Gabelli & Co. 22 nd Annual Pump, Valve & Motor Symposium - - PowerPoint PPT Presentation

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Gabelli & Co. 22 nd Annual Pump, Valve & Motor Symposium - - PowerPoint PPT Presentation

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N Y S E A M E X : G H M Gabelli & Co. 22 nd Annual Pump, Valve & Motor Symposium February 9, 2012 Jeffrey F. Glajch Chief Financial Officer Executing our Strategy Driving Sustainable Growth Diversifying

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SLIDE 1

N Y S E A M E X: G H M

Executing our Strategy ● Driving Sustainable Growth

Diversifying Improving Expanding

N Y S E A M E X : G H M

Gabelli & Co. 22nd Annual Pump, Valve & Motor Symposium

February 9, 2012

Jeffrey F. Glajch

Chief Financial Officer

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SLIDE 2

2

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by words such as “expects,” “estimates,” “projects,” “anticipates,” “believes,” “could,” and other similar words. All statements addressing operating performance, events, or developments that Graham Corporation expects

  • r anticipates will occur in the future, including but not limited to, statements relating to anticipated revenue,

the timing of conversion of backlog to sales, profit margins, foreign sales operations, its strategy to build its global sales representative channel, the effectiveness of automation in expanding its engineering capacity, its ability to improve cost competitiveness, customer preferences, changes in market conditions in the industries in which it operates, changes in general economic conditions and customer behavior and its acquisition strategy are forward-looking statements. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties. These risk factors and uncertainties are more fully described in Graham Corporation's most recent Annual and Quarterly Reports filed with the Securities and Exchange Commission, including under the heading entitled “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of Graham Corporation's underlying assumptions prove incorrect, actual results may vary materially from those currently anticipated. In addition, undue reliance should not be placed on Graham Corporation's forward-looking statements. Except as required by law, Graham Corporation disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this presentation.

Safe Harbor Statement

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SLIDE 3

Recent Price $21.93 Common shares outstanding 9.9 million Market capitalization $217.1 million 52-week price range $26.30 – $14.36

  • Avg. daily trading volume (3 mos.)

66,648 Ownership: ►Institutional 67.9% ►Insider 4.0% ►ESOP 3.2% ►Employee Stock Purchase Plan (ESPP) 40% Participation ►Annual dividend $0.08

Note: Market data as of February 2, 2012; ownership as of most recent filing

3

Graham Corporation

Founded: 1936; IPO: 1968 NYSE Amex: GHM

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SLIDE 4

Executing our Strategy ● Driving Sustainable Growth

Diversifying Improving Expanding

Our Vision

4

Our vision is to be the world leader in the design and manufacture of

ENGINEERED-TO-ORDER (ETO)

products for the

ENERGY MARKETS

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SLIDE 5

5

Condensers 20% Ejectors 29% Aftermarket 13%

Heat Exchangers 7%

Pumps 13%

Other 20% Refining 38% Chemical Processing 13% Power 29%

Q3 FY2012 TTM Sales

$108.9 million

Nuclear 18%

ETO Products and Energy Markets

Products Markets

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SLIDE 6

($ in millions) International Revenue Domestic Revenue FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY 2012E $74.2

$62.2 $101.1 $86.4 $65.8 $55.2

55% 55% 37% 46% 50% 49% * Midpoint of guidance provided on January 27, 2012 ($105-$108 million)

12-Month Revenue

Diversification Drives Recovery

Markets and Geography

$106.5*

FY 2006 – FY 2009 22.4% CAGR Driven by oil refining and petrochemical markets FY 2010 – FY 2012E 30.8% CAGR Oil refining, petrochemicals, Navy and power markets driving growth

