Q4 2022 Graham Corp Earnings Call
It could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the releases as well as with other documents filed with Securities and Exchange Commission.
All of these documents can be found on our website or at SEC Gov.
Also during today's call, we will discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance.
Should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided a reconciliation of non-GAAP measures with comparable GAAP measures in the table tables that accompany our releases and the slides for your information.
With that it is my pleasure to turn the call over to Dan to begin.
Dan.
Debbie.
And good morning, everybody thanks for joining us today.
Here to tell you about both our results and our strategy as we have been working hard to build better companies to deliver superior performance.
We'll start with an overview of the fourth quarter.
Overall, we are encouraged by our results the improvements we have been making to stabilize our Batavia operations and Barbara Nickels continues to perform above expectations for the quarter, we met our revised guidance with sales of $39 $7 million and.
<unk> EBITDA of $400000.
For the year sales were $122 8 million and adjusted EBITDA was a $5 million loss.
Barbara Nickels, and our Gram commercial aftermarket business continued to perform well and made a positive contribution to both our top and bottom lines.
As a result of the Barber Nickels acquisition, we ended the year with over half of our fiscal 2022 orders coming from defense and space.
With backlog to over 80% in defense and space as well.
This backlog will help us mitigate the cyclicality associated with our energy and chemicals business.
For Grand manufacturing in Batavia, we saw maybe first article overruns, continuing in the fourth quarter, along with supply chain delays and our commercial business.
In the third quarter earnings call.
<unk> talked about our commitment to meet critical maybe milestones I'm happy to report we have made good progress there and we will give you more detail on the next slide let's go to the next slide.
Here I would like to review the corrective actions and improvements we've made over the last nine months.
As we discussed in February we got behind on our Navy programs and took several actions to catch up.
In the fourth quarter of fiscal 2021 about a year ago, we started to reassign, our commercial welders to Navy projects you see that in the figure that shows actual labor increasing in deficit starting to flatten out.
In the second quarter of fiscal 2022, we started to bring in contract welders to assist on Navy programs.
In the third quarter of fiscal 2022, we brought in more contract Welders and graduated our first class of welders from our Archon flame program.
As you can see in the graph actual world hours started to exceed planned dwell of hours in the second quarter of FY 'twenty, two and our deficit really started to decrease as of May we are now on schedule.
During this time, we also restructured our Navy organization.
Scrubbed project plans and budgets and accelerated process documentation and optimization.
We have a new director of maybe operations that started in February and he has had a very positive impact already through daily planning process improvements and employee engagement.
We have also hired multiple supervisors to help our production team resolve questions quickly and keep the work flowing.
During the quarter, we added two board members with defense experience.
Carey and Troy have made valuable contributions already and we're happy to have them as part of our team.
On an ongoing basis, we have implemented weekly project reporting with management to ensure we are on track understand our budgets and are addressing roadblocks in executing our plan. Additionally.
Additionally, we are documenting and optimizing our built processes to ensure efficient execution going forward.
At the end of May Graham shipped our first article condenser for our U S. Navy customer our customer was very happy and appreciative of all our efforts and investments even better our employee base is excited to see five years of effort culminate with a V.
Very massive shipments that will help protect our nation for decades to come.
As we move forward, we expect continued growth in the Navy sector.
And stronger margins.
We are working on operational efficiencies and better pricing that will enable this improvement.
With that I'll turn it over to Chris <unk> to review, our numbers and outlook Chris.
Thank you Dan and good morning, everyone. It's a pleasure to be speaking key today as the new CFO Grant.
This is an exciting time for Graham and I look forward to meeting many of you in the future as we embark on this new strategy to build better company to deliver superior performance.
Since joining the company in April I spent most of my time meeting the team learning about the business and beginning to put processes in place that will improve information flow and accountability.
I can tell you that I've been pleasantly surprised that many of these initiatives are already underway and gaining momentum.
With that let's review our results for the fourth quarter and full year as well as our outlook for fiscal 2023.
On this slide you can see our fourth quarter performance, which shows modest sequential improvement.
As Dan mentioned, our fourth quarter results were in line with our expectations.
Sales were $39 7 million up 55% over last year's fourth quarter.
Barbara Nickels contributed $15 9 million of this increase.
And this along with strong commercial aftermarket sales helped to offset weaker sales from our legacy refining chemical and petrochemical businesses.
With the addition of Arbor Nichols.
<unk>, 47% of our sales during the quarter, which is the defense industry.
As well as 6% or $2 2 million to the space industry.
