Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jeff Glajch -- VP and CFO

Graham Corporation (GHM) Singular Research Annual “Best of the Uncovereds” Conference Transcript September 10, 2009 10:00 AM ET

Unidentified Participant

(Starts Abruptly) are muted for the webcast and at the end with the question and answers to begin, I will then open the lines for question and answers. So if you have questions you will be live once I un-mute the lines. And the recording has begun, and Jeff Glajch.

Jeff Glajch

Thank you. Thank you everyone. Good morning. I want to talk about – perfect, thank you. Just wanted – make sure everyone understands what Graham is today. If you have any questions – if you’re going to have questions during this presentation, please feel free to ask during the presentation, at least the people who are in the room. And at the end of the presentation, certainly I will take any questions that any one has.

Graham Corporation, our vision, our goal is to be a world leader in the design and manufacturer of engineered-to-order products for the energy market. This is important –most important here is the engineered-to-order. Everything that we make we have to engineer to our customer specifications. We don’t have any products that sit on the shelf that our customers order and we shipment them right away. Everything needs to be engineered. We believe that is a significant advantage to us, allows us to garner a larger portion of our customer’s business and to achieve a higher profitability because of the fact.

I just have simple financial statistics on Graham. We have been a company since 1936, we were founded – we are based in Batavia, New York, which is a small city or a small town, about half way between Buffalo and Rochester. And we have been a public company since 1968.

What does Graham make? This chart will show you a dispersion of some of the products that we make. We make ejector systems, which you can see a small picture of on the top right corner. I have got a slide coming up which has got a bigger of what an ejector system is and a condenser is, so I can hold off for a bit there. Condensers, separate condensers which are used in concept with, excuse me, which are used in concept with steam turbines.

We have an after-market business. What our after-market business is it’s not as I mentioned before, it’s not the subparts that are off the shelf, it’s actually replacement parts for our existing installations and our installations typically last 10 years to 15 years to 20 years and the replacement parts typically only go in at a point in time when wanted a scheduled maintenance. We also have a small specialty heat exchanger and pump business.

Geographically, our sales are usually around 50% domestic, 50% international. If you look back at the last couple of years based on the strength of the US refining market, we’ve actually been more heavily weighted towards domestic sales.

Last year for example, our domestic sales were up 63%, first quarter this year, we are pretty well back to our normal range of 50-50, and our expectation looking forward is that our sales are going to be more weighted towards international sales, potentially being 40% domestic and 60% international in the next couple of years.

This is an ejector system which was recently installed at a refinery in China. You can see the large cylindrical object, that’s a distillation column. What the ejector system does is it lowers the pressure in the distillation column to allow crude oil to boil off at a lower temperature.

A very simple example, if you think about water, water boils at 212 degrees if you are on a stove, but if you put it in a vacuum environment such as a distillation column and you lower the pressure in that distillation column, you can get water to boil at 50 degrees Fahrenheit.

So very simply, it uses the same thought process here with oil. You want to get more throughput through the facility, you wanted to be utilizing less energy much more efficient, the lower you can get the pressure in the distillation column, the more efficiently you can run and the more products that can be run through the distillation columns.

Our markets on the – we typically sell in the refining market, the chemical processing market and also the power and other industrial applications. Normally, our split is about a third refinery, a third chemical processing and a third power and others. You can see in, we are getting at 2010 and this is also a (inaudible) what we saw in fiscal 2009.

We are more heavily weighted towards the refining market, again the domestic – primarily the domestic refining market. Petrochemical market has been a little weaker. It started to be – it slowed down a couple of years ago, whereas the refining market really domestically just started slowing down more recently.

We have a pretty diverse market stat. I will talk about refining, conventional crude oil, the oil stands in Alberta for example, the utilization of heavier crude oil which has become more prevalent in the last couple of years, sour crude. On the chemical processing side, large ethylene facilities, ammonia facilities, polystyrene, coal-to-liquids to gas-to-liquids, so we play across a pretty diverse range in the petrochemical side.