Revenue by Geographic Market

Asia 15% Middle East 18% Other 15% U.S. 52%

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SLIDE 7

Growth Drivers

Oil Refining Industry

  • Accelerating

demand in emerging markets

  • Aging

infrastructure in developed markets

  • Feedstock

changes

  • Expanding

addressable

  • pportunities

Chemical and Hydrocarbon Processing

  • Middle class

expansion in emerging markets

  • Growing world

population

  • Expanding

addressable

  • pportunities
  • Edible oil/oleo-

chemicals

  • Industrial gases

Power Generation

  • Aging nuclear

power infrastructure

  • New power

plants

  • International

nuclear power expansion

  • Alternative

energy

  • Biomass
  • Geothermal
  • Solar

Power for Defense Industry

  • Naval nuclear

propulsion program

  • Submarine

fleet

  • Aircraft

carriers

7

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SLIDE 8

Differentiators

  • Specialized manufacturing

capability

  • Stringent, highly-controlled

quality processes

  • Low-volume / high-mix

business model

  • Complex order execution
  • Selling model
  • Expanding opportunities for

ETO products in critical applications

  • Value-based purchasing

decisions

  • High cost of failure
  • Limited competition
  • Long-term growth trend

8

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SLIDE 9

Year 1 Year 2 Year 3 Year 4 Year 5

9

Year 1 Year 2

Graham Competitive Advantage: Early Involvement

Graham establishes competitive advantage during first 24 months… Understanding pipeline, developing design options, identifying decision makers, understanding timing, creating strong relationships to…

Gain advantage, optimize margin and win business

$150 million pipeline consistent with past few years

Major Project Cycle

Concept FEED* EPC Bid Purchase Construction

* front end engineering design

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SLIDE 10

Superior quality processes are barrier to entry

  • Custom critical equipment fabricator
  • Nuclear-quality raw material supplier
  • N, NPT, NS, U, and R Stamps and Certificates of Authorizations

Opportunities

  • Increase market penetration with existing nuclear power plants
  • Integrate engineering and design expertise with certified

manufacturing process

  • New power plant designs: 4-6 new plants expected by 2018*
  • Significant addressable opportunities per plant

* World Nuclear Association 2009 Report

10

Energy Steel Acquisition (Dec. 2010)

Nuclear Power Focused

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SLIDE 11

DIVERSIF Y IN G IMP ROVING E X P A N D I N G

Executing our Strategy ● Driving Sustainable Growth

Financial Performance

11

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SLIDE 12

$40.3 $41.0 $46.4 $46.8* $51.8 $48.9 $34.9 $40.7 $41.1 $44.5 $37.5 $41.3 $55.2 $65.8 $86.4 $101.1 $62.2 $74.2 $106.5**

FY1993 FY1994 FY1995 FY1996 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E

EBITDA Margin

Raised the Floor on Margins

12

* 1997 was a three-month transition year and is excluded from this comparison; 1996 reflects a 12-month period ** Midpoint of guidance provided on January 27, 2011 ($105-$108) *** $19.3 million attributable to Energy Steel Note: See supplemental slides for EBITDA reconciliation and other important disclaimers regarding EBITDA.

3.6% 4.5% 7.7% 10.1% 11.1% 7.0% 3.3% 1.6% (1.3)% (0.7)% (3.3)% 1.4% 11.3% 10.5% 25.4% 27.0% 17.9% 15.0% ($ in millions)

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SLIDE 13

13

Profitable Through Downturn

* Excludes $0.5 million, or $0.05 per diluted share, in acquisition costs ** Includes R&D tax credit of $0.16 Note: All earnings per share amounts adjusted for stock splits

Net Income

Earnings per Share

YTD FY2012

$5.8 $15.0 $17.5 $6.4 $6.4

FY07 FY08 FY09 FY10 FY11

$1.71 $1.49 $0.58** $0.64 $0.64*

$10.1

$1.01

($ in millions)

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SLIDE 14

$19.2 $25.9 $25.0 $33.6 $24.3

Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12

12.1% 17.1% 20.0% 26.3% 13.0%

Q3 FY11** Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12

$0.13 $0.27 $0.30 $0.55 $0.16

Q3 FY11* Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12

EPS Revenue EBITDA Margin*

($ in millions)

Q3 FY2012: Solid Start

14

* See supplemental slides for EBITDA reconciliation and other important disclaimers regarding EBITDA. ** Q3 FY11 excludes acquisition costs

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SLIDE 15

15

Strong Cash Position

($ in millions)

Cash, Cash Equivalents and Investments

Cash available for acquisitions and organic growth

$36.8 $46.2 $58.6* $43.1 $44.5

3/31/08 3/31/09 3/31/10 3/31/11 12/31/11 Energy Steel: all cash $18 million acquisition

No bank debt at 12/31/11

* Excludes $16 million in unusually high upfront and near-term customer advances utilized to lock in raw material costs

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SLIDE 16

Executing our Strategy ● Driving Sustainable Growth

Diversifying Improving Expanding

($ in millions)

16

Solid Core Backlog Strength

$91.1 $72.6 $94.3

Reflect major multi-year projects, including U.S. Navy and major Middle East refineries

