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spk07: and welcome to Graham Corporation first quarter fiscal year 2025 financial results conference call at this time all participants are in a listen only mode a brief question and answer session will follow the formal presentation if anyone should require operator assistance during the conference please press star 0 on your telephone keypad as a reminder this conference is being recorded It is now my pleasure to introduce your host, Ms. Deborah Palovsky, Investor Relations for Graham Corporation. Thank you, Ms. Palovsky. You may begin.
spk01: Thank you, Ranju, and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation. Here with me on the call are Dan Thorin, our President and CEO, Chris Thome, our Chief Financial Officer, and Matt Malone. Vice President of Grand Corporation, and General Manager of Barber Nichols. Dan, Chris, and Matt are going to provide their formal remarks, after which we will open the line for questions. You should have a copy of the first quarter fiscal year 2025 financial results that were released this morning. I will also note that you will be seeing momentarily a corrected release crossing the wires. It is correcting the fiscal year 2025 ending date to read March 31, 2025. If you don't have the release, the corrected release is on our website at ir.gramcorp.com, along with the slides that will accompany today's discussion. If you turn to slide two, I will review 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. You 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've provided reconciliations 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 are orders backlog and a book-to-bill ratio. They are operational measures, and a quantitative reconciliation of each of these is not required or provided. You can find the disclaimer regarding our use of key performance metrics at the back of our slide deck. So with that, if you would please advance to slide three, I'll turn it over to Dan to begin. Dan?
spk02: Thanks, Debbie. Good morning, everyone. The first quarter can be characterized by solid growth, consistent improvement, and strengthened profitability, as demonstrated by our robust order flow, record revenue, expanded gross margin, and improved bottom line. Additionally, we have enhanced our balance sheet through strong cash generation, which provides us with the financial flexibility to support future growth opportunities. It is also worth noting that the expansion of our defense business has reduced our economic sensitivity. With a steady flow of program renewals and new opportunities, our total backlog is nearly $400 million. These results are a testament to the dedication and discipline of the Graham team, the confidence our customers have in us, and the effectiveness of our strategy to build better companies. Later this month, we will break ground on a new 29,000 square foot facility in Batavia, New York. This expansion will enhance our capacity and production efficiencies, ensure that we can consistently meet our commitments, particularly to the U.S. Navy. Additionally, as announced a few weeks ago, we have been awarded $2.1 million by the Blue Forge Alliance, a nonprofit neutral integrator supporting the U.S. Navy's submarine industrial base initiatives. This funding will enable us to expand our defense welder training programs and acquire equipment needed to support the programs. One of our more exciting projects, which we announced in June, is our involvement in the world's first net zero carbon emissions integrated ethylene cracker and derivative site being developed in North America. Our state-of-the-art surface condensers equipped with custom venting will optimize turbine drive efficiency. This project is designed to enhance the eco-friendliness of gas refining, with the overarching goal of minimizing carbon emissions throughout the production process. The acquisition of P3 Technologies is progressing as expected, delivering both on revenue and profitability. The integration of their engineering and analysis capabilities have been smooth, with their team effectively supporting both operating companies. Now let me hand it over to Matt, who will provide details on the three project awards valued at over $65 million that we announced earlier this week. Matt? Thank you, Dan.
spk03: We believe that our strong customer relationships, coupled with our investments in expanding engineering capabilities and increasing capacity, have enabled us to both continue serving existing customers and secure new business. Our solutions stand out due to the engineering expertise precision manufacturing capabilities, and rigorous testing and qualification processes, all of which meet the high-performance requirements for mission-critical applications. We highlighted the three awards on slide four. Securing a follow-on option year award to supply alternators and regulators for the Mark 48 Mod 7 heavyweight torpedo program underscores our trusted partnership and sustained excellence in the defense sector. This contract, which covers 100 units with deliveries through the calendar year 2027, adds to our existing backlog of over 200 units for this program. We are also excited to have won a competitive bid for the Mark 19 air turbine pump, used in the torpedo ejection system of the Columbia-class submarine. This project leverages lessons learned from completing first article units, demonstrating our capability to produce these precision units. We are contracted to deliver 10 units for five boats through calendar year 2032. Additionally, we have secured a contract to supply second stage cryogenic recirculation pumps, essential for thermal conditioning of upper stage engines on launch vehicles for space, with deliveries extending through calendar year 2027. In connection with this order, we will be expanding our liquid nitrogen testing capabilities in Arvada which will support our cryogenic pump business. We are grateful for our customers' trust in selecting us for these high-value projects and remain committed to delivering exceptional results. With that, I will turn it over to Chris for the first quarter financial details. Chris?
