5 with the acquisition of Barbara Nickels, we have moved from a very inefficient to a much more efficient balance sheet, we have added $20 million of low cost term debt.

As part of the acquisition and we have access to a much larger revolver revolving line of credit.

This term loan on the line of credit will provide ongoing flexibility.

We expect the acquisition of Barbara nickels to be accretive in fiscal 2022, even with the $2.$1.5 million.

Proximately 20 cents, a share and added amortization costs.

We will continue to look for both organic and M&A related growth opportunities and believe we are of the financial strength to invest in both areas with the addition of Barbara Nichols, We believe theres some excellent opportunities in both the arenas.

On to slide 6.

Orders in the commercial markets picked up in Q1 off of very low base on the previous 2 quarters.

With the $236 million backlog, we are well positioned for long term growth.

80 per cent of that backlog is in the defense market, which provides an excellent baseline for our business not just this year, but in upcoming years as well.

We expect approximately 50 per cent of our forward looking business to come from the defense market and with the opportunities for growth in the space market and recovery of the energy markets. We are excited about the future.

Before I pass it over to Dan I would be remiss, if I didn't recognize Jim for his 37 years of service of Graham The last 15 years being as leader. He has transitioned Graham from a company, which has which was capacity limited and had minimal growth engines to a much broader organization with strong footprints.

The defense.

And the Asian energy markets, coupled with a long history in the United States and Middle East.

Look nearly anywhere of the world and you will see grandma equipment in many world class refining and petrochemical facilities.

You will also see Graham equipment, playing a key role on U S. Navy vessels would support our country's national defense.

I also want to welcome Dan I've known Dan for the past 3 years, including negotiating the acquisition with or perhaps against him.

As of very high character leader with a great history of Bourbon Nicols and I expect them to do the same with Graham over.

Over the past many months.

When the board members of asked from my view as Dan has the potential CEO I was and continue to be unequivocal book unequivocal in my belief that Dan has the right CEO to take Graham forward.

Now that I've set the bar high Dan I'll pass the call over to you.

Thank you Jim. Thank you, Jeff very kind words, very kind introduction and good morning, everyone.

Like to start by thanking the board of directors and Jim lines specifically.

For placing their confidence in me to lead Graham Corporation.

I just spent 2 and a half years getting to know Graham their leadership and at a high level of their business.

Indirectly I've learned a little about their culture their people their customers and their board.

Okay.

Over the last 2 months I've met with the executive team.

Managers employees.

Customers and the board to understand the company in more depth.

These interactions have helped me understand the proud engineering and manufacturing heritage at Graham.

The importance of the company and the community at Batavia, and New York.

And how they have become a trusted partner to their customers across the world and the critical process industries that they serve.

As I go through my slides I'll give you an idea of how we are developing our strategy to build upon our strong legacies.

Leveraging our opportunities in the defense and space industries.

Specifically, we'll be working to generate sustainable earnings growth.

Reduce that earnings volatility.

Improve operating performance.

Generate strong cash flows to reinvest in our business and provide the dividend to stockholders the.

Ultimate goals are to provide an acceptable return to our stockholders and provide benefit to all of our stakeholders.

Now, let's focus on slide 7.

With Graham Corporation acquired Barbara Nichols, we recognize that the 2 businesses have the individuals' strength.

Serving their respective markets.

We do not want to disrupt.

Our strategy is to leverage the strengths of each as platforms.

The provide potential for both organic and inorganic growth.

As such.

Ram operations and be on operations, both operating under the Graham Corporation umbrella.

As we consider future capital investments our plan is to add new companies and technologies with related engineered product set can stand alone.

The collaborate to win bigger business.

Leverage best practices between subject matter experts in the companies.

Share services across the organizations and.

And provide career paths for key employees.

When we do these things each member of company can remain focused and agile.

While accomplishing more than they could alone.

As you look at slide 7 this depicts our 2 platforms for expansion.

Barbara Nichols is currently in space and defense predominantly.

Graham manufacturing is currently in defense energy and petrochemical.

For the space industry, we believe there of acquisition opportunities in this expanding market as it gains more interest in private investment.

We won't be looking for small acquisitions that we can tuck in.

As well as medium acquisitions that can stand on their own and are complementary to our current businesses.

We are also focused on internal investments to develop new products and technologies in that space industry.

Both Graham and Barbara Nickels are well engaged in the defense industries will be looking for new areas to provide value as well as internal investments and acquisitions that can help us grow into new and more sophisticated product.

Graham has been a world leader in vacuum in the heat transfer products for energy and chemical petrochemical applications.

As Jim and Jeff had discussed over many years the domestic market is flat and.

In the international markets have room for growth.

We intend to focus on our domestic installed base.

And provide customers the support they need to keep those plants running at an optimized level.

We will continue to invest in the international markets and grow our presence around the world through our successful shared margin strategy.

Okay.

More recently, both companies are seeing opportunities to gain and to engage in the alternative and clean energy markets through turbo machinery and heat transfer products.

Clean energy is actually in the area, where synergy between companies as possible.

Strategically we plan to both service and grow our legacy business.

Having the engineering and new product capabilities to participate in these new alternative and clean energy markets.

