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Text: We appreciate you joining us today to discuss Graham's Fiscal 2021 First Quarter Results.
We also have slides associated with the commentary that we are providing here today.
If you do not have the release or the slides, you can find them on the company's website at www.
Jeff will start with the financial overview of the period.
We will then open the lines for Q&A.
These documents can be found on our website or at www.
I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
This is Jeff actually.
As Jim and I have noted on our update calls in March and June, due to COVID-19 the COVID-19 pandemic, we've reduced our facility staffing to approximately 10% in late March and after implementing new work practices, enhanced cleaning and safety procedures and educating all of our employees on these changes, we gradually began to increase our staffing.
By the end of May, we were back at near-normal on-site staffing and have continued at that level over the past two months.
I want to compliment Alan Smith and his team for ensuring a safer production environment in this difficult time as well as our human resources team for their continued focus on improving safety in our workplace.
As a result of these proactive measures, our average production staffing and capacity for the first quarter was only 50%, and hence, our first quarter results suffered accordingly.
Sales in the first quarter were $16.7 million, which included a project in China, which had been delayed by COVID from the fourth quarter of last year into the first quarter of this year.
That project made up approximately 30% of the quarter's revenue.
On a positive note, our Defense or Navy sales were 21% of this total or $3.5 million.
We will be reporting the level of our Navy sales on a quarterly basis going forward, which for this year, we expect to be approximately 25% to 30% of total sales.
In the first quarter, we had a loss of $1.8 million or $0.18 per share.
As I noted, we ran at half capacity in Batavia.
Yet as discussed on prior calls, we continue to pay all of our employees their full benefits and wages.
We did not accept any PPP funding, so we consciously realized this type of loss would occur.
As Jim will discuss later, we view Q1 as a discrete event and assuming there are no significant impacts to our business or operations, the rest of fiscal 2021, we will be operating as normal in Q2 and beyond, and would expect far better results going forward.
Cash at the end of June was $67.2 million, and our backlog was $107.2 million, split evenly between defense and Commercial.
This strong backlog level supports our guidance for the rest of fiscal 2021.
On to slide five.
Sales in the first quarter were down $3.9 million.
Please note in Q1 of last year included $1.3 million from our Energy Steel business, which was sold in that quarter.
Gross profit, EBITDA and diluted earnings per share were all down significantly due to our low capacity level, yet more normal level of operating expenses, which occurred in the quarter.
Moving on to slide six.
Our cash position decreased to $5.8 million in Q1 to $67.2 million or $6.74 per share.
We expected this to occur, as I noted during our update call in late March, if we were shut down for a month, we would expect to utilize approximately $3 million of cash per month.
At 50% capacity in the quarter, this is equivalent to 1.5 months average shutdown, hence, the reduction in cash.
As with sales and profitability, we expect cash generation to be positive for the rest of fiscal 2021.
We paid $1.1 million of dividends in the quarter and it continues to be secure and an important part of our capital allocation provided directly back to shareholders.
Capital spending in the quarter was light at $300,000.
We expect capital for the full year to be in the $2.0 million to $2.5 million range.
Finally, our business development, management team and Board continue to be focused on utilizing our strong balance sheet to opportunistically identify and close on acquisitions, which have near and long-term benefits to our shareholders.
I would ask that you refer to slide nine.
$16.7 million of sales for the first quarter were negatively impacted by how we responded to the COVID-19 outbreak, which resulted in 50% reduction of our operating capacity.
During the first quarter, we developed and implemented COVID-19 protocols, which ensures that we would not experience such a low utilization rate for the remainder of FY 2021.
I am proud of the COVID return to work team and the entire company for returning the employees back to work safely and for following our newly implemented workplace safety practices.
Everyone has stepped up and responded well to this new reality we find ourselves in.
Highlights for the first quarter were that revenue from Defense projects was $3.5 million, which represents a year-on-year increase of $1.4 million.
As Jeff mentioned, we also completed a large project in China, which was responsible for approximately 30% of the quarter's revenue.
You may recall that this project due to COVID-19 fell out of the fourth quarter.
Moving on to slide nine.
