Q1 2024 Graham Corporation Earnings Call
Greetings and welcome to the Graham Corporation first quarter fiscal year 2024 financial results Conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Debbie Pawlowski Investor Relations for Graham Corporation. Thank you you may begin.
Thank you Christine and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation here.
Here with me on the call are Dan Thornton, our president and CEO and Chris <unk>, Our Chief Financial Officer.
You should have a copy of the first quarter fiscal 'twenty 'twenty four financial results as well as the strategic investment release that we put out this morning over the wires.
If you don't you can access those releases and our slides on our website at IR <unk> Graham Corp Dot com.
The slides on the website will accompany our conversation today.
Dan and Chris are going to provide your formal remarks, after which we will open the line for questions.
But if you will turn to slide two I will read you the safe Harbor statement.
You should be aware that we may make some forward looking statements during the formal discussion 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 by the company with Securities and Exchange Commission.
Can find those documents on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, 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 reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides.
We also use key performance indicators to help gauge the progress and performance of the company.
These key performance metrics, our orders backlog and book to Bill their operational measures in the company's methodology for calculating these numbers does not meet the definition of a non-GAAP measure as that term is defined by the S. E T. But so what Paul so as a result of a quantitative reconciliation of each of these is not required.
Right, but you can find the disclaimer regarding our use of key performance metrics in the back of our Jack in the supplemental slides.
So with that if you would please advance to slide three I'll turn it over to Dan to begin.
Dan.
Thanks, Debbie and good morning, everyone.
We reported better than expected results for our first quarter of fiscal 'twenty four.
Giving us a strong start to the year.
Revenue grew 32% to a quarterly record of $47 $6 million.
Gross margin expanded to 23% and earnings per diluted share increased over four times to 25 cents.
We had a few benefits to the quarter that were working in our favor.
Had very favorable mix as a result of better priced projects and.
And project timing.
We also are seeing the impacts of improving execution.
The expanded capacity, we have created through productivity and increased direct labor.
And better pricing in our backlog.
Aside from our strong results, we also announced a major strategic investment by defense customer to expand our capabilities and our Batavia operations and.
In support of the Naval nuclear propulsion program.
The investment will be used to ensure we can support the U S. Navy's shipbuilding plan.
Chris will talk more about the investment and how we expect to recognize it through revenue over many years.
We believe this investment validates the tough decisions, we had to make in fiscal 2022.
That year, we chose to make significant investments in order to deliver quality product in a timely manner.
To our customer.
Back then those decisions had a major negative impact on our earnings.
As I noted in the release.
There is a lot to be excited about here at Graham.
We have made measurable progress and we are seeing it in our results.
But what is not as visible to the outside.
Is the advancements we are making as an organization.
We have quite a bit of ground yet to cover.
But I'm very encouraged by the development of our culture of openness challenging growth that I am seeing in the chain.
We are in the third or maybe fourth evolution of Graham since its inception in 1936, and I P. O and 1968, our history is important and a demonstration of the sustainability and resilience of the business.
But our future is what drives us.
And while we still have much work to do I am proud of what our team has accomplished and their openness to change and advancement.
With that let me turn it over to Chris for the financial details Chris.
Thank you Dan and good morning, everyone.
If you turn to slide four you can see that we had a strong sales growth for our first quarter of fiscal 2024.
With record sales of $47 6 million.
This was up 32% over the prior year period, as well as up 11% from the trailing fourth quarter.
As Dan mentioned.
Quarter was better than expected in.
And benefited from an improved mix of higher margin defense projects as well as the timing of material receipts and the completion of some contract projects, which we originally expected in the second quarter of this year.
Higher sales were also driven by better execution and improved pricing.
Defense led the way with $22 8 million in revenue, which was up 13 million over the prior year and 133% increase.
Commercial aftermarket sales to the refining and petrochemical markets continued to be strong.
And were $9 2 million up 49%.
These improvements in defense and aftermarket more than offset softness in the refining industries and declines in the space market.
U S sales were 80% of total revenue up 35% year over year.
Primarily driven by our growth in defense.
Gross profit and margin improved measurably.
Gross profit was $11 million and gross margin was 23, 1%.
$4 2 million and 440 basis points respectively.
This reflects a favorable mix as a result of better priced projects and timing due to build schedules.
We're also seeing the positive impacts on margin from improving execution.
The expanded capacity, we have created through productivity and increased direct labor.
And better pricing in our backlog.
SG&A inclusive of amortization in the first quarter of fiscal 2024 was $7 3 million or 15% of sales.
