Greetings, and welcome to the Graham Corporation Second Quarter Fiscal Year 2021 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Gordon, Investor Relations for Graham Corporation. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. We appreciate you joining us today to discuss Graham's Fiscal 2021 Second Quarter Results. You should have a copy of the news release that was distributed across the wire this morning. 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.graham-mfg.com. On the call today with me are Jim Lines, our President and Chief Executive Officer; Jeff Glajch, our Chief Financial Officer; and Alan Smith, Vice President and General Manager of our Batavia, New York facility. Jeff will start with the financial overview of the period, Alan will then provide an overview of our operations, Jim will wrap up the prepared remarks with a strategic overview of our business and provide our outlook for the rest of fiscal year 2021. We will then open the lines for Q&A. As you are 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 the risks and uncertainties as well as other factors which could cause actual results to differ materially from what was stated in the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov. 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. You should not consider the presentation of this additional information in isolation or as a substitute for the results prepared in accordance with GAAP. We have provided reconciliations of our comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. If you will turn to Slide 4, I will hand the call over to Jeff Glajch.

Thank you, Chris. We're starting on Slide 4. It was great to operate in Q2 at full capacity after working at about 50% capacity in Q1 due to COVID-19. Q2 sales reached $28 million, which is an increase from $21.6 million in Q2 of last year. Sales in the defense Navy market were $9.4 million in the quarter. We had a quick turn material order that accounted for just over half of the revenue in the Navy segment, which we anticipated. While this type of sale isn't something we expect to happen repeatedly, it wasn't unexpected. Year-to-date, defense sales total $12.9 million, making up 29% of our sales, slightly exceeding our full-year expectations. We anticipate around 25% of our sales will come from the Navy for the entire fiscal year. The quarter also benefited from increased activity at one of our Asian subcontractors, who had additional capacity and moved some work from Q3 into Q2. Q2 net income was $2.7 million, or $0.27 per share, compared to $1.2 million, or $0.12 per share last year. This improvement was driven by stronger revenue and margins. Our cash position remains strong at nearly $68 million. Additionally, we received orders totaling $35 million in the quarter, fueled by robust international refining awards in Asia and defense contracts in the United States. Our backlog has grown to $114.9 million, and converting part of this backlog supports our improved guidance for the fiscal year. Moving on to Slide 5. I discussed the sales details on the last slide with the quarter at $28 million. Sales in the second quarter were 62% domestic, 38% international. Last year's second quarter was 73% domestic, 27% international. Gross profit in the quarter increased to $7.7 million, up from $4.9 million last year, primarily due to volume. Gross margins were 27.5%, up from 22.9%. EBITDA margins were 14.2%, up from 7.8% in last year's second quarter. And finally, net income was $2.7 million, up from $1.2 million last year. On to Slide 6. For the first half of fiscal 2021, sales were $44.7 million compared with $42.2 million in the first half of last year. This increase was despite the challenging Q1 when our production capacity was at 50% due to COVID-19. Year-to-date sales are 60% domestic, 40% international compared with 71% domestic and 29% international last year. Gross profit was $9.3 million, slightly off the $9.7 million last year, and gross margins were down 20.7% versus 22.9% last year, again, impacted by COVID-19 in the first quarter. Year-to-date EBITDA margins were 4.9% versus 4.5% in the first half of last year, and net income was $900,000 or $0.09 per share, down from $1.3 million or $0.13 per share last year. Again, the first quarter loss due to COVID-19 was substantial, but we have more than recovered that in the second quarter. Finally, moving on to Slide 7. Cash is at $67.9 million, down from $73 million at the end of fiscal 2020, but this is simply timing of working capital, namely accounts receivable and accounts payable. We are expecting this to come back in the third quarter. Our quarterly dividend remains firm at $0.11 a share. Capital spending has been light in the first half of the year at $800,000 compared to $700,000 last year. As we have seen in the last few years, our capital spending will increase in the second half of the year, and we still expect the total spend for the year to be between $2 million and $2.5 million. Finally, as we continue to work on our acquisition pipeline and activities, COVID has not had an adverse effect on our efforts as we have built some very good relationships over time, and these conversations continue. However, many of them are remote as opposed to in-person. But they are still occurring and very active. Alan will complete our presentation by providing more depth on our operations in Q2, and then Jim will provide a market update as well as our updated guidance for the rest of fiscal 2021. Alan?

