Q2 2020 Earnings Call
Reading.
Welcome to the Graham Corporation second quarter fiscal year 2020 financial results Conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator systems during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your House, Karen Howard Investor Relations for Graham Corporation, you may begin.
Thank you Daryl and good morning, everyone. We appreciate you joining us today to discuss grants difficult 2022nd quarter in first half year result.
Should have a copy of the news release that was distributed across the wires. This morning. We also have rights associated with the commentary that we're providing here today.
If you don't have the release of the slides you can find them on the company's website at Www Dot Graham high Sun and GE Dot com.
On the call with me today, a gym line <unk>, President and Chief Executive Officer, and just like our Chief Financial Officer, and I also want to introduce you to Eric Smith, Our Vice President and general manager of Arbitrated facility.
Jim work, there with its strategic overview of our business and provider outlook for the remainder of the fiscal year.
Jeff will review the financial results for the period and Alan will provide an operations overview. We we'll then open the lines for acuity.
As you're aware, we may make some forward looking statements. During this discussion it's work during the queuing it.
These statements apply to future events and are subject to risks and uncertainties as far as other factors, which could cause actual results to differ materially from what is needed on the call.
These risks and uncertainties and other factor I provided in the earnings release and in the slide deck as well as with other documents filed by the kind of eight with the Securities and Exchange Commission.
Documents can be found on our website or at www Dot Dot Gov.
I also wanted to point out that during today's call. We will discuss some non-GAAP financial measure, which we believe are useful in evaluating our performance.
I would not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with gap.
We have provided reconciliations to comparable GAAP to non-GAAP measure and the tables accompanying today's earnings release.
And with that it's my pleasure to turn the call over to Jim to begin Jim.
Thank you Karen.
Good morning, everyone. We appreciate your joining our second quarter earnings call.
I will begin with a strategic overview of what we are focused on.
My remarks start on slide four.
A key element of our strategy is to strengthen and expand predictable revenue streams.
This will reduce financial performance volatility caused by large capital projects cyclical demand within crude oil refining and chemical end markets.
The flooding in chemical end markets have had historical large variation in demand for our products and that is not expected to change in the coming years to the contrary.
We observed these markets to be more volatile today with greater variation between cycle peaks in bottoms.
Our strategy to increased participation and market share within the U.S. Navy nuclear propulsion program provided predictable level of revenue.
Baby work typically has a long life to backlog, providing vision into a multi year revenue projection that is predictable and not subject to large variation.
The Navy strategy has been successful with current backlog for the segment at approximately $60 million.
We're now on each of the three nuclear propulsion vessel programs.
Participation is expanding as these types of components provided increases.
Over the next 12 months, we hope to secure the supply of two new components.
One for carriers and the other for one of the two submarine programs.
We have executed well or naval strategy.
Alan Smith and his team has executed superbly.
An ongoing confirmation of our success than differentiating held execution on time delivery and quality as the expanding percentage of backlog that is one sole source.
All worked for the first decade of the strategy was competitively bid.
We know we're seeing certain procurement on.
So were sole source bidding.
Moreover, many of the orders were first time fabrications for us a very complex weldments immaterial combinations.
This involves considerable production R&D and the development of efficient don't flow methods.
Productivity and process improvement will drive fabrication efficiency gains, which will be reflected in better and more predictable margin as we move into repeat fabrications.
We expect revenue during the coming for years to continue to expand and also margin quality to improve as we begin repeated fabrications.
This market is an area of M&A concentration as well.
We continue to actively engaged in discussions with companies serving.
The department of defense.
Aerospace end markets.
With our current portfolio of components provided two aircraft carriers and submarines along with new components, we plan to break into.
This segment without M&A.
This is expected to have revenue between 20 and $30 million annually in the next two years.
Also we are focusing.
More on our installed base.
Graham has a sizable global installed base and a great installation record in North America.
In the last 25 years Graham supplied equipment validated valued at more than $650 million that was deliberate into North America.
Moreover, with equipment delivered in the 900, Seventys and Eightys, we estimate that our north American installed base approaches $1 billion.
Here too the segment is not as volatile as large capital projects.
Our customers generally invest to keep their plants operating well.
