Graham Corporation

Greetings and welcome to the Graham Corporation third quarter fiscal year 2020 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Howard, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Doug, and good morning, everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 third quarter and year-to-date 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 or the slides, you can find them on the company's website at www.gram-msg.com. On the call with me today are Jim Lines, our President and Chief Executive Officer, Jeff Gleick, our Chief Financial Officer, and Aaron 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 Aaron 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 deck, 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.fcc.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 GAAP to non-GAAP 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. We appreciate you joining our third quarter earnings call. I will begin with a strategic overview to highlight the focus of management and providing commentary regarding progress during the quarter. Jeff will provide a deeper review of financial results, and Alan Smith, Vice President and General Manager, will provide a review of operational performance. Please turn to slide four. An important strategy for us is to reduce volatility of our financial results by strengthening and expanding predictable revenue streams. Energy end markets will remain volatile and periods between peaks and troughs appear to have shortened. The Naval Nuclear Propulsion Program will provide predictable revenue that leverages our key assets of engineering, complex project management, quality processes, and large welded fabrication expertise. I like the naval work for several reasons, one being it is long-lived backlog providing vision into a multi-year base loading of our fabrication assets. Second is the competition is limited and international companies are restricted from bidding in most cases. Lastly, engineering, program management, quality control, and our operating model required for this work result in high entry barriers. Ultimately, customers in this market value what we do exceptionally well. The Navy strategy has been successful with current backlog for this segment at approximately $60 million. Our naval strategy leadership has us participating in three different nuclear propelled vessel programs, two different submarine classes, and an aircraft carrier program. We want to produce different and more equipment for these programs. Over the next 12 months, we hope to secure the supply of two new components. One is for a carrier program, and the other for one of the two submarine programs. Demonstrable evidence of our success in the naval program, driven by Alan Smith and his team, is the increasing 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 initial orders were first-time fabrications of very complex weldments and material combinations. Production R&D and developing efficient build flow methods along with production jigs and fixtures are needed with first-time fabrications. 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 did add another order to backlog during the third quarter that was in excess of $5 million for the Naval Nuclear Propulsion Program. M&A focus is in the defense and aerospace end markets. We continue to actively engage in discussions with companies serving Department of Defense. Our current portfolio of components provided to aircraft carriers and submarines, along with new components we plan to break into, with this as our view, without M&A, we expect to have revenue between $20 to $30 million on an annual basis in the near future. We are seeing M&A deals within defense end markets being both negotiated and auction processes. Valuation multiples vary greatly, where multiples below 10 times next 12 months EBITDA seem to be non-existent unless the business is broken. And above 15 times isn't uncommon. Finding the right fit where growth and combination benefits are assured is crucial. We will maintain our discipline for strategic fit, value creation, and financial return metrics. Another more predictable revenue stream is derived from our installed base. From the installed base, revenue takes two forms. One is conventional replacement parts and in-kind replacement equipment. The other is revamp and retrofit. Graham enjoys a sizable global installed base with 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 we delivered in the 1970s and the 80s, we estimate that our North American installed base approaches $1 billion. Here, too, the segment is not as volatile as large capital projects in the energy markets, with parts and replacement equipment having modest volatility, while revamp and retrofit is less variable than capital project investment. Our customers generally invest to keep their plants operating well. Also, our thesis appears to be correct that certain regions such as in the U.S. and Canada, they will leverage their facilities to get more from them before investing in new capacity. Regions with dense installation populations are the U.S. Gulf Coast, the 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 our customers. We doubled the size of our performance improvement technical service organization in the past two years. We are currently building out our U.S. Gulf Coast performance improvement engineering team. Two engineers were placed in the territory in 2018, and we expect to add two more in the next six months. These individuals focus on our customers' plants and our installed base, which will be in addition to our historic focus on EPCs and OEMs. Typically, I should highlight, 30 to 40% of revenue is derived in some way from our installed base. Fiscal 2020, to date has greater than 35% of new orders derived from our installed base. Excuse me. M&A deal generation is centered also on the installed base to add products and or services. Deal multiples in this vertical aren't as rich as defense multiples. However, we're finding scalability and growth for these types of companies to present some challenges. When taken together, the naval strategy and our predictable base strategy They're estimated to, in combination, 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 large crude oil refining and chemical 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. We are also observing customer acceptance of low cost regions for fabrication of critical components, such as our ejector systems and 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 increase market 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 the 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. Three critical facets of this strategy to expand market share are controlling quality, achieving predictable results, and protecting our IP. We are building out our supply chain management and quality surveillance organization in support of this strategy. Early successes cited a moment ago are validating we have a good formula for success. Bringing on new fabrication partners can lead to missing financial projections for a given order. Thus far, planned and realized margins have not varied too greatly. The unique or differentiating elements of Graham's IP will be closely controlled as we execute the strategy. We are not releasing or disclosing our differentiating capabilities. That will remain closely noted. We exercised the strategy approximately 20 times since 2006, and we have safeguarded our critical IP along with realizing satisfactory financial results from those orders. Since launching this strategy more aggressively, we secured six large orders during the last 18 months. When taken together, expanding predictable revenue streams, repositioning execution strategy to take more market share in underserved segments, and M&A to add new revenue, this will result in strengthening shareholder returns, more consistent financial performance, and an increase in cash generation to reinvest into the business. I will now refer to slide five. I am pleased with our strategy to change execution to shift competitiveness within markets where our share had been low or where we chose in the past not to participate. Since initiating the strategy, as I said a moment ago, over $35 million has been secured including an order in the last quarter. In that most recent case, the customer and the end user are both new to Graham. Fabricator and partner selection is critical. We have a proven process within China. The success of that is being deployed into other Asian countries and certain countries in Europe. Quality control, on-time delivery, cost efficiency are important performance measures for this strategy. I am pleased with how well we are executing the strategy and achieving realized margins within the market price for this segment of our end markets. By developing global fabrication partners, it provides tremendous execution capability with a variable cost, so we aren't adversely changing our fixed costs. This work, due to sharing margin with our partner, can look different at the gross margin line, but blends in fine at the operating margin line. Importantly, We also reach into non-traditional markets for gram, such as emerging markets for hydrogen fuel delivery systems, natural gas engines, or natural gas delivery systems, applications involving super critical fluids, and applications in cryogenic services. In certain applications, gram products have high differentiating barriers that limit competition. Here to date, There were orders within our short cycle products that were supporting OEMs or end users for natural gas delivery systems, supercritical carbon dioxide extraction, hydrogen fuel delivery systems, and so on. These are smaller dollar value orders that fall into our short cycle segment. However, in the long run, they can become more frequent and more predictable, thereby further expanding predictable revenue streams. I will now move on to slide six. We confirmed full year revenue guidance that will be between $100 and $105 million. This revenue guidance is predicated on executing a quick turn Navy order in the fourth quarter that is currently in backlog. We feel confident that we will be able to do that. Secondly, Jeff and I were on a conference call this morning with our managing director in China. We have some large work being done in the fourth quarter. in China that's being recognized on a completed contract basis, not percent complete basis. We've been advised this morning that the local government authorities are prohibiting workers to go into the factory for this period of time. We'll have to monitor the progress of that. This is happening in real time, and it may affect our ability to land within that guidance projection. We just learned that this morning with Jeff and I were on a call. Gross margin is expected to be between 21% and 22%. and this has been adjusted downward from previous guidance. SG&A spending will be between $17 and $17.5 million. Our effective tax rate is approximately 20%. I would now like to pass it over to Jeff for him to review the financial results. Jeff?