And power generation, we are looking at really smaller facilities, we are looking at 75 megawatt and below. Our surface condensers are used even though it’s a – whether at co-gen facilities. Geothermal, we will have some solar opportunities. Nuclear, we have been in the past and the ability to get back in the nuclear were quite frankly particularly on the domestic side, the nuclear industry has not been particularly strong recently. Other application, edible oils, biofuels, we were involved in a lot of ethanol facilities, where ethanol would have been stronger and certainly have that opportunity moving forward.

This just gives you a bit of a view of some of the – of our orders in fiscal year 2009. In fiscal year 2009, just for a clarification ended at the end of March, so our fiscal years run through March 31st. You can see our orders in 2009 were heavily weighted toward refineries, but if you look at the list of the locations, you will see that they were really more outside of the US. They were in the Middle East, they were in Asia, specifically in China, also in Korea, some in South America, less so in the US in 2009. We are clearly seeing a shift away from the US and more towards international markets.

Petrochemical, the same thing, China, very heavily in China. We are starting to see some activity in the Middle East also on North Africa and Mexico. Our power generation and other products tend to be more domestically focused, so we did have a power generation, a significant order at Turkey this year. So most of our power generation and other opportunities tend to be out – within the US.

Looking at global distillation capacity growth over the next five years, it looked – this came from an OPEC report in the summer of 2009. The net growth is about 6 million barrels per day. You can see where the increase is coming. It’s coming in Asia, half of it’s coming in Asia, another quarter of it’s coming in the Middle East, a very little of it’s coming outside of those two areas.

We do have some increases going into the US and Canada, but a lot of that is facilities that are already in for being build and with our expectations for North America is we are not going to see the growth there, we are going to see the growth in Asia, we are going to see the growth in the Middle East, we are going to see the growth in South America, we believe when the markets do start coming back and we believe the North America market will be last to recover.

The next two slides actually just look at our competition, initially the domestic competition and then also competition internationally. You can see domestically we have very large shares in some of our key markets. If you look at our competitors, again both domestically and internationally, what you will see is either very large companies that have small divisions and small businesses that we compete with or you see a lot of smaller private companies.

So unless you look at the handouts themselves, you will see on the international side, along with the domestic companies you have got a couple of significant competitors out of Germany, GEA Jet Pump and Korting Hannover, we don’t see Edwards out of the UK, and then we have some Asian competitors also.

The interesting thing about our company and about who the markets that we serve, if you look at a refinery for example, typically when a refinery is built, the end customer whether it’s the end customer or it’s the ETC who is going through the selection process, those customers will have a very narrow number of approved vendor, it might be two, it might be three, it might four. They are buying through a reliability of what our products do and whether it’s Graham or it’s one of our competitors, they don’t want to be buying some of the – maybe a little, maybe save a little cost on, but they risk those reliability.

If you look at a typical – if you look at a $5 billion or $6 billion refinery, we might be $4 million, $5 million or $6 million or $7 million of that spend, but it’s machine critical components that the reliability of the facility and the ability of the facility to maximize its efficiency is driven significantly by our ejector system. So price is not the driver here typically, particularly in the North America, particularly in the Middle East, in the more developed markets, it’s value driven, so there is a high barrier of entry.

I just like to go through briefly some of our financial performance over the past few years, to give you an idea from where Graham has come from and then also where we believe we are headed. The last downturn in the market really ended in the late 2003-2004 timeframe and you can see as we recovered and the company recovered from 2005 up to 2009, we have grown from business from just over $40 million in 2005 up to over $100 million in fiscal 2009.

We believe we could have grown it faster, but honestly, we didn’t have the internal capacity to grow the business. We didn’t have – in the last downturn we had not focused enough on expanding our capacity, having that capacity when the ultimate the eventual upturn did come. So we believe we could have gotten to that $100 million earlier, $100 million level earlier, had we have that capacity.

