Release Date: June 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Graham Corp (GHM, Financial) achieved record revenue and orders in fiscal 2024, demonstrating strong financial performance.
- The company eliminated its debt and refinanced for more flexibility and lower rates.
- Significant investments were made to grow the business both organically and inorganically, including the acquisition of P3 Technologies.
- Gross margin expanded significantly, reflecting higher volume, improved absorption, and better pricing on defense contracts.
- The company received a $13.5 million strategic investment from a major defense customer to expand and enhance production capabilities.
Negative Points
- SG&A expenses were higher than expected, partly due to increased performance-based compensation and professional fees.
- There is still some lower-margin first article work in the backlog, which may drag on gross margins in fiscal 2025.
- The defense orders tend to be lumpy, which can cause variability in financial performance.
- The company faces challenges in hiring and training sufficient direct labor to meet production demands.
- The commercial market, particularly in China, remains slow, impacting new capital project opportunities.
Q & A Highlights
Q: SG&A as a percent of revenue came in higher than forecast. Can you provide more color on this? Also, adjusted EBITDA was below the initial guidance. Was this due to the change in calculation?
A: Our SG&A percentage was higher due to the Barbara-Nichols supplemental earn-out bonus and increased performance-based compensation tied to our results. Professional fees were also up. For adjusted EBITDA, the change in calculation impacted the results. If we adjust for the Barbara-Nichols bonus and stock-based compensation, we would have been at $16.2 million, above the high end of our range.
Q: Why are you now including defense aftermarket sales in your aftermarket sales figures? Can you provide the refining and petrochemical aftermarket sales for the fourth quarter?
A: We included defense aftermarket sales because it has grown significantly, particularly within Barbara-Nichols. For the year, we had around $35 million in refining and petrochemical aftermarket sales and about $5 million in defense aftermarket sales.
Q: Will there be any drags on gross margin from projects in fiscal '25?
A: We still have a small amount of lower-margin first article work in our backlog, but it is much smaller than in previous years. We expect some drag in fiscal '25, but not to the same magnitude, which is why we guided to a higher gross margin of 22% to 23%.
Q: Can you provide more details on the investments in Batavia and the potential for increasing the scope of business?
A: The Navy has approached us about producing additional equipment. We are involved in the design of heat exchangers for the next-generation attack submarine, SSNX. The US government is focused on developing their supply chain and building ships and submarines faster, providing us with opportunities to bid on new equipment.
Q: Can you give us a sense of the visibility in the energy and defense sectors for this year?
A: Defense orders will be lumpy, but we have several in the pipeline. For refinery and petrochemical, North America is moving into maintenance mode, with new capital projects mainly in India and Saudi Arabia. We are focusing on aftermarket in North America and new capital projects in the Middle East and India.
Q: Is the automated welder ordered in 2022 operational?
A: Yes, we have a couple of automated welders in operation. They are providing significant benefits in terms of efficiency and quality. We have ordered seven more as part of the Navy investment, which will be installed in both the current and new facilities.
Q: When will the new Batavia plant be operational, and how will it be phased in?
A: We expect to break ground in July and receive a certificate of occupancy by June or July 2025. We will start utilizing some of the equipment funded by the Navy beforehand, with a lot of parallel activities while the building is being constructed.
Q: Are you running at close to 100% capacity now?
A: We have room for more capacity, especially with our welder training program. We are running two 10-hour shifts and could potentially run three. We expect to graduate 20 to 40 new welders annually, which will help us manage capacity.
Q: What gets you to the higher end of the EBITDA guidance range for fiscal '25?
A: It comes down to execution. We need to get materials in time and hire and train enough direct labor. Our direct labor grew almost 10% this past year, and we have budgeted another 10% increase for next year.
Q: Is there any outlook for LNG terminals in your forecast, or is hydrogen a more likely opportunity?
A: We are not significantly exposed to the LNG market. The more likely opportunity is on the hydrogen side, where we are working with several companies to develop solutions for the hydrogen economy. This will be a slow rollout, but we aim to be well-positioned when it takes off.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