Thank you, Jeff. Good morning, everyone. I'd ask that you refer to Slide 9. Sales for the second quarter were $28 million. As Jeff mentioned in his remarks, the company completed a large material-only order for a defense customer, which required very little conversion resources. Sales to the defense industry were up $6.8 million year-on-year due to the prior-mentioned materials order and greater defense conversion as we continue to grow our naval workforce. Lastly, and importantly, due to the strength of our backlog, annual guidance has been increased from $90 million to $95 million to $93 million to $97 million. Please move on to Slide 10. While COVID-19 has impacted demand for our product, there are several actions that are being implemented to ensure that we maximize the margin of the work that is expected to convert during this financial year. During the first-quarter conference call, I outlined several initiatives that the company was pursuing in order to maximize the realized margins. In particular, we are focused on reducing our material costs, hiring and quickly onboarding welders, differentiating our company from our competitors in the defense industry through superior execution, and leveraging IT tools to increase the productivity of our team. On the material procurement front, the team has had success in reducing our costs. Graham is a relatively small buyer of carbon steel and stainless steel plate. Therefore, we typically procure our plates from distributors. However, we are finding in this time of low demand, the mills are willing to sell directly to us, thus reducing our cost. We are also focused on growing our workforce in order to increase the production volume. To this end, we have recently completed an expansion of our weld school. We now have the capacity to train up to 10 welders up from 5. The work for the Navy has higher welder content than does for other work. Welding is a critical skill set for the company, and we must expand our capacity. The weld school on our campus is a terrific addition for workforce development. Currently, we are prioritizing improving our productivity in the Navy production areas now that the company has completed many of the first-time operations. Productivity enhancements will stem from improved bill flows, employee training, the creation of jigs and fixtures, and lastly, applying lessons learned. Our IT department continues to develop 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 projects. The dashboard will aggregate information that is stored on several IT platforms and will improve the productivity of our project managers. With that, I'll turn the presentation over to Jim.