Also our thesis continues to play out that certain regions such as the U.S. in Canada.
We'll leverage their facilities to get more from them before investing in large new capacity.
Regions with dense installation populations are the U.S. Gulf Coast mid Atlantic States.
And the West Coast, plus the Alberta.
Customers need our knowledge and expertise to identify performance risk and what may be limiting throughput or impacting product quality.
We are localizing performance improvement engineers in key regions to focus on our installed base add to assist customers.
This is typically high quality margin work.
And is not highly cyclical.
We are currently building out a U.S. Gulf Coast performance improvement engineering team.
Two engineers were placed there in 2018, and we expect to add to more in the next six months.
These individuals focus on our customers plans at our installed base, which will be in addition to the historic focus we have had and we'll continue to have on Pcs and Oems.
M&A focus is also here to add products endorse services.
Currently 30% to 40% of revenue is derived in some way from our installed base.
When taken together.
The Navy and the predictable installed base revenue segments are anticipated to approach $50 million per year and revenue in the coming two years.
Upon achieving that level of predictable revenue it will dampen the impact of our highly cyclical crude oil refining and chemical large project work.
Also trade policy and tariffs on certain materials have affected competitiveness in international markets and in certain instances it has impacted us in our domestic markets as well.
We're also observing customer acceptance of low cost regions for fabrication of critical components, such as our ejector systems or steam surface condensers.
In response, and actually to reposition our competitiveness and to expand market share the global fabrication supply chain as being more aggressively used by us.
The last 18 months more than $35 million, a new orders were secured by executing differently to take share where previously we were unsuccessful due to cost.
For the projects were for international crude oil refining projects.
I will add to our installed base, which will ultimately drive follow on revenue and coming decades from revamps retrofits and spare parts.
In the past, we approached using the global fabrication supply chain and limited or targeted met or.
Now, we are proactive and aggressively attempting to change participation.
Broader execution scale and expand market share a key element is quality control and IP protection.
We are building out a supply chain management and quality surveillance organization and supported the strategy.
Early successes cited just a moment ago are validating we have a good formula for success.
Importantly, the unique or differentiating elements of grams IP will be closely controlled as we execute the strategy.
I am not moving onto slide five.
The success of our focus on installed base is highlighted by the slide.
Comparing the eight year periods between 2004 in 2000 2011 to those of 2012 to 2019.
The percentage of commercial revenue developed derived from the installed base expanded from 28% to 41% of commercial revenue.
This has come from stronger and more consistent level of spare parts revenue and also end users investing in revamps or retrofits to improve operational reliability or gain incremental throughput capacity.
When the original equipment as grams, a retrofit or REVAP opportunity has a high likelihood of Graham getting an order with strong margin quality.
Importantly that as shown in the in the second set of slides.
Gross profit derived from the installed base. During these two comparison periods expanded from 44% to 60 what percent of total commercial gross profit.
Being derived from the installed base.
Crude oil refining the picture on the right top right.
Installations are absolutely terrific for follow on revenue after initial sell.
Does that market invests in revamps and retrofits and also due to the harsh operating environment in an oil refinery.
A strong spare parts follow on revenue.
Surface condensers lower right.
Offer less replacement parts potential, but do drive in cadre complete replacements. After 20 to 30 years of operating life in many cases.
Again, if the replacement condenser is for a Gram original sale.
There was a good likelihood of a high quality high quality margin replacement order for us.
Moving on to slide six.
We confirm our full year guidance.
Revenue is expected to be between 101 hundred $5 million.
This is predicated on securing a quick turn Navy order in this current quarter that we are anticipating.
Gross margin is expected to be between 20, 426%.
SGN as spending will be between 17 and $18 million.
Our effective tax rate is approximately 20%.
I will now pass it over to Jeff for a review of financial regional results Jeff.
Thank you Jim and good morning, everyone. If you could turn to slide eight some brief highlights on the second quarter sales in the quarter were $21.6 million similar to the 21.4 million in the second quarter of last year.
Q2, net income was $1.2 million or 12 cents a share down from 1.8 million or 19 cents. This year last year.
Included in last years numbers worthy were some losses related to the recently divested commercial nuclear business. If we were to exclude those the comparable net income last year would have been 2.4 million or 24 cents a share.