Each 1 of these markets that have gone over have their own risk and reward profiles.

Having teams focused in each area is paramount and we are well along with the organizational changes needed to successfully execute our strategies in each of the markets.

Let's move to slide 8.

As Jim and Jim and Jeff discussed earlier, we look at fiscal 'twenty 2 is a transition year for the tough start.

Getting better sequentially by quarter.

Meanwhile, we are seeing the stronger pipeline with more inquiries and new orders in the second quarter.

Graham manufacturing second quarter orders are.

$9.5 million to date.

Well, Barbara Nicholls has booked $9.1 million.

Based on the timing of customer projects, we are holding our revenue guidance at $130 million to $140 million.

Of which Barbara Nichols is expected to contribute between 45 and $48 million.

Combined the defense segment is expected to account for almost half of the revenue.

And the EBITDA is expected to be in the $7 million to $9 million range capital expenditures are planned to be in the 3.5% of $4 million range, including the Barbara Nichols' capital expenditure.

Okay.

Let's go to slide 9.

As alluded to in my initial remarks, we are transforming Graham Corporation.

Barbara Nicols was the initial transformational acquisition.

We will be looking to solidify the Barber Nicholson investment through further investment on its platform to enable growth in the defense and space of industries as well as other industries as opportunities arise.

Coincident with the acquisition, we believe we are at or near the bottom of the energy and Petro Chem cycle.

We have been preparing for an upcycle expansion that we believe will start in FY 'twenty to 'twenty 3.

Yeah.

Our world their training program has been very successful in refilling, our pipeline of future employees.

We are qualifying additions to our supply base to enable additional capacity with the expectation of a potential up cycle.

Our plans include expanding our international offices with sales quality and project management personnel.

Both Barber Nicholson Graham have leading market positions and strong brand recognition.

We believe the strong engineering.

Working hand in hand with customers on challenging applications and delivering high quality products on time will enable us to maintain those brand strength and market leadership positions.

As we advance our transformation, while we will be improving our market presence with linked and updated websites and social media.

We believe that this will expand our exposure to a broader audience.

It doesn't yet recognize our growth and earnings potential.

Personally I have a strong interest in being a great corporate citizen and working with all of our stakeholders to build a better stronger business for us all.

Yeah.

With the B and acquisition Graham puts its large cash reserves to work.

And creates and created a more efficient balance sheet.

As we continue to improve our business and further on our strong cash generation generating capabilities.

We'll intend to make smart choices to allocate that capital for further growth with a keen focus on returns.

We are very optimistic about this new combination in the future it presents for all of us.

When you have a talented team of people that can see problems for your customers.

Worked with them to design and build solutions to those problems.

And then shift when the markets change you will be successful.

Graham Corporation, we have that ability and we will be looking to add more.

With that operator, we are ready to open the call for questions.

Thank you at this time, we'll be conducting a question and answer session.

I just wanted to ask the question. Please press star 1 from your telephone keypad and the confirmation tone will indicate your line is in the question queue.

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1 moment. Please on we pull for questions once again Thats star 1.

Okay.

Thank you. Our first question comes from the line of Theodore O'neill with Litchfield Hills Research. Please proceed with your questions.

Thanks, very much so first.

The first question you in your slide presentation, you used an image of the Blue origin, New Shepherd reusable launch vehicle can you give us a little more detail on graham's opportunity in the space development programs.

Yeah, Barbara Nichols is involved in quite a few different new space as well as existing space applications and.

So historically, we've been involved in the propulsion side, So rocket engine turbo pumps, the pumps that basically of take the the fuel out of the out of the tanks and supply into the combustion chamber to provide propulsion.

We're seeing more and more applications for the next.

The next the journey in the space. So you worry about launch first and then you worry about.

We're think about living in space sort of operating in space and so we're starting to get more opportunities for turbo machinery fluid.

And in power.

Systems for space based vehicles.

And so so I won't I won't talk about specific customers or very specific applications, but but think about launch and then think about.

Living and operating in spaces as kind of the follow on to that and that's where Barbara Nicholls has has been involved in has future opportunities.

Okay.

In the prepared remarks, you say that margins were impacted by your aggressive strategy center of the naval nuclear propulsion program, which clearly was successful does this mean you underprice the project to get the business.

This is Jeff.

No we.

We aggressively we do this aggressively price to get in some of these are first the.

The first projects.

Yeah, the either particularly of particularly the vessels. So they have some the obviously have some operational challenges to them also but we knew going into these we're going to be some rough jobs, but we were successful getting them. We've been successful from a customer standpoint of executing them and very importantly, we've transitioned the business.

It was the vast majority of our current backlog.

Is sole sourced so if you look at what's in backlog today and I'm speaking specifically on the line.

The historic Graham side, the not speak not talking to Barbara Nickels here.

Most of what's come into backlog of the past couple of years has been sole sourced.

Great. Thanks very much.

Thanks Neil.

The next question is from the line of <expletive> Ryan of Colliers. Please proceed with your questions.

Thank you on the.

The margin question again can you give us the impact in which the.

Therefore programs those were tied to and then maybe.

