Q3 2020 Earnings Call
Greetings and welcome to the Graham Corporation third quarter fiscal year 2020 financial results.
At this time all participants are in what's that only about a.
Good question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Karen Howard Investor Relations for Graham Corporation. Thank you you may begin.
Thank you Doug and good morning, everyone. We appreciate you joining us today to discuss grant the school 2023rd quarter and your they resell.
You should have a copy of the news release that was distributed across the wires. This morning.
Alfred right associated with the commentary that we're providing here today.
And I haven't really started to slide you can find them on the company's website at www, <unk> Gram Highpin and Oh Gee Dot com.
On the call with me today, Jim line, President Chief Executive Officer, Jeff Gray, our Chief Financial Officer, Eric Smith, Our Vice President and General manager of arbitrator facility.
Let's start with a strategic overview of purposes.
Outlook for the remainder of the fiscal year.
I will review the financial results for the period, an error will provide an operations over here.
With an open the line tricky overnight.
As you're aware when they make some forward looking statements during this discussion as well it's turning to coordinate.
These statements apply to future events and are subject to risks and uncertainties. Its work other factors, which could cause actual results to differ materially from what is stated on the call.
These risks and uncertainties another factor I provided in the earnings release and in the slide deck as far as with other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on their website or www Dot asked you see that gap.
I also wanted to point out that during today's call. We've got some non-GAAP financial measure, which we believe our youth.
Valuating our performance.
You should not consider the presentation of this additional information in isolation or as a substitute her results prepared in accordance with gap.
We have provided reconciliations of comparable GAAP to non-GAAP measure and the tables accompanying today's earnings release.
That it's my pleasure to turn the call over to Jim because again Jim.
Thank you Karen.
Good morning, everyone. We appreciate you joining our third quarter earnings call.
I will begin with a strategic overview of to highlight the focus of management.
Pardon commentary regarding progress during the quarter.
Jeff will provide a deeper review of financial results.
Smith, Vice President and general manager.
Why the review of operational performance.
[noise], please turn to slide four.
An important strategy for us is to reduce volatility of our financial results by strengthening and expanding predictable revenue streams.
Energy end markets will remain volatile.
Pure it's between peaks and troughs appeared to have shortened.
The naval nuclear propulsion program will provide predictable revenue that leverages, our key assets of engineering.
Complex project management.
Faulty processes.
Large welded fabrication expertise.
I like the naval work for several reasons, one being and as long life backlog, providing vision into a multiyear base loading up our fabrication assets.
Second is the competition is limited and international companies are restricted from bidding in most cases, Lastly, engineering program management quality control and our operating model required for this word work, resulting in high entry barriers.
Ultimately.
Customers in this market.
Well you, what we do exceptionally well.
The Navy strategy has been successful with current backlog for the segment at approximately $60 million.
Our naval strategy leadership has those participating in three different nuclear propelled vessel programs two different submarine classes and an aircraft carrier program.
Want to produce different more equipment for these programs.
Over the next 12 months, we hope to secure the supply to new components. One is work a carrier program and the other for one of the two submarine programs.
Demonstrable evidence of our success in the naval programs driven by Alan Smith and his team is the increasing percentage of backlog that is one sole source.
All our work for the first decade off the strategy was competitively bid.
We know we're seeing certain procurement dawn with sole source bidding.
Moreover, many of the initial orders were first time fabrications, a very complex weldments immaterial combinations production R&D.
Developing efficient built flow methods, along with production jetsam fixtures are needed with first time fabrications.
Productivity and process improvement will drive fabrication efficiency gains, which will be reflected a better and more predictable margin as we moved into repeat fabrications [noise].
We did add another order backlog during the third quarter that was in excess of $5 billion for the naval nuclear propulsion program.
Well they focus is in the defense and aerospace end markets.
We continue to actively engaged in discussions with companies serving department of defense.
Our current portfolio of components provided two aircraft purism submarines, along with new components are planned to break into.
With this as our because our view without M&A, we expect to have revenue between $20 million to $30 million on an annual basis.
In the near future.
We are assuming M&A deals within defense end markets being Bolton negotiated an auction auction processes.
Well, you're wasting multiples vary greatly where multiples below 10 times next 12 months EBITDA up.
Seemed to be nonexistent unless the business is broken.
At above 15 times isn't on common.
Finding the right fit where growth in combination benefits are short is crucial.
We will maintain or disciplined for strategic fit value creation and financial return metrics.
Another more predictable revenue stream is derived from our installed base.
On the installed base revenue takes two forms.
One is conventional replacement parts and in time replacement equipment.
The other is revamping retrofit.
Graham enjoys a sizable global installed base with a great installation record in North America.