Orders Backlog

$107.1 $73.9 $108.3 $63.2 $64.4

03/31/08 3/31/09 3/31/10 3/31/11 12/31/11

$75.7 $48.3

$44.3 $50.1 $48.5 $50.0 $41.0 $24.1 03/31/08 3/31/09 3/31/10 3/31/11 12/31/11

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SLIDE 17

DIVERSIF Y IN G IMP ROVING E X P A N D I N G

Executing our Strategy ● Driving Sustainable Growth

Strategy & Outlook

17

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SLIDE 18

Executing our Strategy ● Driving Sustainable Growth

Diversifying Improving Expanding

Strategic Priorities

18

  • Advance market share in oil refining and petrochemical markets
  • Gain share in Asia and South America
  • Maintain strong position in Middle East
  • Continue to dominate North American market
  • Expand Energy Steel capabilities to increase sales and profit
  • Exploit synergies of Graham engineering and fabrication capabilities
  • Aggressively pursue sales to U.S. nuclear utilities
  • Capitalize on opportunities in new construction
  • Continue to develop Naval Nuclear Propulsion Program sales

channel

  • Continue to evaluate acquisitions
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SLIDE 19

Acquisition Strategy: Three Elements

19

Geographic Expansion

  • Asia, especially China
  • Middle East
  • South America

Product Diversification

  • Specialty heat exchangers
  • Process vacuum equipment
  • Packaged systems
  • Process vessels
  • Environmental

Market Diversification

  • Power
  • Nuclear
  • Alternative energy
  • Government / DOD projects
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SLIDE 20

Expected long-term energy demand growth resulting in capacity expansion Record, high-quality backlog Worldwide brand recognition Sales model based on early engineering involvement Expanding addressable market opportunities Strong balance sheet Acquisition opportunities Results-oriented management team

20

Investment Highlights

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SLIDE 21

FY 2012 EXPECTATIONS

Revenue $105 to $108 million Gross margin 32% to 33% SG&A 15% of sales Organic growth 25% to 30% Varied order rates by quarter

21

FY 2012 Expectations

Effective Tax Rate 34%

Guidance provided as of January 27, 2012

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SLIDE 22

DIVERSIF Y IN G IMP ROVING E X P A N D I N G

Executing our Strategy ● Driving Sustainable Growth

Supplemental Information

22

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SLIDE 23

EBITDA Reconciliation

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* Data from FY1993 though FY2005 excludes discontinued operations and is unaudited; 1997 was a three-month transition year and is excluded from this comparison; 1996 reflects a 12-month period. ** Graham believes that when used in conjunction with GAAP measures, EBITDA, which is a non-GAAP measure, assists in the understanding of Graham’s operating performance.

Fiscal Years Ended March 31 2011 2010 2009 2008 2007 2006 GAAP operating profit 8,775 $ 10,042 $ 26,328 $ 21,088 $ 6,013 $ 5,454 $ Acquisition costs 676 $

  • $
  • $
  • $
  • $
  • $

Depreciation & amortization 1,648 $ 1,119 $ 1,005 $ 885 $ 887 $ 793 $ EBITDA** 11,099 $ 11,161 $ 27,333 $ 21,973 $ 6,900 $ 6,247 $ 2005* 2004* 2003* 2002* 2001* 2000* GAAP operating profit (206) $ (1,969) $ (1,028) $ (1,296) $ (124) $ 332 $ Acquisition costs

  • $
  • $
  • $
  • $
  • $
  • $

Depreciation & amortization 780 $ 745 $ 704 $ 774 $ 776 $ 827 $ EBITDA** 574 $ (1,224) $ (324) $ (522) $ 652 $ 1,159 $ 1999* 1998* 1996* 1995* 1994* 1993* GAAP operating profit 2,591 $ 4,932 $ 3,995 $ 2,818 $ 1,075 $ 662 $ Acquisition costs

  • $
  • $
  • $
  • $
  • $
  • $

Depreciation & amortization 820 $ 804 $ 706 $ 732 $ 771 $ 807 $ EBITDA** 3,411 $ 5,736 $ 4,701 $ 3,550 $ 1,846 $ 1,469 $ ($ in millions)

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SLIDE 24

EBITDA Quarterly Reconciliation

24

Graham believes that when used in conjunction with GAAP measures, EBITDA, which is a non-GAAP measure, assists in the understanding of Graham’s operating performance.