While COVID-19 has impacted the demand for our products, there are several actions that are being implemented to ensure that we maximize the margin of the work that we will be converting this fiscal year.
COVID-19 has created a buyer's market for raw material.
Our supply chain has been very successful in securing materials at reduced costs.
I'm expecting that we will be able to continue to be in this position for the rest of the for the remainder of the year.
We are also focusing on growing our skilled workforce in order to increase our production volume.
To this end, we recently completed an expansion of our Weld School.
We now have the capacity to train up to eight welders up from 4.
We established our Weld School approximately five years ago, and it has proven to be a effective means to develop and grow our workforce.
Currently, we are prioritizing improving productivity in our Navy production area.
The company has completed many first time operations.
The productivity enhancements will stem from improved build flows, employee training, creating objective fixtures, and lastly, applying lessons learnt.
The IT department is developing tools, which will improve our ability to manage our global fabrication partners.
A management dashboard is being developed to track all aspects of our outsourced project.
This dashboard will aggregate information in-store on several IT platforms and will greatly improve the productivity of our project managers.
Finally, we are continuing efforts to grow our low-cost outsourcing capabilities, which will allow us to compete on projects where cost is the main decision driver.
I see these end market disruptions as an opportunity, to be clear, I just like the disruptions.
However, our attitude is to take advantage of them, invest in ourselves, improve our processes, gain productivity so that we come out stronger and performing better.
Our attitude is let's not waste the downturn by being a victim of it, but rather let's play offense to create benefits because of it.
I am referring to slide 11.
Jeff and Alan both provided good commentary about the impact to our financial results from the pandemic and price of crude oil.
It has also impacted order patterns.
Energy and petrochemical markets began to change adversely before the pandemic.
Fourth quarter of last year and first quarter of this year each had net orders of approximately $12 million.
There were no Defense orders during those two quarters.
Included in the net orders is $4 million of canceled orders and the impact of change orders.
It was rather even with $2 million of backlog deductions in each quarter.
The underlying bookings for new orders were a bit better than what is shown, however, still down considerably.
I have been through four downturns while at Graham, and now I'm in the fifth.
The each are challenging, went in them.
However, this current downturn feels rather different.
Customer behavior is less predictable this time.
I imagine that is because no one has experienced this type of demand disruption or turmoil in the past.
A couple of examples can illustrate well what we face.
We initiated bidding to replace a 40-year-old surface condenser in 2018.
It was urgent for the end user and end-of-life situation where the customer did not know if the unit would last another year.
Schedule was critical to meet a delivery window.
Order was finally ready to be placed this last quarter.
It was about a $2 million opportunity.
Due to focus on preserving cash, the plant advised that they cannot procure the unit now.
We offered in response, very favorable cash flow terms, we worked our supply chain for better costs, as Alan had mentioned, that then resulted in a lower price to the end user.
Corporate simply would not budge.
The risk of an unplanned shutdown or reduction in plant throughput is high, but cash preservation prevailed.
Any other time this would have been an order placed, put into our backlog and be a contributor to current year revenue.
Another example is a larger project, that's about $5 million for a refinery revamp.
Here too, we've been bidding it for a couple of years.
Learned last quarter, it was to be pushed out another year.
While four weeks ago, we got reengaged with the EPC that needed our engineering and to complete their plant layout and structural design.
In response, we proposed an engineering-only order.
We did a call this week that corporate is likely to sponsor final investment decision and now the full orders back in play for fiscal '22 revenue.
The order is now projected to close this quarter, and everything is hurried to get it done.
Will it actually proceed or perhaps there might be an order placed that subsequently is canceled, like we have experienced in the recent couple of quarters?
I simply don't know.
It's difficult to predict.
I offer these two examples to convey order patterns may be unpredictable and lumpy.
We have no control over the direction of our end markets, and little influence over the decisions a customer may make regarding will a project received funding.
I can convey, though, that we are on top of the available opportunities, controlling well that which we can control which is how we support customers, manage opportunities, differentiate from the competition with our speed, our knowledge sharing, options analysis that we provide, and ultimately, get our company in a position to win should an order get placed.