Up 1.5 million over the prior year period.
Approximately 900000 of the increase was attributable to higher performance based compensation expense, including 800000 related to the supplemental performance bonus payout to Barbara Nickels employees.
In connection with the 2021 acquisition.
If you turn to slide five you can see we had net income in the quarter up 25 cents per diluted share.
Or $2.6 million.
A notable increase over last year.
On a non-GAAP basis, adjusted net income and net income per diluted share or $3 6 million and 33 cents respectively.
Measurably improved over $1 3 million and over that $1 3 million and 12, respectively for the same period a year ago.
Adjusted EBITDA grew to $5 6 million or 11, 8% of sales.
Also reflecting the improvements in our business compared with last year's first quarter.
Adjusted EBITDA of $2 7 million or seven 6% of sales.
Turning to slide six you can see how we are strengthening our balance sheet.
Cash and cash equivalents as of June 32023.
Increased 35% or $6 4 million to $24 7 million.
Compared with the end of the fourth quarter.
Our cash generation is improving with better operating performance what is expected to be lumpy due to the timing of receipt of customer deposits and a corresponding material purchases associated with those deposits.
Cash generated from operations in the first quarter was $8 6 million.
Debt during the quarter was down 400000 to $11 3 million.
As of June 30th 2023, the company was in compliance with this lending agreement with a leverage ratio of just 1.6 times.
On June 30th 2023 the amount available under our revolving credit facility was approximately $26 million and provides adequate liquidity to fund our strategic growth initiatives.
Capital expenditures for the first quarter of fiscal 2024 $1.5 million.
We have updated our expectation for Capex in fiscal 'twenty 'twenty four to range between 12 million and 13 and a half million dollars.
The six and a half million increase is primarily or primarily related to the strategic investment we received from our defense customer and our planned spending to expand our capabilities in ARPA caveat operation to meet the Navy's shipbuilding schedule.
If you'll now turn to slide seven I'll review, our orders for the quarter.
During the quarter, we had orders of $67 9 million, which were up $27 6 million or 69% over the prior year and resulted in a book to bill ratio of 1.4 times.
Included in orders and backlog is the $13 5 million strategic investment from a major defense customer, we've been talking about which we announced separately today.
The investment is expected to flow through revenue over the next eight to 10 years and it will be associated with potential future orders.
And delivering on the eight and a half million of follow on orders, we received from that customer during the quarter.
[noise] space orders were $4 6 million in the first quarter of fiscal 'twenty 'twenty four.
Down from the historically high 7.3 million in the first quarter of fiscal 2023.
But higher than the $2.5 million in orders received in the fourth quarter of fiscal 2023.
<unk> continues to be a strategic focus for us and a meaningful part of our business.
Turning to slide eight we show our backlog.
You can see that it is up 24% over a year ago, and 7% sequentially to a record $322 million.
The defense backlog is up $60 million or 31% over last year and.
It includes that strategic investment from the major defense customer I just mentioned.
Approximately 50% of orders currently in the backlog are expected to be converted to sales in the next 12 months.
And another 25% to 30% is expected to convert to sales over the following year.
The majority of ore is expected to convert beyond 12 months or for the defense industry, specifically the U S Navy.
Turning to slide nine we can review our updated guidance for fiscal 2024.
We are increasing our revenue projection to $170 million to $180 million.
Up $5 million from our previous guidance on the lower end top end.
Our new guidance suggests topline growth over fiscal 2023 of about 11% at the midpoint of that range.
This is right in line with our strategy to grow in the mid to high single digits annually in order to achieve our fiscal 'twenty 'twenty seven goal of greater than $200 million in revenue.
It also captures the better than expected performance in the first quarter, which we expect will normalize for the remainder of the year.
From a margin perspective, we are updating the gross margin guidance to 18% to 19%, which is an additional 100 basis points over our previous guidance on the top and bottom end.
Our guidance remains the same for SG&A percentage as well as for our effective tax rate.
Similar to revenue, we have increased our adjusted EBITDA guidance by $1 million at the top and bottom of the range to 11, and a half to $13 5 million.
Which suggests an adjusted EBITDA margin of about 7% at the midpoint of the range.
These increases to our guidance reflect our better than expected start to the year.
And incorporates more normalized performance for the remainder of the year.
As we start to work on a better price contracts employing our much improved processes.
We expect margins to improve steadily each year in order to achieve our low to mid teen adjusted EBITDA margin goal in 2027.
