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

Graham Corporation (NYSE:GHM)

F3Q 2014 Earnings Conference Call

January 31, 2014 11:00 AM ET

Executives

Karen Howard - Investor Relations

James Lines - President and CEO

Jeffrey Glajch - Chief Financial Officer

Analysts

Jason Ursaner - CJS Securities

Chase Jacobson - William Blair

Richard Ryan - Dougherty & Company

Jon Braatz - Kansas City Capital

Brian Rafn - Morgan Dempsey Capital Management

Operator

Greetings, and welcome to the Graham Corporation Third Quarter Fiscal Year 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Karen Howard, Investor Relations for Graham Corporation. Thank you, ma'am, you may now begin.

Karen Howard

Thank you, Jessie and good morning everyone. We appreciate your participation in our third quarter fiscal 2014 financial results conference call. You should have a copy of the news detailing Graham's results that was released earlier this morning. We also have slides associated with the commentary that we're doing here today. If you do not have the release or the slides, you can find them at the company's website at www.graham-mfg.com.

On the call with me today we have James Lines, our President and CEO; and Jeffrey Glajch, our CFO. Jim and Jeff will review the results for the quarter as well as our outlook, and then we will open up the lines for Q&A.

As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors, which could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at www.sec.gov.

With that, I'm going to turn the call over to Jim to begin. Jim?

James Lines

Thank you, Karen. And good morning everyone. My introductory remarks will begin on slide three. Our planning and specific actions taken during the past couple of years were to ready the company to double across this current strengthening expansion cycle.

Investments in people and equipment including welding and machining equipment, investments in IT and expanding our facilities provide the necessary foundation upon which we will grow and serve the strong demand we anticipate from our markets.

The key macroeconomic trends that we’re watching support our belief that we can double our business. They include population growth, increasing urbanization along with increased levels of income in emerging and developing economies and corresponding move to our consumerism, focus on reducing environmental impact of the facilities where our equipment goes. These together cause an increase in energy demand, there will be increases in chemical and petrochemical products, requirements for food and fertilizer products will increase. All this correlates into increased long-term demand for our products.

We supplement those mega trends with recent reports that will come out from ExxonMobil with their 2014 outlook for energy, OPEC’s world oil outlook, the American Chemistry Council’s report related to the U.S. petrochem expansion along with and most importantly our big pipeline and the size of our pipeline all support our planning basis to double our business across this cycle. We will remain focused on engineered-to-order products and serving the energy markets.

Moving on to slide four, highlights for the third quarter include backlog at quarter-end just under $115 million. This represents the diversification strategies and the success that we’ve had moving into new markets and acquiring new customers. An important point to note of the $115 million of backlog, approximately $70 million to $75 million of that relates to the customer segments we had last cycle. The remainder is from our market and customer expansion strategies.

Cash and cash equivalents and investments increased $9 million across the quarter to just under $64 million. This was due to the timing of accounts receivable collection. Revenue in the third quarter was $23.4 million. This was in line with our expectations and reflects the order levels last year.

Net income in the quarter was $1.4 million or $0.14 per share. Comparing this to the prior period, after adjusting for non-recurring item income last year was $2.1 million or $0.21 per share. We are confirming our fiscal 2014 guidance and we are not changing our top line outlook for fiscal 2015.

Moving onto slide five, sales in 2014, as I mentioned were $23.4 million. Revenue reflects prior order levels three to six quarters earlier. If you look at the order rates in fiscal ‘13, they average $24 million a quarter. And that of course closely corresponds to the sales level that we saw in this most recent quarter.

We do anticipate bouncing off this bottom as we move forward from here. Sales in the quarter were nicely diversified across our key markets of refining, chem/petrochem, power, our naval market and other commercial markets.

The U.S. market remained very strong. That’s of course due to our sales into the nuclear utilities, U.S. petrochem and our naval markets. U.S. sales represented 62% of total sales. The Canadian market at 17% of sales in the quarter was due primarily to backlog conversion of orders we have for oil sands projects in Alberta.