In the last 25 years Graham supplied equipment valuable valued at more than $650 million.
That was delivered into North America.
Moreover, with equipment, we delivered in the nitrogen 70 is on the 80 US we estimate that our north American installed base approaches $1 billion.
There are too 'cause segment is not as volatile as large capital projects in the energy markets.
With parts that replacement equipment, having modest volatility while rifampin retrofit, there's lots of variable band capital project investment.
Our customers generally invest to keep their plants operating well [noise].
Also our thesis appears to be correct.
Certain regions such as.
In the U.S. in Canada.
They will leverage their facilities to get more from them before investing in new capacity.
Regions Whats dentist installation populations are the U.S. Gulf coast.
The mid Atlantic States.
And the West Coast plus 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 to assist our customers. We doubled the size of our performance improvement technical service organization in the past two years.
We are currently building out our U.S. Gulf Coast performance improvement engineering team.
Two engineers were placed in the territory in 2018, and we expect to add to more in the next six months.
These individuals focus on our customers plants, and our installed base, which will be in addition to our historic focus on Mpcs that Oems.
Typically I should highlight 30% to 40% of revenue is derived in some way from our installed base.
Let's go 2020 to date has greater than 35% of new orders derived from our installed base.
Excuse me.
[noise] M&A deal generation of centered also on the installed base to add products and or services.
Deal multiples and that's vertical Arpus Retros defense multiples. However, we're finding scalability and growth for these types of companies to present some challenges.
When taken together.
The naval strategy and our predictable base strategy.
Oh.
There are estimated to in combination approach $50 million per year revenue in the coming two years upon achieving that level of predictable revenue that level of predictable revenue. It will dampen the impact of are highly cyclical large crude oil refining and chemical project work.
[noise] also.
Trade policy and tariffs on certain materials have affected competitiveness and international markets and in certain instances.
It has impacted us in our domestic markets.
We're also observing customer acceptance of low cost regions for fabrication of critical components, such as our check the systems and steam surface condensers.
The response and actually to reposition our competitiveness it looks bad 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 increase market share.
Our previously we run a successful due to cost.
Four of the projects were for international crude oil refining projects.
We'll add to our installed base, which will ultimately drive follow on revenue in the coming decades from revamps retrofits and spare parts.
In the past, we approached using the global fabrication supply chain in a limited or targeted matter now we are proactive and aggressively attempting to change participation.
<unk> broader execution scale and expand market share.
Three critical facets of the strategy to expand market share are controlling quality.
Achieving a predictable results adds protecting our IP.
We are building out our supply chain management quality service organization in support of the strategy.
Well the successes cited a moment ago are validating we have a good formula for success.
Bringing on new fabrication partners can lead to missing financial projections for I'll give an order. However, thus far planned and realized margins have not varied greatly.
So unique or differentiating elements of grams IP.
We'll be closely controlled as we execute the strategy.
We're not releasing or disclosing our differentiating capabilities.
It will remain closely moated.
We exercised the strategy approximately 20 times since 2006.
We have safeguarded are critical IP, along with realizing satisfactory financial results from those orders.
Since launching since launching the strategy more aggressively we secured six large orders during the last 18 months.
When taken together expanding predictable revenue streams.
Positioning execution Stradey strategy to take more market share and underserved segments and.
M&A to add new revenue. This will result in strengthening shareholder returns were consistent financial performance.
As an increase in cash generation to reinvest into the business.
I will now refer to slide five.
I am pleased with our strategy to change execution to shift competitiveness within markets, where our share had been low or where we chosen the past not to participate.
Since initiating the strategy of instead, a moment ago over $35 million has been secured.
Putting an order in the last quarter.
And that most recent case the customer and the engineers end user are both new to grouse.
Fabricator.
And partner selection is critical.
<unk> proven process within China.
The success of that is being deployed into other Asian countries and certain countries in Europe .
Quality control on time delivery cost efficiency are important performance measures measures for the strategy.
I'm pleased with how well we are executing the strategy and achieving realized margins within the market price for this segment.
Of our end markets.
By developing global fabrication partners. It provides tremendous execution capability with a variable cost so we aren't adversely changing our fixed cost.
This work due to Sheratons margin with our partner can look different out the gross margin line, but blends in fine at the operating margin life.
Importantly.
We also reach into non traditional markets for DRAM, such as emerging markets for hydrogen fuel delivery systems natural gas engines or natural gas delivery systems applications involving supercom critical fluids and applications and project services.
And certain application Graham products have high differentiating barriers that limit competition.
To date, there were orders within our short cycle products that were supporting Oems or end users for natural gas delivery systems supercritical carbon dioxide extraction hydrogen fuel delivery systems and saw.
