Graham Q1 2024 Earnings Call Transcript

There are 7 speakers on the call.

Operator

Approximately $900,000 of the increase was attributable to higher performance based compensation expense, including $800,000 related to the supplemental performance bonus payout to Barber Nichols employees in connection with the 2021 acquisition. If you turn to Slide 5, you can see we had net income in the quarter of $0.25 per diluted share or $2,600,000 a notable increase over last year. On a non GAAP basis, adjusted net income and net income per diluted share were 3,600,000 and $0.33 respectively, measurably improved over $1,300,000 and over the $1,300,000 and $0.12 respectively for the same period a year ago. Adjusted EBITDA grew to $5,600,000 or 11.8 percent of sales, also reflecting the improvements in our business compared with last year's Q1 of adjusted EBITDA of $2,700,000 or 7.6 percent of sales. Turning to Slide 6, you can see how we are strengthening our balance sheet.

Operator

Cash and cash equivalents as of June 30, 2023 increased 35 percent or $6,400,000 to $24,700,000 compared with the end of the 4th quarter. Our cash generation is improving with better operating performance, but is expected to be lumpy due to the timing of receipt of customer deposits and the corresponding material purchases associated with those deposits. Cash generated from operations in the Q1 was 8,600,000 Debt during the quarter was down $400,000 to $11,300,000 as of June 30, 2023, the company was in compliance with this lending agreement with a leverage ratio of just 1.6 times. On June 30, 2023, the amount available under our revolving credit facility was approximately $26,000,000 and provides adequate liquidity to fund our strategic growth initiatives. Capital expenditures for the Q1 of fiscal 2024 were $1,500,000 We have updated our expectation for CapEx in fiscal 2024 to range between $12,000,000 $13,500,000 The $6,500,000 increase is primarily related to the strategic investment we received from our defense customer and our planned spending to expand our capabilities in our Batavia operation to meet the Navy's shipbuilding schedule.

Operator

If you will now turn to Slide 7, I'll review our orders for the quarter. During the quarter, we had orders of $67,900,000 which were up $27,600,000 or 69% over the prior year and resulted in a book to bill ratio of 1.4 times. Included in orders and backlog is the $13,500,000 strategic investment from a major defense customer we have been talking about, which we announced separately today. The investment is expected to flow through revenue over the next 8 to 10 years and will be associated with potential future orders and delivering on the $8,500,000 of follow on orders we received from that customer during the quarter. Space orders were $4,600,000 in the Q1 of fiscal 2024, down from the historically high $7,300,000 in the Q1 of fiscal 2023, but higher than the $2,500,000 in orders received in the Q4 of fiscal 2023.

Operator

Space continues to be a strategic focus for us and a meaningful part of our business. Turning to Slide 8, we show our backlog. You could see that it is up 24% over a year ago and 7% sequentially to a record $322,000,000 The defense backlog is up $60,000,000 or 31 percent over last year and includes that strategic investment from the major defense customer I just mentioned. Approximately 50% of orders currently in the backlog are expected to be converted to sales in the next 12 months and another 25% to 30% is expected to convert to sales over the following year. The majority of orders expected to convert beyond 12 months are for the defense industry, specifically the U.

Operator

S. Navy. Turning to Slide 9, we can review our updated guidance for fiscal 2024. We are increasing our revenue projection to $170,000,000 to $180,000,000 up $5,000,000 from our previous guidance on the lower and top end. Our new guidance suggests top line growth over fiscal 2023 of about 11% at the midpoint of that range.

Operator

This is right in line with our strategy to grow in the mid to high single digits annually in order to achieve our fiscal 2027 goal of greater than $200,000,000 in revenue. It also captures the better than expected performance in the Q1, which we expect will normalize for the remainder of the year. From a margin perspective, we are updating the gross margin guidance to 18% to 19 percent, which is an additional 100 basis points over our previous guidance on the top and bottom end. Our guidance remains the same for SG and A percentage as well as for our effective tax rate. Similar to revenue, we have increased our adjusted EBITDA guidance by $1,000,000 at the top and bottom of the range to $11,500,000 to $13,500,000 which suggests an adjusted EBITDA margin of about 7% at the midpoint of the range.

Operator

These increases to our guidance reflect our better than expected start to the year and incorporates more normalized performance for the remainder of the year. As we start to work on our better price contracts employing our much improved processes, we expect margins to improve steadily each year in order to achieve our low to mid teen adjusted EBITDA margin goal in 2027. With that, I will pass the call back to Dan for concluding remarks. Thank you, Chris.