An important point to make as we think about the diversification strategies that have been executed very well is of the fiscal year-to-date revenue roughly 25% is from markets and/or customers where we’re not serving or we did not have last cycle.

With that I wish to turn it over to Jeff. Jeff?

Jeffrey Glajch

Thank you, Jim and good morning everyone. We’re on slide seven now. As Jim mentioned, Q3 sales were $23.4 million, down 9% compared with $25.6 million in last year’s third quarter. Split of sales was 62% domestic, 38% international. This compares with last year’s third quarter which was 45% domestic and 55% international.

Gross margins in the quarter were down 180 basis points to 26%. EBITDA margin was 11% for Q3, down from 17% last year. Q3’s net income and EPS was $1.4 million and $0.14 per share respectively compared with $3 million and $0.30 per share last year. However, if you recall last year, we had a onetime earn-out benefit related to the Energy Steel acquisition, which added $975,000 to net income in the third quarter of fiscal 2013. Excluding that benefit, last year’s net income and EPS were $2.1 million and $0.21 per share respectively.

On slide eight, year-to-date sales were $76.1 million, up 3% from $74.1 million in the first nine months of last year. Year-to-date sales are 57% domestic and 43% international. Gross profit has increased 15% to $24.4 million and gross margin is 32% compared with 28.7% last year, a 330 basis point gain in gross margin was favorably impacted by year-to-date sales as well as improved product mix.

SG&A was $13 million in the first nine months of this year, up only 2% compared with the first nine months of last year when you adjust out the previously mentioned earn-out benefit. EBITDA increased by 220 basis points to 17.2% in the first nine months of fiscal ’14, primarily driven by the increase in gross profit margin. Net income has increased 29% to $77.8 million when you compare to the adjusted basis of $6.1 million last year. EPS is $0.78 compared with $0.61 on that same basis.

On slide nine, as Jim mentioned, our cash position is $63.9 million, up $9 million in the third quarter and $12.2 million year-to-date. I do want to caution that the strong Q3 increase in cash flow is primarily timing of working capital and also the fact that we have to spend only a small portion of the capital for the expansion project that we discussed in October.

As I mentioned during the October call, when we had approximately $55 million of cash, we expected to fund the capital expansion here in Batavia with operating cash flow that would be generated over the next few quarters and that our cash position, once the project is complete would be at a similar level to then or $55 million. We believe that will still be our cash position once we are done with the capital project this coming summer. To note we have only spent $2.1 million of our projected $6 million to $7 million of capital for this year, so there will be a large step up in capital spending in the fourth quarter.

We continue to have a strong balance sheet with no bank debt. This will allow us to continue to utilize our cash for both internal and external growth opportunities to invest in our current business as well as acquisition possibilities.

With that, I'd like to pass it back to Jim, who will complete our presentation and comment on our view for the rest of fiscal ‘14. Thank you.

James Lines

Thank you, Jeff. I am now on slide 11. New orders in the third quarter were $23.5 million. It's not unusual to have variation or volatility of orders quarter-to-quarter due to the timing of projects converting in our bid pipeline along with the size of potential orders that we may win in a given quarter.

We tend to look at our trailing 12 month booking level as a better representation of the market health. If you think about our trailing 12 month order rates, they relate to $32.5 million per quarter average order rate. If we think about the first three quarters of fiscal ‘14, the average is $35 million per quarter. Therefore, while the third quarter was off a bit at $23.5 million, we will attribute that to the timing of the pipeline, the next set of projects moving in the pipeline to place orders. We still remain very positive about our bid pipeline. And as we think about the diversity of orders that came in, strong order level from the chemical, petrochemical sector at 47% of total orders, looking more narrowly at the U.S. petrochem, about 30% of the total orders in the quarter we would attribute to the U.S. petrochem expansion cycle.

29% of orders were for the power sector including nuclear and renewable energies, 13 refining, remainder from our other markets. Higher percentage of the orders came from the U.S. markets, principally because of the strength of the U.S. petrochem market and of course, most of our nuclear sales and all of our Naval sales are to the U.S. customer base -- orders, I’m sorry.