Looking down the road with being a sole source what kind of margin should we consider going forward.

<expletive> I can't I can't really provide much detail on your first question other than I will say it was really it is across the multiple.

Boats.

As we look forward.

As we look forward as we get it, particularly as we get into fiscal 2023 and beyond we expect a pretty substantial step up.

Not a couple of hundred basis points, but the well beyond that 2.

2 of our more more reasonable and more normal level of profitability. So I can't provide again that the specific margin number but I assure you. It's not a couple of hundred basis points is much more than that.

Okay.

Okay. Thank you well on your commercial side, the increased business coming through there of how does that margin profile stacked up I thought you said it was more of domestic business and I know of the Chinese and Indian markets are probably more price sensitive so can you.

Kind of handicap that going forward.

<expletive> as Jim mentioned, we had the 1 order in the first quarter I believe.

He will be speaking of on the domestic side, but we've also had.

Some orders of some of the ones that Dan mentioned, we are in the international markets. Even the ones that are in the international markets are not at a at a poor margin level of actually had a pretty decent margin levels. So the the orders that have come in in the first quarter and the ones. So far of the second quarter that the Dan talked about are all of the.

The better margin level than what we've been pulling out of backlog over the past the.

This past quarter I get a lot of that was due to a really low order level in the second half of fiscal 2020.1.

Yeah, I know you haven't published the target model, but when you get into 'twenty 3 'twenty 4 with the rebound in energy.

The defense kicking in.

Can you give us the range of where do you think gross margin should.

Should be coming in.

When when kind of both sides of the commercial on the defense market.

Operating more efficiently.

Yeah.

The degree at this point, we've not provided any anything in the future looking at gross margins I will talk a little bit about EBITDA EBITDA margins of and those we do expect.

If you look at this year's EBITDA margins relative to our guidance, you'll see that they would be kind of in the 5 to kind of 6% range.

We expect those to noticeably step up as we get into fiscal 'twenty 3.

Okay. Thank you.

Youre welcome <expletive>.

The next question is from the line of Andrew Shapiro with Lawndale Capital. Please proceed with your question.

Hi, Thank you.

Sorry to.

Pile on on the tissue, but margins are I think that the main focus here, maybe I could throw out the question in different way if you could help.

Clarify on maybe bridge the steps to achieving the normalized range of margin and can you at least identify what kind of range of margin.

It would be appropriate and when I'm asking about the clarification of a bridging us from our current.

Below the expected margins to a normalized margin.

This is independent of.

The overhead absorption of revenue growth I wanted to get to that and the follow up question.

Okay. Andrew This is Jeff again.

It's a couple of things first off if you look at the first quarter results of as we talked about the the of the $20 million on revenue of about 335 million was Barbara Nichols. The recipe the historic Graham business. Most of the challenges that we had from a margin standpoint I'll talk EBITDA.

Margin if that's okay.

Per wear.

We're on the Graham Historic Graham side.

Those will start to work their way out in the second half of the year.

And we would expect the those to turn positive in the second half of the year of some of it will be due to the the transition from the mix of of way away from the mix of some of the lower profit projects that we had debt.

I'll run through the first quarter and will be running through some be running through out the year, but that will be of lesser percentage of our business going forward and will be the through with most of that as we get through the end of the year.

So some of it is the mix of projects on the Graham side, and again, we'll move that toward a positive profitability level.

In addition, the first quarter only had 1 month of Barbara Nicholson of it.

And had Barbara Nichols of probably a little lower revenue number than we would expect the across the year, Dan mentioned $45 million to $48 million is our guidance for the full year for Barbie Nichols since that's the only 10 months you do the math, it's 4.5% of $4.8 million on a monthly basis and Barbara Nichols the revenue in the in the.

The June quarter. It was only $3.5 million. So it was out of lower revenue number than normal for them.

And the profit was also the <unk>.

The down a little bit because of that as we move into the current quarter and as we move through the third and fourth quarter, we expect Barbara nickels to be.

Executing at a higher revenue.

The level and that will help the profitability also so if I look at the business combined you will see the.

The historic Graham business moving toward positive EBITDA, as we get particularly in the third and fourth quarter and the Barber Nichols business. If you think about the the direction that we provided on the Barbara Nicholas call on June 1st we had a we talked about the EBIT the level of it if you kind of.

Back into you would get into low double digit EBIT of the levels, we would expect to be in those debt level in the second third and fourth quarters in general they may be a little.

A little higher 1 quarter of the lower another but throughout the next 9 months of the year. So the.

EBITDA, which was obviously quite poor in the first quarter. If you look at the last 3 quarters, our expectation of revenue.

Again, just taking your guidance and backing out the first quarter is $37 million to $40 million of revenue per.

Third quarter, and a positive EBITDA margin.

Sequentially growing lower than the first in the second quarter, but growing into the third and fourth quarter I, probably I do want to expand on 1 thing if I can.

Related to your question is certainly related to <expletive> Ryan <unk> question that he asked a few minutes ago.

If we think about the EBITDA margin this year.

