Q1 2023 Graham Corp Earnings Call
Greetings and welcome to the Graham Corporation first quarter fiscal year 'twenty 'twenty three financial results. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
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As a reminder, this conference being recorded it is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for Graham Corporation. Thank you you may begin.
Thank you Latanya and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation.
Joining me here today are Dan Thornton, our president and CEO and Chris <unk>, Our Chief Financial Officer.
You should have a copy of the first quarter fiscal year 2023 financial results, which we released this morning before the market you should also have a separate orders announcement that we released simultaneously.
If you do not have these releases you can find them on our website at Graham Corp Dotcom.
Yeah.
Chris and Dan will be doing a formal presentation after which we will open the lines for Q&A, but if you'll turn to slide two in the deck I'll review the Safe Harbor statement.
You should be aware that we may make some forward looking statements during the formal discussions as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today.
These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with Securities and Exchange Commission. These.
These documents can be found on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these measures will be useful in evaluating our performance you 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 the reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. So with that if you would please advance to slide three I'll turn the call over to Dan to begin Dan.
Thank you Debbie and good morning, everyone. Thanks for joining us today for our first quarter fiscal 'twenty two 'twenty three earnings call.
Just last month, Chris and I presented our fiscal year 2022 results.
And multiyear strategic plan I am really pleased to report that our first quarter fiscal 'twenty results.
Nearly demonstrate the solid execution of our plan and reinforces our confidence and our expectations for the year.
The strategic plan is in place.
<unk> for fiscal 'twenty, three and beyond <unk>.
Our teams are engaged and we are planning predicting and actively managing our business.
As we progress we have also improved customer relationships and our strengthening the culture internally with higher expectations as a new enterprise with a solid outlook.
We had strong growth in all markets in the quarter and benefited from a full quarter of our Barbara Nickels acquisition.
Also higher volume of commercial aftermarket work in Batavia contributed to the increase in sales.
Importantly, with shift critical product to the Navy and are back on schedule.
We also saw better results that came from improved execution.
And better mix as a result, we turned a nice profit in the quarter, despite a difficult operating environment.
Ultimately, our first quarter performance gives us higher confidence that we can deliver our guidance.
Bookings for the quarter were spread across all of our markets further demonstrating the success, we are having with the transformation of Graham.
We have a nice vacuum distillation unit order for a refinery in India, a strong aftermarket order volume from energy and petrochemical.
A small but meaningful set of defense orders and.
Several space orders to key space industry players that added up to $7 $3 million of new business.
With that I will hand, it over to Chris now to cover in greater detail our much improved performance in our first quarter results.
Yes.
Thank you Dan and good morning, everyone.
If you turn to slide four you can see our first quarter fiscal 'twenty, three performance, which shows impressive year over year growth.
Sales were $36 1 million up $15 9 million over last year's first quarter and was across all of our diversified markets.
During the quarter, Barbara Nickels contributed an incremental $8 9 million in sales.
Agg mentored by stronger sales from our <unk> operations.
More specifically.
During the quarter, 27% of our sales were to the defense industry. As we delivered two first article projects to the U S. Navy.
One for our submarine program and the other for a Cvs carrier program.
As further evidence of our branding and market sales efforts, 18% of sales during the quarter or from the space industry.
Impair to just 4% last year.
And our Batavia operations, we had higher sales to the refining chemical and petrochemical markets.
Which was driven by aftermarket sales, which were up 38% during the quarter.
Our gross margin for the quarter was a healthy 19% compared to 5% last year's quarter.
Improved execution on completed contracts and a better mix of higher margin projects.
Contributed to our significantly improved gross margin on both a year over year and sequential basis.
SG&A expenses in the first quarter of fiscal 'twenty, three were $5 8 million.
836000 over the prior year.
But lower by 502000 from the sequential fourth quarter.
Having a full quarter of Barbara nickels in the current period contributed an incremental $1 4 million of SG&A expenses.
This was partially offset by cost discipline and expense deferral initiatives.
We have been very intentional in our spending to delay what we can and are leveraging our existing infrastructure to drive improved profitability.
As a result of all these factors our net income in the quarter was 676000 or <unk> <unk> per diluted share.
On a non-GAAP basis, which excludes intangible amortization acquisition costs and other unusual and nonrecurring expenses adjusted.
Diluted EPS was 12%.
It was <unk> 12 per share.