Our bid pipeline remains elevated and strong at a level that’s between $800 million to $1 billion, which is more than double the aggregate value of our pipeline at the start of the last cycle in fiscal 2004, fiscal 2005 timeframe, where a number of bids that we’ve made for North American petrochemical markets, the global refining markets and for the power sector.

Moving on to slide 12, this is a very important slide as we think about where the business is going as we move out of where we are right now. At $150 million of backlog, just under $150 million of backlog, 40% of that is from markets and/or customers we didn’t have last cycle, primarily the power market including nuclear and the work we are doing for the naval programs and of course along with new customer acquisition from our traditional markets. So, we are very pleased with the direction of our diversification of future sales and the strength of our backlog.

Also importantly, our backlog is more extended than it had been, giving us better visibility in out years beyond fiscal ‘15 into ‘16 and into ‘17. The $114.6 million backlog that we have, which is dispersed fairly evenly across our key markets of refining chem/petrochem, power, naval and other markets, approximately 70% to 75% of the backlog converts within the next 12 months another 15% to 20% will convert 12 to 14 months after that -- 12 to 14 months out from now with remainder beyond two years from now. It’s a sharp change from where our business was four or five years back.

Moving on to slide 13, as we said earlier, we have confirmed our fiscal 2014 guidance, it remains unchanged. Revenue is expected to be within the range of $100 million to $110 million, gross margin for the full year between 31% and 33%, SG&A as a percent of sales between 16% and 17% with an effective tax rate of 33% to 34%. Also, we have not changed our revenue expectation for the coming fiscal year, fiscal 2015.

With that Jessie, please open the line for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we’ll be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is coming from the line of Jason Ursaner with CJS Securities. Please proceed with your question.

Jason Ursaner - CJS Securities

Good morning.

James Lines

Good morning, Jason.

Jeffrey Glajch

Good morning.

Jason Ursaner - CJS Securities

First, I had a couple of questions on the gross margin of 26%. I was wondering if maybe you could walk through some of the various puts and takes there, how should we kind of be balancing factory absorption versus -- we sort of knew that these were legacy orders or written to lower margin and then maybe some of the short order work you had in the first half.

James Lines

From a quality of orders perspective, the pricing of the orders was fairly similar. I would attribute most of the gross margin decline to the utilization or the absorption of our fixed overheads. So pricing is relatively consistent with prior quarters and reflects the revenue level -- I am sorry, yeah, the revenue level of the corresponding absorption pulled down the gross margin. Short cycle sales have held fairly constant as had their margins. So, I would attribute the pullback in gross margin to utilization.

Jason Ursaner - CJS Securities

Okay. And just looking out towards next quarter and next year, my perception is that projects in backlog should be written to modestly higher gross margins, just given the improving pricing environment. And you have talked about -- because of the delivery schedule compression and you guys are utilizing some outsource manufacturing. Do you have a better sense at this point for the impact that’s going to have on gross margin for those deliveries kind of relative to the fact that they should have been written to a better margin to start with?

James Lines

We haven’t come out with margin projection or guidance for fiscal 2015; it’s still bit early for that. From a qualitative or quantitative perspective the orders being added into backlog over the last couple of quarters have generally been consistent with the pricing or anticipated gross margin.

We have talked about a couple of scenarios or situations where we did have some competitive pressure from international competition or international customers in the U.S. market, U.S. petrochem market that did have an effect for a couple of projects of lower pricing than we were anticipating because of that competitive pressures. But when you look at it on average running all of the orders together, I think the average gross margin is consistent and fine as we move forward. But we’ll come out with the gross margin expectation for ‘15 in our May early June conference call.

Jason Ursaner - CJS Securities

Okay. And then a significant portion of the order activity is obviously being driven by the U.S. petrochem market. A lot of those projects seem to be predicated on low natural gas prices for the foreseeable future. As you see natural gas prices rising pretty substantially this winter, I guess how does that impact any confidence you have in the pipeline of projects you see coming forward?

James Lines

At this point, Jason, we haven’t seen it change the attitude of our customers. I think it becomes potentially a greater concern if it moves north of $5 and stays north of $5 per million BTU. At this point, the projections are not [through] that to occur. And also it relates to the differential between comparable energy input from crude oil versus natural gas.