Speaker 1

I am on Slide 10. I have covered the pillars of our strategy on Slide 10 previously. I would just like to reemphasize that it takes a team that understands our customers' critical challenges to help them find solutions, which drives our success. We are doing this on many fronts, which is also driving our diversification. We have much going on in space, new energy, cryogenics, refining and petrochem as well as defense.

Speaker 1

We are well on our way to achieve our growth and profitability goals for fiscal 2027. And even beyond that, I believe our long term outlook is very encouraging And I hope you share in that excitement. With that, Christine, we can open the call for questions.

Speaker 2

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Theodore O'Neil with Litchfield Hills Research. Please proceed with your

Speaker 3

Thank you very much and congratulations on the great quarter.

Speaker 1

Thanks, Leo. Thanks, Dale.

Speaker 3

So Chris, I was wondering if you can clarify the strategic investment, which sounds to me like this is for spending on CapEx. Yet in your prepared remarks, You included in orders and backlog and say it will be drawn down over the next 8 years, which sounds like advanced deposits.

Operator

Yes. Thanks for the question, Theo. I realize that this can be a little bit confusing. So we received a $13,500,000 towards strategic CapEx purchases and an 8,500,000 of follow on orders related to the strategic program, which these investments relate to. You are correct.

Operator

We are including those in our balance sheet as customer deposits

Speaker 3

like a

Operator

prepayment. However, when we spend the money on the CapEx, it's going to go through as capital expenditures. So it's going to cause some lumpiness in our cash flow statement over the next several years here. We're not under the terms of the agreement, we're not allowed to charge our customer for the depreciation on this equipment, and it is related to specific orders for this strategic program. So we determined that it is really revenue, so it's going to be flowing through revenue, as we work on the current orders as well as potential future orders over the next 8 to 10 years.

Speaker 3

And Will this have sort of a one time use for this particular customer and application or is there other usefulness to this?

Operator

So we do have to provide our customers strategic program priority while we're using that machinery and equipment, but if there is excess capacity, we can certainly use it on other revenue generating operations. And it is and the equipment is all in our name at the end of the day.

Speaker 3

Okay. Can you give us an update on your CapEx plans for some of the long lead time items and also update us on how it's going to grow your welding capacity?

Speaker 1

Yes. So as Chris said in his remarks, I think there was like 6,500,000 That will be charged to the CapEx this year, right?

Operator

It increase of 6.5, yes.

Speaker 1

Yes. So in that Strategic investment, there's everything from building additions to machine tools for Drilling holes and turning different raw materials. So turning and milling machines, there's welding machines Associated with that, there's all kinds of different rolling machines. And So it's a wide variety of things. As you kind of look at all the machines that are needed to kind of process Those particular heat exchangers for our customer, they're basically helping us get tooled up to really push those through Quicker than we would be able to on our own.

Speaker 1

So yes, there's definitely welding machines in there, but there's everything else too.

Speaker 3

Okay. Thanks very much.

Speaker 1

Yes. You're welcome, Theo. Thanks, Theo.

Speaker 2

Our next question comes from the line of Gary Schwab with Valley Forge Capital Management. Please proceed with your question.

Speaker 4

Yes. Hi, Dan. Hi, Chris. I think you surprised a lot of people with this release. Good work.

Speaker 1

Thank you, Gary. Thanks, Gary.

Speaker 4

Anyway, it's been a year since you delivered your first two steam condensers. The next 2 should be very close to delivery or have you delivered them already? Can you comment on that?

Operator

Yes. So we did deliver 1 more at the beginning of July, and we have one more that's scheduled to go in the 3rd quarter of this year.

Speaker 4

Okay, great. This is I wanted to ask About this, my daughter just moved into a new house and she bought a pair of 6 draw dressers from IKEA that she asked me to assemble. And I spent About half the time building the 2nd dresser than I than it took me to build the first one. But I don't think I'd save much more time on a third one. Now you mentioned how your teams are questioning and challenging each other.

Speaker 4

Were there significant new practices Were innovations developed where you saw like a real step change in savings and productivity on your second articles? And how much more do you think there'll be in labor innovation that you can squeeze out of a third article?

Speaker 1

Yes. So what you're describing is a learning curve. And essentially, you learn by building First one. And you can apply those lessons learned to the second one. And you don't have to improve your processes, improve your tools, Anything and you actually get some benefit just from the learning of how to do things and then what sequence etcetera.

Speaker 1

But then if you start to look at your process and look at How you can reduce time or make processes go in parallel or things like that, You can start to get even further down that learning curve. So in industry, the manufacturing industry, you'll see Learning curves that are very steep, at the very beginning for small quantities. And then as you increase quantities or Basically put accumulate builds, you'll start to see that learning curve flatten. And each one of those learning curves really is product and process specific. And so I wouldn't even attempt to start to name savings from first article to second to third The second to third to fourth to 5th, just because they are so dependent upon The process and the product and then ultimately the people.