We spent the upturn period rationalizing our organizations from a capacity standpoint looking how do we improve that capacity, how do we improve the throughput on – on not just the production side, but also at the frontend which is our engineering side, so we looked at how do we streamline the operation, how do we invest in IT technology to allow our engineers to be more efficient and to be more productive, how do you streamline our operations so that we can flow more through our facility and without adding to our roofline.

We didn’t expand our roofline to get from $40 million to $100 million. We took the roofline that we had and improved the facilities from within. Our capital spending has not been enormous for a company of our size. We typically spend about a $1.5 million to $2 million annually on capital spending. Fiscal 2010, we are actually looking at only spending about $1 million. This is not a capital intensive business by any means.

If you look at our expectations looking forward, we’re clearly in a downturn and we spent – while we spent the upturn looking at ways to get additional capacity, we also spent that time period looking and saying there is going to be an eventual downturn, there always is, this is a cyclical industry. So when we get to the downturn, we want to be prepared.

So as we were growing, we were growing adding variable cost, we were adding additional employees, we were running a third shift, we were running more overtime, we outsourced some of our business, we didn’t add fixed cost, because we knew when the next downturn came, we wanted to be profitable not just in an upturn, but we wanted continually profitable going into a downturn, and I will speak more of that in a bit.

Productivity, we went from $40 million to $100 million, but we didn’t increase our number of employees by that level. We were around 240 employees back in fiscal ’04 and fiscal ’05, by fiscal 2009, we were around 300 – we went from 240 to about 300 employees, so we added about 25% as we increased our sales from $40 million to $100 million.

Inventory turnover, you’ll see a little bit more on our cash management was one of the things we focused on very heavily is how do we lower our inventory levels, how do we lower our receivable levels, so that we are getting more cash into the business, we increased our turnovers by more than a factor of 2 over the last five years, and we expect to keep that level of inventory turnovers moving – going forward.

I’ll give one example, our raw material inventory, so that inventory which hasn’t been touched is not work-in-process, but it’s just pure raw material. If you’ll go back to 2004-2005, we were a $40 million business, had $3 million of raw material inventories.

Jump forward to 2009, business is 2.5 times as large, but cost of materials is double, maybe even more than that, and yet our raw material inventory saw a cost per unit has doubled, and yet our raw material inventory actually went down from $3 million to $2 million. So we are very focused not just on our gross margin and our operating margin, but also on our cash management.

If you look at our margins, historically – and again I have got another slide which will speak of this even further. But historically in a downturn, Graham’s margins were in the low 20s or the high teens and in an upturn they would kind of peak around 30%. And clearly, you will see 2005 was the end of the last downturn and we have very soft margins.

As we’ve grown through that through ’06 and ’07 and particularly in 2008 and 2009, you can see our margins have expanded pretty significantly. For 2008 and 2009, our margins were around 40%. We don’t believe long-term in an up cycle 40% a level of margin we believe is some probably somewhere in the mid-to-high 30s and there were some specific opportunities that’s not just a little bit higher in ’08 and ’09, but we believe in an up cycle, the margins should be in the mid-to-high 30s. And in a down cycle, they should be in the kind of mid-to-high 20s. Clearly fiscal 2009 was the top of that cycle, and I will speak a little bit more when we are looking for fiscal ’10 and beyond.

Our net income, historically when the company hit a down cycle it was breakeven and it might make a little bit of money, might lose a little bit of money, that’s an – and you can see that very evident in 2005, and we will talk to where we are going forward, but looking forward we are looking to be profitable in a down cycle and extremely profitable in an up cycle.

We clearly had a nice drawn on the earnings side for the past couple of years and as if you can see on the next position, we currently have $45 million worth of cash at the end of the – our first fiscal quarter, which was as of June of 2010. Our expectation for 2010 is we will generate a significant amount of cash along with significant profitability and we will continue to add to this cash position.

We have no bank debt. We have a long-term liabilities which you can see here are about $2.6 million are primarily a deferred taxes. So we have no long-term bank debt. We have $45 million of cash. You can see obviously our current assets and liabilities are in a very favorable position also.