Similarly, we had a very nice turnaround in adjusted EBITDA from.
From a loss of $2 9 million in a year ago period to a gain of $2 7 million or 767, 6% of sales in the current period.
Slide five provides our capital structure at the end of the quarter as well as our operating and free cash flow results.
Graham has always generated good cash flow and is expected to do so in the future.
Positive cash net income during the quarter was offset by a working capital build driven by our growth.
Typically the first quarter of the year as the worst cash flow quarter due to the payment of prior year incentive compensation.
And that was true again this year.
Additionally, 300000 of cash was used for capital expenditures and 500000 was used to pay down debt.
The net result is that cash decreased by $1 8 million during the quarter.
Availability under our line of credit and future cash flow from operations is expected to be sufficient to fund ongoing capital expenditures and debt repayment.
Full year capital expenditures are expected to be between $4 5 million and $5 5 million.
And is primarily related to various growth initiatives.
Our recently revised lending agreement has provided more financial flexibility as we move into our growth phase.
And I am pleased to report that we are in compliance with all of our debt covenants.
On slide six you can see the strength and breadth of our orders across all markets.
Even with our higher sales during the quarter increased demand resulted in a healthy book to bill ratio of 112.
Stronger orders continue for our commercial aftermarket.
And we have now seen our global expansion efforts bear fruit as we booked a large refining vacuum distillation order in India.
Defense and space orders were across multiple programs and with a variety of key strategic customers.
This demand is being driven by our advanced technology and engineering Knowhow as well as our strong execution.
This order diversification solidifies our confidence in our longer term outlook and growth opportunities.
Turning to slide seven.
Our backlog remains at a very healthy level and increased 2% sequentially sequentially.
Defense remains the key to our backlog story and comprised 74% of our backlog at the end of the quarter.
Also notable is that our commercial backlog has increased 42% on a year over year basis and 9% sequentially.
Primarily driven by space in the commercial aftermarket.
We believe 40% to 50% of our backlog will convert within the next 12 months and provide stability to our business.
Slide eight shows our guidance for fiscal 'twenty three.
Our strong first quarter performance and backlog gives us confidence in our full year guidance.
As such we are reaffirming our expectations of revenue and adjusted EBITDA growth.
Revenue is expected to be between $135 million to $150 million.
Which suggests topline growth of about 16% at the midpoint of guidance.
Our confidence in our profitability profile has improved as a result of the strong execution, we demonstrated in the first quarter.
Nonetheless, we are holding our adjusted EBITDA guidance of $6 5 million to $9 5 million.
We do believe our second quarter will not benefit as well as the first quarter on mix and deferred expenses.
But the second half should normalize to achieve our guidance.
As we look longer term.
We expect our strategic initiatives to yield high single digit revenue growth and low double digit low double digit mid teens EBITDA margins.
With that operator, please open the phone lines and Dan and I will be happy to answer investor questions.
Thank you.
At this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, while we poll for questions.
Our first question comes from Theodore O'neill with niche fill Hill research. Please proceed.
Hey, congratulations on the good quarter.
Thanks, Scott Yeah, Hey, just my first question is about this change order for.
For the CV and carrier program.
Is that is that sort of thing that is likely to have an impact on the gross gross profit margin or is that something that's paid for a couple of the paid for.
So.
<unk>.
It definitely had an impact for the first quarter on our margins and we will continue to impact it.
Basically when.
Customers ask us to make various changes to our contracts. This is with all our customers we track those changes and then.
Bill them Accordingly, as they were not considered in the original proposals.
Right right.
And then the growth in this space orders.
I see it's not a big dollar number, but where is that growth coming from is it you've got more customers or the customers you have.
Doing more with you.
Both of you.
So we're seeing some.
Some follow on orders from existing customers and we're getting we're continuing to add new customers.
And developing new products for new customers. So it's.
Broader and deeper.
Okay. Thanks very much.
Yes.
Our next question comes from John <unk> with Pinnacle. Please proceed.
Good morning solid quarter.
I was just curious.
The Capex guide.
I have to five and a half that seems helpful. Todd I was.
What specific gross growth initiatives are you referring to regards to capex.
Sure. So I will say that nearly all of our.
Planned capex for the year is related to growth initiatives.
In particular with the growth in our defense business, if Arbor Nichols, we're looking into potentially moving into some additional space, there, which is going to require some capital as well as machinery and equipment.