($ in millions) Quarter Ended: 12/31/2011 9/30/2011 6/30/2011 3/31/2011 12/31/2010 9/30/2010 Net Income $1.64 $5.47 $3.02 $2.68 $0.76 $1.56 + Acquisition transaction costs $0.00 $0.00 $0.00 $0.00 $0.67 $0.00 + Interest Expense $0.06 $0.18 $0.02 $0.06 $0.01 $0.01

  • Interest Income

$(0.01) $(0.01) $(0.02) $(0.03) $(0.01) $(0.02) + Income Tax Provision $0.96 $2.77 $1.48 $1.30 $0.40 $0.78 + Depreciation & Amortization $0.52 $0.42 $0.51 $0.64 $0.43 $0.29 EBITDA $3.17 $8.83 $5.01 $4.65 $2.26 $2.62

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SLIDE 25

Chemical / Petrochemical Processing 13% Oil Refining 38% Other 20% Power 29%

Strength Through Diversification

Asia (China)

  • Refining, petrochemical,

coal-to-liquid, fertilizer

Middle East

  • Refining, petrochemical

South America

  • Refining, petrochemical

United States

  • Nuclear power, renewable

energy and refining

  • Defense (Navy)

Selling into the

  • pportunities

25

Revenue by Geographic Market: 3Q FY2012 TTM Revenue by Industry: 3Q FY2012 TTM

Past: Primarily Oil Refining & Petrochem Now: Four Distinct Markets

Asia 15% Middle East 18% Other 15% U.S. 52%

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SLIDE 26

Geographic Expansion and/or Diversify Products/Markets Engineered-to-

  • rder products

for Energy Industry Strong management team / quality culture Return exceeds cost

  • f capital

Up to $60 million in revenue

ACQUISITION CRITERIA

26

Acquisition Criteria

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SLIDE 27

Acquisition Terms

  • $18 million, all cash, no debt
  • $2 million performance contingency for CY2011 & 2012
  • Acquisition costs expensed: $0.05/share impact to Q3 2011

Energy Steel Financials

  • Revenue of ~$18-$20 million
  • Margins similar to Graham: GM: 30%-35+% OM: 13%-18+%
  • Backlog of $12.8 million at 12/31/11

27

Energy Steel Acquisition (Dec. 2010)

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SLIDE 28

Use disciplined product pricing and order selection process Apply continuous improvement and targeted capex to gain capacity and reduce lead time Employ flexible cost model to accommodate cyclical demand Align manager and employee compensation with profit and cash management objectives Focus on cash management and operating working capital

Dramatic improvement in financial results, both at top and bottom of cycle Strong, debt free balance sheet A business poised for

  • rganic and

inorganic long term growth

28

Operating Performance Principles

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SLIDE 29

STRATEGIC ACTIONS TO DRIVE GROWTH

Expand market opportunities: Create larger addressable market

  • Win in rapid growth economies
  • Advance Naval Nuclear Propulsion Program (NNPP) opportunities
  • Expand nuclear power involvement
  • Capitalize on renewable energy projects

Expand variable cost model

  • Broaden subcontractor network: Increase flexibility with shorter supply chain
  • Qualify additional North American and international subcontractors

Strengthen core business for margin retention

  • Shortened lead times
  • Reduced errors
  • IT improvements in production and office
  • Continuous improvement process (CIP)

Investments in personnel to expand capability and capacity

29

Strategic Actions to Drive Growth

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SLIDE 30

30

EXPANDED CUSTOMER BASE

End Users (Exxon Mobil, Chevron etc.)

  • Original Equipment Manufacturers

(Dresser Rand, GE etc.)

  • EPC Contractors (Jacobs, Fluor etc.)
  • With Energy Steel Acquisition: 104

Nuclear Power Plants in U.S.

Diverse Markets & Expanded Customers

OIL REFINING

  • Conventional crude oil
  • Oil sands
  • Extra-heavy crude oil
  • Sour crude
  • Lube oil

CHEMICAL PROCESSING

  • Ethylene
  • Ammonia
  • Nitrogen
  • Methanol
  • Styrene
  • Polystyrene
  • Ethylene glycol
  • Detergent alcohols
  • Plastics, resins, fibers
  • Coal-to-liquids (CTL)
  • Gas-to-liquids (GTL)
  • Urea / fertilizer
  • Cogeneration
  • Waste-to-energy
  • Heat, power and light
  • Geothermal
  • Nuclear
  • In situ

OTHER APPLICATIONS

  • Edible oil / Oleochemicals
  • Biofuels:

Ethanol Biodiesel

  • HVAC
  • Industrial gases
  • Cryogenic

POWER GENERATION

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SLIDE 31

31

North American Competition

Market Competitors

Refining vacuum distillation Gardner Denver Chemicals/Petrochemicals Croll Reynolds; Schutte Koerting; Gardner Denver Turbomachinery OEM – refining, petrochemical Ambassador; SPX (Yuba); Krueger Turbomachinery OEM – power and power producer Holtec; Babcock Thermal Engineering; SPX (Yuba); Krueger HVAC Alfa Laval; APV; ITT; Ambassador Naval Nuclear Propulsion Program Joseph Oats; DCFAB Nuclear Dubose; Consolidated; Tioga; Nova; Maxim

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SLIDE 32

32

International Competition

Market Competitors

Refining vacuum distillation Gardner Denver; GEA Jet Pump; Korting Hannover; Edwards Chemicals/Petrochemicals Croll Reynolds; Schutte Koerting; Gardner Denver; GEA Jet Pump; Korting Hannover; Edwards Turbomachinery OEM – refining, petrochemical Donghwa-Entec; Bumwoo; Oiltechnik; Krueger; various local fabricators Turbomachinery OEM – power and power producer Holtec; Babcock Thermal Engineering; SPX (Yuba); Krueger

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SLIDE 33

Improved Operating Performance Throughout Cycle

Selling Process

  • Re-branding
  • Adding value
  • VacAdemics
  • VacWorks
  • Technical support
  • Redefining profit metrics
  • Decision rights &

disciplined approach

  • Gain market share
  • Not every order is a good order

Operational Excellence

  • Capital plan
  • Graham production system
  • Focus on lead time reduction
  • First time, every time
  • Training
  • Safety culture
  • Continuous improvement
  • Creating scale
  • IT
  • Outsourcing
  • Variable costs

People Process

  • Accountability
  • Policy deployment
  • Performance management
  • Change agents:
  • IT, HR, OPS &

executive

  • Alignment
  • Engagement

Sustainability

  • Leadership commitment
  • Long-term vision
  • Balance financial results with

investing in the future

  • Graham management system
  • Succession planning

33

Catalysts Changing Financial Performance

A Company-wide Approach to a Better Graham Today and in the Future

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SLIDE 34

An 11 MW turbine-generator set at a geothermal power producing plant in Papua New Guinea.

PRODUCTS: DIRECT CONTACT CONDENSER

34

Products: Direct Contact Condenser

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SLIDE 35

Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power. 35

Products: Surface Condenser

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SLIDE 36

VITAL PROCESSING COMPONENTS

CONDENSERS AND EJECTORS

An ejector system lowers the pressure in the distillation column to allow crude oil to boil at a lower

  • temperature. This allows for more

efficient and cost-effective separation of crude oil into valuable products, such as diesel, gas oils, kerosene, and other fuels. A condenser supports a steam turbine and enables the conversion

  • f maximum energy in

high pressure steam into power.

REFINERY EJECTOR SYSTEM CNOOC HUIZHOU REFINERY–CHINA 240,000 BBL/DAY REFINERY

Vital Processing Components

36

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SLIDE 37

Growth Options 1. Increase ability to serve existing U.S. nuclear power plants 2. Capitalize on planned U.S. new nuclear power plant construction 3. Expand company to access and service international nuclear power plants Products 1. Heat exchangers 2. Vessels 3. Piping 4. Systems 5. Raw materials 6. Vacuum products

37

Nuclear Sector Growth Opportunities

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SLIDE 38

NUCLEAR RENAISSANCE

38

Operating = Connected to grid Under Construction = First concrete for reactor poured, or major refurbishment under way Planned = Approvals, funding or major commitment in place, mostly expected in operation within 8-10 years Proposed = Specific program or site proposals, expected operation mostly within 15 years

Source: World Nuclear Association, as of January 1, 2012

Nuclear Renaissance

Future Expansion: This data represents a more than 50% increase in planned and proposed reactors since the 2007 WNA report

Country Operating Under Construction Planned Proposed USA 104 1 7 27 France 58 1 1 1 Japan 51 2 10 5 Other 62 8 41 91 China 14 26 51 120 Russia 33 9 14 30 South Korea 21 5 6 Germany 9 UK 18 4 9 Ukraine 15 2 11 Canada 17 3 3 3 Sweden 10 India 20 6 17 40 South Africa 2 6 Total 434 61 156 343

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SLIDE 39

N Y S E A M E X: G H M

Executing our Strategy ● Driving Sustainable Growth

Diversifying Improving Expanding

N Y S E A M E X : G H M

Gabelli & Co. 22nd Annual Pump, Valve & Motor Symposium

February 9, 2012

Jeffrey F. Glajch

Chief Financial Officer