Graham Corporation

Good morning, everyone, and thank you for joining us this morning for Graham Corporation's fourth quarter fiscal year 2022 earnings results conference call combined with our strategy briefing webinar. We're really happy that you can be joining us here today. You should have the results, our 2022 financial results, and the new strategic plan press releases that were released over the wires last night. You should also have the slides that accompany our conversation today that were pushed out earlier this morning. All of these materials, if you don't have them, can be found on our website at GrahamCorp.com. Let me tell you a little bit about the format for this morning. We're first going to start by reviewing our fourth quarter fiscal year 2022 results. Then we will go to a briefing on our strategy. after which we will open it up for Q&A. Now, throughout the webinar, you can actually submit any questions that you might have through the Q&A chat platform on the webinar portal. And alternatively, if you would like to ask your questions live on the last slide that I'm not going to show until I get there, but you have the slides, we do have a phone number that you can dial into. And those questions then will be handled very similarly to a way a normal conference call is done. So I hope you enjoy this platform, but we felt that for the strategy briefing, it was important that it was a more formalized platform where you could see us presenting the materials. And who is presenting today? Well, let me start by introducing Dan Thorne, our president and CEO. Dan was appointed as president and CEO in just September of 2021. And I also have joining us, Chris Thome, our new CFO, who just recently joined us in April. So our new executive management team is going to be presenting our new strategy. As you do know, we may make some forward-looking statements during the presentation as well as during the Q&A, if I can pull up the Safe Harbor slides. 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 releases, as well as with other documents filed with Securities and Exchange Commission. All of these documents can be found on our website or at sec.gov. Also during today's call, we will discuss some non-GAAP financial measures. We believe these 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 reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany our releases and the slides for your information. With that, it is my pleasure to turn the call over to Dan to begin. Dan?

Thank you, Debbie. And good morning, everybody. Thanks for joining us today. I'm eager to tell you about both our results and our strategy as we have been working hard to build better companies to deliver superior performance. We'll start with an overview of the fourth quarter. Overall, we are encouraged by our results. The improvements we have been making to stabilize our Batavia operations and Barbara Nichols continues to perform above expectations. For the quarter, we met our revised guidance with sales of $39.7 million and adjusted EBITDA of $400,000. For the year, sales were 122.8 million and adjusted EBITDA was a $5 million loss. Barbara Nichols and our Graham commercial aftermarket business continued to perform well and made a positive contribution to both our top and bottom lines. As a result of the Barbara Nichols acquisition, we ended the year with over half of our fiscal 2022 orders coming from defense and space, with backlog over 80% in defense and space as well. This backlog will help us mitigate the cyclicality associated with our energy and chemical business. For gram manufacturing in Batavia, we saw Navy first article overruns continuing in the fourth quarter, along with supply chain delays in our commercial business. In the third quarter earnings call, I talked about our commitment to meet critical Navy milestones. I'm happy to report we have made good progress there and we'll give you more detail on the next slide. Let's move to the next slide. Here I'd like to review the corrective actions and improvements we've made over the last nine months. As we discussed in February, we got behind on our Navy programs and took several actions to catch up. In the fourth quarter of fiscal 2021, about a year ago, we started to reassign our commercial welders to Navy projects. You see that in the figure that shows actual labor increasing and deficits starting to flatten out. In the second quarter of fiscal 2022, we started to bring in contract welders to assist on Navy programs. In the third quarter of fiscal 2022, we brought in more contract welders and graduated our first class of welders from our arc and flame program. As you can see in the graph, actual weld hours started to exceed planned weld hours in the second quarter of FY22, and our deficit really started to decrease. As of May, we are now on schedule. During this time, we also restructured our Navy organization, scrubbed project plans and budgets, and accelerated process documentation and optimization. We have a new director of Navy operations that started in February, and he has had a very positive impact already through daily planning, process improvement, and employee engagement. We have also hired multiple supervisors to help our production team resolve questions quickly and keep the work flowing. During the quarter, we added two board members with defense experience. Carrie and Troy have made valuable contributions already, and we're happy to have them as part of our team. On an ongoing basis, we have implemented weekly project reporting with management to ensure we are on track, understand our budgets, and are addressing roadblocks in executing our plan. Additionally, we are documenting and optimizing our build processes to ensure efficient execution going forward. At the end of May, Graham shipped a first article condenser for our U.S. Navy customer. Our customer was very happy and appreciative of all our efforts and investments. Even better, our employee base was excited to see five years of effort culminate with a very massive shipment that will help protect our nation for decades to come. As we move forward, we expect continued growth in the Navy sector. and stronger margins. We are working on operational efficiencies and better pricing that will enable this improvement. With that, I'll turn it over to Chris Thome to review our numbers and outlook.