In the prior year fourth quarter defense comprised only 26% of total sales and we had no revenue from space industry.
Our Batavia operation continued to be impacted during the quarter, but to a lesser degree than in the third quarter.
Due to the higher costs related relating to material labor overruns for first article Navy projects.
Sequentially gross margin improved eight seven percentage points as we advance these projects improved processes.
And reduce related costs.
I would again like to point out that we have recently delivered the first condenser.
Our critical Navy submarine program, which was the source of a significant portion of the losses incurred in fiscal 2022.
I am pleased to report consistent Denver was delivered on schedule, which was viewed very favorably by our customer.
Thus validating our strategic the strategic decisions made in resources invested over the last nine months.
I should also mention that the remaining first article Navy projects are on schedule.
And are expected to ship throughout 2023.
Selling general and administrative expenses in the fourth quarter of fiscal 2022 or $6 1 million.
Up $1 $7 million over the prior year period.
Barbara Nicholls added $1 7 million of incremental SG&A during the quarter, including 300000 amortization.
Additionally, we incurred approximately 500000 of cost in connection with our credit agreement Amendment and acquisition related expenses.
Our net loss in the quarter was $1 4 million or <unk> 13 per diluted share.
On a non-GAAP basis, which excludes intangible amortization acquisition related costs and other nonrecurring items.
Adjusted diluted loss per share was <unk> <unk>.
All of the above items contributed to an adjusted EBITDA of a positive 400000 in the quarter.
Paired with a loss of $2 6 million in the third quarter fiscal 2022.
This next slide shows our results for fiscal 2022 as a whole.
Many of the items impacting the quarter also drove our results for the full year.
Our fiscal 2022 sales grew by 26% to $122 8 million.
For the 10 months that we owned by Ron Nichols, its contribution was $47 $9 million of sales.
Sales to the defense industry increased 160% to $62 2 million and now represents 51% of total revenue compared with just 25% in fiscal 2021.
The expansion in defense was partially offset by declines in the commercial refining and chemical markets primarily in Asia.
I should point out that both sales and orders for the commercial aftermarket increased over fiscal 'twenty, one which is significant in that it usually is a leading indicator for future capital investment by our customers.
Sales in the U S increased 85% to $97 6 million and were 80% of total sales for fiscal 2022.
As revenue from the acquisition is primarily or primarily in the U S.
Gross profit and margin were down compared with the prior year due to the same factors, which impacted the quarter.
Early in fiscal 2022, we made the strategic decision to over resource certain critical defense orders in our Batavia operation.
This included increasing the use of contract welders and redirecting resources away from our commercial business to meet delivery schedules.
The impact of the defense projects and related cost overruns are expected to lessen over the coming quarters and to be completed before the end of fiscal 2023.
We estimate that these factors impacted gross profit by over $10 million for fiscal 2022.
SG&A expenses in the full year fiscal 2022 were $21 3 million and included intangible amortization of 900000.
This was an increase of $3 8 million compared with fiscal 'twenty one of.
Of which $4 8 million was contributed by Barbara Nichols.
Additionally, cost associated with the acquisition and debt Amendment totaled 840000.
Offsetting these increases was reduced incentive compensation.
<unk>.
Net loss and loss per diluted share were $8 8 million and 83, respectively.
On a non-GAAP basis adjusted diluted loss per share was <unk> 62.
The above items negatively impacted adjusted EBITDA, which is a loss of $5 million for fiscal 2022, compared with income of $5 1 million in fiscal 2021.
On the next slide you can see our capitalization.
Brand has always generated good cash flow.
And this positive dynamic of our business model was validated.
We generated $12 $3 million cash from operations and paid down $10 4 million of debt during the quarter, Despite our weaker financial performance.
As recently announced we have put in place and revised lending agreement, which puts us in compliance with our financial covenants.
Gives us the financial flexibility as we work through these operational issues and returned to profitability in 2023.
For fiscal 2023, we expect capital expenditures to range between $4 5 million and $5 5 million.
Third to just $2 3 million for fiscal 2022.
As we make investments, which will support our future growth.
Turning to the next slide you can see the developing trends and our orders are both commercial and defense related and how our market diversity solidifies our confidence in our long term outlook.
I should point out that our defense orders tend to be lumpy in nature, which explains the large variances from quarter to quarter.
Looking at the quarterly trends chemical and petrochemical orders appear to have stabilized over the past three quarters, and we have seen nice sequential growth in our space business.