[noise] orders in the second quarter was strong at $32.6 million driven by some key refining orders in Asia and the United States. Our backlog has improved a 127.8 million the backlog level includes a tripling of our commercial backlog over the past 24 months and when we.
Back out the diverse divested.
Nuclear business from prior periods. This is our largest backlog ever.
Move on to slide nine.
Again, Q2 sales were 21.6 million versus 21 for last year sales in the second quarter was 73% domestic 27% international fairly similar to last year, which was 70% domestic 30% international.
Gross profit decreased to 4.9 million from 6.2 million last year, due primarily to an unfavorable mix of projects.
Gross margin was 22.9.
Percent down from 29% in the second quarter last year.
EBITDA margin was 7.8% down from 14.7 in last year's second quarter.
And as I noted earlier net income was 1.2 million or 12 cents a share down from adjusted level of 2.4 million or 24 cents a share.
On the slide 10, looking at the first half of the year.
Sales in the first half for 42.2 million compared with 51 million in the first half of last year.
You might note the last year, we had a much stronger first half than second half of the year.
Clearly per our guidance, we're expecting the opposite to occur this year.
Year to date sales or 71% domestic 29% international compared with 56, and 44% respectively last year you may recall in the first half of last year, we are large high cost metal Canadian oil sands projects, which helped push the international sales higher.
Gross profit year to date is $9.7 million down from 13.4 million last year and gross margins are 22 nine.
Versus 26.2 last year due to unfavorable mix as well as the lower sales volume.
Year to date, adjusted EBITDA margins were 7.3% down from 14.4% last year, both periods reflect the exclusion of our commercial nuclear business, which we sold in June .
Finally, adjusted net income was $2.2 million or 22 cents a share down from 5.1 million or 52 cents a share last year.
Again as with sales last years earnings were front end loaded with minimal that income in the second half of the year.
On the slide 11.
Excuse me.
Our cash is $73.8 million down $4 million in the first half of the year, but this is simply timing of working capital.
We have noted that we increased our dividend in August to 11 cents per share.
Third quarter or an annual rate of 44 cents per share.
Capital spending has been light in the first half of the year at $700000 compared with 400000 last year as we've seen in the past few years, our capital spending has will increase of the second half of the year and we still expect to spend between 2.5 and $2.8 million in the full.
Fiscal year.
As we continue to expand our acquisition, we continue to expand our acquisition pipeline, particularly in the Navy in aerospace arenas as Jim mentioned earlier and we're quite pleased with the list of companies that we are considering pursuing to utilize some of the cash on our balance sheet.
Alan Smith will complete our presentation by providing more depth on our operations in Q2.
For those of you who have not met Alegeus general manager of our Batavia business has been with Graham approximately 27 years in various engineering and sales rose Alan.
Thanks, Jeff if you could please turn to slide 13.
Second quarter revenue was comparable to the same period last year. However, there was some end market variation refining industry sales in the quarter were down $3.4 million. This was due to a number of north American revamped or retrofit projects, which were under execution last year. This does not.
Signal any change in our end market fundamentals.
On the other hand, chemical industries, Dow's, where considerable considerable relative to the same period last year. This is driven by domestic new capacity and investments in retrofits.
Power industry sales are down due to the divestiture of energy steel, whose revenue was in 2019 and is no longer part of the ongoing mix.
We continue to have a high concentration of domestic revenue.
It is 73% of our overall revenue such a high concentration is due to native Avenue, the strength of the domestic and chemical end markets and the revamp investments that are routinely occurring in the us based refineries.
Please turn your attention to slide 14.
To highlight here as the straight and improvement in order levels from grams commercial end markets that are principally crude oil refining and in the chemical markets from the low water Mark about two years ago. The level of trailing 12 month orders are up approximately a 100%.
We are expecting a book to bill ratio greater than one for flight 20, implying that the order pattern is anticipated to be strong in the second half there's a nice pipeline a bids for the U.S. Navy and our international crude oil refining market.
Chemicals are expected to be stable, but not as strong as orders from the us Navy where oil refining end markets.
I'm now referring to slide 15.