But if you look, if you back out our cash, one of the things you will see in our current assets and liabilities if you back the cash out, will be about $28 million, $29 million worth of current assets and $21 million of the current liabilities. So our working capital – we have driven this business from a working capital management standpoint that we don’t need a lot of working capital to operate the business.

So as I look at that $45 million worth of cash that’s sitting on the balance sheet, I don’t need a lot of it to run the business, because we are continuing to generate cash rather we have the opportunity to use that for other purposes and our other purposes primarily are looking at external acquisitions.

We also have in placed a stock buyback program, which we put in place in January for a 1 million shares, we have purchased 300,000 shares through the end of June, it expired at the end of July, we renewed it for another year, so it runs through July of calendar year 2010 and we have the ability to purchase up another 700,000 shares if we so choose. But that’s secondary to our acquisition is upfront.

Cash management, I talked about inventory briefly. You can see our cash cycle has declined from a 112 days in 2005 down to 17 days in 2009. We spiked up a little bit in the first quarter, but that was all – quite frankly it was all timing. Our expectation in 2010 is we are going to be in the 20 to 30-day range for our cash cycle.

What’s our strategy and our outlook going forward? Clearly, we are in a down cycle right now. You can see our orders and our backlog over the past five years have grown – our orders have grown as high as a $107 million through the fiscal year 2008. Fiscal ’09, they were just below $74 million and trailing 12 months we are about $55 million.

Our backlog peaked $76 million, almost $76 million at the end of ’08. We’re down around $37 million at the end of first quarter. We believe from a backlog standpoint, we’ve gotten more toward a level, the current level in trough, so we are going to see some spikes.

Our order level in the past four quarters has been up and down, we were at, I believe it was $16 million to $17 million and then we dropped down to $8 million, then we went up to $20 million, then we went down to $9 million. We expect that type of volatility for the next number of quarters. The markets are still unstable. We are seeing some signs of recovery.

The Dubai project for example in Saudi Arabia, which was initially announced a few years ago, it’s going to be a $6 billion project. They then put it on hold when they realized the cost had increased rather dramatically, primarily driven by material cost and it is driven to a point where they thought it was going to be $12 billion, so they put in on hold a while back.

About a year ago, they just realized it about a month ago, they believe that the material cost – the material cost having coming down, it’s more down about $9.5 billion, so it’s down about 20% from where they thought it was going to be a year or so ago, so that’s a sign that project is opening up.

China for example, there have been – there is continuous de-activity in China. There have been 12 refineries in the last three years that have been announced that we bid on and in fact we bid on all 12 of those, 10 larger ones, 2 smaller ones. The two smaller ones, quite frankly were not in our sweet spot, but the 10 larger ones were, and off those 10 refineries, we won seven of them. So we will make great opportunities in China. We believe China will continue to grow. Think about it, they are building 12 refineries in three years.

There is a 149 refineries in the United States, so think of growing adding essentially four a year in the last three years and the expectation going forward is they are going to continue to grow – to build new refineries whether it’s 3 years or 4 years or 5 years or 6 years, there is certainly a significant opportunities in China. We are very well positioned to take advantage of that. So we are clearly in the down cycle, but we believe we are planning for to be continually profitable in this down cycle and then to be very profitable and to continually grow our business in the up cycle.

One of the things we look and I spoke about a little about this before is how do we – how we changed our business to be a profitable company not only in an up cycle, very profitable on up cycle, but also continuously profitable in a down cycle. If you look back to 1998, which was the – an end of the last up cycle, Graham was about a $52 million company, had 31% gross margins and 9.5% operating margins.

Two years later, as the down cycle had – was fully engaged or fully involved, the sales were down about $35 million, our gross margins were down at 24%, our operating margins was essentially breakeven and that’s – that down cycle continued. It was a longer than normal down cycle that really went through 2004 and we sat at that kind of a level of $30 million to $40 million and basically we breakeven, maybe even lost a little bit of money.