All in all, we remain very optimistic even though natural gas has crept up a little bit. We don't think it’s at a point where it puts these projects at risk. And we haven't seen an attitude change from our customers about the viability of the projects that we've been bidding.

Jason Ursaner - CJS Securities

Okay. And just maybe last question from me. Can you maybe give any update on the submarine program for the U.S. Navy, I know you can't always discuss all aspects of it, but maybe if there is anything you can talk about that?

James Lines

We do have and we have communicated that we have a strategy to expand our offering to the U.S Naval Nuclear Propulsion Program including both surface ships and submarine programs. I feel that our strategy is being executed very well. And we will become overtime a supplier to the submarine programs. With respect to orders that we may or may not have secured or activity around submarine programs, there is very little we can say about that at this point in time other than I can say I'm pleased with our strategy and the execution of our strategy. And I expect that we will over a period of time realize that strategy.

Jason Ursaner - CJS Securities

Okay, great. I appreciate all the commentary. I'll jump back in the queue. Thanks.

James Lines

You're welcome. Thank you.

Operator

Thank you. Our next question is coming from the line of Chase Jacobson with William Blair. Please proceed with your question.

Chase Jacobson - William Blair

Hi, good morning.

James Lines

Good morning.

Chase Jacobson - William Blair

I just had -- I wanted to follow-up on Jason’s question about the chemical market. I know the customers obviously look a lot longer-term than just what the spot price of gas is doing. But have you seen any, over the last month and a half or so, have you seen any change in pace of how they’re moving forward with this project, are they just slowing it down a little bit or anything like that?

James Lines

That’s hard to discern. What we did see was the initial movers got to the market first with placing the orders for long lead equipment which is our type of equipment. And we saw a flurry plenty of activity starting in June through the September ending quarter. It’s not unusual that there would be a stacking up of the next coming projects that take a month or a few quarters to get set up. So we weren’t surprised that we saw a flurry of first movers and now we’re looking at the positioning of the next projects.

And I still anticipate that they will be coming. Nothing is being advised to us by our customers that the dynamics have changed the pace has changed, we just haven’t seen that yet. To the contrary, we have had some discussions. This is more anecdotal, but it’s perhaps directly to the question that you’re asking. We have had some commentary with some customers that haven’t placed orders for our equipment yet that reflect accelerated schedules because they are behind. And they want to get our equipment on order or our type of equipment on order and then it will be a very aggressive push to meet short in schedule. So that’s encouraging and again that’s indicative of suggesting there isn’t a change at this point in time in the pace of this activity. We would attribute it more to the staging of the waves of projects.

Chase Jacobson - William Blair

Got it, okay. It’s helpful. And maybe, can you just talk about China a little bit. I know that’s obviously been a really good market for Graham, there is some slowdown in some of the coding and bidding activity? Can you just talk about what is going on there?

James Lines

Sure, that’s a great question. And something we have been experiencing over the last 12 to 18 months. While the bidding activity had really slowed down, stepping to the plate and placing orders by our Chinese customers in the refining sector had been difficult to predict and still is difficult to predict.

We do see a few projects, a handful of projects that’s seemed to be moving along over the next six months to placing orders. Having said that, I would have said the same thing nine months ago or six months ago, so those projects are still active, they are still moving along. But we did see a pullback in new refining infrastructure investment last 12 to 18 months. The projects are viable to us. As they appear viable, they are going to materialize and it seems to be more real now as we move into calendar 2014. But again our optimism, what I am conveying to you here, I probably would have conveyed the same comment six months ago or nine months ago.

China is hard to predict. When they are ready to place an order, it happens in 5 to 10 days. Prior to that, there is lot activity bidding. So I can’t say our bidding activity hasn’t changed those last 5 or 10 days raising to appeal that seems to be installed.

