Greetings. And welcome to Graham Corporation's Second Quarter Fiscal Year 2022 Financial Results 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. I would now like to turn the conference over to your host Deborah Pawlowski, Investor Relations of Graham Corporation. Please go ahead.

Thank you, Maria and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation. Joining me on the call are Dan Thoren, our President and CEO' and Jeff Glajch, our chief financial officer. You should have a copy of the second quarter fiscal 2022 financial results which we released this morning before the market. If not you can access the release as well as the slides that will accompanying your conversation today at our website, www.graham-mfg.com. After our formal presentation, we will be opening the line for Q&A. If you'll turn to slide two in the deck, I will first review the Safe Harbor statement, you should be aware that we may make some forward-looking statements during the formal discussions as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with Securities and Exchange Commission. These documents can be found on our website or@sec.gov. During today's call, we will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release in the slide for your information. So with that, it's my pleasure to turn the call over to Jeff Glajch to begin, Jeff?

Thank you, Debbie. And good morning everyone. If you could turn to slide three, revenue in the second quarter was $34.1 million, up $6 million, or 22% compared with last year's second quarter. The addition of Barber-Nichols contributed $16.5 million in the quarter. Our legacy Graham manufacturing business offset part of the game. There are two reasons; first, in the comparable quarter last year we had non-repeatable material only order. In addition, we had a significant level of Chinese sub-contracting in the second quarter last year. These two items made up approximately $10 million in lower revenue compared with last year. We are pleased with our strategic expansion into the defense business evidence that with 58% of our quarterly revenue coming from this key market, while we await a recovery in the energy and petrochemical markets. As we look to the second half of the year, we continue to expect strong performance from Barber-Nichols. For the Batavia facility, we expect to see a significant shift toward higher profit defense jobs. In our commercial markets, we expect to have a large increase in subcontract to production plans for both the United States and India, which will measurably improve revenue and gross profit in the second half of the year. I would caution however, that this large increase in the amount of outsourcing while set up very nicely right now is dependent on our subcontracting partners and can occasion take longer -- can allocation take longer than planned. So there is a risk a portion of this could shift out of the fiscal year into fiscal -- into Q1 of fiscal 2023. Orders increased to $31.4 million up from $20.9 million in Q1, orders were split evenly between the Graham manufacturing business and Barber-Nichols. Our $233 million backlog is strong with 78%…

Thank you, Jeff. And good morning, everyone. I'm starting on Slide seven. We had a nice mix of orders in the second quarter, $12.5 million came from our defense customers almost $19 million from our commercial customers. Defense orders were for both new and existing programs, and new and overhaul equipment, giving us full lifecycle exposure. Space related orders were around $2 million and advanced energy orders were close to $2 million. Our commercial balance orders or spares are trending upwards. The big change in backlog from fiscal year '21 to fiscal year '22 was mostly from the acquisition of Barber-Nichols. Of the $233 million backlog 78% or $182 million is in defense. From a backlog perspective, Graham has certainly made the transition from an energy and chemical business with some defense work to a defense company with an important contribution from energy and chemical. About one half the backlog is expected to convert to revenue in the next 12 months. The remaining 12-month order graph does not include BN orders prior to the acquisition on June 1 to 2021. Moving to slide eight Graham's strategy started many years ago, has been realized through both organic and inorganic means. The organic defense business supplying vacuum and heat transfer equipment on Navy carriers and submarines has been very successful. The acquisition of Barber-Nichols has added more defense business that helps to offset the cyclicality in the heritage energy and chemical business. Our second quarter revenue in defense was $20 million, up $12.7 million from the first quarter where BNI contributed for one month. The really nice thing about defense business is the visibility. Ships and submarines take a long time to build. So budgeting and plans are in place long before orders come. In some cases, the Navy will place orders…

[Operator Instructions] Our first question is from Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.

Thank you very much. I want to ask about the nuclear sub opportunity in Australia. From what I can tell here, I'll show you it does have some capacity to make submarines in the diesel electric variety. But with this present, can you talk about what kind of opportunity this would present for Graham Corporation in Australia?

Yeah, absolutely. So our understanding, and it's certainly not written in stone at this point. But our understanding is that the Australians are interested in nuclear propulsion, that the U.S. and Britain have in their submarines. And if it goes that way, Graham has been providing some of the heat transfer and vacuum equipment for the United States nuclear submarines, the power plants in there. So we would expect that there might be an opportunity to provide that same or similar type equipment for the Australian subs, this would be a new design, it's many years out. But we're encouraged by that. Barber-Nichols also makes torpedo injection pumps for the United States Navy submarines. And in if the technology goes that way, for the Australian subs, barber Nichols could have an opportunity to supply torpedo injection pumps for the Australian subs also.