At 5% to 6% and quite frankly, you back out the first quarter you get to 2 high single digit EBITDA margins as I as I think about without giving a lot of direction in fiscal 'twenty, 3 but as I think about fiscal 'twenty 3 I'm expecting that we will be into that.

The transitioning into the low double at least the low double digit EBITDA margins as we step into fiscal 'twenty 3 so I, probably should've been clearer on Dick's question and perhaps this is a little bit of the the.

The the bridge as Youre looking for as we see our EBITDA margins grow so I hope that helps.

Some of them there please on no.

Got.

It very much helped in terms of the the follow up.

In terms of the you know the coming the rest of the fiscal year in the early into the next year.

Is can you talk about the the the revenue streams is that revenue streams with respect to existing backlog and orders or does that include <unk>.

Certain anticipated growth in revenues.

Above and beyond what you have is book business already.

Sure the vast vast majority of it includes things that are already on our backlog and I will include a backlog of 2.

To include.

Some of the orders that Dan mentioned that came in during the month of July.

Okay, that's fine.

Let me let me let me if I can expand a little bit here, because I think it will help.

[laughter].

So if you think about our guidance of 130 to 140 million I'm going to make math easy and put it right in the middle and take the $135 million and you talk about Barbara Nichols, which was $45 to 48, so I pick that middle midpoint of 46 in the half back that out and you look at the historic Graham business and because I've talked already talked.

About the growth, we expect to see the Barbara Nichols.

That would back into about $88.5 million for the historic Graham business. The first quarter was 16 in the half or so which means there is about 72 million.

Left for the rest of the year, so that 6.6 of <unk>.

Revenue number on average in the next 3 quarters for the historic Graham business of.

Of something around $24 million of you.

So that's an increase of about 50% from what we saw on the first quarter that debt growth I don't expect it to be 24, 24, 24, and rather I actually expect it will it will grow as the year goes on so the second quarter, maybe maybe lower than that certainly would be lower than that but the third and fourth quarter, we would.

To be at or above that number. So I think part of that ramp to get to get you more comfortable with the ramp in profitability is a pretty significant ramp in the historic Graham business, along with the ramp in the Barber Nicholas' business. So I hope that a little extra color was helpful.

Yes, and then regarding the <unk> the <unk>.

Short fall of the disappointment in the margins of some of the Graham the legacy Graham business.

With these on.

And my assumption is these are fixed price contracts did they encounter unexpected difficulties, where they did too too tight.

And they were just low margin businesses, what what was encountered.

In these projects that.

Eventually obviously they work themselves out and then leave the books to be the drag on this quarter and somewhat of the.

Declining albatross in the coming quarters.

Sure.

As much of the above the you mentioned that they were bid aggressively we knew when we bid them that they were going to be.

They weren't going to be fantastic projects everywhere.

Terrible projects.

And then as we've executed the team has executed well but.

Particularly when you're when you're looking at the first project of the particular vessel.

Is that can that can provide some challenges from a from an operation standpoint, I think our team has done a great job of overcoming those challenges, but there is this cost of cost typically falls in the category of additional labor to get those executed there's 1 additional thing that.

The little hard to explain but I'll try it.

On some of our orders of on the.

We've received some shorts short term material orders, which ultimately became part of the full of large order.

Unfortunately, the way the profit worked out we ended up with a little more profit in that material portion of the order which makes the.

On the execution part of the order a little less profitable also so all of those weighted together.

As we talk about the projects going forward again whats come into backlog.

There are sole sourced on.

At a better position because theyre not theyre not aggressively competitively bid theres certainly not <unk>.

<unk> that we will make an enormous amount of percentage margin on.

They will be much fair to both the customer and to Graham as the as the vendor.

If I can now.

Go on if I could add a little bit of color to that.

Barbara Nichols has seen that the same thing.

On some of our Dod projects Navy projects, where it's fairly typical of across the industry where.

Youre relatively aggressive when you're when you're in.

In your <unk>.

Competing for this new work and trying to break into a particular area.

And so you're bidding it aggressively not not overly aggressive but you are bidding of tight.

The first articles you are learning a lot.

There is a process that you are developing there is engineering that you are putting into the.

Developing these processes et cetera.

And that investment in the first article is not reinvested in the second and the third.

And so you kind of have this the steep learning curve, where the first 1 is it's a challenge.

For sure.

As we are recognizing this revenue over time and as we as we go through each 1 of these subsequent units.

We're getting better and better and better and so so I think Jeff and Jim have have described what we've seen at Barbara Nichols, where these first articles are a drag.

And once you once you kind of get through those first articles then the subsequent ones start to get better and better.

And frankly, that's kind of what we're projecting.

Going forward as this improvement sequentially kind of quarter by quarter end on that follows a pretty typical.

The new project for our Navy business.

So these projects the that contributed to the disappointment in this quarter and then are going to be worked off.

If you could clarify the bulk of these are.

On.

Products or programs that are not like working themselves off and they're done. These out of the these are like the first round of wonder it's going to be successive.

Orders and success of similar products from which you will have obviously developed production efficiencies and and.

Oh, the workarounds et cetera is that correct.

Andrew that is correct and not only of the projects. The programs that we are continuing to be in but in most cases, we already have the already have those on our backlog for the next article.