These are smaller dollar value orders that fall into our short cycle segment. However, in the long run they can become more frequent and more predictable, thereby further expanding predictable revenue streams.
I will now move onto slide six.
We couldn't from full year revenue guidance that will be between 101 hundred $5 million.
This revenue guidance is predicated on executing a quick turn Navy order in the fourth quarter that is currently in backlog.
We feel confident that we will be able to do that.
Secondly, Jeff and I are on a conference call. This morning with are managing director in China, We have some large work being done in the fourth quarter in China, that's being recognized on completed contract basis not percent complete basis.
We have been advised this morning that the local government authorities are prohibiting workers to go into the factory for this period of time, we'll have to monitor the progress of that this is happening a real time.
And it may affect our of our ability to land within that guidance projection. We just learned that this morning with Jeff what I'll call.
Gross margin is expected to be between 21 and 22%.
And this has been adjusted downward from previous guidance.
That's GNS spending will be between 17 and $17.5 million.
Our effective tax rate is approximately 20%.
I would now like to pass it over to Jeff for him to review the financial results Jeff.
Thank you Jim and good morning.
If I could have you move to slide eight.
Revenue in the third quarter was $25.3 million up from 17.2 million in Q3 last year.
Q3, net income was breakeven compared with 95.
$2000 or one cents a share last year I will speak more to our Q3 results on the next slide.
Orders in the quarter with $20 million and our backlog now stands at nearly $123 million.
On the slide nine.
Q3 sales were up significantly versus last year. However, we had a poor mix of projects converted in the quarter.
Sales in the third quarter were 53% domestic and 47% international in last year's third quarter, the mix was 83% domestic and 17% international.
The increase in sales in the quarter was all in the international markets, primarily from outsourced fabrication work.
Gross profit in the quarter increased to $4 million from 3.7 million last year, though the sales level increase significantly the mix of projects was very unfavorable as well as the amount of short cycle aftermarket aftermarket work was lower than normal.
Due to this mix change gross margin was 16% down from 21.8% last year.
We believe the poor mix of projects will shift to a more favorable mix in the fourth quarter and beyond.
And in addition, we continue to see an improvement in margin in what is going into backlog compared to what is coming out of backlog.
EBITDA margins in the quarter, we're just above breakeven down from 4.5% in last year's third quarter.
And net income was breakeven down from 95000 or one cents per share.
On a reported basis and 500000 or five cents a share on an adjusted basis.
On the slide 10 looking at year to date results.
Sales in the first nine months of fiscal 2020 were 65, so I'm, sorry, $67.5 million compared with 68.2 million in the first nine months of last year note that last year had a much stronger first half in second half and per our guidance, we're expecting the opposite.
And strong sales quarter in the fourth quarter.
Year to date sales were 65% domestic 35% international compared with 63, and 37% respectively last year.
Year to date gross profit was $13.7 million down from 17.1 last year and gross margins are down at 20.3% versus 25.1 in the first three quarters of last year.
Favorable mix impact is a third quarter is the main driver in the reduction in gross profit margin in dollars.
Year to date adjusted EBITDA margins were.
4.8% down from 12% last year.
And full year, Oh, sorry, nine month, net income is $1.3 million or 13% or share.
As reported basis, and $2.2 million or 22 cents per share on an adjusted basis, compared with 5.6 million or 57 cents a share on an adjusted basis last year.
Moving to slide 11.
Cash is at $70 million down from 78 million at the beginning of the fiscal year. This reduction is simply the timing of working capital and we expect it will reverse over the next one to two quarters.
Capital spending has picked up in the third quarter and is now $1.4 million through the first nine months similar to last year.
We expect significant capital spending in the fourth quarter and full year capital spending of $2.5 million to $2.8 million for the full fiscal year.
As Jim discussed we continue to expand our acquisition pipeline and despite high prices in that arena. We are pleased with the list of companies we are considering pursuing.
Alan will complete our presentation with.
By providing more depth than our operations in Q3.
Thank you, Jeff and good morning, everyone I'll provide commentary and operations level.
Asset you refer to slide 13 please.
25.3 million in sales for the third quarter reflected the benefit from our increasing instead of 12, <unk> fabrication and supply chain temperature participation in market share in the segment on the refining market that we previously.
We're not focused on.
5.6 billion increase in refinery sales in the quarter comparison year earlier, it's principally due to this strategy. We are executing a large and mid east near capacity and finding project using agent fabricators to expand our execution capacity and to prevent costs.
It's happened at the price centric decision by the Beacon starting to move out which.
Necessitated.
Different execution plan.
We haven't generally observed this or the middle East refining application.
We plan to complete this order in the fourth quarter.