Chase Jacobson - William Blair

Okay, okay. And just one more question, Jeff. You commented a little bit on the cash flow, clearly very strong this quarter. What was better than you expected because I think you’d said that you’d expected cash relatively flat sequentially. I noticed there were some good customer deposits this quarter despite the lower awards. So just any color you can give around the cash flow and if there is something that changed versus your expectations?

Jeffrey Glajch

Sure. Chase, if I look at the expectations over a multi-quarter period, so over two or three quarters really nothing has changed, it was really the timing of some of our receivables, the timing of some customer deposits, but nothing dramatic change. My commentary last quarter which was again we were around $55 million and I believe I had a question or maybe I proactively mentioned that while we have this large capital project, we felt like we were going to fund it with our cash flow, operating cash flow is still the -- we believe basically what happen is we just had a cash inflow in this particular quarter, which would probably some of it would reverse itself normally in next quarter anyways. But then on top of that we’ll have the addition of the higher level of capital spending over the next quarter or two. So it’s really just timing of working capital, nothing beyond that.

Chase Jacobson - William Blair

Okay. I appreciate that help guys, thanks.

James Lines

You’re welcome.

Operator

Thank you. The next question is coming from the line of Richard Ryan with Dougherty & Company. Please proceed with your question.

Richard Ryan - Dougherty & Company

Thanks. Hey Jim could you talk a little bit what you are seeing on the nuclear power side?

James Lines

We are seeing bidding activity begin to pick-up immediately. We had seen some pullbacks following Fukushima and as the utility is adjusted to the outlook with respect to combined cycle power plants driven by natural gas, but we are seeing now more bidding activity we are seeing the effect of the Fukushima regulations around safety parameters get into the RFQs we’ve got few proposals. So we are seeing improvement as a whole and we are seeing orders release hopefully at a more stronger pace than we had experienced the last 15 to 18 months. So I do think we are bouncing off of what I would characterize as a trough that was attributable to Fukushima and adjusting to the natural gas market.

Richard Ryan - Dougherty & Company

Is that primarily domestic or you…

James Lines

That’s primarily domestic. About my comments, I apologize those are primarily domestic. We have begun to begin to bid the next four reactor projects for China and they are probably out over the next one to two years worth of opportunities. So the next wave of Chinese reactors are starting to be bid, nuclear reactors and the opportunity we believe for us there. But my comments earlier really were centric around the U.S. market.

Richard Ryan - Dougherty & Company

Can you give a sense of the kind of contracts that are in the RFQs when you look at what these utilities are looking at for kind of Fukushima compliance I mean what kind of order of magnitude these contracts can mean?

James Lines

I would expect the average order price to be -- for the projects that I have line of sight to, team has line of sight to that we are talking about every week, they vary between $0.25 million and maybe $2 million and they are heat transfer equipment, they are pumping systems, they are structural members, so right in the wheelhouse of our Lapeer team. And we have a number of bids in those areas for that. So, the average order price is that relative magnitude of $0.25 million to a large one might be $2 million.

Richard Ryan - Dougherty & Company

Okay. In your backlog have you seen any push outs or cancellations? I know you had a pretty good description of the order activity and kind of a difficulty of timing, but has there anything soured in the backlog at all?

James Lines

No, I would say nothing, certainly nothing has soured that we are aware of. The backlog is of a high quality and we expect it to be converted. Timelines aren't generally pushing out other than the ordinary expected push outs that we have communicated over last couple of quarters. With that big surge of work that we saw commencing in June through September, we did feel that would have a [tunnel] to move to the right calendar wise, because of execution constrains within the supply chain, whether they would be the EPC or the end user or perhaps even ourselves. But so far, I don't think we're driving that. So, we haven't seen anything extraordinary other than what we anticipated was to moving around the backlog conversion tied to execution schedule, some of that out of our control.

The project viability or project risk or quality of the backlog, from our perspective has not changed.

Richard Ryan - Dougherty & Company

Okay, good. Hey Jeff, you talked about the next cycle peak and I think you've indicated gross margins in that mid upper 30% range. Can you give us some color, what you might think on the operating margin side?