If you get that kind of business, does that strategically set you up in a better position for more business in Asia in general? To change anything about the contracting subcontract part of the business?

I would guess not because the United States holds their nuclear propulsion very, very tightly. And so they only share it with their closest allies and so I would expect that it goes no further than Australia.

Okay, thanks very much.

Our next question is from Tate Sullivan, with Maxim. Please proceed with your question.

Thank you. Staying within the defense work. Can you just review in your comments on the competitively bid first article defense work? Did you say that job should end and so that's not a source for the higher margins in the second half of your fiscal year? Is that correct?

Sure Tate, those jobs are actually continuing through the second half of the year, but a much smaller percentage of our total revenue. And then by the end of the fiscal year both of the jobs that have been pulling down the profitability will be very close to complete. We're expecting them to be between 90% and 95% complete by the end of the year, and so they'll have a very minimal impact on fiscal '23.

Okay. And then is this -- are those -- are these lower margin projects related to some of the opportunities that you have with U.S. Navy to go more sole source from competitively bid? Are they separate? Or can you give a little more detail with those?

Sure, of course Tate. Both of these projects are projects that we now have sole source opportunities going forward. And they're already in our backlog at the different pricing points, as they were so sourced, and very importantly, particularly on the first article one, we've gotten through all the learnings of the first article side, so are, as we're running through the project, we're seeing better efficiency toward the end of the project. And we were certainly in the beginning of the project, because we treat it as one project, though, you get the good and the bad from a profitability standpoint, when we recognize revenue. So our expectation going forward on both of these types of projects, is that the with what's in backlog right now, we will see significantly better results when we're converting the index vessel.

Okay, thank you. And going back to the comments on the earn-out. Just to clarify the change in the earn-out and then go into bonuses. It was not related all the Barber-Nichols performance, so far?

Not at all Tate, actually, yeah, not at all. Basically, it was really the sellers, typically in an earn-out scenario, the sellers are ones who receive the benefit of an earn-out. The sellers, decided that they did not want, they wanted to do something a little different, so that we basically cancelled the earn-out as it was. And then separately, we put in a bonus program to allow the much broader group of individuals at Barber-Nichols to participate. Some of them are the sellers, but they're much smaller percentage of the total that obviously 100%. And we believe this bonus program will be very, very impactful to retain individuals, perhaps to even attract individuals and because it goes over fiscal years '24 through '26, by the end of fiscal year 2026, that will be the fifth year of the acquisition. So it's a really nice retention pool and attraction for employees now. That will help us retain them and attract further employees through years three to five of the acquisition. So we're really excited about this change. And quite frankly, I have to tip my hat to the sellers, who quite frankly, could very easily just taken the earn-out were assuming it was earned in fiscal '24. The metrics for the earn-out for fiscal '24 were -- there were certain metrics, the metrics for the bonus for fiscal 2024 are exactly the same. For fiscal 2025 and fiscal 2026. They're actually an increase off of the fiscal 24 numbers. So from a corporation standpoint, we believe that it is not only fair, but it's -- it will lead to very strong returns. So we're getting very excited about it.

Okay, thank you.

Thanks, Tate.

Our next question is from Dick Ryan with Colliers. Please proceed with your question.

Thank you. So Dan, you mentioned on the order front, both new and existing programs. Can you give us any more color on what new opportunities you've brought in?

Yeah I can't right now, Dick, as some of those we have to get customer approval to talk about. So I can't give you any specifics there. But we are really excited that we continue to get some new programs. And then the other piece of it that I talked about in my prepared remarks was we are expanding our overhaul business and so that full lifecycle is something that that we've been working towards, and we're starting to see the fruits of those labors. The being a full lifecycle supplier for Navy, is an excellent position to be in and we're really happy about these new orders coming in.

What risks could you see from this executive order on vaccine mandates and in terms of maybe your second half results? Would it be costs, the ability to deliver, or you been able to kind of parse those risks out at all?

Yeah, it's a great question. And it's something that we're putting a lot of brainpower into. I'll start with the exact requirements aren't fully defined for us yet. The executive order has some unclearness associated with it that we're still trying to parse apart. What is very clear is that it would be flowed down contractually, we have not seeing -- have not seen contract mods from our customers, yet relative to that Federal acquisition regulation flow down yet. I'm suspecting that we would. And when that does float down, it's very clear that to continue to execute, we have to have employees vaccinated or with approved exemptions by December 8. Our employee base is not 100% vaccinated. And so I would suspect that if they choose not to get vaccinated, then it will have an impact on our workforce will have a reduced workforce and the ability to execute the programs as scheduled would be compromised. And so ultimately, what that means for us is probably lower revenue in the second half, and then schedule delays to our customers that we would go back and ask for some type of consideration to address that change, essentially, that's been driven by the government. So yeah I mean, lots of lots of things kind of rolling right now you're seeing different defense companies that have rolled this out. And, there are negative consequences that they're saying they are losing people because of it.