Chemical sector sales more than doubled in the park I want to impact our last year due to ongoing investment in North American petrochemical plant tied in low cost.
Stack advantage stemming from shale derived oil and gas.
Commercial sales, which include the Navy increased 1.6 million due to the navy backlog progressing into fabrication.
Our geographic sales mix as close trending closer to 50 50 domestic and international.
Looking at par mentioned in east daughter.
I would expect domestic sales to range between 50 and 75% in the long line due to strength of our naval backlog.
As Jim noted since both 2020 revenue is expected to be between 100 and 105 million.
The risk in the short cycle than any order and backlog.
Set up to complete but our customer always can in fact or completion in a negative way.
My conversations with customers suggest that we will complete this order within the fourth quarter.
Moving onto slide 14.
Hi.
The higher level of yet a trend line does that mean skate the cycle by them for non Navy orders haven't essentially double that trailing 12 month order levels when compared to the low water mark in the first half of fiscal 18.
We do have rather large orders from time to time be they felt an 80 or other end markets, which can create spike such as the one seen in the second quarter fiscal 19.
We are enjoying [laughter] level orders from our installed base eat orders come in two for.
One is a typical spare parts or increasing the placement the other as retrofit or revamped type orders.
Year to date or is derived from the installed base represent approximately 30% of the total orders.
More importantly installed base orders typically had the highest margin potential.
We did add approximately $8 million a new work into the backlog from their naval end market year to date, a portion of the eight nine came in the form of change orders for scope modifications.
Nesting backlog and a larger percentage.
For additional components.
Most importantly, there was an active pipeline in excess of $50 million, a new naval opportunities project close within the next 12 to 18 months.
Lastly, there's a lag to put me on beds that will require us to utilize global fabrication supply chain strategy, which totaled 75 million and his plant closings in the next 12 months.
We're not expecting get all of that however.
We are in good position I believe for second targeted projects.
I expect that trend line <unk> outlets across the next several quarters.
Finally, I'll wrap up on slide 15.
The backlog is healthy at 123 million with naval order, if representing just over half the backlog.
Refining backlog expanded to 30% of until.
I highlight that that's compared to a year ago because of finding backlog is up 20%.
Importantly, refining backlog provides higher margin and work when compared to the chemical market backlog.
Lastly, backlog conversion, it's 55% to 60% across the next 12 months and 25% to 35% will be completed beyond 24 months from now.
Operator, please open the lines for questions.
Thank you will not be conducting a question and answer session. If you'd like to ask your question. You May proceed star one on your telephone keypad a confirmation total indicate your line is any question Q.
You May proceed or too if you would like to remove your question from the Q.
Participants, Judy speaker equipment, and maybe if necessary to pick up your handset before pressing the star Kate.
First question comes from the line of Joe Mondillo from Sidoti and company. Please proceed with your question.
Hi, everyone. Good morning.
What a Joe good morning, Joe.
So first off I went back so looking at your 12 month backlog and I sort of compare it to your truck trailing 12 months of revenue.
Compared to a year ago, it's actually very similar but over the last eight years, it's actually one of the highest that you've seen in the last few years. So I'm just wondering I know you're not giving guidance on fiscal 2001 quite yet, but just could you talk qualitatively and how you think your position heading into fiscal 21.
At a qualitative level Joe we are we are projecting unexpected up there will be you're on your growth in 21 versus.
20, the year is.
It's not fully set up.
But it's not a very good point at this at this juncture with where we are entering the year, we have probably six more months of booking large project work that could contribute to revenue in fiscal 21 for pipeline looks a look sample backlog is set up for execution. So.
It does or does suggest and direct does toward thinking that 21 will be a strong year for ground.
Okay, and then a couple of questions on gross margin. So it sounds like correct me if I'm wrong. It sounds like the maybe middle East or international work that you did and you had to do some outsourcing of the fabrication.
Cause the low gross margins.
That's if that's correct and I'm reading that correctly. It was this something that you weren't anticipating and could you just help us understand.
It seems like something you know you have a big backlog and you only a two quarters left in the year and I would've thought that would have been something that you would anticipate could do to help us understand the low margins that we saw in the quarter.
Sure sure Joe as Jeff indicated in his prepared remarks, we had [noise].
We had some.
Some effect.
Minimizing the effect of lower margin work that was converted.
What we have that our book of business.
We've talked about this over over many quarters over the last 10 years or so.
Have a varied margin profiles so.
Some are strong.
Well some can be so so.
As we set up the third quarter going into it we had a particular vision of execution and labor allocation across a certain mix of work.
What actually happened because of a starts and stops or for other reasons, we had to allocate work into into lower margin profile backlog.
That was not how we modeled and as a consequence, it had lower profit generation potential and drove down margins the international refining projects or that a.