Jeffrey Glajch

Sure. Dick, we've talked about SG&A going forward was probably going to be somewhere in the mid-teens or so and it’s obviously, we take that off of the gross margin number, you would look to have pre-tax margins pushing up in the very low 20. So I think that hasn’t changed and certainly as we grow, there will be the need to add additional SG&A, but at the same time it probably won’t grow quite at the rate that the top-line will grow. So you should see a little bit of improvement there from where we are currently.

Richard Ryan - Dougherty & Company

Great, thank you.

James Lines

Thank you.

Operator

Thank you. The next question is coming from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Jon Braatz - Kansas City Capital

Good morning gentlemen.

James Lines

Good morning Jon.

Jon Braatz - Kansas City Capital

You touched earlier on China, when I look at your numbers your sales numbers for this year so far sales out of the Mid-East are down substantially. Are you seeing the same thing in the current order flow of the Mid-East? And if so, what’s -- is there an issue in the Mid-East that corresponds to the softness?

James Lines

From a comparable period point of view we had some very nice orders converting about a year ago for large refining projects for the Middle East. We have a very nice refining project for the Middle East that will begin to convert as we go into subsequent quarters that should begin to show that revenue mix pick up a little bit. And as we look at our bid pipeline, we have an extraordinary amount of bidding activities for refining projects in Kuwait, Oman, Saudi Arabia, petrochem in Qatar and elsewhere. So we’re expecting to see the Middle East. While it can be lumpy, remain very important to us. And as we think about how it looks going forward, I’m more positive about the bookings opportunities than by more to look backward.

Jon Braatz - Kansas City Capital

Right, okay. So it’s more of a timing issue and nothing else, nothing really has changed there. How much exposure do you have in Canada to the oilsands area?

James Lines

That’s a very important market for us. And it’s important and it typically though hasn’t represented more than 5% to 10% of sales in a given period. And for how we participate in the oilsands market which is primarily in the downstream sector called the upgraders, we have not seen more than two projects move in an 18 month period and the order value for us, for those types of projects would be $4 million to $6 million. So it’s very important, but in terms of disproportion in amount of our sales mix, I don’t see that changing in going forward.

Jon Braatz - Kansas City Capital

Okay, all right. Thank you very much.

James Lines

You are welcome.

Operator

Thank you. Your next question is coming from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed with your question.

Brian Rafn - Morgan Dempsey Capital Management

Good morning, guys. I jumped down late, so bear with me. Yeah, give me a sense, as you guys said you had a very strong first half. The little as we guess, what is your -- if you go back to the beginning of the year your CapEx and your headcount additions, where are you kind of on track as you built for that peak sales?

James Lines

Sure. Actually that program to prepare for the strong demand has been executed very well. Over the last three years and we have been on a journey here to ready our business for the strong demand that we were anticipating. We have actually added in people to our business through December 2010 to December 2013. And they’ve been spread fairly equally across our direct labor and our indirects.

So we've -- year-on-year this has been in a 20 people range that we've added. And as we look at how we’re moving into fiscal ‘15, perhaps another 10 to 15 people would be added, will begin to taper off we believe as we right size the business for the future opportunities that we felt we will be realizing one or two years forward.

So the team actually has done a remarkable job to get our [staffing] level ready. And from an operating perspective, I’m extremely proud of how the team did that, while maintaining reasonable levels of operating profit, while we invested ahead of the corresponding revenue. So I, longwinded answer to your question, we have added people year-on-year and over three year period about at 80.

Brian Rafn - Morgan Dempsey Capital Management

Yeah. That's a good answer. Jim any bottlenecks engineers, I hear it [despite] your manufacturing, everybody just starve for engineers. Give me your sense if there is anything in that nickel welders or is there any specific specialty that's really top for you guys to draft and retain?

James Lines

In general, acquiring skilled labor or indirect personnel is challenging. What I’ve seen, our management team and our human resources department do is reposition Graham, we branded Graham, we’ve branded Graham as an employer of choice over the last two to three years and it’s helped us immensely acquire the talent that we need, because we are stable business, we are profitable business, we’re growing, we have excellent wage packages, we help employees build a career at our company over a long period of time. And our strategy to rebrand our company as a different employer than a typical industrial really has ramped up our ability to acquire the talent. And while still challenging, Brian, I believe our team has found a way to resolve some of that constraint that I would have said was a greater constraint three or four years ago.