With that I will pass the call back to Dan for concluding remarks.
Thank you Chris.
I am on slide 10.
I have covered the pillars of our strategy on slide 10 previously.
I would just like to reemphasize. So it takes a team that understands our customers' critical challenges.
To help them find solutions, which drives our success.
We are doing this on many fronts, which is also driving our diversification.
We have much going on in space, New energy cryogenics, refining and petrochemical as well as defense.
We are well on our way to achieve our growth and profitability goals for fiscal 2027.
And even beyond that I believe our long term outlook is very encouraging and I hope you share that excitement.
With that Christine we can open the call for questions.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Theodore O'neill with Litchfield Hills Research. Please proceed with your question.
Thank you very much and congratulations on the great quarter.
XL excel.
So Chris I was wondering if you can clarify this strategic investment, which sounds to me like this is for spending on Capex yet in your prepared remarks, you included in orders and backlog and say it'll be drawn down over the next eight years, which sounds like advanced deposits.
Yeah.
Yeah I I. Thanks for the question. They are I realize that this can be a little bit confusing. So we received a 13 and a half million towards strategic capex purchases and an eight and a half million of follow on orders are related to the strategic program, which these investments relate to.
You are correct, we are including those in our balance sheet as customer deposits like.
Like a prepayment however, when we spend the money on the Capex, it's going to go through as.
Capital expenditures, so it's going to cause some lumpiness in our cash flow statement over the next several years here.
We're not under the terms of the agreement, we're not allowed to charge our customer.
Sure.
Depreciation on this equipment.
And it is related to specific orders for this strategic program.
So we determined that it is really revenue so it's gonna be flowing through revenue.
As we work on the current orders as well as potential future orders over the next eight to 10 years.
And will this will this have a sort of a one time use for this particular customer and application or is there a.
Other usefulness to this.
So we do have to.
Provide our customers strategic program priority.
Well, we're using that machinery and equipment, but if there is excess capacity, we can certainly use it on other revenue generating operations and it is and the equipment is all in our name at the end of the day.
Okay.
Can you give us an update on your Capex plans for some of the long lead tie-dye time items and also update us on how it's going to grow your welding capacity.
Yeah.
Yeah, So as Chris said in his remarks, I think there was like six and a half million that'll be charged to that capex. This year right an increase of six and a half yeah yeah.
So so in that in that strategic investment there's everything from.
Building additions to.
Machine tools for drilling holes and turning.
Different raw materials, so so turning and milling machines, there's welding machines associated with that there is there's all kinds of different rolling machines, and so it's a wide variety of things.
As you kind of look at all of the machines that are needed to to kind of process.
Those particular heat exchangers for our customer, they're basically helping us get tooled up to to really push those through quicker than that we would be able to on our own. So so yeah. There's there's definitely welding machines in there, but there's there's everything else too.
Okay. Thanks very much.
Yeah Youre welcome Bill Thanks Bill.
Our next question comes from the line of Gary Schwab with Valley Forge Capital Management. Please proceed with your question.
Yeah, Hi, Dan Hi, Chris I think has surprised a lot of people with this release.
Good work.
Thank you Gary Thanks, Barry.
Anyway, it's been a year since you delivered your first two.
Steam condensers.
The next two should be very close to delivery or have you delivered them already can you comment on that.
Yep. So we did deliver one more at to be at the beginning of July .
And we have one more that is scheduled to go into the third quarter of this year.
Okay great.
This is a I wanted to ask you about this you know my daughter, just moved into a new house and she bought a pair of six draw of dressers from Ikea that she asked me to assemble and I spent about half the time building. The second Dresser. Then I then it took me to build the first one but I don't think I'd say much more.
Time on a third one you mentioned how your teams are questioning and challenging each other well.
This significant new practices, where innovations developed where you saw like a real step change in savings and productivity on your second articles.
And how much more do you think there'll be an labor innovation that you can squeeze out of a third of article.
Yeah. So so what you're what you're describing is a learning curve.
And and essentially you learn by building the first one.
And you can apply those lessons learned to the second one.
You don't have to improve your processes improve your tools anything and you actually get some benefit just from the learning of how to do things and in what sequence etc.
But then if you are if you start to look at your process and.
And look at how you can reduce time or or make processes go in parallel or things like that you can start to get even further down that learning curve. So so an industry that manufacturing in Australia, you'll see learning curves that are very steep at the very beginning you know.
For small quantities and then as you increase quantities or basically put you know accumulate bills.