Thank you, Alan, and good morning, everyone. I'll begin my remarks starting with Slide 12. Order levels in the quarter were strong, especially given the state of crude oil refining and petrochemical markets. The strong order level in the quarter is the result of effectively implementing our diversification strategy. We discussed during the past couple of years the actions taken to be successful in the more price-conscious segment of refining and chemical markets. Both participation and market share were low, which afforded an opportunity to address this segment differently. Opportunity generation and bid management structure were modified and also execution strategy changed. Replicating the success in China, a subsidiary structure was established in India. It is necessary within India, as an example, to localize selling certain technical resources and quality control personnel. We have the best chance to secure large project orders when they are supported and followed for a long time. A local presence permits that. This then allows for pulling a customer toward Graham rather than Graham having to move towards its competition. Also, fabricating certain components locally within India is important. As a result of this strategy, $10 million of new orders for India were secured in the quarter. These orders were for both customers and end users that had not used Graham before. I am pleased with our success in India. We plan to pursue principally large project work. And as of today, the company secured 2 of the 3 most recent large projects. I commend the team that initiated and drove the strategy and those now executing the orders. Another highlight was securing additional work for the U.S. Navy. This strategy is about 10 years old, and a large order in the quarter confirms the shipyards and the U.S. Navy find value in our engineering and fabrication capabilities, program management strengths, willingness to listen to feedback and implement improvements, and our quality program, as well as that we will invest in facilities, modern machine tools, personnel, and employee development. General conditions in our crude oil refining and petrochemical markets are weak, while the pipeline for the U.S. Navy is strong. This is noted by orders for our crude oil refining and petrochemicals being down compared with last year. Let's move on to Slide 13. I want to discuss briefly market outlook and what we are seeing in our key markets. I plan to go clockwise, beginning in the upper left quadrant. The sales team did well to secure a significant amount of work for Asia. The Indian work mentioned a moment ago, plus approximately $10 million in additional orders fiscal year-to-date that are for Asia. The pipeline must rebuild and move from early-stage activity to procurement stage. We expect the next few quarters to be about building the pipeline. We are seeing COVID impacting Asia as one large project in the bid pipeline that was teed up to be placed, had to be postponed due to workforce impact from the disease. We believe it will be activated again once the country has the spread of the disease back under control. Our team in India, our team in China, and those overseeing Southeast Asia point to COVID being on the rise again, resulting in slowing of activity along with heightened uncertainty. In the Americas, it was quite slow for both revamps, retrofits, and also routine spare parts. Refiners are focused on preserving cash right now and are postponing MRO or capital projects. We don't see this picking up until demand recovers, following having COVID under control. Those projects that may proceed, we are carefully following. On a positive note, an engineering-only order for a large crude oil refinery revamp was secured, that we hope will proceed within the next 12 months. For that case, the refiner could fund only upfront engineering at this stage so that detailed layout is done, enabling the project to proceed quickly once it is ultimately released for fabrication. If and when it proceeds into fabrication, we anticipate that a change order will exceed $5 million. Crude oil below $40 a barrel and pandemic-driven global disruption have resulted in activity being pulled in by most national integrated and independent oil refiners. Moving over to the U.S. Navy. The Navy in particular and defense overall is active. We have a solid pipeline of activity. Some of it is for new components that we have not done before, while others are repeat components for upcoming vessels. Submarine programs are vital for national defense and other strategic missions for our country. There's terrific visibility into multiple year new vessel requirements that underpin this segment continuing to be strong. We have identified and are pursuing $40 million to $60 million of opportunities for the Navy, and they should be placed with a selected vendor over the next 9 months. We have M&A target identification and development concentrated in the defense segment due to its strong long-term fundamentals. As Jeff noted, relationships in certain cases were established prior to COVID, and we continue to nurture them with a combination of remote interactions along with selective visits. Short cycle work is down 20% to 30%. Crude oil refining and petrochemical markets are where the majority of spare parts revenue was derived. These markets, as I mentioned, are in cash preservation mode until the global economy is back on its feet and demand subsequently recovers. On an upbeat note, there is a step-up in short-cycle inquiries. However, that has not translated into an improved order level just yet. Chemicals and petrochemicals are also down. Projects have been shelved or delayed. The pandemic sent a demand shock that is not yet fully abated. Getting COVID behind in most regions throughout the world is the catalyst for demand returning. Let's now move on to Slide 14. Backlog is a healthy $115 million, split evenly between commercial and defense. The staging of backlog or work in process already provides an ability to state guidance at this extraordinary time when many companies cannot. 60% to 65% of backlog is planned to convert during the next 4 quarters, with approaching 40% of backlog planned to convert during the next 2 fiscal quarters. Please go on to the next page. As Jeff and Alan mentioned, we are updating our guidance. We've increased the revenue range to between $93 million and $97 million, implying the second half should be between $48 million and $52 million for revenue. Gross margin is expected to be between 21% and 23%. SG&A spend between $17 million and $17.5 million. And we're projecting the effective tax rate is approximately 22%. With that, Christine, I would ask that you open the line for questions.

Our first question comes from Joe Mondillo with Sidoti.

So I was wondering if you could let us know what the gross margins for the quarter looked like if you exclude that defense material order.

It would have been comparable because that was a materials-only order. So it wasn't appreciably different.

Comparable to...

In the quarter overall.

What...

The quarter overall.

Okay. So the 25, excluding that order, it would have been 27.5% or around there?

It's not materially different from that. Correct.