Brian Rafn - Morgan Dempsey Capital Management

Yeah okay, good answer. In a parallel you certainly you added a human component. What over the last three years might you look CapEx, brick and mortar, the physical footprint of the plants?

James Lines

If we take all the aspects of our preparedness for where we believe we are going over the next three to five years, it’s been extremely thoughtful and it has us ready, which is great, that’s a great feeling for us as management. We’ve invested significantly in productivity enhancements for our facility and new machinery equipment that reduces lead time reduces cycle time, more modern welding equipment; eventually thought what can we do to enable our workers to be successful and help us realize our strategies?

So we’ve invested in their success with manufacturing equipment. We’ve invested to enable their productivity improvements with IT tools. And a great asset that we’ve unlocked is our ability to onboard these 80 new employees in a way in which we can -- we’ve thought about trading and onboarding differently. So their time to proficiency has enhanced in the past that first [introduction] to our company to becoming a productive employee whether it was a person in our production area or in engineering or in design and drafting that might be a two to three year process.

Our management team has thought about that because we have to be ready to grow and they tackle that. So the time to proficiency is cut in half or better. So if I take all of this together in the pieces that we thought about of how to ready our business, I can't be more pleased about how we're positioned to capitalize on the strong demand that we see going forward. The team has done a great job across a number of factors that had to be addressed.

Brian Rafn - Morgan Dempsey Capital Management

Okay. You kind of partially answered my next question. Your lot of time is always focused on developing bids and quotes and how quickly can you convert them to sales and the back and forth. You may cuts on something with a new [mile] welding equipment. And what have you seen, Jim, once you get an order of the cycle time throughput in efficiency? Do you have any day metrics that you can share of what Graham might have looked like processing a condenser or ejector order three or five years ago versus what you can do today? How quickly can you get that live order to the plant?

James Lines

Sure. I'm going to address it in two ways. One, if you think about these large orders that we talked about aside from a naval order. In rough numbers, an order to shipment cycle is 12 months. Half of that cycle is in our office. Second half historically has been in our plant. With the investments that we've made in the engineering side of the business to get ready for the strong demand, we had a great opportunity to stress test our investment in our personnel. We actually have just run at about a 2x throughput capacity for six months with the order levels that we had. And we cut lead time at that 2x capacity by about 15%.

So, our team executed at 2x level at about 85% of lead time that we used to have historically. So that is elevated that we hit the mark on that. And so that’s very gratifying. So if you think about over six month period with the order levels that we had, we just executed at about a $140 million run rate for a six month period through our engineering team. And they did so with less lead time that we historically have seen.

On the operating side, I can answer that better in about a year after we push this slug of work that we just got to our plant. The plant wasn’t necessarily fully loaded as we were looking at fiscal ‘13 and ‘14 but as we’re going into ’15, our operations will be loaded, the productivity should be sharper and improving. And I’d like to hold off on answering that question for about three more quarters.

Brian Rafn - Morgan Dempsey Capital Management

Yeah. No, you’ve done certainly a fabulous job given some insight on that. You talked a little bit about your four -- the reactor projects in China. What is kind of the mines, do you see a difference of price, quality, value; what, are the Chinese more sensitive for engineering specifications and powers, is it always about price, how might the Chinese be different or are they very, very similar in the power markets to other global customers?

James Lines

The reactors that we’ve been involved in have been the Westinghouse AP1000. So the design basis and the specification requirements of quality control have been consistent whether it’d be a North American project or a Chinese project. The big difference though Brian comes down to the willingness of using local supply chain for the Chinese market versus demanding western quality. There is very fine businesses in China that produce these products, but there is a tendency to look more locally for the more rudimentary type products. And where there is a high cost of failure or specialty in how it’s being built or designed that a western supplier might fit better. But it’s really been based on what criticality there is with the product and is there a local supply chain that can serve that opportunity.