Overall orders were solid for fiscal 2022 with a book to Bill ratio of one two.
Looking to the next slide you can see that defense at 70 at 76% of our backlog.
The key to our story and will add stability to our future revenue stream.
At $256 5 million at the end of the fourth quarter backlog is down 6% sequentially, primarily due to the progress made in our key defense contracts.
We believe that 40% to 50% of our backlog will convert within the next 12 months.
The commercial backlog was quite low entering this fiscal year.
It has grown from $33 million at the end of fiscal 'twenty $1 million to $62 million at the end of fiscal 'twenty two.
And reflects the acquisition of Barber Nichols.
Additionally, we are seeing growth in our commercial aftermarket backlog, which will help drive future margin expansion.
The next slide provides our initial guidance for fiscal 2023.
As you can see we are forecasting a significant improvement in profitability.
And a continuation of the positive momentum that started in the fourth quarter.
Revenue is expected to be between $135 million to $150 million.
Which suggests topline growth of 16% at the midpoint of our guidance.
From a margin perspective, we're looking for gross margin of 16% to 70, 17% with an adjusted EBITDA of $6 5 million to $9 5 million.
Our adjusted EBIT margin of 5% to 6%.
While we expect the first quarter of fiscal 'twenty three to be better than the fourth quarter 'twenty two.
We'll still lag behind historical levels due to the overhang from the first article Navy jobs.
We expect to see results gradually improve as the year progresses and those projects are completed and work begins on more profitable second and third article jobs.
And the operational improvements we are implementing begin to show results.
Fiscal 2022 was certainly a challenging year, but we have made good progress and have a strategy to drive organic growth and margin expansion.
We're excited about our future and.
And I'll pass the call back to Dan to tell you more about our strategy to build better companies to deliver superior performance.
<unk>.
Thank you, Chris we've been having a lot of fun working through Graham Corporation strategy and rebranding in this presentation is an overview of our efforts.
Graham Corporation is now a corporate entity with two operating companies Graham manufacturing and Barbara Nichols, and we will be looking to add more operating companies as we go forward.
We'll be wrestled with different approaches to differentiate the corporate group from the operating entity with the same name.
Ultimately, we decided to award that we weren't big enough to pull off of Facebook to meta or Google to alphabet rebrand. So.
Settled on a new logo and website refreshes that instead.
I am sure is much more economical than a complete rebrand.
Our Graham Corporation logo is our ticker symbol.
With Red lines emanating from the G depicting energy movement and flow.
We are re energized and ready to move improve and grow.
The fluid power heat transfer and vacuum products that we design and make involve Flo.
We know that gas and liquid flow can provide useful work adapt to constraints and eventually overcome all obstacles. We liked the notion of continuous steady flow in motion and built that into our logo.
Our corporate mission is.
Build better companies to deliver superior performance and our new corporate website is www Dot Graham Corp, Dot com. Please check it out.
This next page shows our corporate vision and competitive advantage, there's a lots of unpack here. So let me walk you through it.
Our vision includes several key concepts first is build our passion is creating and improving something of value.
Second is engineered product.
We'll never be stagnant, if we continue to refresh and reinvent our product and ourselves.
The third key concept here is team.
As individuals small businesses, we can improve faster with collaboration leveraging best practices and sharing services.
At a corporate level, our competitive advantage comes from our people our culture, our structure and our process.
We believe that entrepreneurial relationship driven people combined with the culture of improvement and innovation.
And the value enhancing corporate structure with focused agile businesses provide a competitive advantage over larger slower bureaucratic.
Competitors.
We prefer to operate with less leverage.
With equity engagement of our people.
We look to generate capital to grow.
We believe this structure will be enticing to companies that are looking to be acquired.
It worked for Barbara Nichols.
The next slide shows our strategic planning process, which summarized here I point this out.
<unk> got to go through a strategic planning process, but it's just another tool to build better companies.
So one key element to building better companies is to develop a plan and then execute it that's what reserves.
Graham became a significantly different company with the addition of Barbara Narcos.
We gained diversity in markets and products.
We gained deeper and broader expertise and fluid in power systems.
And at some point, we should be able to realize synergies and integrating systems.
On a more operational level, we are making progress in convincing a very important customer that is the USA.
But we are a supplier that can counsel.
We invested significant time and money and maybe first articles to meet critical deliveries.
In addition to earning significant customer goodwill, we also built a barrier to entry for our competitors.
The combination of commercial and department of Defense business provides a stable platform and strategic direction to deliver superior results to our stakeholders. We are continually improving so expect more positive change in the future.