And then just as far as sort of what you can see in terms of work and sort of the bookings pipeline over the next, I guess, for maybe the rest of the fiscal year, it sounds like things are relatively slow. In the past or in this past quarter, you saw some strength in the orders and some of that was Asia related, but you sort of mentioned that Asia is maybe you're expecting a rebuild of the pipeline. And so does that indicate that, that Asia strength that you saw in the quarter will be lighter than what we saw in the second quarter? And it sounds like Americas is pretty weak. So just overall, it seems like from my vantage point that bookings may be comparable to the four quarter trailing average? Or could you just talk about sort of what you're seeing in the pipeline?

At a qualitative level, I think your assessment as you take the information that we've shared with you today into account is generally correct. There is an overall slowness notwithstanding the region in refining and petrochemicals. We did have some large project work get secured by us in the quarter. Those aren't always repeatable, and they can make our order patterns lumpy or quite variable, when those orders are $5 million, $6 million and a quarterly order level might be $20 million to $25 million as an example. So those can have a material impact. But as we look at the quarter or the upcoming quarters from an order level, we see some softness indeed for large project work. We don't necessarily feel it, it takes us back to how Q4 and Q1 were. And also on a more positive note, aggregating all of our end markets, we are anticipating a book-to-bill to be above 1.

And that would be for the year?

For the year, I apologize. For the full year. Yes, Joe.

Okay. Relative to gross margins and looking at the backlog, your gross margins have been somewhat inconsistent over the last three or four quarters. Could you help us understand what the gross margin profile looks like in the backlog? It seems like you're expecting some strong gross margins in the second half of the year based on your guidance. Perhaps you could comment on that and also what to expect beyond fiscal '21.

I'm going to dissect it a little bit. The margin quality for the naval work as we project forward, we believe begins to average up. And there are reasons that we had cited previously for that. As Alan and his team have executed extraordinarily well on that strategy over the last decade, we have been able to move from what was principally 100% of the backlog at a point in time, 5 years or so ago, being all competitively bid, to today, maybe 20-ish percent of the backlog being competitively bid. I'm sorry, 80% is competitively bid, 20% is under sole source contracting. Projecting forward how we're seeing the evolution of our relationship with the shipyards, we think in a few more years, our backlog should be closer to 50% for the Navy under sole source versus competitively bidding. And that has a different margin potential than what's been running through backlog right now. So we would expect that backlog quality to continue to improve as we move through the next several quarters, the next several years. And then of course, that translates into an improvement, we believe, in our overall financial performance as a result.

Okay. And it looks like the guidance is implying gross margins in the back half of the year of 23%, 24% roughly. What is driving that? Because you've seen other than the second quarter and, I guess you can't really count the first quarter, because you were operating at low operating rates but looking at the back half of last year, you're implying some good, very good improvement. What would be driving that in the back half?

Joe, this is Jeff. We've been discussing for the past few quarters that our backlog's margins have been improving. Of course, Q1 was affected by operating at half capacity. However, if we look back to the middle of last year, we mentioned that our backlog was on an upward trend, and we observed some improvement in the margins. That’s what is driving the current situation.

Okay. And then just last question, I'll hop in queue. Relative to COVID, could you just address sort of what you're seeing in your Buffalo market and anything that you have to say regarding the ramp-up that we're seeing in cases in the country and just anything that you're anticipating potentially as we get into the winter months?

Sure. I think in the local markets, we've seen a little bit of an uptick, but not a dramatic uptick. We've put in some very good processes here at Graham to minimize the risk to our employees. We are not allowing visitors on-site with very minimal exceptions. We have cleanliness procedures across the company that we put in during the time period that we primarily shut down in late March, early April, and those have been very effective for us. So we're pleased with the fact that our employee base has not been impacted by COVID, but obviously, we continue to be very wary of what's going on in the community, what's going on outside of our community because some of the COVID issues can be local and some of them can travel their way in. But we're not seeing a huge uptick locally, though. As I think with a lot of places, there is a bit of an uptick that is occurring. But we're going to stay vigilant. Our employees are doing a great job, and our leadership team around COVID has stayed focused on making sure that we don't take our eye off the ball.