Chris. Thank you, Dan. And good morning, everyone. It's a pleasure to be speaking to you today as the new CFO of Grant. This is an exciting time for Graham, and I look forward to meeting many of you in the future as we embark on this new strategy to build better companies to deliver superior performance. Since joining the company in April, I spent most of my time meeting the team, learning about the business, and beginning to put processes in place that will improve information flow and accountability. I can tell you that I've been pleasantly surprised that many of these initiatives were already underway. and gaining momentum. With that, let's review our results for the fourth quarter and full year, as well as our outlook for fiscal 2023. On this slide, you can see our fourth quarter performance, which shows modest sequential improvement. As Dan mentioned, our fourth quarter results were in line with our expectations. Sales were 39.7 million, up 55% over the last year's fourth quarter. Barbara Nichols contributed $15.9 million of this increase, and this, along with strong commercial and aftermarket sales, helped to offset weaker sales from our legacy refining, chemical, and petrochemical businesses. With the addition of Barbara Nichols, 47% of our sales during the quarter were to the defense industry, as well as 6%, or $2.2 million, to the space industry. In the prior year fourth quarter, defense comprised only 26% of total sales, and we had no revenue from the space industry. Our Batavia operations continued to be impacted during the quarter, but to a lesser degree than in the third quarter, due to the higher costs relating to material labor overruns for First Article Navy projects. Sequentially, gross margin improved 8.7 percentage points, as we advance these projects, improve processes, and reduce related costs. I would again like to point out that we have recently delivered the first condenser for our critical Navy submarine program, which was the source of a significant portion of the losses incurred in fiscal 2022. I am pleased to report that this condenser was delivered on schedule, which was viewed very favorably by our customer. thus validating the strategic decisions made and resources invested over the last nine months. I should also mention that the remaining first Article Navy projects are on schedule and are expected to ship throughout 2023. Selling general and administrative expenses in the fourth quarter of fiscal 2022 were $6.1 million, up $1.7 million over the prior year period. Barbara Nichols added 1.7 million in incremental SG&A during the quarter, including 300,000 in amortization. Additionally, we incurred approximately 500,000 of costs in connection with our credit agreement amendment and acquisition related expenses. Our net loss in the quarter was 1.4 million or 13 cents per deleted share. On a non-GAAP basis, which excludes intangible amortization, acquisition related costs and other non-recurring items, adjusted diluted loss per share was 2 cents. All of the above items contributed to an adjusted EBITDA of a positive 400,000 in the quarter, compared with the loss of 2.6 million in the third quarter fiscal 2022. This next slide shows our results for fiscal 2022 as a whole. Many of the items impacting the quarter also drove our results for the full year. Our fiscal 2022 sales grew by 26% to 122.8 million. For the 10 months that we owned Barbara Nichols, its contribution was 47.9 million to sales. Sales to the defense industry increased 160% to $62.2 million and now represents 51% of total revenue, compared with just 25% in fiscal 2021. The expansion in defense was partially offset by declines in the commercial refining and chemical markets, primarily in Asia. I should point out, that both sales and orders to the commercial aftermarket increased over fiscal 21, which is significant in that it usually is a leading indicator for future capital investment by our customers. Sales in the U.S. increased 85% to 97.6 million and were 80% of total sales for fiscal 2022, as revenue from the acquisition is primarily in the U.S., Gross profit and margin were down compared with the prior year due to the same factors which impacted the quarter. Early in fiscal 2022, we made the strategic decision to over-resource certain critical defense orders in our Batavia operation. This included