As we’ve planned in this last up cycle, we clearly achieved, we significantly over achieved compared to historical prospective for Graham and our gross margins and our operating margins, we added 100 – I am sorry, 1000 basis points on the gross margin level and we went from 9.5% to 26% operating margins. And we believe with the workflow change we put in place, with the investment in technology, with the change in the focus of our organization, we are a different company today than we have been in the previous up cycles, we are now a different company as we have gone through this down cycle.

We always plan for this down cycle, and as we are looking at 2010, and what I have shown you here is our midpoint of our guidance for 2010. This is the guidance that we put out at the beginning of the fiscal year. We made a slight adjustment to it at the end of July and that adjustment was we have given a margin range of 28% to 31% and the only adjustment we made on that guidance was to suggest that we are going to be at the upper end of that guidance based on our first quarter results, so that we still are using the 28% to 31%, but we believe we are going to be at the upper end of that.

So if you look at the fiscal 2010 guidance, what you see is new margins and this shows 29.5%, if we went a little higher in the upper end of that range, it will be in the 30.5% to 31%, which would give you an operating margin around 10%, EBITDA margins of almost 12%.

So in a down cycle, we are going to continue to be profitable, we are going to continue to generate cash and we believe that as we have come – we are in this down cycle not (inaudible) our organization to a point where we can’t continue to improve our – the operation of our business and that we can’t be ready to come out of there when the markets (inaudible) into recover that we will be able to continue to grow this business and take additional share.

If we look at the markets today, petrochemical potential we believe is very limited in the United States right now. We believe the Middle East is becoming active. Asia, we are starting to see new opportunities there and we believe that the Middle East and Asia are where the recoveries going to begin. Internationally, there is additionally additional ammonia for lighter facilities, some revamps of projects and other new grass root projects. So we are not out of it yet but we do see some little bit of time for the petrochemical side.

What’s our near term strategy? Very simple, we are going to continue to develop our organization, develop our processes, develop our people and have a constrained capital plan and place which will allow us to be ready for the next upturn. We are staying close to our customers. One of the things I didn’t talk about and I would like to talk about briefly here is our selling process.

If you – and I will use a refinery as an example. If you look at a refinery from the point of the decision is made to build a refinery until it’s built, is a 5 year, it can be a 6-year process. If you look at, say it’s a 5-year process we are involved from the beginning of the process. We start when they are scoping out the facility, because that process can take six months to 12 months. There is a permitting phase which comes next which can take a number of months. There is a selection of the EPC which will take a few months. So that’s probably – can be anywhere from 12 months to 18 months, even 24 months before put into our products.

We are involved from day one. Our engineers are working with their engineers. We have the technical capabilities that that some of the larger companies have walked away from it, they’ve – leave that back on to us and to our competitors, but we work with them from the beginning of the process, we are helping them understand the tradeoffs between operating cost and capital cost and so we are involved through that whole process up to RFQ.

What that allows us to do is when the RFQ comes out and our competitors even if there is only two or three of them that are still that are approved vendors, we have a leg up at that, we believe it’s about 18-month process where we have been involved with them, have been working with them, gives us a deeper knowledge into the facility, gives us better relationships with the people making those decisions and gives us the opportunity to quite frankly, one, get a higher share of wins and second, also it allows us to get better profitability margin.

So that’s a competitive advantage. Is there a costs doing that upfront? Absolutely. Well we believe that’s a selling cost and that we get more than paid back to that selling cost. So that’s – we are continuing to do that. And what’s interesting is the book of business is out there right now today, even in this down market is not significantly different than it was a year or two or three ago when the market was very strong.

The difference is a couple of years ago, our customers were almost buying capacity, looking to reserve capacity. Now they’re taking their time significantly longer than – excuse me, now they are taking longer to ultimately put their orders in. But the activity is still out there, it’s just not coming into fruition through to the buying decision.

We believe we are going to continue to gain market advantage in this period and we are selling support, we are continuing to support that pipeline of business I just spoke of. Both performance standpoint, we absolutely are going to maintain profitability and positive (inaudible) actual as I spoke to before, value and potential acquisition opportunities and I will speak a little more specifically to that in a few minutes, and we believe we will continue to capture market share.