Okay. So.

Net debt that actually helps a lot I did have some knowledge and the.

In some of this navy work, but didn't know if this was like this is these are projects that were.

You're just finishing up and we're just so happy to be done with them versus this is really the the.

The the inefficient initial ramp ups for what will then be.

Follow on similar business from what you will have efficiencies and it sounds what I. Just described here in the ladder is what was the bulk of the issues here in Q1.

Correct.

We are happy we're actually happy that we have article 2 and beyond.

We're excited about.

Not only executing but also the profitability of these projects going forward or at least the program forward.

And then moving on to go on but again I would say Andrew that the.

This is good business and we will continue to chase.

Additional navy opportunities, where we will do first articles and the first articles will be a challenge to get through and then subsequent ones will get better and better. So so this will be kind of a recurring theme, it's and we've seen the Barbara the nickels too.

Yeah on your first get into it.

They're tough the.

The challenge.

The portion of the quarter than normal.

Right I I saw the Spartan Corp, what theyre selling the believes as well so with.

Moving on to 1 last other topic here was your discussion on.

The future growth deploying of capital capital allocation opportunities and 1 of those things. You described was it seems like then there was greater language of this and then you know.

In the past maybe is.

The acquisition focus and so I was wondering on acquisitions.

Is where is your focus the suggestion space as you mentioned there are some opportunities.

Is there a ready of pipeline of acquisitions you are evaluating.

And I know Barbara Nickels acquisition was 3 years in the making.

Do you have somewhat of a timing.

Thought process on all of this is there is there a certain amount of.

Absorptions swallowing the integration to go on with Barbara Nickels before the next acquisition is compelling.

Compelling and teed up for the board and for you to present to the shareholders.

So Andrew this is Jeff I'll start on that and then I think I'd like Dan to add his thoughts also you're correct. The Barbara Nicols was 3 years and I will facetiously blamed Dan for the the negotiations there, but no debt.

That was not at all.

But.

We.

To answer 1 of your questions from an integration standpoint, because of how the businesses of run in the the leadership that's in place Theres not theres not going to be too much of a of a challenge to from an integration standpoint to the 2.

That could take us on an enormous amount of time.

The 2 integrate and then that will slow down our acquisition process, but rather what we're doing now is we're looking at the organization looking at the capabilities that we have in the markets that we have looking at the markets themselves and trying to identify which of the markets that we want to go after more aggressively with a lot of prioritize we don't want to try to go after the say hey, we're going to go after everything.

We're looking at prioritizing and so part of the activity over the next.

Couple of quarters is looking at those markets, having the Barbara Nichols and the historic Graham team work together to look at where those opportunities are and what are the right ones for us to be going after is spaced on opportunity absolutely is defense on opportunity absolutely is the energy and opportunity.

Perhaps to some extent, but not to the level maybe the those other 2 are but we want to we want to look at at the markets and look at how we want to position ourselves in those markets and do it thoughtfully, so rather than running on saying here's the there are a pipeline of a bunch of companies, but I really don't want to be chasing those 2 hard immediately until we get our feet on.

There's a little better on where do we really want to focus that the that activity.

This fruitful opportunities out there I'm not worried about the the number of targets that are out there what I'm worried about is let's make sure that we laser in as best as we kind of on the ones that we want to go after with that I'll pass it over to Dan if he has anything he'd like to add.

That's actually very well said the the prioritization is going to be probably our biggest of the internal challenge we feel like we've got lots of different opportunities.

That we can go chase.

And ultimately from a from a direction standpoint.

What we're looking for is as these these smaller companies that we can either tuck into.

2.1 of our existing companies or a company that can the can stand on its own and not and is complementary to our other businesses, we like to think about the <unk>.

Companies that are complementary and can join together to go after larger business.

That the bat engineered product is really key.

Debt complementary piece is very key debt.

Enables us to go after larger more sophisticated systems. So.

The challenge will be again.

<unk>.

Where do we prioritize and we're definitely deep into that process right now.

And.

Is the focus.

Primarily defense or if he would you be looking for something in the petrochemical or something like that as well.

We're very open.

Okay.

Space Defense.

There's fluid systems in general debt that we're looking at debt you can you can kind of apply fluid systems across the a bunch of different.

Okay. So so yeah, we're we're pretty open at this point and and trying to understand where the best opportunity is earliest debt wood.

Provide the focus that we want to to go chase.

Our next acquisition.

And Dan that the we'll call it acquisition infrastructure, obviously Graham had been spending 3 years focused on acquiring Barber Nichols.

And the Harvey Nichols had been spending 3 years in the since focusing on its perspective.

Being acquired.

Is there was there looking for acquisition type of focus at all at Barbara Nickels that was brought in on the other than of course yourself on your strategic vision that was brought in or is it primarily the Graham acquisition the infrastructure that you're obviously layering on top of it.

Hey, Andrew This is Jeff I'm going to I'm going to jump in first and then let Dan add on from my perspective.

The acquisition team that we have at the Grand which is relatively small.

Mostly myself and Chris Johnston, our head of business development.

We've always been focused on on external.