We have a terrific high quality backlog and the profitability of our backlog continues to strengthen the backlog at September Thirtyth was $127.8 million with approximately $60 million for the Navy and roughly $40 million for crude oil refining customers is also important.
And now that excluding energy steel the background reported on September Thirtyth represents a record high for ongoing business.
Our diversification efforts of the U.S. Navy have been effective and provide a strong level of multiyear base load for our operations.
55% to 60% of a backlog is anticipated to convert within the next 12 months and 25% to 35% converts within two years and beyond.
Daryl can you. Please open the lines there are questions. Thank you.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please won't be poll for questions.
Okay.
Our first question comes from the line of Theodore O'neill Litchfield Hills Research. Please proceed with your question.
Thank you congratulations on the good quarter.
Thanks, Leo Thank you feel yep.
And I just have a question here about slide five.
We're well you showing that the commercial revenue has grown its grown in the last seven years relative to the previous seven years and I understand that profit is.
The profit aspect of it.
[noise] profit ought to be better but.
Does this imply that there's some kind of change in in construction and new building of equipment Bill building of facilities that you would service is there a cyclical components of this where they're not there's not as much new equipment anymore, they're just rebuilt.
Retrofitting and buying parts and is this at all cyclical.
No it doesn't.
Signal at our mind, a long term change.
What we had identified or what our thesis was coming out of this downturn that expansion would be driven initially off of investment in the installed base.
We thought that would come first and that actually played out as we had expected and we began to shift our customer facing resources more toward the installed base, because that's where the.
The revenue would come first as we look at our bid pipeline. However, Theo.
From a global perspective, we are beginning to see our bid pipeline fill with more new capacity work, it's more of a timing and its typically how we come out of a downturn.
Were installed base gets focused on first before new global capacity starts to be invested and now we have won some orders in the last year, so for new global capacity, but as we look at our bid pipeline, it's beginning to expand and be more filled with global new refining.
Capacity.
Okay. Thanks very much.
Welcome.
Our next question comes from the line of Tate Sullivan of Maxim Group. Please proceed with your question.
Hi, Thank you a couple of follow ups on on your conversation about Navy work and aerospace defense work in general.
First what did you what do you referred to when you mentioned a quick turn.
Navy order can you give more context to that please.
Yes, that's an order if you track back a type of order to attract back to fiscal 17 or fiscal 18, we had acknowledge that there can be so quick turn naval work that comes in and out in one or two quarters that can be.
Can be rather significant we are anticipating there might be one of those in fiscal 2000.
2020, but I would ask you to maybe step back to the 2017 fiscal year 2018, where we had a similar to the water happened that affect both those years, we're expecting that to occur again, it's more of a.
A material type order versus the fabrication.
Okay.
And then with your and pardon if I Miss phrase it but you mentioned the annual revenue target and do you referred to is aerospace defense of 20 to 30 20 to 30 million annually in the next two years does that imply moving beyond equipment work just for the submarine and aircraft programs or is that most all still sub.
Aircraft programs.
As noted that that's a great question, that's with our current component mix.
Providing two carriers and the two submarine programs.
Plus we hope to win additional components for those vessels, but that comment really reflects where our current backlog is and its conversion schedule plus what we anticipate to win that as I said is for carriers and submarine. So it's it's not branching into aerospace at all.
Okay. Okay, and then have you I I come back into it but I think calm on your revenue and how you break it out with the there was another its theres a lot for other commercial industrial and defense work I mean relative to that 20 to 30 million annual target is trailing Navy work about 18 million or can you give give that number.
We haven't been.
The definite about that it's it's Ben.
Between 10 and 15% of sales.
And the given year, that's that's been the range.
And other elements other end markets to go into into that other segment could be edible oils could be pharma, but by far the most meaningful.
And what we grew up in other right now is navy.
Okay. Thank you and then are there any sound optimistic on more future Navy orders and just based on other companies talking about the summer in an aircraft programs are there are the order subject to the procurement cycle. I mean do you have visibility that you have them, but you're waiting for the allocation and do the procurement until you put into backlog or how does that how will.
That work potentially.
Well, we have visibility into the bids that we've already made.
We have dialogue with the counter party of when they would begin to negotiate.
It can be difficult to predict when they actually settle on.