Speaker 1

So but we are very active And looking at this process is mapping those processes, helping our folks With better tools and better supervision and timely receipt of materials and gosh, all of that. So It's the nature of a manufacturing business that if you have one, you live it and you really enjoy The improvements that you can make in your process and your people over time.

Speaker 4

So you think you can squeeze A lot more margin out of the 3rd articles that you'll be building over the second?

Speaker 1

Yes. As Build more of them. The improvements or the reduction in time starts to decrease for each one. That's what they kind of I'll call moving down the learning curve. So you'll save probably the most between the first and the second, a little bit less between the second and third.

Speaker 1

You'll save a little bit less between the 3rd and the 4th, etcetera.

Speaker 4

Okay. So it's still there. There's still savings.

Speaker 1

Absolutely, it's still there. It just flattens.

Speaker 4

Right. And as far as what you were expecting in efficiency And productivity on the second article, did it meet what you were expecting when you first started on the first article and Thought about the second or did you surpass what you thought you would get to?

Speaker 1

Good question that I don't know the answer to actually. There was definitely the savings that our guys and gals really predict or not, I couldn't tell you.

Speaker 4

Okay. I didn't know if you figured or predicted a margin that you thought you would save or an additional margin you would make or shorten your labor time on the second one Over the

Operator

first. Yes. I'm not sure

Speaker 1

they have Gary, but I couldn't quote it to you. Okay.

Speaker 5

And it's different

Operator

for every program. As you know, we have multiple programs in the backlog.

Speaker 4

Right, right, of course. All right. Well, thanks very much and great job. Thank you.

Speaker 1

Thanks, Gary. Thanks, Gary.

Speaker 2

Our next question comes from the line of Brett Kearney with Gabelli Funds. Please proceed with your question.

Speaker 6

Hi, guys. Good morning. Congrats on the continued momentum.

Speaker 1

Hey, thanks, Brett. Thanks, Brett.

Speaker 6

Just following up on the strategic investment, this is For, I guess to get yourself aligned with your customer for new work you all will be bidding on with the U. S. Navy going forward?

Operator

Correct. So we already did have a few orders in our backlog. Right after we received the PO for the strategic investment, we received another order for several more units. And then we will have the opportunity down the road to put to bid on other jobs and other units as they come up for bid.

Speaker 6

Okay, excellent. And then, it sounds like incorporated in this in your plans is some more advanced machine equipment. How are you guys thinking about the labor needs to meet the ramp on these new lines?

Operator

Yes, that's a great question, Brett. Unlike just like everyone else, we're not immune to the difficult labor market that's out I will say that overall our human resources team has done a fabulous job. Our labor is actually up 44 people since this time last year, which is about a 9% increase. But then within our budget, we still expect to increase our labor force another 8%. So we've done a great job till now.

Operator

But As you can imagine to grow your revenue 8% to 10% a year, you need to build your workforce equivalently. But We've been able to manage through it so far and our HR team is doing great with the Programs that they have with the local community colleges, the Arc and Flame Welding program that we partnered with the local community colleges with and other programs that are out there. So they've done a really great job being able to keep up with our growth to this point.

Speaker 6

Definitely. Thanks so much, Chris.

Speaker 1

Thank you. Thanks.

Speaker 2

Our next question comes from the line of Dick Ryan with Oak Ridge Financial. Please proceed with your question.

Speaker 5

Thank you. And also congratulations on a strong report guys. Thank you. Chris, I think you mentioned better pricing and backlog. Is that more mix, the end market composition there?

Speaker 5

Or actually are you Seeing better pricing and if you are, what markets would that be occurring in?

Operator

Yes. So we are seeing better pricing And that's on the in several different areas, right? We've been able to because of the demand, we've been able to increase pricing taken aftermarket several times over the last year. So that's part of it. As you know, after you get done with your first programs.

Operator

When you're bidding on the next articles, it's based on the hours that you spent on the first, I'll call it, inefficient unit, right? So you get a natural bump in price, because it's based on the first article hours. But at the same time then you do get, as Dan has just been talking about, more efficient on producing those. So that will help expand the margin as well. So The mix is coming from, again, higher priced second and third article units as well as, as I mentioned, the aftermarket.

Speaker 1

And I think I'd add to that, that we're able to get a little bit better pricing even on the commercial side, the refinery petrochem. We are seeing that heat up a little bit. Certainly, the aftermarket has been busy for the last year and a half. We're seeing some capital projects starting to come through. The pricing on those, we're To get a little bit better pricing than we have in the past, even on the commercial side.