increasing the use of contract welders and redirecting resources away from our commercial business to meet delivery schedules. The impact of the defense projects and related cost overruns are expected to lessen over the coming quarters and to be completed before the end of fiscal 2023. We estimate that these factors impacted gross profit by over 10 million for fiscal 2022. SG&A expenses in the full year of fiscal 2022 were 21.3 million and included intangible amortization of 900,000. This was an increase of 3.8 million compared with fiscal 21 of which 4.8 million was contributed by Barbara Nichols. Additionally, costs associated with the acquisition and debt amendments totaled 840,000. Offsetting these increases was reduced incentive compensation. Net loss and loss per diluted share were 8.8 million and 83 cents respectively. On a non-GAAP basis, adjusted diluted loss per share was 62 cents. The above items negatively impacted adjusted EBITDA, which was a loss of 5 million for fiscal 2022, compared with income of 5.1 million in fiscal 2021. On the next slide, you can see our capitalization. Graham has always generated good cash flow, and this positive dynamic of our business model was validated. As we generated 12.3 million in cash from operations, and paid down 10.4 million of debt during the quarter, despite our weaker financial performance. As recently announced, we have put in place a revised lending agreement, which puts us in compliance with our financial covenants and provides us the financial flexibility as we work through these operational issues and return to profitability in 2023. For fiscal 2023, we expect capital expenditures to range between 4.5 million and 5.5 million compared to just 2.3 million for fiscal 2022, as we make investments which will support our future growth. Turning to the next slide, you can see the developing trends in our orders, both commercial and defense related, and how our market diversity solidifies our confidence in our long-term outlook. I should point out that our defense orders tend to be lumpy in nature, which explains the large variances from quarter to quarter. Looking at the quarterly trends, chemical and petrochemical orders appear to have stabilized over the past three quarters, and we have seen nice sequential growth in our space business. Overall, orders were solid for fiscal 2022 with a book-to-bill ratio of 1.2. Looking to the next slide, you can see that defense at 76% of our backlog remains the key to our story and will add stability to our future revenue stream. At 256.5 million at the end of the fourth quarter, backlog is down 6% sequentially, primarily due to the progress made in our key defense contracts. We believe that 40 to 50% of our backlog will convert within the next 12 months. The commercial backlog was quite low entering this fiscal year. It has grown from 33 million at the end of fiscal 21 to 62 million at the end of fiscal 22 and reflects the acquisition of Barbara Nichols. Additionally, we are seeing growth in our commercial aftermarket backlog, which will help drive future margin expansion. The next slide provides our initial guidance for fiscal 2023. As you can see, we are forecasting a significant improvement in profitability and a continuation of the positive momentum that started in the fourth quarter. Revenue is expected to be between 135 to 150 million, which suggests top line growth of 16% at the midpoint of our guidance. From a margin perspective, we are looking for gross margin of 16% to 17% with an adjusted EBITDA of 6.5 million to 9.5 million or an adjusted EBITDA margin of five to 6%. While we expect the first quarter of fiscal 23 to be better than the fourth quarter 22, it will still lag behind historical levels due to the overhang from the first article Navy jobs. We expect to see results gradually improve as the year progresses and those projects are completed and work begins on more profitable second and third article jobs. And the operational improvements we are implementing begin to show results. Fiscal 2022 was certainly a challenging year, but we have made good progress and have the strategy to drive organic growth and margin expansion. We are excited about our future. And I'll pass the call back to Dan to tell you more about our strategy to build better companies to deliver superior performance. Dan.