We may not take an order at a particular price, but the job of our sales team and that team does it well, is to get Graham in a position to accept or decline an order.
Even today, our naval bid pipeline is unpredictable, more so over timing, but it's still as difficult to define within a quarter when an order is going to be placed from the U.S. Navy or their prime contractors.
Moving on to slide 12.
Just stepping through our different key end markets.
Refining is down in North America across our three segments, which would be the integrated refiner, the independent refiner and also the MRO segment, spares and parts that's down.
In Asia, we do see a pretty active pipeline for new capacity that would be for India, China or elsewhere in Asia.
For the Middle East, or Latin America, there's really nothing significant in our pipeline right now.
We think those new capacity opportunities will present themselves after fiscal 2021.
For the U.S. Navy, we have a very healthy active bid pipeline across the three programs that we are in, the carrier program, the Virginia-class submarine program and also the Columbia-class program.
What's great in certain of these bids are for new components that aren't currently in backlog that we've not done.
So our focus on expanding our share of wallet is presenting opportunities that we hadn't seen previously, and then we're going to go after those and hopefully win those.
Across the next three quarters, we anticipate somewhere between $30 million to $50 million of work would be placed by the Navy with the suppliers such as Graham, and hopefully, we will win a strong share of that.
In the chemical, petrochemical market.
As I cited with the one example of a bid opportunity, focuses on preserving cash, without demand had collapsed globally, this market is really focused on clamping down on capital spend expenditures, MRO expenditures and just conserving cash across 2021 sorry, calendar 2020 and across fiscal 2021.
We are beginning to see some early signs of the next wave of new ethylene capacity, and you might recall that we view ethylene as the as a surrogate for the overall chemical industry.
An important consideration at this point in time is we're trying to understand for the next wave, the relevance of North American investment.
It may not be as strong as this most recent wave that began in the 2012, 2013, '14 time frame.
On the short-cycle side, that seems to have pulled back 15% to 20%.
We are seeing some improvement on the spare parts side.
However, the OEM work, again, this is short-cycle work that seems to be off correlated to the global economy and end market demand collapse.
We are also involving ourselves in new markets or emerging markets, if you will, alternative energy markets, hydrogen fuel cell market plus natural gas, and also supercritical fluids.
We have certain technology.
These are high-pressure applications where our product line fits extraordinarily well.
These are not large orders.
The ASP is probably under average selling price is probably under $100,000 for that type of sale.
But it's a very nice bread and butter work.
And we're focused on our participation in securing a presence in these new emerging markets.
Let's move on to the next slide, slide 13.
Our balance sheet and also backlog position entering this downturn are both beneficial.
After the first quarter, which we do consider an event isolated to that quarter, we get back into backlog conversion in the second quarter and hit stronger conversion in the third and fourth quarters.
$107 million of backlog as of June 30 is terrific to have.
70% to 75% of that backlog is planned to convert over the next 12 months.
That implies for fiscal 2021, $81 million of fiscal 2021 revenue is in hand, either converted during the first quarter or from current backlog.
This provided us the confidence to give full year guidance that I'll speak to in a moment.
Our backlog is split roughly 50-50 between naval work and orders for our traditional end markets.
And for the naval work, as we've been saying for the last several quarters, we are in all three programs and have backlog in full conversion mode.
Again, by programs, we mean one program for the carrier, another for Virginia-class submarine and the third program is Columbia-class submarine.
Let's move on to the guidance slide.
We're coming out with full year guidance because of the confidence that we have with our backlog and how we see the remainder of the year shaping up.
Revenue guidance is expected to be between for revenue to be between $90 million and $95 million.
Gross margin is projected to be between 20% and 22%.
Our SG&A spend is projected to be between $17 million and $18 million, and the effective tax rate is 22%.
Implicit in this guidance is that we continue to run that whole sorry, implicit in this guidance is that we continue to run at high production levels and don't have work stoppage or curtailments due to another COVID-related impact to our operations or those of our supply chain fabrication partners.
This is a risk that management will address and communicate about should it alter fiscal 2021 performance.
Of course, the second risk is that a customer may place a large order on hold or cancel it, we are unaware of particular orders of backlog with that risk.