Global fabrication project, we booked at Cleareyed you understood as margin potential in this projection.
That did not surprise us that's actually mapping toward our margin profile. When we book the order. So there's no surprise there this came down to a relatively.
I know you can't see behind the curtain, but from from us being able to look behind the details. It was the way we flowed production hours into the highly varied backlog that we have.
Joe This is Jeff one additional comment do we also had on a relative basis, a lighter quarter of aftermarket in a short cycle sales, which as you know are at a higher margin for us. So that also contributed to the difference between what one would normally expect.
Compared to what we actually saw from margin perspective.
Okay, and just a follow just so I.
Fully understand.
This is.
Backlog work that you have different ways to fill the order and deliver or was that you have a backlog of various different orders and due to timing with the customer you had to push out the high margin stuff you know board to future quarters, and you had to work solely on the.
The lower backlog work.
One.
It's more akin to your latter description, which is we had.
We have work in process.
That that has a a range of gross margin generated per production hour.
And what actually happened is we flowed work into for a number of reasons.
Into orders that had the lower gross margin.
Our per production hours that we had modeled going into the quarter or how we modeled the second half. This happens in our large project work happens with our naval work it happens with our energy market works work and.
It's it's frustrating.
Because nothing to us is broken into business as a consequence of the wide variability in margin profile of our backlog. What's great is we have an operating model, where we can we can adjust our production resources and flow work into our work in process.
Because we have enough of it in web that allows us to deploy those resources effectively into other other work. It just is the way that mix and math works. When you have such a huge variability and gross margin per production hour.
The positive what that is it portends to stronger margin in the future.
That's what I was that's going to clarify so the future couple of quarters. There are few quarters I'm, you're pushing out higher margin work. So that should actually benefit you going forward I guess in the next couple of corners.
Sure, we ultimately need to deliver that higher margin work in it and it will flow through in subsequent quarters.
I think one more question.
I'm, sorry, I'm, sorry, but yeah, sorry to interrupt but important point in line with Jim just mentioned is.
It's it's not a situation, where we've seen any city cost increases or anything.
Like that that would have that will impact that impacted the quarter that will impact us going forward. It's the same project work at some margins, we booked and our expectations of executing all those projects are in line with the costs that we assumed when we booked them.
Just unfortunately as Jim mentioned some of the poor poorer projects were executed in this quarter, which portends you know very nicely for the future.
Okay, I understand and not one last question on gross margins just sort of a longer term type of a question I went back to sort of the fiscal qual fiscal 16 time period and over that you know for five years you were realizing about 30.
35% of your revenue was derived from your high more higher margin refining business and actually currently your refining business is actually even higher than that as a percent of sales. Yeah. You are realizing 30% gross margins back then and now you're sort of closer to 20% I'm just wondering has anything changed.
Compared to that time period back then do you do you think you can get back to closer to 30% gross margins.
Oh I answer the second question first we do as we do feel that the margins that that the were exhibited a year to date.
Or not reflective of the margin profile of this business as we as we get some of the backlog behind does that reflected decisions. We made 12 18 months ago when the order environment was different.
And then secondarily.
As you might recall.
And as Alan said refining provides our highest margin potential however, within that end market mix as a geographic mix that can affect.
Margin So North America work is the best.
Middle East work under normal circumstances.
As a second best.
And this particular case I think gallatin.
I had mentioned that we had a price centric purchase decision from NEPC that was was not typical again.
We book that we understood the margin, we're realizing our our of our booked margins. So nothing surprising us that are just didn't carry the margin profile of a classic middle Eastern project.
But asia, depending upon as we as we shift our mix to where new capacity and let becoming from as we deploy the global fabrication strategy, we will be bringing in work from refining space that has a different margin projection done as you thought about Graham and there were finding activity a decade ago.
Because we're shifting our position where we didnt served that market fully before we can add that work into our business, it's going to be attitude about the operating margin line, but it can come in as a compression at the gross margin line that type of work.
Okay, and then just one I guess one last follow up a regarding this its been a few you several years, where I guess, maybe North America has been a little weaker than that's made and maybe that's I guess why.
The margin profile has.
Has not been a strong comparative back in that time period, do you see any catalysts or any growth factors.
Related to a pickup in work in North America.
And maybe specifically also you can address everyone's talking about how we are the biggest export of oil now and worthwhile to dependent or independent on oil. However, that's a little bit of you know for the you know related to the fact that our refineries.
Yeah.
You know process, a large part of the soil that were actually growing on do you see any sense regarding or any driver our work where some of the refineries are I'm thinking about a investing and ways to actually utilize some of this oil or any factors at all rugs.
Starting North America refining.