Looking at the external opportunities for us and we will continue to be going forward, what's exciting to me about the Barbara Nichols team as they have done a great deal of work.

Looking at the platforms within their business and looking at.

What not from necessarily as much from a company other companies out there standpoint.

That they want to grow, but rather what technologies what areas what products. They would like to grow on so I think there's probably been more of a market focus and less on the specific company focus and now we're marrying the 2 groups together and in fact, we're doing it is currently is today there are meetings today with.

With our.

External.

With Chris Johnson, and his team and with the Barbara Nick of Chris Johnson, and some folks with him from from the Graham business as well as a large contingent from the team here at Barbara nickel. So I'm excited about the ability to to pull out that knowledge from Barbara Nicholas and then have them work with the.

The I'll call it the corporate acquisition deal, which is again really Chris and I at how we go after it and.

Dan has a tremendous amount of knowledge in the markets of Barbara Nickels are in and so he is providing.

Tremendous amount of guidance and direction to our team as we're looking forward. So.

G. Barbara Nicols was probably less focused on acquisitions per se, but they did a really really deep analysis and continue to do a deep analysis of the markets, they're in and where the opportunities would make sense to expand Barbara nickels, whether it was organically or perhaps inorganically, we're going to take advantage of that as a total of.

Company and see what we can do again, both organically and via the M&A route.

Awesome. Thank you guys.

For me I think I would just throw out in the example, and say.

4 as Barbara Nickels looks at our markets, we provide very simplistically, we will.

Fly of pump for 4.

For transferring fluid.

Between point of endpoint be there's lots of other things between <unk> and point of view there might be.

Troll valves, there might be plumbing, there might be of skip that everything sits on their might be heat exchangers et cetera, and so when we think about fluid systems. For instance, we think about the system and what are all of the pieces and as Jeff alluded to.

We've done a pretty decent job of understanding where our GAAP SAR.

Before the acquisition, we really looked at more organic growth. What is the next piece that we would want to bring on to enable us to move higher in the food chain and provide that next level of system or subsystem and so.

Yes, less less on the specific companies, but a very clear vision of of what are the pieces that we would need to build up to the next.

Higher sophistication.

Or system.

Our next question is from the line of William Bremer with Vanquish Capital Partners. Please proceed with your question.

Okay.

And can you hear me.

Yes.

First of all Jim all of its been a plethora of all these years congrats on the retirement Daniel welcome I'm of course.

And Jeff did a great job, just now and that clarity on <unk>.

Just on the financials, but in end market.

My question is specifically on and you touched on you just touched on this on the fluid handling systems.

I'd like you to go into your the opportunity primarily on hydrogen and what Youre seeing there.

And educate us a little bit on if you. If these projects that they're dicey did lumpy I understand that a little bit on the permitting issues that you may be seeing and how long it takes but more importantly, your exposure and potential.

Potential margins here. Thanks.

Yes.

The the hydrogen economy is is a very old and it's very new.

So Barbara Nichols.

And the hydrogen economy very early on.

On a lot of the automotive companies, we're looking at hydrogen powered fuel cells.

To look at that and we were providing anode cathode blowers for.

For their R&D types of systems.

Kind of fast forward to today and.

And the hydrogen economy is still a discussion.

I think the position net debt.

Graham and Barbara Nichols play there is really on the component side and less on the system side.

We are both companies are talking to various potential customers and customers about what they are doing with the hydrogen.

On.

How do you make hydrogen how you distribute the hydrogen and how your fuel different vehicles with hydrogen. So so we are in involved in all of those discussions.

Boy, it's way too premature to talk about exactly what our play will be there as well as what our.

Margins will be but but you.

You can you can be sure of that that we are engaged in that and having some some very great conversations with the with customers that.

We hope to be able to talk a lot about in the future, but right now too premature.

Completely agree Sir would you be selling.

Potentially direct or through distributors.

I would guess, it's going to be direct yeah.

I don't see it really getting to the point, where it's whereas commercial off the shelf for for quite a while.

It would be going direct to the Oems that are building on the larger systems.

Great. Thank.

That's the way.

Thank you.

My name in the press Star 1 to ask a question. The next question is from the line of Gary Schwab with Valley Forge Capital Management. Please go ahead with your question.

Yeah, Hi.

In your fourth quarter conference call 1 of the priorities.

It's the speed up your backlog conversion by growing your work force capacity I think.

Jim said he wanted to grow up by 20%.

He also said the Batavia currently has the infrastructure to handle the work force expansion can you just talk us through that growth plan and its timing I know that you said.

At the well the pipeline is picking up.

Yeah, Gary this is Jeff.

We are we are looking to continue with looking to grow obviously, it's as many companies are finding it challenging to to.

To bring on new employees, so what we're doing Dan talked about part of it with the well the training that we have in house. We also have engaged with a third party.

To provide additional wells really just source of additional individuals and provide additional well do training for us and then.

And some of these folks.

Come in fairly fresh with minimal capabilities on welding side, but they're being taught what we need them to have those capabilities to ultimately join our organization. So.

I don't have a great time line on your just because the the the uncontrollable variable is the number of individuals that are available or they're making themselves available.

Certainly we've seen.