For contracts that we have in place.
We're also looking at some.
Cost savings.
Machinery and equipment at the <unk> operations to improve our efficiency.
So yes, it's types of projects like that.
At both Batavia, and Denver, Yes.
Yep, Okay, and how does that.
Fold over the coming three quarters I think there was only 300000 or so.
In the first quarter does it unfolded evenly through the remainder of the year.
Per quarter.
So certainly we're going to see an uptick since we as you mentioned, we only had 300000 in the current quarter.
Things tend to be lumpy, but I would say there'll be.
Rather smoothed over the next three quarters, it's kind of hard to judge it all depends when on the execution and when the invoices come in and things like that yes, I would suspect that it builds.
Throughout the rest of the year.
As we get things on order.
The new equipment comes in and the building modifications happened I think it will build through the rest of the year.
Great and I guess the other question is you referenced customer change orders.
That's always.
Can be an issue.
You're always able to bill the.
The customer for the amount of the change or is that sometimes negotiated.
Thanks.
Yes.
Often negotiated because.
<unk>.
Contracts are never entirely clear and so theres interpretation of what was required and what wasn't required and so for sure.
They are often negotiated.
Okay, and so far that has not been an issue.
No.
In fact, I think that our customers are actually very.
Cognizant of the things that are happening in the market right now with.
With.
The cost of materials going up with delays and supply chain.
Things like that so so our customers are actually pretty accommodating and understand what we're going through because they are going through the Samsung.
Okay.
That's great. That's all I have good luck going forward.
Thank you John Thanks, John .
Our next question comes from Graham Madison with what are our research. Please proceed.
Hi, Good morning, guys again, congratulations on the quarter just a question.
You're seeing a nice pickup in the commercial aftermarket what's your outlook on that going out to the rest of the year will that continue to remain a strong market for you. Thanks.
Graeme you're exactly right. It's really picked up is it is very strong right now.
Graham.
When that aftermarket started to pick up.
It basically predicted that there is future capital spending coming.
Not sure exactly.
When the capital expenditure will be coming and how strong it will be but for right. Now we're very very happy with the aftermarket business, it's coming and it's coming at a at a rate that's higher than what we've seen in the past.
And obviously.
Aftermarket business is highly profitable for us. So we're actually very very happy to have that coming again.
Alright, great.
And then another question sort of in line with that on the improving EBITDA margins that youre forecasting what gets you to that higher margin is it volume a different mix or just additional operating actions that youre putting into place.
It's all of the above so so certainly we went through a rough 2022 with some with some challenging projects.
As we push those out so we've delivered a couple of first articles here in the last months, so as we push out those those lower margin jobs.
The bulk of the business that we have in our backlog is better priced.
In addition, we're doing quite a bit of work as we've kind of talked about on our strategic plan about improving our operations and really improving the efficiency of the work that's going through so so I would say that it's that it's.
Some combination of price certainly.
Contribution from.
And efficiency improvements.
And they're starting to get some volume too. So the factory is full we're.
We're cranking along so so all things are at this point kind of moving in the right direction, which says that our EBITDA margin will start to improve from where it has been.
Got it great all right I'll jump back in queue. Thank you very much thanks Graham.
Our next question comes from Gary Schwab with Valley Forge capital. Please proceed yes.
Just repeat good good quarter.
Can you just expand on.
What's your road here, our improved profitability with as a result of the deliberate.
Decisions, we're making as a team to defer cost manage project timing to improve mix and take price were earned.
Sure.
Sure so.
Dan and I spent a lot of time with the team here and they've done a great job.
Really putting in financial discipline, and deferring costs, where it makes sense.
Really thinking twice before they make expenditures.
So thats. One example, as we did.
Lesser reliance on some of our third decision made last year, which we're benefiting from this year as.
We lowered our.
Reliance on third party distributors.
Distributors and now we're going direct to some of our customers. So that savings if you recall from previous sure Paul.
But additionally, as you said.
We did see some benefit on prices.
<unk>.
We went back to our customers on various change orders or if there were cost escalations.
And then thirdly, we did benefit in the quarter from.
A good mix in the revenue that we are realizing.
Some of the challenges with supply chain with material receipts and things like that some of the.
Orders were expecting in the first quarter Didnt come out but.
The management team did a great job pivoting and moving to other orders which were higher profitability.
