Graham Corporation (GHM)

F3Q12 Earnings Call

January 27, 2012 11:00 AM ET

Executives

Deborah Pawlowski – Investor Relations

Jim Lines – President and CEO

Jeff Glajch – Chief Financial Officer

Analysts

Gabe Birdsall – Brasada Capital Management

Mark Tobin from – Capital Partners

Joe Mondillo – Sidoti & Company

George Walsh – Gilford Securities

Presentation

Operator

Compare to:
Previous Statements by GHM
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Greetings. And welcome to the Graham Corporation Third Quarter Fiscal Year 2012 Quarterly 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. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, Ms. Pawlowski. You may now begin.

Deborah Pawlowski

Thank you, [Shea], and good morning, everyone. We appreciate your time here today with the Graham Corporation’s third quarter fiscal year 2012 conference call. On the call, I have with me Jim Lines, President and CEO; and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results of the quarter and also provide a review of the company’s strategic -- strategy and outlook.

Many of you -- you should have the website -- on the website there are slides that accompany the conversation today. If you don’t have them you can find them on the company’s website at graham-mfg.com.

As you may be 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 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. Good morning, everyone. And we appreciate your time today. Please turn your attention to slide four. I feel we had a solid quarter with revenue expanding year-on-year 27% to $24.3 million. Organic sales are up 13%, Energy Steel represented 14% of total sales.

An indicator to the market direction for us, one of them is our organic short cycle sales and we’ve seen that segment of our business improving year-on-year, it’s up 25% in revenue, while a lot of this is providing expanded margin due to price strategies we implemented earlier in the year.

The power market in whole that expanded about $2 million year-on-year. Petrochemical market, we’re continuing to see good activity there, primarily on the order intake side. Sales to the refining market were flat in the quarter. Our geographic sales mix was 57% domestic, 43% international.

Please turn to the slide five. Margin was in line with expectation for the third quarter. Gross margin came in at 27% and a 13% EBITDA margin. Organic production volume, as measured in total labor hours, was up 15%.

Tier 2, we believe this is an indication that our markets are improving, as one of our leading indicators to the direction are markets are moving in. We’re also nearing the end of producing a couple of large Middle Eastern refining projects and that did have an effect on sequential gross margin.

Please turn to slide six. Our strategy to diversify has had a positive impact. Our second quarter was a clear indication of what this can mean. As our traditional refining and petrochemical markets gain momentum, coupled with growth from power generation markets along with our work for the U.S. Navy. We anticipate stronger growth this coming expansion cycle than we enjoyed the last cycle. We also feel going forward our geographic sales mix will be roughly 50/50 domestic and international.

Slide seven. We do have a solid pipeline of good quality opportunities. Order growth was 23% year-on-year driven primarily by our strategy to be in the power market, principally Energy Steel win or new construction in the U.S., nuclear energy facilities. New orders in the quarter were $21.9 million. Energy Steel provided just under $10 million.

For the organic business order rate was down 28% to $12 million. As I look at that, while that was disappointing, we do believe that’s partly due to timing. Several orders that we’re expecting to close during the quarter for Asian applications moved out of the quarter.

To be candid, we actually thought a few of those orders would close in the second quarter, but as we’ve communicated on several calls, it’s been difficult to predict when orders will close. We do expect these orders to finally close in the fourth quarter.

Also in the quarter we did face stiff competition from South Korean competitors that took a few orders from us, to be direct there were price levels that that were unsatisfactory for us and coming out of a downturn into recovery, it’s not a time to be anxious and make decisions to take business off to street to low the business with inferior profitable orders. So we work smart in our decisions I feel. It’s tough to moves these orders at this point in time but I do feel they are the right decisions that we made at this point in the recovery.

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