As many other companies have had seen challenges in hiring but we're trying to bring on.

Kind of 5 or 6 a quarter, if we can possibly do that as we go forward do we get there in the next 9 to 12 months, we hope so.

But I can't guarantee anything because again, there was debt uncontrollable variable, which is there needs to be the supply, but we're putting out multiple approaches rather than simply saying, we're we're doing our own recruiting and just letting letting them come to us we're looking for other avenues and our operations team on our human resources team has done a <unk>.

Great job of expanding those those areas such as this new program that we just the.

Signed up for a couple of weeks ago.

And I guess I would add onto that.

From from Barbara Nickels perspective, as we've grown you didn't grow too fast.

The people that were looking to train and develop.

Have to have very consistent.

Skills, the ability to produce our equipment and our fabrications in a very very consistent high quality manner.

And so you can absolutely grow too fast.

Think we're quite there with Graham.

We're still kind of bottleneck on the.

On the the training piece, but absolutely.

Alan and his team have done a great job of of developing curriculum.

And and and being very proactive in priming, our pipeline and I think it's I think we're seeing benefits from that.

So.

So we can't quantify it real well right now, but we're definitely headed in the right direction.

Okay and also when you talk about backlog conversion speeding it up.

Doug can you just you have a tremendous backlog now but.

Do you also have <unk>.

Net delivery schedules.

The other words of you speed up your conversion can you do that or do you have to basically.

Both.

So yes, we have.

We have long term contracts and then we have delivery dates with those contracts and they are alive.

Aligned with the shipbuilders, so that they get there at the right time.

Certainly there is the ability to speed it up to some level.

But if we go too fast then the shipyards actually can't use on they willing to accept them.

And so there's there's certainly some give and take there.

And we've got enough different programs that are in some cases, they are looking to accelerate.

Our deliveries in some cases, there might be something that slower that's bottleneck their production and potentially they don't need it as fast as we've got it scheduled so but there is enough of those variables of enough of those programs that debt, we actually have some operational ability to kind of speed up here of slowdown there.

If need be so.

Okay, and then I just have 1 more I have a housekeeping question.

The acquisition of DNI is now 2 and a half months old.

But when you go on to the Graham website, you're still of your old website up.

And if you look at the Graham as our corporate profile it doesn't say anything about the fence.

If you do of financial search on Yahoo of Wall Street Journal, It says grams in industrial machinery company.

So anybody that's doing a search for defense companies.

Graham doesn't even show up.

When will that be updated.

Hey, Gary this is Jeff.

I appreciate you, bringing this up at the new and I've talked about this a 1 on 1 we are working on updating on our website both of the grant of website and the interaction with the Barbara Nickeled website, we recognize that if theres 1 area. We've let slip through the cracks that's clearly been in but we are working on improving our website and.

And we should we should hopefully be seeing some some impact of that soon and then overtime much greater impact.

Barbara Nicholls has done a great job over the last year of focusing on the website and improving it.

We're looking to do the same.

Of the Graham website and linking the 2 so I appreciate your frustration.

It also but that's on us and we need to we need to get that the work.

Can true it leaves changed the wording on your profile and the and send out.

Contact information to different financial companies, saying that Youre now of New company. Please change of our profile don't put us in industrial machinery anymore.

Yes, we are doing that we are actually working on that Gary.

Okay, great. Thank you thanks, Jeff.

Thank you.

At this time I'll hand, the flow back to Dan Thornton for closing remarks.

Maybe you anymore.

Sorry.

More in the queue.

If you'd like to take that call right now share my apologies.

That's 1 of Andrew Shapiro with 1 day of capital.

Oh sure Great Hi, Thanks for the follow up it's actually a follow up on Gary's comments or questions. In addition to obviously the website and then it sounds like changing the wording and all of that.

What are your.

The planned investor.

Outreach and engagement of events in terms of I know I think youre doing the seaport global you may be doing.

The Midwest ideas or something but what are the planned upcoming.

The Investor relations events and.

The steps that you might take to position the company to be in front of.

Defense sell side analysts not just industrial machinery analyst themselves since we only have a few.

Sell side of that covers the company and I think there may be more people on the sell side of around in the defense space.

Andrew This is Jeff. Thank you for that question you are correct that the 2 conferences at the latter part of <unk>.

August I believe the last Wednesday, and Thursday of.

August which would be the 25th of 26, we have those colliers is having a virtual conference the.

The second week of.

The September don't quote me on the day, but I believe at the night. Thank you Debbie and then the Sidoti has the conference in late September that were attending.

That's also a virtual theirs, we're also planning on attending the <unk>.

Southwest New ideas conference, which is in the middle part of November.

That right now is set to be in person in Dallas.

And the beyond that we are.

Welcome.

Certainly having calls and video.

Calls with investors.

Investors and I would greatly welcome some in person meetings if of investors are willing to see us in person, Dan and I have met with a couple of investors in person actually both here in Denver.

Back in June but were more than the open too to going on the road and seeing people in person if they're willing to have us.

Given some of the Covid concerns on <unk>.