Why we're also saying we think we're not going to get the same benefit in the second quarter, but it should normalize in the second half of the year.
Okay.
Going back to the change order you said.
Youre negotiating these are you allowed to keep your prior margins.
On that negotiation.
So the change orders are specific to a customer request rate so kind of the original contract is intact.
But then if a customer asks us to maybe expedite delivery or make a change to the original design that's cost US something then we pass along that charge and we do that for all our customers commercial and Navy.
Okay, and then one last thing so now that you've delivered your two.
<unk> condensers for one for the Columbia and the one for the CV and carrier.
I assume youre already working now on the next Columbia, The next carrier condensers.
Can you talk about what you learned from that first our fabrication and where youre seeing the savings on the second articles.
Yeah.
So.
On any first article.
Youre not quite sure what all material you need.
To begin weapons so.
You build it you find different things that you need from tooling to.
Extra material to.
Different fixtures and machinery.
And so getting the complete bill of material.
Blocked down after year through the first.
Build.
Really enables you to predict the future. So so bill of materials is the first piece of it.
And then there is.
As you as you build up for the first time.
You.
Can make some mistakes and how you build it you learn from those mistakes the.
The most important thing is to document.
How you want to build up the next time, which we've been doing.
And then so the next time, you're basically not going to make those same mistakes you will know exactly.
The sequence that you want to build.
The units and.
The folks that have built it.
No how they did it last time and as documented so that they're further down the learning curve.
Certainly.
As you sit there and build that getting manufacturing engineering out there on the floor watching how things are going thinking about alternate ways to do that and then trying different fabrication techniques on that first article are all things that.
We've been able to do especially on the Navy side with our with our new operations director there. So.
So we are beefing up our manufacturing engineering.
The documentation of our build process.
We expect to too.
Benefit from those actions and subsequent builds.
Okay. Great is this the is this a primary factor on why you expect the second half to be so much better yes, it's kind of kind of all of those things right. So it's.
It's better pricing on on.
Subsequent units.
It's all of those lessons learned in process improvements that we're making.
For sure so yeah all of those additionally, if I could just add to that.
As you recall last year, we had to subcontract out a lot of our commercial jobs in order to.
Meet the deadlines that we wanted to with the Navy jobs, well that reliant worked at reliance on subcontractors is.
Getting a lot less in <unk>.
So that in turn makes the jobs more profitable when were doing them in house versus subcontracting the Mt.
Okay, great. Thanks very much.
Okay.
Thank you. Our next question comes from Andrew Shapiro with Lawndale capital. Please proceed.
Hi. Thank you. This is somewhat of a follow up to the prior questioner so I can better understand.
The differentiation between first article in <unk> and.
And beyond.
So on the first article components.
Youre doing a lot of trial and error et cetera.
These cost plus or they were also the fixed cost.
Contract.
And our fixed charge initially and then.
Subsequent articles or subsequent.
Components.
Our separately negotiated or they've already been pre negotiated as to price.
Yes, so so.
All of our orders at this point with the Navy yard firm fixed price.
So.
And essentially we have.
Three units.
On the on one order for yet another.
That are all at that price subsequent orders some of which we've got in house.
Our at different prices, so as we got into the first order.
We learned.
Where we needed to be we have the cost.
At.
Supported a higher sales price.
And so those subsequent contracts are negotiated at higher price. So so when we talk about better pricing.
And that's essentially what happened was we learned from the first.
Article the first contract if you will.
And then built in better pricing into the second.
Subsequent contracts.
So at the same time.
What happens as you go further down the learning curve.
Get better and better at building. These so so your margins start to improve so it's a combination of better pricing.
And better margins due to learning curve.
Right so.
That I understand so then to understand what's inside of the first article because you referred to as the first article the first contract.
Is the first article and first contract for a single cell or the first article and first contract was for.
A few subs.
I can't get too specific there, but but often our contracts are for multiple units.
Okay and you have.
The second contract already in the backlog for we'll call. It the subsequent set of of ships.
Yes.
In some cases, yes.
We're building a bunch of different types of heat exchangers.
In some cases, we have two and three subsequent contracts and in some cases, we have one.
And in some cases and processes bidding the next one.
And then in.
In a single boat because Congress authorizes only so many of these.
A year because theyre not cheap.
A single boat.
Building one component.