You'll start to see that learning curve flattened and and each one of those learning curves really is product and process specific.
And so I wouldn't even attempt to to to start two to name savings, let's say from first article the second to third to fourth to fifth.
Because they're so dependent upon you know the.
The process and the product and then ultimately the people so, but but we are very active and.
And looking at those processes mapping those processes, helping or are folks with you know with better tools and better supervision and timely receipt of materials and gosh all of that so.
It's it's it's the nature of our manufacturing businesses that are that that if you have one you love us and and you really enjoy the are the improvements that you can make in your process and your people over time.
So you think you can squeeze.
A lot more margin out of the third of articles that you'll be building.
Over the cycle.
As you as you built.
Build more of them the the improvement sort of or the reduction in time starts to decrease for each one and that's that's what they've kind of.
Called moving down that learning curve. So so you'll see probably the most between the first and the second a little bit less between the second and third you'll save a little bit less between the third and fourth etc. Okay. So it's still there there's still still savings absolutely still there it just flattens.
And as far as well.
What you were expecting a in in efficiency and productivity on the second article did it did it meet what you were expecting you know when you first started on the first article and thought about the second or did you surpass what you thought you would get to.
A good question that I don't know the answer to actually.
There was definitely the savings did our guys.
And Gal it you know really predict or or not I couldn't tell you Oh.
Oh, Okay I didn't know if you figure the predicted a margin that you thought you would save or an additional margin you would make or shorten your labor time on the second one over there.
They have theory, but I couldn't quote it to yeah, Okay, and it's different for every program and as you know we have multiple programs in them in the backlog.
Right right of course, alright, well, thanks, very much and great job. Thank you.
Thanks, Gary Thanks Kerry.
Our next question comes from the line of Brett Kearney with Gabelli funds. Please proceed with your question.
Hi, guys. Good morning, Congrats on the continued momentum.
Thanks, Brett Thanks, Brett.
Just following up on the strategic investment. This is for I guess to get yourself aligned with your customer for new work you all will be bidding on with the U S Navy going forward.
Correct. So we already did have a few orders in our backlog right. After we received the P O for the strategic investment we received.
I know another order.
For several more units.
And then we will have the opportunity down the road to put to bid on other jobs.
And other units as they as they come up for bid.
Okay excellent and then it sounds like incorporated in this are in your plans as some you know more advanced machine equipment. How are you guys thinking about you know the labor needs.
To meet the ramp on these new lines.
Yeah. That's a great question, Brett you know unlike just like everyone else you know, we're not immune to the difficult labor market. That's out there you know I will say that you know overall, our human resources team has done a fabulous job or a labor is actually up 40.
Four.
People since this time last year, which is about a 9% increase.
But then within our budget, we still expect to increase our labor force and another 8%. So we've done a great job till now, but as you can imagine to grow your revenue, 8% to 10% a year you need to build your your workforce equivalent Lee but.
We've been able to manage through it so far in our H H our team is doing great with the.
The.
Programs that they have with the local local community colleges. The archon flame wellbeing program that we've partnered with the local community colleges with and other.
All other programs that are out there so they've done a really great job being able to keep up with our growth to this point.
Definitely thanks, so much Chris.
Thank you thanks.
Our next question comes from the line of <expletive> Ryan with Oak Ridge Financial. Please proceed with your question.
Thank you and also congratulations on a strong report guys.
Thank you.
And I think you mentioned better pricing in backlog is that more mix.
The end market composition, there or actually are you seeing better pricing and if you are what markets would that be occurring in.
Yeah. So we are seeing better pricing and that's on me.
In several different areas right, we've we've been able to because of the demand we've been able to increase pricing and aftermarket several times over the last year. So that's part of it.
As you know after you get done with your first article programs when you're bidding on the next articles it's based on the hours that you spent on the first I'll call. It inefficient.
Unit right. So you you get a natural bump in price.
Because it's based on the first article hours, but at the same time. Then you you do get you know as Dan has just been talking about more efficient at producing though so that'll help expand the margin as well so.
The mix is coming from again higher priced second and third article units as well as as I mentioned the aftermarket right.
I think I'd add to that that we're able to to get a little bit better pricing even on the commercial side, the refinery and Petro Chem.
We are seeing that heat up a little bit certainly the aftermarket has been busy for us for the last year and a half.
We're seeing some capital projects starting to come through.
The Ah <unk>.
And on those we're able to get a little bit better pricing than we have in the past even on the commercial side. So so it's it's.
Improving I would say across several different markets.