spk00: Thank you, Matt, and good morning, everyone. As a reminder, our results include P3 technologies for the full quarter. We acquired P3 in November of 2023, and this impacts the year-over-year comparisons. I will begin on slide five. As you can see, we had another record quarter, achieving sales of 50 million. This represents a 5% increase, or 2.4 million, over the prior year, and includes 1.6 million of incremental sales from P3. Sales to the defense market reached 29.1 million, marking a 28% increase and setting a new quarterly record. Another contributor to our overall sales growth was a 20% rise in refining sales, which totaled 8.2 million. The decline in our other revenue was due to the timing of projects with multiple customers across various markets. It is worth noting that while aftermarket sales were down compared with the record levels of the prior year, they remain robust overall. This demonstrates the ongoing strength of our aftermarket business. U.S. sales accounted for 82% of our total revenue this quarter, which reflects the size and scope of our domestic defense business. On slide six, you can see that our gross margin reached 24.8% for the quarter. an expansion of 170 basis points over the prior year. I should point out that this quarter's gross margin benefited $480,000 from the Blue Forge Alliance grant that Dan discussed earlier, which is a strategic investment in our workforce development, ensuring we have the skilled labor necessary for future growth. Additionally, P3 continued to provide margin accretive sales, reinforcing the value of this acquisition. and we benefited from improved execution and pricing on our defense contracts. It is also worth noting that we are beginning to see improved profitability in our recent refinery projects in India, a promising development driven by new leadership and localized engineering efforts that enhance our efficiency and cost effectiveness. On slide seven, you can see how our strong performance is translating into our improving bottom line. We continue to trend upward both quarter by quarter and year over year. Net income for the first quarter was $3 million, a 12% increase compared with $2.6 million for the same period in 2024. This translates to $0.27 per share. Adjusted net income saw an even higher increase, up 20% to $3.6 million, equating to $0.33 per share. Our lower tax rate for the quarter reflected a discrete tax benefit related to the vesting of restricted stock awards. For the full year, we still expect an effective tax rate of 20% to 22%. Slide 8 shows our adjusted EBITDA, which was $5.1 million for the first quarter and represented a 10.3% margin. Expenses were higher this quarter with SG&A inclusive of amortization, increasing by $2 million year-over-year. This rise was largely due to our continued investment in our operations, our people, and our technologies. This included a $0.3 million increase in the supplemental performance bonus from the Barbara Nichols acquisition, a $0.3 million of incremental costs associated with the P3 acquisition, 0.3 million of expenses for the ERP conversion at Batavia, and 0.4 million of increased investment in R&D. I should point out that SG&A expenses were down versus the sequential fourth quarter due to lower performance-based compensation and professional services fees. Turning to slide 9, we had another quarter of strong cash generation, totaling $8.7 million. our balance sheet remains very strong with $21.6 million in cash and no debt. The $29 million of availability on our senior revolving credit facility at June 30th provides additional financial flexibility to support our strategic initiatives and operational needs. Capital expenditures for the quarter were $3 million directed towards capacity expansion and productivity improvements, such as automated welding equipment and new machining centers. For fiscal 2025, we still expect CapEx to be between $10 million to $15 million. Approximately half of this amount is related to the customer-supported expansion of our Batavia facility, which will accommodate an accelerated shipbuilding schedule for the U.S. Navy. Turning to slide 10, you'll see that we achieved orders of $55.8 million in the quarter, resulting in a book-to-bill ratio of 1.1. Approximately half of these orders were for the defense sector, including the award for the Mark 48 program that Matt discussed. Another significant driver was the 53% increase in chemical and petrochemical orders, which included the order for the ethylene cracker that Dan mentioned. Slide 11 shows that our backlog has been consistently around the $400 million level for the past three quarters, further underscoring our consistent demand and strong market position. This stable backlog provides us with good visibility into the future and ensures a level of operational stability. Overall, our backlog increased 23% year over year, with defense backlog up 29%, or $74.5 million, and our chemical petrochemical backlog up 82% or $10.5 million. Approximately 35% to 45% of our backlog is expected to convert to sales within the next 12 months, with an additional 25% to 30% expected to convert over the following 12 months. The majority of orders expected to convert beyond 12 months are from