Alan hit on it a tangentially in his remark, where he mentioned that our installed base new orders year to date, where 30 or 35% of total.
What what's important within that is much of that was coming from or came from the refining and market.
That is implying to us as we look and Jeff had said the margin of our work going into backlog is superior to the margin of what was being relieved out of backlog than current periods are most recent periods.
Thats largely due to the fact that we're seeing ours our mix.
Come more.
North American and refining based and Thats, representing an improvement in our backlog quality with what's being added to backlog.
So again, we feel more positive as we look through the windshield, but as we look through the rear view mirror.
Okay.
All a I've several more questions, but I'll, let someone else seven cents. Thanks.
As a reminder, ladies and gentlemen, it is star one to ask your question. Our next question comes from the line of Theodore O'neill with Litchfield Hills Research. Please proceed with your question.
Thanks, very much a Jim in your prepared remarks, it did I hear correctly that there were jigs and fixtures you had to build out in Q3 that <unk> in order to execute on a contract that you will happen. If we were kind of Q4.
I I made a comment in my prepared remarks about.
First of a first of a time fabrications that require jigs and fixtures.
And.
That was not a drag on the third quarter, if I if I represented that way that onto itself wasn't an issue what I was trying to referred to was.
Our first decade was.
Competitively bid work and some first time fabrications.
So as we look forward, having those fabrications behind us we've built the collateral.
Indication asset that we need for future production the repeat builds the margin profile of our naval work will become stronger. However, we're dealing with the backlog in our strategy is to enter the market.
Over the last decade, very pleased with what we've done and the execution of that strategy.
The future look stronger than looking backward.
Understood and on China, I'm, I'm hearing anecdotally that no one's going back to work until after February 10th.
Is that the sort of thing you're hearing.
The call that Jeff and I were on the location of where our office was this February nines.
Yet we haven't heard the.
Times down for where we're having equipment built.
But they are on the Chinese new year shut down right now anyways.
So so nothing was happening with respect to advancing the particular order.
However, this is playing out real time for all of us.
We did get notified today through a proactive call, Jeff and I had placed to our China team to understand where where that particular order was that we plan to have complete in the quarter.
And ER, we shared with you in the prepared remarks, what we were advised which was the government has not permitted workers to return to the factory.
To date upon which they can return is not clear to us.
I'd have better better visibility middle of next week.
And.
We'll watch all about unfolds, there's little we can do.
Right.
We're not victims well we are little we can do.
Got it and and Jeff just following up on.
Gross margin question does outsourcing necessarily produced lower margin business for you.
It can in some instances that other instances it can be.
More in line with I think if you look at our margin levels today, it perhaps can be closer to a margin levels. Today I think if we're looking at margin levels, but our business will.
Our normally run out which is as Joe Mondillo noted was up in that 30% range that might be a little more challenging on it.
Consistent basis outsource outsource basis on some projects, yes, but I think across the board it might be a little bit less than that overtime.
Okay. Thanks very much.
Thanks Neil.
All right I would like but.
I would like to just extended to bid on that.
The segment of the market that we're we're deploying the strategy.
There's a market that we have segment, we underserved previously the has a different price potential in a different cost basis.
We we would expect most of those were most of those orders to have as Jeff had outlined.
Margins comparable to see our business as a whole right now.
We're not expecting we don't have illusions that that that segment of the market will provide.
Western type margin profile.
Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Okay. Thank you a couple of follow up questions on Alimta in your comments I think you mentioned a change in an execution plan did I hear that what was that can you review those comments. Please.
Sure do that support the.
The expansion into the even a more price focused buyer that Jim it comment until on his.
His comments where were going to win and agent in southeast Asia supply chain, so and doing it and they have to make sure that we have our vendor oversight on.
Processes Bailey button down.
What's important to us is that the product name for Dennis even though it's not being made by Graham employees. It meet our quality standards. So we have we have to have really tight quality surveillance and oversight with the vendors to ensure that we forget the quality product that's what's your name plate.
Okay that was related to the Asia supply not the or was that related to the middle East project for the C., but you can see buyer yeah that middle East project was built in Asia, South East Asia. Okay. Okay. Thank you and then also related to your comments too I heard a the number of.
35 million potential project pipeline with other work besides the navy, but do but what was the number that you said the potential Navy backlog that you can compete for the next 12 to 18 months.
Yeah. The next 12 18 months, that's in excess of $50 million.
Okay. Thank you and and following up on that what is what it when you refer to executing and Jeff engine to refer to executing a shorter cycle Navy project in Fourq. You can you what does that mean, what can you quantify clarify what type of equipment that is.
Right.
Yes, it's a it's a it's.