Our next question comes from Theodore O'Neill with Litchfield Hills.

Congratulations on a great quarter.

Thanks, Theo.

Thank you, Theo.

Yes. So my first question is for Alan. Last quarter, Alan, you talked about expanding the welding school up to 8 welders. And now you're saying it's going up to 10. What's driving that? And how is it going?

What's driving that is as we completed the project, it appeared that we had more room than we thought. So we were able to locate two more weld booths. The project is going very well. Where the teaching and training portion of the building is, that's complete. We're finishing up a canteen and restrooms. The restrooms and canteen should be completed by the end of November, and we'll be ready to accept all 10 new students.

Great. Jim, on Slide 13, I'm not sure I understand this bullet point. Under the U.S. Navy, certain bids are new components. What components are you referring to?

That terminology, Theo, is it's a new fabrication for us that we have not done before. And we wanted to cite that because it confirms our ability to continue to grow within the three programs that we're involved in organically by winning new equipment, new components.

Our next question comes from the line of Joe Mondillo with Sidoti.

Just a couple of follow-up questions. On that same slide, Slide 13, in the bottom-left quadrant, talking about the petrochemical market, you cited about the next wave of ethylene capacity in the Middle East and Asia. Could you give us a sense of sort of more what's going on there and what kind of timing of where some of these projects that you're seeing are at right now? And maybe when they would maybe start to convert into orders for you guys? Is this a multiyear type of thing or next year?

I would say it's more of a multiyear situation. The outlook today is different from what it was 6 to 9 months ago, before COVID. The projects in the Middle East require stability in the global markets and likely some improvement in oil prices. These are typically integrated refining projects that combine crude oil refining with petrochemical production, and we think they are a couple of years away. However, several countries, particularly Saudi Arabia, have a clear mission to diversify into petrochemicals through integrated refineries. In Asia, especially China, they may be ahead of other regions in investing in new petrochemical capacity. They will also be building integrated refineries that link petrochemical production with crude oil refining, which presents significant opportunities for us. We are currently executing one of those orders for China. Previously, we would have thought that new capacity in China would bring about a $3 million to $5 million opportunity for us, but we are now processing a backlog worth $13 million for an integrated refinery. This work is secured and in the execution phase now. We expect that China, along with other regions worldwide, will increasingly shift from traditional fuels to a focus on petrochemicals.

Okay. And as far as your short-cycle business, is that mainly North America, given your installed base is so big? Or is that beyond that? And based on your answer, I'm just wondering, you mentioned inquiries are up. I was just really specifically wondering where specifically what markets or geographies those inquiries are up.

We tend to think of our short-cycle work as 80-20. 80% domestic, some of it is international, but the vast majority is domestic.

And so those inquiries are then mainly domestic then?

That's correct. I'm sorry. Yes.

Okay. And then lastly, wondering if you could just sort of update us with a typical quarterly update on your balance sheet and M&A and any updates there.

Sure. Joe, this is Jeff again. On the balance sheet, our cash is approximately $68 million, which is fairly consistent with last quarter. I expect to see improvements this quarter as we have a significant amount in receivables expected to come in over the next couple of months. Therefore, I anticipate our cash position will increase during this quarter. The rest of the balance sheet is in a good state, with nothing unusual to report. Regarding mergers and acquisitions, both Jim and I have mentioned that we remain active, focusing primarily on the defense and Navy sectors. Our approach involves building relationships over time, many of which predate COVID, allowing us to maintain them mostly remotely with some in-person visits over the last quarter. We expect to continue this momentum, and our acquisition pipeline remains strong. Despite some challenges, we've managed to navigate the virtual environment effectively due to those established relationships, and there has been no slowdown. We're pleased with the current state of the pipeline and hope to keep progressing.

We have no further questions at this time. Mr. Lines, I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. And thank you, Joe and Theo, for your questions this morning. We appreciate everyone listening in to our conference call, and we look forward to updating everyone again in January. Have a great day. Stay safe. Bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.