Graham Corporation (

GHM

)

F1Q 2012 Earnings Call

July 28, 2011 2:00 AM ET

Executives

Deborah Pawlowski – IR, Kei Advisors LLC

Jim Lines – President and CEO

Jeff Glajch – CFO

Analysts

Rick Hoss – Roth Capital Partners

Joe Mondillo – Sidoti & Company

Dick Ryan – Dougherty

George Walsh – Gilford Securities

John Sturges – Oppenheimer & Company

Presentation

Operator

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Greetings and welcome to the Graham Corporation first quarter 2012 quarterly results. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, Ms. Pawlowski. You may now begin.

Deborah Pawlowski

Thank you, Jackie and good afternoon everyone. We appreciate your joining us today on Graham's fiscal 2012 first quarter conference call.

On the call I have with me today Jim Lines, President and CEO and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results for the quarter, and also provide a review of the company's strategy and outlook. On our website at graham-mfg.com, you will find both the press release as well as supplemental slides that the guys will be talking here today.

As you may be aware, we may make some forward-looking statements during this discussion as well as during Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at the company's website or at sec.gov.

So with that, let me turn it over to Jim to begin the discussion. Jim?

Jim Lines

Thank you Debbie. Turning to slide four highlights for the first quarter. I feel we had a very strong first quarter with fiscal 2012. Our traditional sales expanded by 58%. Energy Steel provided $3.9 million in sale. We saw strong sales growth for the Middle East, in particular two projects for Saudi Arabian refineries and for South American refineries.

Our sales mix geographically was 55% international, 45% domestic. From an end use market perspective, our sales mix was 48% for oil refining markets and 22% to power generating markets including the nuclear market, 12% for petrochemical markets.

For order intake, we had $5.1 million of orders from Energy Steel, for the nuclear market, another 1.8 million within the power market sector for renewable energy and alternative energy markets. $5 million in orders for oil refining markets.

Our bidding activity still remains strong and diverse across our market mix. Orders were 37% for power generating markets and 32% for oil refining markets.

We had strong margin in the first quarter with gross margin at 32.8% and EBITDA margins of 20%. This was due to a better leverage and higher sales. We also had strong mix of more profitable orders in the quarter and we've converted much of the low margin backlog that went through our sales in Q2, 3 and 4 of last year, pretty much through our backlog now. That's also helping lift margins.

Turning to slide five. As you can see our guidance for fiscal 2012 is (inaudible) point is $100 million. We're projecting about 50% international, 50% domestic. Within that projection for fiscal 2012 we are projecting that traditional product growth including the navy will expand by 20 to 25%. And with Energy Steel that yield is about 35% topline expansions for the business, two-thirds is from traditional products and one-third from the acquisition of Energy Steel. We also see a large amount of the navy order converted during fiscal 2012.

Turning to slide six. In Q1, Energy Steel again provided 5.1 million in new orders, 3.9 million of sales, the backlog as of June 30th; at Energy Steel is $9.7 million. We're seeing a good amount of bid activity by Energy Steel within the existing US plants and also we have some activity around new construction that the US market Energy Steel is pursuing as well.

We see a huge addressable opportunity for Energy Steel in new construction with a long-term perspective is not necessarily meagerly in front of us but from a longer-term standpoint to see a lot of opportunity there.

On to slide seven. Our outlook for fiscal 2012 remains unchanged. Revenue between $95 and $105 million, Energy Steel being 16% to 20% of that total revenue. Again traditional product growth rate in the 20% to 25% range. Gross margins were projecting to be between 29 and 32% with SG&A between $16 million and $17 million.

Our priorities in fiscal 2012 are to advance our market share in our traditional market finding petrochemicals, primarily in Asia and South America where there is a good amount of bid activity now. Continue to maintain our strong market position in the Middle East and also to defend and dominate our position in the North American markets for oil refining and petrochemicals.

We also wish to expand the capabilities of Energy Steel to increase their sale and profitability by exploiting their synergies of engineering fabrication capabilities and by aggressively pursuing sales to US nuclear utilities and also capitalize on new opportunities for new construction.

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