Okay.
This next slide covers the people changes we've made in the last year.
With Graeme approach Barbara Nicols about acquisition one of the immediate questions we had.
Was weather their board was open to change as the company changed to their credit they were.
So we've just appointed two new directors with excellent defense industry knowledge.
As we work through strategic planning process, we identified gaps in our organization that needed to be filled.
And the list, you'll see numerous operations engineering sales and HR positions that we filled with both internal and external candidates in the last year.
I am very excited about my direct team.
Chris our new CFO comes from larger companies with great systems processes and public company Heritage. He has made a huge impact already and we are fortunate to have him on our team.
Alan Smith, who is a veteran that Graham and knows the business inside and out.
With the restructuring we have given him the ability to lead at a much higher level mentor. His reports and provides a strategic insight needed for his business.
Matt Malone is my very capable successor at fiber Nichols.
Younger than the rest of us highly intelligent highly engaging and brings a level of relationship and team building to Barbara Nichols that will enable their success for years to come.
Okay.
The next slide shows corporate strategies and niche and initiatives that.
Chris and I will be leading.
It's not too surprising that building better companies is top of the list. We will do this mostly through regular evaluation improved business practices and smart investments.
We need to develop corporate structure and processes as we grow.
Rather than reinvent something we'll rely on our board and industry connections to accelerate this.
I Love the business development side of the strategy and we'll be working with our business unit leaders to advance strategic market offerings. As we are successful, we'll build our organization to support the growth with the business development rights.
People are the backbone of our business.
Growing leaders is a key initiative for us all.
So we will be working with different structures that we've already started we will be talking about rotation of people.
And we will build human capital management systems to really drive at all.
Chris has a lot of experience in shared services.
As we add new businesses to our corporation, we want to add the services that add value to all.
And gain the efficiencies with shared services can provide.
I will now turn the presentation over to Chris for the next couple of slides.
Okay.
Thanks, Dan.
This slide provides the culmination of what we've been talking about this morning.
Graham is more diversified and now has a very solid defense industry base, which is complemented by our well established refining and petrochemical industry presence.
Higher growth opportunities are also presenting themselves and advanced energy, specifically hydrogen and space markets.
Similar to our guidance for fiscal 'twenty, three or five year aspirational goals are purely based on organic growth expectations.
We believe we have the ability to reach 200 million, which represents an 8% to 10% CAGR over the top line.
For the top line.
We expect this level of performance should allow for adjusted EBIT margins to be in the low double digit to mid teens range as we leverage our operating platform improve operational processes and grow our higher margin businesses.
This growth will be primarily defense driven both at Barber Nichols.
With expanding opportunities.
<unk> with its legacy Navy business.
We view the commercial legacy business is a steady performer.
Augmented by an impressive push into higher margin aftermarket sales.
Turning to the next slide with the modest sequential improvement we saw in the fourth quarter of fiscal 2022.
We believe we will continue to demonstrate that we are moving beyond our current challenges and have positioned our business for strong organic growth.
We have initiatives at both of our businesses organically grow.
Through new product development, increasing partnerships and other growth initiatives.
With that we should again be showing that brand has a business model that can generate attractive levels of cash.
We are committed to utilizing that cash to first pay down debt.
We feel that less than two five times leverage is an appropriate level for a company of our size.
From an M&A standpoint over time, we believe we can take our improving financial position and fund future acquisitions.
Barbara Naples is the blueprint that we believe we can duplicate given the dynamics of both of our platforms.
It has not been forgotten that with our recent financial challenges, we had to suspend our dividend.
We believe that dish.
As we get beyond the restrictions.
We believe that as we get beyond the restrictions and fixed existing in our lending agreements, both dividends and potential share buybacks and again be topics of discussion at future board meetings, but not until fiscal 2024.
Let me now turn the call back to Dan to dive deeper into our strategy discussion.
Thank you Chris.
This graphic gives you an overview of the various pieces of our business.
The size of the bubble gives you an indication of the amount of revenue associated with each segments.
We believe that each one of these businesses can grow in revenue if we apply the right strategy to each.
The color of the bubble tells you that the segment is Barbara Nichols, which is blue or Graham manufacturing, which was tan.
But then I'll also point out that both operating units play and new energy.
The position of each bubble gives you an idea of how we believe we are currently positioned relative to growth and differentiation and margin potential.
Let's walk through each.
New energy in space kind of up at the top left.
Are both small businesses now, but they have good growth prospects.