Okay. You talked about early indicators in the energy side, what are you seeing? Is that more international? Domestic? Or how do you see that business opportunity flowing?

So for people who have been around Graham manufacturing for a long time, they tell me that when we start to see our balance orders picking up, that's a leading indicator for an upcycle in energy and petrochem, we are seeing our spares orders increasing. The majority of our spares do come from domestic. And so it is a domestic --it's a more of a domestic situation that we're seeing. But what that means is that that our customers feel likely, they see an upcycle coming, they want to repair their plants, getting them up to tip top condition so that they can really benefit from the increase in energy prices. So we're seeing those indications. At the same time, as we talked to our customers, they say any major projects are still 12 to 24 months out. And so we expect this to be a very slow upcycle. But the really good news is that there's indications that it actually might be coming. So we're excited about that.

Great, thank you.

Our next question is from Gary Schwab, with Valley Forge Capital Management, please proceed with your question.

Yeah. Hi. First of all, I want to congratulate you on creating such an improvement on your website over what you had at the end of the last quarter. I mean, I think it's 1000 times better. And I want to thank Debbie Pawlowski because I know that she was the driving force behind getting that new website up and running so quickly.

Gary, this is Jeff. There's a lot more coming, I assure you.

Okay, great. But secondly, I want to drill down some more on your first article projects and how that affects your margins. Is there a big difference between the initial cost and learning curve on first article DOD projects, very similar commercial projects that aren't DOD?

That's a great question. So Gary, this is Jeff, let me try to hit part of it if I can. On the commercial side, we do a lot of projects that are every project is a little bit different on the commercial side. However, there's such a long history, within Graham manufacturing of these projects that a lot of times we can take a lot of what was learned from previous projects and apply them to the next project. So while they're all different, there's a lot of similarities there and there's a lot of history there. On the defense side, the first article, there's a lot of engineering. So let me give you a good example, one of the projects that's in fabrication right now was a project that was one in, I believe it was fiscal 2015 and there was 2016. And there was a, there was a lot of engineering work that was done over a number of years. And so that after the engineering work, when you start the fabrication work, the -- you're dealing with new engineering work from our side, you're dealing with new vessel configuration for the Navy side. And it's really just -- there's a lot of back and forth between us and the government as there is in the government -- the Navy, I'm sorry, the Navy and the customers as there is on the commercial side. But that back and forth on the commercial side is a six-month process, the back and forth here is a many year process. And there's a lot of changes as you go. And some of the fabrication, when we thought about this four or five years ago, and we're looking at it now. It's difficult fabrication, difficult welding, and its things that we're doing for the first time. On the commercial side, we've done very similar welding, many, many times, and so it's not as much of a lift. The nice thing about it, though, is once you get through that learning curve, and we're seeing it even in the vessels we're doing now, the latter part of the project is much more efficient than the beginning part of the project. And so as we look at the next project, we expect that learning -- all the learnings that we got from the first article are behind us now and really are part of our procedures. So very long answer to a short question, but I hope that was helpful.

Is this different for you make big hunks of metal versus BN, which makes more I don't know, sophisticated electronic, smaller pieces of equipment. And other words, as your first article is the cost and learning curve versus the final selling price? Higher percentage for Graham, because you have to make all these jigs and molds and everything that that BN doesn't have to do? Is it a little different?

I would I thought Jeff's answer was actually really good. And so it really kind of goes back to what do you have experience with. And so if you look at Graham's commercial business, a lot of the injectors and heat exchangers are, why they may be custom designs, they're based on prior designs. That the Navy work is really, really custom. That you're trying to fit something into a vessel and it has all kinds of different shapes that it kind of has to work around. And so it's a very custom, challenging first article. For Barber-Nichols, we kind of play in the same realm where if we have a pumper turbine, a compressor, a motor drive, that is a new order. If it's pretty similar to something we've done in the past, then the risks are lower. If it's boy, if it's brand new with lots of new requirements, that we haven't worked before, the risks are higher in the first article. So I would say that both companies are similar that way, and if we can leverage something that we've done in the past, we can reduce risk. And if we're out there kind of on the leading edge, if you will, or kind of plowing new ground, then the risks are higher, and we're seeing that on the Graham side, but frankly, not unusual within the industry on the defense side.