The supplier and release of purchase order. However, we have a view based on the dialogue that we're having the bids are already very mature.
That's a good book of opportunities should close in the next six months.
For the Us Navy.
Okay. Thanks, and last one for me and sorry, if I missed a earlier in the prior quarter as Gionee dropping a 3.8 million from 4.6 in the prior quarter and keeping guidance unchanged. We did I Miss did you talk about some timing and not expense and why should that increase in the second half the year. Please.
Sure a couple of things take this is Jeff first off we did have energy steel in the numbers in the first quarter. So as a piece of the drop off there was also excuse me some timing of some things that did not occur in the second quarter that got pushed we'll get pushed to the second half of the year.
And so they'll be a little bit of book, that's part of what's driving the increases that we just had a very light quarter in the second quarter relative to two I would call on normal quarter and that happens on occasion, sometimes it happens has happened was the first quarter. This year. The like this happens it happened happened to occur in the second quarter.
Okay. Thank you for all that detail.
Thank you addressed today.
Okay.
Our next question comes from the line of Brian Clough Sidoti. Please proceed with your question.
Hey, good morning, everybody brine on for Joe This morning, Congrats on solid quarter.
Thanks, Mike you Brian .
Just real quick wanted to touch on the gross margin a little bit more when you raised the guidance for the gross margin in the first quarter do you kind of anticipate.
The result, this quarter and if not by reaffirming it are you kind of implying maybe there could be some surprise in the back half and then also how does that gross margin compare on some of the more recent orders.
Maybe in the backlog compared to some recent shipments.
So a couple of questions or the first one is did we anticipate the.
The margin this quarter relative to the guidance that we get and we did the this quarter was pretty much in line with with what our expectations had been I'm. So that that was inherent in the guidance we gave fiscal year.
Secondly, I believe your question was around the the.
Margin in backlog, we talked about this quarter, having a bit of unfavorable mix and it what's in backlog, what's going into backlog is.
We're continuing to see an improvement in margin it what's going into backlog versus what's coming out so I'm, a big Alan mentioned, the high quality or the improving quality of our backlog and part of that comment was clearly a better margin profile. The whats recently come out of backlog.
Great. Thank you and then just as far as the bidding activity. It sounds like everything is still on track for that kind of $30 million in orders I'm kind of that cadence going forward is anything really changed since last time, we spoke or is that sound about right.
Nothing has really changed Ryan other than we thought we could have booked one or two of the orders that are now pushed out last quarter.
Just a typical customer delay we do have some rather large projects. So it might look chunky in terms of how the order flow could be quarter to quarter because of the size of some of these projects in our pipeline.
Between five and some $15 million.
However, our overall view is unchanged from commentary last quarter.
All right and then lesson that leases on the M&A pipeline.
Sounds like you guys kind of honing in on some targets there.
Hi have multiples come down at all I'm, just kind of with the the general environment.
I'm not really unfortunately added in the space that we're looking in.
The defense market as well as in the some of the aftermarket on the commercial side the multiples are still pretty.
Pretty frothy.
And Oh, but we'll we'll manage our way through that but no. They really have not come down.
Okay, well appreciate it and again good gentleman quarter.
Thank you thank you Brian .
As a reminder, if you would like to ask the question. Please press star one on your telephone keypad [noise].
Our next question comes from the line of Bill Baldwin of Baldwin Anthony Securities. Please proceed with your question.
Thank you and the good morning.
Hi, Bill.
I was a.
Looking to see what a color you can offer a regarding the initiative you youve undertaken to.
I guess secure more of a global fabricating the supply chain you know using third party fabricators.
Kick in the offers some inside there Jim as to what a lot that entails.
Oh, you're expanding relationships with existing fabricators are are you, adding new fabricators and.
So how do you do your due diligence and bad you know and best those those new fabricators.
So my question sorry, a great question, we do have a group of historic International fabrication partners.
We will continue to leverage and we Furthermore, intend to expand and add more fabrication partners, we do a very deliberate due diligence process around financial.
Capabilities.
Quality customer centric organization.
Similar sensibilities to Graham.
And.
Once we selective vendor and move them onto our fabrication Avi L that doesn't mean, we detach ourselves once we have an order that will put into that business.