Margins are expected to be nominal as volume stays low for the time being.
Both Barber Nicholson Graham Navy businesses are expected to grow.
While Graham has good differentiation now the margins have been challenged with first article units.
Fiber Nichols rebuild business is small now but could grow.
And the Graham aftermarket is very profitable business, but probably doesn't grow significantly.
Finally, the legacy Graham energy and petrochemical business is likely the slowest growing business. It gets more profitable with an energy up cycle.
And less profitable with more global competition.
Next slide.
Now we move to the Gram operating business overview.
Graham as an engineering and fabrication facility in Batavia in New York and offices in India, and China that provide sales engineering and project oversight.
Competitive advantage comes from technical people and processes.
I note means here in SMA as me and subject matter experts.
Competitive competitive advantage also comes through global reach in the installed base excellent fabrication facilities and a culture of service and problem solving.
Yeah.
This slide shows markets and products that Graeme serves.
The major markets are defense chemical petrochemical.
And refining.
We also serve new energy and have a few products that support the space industry.
Our major defense products are surface condenser condensers vacuum systems and various heat exchangers for Navy nuclear power plants, we serve both the aircraft carriers and submarines in this capacity.
On the commercial side, we provide condensers vacuum systems and various heat exchangers for refinery chemical petrochemical process plants.
This slide really shows the strategic importance of the Navy work through our business.
We've got Virginia submarine on there, which is the us Navy's.
This attack submarine Columbia submarine, which is the Navy's brand new AI ballistic missile submarine.
The Ford aircraft carrier and then there may be as just started on the <unk>. The next generation of attack submarines.
These programs have very long time horizons.
As we can get qualified to supply the equipment. It means long term revenue that we can build a business around.
We can improve productivity and margins with the repeat orders qual.
Qualification also provides a barrier to entry for competitors.
As we look at energy and petrochemical market projections, we see a complicated story.
Dependent upon how fast the world moves to clean energy, we could see oil demand peak anywhere from 2024 through 2050.
According to the International Energy Agency.
We do see more opportunity in China, and India than in the U S for new capital equipment, We also see more capable competition globally.
Domestically, we are seeing the aftermarket orders increasing.
With the capital equipment upturn expected sometime in the next 12 to 18 months.
Operationally, we expect to fill our Batavia plant with the combination of Navy and domestic energy and chemical business. The Navy backlog can fill in capacity holes, if we can't fill with the commercial business.
We will fulfill our international demand from our India and China locations.
The Grand manufacturing operating business strategy overview is shown here.
We've been working hard over the last nine months to stabilize our business.
We started with the challenging business conditions, we had a COVID-19 hangover, we had executive turnover and we had some late projects.
We work to fill the holes organizationally.
Work to catch up on the projects our team at Batavia has been amazing through at all.
Much of this work is completed and we are headed in the right direction.
We are now in the improvement phase with a clear roadmap.
We are evolving our approach to realize return in all markets. So we're going to try to make money in everything we do.
We are also improving operational effectiveness and developing capabilities to provide more value to our customers.
In future years, we have high single digit growth plan for our Grand manufacturing operation.
Most brokers and Navy, but we also see growth in aftermarket and international markets.
We are not counting on growth in our domestic commercial markets, but we could be surprised.
We have started a new product development efforts to expand our commercial offerings as well.
As we mature we will work to bring product lifecycle strategy into each product area.
On the next slide if we move to Barbara Nichols.
Barbara Nicholls has over 170 employees and there is still hiring.
We almost doubled our facilities footprint in 2021.
Barbara Nickels overall competitive advantage is new product development and full lifecycle product support.
This competitive advantages enabled by great relationships between our subject matter experts and our customers subject matter experts.
Integrated design manufacturing Assembly test overhaul capabilities all there in arvada.
And people passionate about what they do.
The next slide shows Barber nickels major markets and products.
We provide pumps turbines compressors.
For mission critical applications and the defense.
Face aerospace advanced energy and thermal management markets.
To give you a sense of how mission critical business James R.
Some of our turbines run as hard as 500 degrees Fahrenheit and our pumps run as low as minus 450 degrees Fahrenheit.
Next slide.
Yeah.
The graph on the left shows an estimate of the global space economy, and where money will be spent.
There's lots of different market researches research pieces out there around space.
One of them that I've, just recently looked at with Bank of America I May say the space industry will triple from over 400 billion today to one four trillion by 2030 for a CAGR of over 10% per year Morgan Stanley is a little more conservative, suggesting the global space industry could be.
