Graham Corporation

Greetings. Welcome to the Graham Corporation Second Quarter Fiscal Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Karen Howard, Investor Relations for Graham Corporation, You may begin.

Thank you, Darrell, and good morning, everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 second quarter and first half year results. You should have a copy of the news release that was distributed across the wires this morning. We also have slides associated with the commentary that we're providing here today. If you do not have the release of the slides, you can find them on the company's website at On the call with me today are Jim Lines, our President and Chief Executive Officer, and Jeff Gleick, our Chief Financial Officer. And I also want to introduce you to Alan Smith, our Vice President and General Manager of our Batavia facility. Jim will start with a strategic overview of our business and provide our outlook for the remainder of the fiscal year. Jeff will review the financial results for the period, and Alan will provide an operations overview. We will then open the lines for Q&A. As you are aware, we may make some forward-looking statements during this discussion, as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors which could cause actual results to differ materially from what is stated on the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide decks. as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sdc.gov. I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are 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 reconciliations of comparable gaps and non-gap measures in the tables accompanying today's earnings release. And with that, it's my pleasure to turn the call over to Jim to begin. Jim?

Thank you, Karen. Good morning, everyone, and we appreciate you joining our second quarter earnings call. I will begin with a strategic overview of what we are focused on. My remarks start on slide four. The key element of our strategy is to strengthen and expand predictable revenue streams. This will reduce financial performance volatility caused by large capital projects typical demand within crude oil refining and chemical end markets. Refining and chemical end markets have had historical large variation in demand for our products, and that is not expected to change in the coming years. To the contrary, We observe these markets to be more volatile today, with greater variation between cycle peaks and bottoms. Our strategy to increase participation and market share within the U.S. Navy nuclear propulsion program will provide a predictable level of revenue. Navy work typically has long-lived backlog, providing vision into a multi-year revenue projection that is predictable and not subject to large variations. The Navy strategy has been successful with current backlog for this segment at approximately $60 million. We are now on each of the three nuclear propulsion vessel programs. Participation is expanding as the types of components provided increases. Over the next 12 months, we hope to secure the supply of two new components, one for carriers and the other for one of the two submarine programs. We have executed well our naval strategy. Alan Smith and his team has executed superbly. An ongoing confirmation of our success in differentiating on execution, on-time delivery, and quality is the expanding percentage of backlog that is one sole source. All our work for the first decade of the strategy was competitively bid. We now are seeing certain procurement done with sole source bidding. Moreover, many of the orders were first-time fabrications for us of very complex weldments and material combinations. This involved considerable production R&D and the development of efficient build flow methods. Productivity and process improvement will drive fabrication efficiency gains, which will be reflected in better and more predictable margin as we move into repeat fabrications. We expect revenue during the coming few years to continue to expand and also margin quality to improve as we begin repeated fabrications. This end market is an area of M&A concentration as well. We continue to actively engage in discussions with companies serving the Department of Defense and aerospace end markets. With our current portfolio of components provided to aircraft carriers and submarines, along with new components we plan to break into, This segment without M&A is expected to have revenue between $20 and $30 million annually in the next two years. Also, we are focusing more on our installed base. Graham has a sizable global installed base and a great installation record in North America. In the last 25 years, Graham supplied equipment valued at more than $650 million that was delivered into North America. Moreover, with equipment delivered in the 1970s and 80s, we estimate that our North American installed base approaches $1 billion. Here, too, the segment is not as volatile as large capital projects. Our customers generally invest to keep their plants operating well. Also, our thesis continues to play out that certain regions, such as US and Canada, will leverage their facilities to get more from them before investing in large new capacity. Regions with dense installation populations are the U.S. Gulf Coast, mid-Atlantic states, and the West Coast plus Alberta. Customers need our knowledge and expertise to identify performance risk and what may be limiting throughput or impacting product quality. We are localizing performance improvement engineers in key regions to focus on our installed base and to assist customers. This is typically high quality margin work and is not highly cyclical. We are currently building out a U.S. Gulf Coast performance improvement engineering team. Two engineers were placed there in 2018 and we expect to add two more in the next six months. These individuals focus on our customers' plans and our installed base which will be in addition to the historic focus we have had and will continue to have on EPCs and OEMs. M&A focus is also here to add products and or services. Currently, 30 to 40% of revenue is derived in some way from our installed base. When taken together, the Navy and the predictable installed base revenue segments are anticipated to approach $50 million per year in revenue in the coming two years. Upon achieving that level of predictable revenue, it will dampen the impact of our highly cyclical crude oil refining and chemical large project work. Also, trade policy and tariffs on certain materials have affected competitiveness in international markets, and in certain instances, it has impacted us in our domestic markets as well. We are also observing customer acceptance of low-cost regions for fabrication of critical components, such as our ejector systems or steam surface condensers. In response, and actually to reposition our competitiveness and to expand market share, the global fabrication supply chain is being more aggressively used by us. In the last 18 months, more than $35 million in new orders were secured by executing differently to take share where previously we were unsuccessful due to cost. Four of the projects were for international crude oil refining projects, that will add to our installed base, which will ultimately drive follow-on revenue in coming decades from revamps, retrofits, and spare parts. In the past, we approached using the global fabrication supply chain in a limited or targeted manner. Now we are proactive and aggressively attempting to change participation, create broader execution scale, and expand market share. A key element is quality control and IP protection. We are building out a supply chain management and quality surveillance organization in support of this strategy. Early successes cited just a moment ago are validating we have a good formula for success. Importantly, the unique or differentiating elements of Graham's IP will be closely controlled as we execute this strategy. I am now moving on to slide five. The success of our focus on the installed base is highlighted by this slide. Comparing the eight-year periods between 2004 to 2011 to those of 2012 to 2019, the percentage of commercial revenue derived from the installed base expanded from 28% to 41% of commercial revenue. This has come from stronger and more consistent level of spare parts revenue and also end-users investing in revamps or retrofits to improve operational reliability or gain incremental throughput capacity. When the original equipment is grams, a retrofit or revamp opportunity has a high likelihood of gram getting in order with strong margin quality. Importantly, and as shown in the second set of slides, gross profit derived from the installed base during these two comparison periods expanded from 44% to 61% of total commercial gross profit being derived from the installed base. Crude oil refining, the picture on the top right, installations are absolutely terrific for follow-on revenue after initial sale. This then market invests in revamps and retrofits, and also due to the harsh operating environment in an oil refinery, there are strong spare parts follow-on revenue. Surface condensers, the lower right, offer less replacement parts potential but do drive in-kind complete replacements after 20 to 30 years of operating life in many cases. Again, if the replacement condenser is for a gram original sale, there's a good likelihood of a high quality margin replacement order for us. Moving on to slide six. To confirm full year guidance, Revenue is expected to be between 100 and $105 million. This is predicated on securing a quick turn Navy order in this current quarter that we are anticipating. Gross margin is expected to be between 24 and 26%. SG&A spending will be between 17 and $18 million. Our effective tax rate is approximately 20%. I will now pass it over to Jeff. for a review of financial results. Jeff?