Our quality control, our manufacturing specialists are surveilling and in those businesses fairly regularly to ensure that form and function quality contractual adherence and that it has the ground badge and were proud of what's being delivered so we're very deliberate and very measured in that if I.
Thought about the strategy from a historical perspective, we were more opportunistic and we would slide that this work when it suited US now how we thought about the last 24 to 30 months.
Is we want to aggressively reshape our position in certain segments of the market change our market share a drive down our.
Just for that type of work by using a.
More aggressively the global fabrication supply chain and really under the day is to take more global share within a within a different market.
Pricing expectation, while driving an acceptable return for ourselves. So we're thinking about it differently. Ultimately linchpin is let's change our position, let's take more share feed the installed base and so far as I've said in the prepared remarks bill.
We've had half a dozen contracts in the last 18 months, a total something north of 30 million $35 million.
We are executing with some of those contracts with old partners are executing some of those contracts with new partners.
[noise] are you using the they fabricator day, primarily for the.
Global refining and petrochemical markets or is it primarily refining.
It's actually both.
Of from a from a declared of point of view, we want to own and be the dominant player in refining.
Our attitude as we never want to lose finding a budget.
Right right, but we've been in that dominant position, but we also want to shift higher our market share in chemicals. So of those six projects that I decided just a moment ago.
As I said on the prepared remarks four of those are responding projects in two of those are chemical industry projects.
Okay very good.
When you got such a.
Extreme tolerances you have to meet the you know in terms of some of your products. It just Uh huh.
The do you have some of your own people, sometimes they have to go on board has to go on site there to make sure that.
But the quality of the work is being you know I mean, the these fabricators out of the quality people on board to do the kind of work you could do there and the your plants, there and the New York.
Well no one build it like ramp let me start with that.
We are exceptionally good capable fabricator. However, we can we can push our our expertise into certain fabricators. Not every fabricator is is a good fit for us we're not looking for.
As we're looking for the right balance between outstanding quality and fabrication capabilities at an acceptable price. So we're not going to the secondary or tertiary fabrication supply chain. They won't there's sort of what you're citing here as a risk.
They won't fit us they won't they won't match, our brand and our quality requirements. So we are going into the top tier fabricators. If you will have the upper tier where their capabilities our strong their ability to fabricator to our tolerances and quality criteria in the criterion of our customers.
Acceptable so we're striking the balance of were not chasing lowest cost.
Or putting quality first execution.
Execution in quality and delivering I'll think consistent with our bad Brad just a priority at an acceptable price. So hopefully that answers the question yeah.
He has a good inside <unk> are there any IP issues involved here that you had to protect when you're working with fabricators like this Jim I mean are you giving them.
Access to certain heavier.
Practices that you consider to be a proprietary.
You know certainly anytime you embark on a strategies such as those that's the first thing that comes to mind. That's the first thing that came to the mind of of the management team of.
How do we execute this and moat the critical IP that is unique and differentiates us.
And we have methodologies to do that what were imparting into the fabricators.
Is less critical IP.
And more commercially available technology.
That's not the secret Differentiators of Graham.
Reserve that we hold that we both that and.
Adult that into the fabricators wheelhouse.
Okay.
A key criteria and as we do this with a clear vision that we will not create a competitor.
Exactly exactly yeah. That's that's the last thing you want to do there.
And lastly are you finding the sufficient.
Number of these folks to talk to that mean to our their people out there to meet those criteria has a pretty much where you want to where you want to be located or wherever you data.
It's a process.
We've just.
We've gone in and then did an audit and in a pretty large country that has a massive.
Supply chain base of this this type of fabricator and we've added five tour Avi L.
Assess our Grand gives expanded opera our brand gives expanded opportunity. So we're finding a really keen receptiveness to work with us because.
And optimization of their designs.
So when they run their plans to meet their operating objectives. So we we think we differentiate on that front secondly, because of the segment of the market that we've chosen to serve which is this highly complex.
Of critical piece of equipment that integrates into a very complex process.
Second differentiator is the engineering organization the process know how of how after we have an order we're able to when we get an order and you probably heard this before all on the call have heard this before.
Designs rarely are frozen for our large project work.