the defense industry, specifically for the U.S. Navy. On slide 12, you can see that we are reiterating our guidance for fiscal 2025 that we provided last quarter. We continue to expect revenue to be between $200 million and $210 million, indicating top line growth of 11% over fiscal 2024 at the midpoint of this range. we have accounted for the seasonal cadence in our projections with historically lighter second and third quarters due to holidays and direct labor vacations. From a margin perspective, we continue to expect our gross margin to range from 22% to 23% for the full year, and our SG&A, including amortization, to be between 16.5% to 17.5% of sales. Our SG&A guidance includes costs associated with the Barbara Nichols supplemental bonus from the acquisition, equity-based compensation, and ERP conversion costs of approximately $6.5 to $7.5 million. The net result is that we expect adjusted EBITDA for fiscal year 2025 to be between $16.5 million to $19.5 million, which implies a 35% increase at the midpoint. The range also implies an adjusted EBITDA margin of about 9% at the midpoint, or a nearly 200 basis point improvement over fiscal 2024. With that, I will pass the call back to Dan. Thanks, Chris.
spk02: On slide 13, I will highlight our strategic and operational priorities that we expect to enable us to deliver on our long-term goals. Our focus on developing full lifecycle product opportunities ensures that we remain a trusted partner throughout the entire operational lifespan of our customers' facilities or products. For example, the longevity of operations in the refining and petrochemical market has driven strong demand for our aftermarket services, highlighting the importance of maintenance and upgrades in extending the life of existing facilities. Additionally, we are making significant progress with our defense aftermarket business. For instance, we are supporting overhauls of air turbine pumps for the navies of Canada and Australia, in addition to performing complete overhauls for the US Navy. In our research and development efforts, we are dedicated to creating products that enable our customers to reduce energy consumption. This not only helps them lower production costs, but also supports their sustainability goals. On the sustainability front, we are witnessing an expanding pipeline of new energy projects, and we are confident that our solutions align with these emerging opportunities. With no debt, we are well positioned to drive growth both organically and inorganically. Our upcoming expansion in Batavia exemplifies our organic growth strategy, while our ongoing evaluation of acquisition targets aligns with our organizational goals and investment criteria. For fiscal 2025, our CapEx plans remain consistent with an anticipated investment of approximately 5% to 7% of revenue. Each initiative will be required to deliver an expected ROI of over 20%, reflecting our dedication to growth, profitability, and enhancing shareholder value. We are actively engaging all stakeholders to improve our operations. Our expansion in Batavia has been bolstered by government support and investment from a key customer. To sustain our growth, we are focusing on training, apprenticeship programs, and management development, which will necessitate strong community involvement. Additionally, we anticipate that developing our suppliers both domestically and internationally will open up new opportunities across the markets we serve. As I have mentioned before and continue to believe, This is an exciting time to be part of the Graham team. We are making steady progress, meeting our targets, and strategically positioning ourselves for sustained growth, all while staying on track to achieve our long-term financial goals for fiscal 2027. I want to extend my heartfelt thanks to all of our associates whose dedication and passion are driving our success and shaping a bright future. With that, Renju, we can open the call for questions.
spk07: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Joe Gomes with Noble Capital Markets. Please go ahead.
spk04: Good morning. Thanks for taking my question. Hi, Joe. Hey, I wanted to first touch base here on the the air turbine pump program that you guys recently won here. You talked about it was a competitive bid. I just wanted to give us a little more color on, you know, who was kind of the competition out there, what the process was, and, you know, what kind of stood out that Graham was the winner of this bid?
spk03: Yeah, Joe, this is Matt. There's portions of that that I'll not disclose, but certainly it was a competitive bid. We've been working on air turbine pump programs specifically for the Virginia class at Barber Nichols for several decades from a component level. That experience base is directly transferable to the Columbia class air turbine pump, which well positioned us. And the short takeaway is we have been manufacturing, setting up the supply chain, and delivering several first article units for this program for various customers over the last three years. And so this is a follow-on extension of the great work that's been done to date. And with successful units completed, it was a clear demonstration that we're capable to provide long term.