It's a long lead material order that we that that Danny or enable customers give us from time to time and some of these arent they like to lock down at a time base risk and material cost. So it isn't it a material order basically for us for future project.
Okay. We've got a a couple of these.
Previous fiscal years, where they'll be material orders are material orders with a not what I'll call a nominal amount of of fabrication work on them.
And they ultimately can become part of a bigger order as they did in the Oh, we have these in the past couple of years, but they're not necessarily guaranteed to be that but we've had a couple of these in fiscal years.
In the past couple of fiscal years.
Fiscal year 17 18.
Okay. Thank you and Jeff <unk> I'll also one your earlier comments, what usually historically has caused a less aftermarket orders in a quarter that you mentioned.
Sure the aftermarket orders and we look at the aftermarket as part of our predictable base and over.
You know 12 month period for example, it can be it as it is pretty predictable there can be a bump up or a bump down in a particular quarter.
For aftermarket or is it can move it 15, or 20%, which is really essentially the impact we had in this quarter. It's just timing of orders that you could you could or could be a lot of things that could have it could be the the holidays around the.
You know in December that can impact it it can be how the plants or are ordering it can be plant budgets. It can be a lot of things if we see a bump for a quarter either direction, we don't necessarily overreact, it's certainly see it over an extended period of time and we've not seen that yeah. We're this was just a the amount of orders it.
That we're able to actually they came in and and or executed in the quarter. Oh were were lower than we had a would normally anticipate.
Okay. Thank you and Jim wouldn't lessons for me is are you mentioned steeper cycles in previous earnings calls to for refining and chemical work I mean, why is that I mean is that foreign competition or lower budgets or what's different today than in previous cycles.
So what we're observing today and the difference would be a geographic mix when we when we thought about the or reflect upon.
The 2006 through 2009 surge.
Or the.
Is this decade search it was principally North America and mid East.
We're not yet seeing strong mid east.
And were and we're seeing more international.
And not as strong of a of work coming out of Canada, which as a which was up the oil sands wasn't good area for us we're not seeing as much work coming out of their sounds a bit of geographic mix.
But all in all.
As I've said in of remark a moment ago the orders that.
We've gotten so far this year year to date.
About a third round numbers was from our installed base in the form of some large projects that were revamp retrofit large in kind replacements that principally are being pulled from the north American refining market and that's always been a.
Healthy spot for us.
From a margin perspective.
So we're not we're not seeing the same geographic mix today.
Right now as we did a middle of this early in the in this decade or in the middle of the 2000 2010 decade.
Okay. Thank you. Thank you for that those comments I have a good rest of the day.
Oh, thank you.
You as well.
Our next question as a follow up question from the line of Joe Mondello with Sidoti and company. Please proceed with your question.
Hi, guys just a couple of follow up question regarding the slide on page five just wanted to.
Dive into that a little more and it sounds like a sort of a new strategy that you're taking on the person left side of the page I'm, referring to that are you planning on reducing any fixed labor wall, you try to transition to sort of more.
This outsourcing rising.
What actually is quite beneficial is the.
Confluence of the strategy with the strength of enabled backlog so while we're looking at.
The incremental work from our traditional energy markets.
Perhaps using this a shared fabrication strategy.
The use of our asset base in our production labor is growing.
Very up appreciably from our naval backlog.
It's stepping up quite markedly between 19 to current year then between this year and 2021, so we're actually flowing production resources and production assets into a stronger naval revenue.
And so we're not we're not.
Changing reducing cost as a consequence that actually is a perfect combination of.
How we'll see the market's evolving complemented by the strength of our of our naval strategy.
Okay. So you won't have to take on a new labor to facilitate maybe orders on the energy side of things at the same time your capacity utilization is increasing.
I don't think that's accurate we do plan to continue to build out our direct labor force our production personnel.
We see a enough market demand to that gives us confidence that that's the right thing to do.
I would anticipate over the next year, we would add another 10% to our direct labor workforce.
And if the markets don't change in how and that play out as we envision we would probably out another 10% the year after that.
Primarily fulfilling.
More energy end market demand, because we understand the naval strategy in the naval backlog conversion that we structured our business to put our production assets toward that predictable backlog. So that's already understood.
The additional direct labor really reflects our vision that the markets are continuing to expand.
Or if they don't.
Change from this tepid expansion cycle, where it will take more share.
Okay. So you wouldn't have to expand your labor as much as maybe the prior plan.
Were you didnt have the outdoors flexibility than.
That's fair.
Okay, and then on the Rightside I'm just curious so correct me if I'm wrong. It sounds like you are trying to attack new markets on the short cycle opportunities.
Could you just expand on that and I'm not sure. If you can provide any detail on how big of an opportunity this could be.
Well some of those could be.
I want to use.
You know.