We go through a process, where the customer to actually.
Finalize a design is highly it or chips. So we have to have an adaptive and flexible ops model in the office portion for executing these orders that something always arises theres design churn design integration, we have to have an adeptness.
And to a vision that that's the nature of this work and we don't make every problem of customers problem.
And they need us for that so that's a second differentiator a third differentiator is.
The custom fabrication of these complex very large weldments to exacting tolerance is a bit liked what bill Baldwin at question, because we think about our fabrication partners and their capabilities of doing that.
We have incredible artisans and trust persons that Graham that can fabricate these complex things as big as a house to watch tolerances.
With massive amounts of weddell metal welding onto the metal and material movement and that's a unique capability.
That that our company has an has developed over long period of time.
And here to even when something's and fabrication design might not be frozen. So we have to have Alan and his team enough to have an operations model, where there's ample whip.
On production floor when jobs go one stop when there's design change.
We can fluently move and resource other orders to keep production flowing well in order goes on stop but that's a particular uniqueness of a low volume high mix ops model that we feel weve perfected that's what our market demands and that's a key differentiator for us versus a.
I high volume low mix off model ops model.
Fourth differentiator is the fact that we care about our installed base, we care about operational reliability. We're just not an initial sale partner.
We're a life partner, we make sure that the facilities will operate for the life of the facility whether using our equipment most of our competition I'm not being disrespectful, they're focused on the initial sale. We're focused on the value of the life of the relationship not on the initial sell solely we've built out at a a poster.
Ward organization that provides technical services knowledge transfer.
Helps our customer with operational reliability unlocks latent car kept capability.
And there is a strong pull on that organization, we gave that organization and identity about 12, 10 12 years ago, we've added to it it's probably doubled in size since we started the.
The aftermarket team.
Provided field service.
So that's a key differentiator for most of our competition that's concentrating on the initial sale. That's for the fifth one is we will invest in ourselves, we will deploy our capital into our business and an aggressive lay the last.
20 years, we put approaching $30 million of capital under this facility.
Year to expand our capabilities to drive productivity improvements to do more with our roof line and then we've also invested in our workforce and I T tools in productivity tools and high caliber change agents being brought into the business. So we think differently about managing the income statement.
In the near term versus the long term value creation of our of all of those four other differentiators I think.
That's how the customers think about us that's why they value working with us.
And now when we think about a partner.
We're looking for someone that has really the fabrication shops that middle part two and three differentiators because that's what we need from them, where they have that an ability to execute these orders and then an ability to fabricate these complex weldments to our fit form and function criterion and that's not know casual casual.
Okay. So that's what we're looking for in US we're thinking about M&A I'll turn it over to an M&A in just a moment with respect to Jeff.
But I want to be clear as it pertains to M&A.
On the strategy that we're talking about just a moment ago.
We're not necessarily thinking of M&A, there with an operations type strategy of buying something in international markets.
I very much favor because of the cyclical nature of these end markets a flexible cost basis in a way in which we can address burst demand or burst capacity needs with a global fabrication supply chain.
And I'm I'm reluctant to and Jeff is as well to focus M&A resources on buying bricks and mortar in the international markets, because I don't think that solves anything.
In the short term.
For the long term and it creates long term issues.
And I'll turn it over to Jeff for a more broad discussion of our M&A focus and the criteria that we're looking at thanks, Jim Yeah, Jerry as we're looking at.
Potential acquisition candidates.
One of the things were focused on is it just Jim mentioned, we're not trying to to buy capacity per se. We're actually trying to buy we're looking for a business that fits our type of operating models. So has the the customer and quality focus that we believe we have for our customers.
And that has a good management team that wants to remain with the organization. That's very that's key to us who we're not buying a buying a business bovine the people in the business as well and that's that's critical critical for US we want someone who has a lot of the same attributes that Jim conveyed of about Graham but.
We're looking to how do we.
Grow this business in parts of our markets that we believe our perhaps less cyclical than our core energy markets. So we talked earlier about the the navy space or <unk> and I and we threw in aerospace because many of the companies that were looking at that have a large.
Navy component also have a on aerospace component, maybe not as big but it certainly exists and that is interesting to us if it.