And now moving on to slide 15.
This provides a quick snapshot of what we're focused on, what our strategic goals are and a bit of a progress update.
We have been focused for a number of years on increasing what we call our predictable revenue streams, our predictable base.
A key component there is our work for the Defense because of the long live nature of that backlog that gives us a strong level of predictable revenue.
For a comparison, we are projecting that fiscal 2021 revenue compared to fiscal 2020 revenue for the Defense work will be up about 50%.
We're also focusing on our installed base.
We are an 80-plus-year-old company.
We have this massive installed base around the world, a very large installed base in North America, and we've been allocating resources toward focusing on that differently than our company had in the past.
To be candid with what's occurred with the pandemic, there's been a bit of a pause on our investment there and putting personnel into regions where the installed base is high, primarily because our customers aren't openly permitting access to their plants.
They're being very careful about admitting personnel into their facilities.
So we can't gain access to those sites.
And also, we're very mindful about worker safety and having our people travel at this point in time and the consequences of being sequestered or isolated upon return.
So therefore, our investment this is a bit of a pause.
It doesn't reflect our commitment to this strategy is just the consequence of what we're currently facing.
And of course, we're looking at M&A.
In our M&A program, we're focused on more stable revenue streams to support our expansion of the predictable base of our business.
We're also taking action and have taken action to reposition our company to be more successful in price-focused opportunities.
We participated in those opportunities before we more situationally secured those orders when it made sense to us.
We've now structured and are structuring and making investments to go in and carve-out a meaningful market share for ourselves in that underserved market previously.
We have seen these opportunities in the past.
We're still seeing them today.
The operations team is now structuring to how to go win those and execute within a lower market price at an acceptable return.
We've had a healthy level of that type of revenue in fiscal 2020, and we'll actually have a greater revenue level in fiscal 2021 compared to 2020.
So this strategy is being executed well.
And I'm very pleased with our progress there and our ability to extract and realize the margins that we targeted.
Also, we're, of course, focused on strengthening our financial results.
A key element here is to push more volume through our roof line and put less into our local supply chain with our fabrication partners.
Alan and his team are, along with the HR team, are looking to continue to add to our skilled workforce, welders, machinists, assemblers.
I'd like to see us with about 20 to 25 more direct laborers over the next one to two years, probably the next two years.
And that will be very, very helpful in lifting our margins.
In the naval program, we need to earn our position as a sole source supplier.
We have some of that work now, which can come in sole source, but there's more of that through good performance, through strong execution, through program management, risk identification, risk mitigation and cost efficiency.
We may be able to secure additional work under sole source bidding.
That's earned, that's not given.
And Alan and his team are doing a really good job to position us to be into that type of supplier category.
Also, for our naval work, Alan mentioned it in his remarks, we have had some of that work, that's first time articles for us, first time fabrications, and that has an aspect of cost structure that we've carried for that type of order.
And that has a little bit of a headwind on the gross margin side, elevated cost of goods sold.
However, as we get through those first article fabrications, and Alan and his team focus on workflow improvements, production optimization, reconfigure the operations to flow work more efficiently.
Now that we've gone through the first article that will drop down to improved financial performance from that segment of our business.
And also, we'll balance our near term realities with the reduction in demand on the order front.
With our long-term strategies to grow this business, we've chosen not to right size our costs for what was happening in our first quarter or to an extent, what's happening in our second quarter with where revenue is.
Because we believe in the long term and we believe in our strategies and we'll balance decisions we'll make around improving near term quarters that could be to the detriment of long-term value creation.
So we will be very mindful of that watch out fiscal 2022 begins to take shape.
With that, I think it's an appropriate time to open the call up for Q&A.
Devin, would you please open the line?

user
compname reports q1 loss per share $0.18.
q1 sales $16.7 million versus refinitiv ibes estimate of $14.2 million.
q1 loss per share $0.18.
fiscal 2021 revenue guidance of $90 million to $95 million from expected improved performance for remainder of fiscal 2021.
averaged about 50% of normal staffing capacity during quarter.
encouraged by pipeline activity that co is addressing in both defense industry and emerging markets, specifically india.

assistant