Most importantly, just as we planned for the downturn during the last upturn, we are planning for the next upturn, we want to be ready, we want to get more quickly go up the growth curve than we did last time. We want to take market share and we want to continue to invest and expand this business.

As I mentioned, the pipeline of major projects are very active. It’s just the timing is really what is a little slow right now. But we are seeing some one-off times that things are starting to get a little bit better, but we do believe for the next three to four quarters, it’s going to be an up and down order pattern, and until we see a consistent order pattern, we don’t believe that we are on our way back up.

Finally, I want to briefly speak about our acquisition criteria. As I mentioned, we have a balance sheet, a very strong balance sheet. We have $45 million of cash, we have an available line of credit through Bank of America which we do not touch, we use it for letters for credit, but don’t actually touch for any other reason. So we have the capability to expand inorganically.

And what are we looking to do, we’re really looking at one of two avenues, we are looking at a geographic expansion or a diversification of products. Geographically, we have one manufacturing facility in Batavia, New York, which has served the world and we do very well by it. But we believe by having local fabrication in somewhere like China, or somewhere like India, will provide additional opportunities for us.

Speaking to China, we put a sales and engineering office there back in 2006. And as I mentioned, we have been very successful, well over 50% market share for large refiners in the last three years. So we are hitting the homeruns in China. The issue is we are not hitting as many singles and doubles. And we believe if we had fabrication, local fabrication in China or other places, India is an opportunity, in the Middle East that would allow us to hit some additional singles and doubles and really grow our business there, and there is a huge domestic market. I keep speaking to China, but as we all know there is a huge domestic market in China for our type of products.

The other alternative is looking at diversifying products. I talked about our selling process, we are in there for 18 months, while we have very good products, we have a fairly narrow spilt [ph] of products. We believe if we had a broader product base, we can get a larger share of our customers while it’s for those customers that we are in for that time period and have an opportunity to sell more things to them than we are aware that they sell.

Also we believe in potentially did allow us to even further expand our customer base, so that’s the other avenue we are looking at. And quite frankly we are looking at both avenues very aggressively. I have been on board with Graham for about six months. And since I have come on board, we have significantly accelerated our activities that are around acquisitions.

That being said, we want to be very, very disciplined about what we potentially look to do. We want to stay in the engineered-to-order products, we are doing the best that we do well and that’s what we believe we get paid for doing and that’s an avenue we are going to stay in. And so we are not going to go out and buy a pump company for example, that’s not just what we do well.

Size wise, we are looking for something, $60 million of revenue. We have kind of used a range of $20 million to $60 million, it doesn’t mean we wouldn’t go smaller than that, it also doesn’t mean we wouldn’t look at something larger than that. We’ve looked at things across that arena and outside of that $20 million to $60 million. It’s really going to be the right business, the right fit to us and at the right price.

Management team, we want to make sure it’s a management team that we will work with us. Obviously we would like to have a strong management team and we want a quality, culture, we want a team that’s going to work and is going to be very similar how Graham runs the business. We have been successful, we want to play up on that.

Finally from a financially perspective, once we get all that other – all the other criteria laid out, we want to make sure financially that this is going to generate a significant returned up to our company. We could certainly increase our earnings per share.

If you look right now, our $45 million of cash is primarily invested in short-term government bills, treasury bills, making 15, 20, 25 basis points, so we can prove our earnings per share would not be difficult, but that’s not our focus, our focus is to generate cash in excess of our cost of capital, which we targeted to be, cost of capital to be in the mid teens, so we want to get short-term returns on, we want to get long-term returns on the investment. We don’t want to simply do something to make our EPS look a little bit better, because that would be the wrong long-term decision.

Thank you very much. There is a few more slides in the back, so you’ve got the really more market information and backup information. Glad if I can take any questions at this time.