And I guess I would just add to that you know we've also.
Been putting in and stressing to the team about going back you know where our customers caused a delay or they they caused in you know the cost to go up you know for either more engineering that they request or <unk>.
If there was a delay in the order in material prices go up right. We've been encouraging the team to go back and we've been successful in going back and negotiating change orders and increased P O prices.
To compensate us for that so that's also being built into some of the pricing that you're seeing as well.
Okay, Yeah, because I know you thought you were going to be putting more emphasis going after some of that aftermarket business. So it's good to see that that's bearing some fruit. Dan you briefly mentioned are seeing some pick up on the the energy side is that domestic.
What are you seeing in your Internet in India, and China operations.
From an energy standpoint.
Yeah. So we we have seen an uptick domestically we want a.
Big order in India and.
And China has has been really slow coming out of Covid. So.
The.
Our pipeline domestically.
Really cleared out a little bit here this last quarter, where we were we got several different.
Orders, but.
But we just havent seen that China market come back as quickly as we thought that we would at this point.
What was the size of the India.
Ward.
Yeah, It was about $9 million.
And what's the delivery timeframe on that.
I'd say over the next year and a half.
Okay.
Okay, great congratulations and.
It's good to see that all your efforts from fiscal 'twenty to the hard decisions that are starting to pay off.
Yeah. Thanks, there thanks <expletive>.
As a reminder, if you would like to ask a question press star one on your telephone keypad one moment. Please while he repo for any additional questions.
Yeah.
Thank you. Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.
Hey, good morning, Dan and Kriss Ah Hey.
Hey, Bill good morning Bill.
I would disliked it.
Your comments and insights on the bus.
What you're seeing right now in terms of activity or.
What kind of project, you're kind of aiming for in terms of potential future activity regarding that.
Your new energy.
The initiatives and.
Cryogenic initiatives.
I know you're involved with.
Can you provide a little color there as to what types of projects Youre working on or looking at.
Yeah, we can I I would say that that the hydrogen inquiries have increased.
And so there's there's a lot of these air products types, the industrial gas types of companies.
That are that are looking at hydrogen and and see a real opportunity.
To start to serve that market in the future. So AR actually went to a hydrogen conference in Houston last month and kind of learned what was going on there lots of.
Technology development lots of investment in infrastructure.
For hydrogen production and distribution of hydrogen fueling of hydrogen vehicles et cetera.
Went to the national renewable energy lab to kind of understand what they're doing quite a bit of activity on the hydrogen side. There also so so I would say that.
The biggest thing that we're seeing is really probably on the hydrogen side.
And and people are interested in all phases.
From production all the way through fueling using hydrogen if it's you know that.
The future is anybody's guess as to how it really unfolds, but but there's it's it's kind of interesting to compare it to you you know the space environment that we saw a decade ago, where you know it was all government and now we're starting to see.
You know quite a few commercial companies starting to put their own money into it so a pretty interesting.
And then small modular nuclear we continue to see just a steady pushed.
Push to develop a technology there there are several different.
Companies that are working on and different technology areas and and we're trying to support as many as we can but that's that's a much longer.
So I think I would suspect with the hydrogen.
If it if the hydrogen economy really goes well, we'll pay dividends sooner than those small modular nuclear but those are the two biggest areas that we're involved with right. Now now Graham is is also supporting some of the biodiesel a sustainable aircraft fuel.
And that those are more on the the.
Process side so.
Some of the heat exchanger vacuum equipment. The grandmothers made for a long time is being used in those plants also so we're we're we're covering quite a bit of the new energy space are and I will just see what we'll see which one really who really takes off here.
Thank you Dan and any.
Any specific comments on the cryogenic projects or types of activities going on there.
Yeah. So so cryogenic is that or is it is that part of hydrogen are part of best hydrocarbon yeah. So.
There I'm using gas hydrogen gas and they're also looking at liquid hydrogen for four fuel and and transport as well as some of the.
Other carrier type fluids like like ammonia and.
So all of that is being discussed about.
In the distribution transportation of hydrogen.
Okay, well, yeah, that's that's where the cryogenic pumps come in for the liquid hydrogen.
Yeah.
Thank you very much.
Yep, good talking to you Bill.
Yes.
Thank you we have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Yeah.
Thank you for joining us today.
We continue to demonstrate progress with our plan.
And we're putting proof points on the board, we have lots of opportunity to continue to grow and diversify.
Look forward to updating you further with our second quarter.
Enjoy your day.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.