Something to over the top but.
If if these take off say hydrogen the hydrogen economy of if that were take off and we're participating in that with a very differentiated product.
And that becomes a high volume produced a component for us that could be quite significant I don't see that in the next.
Half of a decade.
Perhaps decade, but the key is we've entered these emerging markets were participating.
We're helping 'em, our our customers evolve their their technologies on the delivery of these new solutions and rather ground floor and.
The right thing for us to do I don't think their game changers or needle movers in the next one two or three years, but I like that where there are like that we're participating.
I'd like how we're.
We're we're.
Moving appropriately into other all alternative energy sources.
As a business so it makes sense and.
Again, I don't want to I don't want to convey that their needle movers or the ultra grabs <unk> financial performance in the next one or two years, but the long term play.
I'd say, the hydrogen economy takes off or the.
Compressed natural gas.
Further accelerates we're in those markets, we participate a really nice.
Opportunities for Us nice margin worked and.
If that were to doubled tripled tenfold its was quite impactful and those aren't numbers that would be extraordinary as those.
Emerging.
Technologies take hold and have traction.
Okay, and then you mentioned, a winning a 5 million plus order in the Navy business.
In Threeq, you was that related to the the material orders for future projects that you were referring to when he was asking about that or is that something different.
No you might recall on the conference call that we had last quarter.
When we gave the guidance. We've we've mentioned it was excuse me [laughter].
Tied to winning a short cycle naval work order, we've not want it and now it comes down to delivering it.
So, saying one as we cited last quarter.
Excuse then regarding [laughter].
Regarding what you have in backlog for Navy or for the defense business. It seems like this year is looking like that business is going to be up maybe four or $5 million and I remember the big order that you won a couple of years a few years ago I'm, a big chunk of that was supposed to ship largely in.
You know fiscal 20 122.
I'm not sure where we are in terms of that because I know there's.
Some timing issues and pushing out there at certain things I'm, just curious on what sort of the outlook is for pickle 21, compared to the here relative to sort of how the customers on doing in production.
We had commented in our prepared remarks that our naval strategy is really predicated off of our backlog would imply that we'll have a revenue level between 20, and 30 million will should be up from from where it had been.
We will be we think if this so short cycle order gets completed in this quarter will be above $20 million from the naval strategy. It would be above 20 million, but we were projecting 20 120 to 23 and onward. So we're at the full stride of backlog conversion those big orders that we had one or the one.
You had mentioned.
We're into production well into production now.
The only proviso that that.
I would offer is it's the first components, our first time fabrications.
That have a lot of customer engagement and the potential for execution not to flow as modeled.
No no reason that we did anything wrong, it's just the way those first fabrications Gill.
But we're in production.
Those big orders are a in revenue cycle now and we're underway.
Okay, and then just on the order trends it seems like a the $20 million I'm sure you were.
Obviously, the timing issues with your business I understand I'm sure I'm, hoping for higher than $20 million on a run rate on a quarterly basis on an average run rate I guess.
Is that fair to say given the $75 million at present, a wins and 50 million plus the Navy.
Yep 20 isn't enough.
20 is is what was a point a period of time bookings better.
Last quarter.
The pipeline implies that's.
That's a.
Not to be expected every quarter going forward it could happen again.
What we have a great.
Book of bids that's out there Ellen mentioned.
The naval side or on the just on the.
Global fabrication strategy side 75 million.
Maybe 50 million and that's not counting the ordinary Graham energy market, which is very substantial.
Again, it comes down to timing of there's one thing that we're finding different about this cycle.
Is the ability for us to reliably predict timing of order placement is has been impossible.
We've been chasing orders that should have closed last year that haven't closed that we haven't lost them.
They just haven't closed in the.
If you would have asked me three quarters ago would we have won this particular project that would have said, yes, and it's still sitting in the bid pipeline.
What we're sensing a hesitancy reticence by our customers to make the final investment decision, we don't know necessarily why.
But it's very difficult for for the sales forecasters too.
By the credible.
What's going to book this quarter, we feel more confident over 12 month period.
Less confident within a one month or.
Or three month period.
Okay. Thanks, that's it for me Thanks, a lot.
Thank you Joe.
Unfortunately, we are at a time for questions I'd like to hand, it back to management for closing comments.
Well, Thank you Oh, Joe and Tate for your comments this morning.
We appreciate the depths with which you.
Roped, Alan Jeff and myself.
We look forward to updating everyone.
On our year on results.
As as we wrap up the year.
And that will be probably not until may right and to me. So again will be a advising if there's any large new order announcements worthy of a press releases.
We look forward to updating everyone as we wrap up the year and have our year on results conference call. Thanks for your time today.
Goodbye.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.