<unk> one trillion by 2040.
Barbara Nichols is involved in multiple fluid in power systems related to space.
And just as an aside I decided in training session.
Day before yesterday, and we had space people here at Graham learning about vacuum systems, so that was pretty fun.
Thermal management system opportunities are also growing at mid to high single digit rates. According to various market research reports.
As our customers develop more power dense products thermal management becomes more challenging and we move from passive to active pooling.
The graph shows thermal management system procurement spending.
The department of Defense by program. They estimated that they will spend over $62 billion in years 2021 'twenty two on these systems.
Barbara Nicholls provides pumps and controllers for multiple defense related thermal management systems.
We moved to new energy markets on the next slide.
New energy markets are the most uncertain markets our businesses serve.
Both businesses serve new energy.
Dependent upon the scenario.
You can look at a full net zero carbon emissions by 2050 and that tells you quite a bit different story than the stated policies scenario today and thats the steps versus LNG depictions on the graph on the right.
So you can see a single digit growth rate to a greater than 20% CAGR and selected clean energy technologies.
Graeme provides heat exchangers and back end systems for alternative fuel processing.
Nicholls provides pumps and power producing systems for new energy systems.
The Barber Nichols business strategy overview is on this on the next page.
With competitive advantages in product development for lifecycle support our strategy is focused on continuing this development and growth.
So in developing markets like new energy, we are nurturing relationships with market, leading customers and developing products that we hope are scalable leverage level for this new energy applications.
And new applications like space, we are getting in on the ground floor.
We're helping to specify requirements and then we're validating a customized solution to lock in future production.
For existing markets like thermal management systems, we pursue opportunities that will benefit from disruptive solutions and that require full lifecycle support.
Finally for production and service programs, we pursue high compliance programs like in the defense market.
And we execute with excellence, we proactively offer solutions for supplier technical issues. So we really focus on affordability and continual improvements in those types of programs.
Ultimately, we want to develop long term.
Stable full lifecycle products businesses.
Graham Ni Graham Corporation, and I are committed to sustainability.
We want to build businesses that serve all of our stakeholders and being good stewards as part of our responsibility we have upped our game in sustainability. This year by documenting our activities in the SaaS fee Factsheet, we will post the factsheet on our website by June 17th when our proxy statement should be released.
In conclusion.
Graham is transforming to drive value for all stakeholders.
We have a new platform for growth and Barbara Nichols.
We expect our navy business and both companies to grow with strong profitability long term visibility and significant cash generation.
We are evolving our approach to our legacy energy and chemical business to grow our best business, whether it's domestic or international.
In short the Graham Corporation, we are building better companies to deliver superior performance.
This concludes our presentation and we'll now move into Q&A.
Debbie.
Thank you again and I hope everyone. Appreciate all the information that we've provided here.
We will now start the Q&A session. So again there are two ways that you can submit questions to us one is through the Q&A.
Button on the web portal <unk>.
<unk> seen that and the other is to dial into the number provided 201 6885.
<unk> four operating unit will then pursue inside the teleconference Com and you can see when Mike Mike.
<unk> Star lines, just not to do it.
Normal conference calls.
I do activity the Permian to the conference call line and probably have the webinar science, it's still new.
Computers, so that we don't get all of the feedback.
While remaining Dan and Chris for those teams to include the teleconference.
Pricing.
Let me just bring up the first question that we have.
<unk> from the webinar.
And that is.
So Dan you came into ground this last year and it's been quite heavy.
It would appear.
Can you tell us some of the PK whats like the EBIT right.
Thanks.
First year.
Yes.
The.
Best Pleasant surprise I think was just the.
The welcome that I've received.
<unk>.
The genuine nature of people here in Western New York.
<unk> been really nice and I've been welcomed with open arms. The team is very open to change.
Really looking to improve and get better and better and so thats been awesome.
The other thing that I that I really noticed has stepped away from Barbara Nichols.
Been there for 30 years and.
And so to to watch that crew, just take off and really execute on their own.
Without me I barely been check and they are doing an amazing job. There. So so I think that we built a.
Great team, there and Matt Malone is doing a great job of leading that group.
Thank you.
Don I see that we have greater clarity from the Gabelli funds.
A question on the telephone confirm.
Thank you Frank. Please go ahead with your question.
Great. Thanks for taking my question.
Starting with income.
Alright, well.
Wow.
<unk>, let me take some of the questions and answer.
Yes.
The web site.
No.
Let me start with a question for <unk>.
Great.