spk04: Great. Thanks for that. And on the aftermarket side, I know you talked about the revenues were down, although still relatively strong. I know you guys had talked about making some efforts in putting together some databases, let's call them, of where your products are, the life cycles, et cetera. I was wondering maybe you could give us some more color on where you stand on that project.
spk02: Yeah, so Graham has an amazing database of all the equipment, where it's installed, when it was installed, et cetera. And so our team has really developed that to the point that we can use it on a more active sales approach. The challenge with that is as you can imagine, turnover within plants, refinery, petrochem plants, over the years, and especially through COVID, kind of kills your contact information within that database. And so we're going through the process of updating that and also evaluating the ability for us to more automatically update that. So there's actually several databases out there, several services out there that have up-to-date contact information for the purchasing folks and the maintenance folks, et cetera, that we're looking at trying to more automate that process to speed that up. And then there's a couple of other things that we've got in the works to really more proactively go after that aftermarket business domestically, where the majority of our equipment is along the Gulf Coast. And so you'll be hearing more about that in future calls. But we look at that as a very significant piece of our business and something that we really want to continue to leverage. So hopefully that answers your question.
spk04: Yes, thank you. And on the facility, you know, I think last quarter your expectations were to break ground in July. Obviously, it's now August. Not terribly, terribly delayed, but I was just wondering anything pop up that caused that move from July to August or just your typical run of the mill with these types of projects?
spk02: Yeah, typical run of the mill. We're still very confident in our overall schedule. And we'll be announcing more on that relatively soon. But I haven't been in Batavia for a few weeks, so I'm not sure if ground actually has been broken, but we'll be doing a ceremonial groundbreaking here in the next couple of weeks. Okay.
spk04: And then one more for me, and I'll get back in queue. I know one of the things you talked about also last quarter was you know, labor additions. I think you were talking about, you know, you're looking to increase your labor force by 10% in fiscal 2025. And just wondering, you know, how your efforts are going there. Are you seeing any potential hiccups or pushbacks that could make that more challenging than originally thought?
spk02: Chris, you want to take that one or you want me to?
spk00: No, I could take it, Dan. So, you know, Joe, I've said this on the last several calls, I feel like a broken record, but our HR teams continue to do an excellent job in recruiting talent. Our workforce was up by 23 during the quarter and is up year over year by 13%. We have seen a slight softening in the labor market, so we are you know, finding it easier to come across a little bit easier, but it is still challenging to get the direct labor. And with the announcement of, you know, the Blue Forge grant, you know, we now have that program funded, you know, for the entire year. And we just graduated a class of 10 this past month, and we have a class of 16 that just started. So things are going well with recruiting.
spk04: Great. Thanks for taking my questions. I'll get back in queue. Nice quarter. Thanks, Joe. Thanks, Joe.
spk07: Thank you. Next question comes from the line of Dick Ryan with Oak Ridge Financials. Please go ahead.
spk06: Thank you, guys, and also congratulations on the continued strong execution, Dan. You guys have put together a nice track record. I guess A couple of my questions, though, geared towards Matt. You know, Matt, you got some nice wins on the Barbara Nichols side. Do you have any capacity issues on the BN side? Do you need, you know, any kind of extra capacity or human resources to deliver on these contracts?
spk03: Yeah, great question. The answer is these programs do fit nicely into our long-term capacity plans. With that being said, Mark 48, as you can imagine, bolts onto the back end of the existing contract, so utilizes the same equipment and facilities. Mark 19 slots into production capability that we have and capacity that we have, as well as the Blue Origin program. And so on that, we do have a lot of investments that are forthcoming, and specifically that's to support other programs. The cryogenic facility that was discussed is very critical. We need to be able to test that capability on site and ensure that the product meets expectations. So with that being said, that is the major investments that's needed to support these programs.
spk00: And, Dick, I would just add to that that these programs is all consistent with our CapEx guidance of $10 to $15 million for the year, as well as our long-term guidance of you know, five to seven percent of revenue for the, you know, next several years as we invest in these types of things.