The COVID-19 concerns. So we're doing all of that with regard to looking on the defense side, we're looking into that right now and Debbie pawlowski on her her folks at key advisers are helping us there to look and see what other arenas that we can reach out to.

And not move away from being an industrial company, but refocus towards being more in the defense and aerospace arena. So we're doing all of that we wanted to get on message out and probably the biggest frustration to me like it's hard to do it in person these days, but gosh darn if we can do it in person will be there.

Yes, if you give them. The if you can get into some of the databases and then Youll show up on the relative calm.

On the tables that'll be a start.

Absolutely.

Great. Thank you if I can add in if I can add in for for everyone from kind of taking all of this to them those will start to switch over as the definition of.

Change in our in our SEC filings, that's where most of the information systems pick up the the changes and I think you'll see when you see our next 10-Q on that.

We are advancing on the discussion regarding being a defense company and those disclosures.

Great.

Thank you.

Thank you Andrew.

And I'll tell you we will take on please share.

My question is from John I'd share with Pinnacle capital management.

Sure.

Hi, Thanks for taking my question.

Oh first of all I'd like to congratulate Jim it's been a pleasure working with you.

I appreciate the.

All of the assistance you provided over the years on helping us better understand Graham So wish you willing on your retirement.

Thank you very much John I enjoyed working with you and.

Everyone else that was on the call and other investors over the years.

Oh, good luck and my I just had 2 questions 1.

Regarding the margins are what was the liquidated damages amount that you highlighted.

Sure John.

<unk> disclosed that but what I will say is that it didn't have.

It certainly wasn't.

On enormous percentage of the of the impact, but it did have an impact on <unk>.

As a percentage of the impact on the quarter.

Oh can you frame it somewhat for us.

Yeah, It's a couple of hundred of few hundred basis points.

A few hundred basis points impact on gross margin.

Yeah, Yeah, a couple of hundred.

Let me, let me clarify a couple of hundred basis points on gross margin and obviously on the EBIT or EBITDA margins also.

Okay, that's helpful and I'd like to welcome Dan.

My question to you Dan is perhaps I would guess you have an employment agreement.

And I would be curious hopefully a large percentage of your comp is incentive based.

And I'd be curious.

How is that structured.

Resume it might be disclosed in an 8-K.

We're certainly going to see it when the proxy comes out but I'd be curious as to.

What's your incentive compensation is tied to specifically.

John This is Jeff I'm going to jump in for 1 second and then let Dan jump in the the 8-K on the employment agreement will be filed over the next couple of days.

It does not delineate the specifics of Dan's.

<unk> comp it does talk a little bit about it but it does not vary the delineate the specifics, but I can assure you that his variable component is a very large percentage of it is.

His total compensation and I'll, let Dan jump in and talk about what areas. He is focused on 222.

To meet the those of those.

Of those goals.

Yes.

The conversation I had with the comp committee really pushed towards less fixed and more variable.

I am a person that is.

As long term driven.

And.

I wanted to make the statement of that.

Debt.

I'm investing in this long term and so on.

Thank you will see that the.

The my compensation tends to tends to head in that direction.

The coming.

Coming from a.

A private company.

I am.

Really driven by planning and building.

On the organization to execute the plan.

No.

A chunk of of.

My compensation will be tied to my ability to get our strategic plan in place for the board to that.

That it meets their expectations.

And the other piece is of private.

The company leader has been that I don't have.

The experience with Investor Relations and a lot of this.

This quarterly earnings call and Investor conferences on all of that and so again 1 of the 1 of my my areas of learning and need to.

To help Graham going forward is absolutely in this investor relations piece and so I've got several different things that I'm doing there too.

To get up to speed quickly. So it can be a more effective later there.

John 1 last piece for from me this is Jeff again.

Across our long term incentive program.

While half of it of our time vested shares the the other half of performance vested in the performance vested now all going forward not just for Dan but for all the executives are completely tied to relative.

Total.

Shareholder return. So we think it's important that and Dan is very very strong on this <unk>.

Spoken about it a couple of times.

That we want to align our interests with the interest of the shareholders and.

The long term incentives are tied that way the shorter term incentives are more focused on the.

1 of the next 1 or 2 year performance, but ultimately all of our focus is on the.

Total shareholder return and quite frankly, Dan Nguyen.

When Grandpa Barbara Nichols took up a meaningful portion of his.

Proceeds from the sale in Graham stock and so he is absolutely tied into the.

Return to the shareholders.

Okay, great and in terms of the short term metrics I mean does it.

Gross and as the EBITDA driven what what are the.

The key metrics there.

Historically and I think if you look at our proxy from last year that would probably be a good.

A good gauge there typically of 3 components. There is a component which is related to in year of.

The financial performance.

Last year that was 40% in debt. This year. It's also 40% of the short term incentive another 40% is related to our bookings so critically debt while it has a little bit of an impact on this year more importantly, it has an impact on next year and the years beyond.

And then the last 20% of based on the personal goals Dan talked to you about a couple of his personal goals going forward right. Okay. Great. Thanks, very much. Thanks.

Thanks, John Thanks, John.

Thank you all for your questions and your interest in Graham Corporation, We will look forward to updating you again in late October.

Thank you. This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.