Can you can you comment as to how many of these components are in a single boat.
Yes, there's a lot of heat exchangers and the boats.
And.
In most cases building multiple heat exchangers per boat.
Okay.
How many heat exchanges is it take for you to get up this whole learning curve in terms of.
Efficiencies and productivity as well as efficiencies in pricing.
The two big ones were through.
So we had two big condenser.
Shipments that we've just made.
And so we've gotten through the learning curve with those we've started to incorporate.
A lot of those lessons learned and so future margins will improve now.
Now we will continue to bid.
Additional heat exchangers that we have not built before.
They will be smaller.
And.
So lower risk for sure.
But but.
One of the things that we wanted to do is expand.
Our Navy business and that does mean going after new product so.
So it won't be.
Going through learning curves on on new orders in the future now that said.
The more that we get in production.
Smaller and smaller impact these first articles will be.
But once you build the first article venue built a moat around your business.
Andrew just to add to that too I mean, the first article is always going to be your least efficient right because the bill of materials isn't set so I would say.
The efficiency gained off the first is is going to be the greatest and then it'll diminish after that but.
We will still continue to try to improve our processes, but the biggest one with the first is getting that bill of materials locked down and that won't change. After we do the first one.
And in the backlog does that include contracts.
We're arguably second articles, but before you learned all of this on the first article or when.
Uh huh.
Yes, sure Andrew Youre on the right track.
Each one that we build.
We'll get better and better at and some of these.
Or at the lower pricing.
But.
The margins will improve just because of the lessons learned.
So you kind of think about about this business is improving margins over the long term.
That's.
That's absolutely what's going to happen as we improve operations and we get better prices in the future.
Great. Thank you.
No.
Once again to ask a question Thats Star one at this time. Our next question comes from Brett Kearney with Gabelli. Please proceed.
Hey, guys. Good morning, Congrats on the early traction from all the hard work you've been doing.
Thanks, Brett Thanks, Brett.
Just had a question given the really robust outlook certainly at Barbara Nichols and then also.
On the aftermarket side at Graham in the Navy business and there was some talk from.
Other players and kind of the energy space, neither even larger.
Pump suppliers into that space that we could see.
That multiyear capex cycle could come to fruition just curious as you think about the potential timeline with that how you. All are viewing resources you have I guess to meet the.
Growth ramps potentially in both sides of the business I know you've done a lot of work.
At Graham in this area and already have some great processes.
In place of Barbara Nickels, but just how youre thinking about resourcing to growth ramp of the business.
Sure so.
The strong aftermarket growth is certainly encouraging that we're we're on the cusp of a capital investment cycle here.
We're still thinking that it is about 12 months away.
And just like everyone else we are facing.
Labor constraints in.
The labor market is definitely very competitive these days, but we've been.
We're fairly optimistic about it right now on the Batavia side.
We have been reaching out to all the trade schools and colleges and.
Those programs are full right now.
Our archon flame program that we sponsor.
We just graduated for and we have another 11 that are signed up those will graduate in November . So we have about 18 right now.
<unk>.
Well, there's that are in our <unk>.
In training.
Come online in the near future here, but then some a little bit longer out.
So we are.
Pleasantly surprised that we are seeing the labor market soften a little bit we have started getting some applications from experienced well there. So we've been doing a great job. The team has been doing a great job, reaching out and getting some experienced hires as well.
But just like everyone else it remains scale.
Skilled labor remains a challenge in.
We're working that every day.
And then on the on the facilities side, we still have quite a bit of room to.
Grow and expand.
Here in Batavia, Barbara Nichols is more constrained.
But we're very active in.
And looking at areas that we can expand there also.
So.
They're doing a really nice job on the hiring front again, it's not easy.
But they are working awfully hard.
They've built.
Our culture at <unk>.
And a social presence there that's actually.
Given a lot of people interested in the company. So so theyre working hard and we're having some success.
And those folks.
That's very helpful and congrats again, thank you.
Thanks, Brett.
There are no further questions in queue at this time I would like to turn the call back over to Mr. Thorne for closing comments.
Thank you very much.
Closing I will just say that we have.
We're excited.
About the future Graham and I am, especially grateful to the entire Graham Corporation team for their commitment their resiliency their contributions to delivering on the quarter and to driving our future potential. Thanks for your interest in our company Hope you have a great day and look forward to talking to you again.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.