Our double digit EBITDA margin is likely to be achieved prior to fiscal year 'twenty seven.
Sure.
So as you can keep the guidance today, we're projecting 5% to 6% EBIT margins for 2023.
We would hope ADT gradual improvement year after year from there as we leverage our operating base and make some of these operational changes that Dan and I have been talking about today.
So we think that obviously low double digit would be.
<unk> before 2027.
But then we hope to get to the mid teens as we progressed through that and make improvements.
Excellent.
And.
<unk>.
Alright, and then Don and maybe you can bring that back into queue.
Thank you Sir Please go ahead with your question.
Hi can you guys hear me now.
Sorry about that Brad.
We lost you again, and lastly, again, Brian and that sort of thing around here.
Jonathan we have a solution.
I own.
Brian . Please go ahead again.
Yes.
Okay.
One question nice uptick.
Organic growth investments curious on.
R&D side, if you could talk about like some of what you can disclose in terms of some of the attractive applications and vertical that you guys have identified and then more broadly how you any changes you have made or plan to make process wise to the company's new product development.
Approach.
Yes, so I can talk a little bit about both.
And Graham manufacturing.
We look at.
Some new technology and vacuum systems.
That.
That are much simpler.
<unk> existing solutions today on the market.
So we will be developing.
From scratch.
New vacuum technologies that.
That we hope will.
Enable us to basically grow our commercial side.
<unk> from where it is today now it is RMB, we may or may not actually be successful, but we're actually pretty excited too to jump into some new product development a graph.
At Barbara Nichols theirs.
Do R&D every day.
And so so we've talked a little bit about the <unk>.
The nurturing the new energy programs and so Barbara Nichols is working with some pretty advanced Tech.
Technology and systems with our customers in that space.
Some of it's solar.
Some of its nuclear.
So some pretty cool.
Customer funded R&D, that's going on there, but then Barbara Nichols is also looking at developing and in really qualifying some of this disruptive pump technology for thermal management systems and so they've got some R&D spend in that area also.
Great. That's very helpful. Thank you.
So let me take a couple more questions from the web for now I'm going to combine a couple regarding capital spending.
Specifically can you provide some insights on the projects for fiscal year 2023, when we're looking further out what level of Capex is required to grow revenue organically with our expectations.
Yeah, So I'll take the first half of that and maybe leave the second to Chris.
So so capital spend this year.
Looking at expanding our.
Navy facilities to enable.
A better use of our existing facilities.
So we'll spend some some money there.
Spanning some inspection areas. So that we can get more fabrication area underneath underneath crane on.
On the Barbara nickel side, they are looking to expand facilities to support the Mark 48 program. So they just landed the next block.
Mark 48.
In December and we announced that in a minute.
Press release then.
The Navy is really looking to ramp up.
With production rate.
And so we need a little bit more space their fiber networks to be able to do that so those are a couple of.
Examples of capital expenditures have been doing this year theres more but I'll leave it at that and then Chris I think the question is what do we think that will have as far as capital expenditures in subsequent years right. So our fiscal 'twenty three guidance 70 today shows capex at about 3% of.
Revenue, so I would see us maintaining that.
To support some of the growth initiatives that we have in place some key anywhere from 3% to 5% over the next three to five years.
Okay.
Yes, I think the very strong Q4.
Yes, hi.
If I could ask a couple.
You shipped your first condenser this quarter.
How many condensers either per sub and how many more of these condensers do you have in your backlog.
So.
Theres one per sub.
And we have.
Boats 234.
Q3, two and three in our backlog for two and three of our backlog yes.
Okay.
And then another question on this.
I assume that you that you won this bid.
While ago.
There was very little inflation when you originally bid for these condensers and your other projects that you have in your backlog.
How do you and the navy handle the labor and material inflationary costs.
On the balance of the condensers and on the other projects in your backlog.
Yes, it's a great question Gary.
So.
When we've been debated and this is both companies when we bid. These these longer term contracts.
Start with building on an assumed level of inflation.
Can I can pretty much guarantee you that what we assumed when we bid some of these isn't keeping up with inflation today. We're.
Inflation is today.
And so.
Customers are actually.
Pretty understanding of what's going on and even under firm fixed price contracts.
There are allowing us to go back and propose.
Additional costs associated with these with the inflation.
Impact too.
Material labor.
The big impact really is on the materials side.
We're seeing.
Material.
In some cases up by 20 percentage, it's kind of crazy and some varies.
Arrow.
Windows, but.
But generally our customers are very open to that we're also.