Question-and-Answer Session

Unidentified Participant

Jeff, with the golden nature of refining over as you mentioned in the US now, in your renewed focus internationally, are you – it seems to me a lot of these international projects in the Middle East and in China are done with some political desire to have it fully integrated downstream capabilities in the country. And some of them just don’t make any amount of sense on a global scale. Are you worried at all that they are going to wake up one morning and decide that this is coming to the stuff on hold, coming with extra capacity, (inaudible). There seems to me with this new reliance refinery, and there is a lot of products that go looking for a home in that part of the world, but that there is just too much capacity being built right now.

Jeff Glajch

Well certainly, for your first part on the US, the –

Unidentified Participant

Can you repeat the question –

Jeff Glajch

Sure, I am sorry. The question was really around looking at the capacity that is out there and both domestically the concept that will probably pass the high point of the domestic refining market and then internationally looking at the projects that are out there whether they’ll be in the Middle East, they’ll be in Asia and whether they are – these are projects that are maybe not economically justifiable and will someone at some point wake up and realize we have too much capacity and there is not an – there is not the need for this capacity going forward. Did I get that –

Unidentified Participant

Yes.

Jeffrey Glajch

Okay, thank you. A couple of things, first off, domestically we are certainly past the golden age in North America. Interestingly, we haven’t built a refinery in North America in 35 years and there is a lot fewer number of refineries today with a 149 of them compared to well over 200 15 years or 20 years ago.

What’s interesting though is through out that processing, there continues to be investment, reinvestment in existing refineries even if it’s replacement of existing equipment. There is also environmental regulations drive our business and when there is changes in environmental where there is need for a sulfur content that drives our business. Certainly last few years, the feedstock diversification has driven our business.

All that being said we believe certainly in the immediate term, the next couple of years, the US refining markets are going to be pretty slow. So, we are not too overly focused on the US refining market, although than obviously where there is replacements going on and there is either small upgrades or there is an improvement in the existing facility. Internationally, interestingly there is long-term demand expectation that are – whether it’s OPEC report or other reports that are out there, but there is a long-term need for additional power and additional refining capacity.

To your point on the capacity side, there is certainly is a lot of capacity that people are looking at, but seems to be politically motivated. But what we believe is there is enough demand out there and although on a percentage basis, it doesn’t seem like it’s a big number, I believe OPEC and I think there is some on the backup slides is now saying that between now and 2030, there is an increase of 23% from a demand perspective, that’s a 23% of an (inaudible).

So with that, we look at very favorable and we do believe that there will be continued investment because of the demand, but to your point on the capacity side, there is a lot of capacity going in right now, but there is – we believe there is still the need for additional capacity long-term.

We also look – well, we said we always talk long-term as a company, we believe long-term first off, and second off, again with purchase decisions to some we are making today are for facilities going in 3 years or 4 years that it going to be downstream. So that’s where we are – if we look out 5 years, if we look at 10 years, if we look at 20 years, we believe there will be a continued need for capacity.

In the power industry – and although we play heavily in refining, we are relatively agnostic around where the power is coming from, whether it’s in refining, whether it’s in geothermal, whether it’s in solar, we can plan on all of those fields. And so whether – if the refining market – powering into the refining market aren’t stronger there are certainly other opportunities in the energy arena for us.

Did I answer? Okay, thank you. Yes.

Unidentified Participant

(inaudible).

Jeff Glajch

That’s our total backlog. We have very good visibility into our expectation of how much of that’s going to book in the next 3 months, 6 months, 12 months. Off the backlog that we have at the end of the first quarter, we believe 85% of that will book in the next 12 months. We have a few projects that are on hold that were put on hold a while a back, typically when projects are put on hold unless they come off hold, they don’t get cancelled.

Vast majority will end up coming to fruition, just being delayed and pretty much a difference between the backlog we have and that that other 15% of projects that are on hold. Most of our projects book out over about 12-month period. Our larger projects, our smaller projects typically order to billing can be anywhere from a couple of weeks to typically three months.

Unidentified Participant

(inaudible).

Jeff Glajch

Sure. Question is around the risk to us meeting our projection in the slowness of the recovery on the US refinery side and I guess in really refineries in general. Now was that comment versus 2010 or 2011?

Unidentified Participant

(inaudible).