spk06: Sure. Thanks, Chris. So when you look at, you know, you've had P3, not quite a year, and other programs that are opening up, what's, how would you, you know, how can you provide some color for us on the pipeline of opportunities, Matt, And maybe specifically on P3, since it's been under your umbrella now since November, what are you seeing from the customer side for P3?
spk03: Yeah, so P3 really is an extension of Barbara Nichols. We're seeing a lot of opportunities that could slot into Barbara Nichols or P3. They continue to excel in the opportunities that they had in their backlog prior to acquisition. They're also supporting quite a few R&D efforts at both Barbara Nichols and Graham Corporation, which is fantastic because it can stimulate new business. But what we're seeing in particular is quite a few space programs that would either flow through Barbara Nichols with content to P3 or go directly to P3. knocking on the door a lot of opportunities and we're just harvesting them. But yeah, it's a continued strong pipeline. It's just timing of projects landing. Okay.
spk06: Chris, on the gross margin, 22%, 23%, you're getting a little bit of a kicker from the grant. But are there any more first article issues that weigh on the gross margin anymore or you're pretty beyond those?
spk00: Yeah, as you know Dick, we did ship all the major first article units last year. We do have some lower margin articles that are still in the pipeline that combined with the seasonally lower Q2 and Q3 due to vacations and holidays. is kind of why we left the guidance where it is. But yeah, we do have a small amount of lower margin work in the pipeline still, but it's lower as an overall percentage of our backlog as compared to previous years.
spk06: Sure, sure. Okay, great. That's it for me. Congratulations again, guys.
spk05: Hey, thanks, Dick.
spk07: Thank you. Next question comes from the line of Gary Schwab with Valley Forge Capital Management. Please go ahead.
spk05: Yeah. Hi, guys. Likewise. Good quarter. I had some questions on the plant expansion. I don't know, either Dan or Chris on this one. When you first applied for the plant expansion last December, the proposal was $13.9 million investment to build an 18,900 square foot building. Today you announced that you increased that from 13.9 to 17.6, and you increased the size by over 10,000 square feet to almost 29,000. So just wondering, how should we look at that? What changed your thinking basically in the last six months that caused you to redesign and make such a significant increase in the size of the new facility?
spk02: Yeah, Gary, I would say that when you first propose something, especially on the order of a grant to the government for $13 million, you kind of go, huh, I wonder if there's any chance at all we're going to get this. And so you apply for it, and surprise, surprise, you win it. And it's like, holy mackerel, this is awesome. Now let's really think about what is the best use of this money. And should Graham be also kicking in some money to really get something that we want out of it? And so we kind of took a step back and said, strategically, what do we need to enable us to continue to win Navy business and win more of it in the future. So we were able to put together a plan that includes this first bay, if you will, and have the opportunity in the future to add additional bays onto it. So it really was originally kind of thought of as a, let's kind of upgrade our facilities here and there to, no, let's build a bespoke facility for the Navy program that we can really excel at and have a vision for longer term beyond that. And hopefully business continues to come and allows us to continue to expand our facility there in Batavia. So, but you know, long, long story, but, uh, but, but it was just exactly that, uh, where we, we just took a step back and said, what do we really want?
spk05: Did suspecting that you would be getting this blue forge award, uh, with the opportunity to boost your workforce, have anything to do with that change?
spk02: Uh, uh, I would say probably not, you know, um, we, we, we applied for a lot of different things. We, uh, and it's not really clear what we're going to win and when we're going to win it. So we tend to take one at a time, but have a long-term vision of where we want to take it and keep applying for those types of things that will support the vision.
spk07: Thank you. There are no more questions at this time, so we have reached the end of question and answer session. I would now like to turn the floor over to Dan Torren, closing comments.
spk02: Thank you all for joining us today. If you would like an opportunity to speak with us in more detail, we will be participating in two upcoming conferences, the Midwest Ideas Conference on August 29th in Chicago, and the Gabelli Aerospace and Defense Conference in New York City on September 5th. As always, please feel free to reach out to us at any time, and we look forward to talking with you all again in November after our second quarter fiscal 25 results. Enjoy your day.
spk07: Thank you. This concludes our teleconference today. You may disconnect your lines at this time. Thank you for your participation.
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