Graham Corporation's CEO Discusses F2Q 2012 Results - Earnings Call Transcript

Graham Corporation ( GHM)

F2Q 2012 Earnings Conference Call

October 28, 2011 11:00 ET

Executives

Deborah Pawlowski – Investor Relations

Jim Lines – President and Chief Executive Officer

Jeff Glajch – Chief Financial Officer

Analysts

Chris McCampbell – Stifel Nicolaus

Joe Mondillo – Sidoti & Company

Gabe Birdsall – Brasada Capital Management

George Walsh – Gilford Securities

Presentation

Operator

Greetings, and welcome to the Graham Corporation’s Second Quarter Fiscal Year 2012 Conference Call. At this time, all participants are in a listen-only mode. A 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 begin.

Deborah Pawlowski – Investor Relations

Thank you, Claudia, and good morning everyone. We appreciate your time here today with the Graham Corporation’s second 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 providing review of the company’s strategy and outlook. If you did not get that via e-mail, you can find on our website the slides that they will be using with the presentation and that the website is 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 – President and Chief Executive Officer

Thank you, Debbie. Good morning, everyone. We appreciate your joining us for our second quarter earnings conference call. We had a very solid quarter. I wish to comment that the management teams and employees at our Batavia, New York; Houston, Texas; Lapeer, Michigan; and Suzhou, China locations. The teams executed extremely well at closed collaboration for a couple of major projects and together delivered tremendous value for our customers and terrific financial results for the business.

I cannot say enough about the fine work our employees do each day to ensure we remain a supplier of choice to our customers to develop deep and lasting relations with our customers by helping to solve their challenges and by adding value during every interaction with us, and to make our businesses better by improving quality, becoming more productive, and by developing ways to improve processes.

Please turn to page four in the deck. By expanding our addressable markets during the downturn, we were able to have significant revenue growth in the quarter. Revenues were $33.6 million with power including sales by Energy Steel being about 30% of total revenue. The refining market was strong at 36% of sales. Our other commercial and industrial markets which include our work for the U.S. Navy, was about 20% of sales. Chem and Petrochem markets were about 12% of sales. There was exceptional comparable period growth of 68% along with 25% sequential growth.

Short cycle organic sales continued to be strong, up 30% year-on-year and up 20% sequentially. Energy Steel provided $7.2 million of revenue in the quarter. The team in Energy Steel executed extremely well on an order in excess of $2 million, one at the very end of the first quarter that was mostly completed during the second quarter. Actual shipment for that order was completed mid October. This order lifted Energy Steel revenue above $7 million. Sales were fairly evenly split between domestic and international markets with domestic sales at 53%.

Please turn to page five. Terrific financial results in the quarter were achieved with net income at $5.5 million or 16% return on sales. Gross margin was 38% with EBITDA margin at 26% in the quarter. These results reflect solid execution by our teams and leverage from tight production utilization in Lapeer and Batavia operations. Added volumes through our ongoing outsourcing strategies, we had approximately 25% of the Batavia’s production that was outsourced.

The benefit of increased volume from short cycle organic sales at higher margins and timing of backlog conversion related to recognizing revenue and profit, where a couple refining orders that actually were won in the third quarter and fourth quarter of fiscal 2009. Again, we achieved 16% return on sales, up from 10% year-over-year and 12% sequentially.

Please turn to page six. I am very pleased by improvement, we continue to see in our markets and by order development and margin improvement on orders we are wining. The organic business increased short cycle sales year-over-year about 20%, with improved margin on those sales. Our larger orders increased substantially year-over-year about 35% comparing the periods of January through September of 2010 to January through September of 2011. And here too, margin is improving comparing the two periods.

We also had $5.9 million of orders for the power market including $4.3 million from Energy Steel, $10.9 million of new booking from chemical and petrochemical markets. Just under $3 million came from the refining markets for new orders. Qualitatively, biding activity is improving. Outlook long-term is very positive. Short-term well see order levels vary somewhat, but all-in-all, we are seeing a much healthier market.

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