Jeffrey Glajch

Okay. I think I guess I look at it at two different ways. First, I will look for the 2010. We have very good visibility into 2010 because of our backlog and the majority of what is in our backlog we will book this year, there is a – there is a component of smaller projects that will come in that we will book this year, because we will build this year, because the vast majority of our buildings we have we are pretty comfortable with our billings for 2010.

So we are comfortable with the guidance that we’ve provided which is a reduction of about 30% to 40% off of that $100 million mark, so somewhere in the $60 million to $70 million, we are very comfortable with – we’ve stated every time that we are comfortable with that level of guidance. So for 2010, I understand the position, but I think we are comfortable with the position we provided.

For 2011, we are still looking at 2011. We are not far enough into 2010 in our order book to really have a strong position on 2011. We haven’t really talked much about 2011 other than let’s say that we believe in fiscal 2010, our order will continue to be on a quarterly basis choppy and we will see some business starts. And one of the things we always suggest to people when they are looking at our orders particularly don’t look at one quarter, look back four quarters.

I will give a perfect example of that. If you look at our third and fourth fiscal quarters of fiscal 2009, which were the quarters that ended in December and in March, our orders in the quarter that ended in December were $8 million and our quarter that ended in March was just over $20 million.

And there is a huge swing there, but in reality, there were number of projects that we had thought were going to come in November, December to split the January or February, very easily that 8-20, or total of $28 million could have been $14 million and $14 million, still totaling $28 million, but could have been more level.

So given the magnitude of the some of the projects that we have in that volatility in the order book on a quarterly basis can be pretty significant. So we always suggest people please look at 12 months rolling average as opposed to any specific quarter.

Unidentified Participant

Okay, thank you.

Jeff Glajch

Okay.

Unidentified Participant

What I am going to do right now is I am going to un-mute the lines so that – so that our webcast participants, if you would like to ask a question. And Tom are you still there at this time?

Unidentified Participant

Yes.

Unidentified Participant

Okay. That just tells me that we are live on the webcast. At this point in time, if you have a question on the webcast, feel free to ask any question that you might have. And we will just wait for just a moment here. Okay, while we are waiting for that, are there any other questions from the floor here?

I will make a comment here, our analyst, Greg Garner is projecting a – in 2011, an earnings growth rate of 31.2% and that’s a fairly good target. He has a target price for the stock right now it’s $16.5.

Any other questions? Yes, good ahead.

Unidentified Participant

(inaudible).

Jeffrey Glajch

Sure. The question was in this environment are we cutting back on our sales staff, are we maintaining it or are we redeploying it and reallocating it elsewhere. Actually what we have done in this downturn is we have added sales resources. We have cut our SG&A cost back.

Our SG&A cost in fiscal 2009 were just over $15 million. The guidance we have been giving is a range of $13 million to $14 million. So we have cut the SG&A cost back some, but we have – we have actually added to our sales resources. We believe this is the time we try to take share in the downturn and then also be well positioned to take share in the upturn.

Unidentified Participant

Okay, we are still live. One more opportunity for questions. Kind of take quarters up here. Any other questions?

Okay. At this time, I would like to – I thank – I would like to thank Jeff for his time. And with no further questions, let me review the schedule with you before I let Jeff go here, there still might be one more on the webcast, feel free to ask if you are there while I am talking.

The next presentation we have begins in approximately 15 minutes with Life Partners Holdings, and Scott Peden is the President, and he will be presenting in that time. Any further questions?

Jeff, thank you very much for your time. We appreciate it.

Jeff Glajch

Thank you.

Unidentified Participant

I might mention that Jeff has a breakout session in Madison I which is at the end of the hall there. If you would like to go one-on-one with him for a little bit, feel free to do that, and that will be starting momentarily as he adjourns to that – into that room over there. So that breakout session will be happening in just a few minutes as well. The time right now is 10:46 and we will resume again 11 o’clock Eastern Time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Graham Corporation in Singular Research Annual "Best of the Uncovereds" Conference Transcript
This Transcript
All Transcripts