Speaker 1

So it's Improving, I would say, across several different markets.

Operator

And I guess, Dick, I would just add to that. We've also than putting and stressing to the team about going back where our customers caused a delay or they caused the cost to go up for either more engineering that they request or if there was a Delay in the order and material prices go up, right? We've been encouraging the team to go back and we've been successful in going back and negotiating change orders and increase to PO prices to compensate us for that. So that's also being built into some of the pricing that you're seeing as well.

Speaker 5

Okay. Yes, because I know you're I thought you're going to be putting more emphasis going after some of that aftermarket business. So it's good to see that that's Bearing some fruit. Dan, you briefly mentioned seeing some pickup on the energy side. Is that domestic?

Speaker 5

What are you seeing in your India and China operations From an energy standpoint?

Speaker 1

Yes. So we have seen an uptick domestically. We won A big order in India, and China has been really slow coming out out of COVID. So the our pipeline domestically really cleared out a little bit here this last Quarter where we got several different orders, but we just haven't seen the China market come back As quickly as we thought that we would at this point.

Speaker 5

What was the size of the India Award?

Operator

Yes, it was about 9,000,000

Speaker 5

And what's the delivery timeframe on that?

Operator

I'd say over the next year and a half.

Speaker 5

Okay. Okay, great. Congratulations. And It's good to see that all your efforts from fiscal 2022, the hard decisions are starting to pay off. Thank you.

Speaker 1

Yes. Thanks, Dick. Thanks, Dick.

Speaker 2

Thank you. Our next question comes from the line of Bill Baldwin with

Speaker 5

I would just like to hear your comments and insights on what you're seeing right now in terms of activity or What kind of project you're kind of aiming for in terms of potential future activity regarding your new energy Initiatives and your cryogenic initiatives that I know you're involved with. Can you provide a little color there as to what types of projects you're working on or looking at?

Speaker 1

Yes, we can. I would say that the hydrogen inquiries have increased. And so there's a lot of these air products types, the industrial gas types of companies that are looking at hydrogen and see a real opportunity to start to serve that market in the future. So I actually went to a hydrogen conference in Houston last month and kind of learned what was going on there. Lots of technology development, lots of investment in infrastructure for hydrogen production, distribution of hydrogen, fueling of hydrogen vehicles, etcetera.

Speaker 1

Went to the National Renewable Energy Lab to kind of understand what they're doing, quite a bit of activity on the hydrogen side there also. So I would say that the biggest thing that we're seeing is really probably on the hydrogen side And people are interested in all phases from production all the way through fueling Using hydrogen. It's the future is anybody's guess as to how it really unfolds. But there's it's kind of interesting to compare it to the space environment That we saw a decade ago where it was all government and now we're starting to see A few commercial companies starting to put their own money into it. So pretty interesting.

Speaker 1

And then small modular nuclear, We continue to see just a steady push to develop technology there. There are several different Companies that are working in different technology areas and we're trying to support as many As we can, that's a much longer effort I think. I would suspect that the hydrogen effort. If it if the hydrogen economy really goes, we'll pay dividends sooner than the small modular nuclear. But Those are the 2 biggest areas that we're involved with right now.

Speaker 1

Graham is also Supporting some of the biodiesel sustainable aircraft fuel and that those are more on The process size, so some of the heat exchanger vacuum equipment that Graham has made for a long time is being used in those plants also. So we're covering quite a bit of the new energy Phase. And we'll just see we'll see which one really takes off here.

Speaker 5

Thank you, Dan. And any specific comments on the cryogenic projects or types of activities going on there?

Speaker 1

Yes. So cryogenic

Speaker 5

Or is that part of hydrogen or part of

Speaker 1

That's hydrogen, yes. So they're using gas, Hydrogen gas and they're also looking at liquid hydrogen for fuel and transport as well as some of The other carrier type fluids like ammonia. So all of that is being discussed about in the distribution Transportation of hydrogen. Right. And so, yes, that's where the cryogenic pumps come in for the liquid hydrogen.

Speaker 5

Thank you very much.

Speaker 1

Yes. Good talking to you, Bill.

Speaker 5

Absolutely.

Speaker 2

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Speaker 1

Thank you for joining us today. We continue to demonstrate progress with our plan And we are putting proof points on the board. We have lots of opportunity to continue to grow and diversify. I look forward to updating you further with our Q2. Enjoy your day.

Speaker 2

Ladies and gentlemen, this does conclude today's teleconference.

Earnings Conference Call
Graham Q1 2024
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