Okay. And just looking at your current backlog of $182 million I know you said that you'll be finishing your first article work, what you're working on now, are there other different started first article projects that are still in your backlog that you'll be getting to in a year or two?

Yeah, they're very small. But Gary, I will tell you that we are pursuing new equipment, new applications to continue to grow our defense business. And we would expect, the first time that we make these new things that we bid in the future, to go through the first article challenges, that is very typical. So this will this will be somewhat of a recurring theme. The beauty is, is that if we can build up this this catalog, if you will, or these programs, so that we've gotten many of them in place, and we're taking one new first article that may impact of that on our overall results would be less, but we're going to continue to chase the new business to continue to grow the defense business, and we will have first articles in the future.

Yeah, Gary, it's just unfortunate that in this particular first half of the year, it's been a much bigger percentage of our overall business. And it's impactful. Normally, when that happens, it's not that particularly impactful, and it doesn't move the needle.

Okay, can I ask one more question?

Of course. Yes.

From what I understand the Navy wants to get back to their pre pandemic production schedule, they were building three subs a year, they were building two Virginia's and one Columbia class. And they said they want to get back onto that schedule again. Does that mean that and they want to get onto that schedule again for like the next 20 years? So they're talking about three subs a year, they even would like to push the floor. But I don't think they can do that right now. Does that mean that you would probably win whatever you're doing currently, on all of these new projects as they come along? And I guess the question I have is if they're doing three subs a year? Can you even handle that?

Gary, it's a great question. And I would say that everybody from the shipbuilders down to the subcontractors are having those conversations right now. So the shipbuilders start and say, Okay, we're ramping up, we don't have enough capacity. So we want to push some additional things that we've been doing in-house to our supply chain, the supply chain is saying, we appreciate the opportunities, and we're working hard to figure out how to help you out. So the opportunities that are coming at us are wonderful. Some of them will be competitively bid, some of them will be sold sourced. And we've got to plan and manage our business and continue to invest in it to be able to take as much as it makes sense to take. We won't over commit. But at the same time, we love the visibility of this business, it's long term business, it can be very profitable business. And so we're definitely in cash weekly conversations with our customers about, what is coming in the future and how can we help you.

Okay, great. And then one last thing. Let's goes back to a question that somebody else asked about COVID. I was just wondering, on this testing, that's due by December 1. Do you have any critical employees like supervisors or Foreman that haven't been vaccinated? And is there alternative, like I know some companies are saying, well, if you don't get vaccinated, then you have to be tested twice a week. Are you doing anything like that? Or is that in the plan?

Yeah, so thus far, there has been no requirement for employees to tell employers whether they're vaccinated or not. The COVID protocol that we have is that if you're not vaccinated, we're asking you to wear masks and socially distance that it follows the CDC guidance. Going forward it's not as clear. So, to answer your question specifically, we don't know, who was vaccinated and unvaccinated because we don't have cards for everybody. So there is the potential that that there's some folks that are not vaccinated that could be impacted by this rule. We just don't know. Certainly we're communicating to our employees and letting them know what's coming. But we don't have a requirement yet, contractually, our customers have to flow down this federal acquisition regulation that embodies the, the executive order. And we haven't seen that yet. But we're trying to get ready for it. I would suspect, just kind of based on other companies that we've heard about in the Western New York area in Colorado area, frankly, that there will be some fallout, but by characterizing it now and giving you specificity, I just can't go there.

Okay. All right. Thanks.

Thanks, Gary.

Our next question is from William Bremer, with Vanquish Capital Partners. Please proceed with your question.

Hi, Dan, Jeff, solid call.

Thank you.

I got two questions that are sort of out of the box type of thinking, number one; a lot of talk in the last six months, and in the press regarding the big three Bezos, Branson Musk on space, and we've seen it. And I know, we have a small and immaterial piece of that. I was wondering if you could provide us what your opportunity may be, as this development starts to become more commercialized.