Our bids we're letting people know that the bid validity is pretty short.
And so so the bids are only good for 30 days in some cases, and we reserve the right to special on the commercial side that come back and update that once we actually get under contract.
So so quite a few different things that we're doing.
To try to mitigate to that particular site.
<unk>.
If something or do you want to add to that.
No just maybe not specific to the navy contracts, but when we can we try to as soon as the bid is accepted and one we lock in and we purchase our materials right away to lock in some of the future pricing. So a lot of that is already built in and we already have that on all of it, especially given the long lead times that we've been seeing as well.
Yes, great point.
Okay very helpful. Thanks very much.
Right.
Take the next questions are from the land.
Your primary customers is coming from the government are primarily private space.
And can you give us any kind of ultimately platform.
So.
So I would say that the majority of our coming from private space.
And.
And can we can we put any color on who.
No we really cant there is.
One company that we've actually put a video out west and that surge in orbit.
And you can see that on Youtube, but thats the only one that we can actually talk about.
And then what about the return requirements for allocating capital for acquisitions.
Okay.
Sure.
So as Dan mentioned in his speaking points.
We're a little bit away from starting to talk about acquisitions, which definitely in the long term strategic plan.
But we have to focus right now on <unk>.
Improving our profit our profitability and our operational performance before we can start talking about acquisitions.
So we haven't spent a lot of time on that that's really part of Gan in my strategic goals for this year is to start identifying targets, we start thinking about that but we would definitely be looking at double digit returns when we start that process.
Thanks Luke.
And what we've done.
That makes sense.
Mr. O'neil. Please go ahead.
Great can you hear me, Okay, yes, Phil Thank you.
Great.
So Chris in your prepared remarks, you said if I got this correctly that you thought that the impact of the issues in Batavia had a $10 million.
Hit to gross profit margin, if I add that back your gross profit margin for the year is still below where it's been the last couple of years. So the.
The other things that were going on there is that supply chain and COVID-19 related.
Yes sigh of change.
It's all the above.
Sure.
We estimated that impacted margins by 10 over $10 million.
Is what is what we are.
What we're projecting and what we estimated.
Certainly increases in labor and in the inflation on raw materials impacted our margins as well.
But that'll get built into the contracts as our backlog rolls off and new contracts, we start working on new and more profitable contracts, especially as we get into the second and third and hopefully fourth and fifth article jobs.
Our Navy business backlog begins to build which will have some of that pricing and inflation built in.
Okay and my other question is that of the.
74% of the backlog within defense.
You break that out as to how much of that.
<unk> business.
So it all of it is related to the Navy business and maybe not directly it's two different first tier suppliers that we supply to but Indiana.
I'll eventually go to the Navy.
So Barbara missiles has has contracts that are built into that backlog.
They go to two tier one suppliers.
The Navy, but some that go direct to the Navy.
Graham's really go through through tier one primes and.
David.
Okay. Thanks very much.
Yes.
And then obviously if you want to dial <unk> ask question I remember is there on the screen.
We can integrate question through the web portal.
I have a question.
Cassidy constrained and wide crack spreads with patents that are currently sit.
Severe indicate future demand for <unk> products.
But gosh I hope so.
Yeah.
So as we talk to our customers.
Essentially the story that they are telling us and it's and it's pretty uniform across most customers is that is there.
A lot of the companies, we're really holding on to capital spend and.
And really trying to recover from for the last several years and so they were just kind of bank and profit and then providing some some payout to stockholders.
When they were spending money.
Tended to be a little bit more towards that new energy space some of the alternative fuels and.
And things like that.
We have seen.
An uptick in the last six to nine months and the aftermarket business and historically that has been and indicators that that people are fixing up their plants first they are existing.
<unk> and then and then they'll consider capital spends later and our customers are actually <unk> that of that and that.
They are saying, yes, we are spending money right now, making sure that our that our plants are running well and up to capacity and then we will start to rework either revamps or retrofits.
And then new plants internationally.
Also on the books. So so we do expect that.
The capital equipment.
Business will come back, but we think that it's 12 months away before we start to see that.
Referrals.
As to the lower <unk>.
Right.
I just wanted to thank you all for your time today.
We've been working on this hard we've been really quiet.
And working to really understand our business and where we're making money and where we're not making money and then and then figuring out how to how to improve our businesses and so so we've had a great time.
During all of that out and we're just really happy to have the opportunity to present that to you and Chris and I will look forward to talking to each of you individually in the future.
Thank you very much.
And as our revenue thank you.