Sure. So this all kind of started, when people were looking forward into the future and saying, Gosh, wouldn't it be nice to connect us all better, and start to get out the side of our world and start to explore our universe, the connect us piece has been very active and very robust A lot of the commercial investments into launch were driven by the desire to connect everybody across the world. So this concept of the other 3 billion, the people that are not connected, how do we connect them, we do that with communication satellites. And is that notion started to come. A lot of these folks, we got to get satellites up there, and we got to get a bunch of them up there. And so that the billionaire started to invest. And we have been involved with those folks helping them to develop new launch capabilities. And in some cases, we have production opportunities for those launch vehicles, namely in the rocket engine, turbo pump, arena. So then, if you think about the payload, what is going on as rockets that go up, and a lot of our communication satellites, and essentially what they're trying to do is pack more and more communication gear into a smaller and smaller package on satellites. So they're kind of pushing the envelope of power density, which means that you have to worry about heat. And so thermal management systems are something that that Barber-Nichols gets involved with. And so we do have thermal management pumps that are pumping around a liquid to help cool the electronics on these satellites. And, those are being built today. The next level is Okay, now let's get up into space and kind of have a departure point to go visit other planets or solar systems or whatever. And so you think about space habitation, and then you think about fueling rockets in space, so that you don't have to launch from the Earth's surface. And so Barber-Nichols gets involved in cryogenic liquid transfer. And so while we're talking to folks about that you also worry about environmental and life support types of systems up in space. And we're involved in those types of systems also. So I look at it as a fun exciting area that that has some growth, it is not a huge market from what I can tell for either grant manufacturing, or Barber-Nichols. But certainly a unique and interesting area to work at. And it provides some diversity in our business. So we kind of like to be in in different markets and serve different customers. So from that perspective, we look at it as a great place to work and play.

No, I completely agree with you. Second question, and it's out there as well, a little bit, I'm starting to see a renaissance in the nuclear area with these globalizations of these smaller Modular Reactors. Do we have any exposure there? We do.

Can't talk about it. But yes, we did.

That's why Mr. Question in a public forum.

So a lot of these are startups that are very concerned about their IP. And so we've signed nondisclosure agreements with many of them to say that we would not let details out. But we can't say that we are participating in those small modular nuclear types of programs in other types of renewable energy type programs. And it's a really neat area that you don't know where it goes. But if it does go somewhere, you want to be part of it. And so that's the interesting thing about having an engineering capable company and both Barber-Nichols and Graham are engineering capable to help our customers design and develop brand new kind of out there, types of equipment. And so it's yes, again, exciting place to be. You'll never bat 1000 in this league. So but you learn a lot along the way. And so we're excited to be part of that also.

Thank you for confirming my data and my channel checks, appreciate it.

Sure.

Our next question is from Tom Spiro with Spiro Capital. Please proceed with your question.

Tom Spiro, Spiro Capital. Good morning.

Hey Tom.

Two three quarters ago, as I recall, the company won a number of large Asian refinery projects, maybe 2 of them, 3 of them. Could you give us an update on where those projects stand, number one? And number two, the outlook for further Asian opportunities?

Sure. Tom, this is Jeff. I think the opportunities you're speaking of were one perhaps a year or so ago, maybe even a little longer, specifically for the Indian market. And there are -- you're correct. There are two opportunities that we won, two projects that we won. Those are proceeding well. One of them -- the first one of them is in fabrication. Now we've had some of the work done by our third-party fabricator in India. In fact, they just delivered a component portion of it and on time, on budget. So we're very pleased about that. So that one is in process now. The second one had a delay on it for a little while. It was a more of a, call it, engineering timing delay. That one we're starting has -- will be starting shortly, and we will see some -- that's a significant portion of the manufacturing -- subcontracting manufacturing hours that we're assuming we are projecting in the second half of the year. And that will continue not only in the second half of the year but into fiscal year '23. So we don't have all of it in the next 6 months. We have a good chunk of it in the next 6 months, but then we have some more into fiscal '23. With regard to other opportunities, as we look at that, particularly in that market, there's a good number of projects over the next 6 to probably 36 months that are teed up to go to bid. We will participate in all of them. We're hopeful that we will be successful in some of them, certainly not all of them. But we believe we're well positioned. These first couple of projects have really shown our capabilities and our -- the strength of our brand within the Indian market, and we think that will help us with the future opportunities.

Have the first couple of projects hiking your enthusiasm or diminished it? Are you comfortable with how they're proceeding or not?

No, we are comfortable, Tom. Absolutely. In fact, one of the things that you see any time you enter into the market, and I can -- even a little before my time, I can harken back to when we entered the Chinese market, we had some ups along the way there. And to be fair, we haven't had that level of bumps along the way here in India. The subcontractors have been doing very well for us so far. And we expect they will continue to -- so that we're excited about the opportunities in the Indian market given the -- particularly given the quantity of them and how successful we've been so far. So we're definitely looking at a better today than even we were a year or 2 ago.

That's great. Thanks so much and good luck.

Thanks Tom.

It appears that there are no further questions at this time. I would like to pass the floor back over to Dan Thoren, President and CEO, for closing remarks.

Thank you very much, Maria. So thank you all for participating today. This does conclude our earnings call. We wish you a great fall season, and we'll look forward to talking to you again in the next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.