In China, ideally they would -- I would believe over time prefer to do it all locally, right now they’ve done -- but necessarily able to do that entirely.

Brian Rafn - Morgan Dempsey Capital Management

Okay, alright. And then just one closing one on the navy side. Are you seeing any progress in additional orders for the Virginia class tax subs? And in the carrier side with the kind of the announcement of CVN-80, I think it’s the enterprise very, very really, (inaudible) under construction. What -- any forward bids, quotes, reorders, anything from the navy on the carrier side?

James Lines

Nothing really other than some initial discussions that we’ve had. And we’ve said this before, carriers, and as you know well Brian, carriers have built on a five or six year center. The last carrier order we got was in December of 2009. So, we would anticipate bidding activity to begin for CVN-80 and maybe orders materialize sometime in latter part of fiscal ‘15 or into fiscal ‘16.

We don’t think the build centers changing from five to six years and moving into the next carrier 80 bidding activity over the next 12 to 15 months, I would expect. And on the submarine front, again that’s a strategic area we are trying to break into. We’re restricted on what we can discuss there about our bidding activity or order rates. I can just leave you with I’m pleased with the execution of that strategy and feel over time, we will realize our objectives there.

Brian Rafn - Morgan Dempsey Capital Management

Okay. And then just one more, are you guys going to have the analyst meeting again in September this year or is that something you are going to just do episodically?

James Lines

No, no, we’ve talked about it. We thought that was valuable, as we communicated the strategy for our company. We are setting a date for the latter part of September. The date has been locked down, I just don’t recall it exactly, I think it’s a 25th of September. And we’ll get some announcements out to the investment community and we hope to have great participation just like last time.

Brian Rafn - Morgan Dempsey Capital Management

Yeah. Great, super. All right, thanks guys. I appreciate the good job.

James Lines

Got it. Thank you.

Operator

Thank you. Our next question is a follow-up coming from the line Jason Ursaner with CJS Securities. Please proceed with your question.

Jason Ursaner - CJS Securities

Thanks for taking my follow-up. And just first appreciate the commentary on utilization and lead times. I thought that was really good transparency. But you talked a little earlier on nuclear market, so I was just wondering the commentary on the domestic market that was mainly the life extension MRO type project demand where you get some numbers on average…

James Lines

Yes, yes that really -- as we think about the North American market, it primarily is an MRO for sale, keeping the existing utilities operating and running and supporting that endeavor although we do have some orders that we've talked about in our backlog that are for new construction. However, most of what my commentary related to was on the MRO side.

Jason Ursaner - CJS Securities

Okay. And the two stationary plants of Vogel and Summer, I think you originally had 15 million of orders; is all of that still in backlog, or there has been some percent completion?

James Lines

No, we've converted a good percentage of that. It’s probably somewhere around 50% to 60% remains.

Jason Ursaner - CJS Securities

Okay. And I think originally the size you talked maybe another 15 million to 25 million potential content out there; I know those projects seem to be hitting some challenges but yeah I guess is there any thoughts on additional content out there and maybe the time table for when those projects start heading towards completion?

James Lines

We have won some additional content but it’s been smallish. So, we have secured additional orders for Summer or Vogel plants. Some of the larger work hasn’t materialized yet in terms of placing orders. And admittedly there has been a couple of orders that -- there have been a couple of orders that we lost.

Jason Ursaner - CJS Securities

Okay. And on the expense, your storage containers, any update there? The current CapEx plan, does that include any of that -- I guess just overall update on what you think on that market?

James Lines

We’re still developing our strategy and operating model to participate in that segment of the nuclear utility business. Our strategies have not been formulated to the point where it would want a CapEx.

Jason Ursaner - CJS Securities

Okay. And then last on the navel nuclear, the carrier program; you mentioned the bid cycle on CVN-80. I was just wondering on CVN-79 I thought maybe there were still a few pieces up in the air beyond the 25 million surface condenser, are any of those still out there or it’s really shifting towards looking 80 at this point?

James Lines

We are shifting our attention toward 80. Some -- one or two orders have been placed for additional addressable opportunity; we were not successful on 79.

Jason Ursaner - CJS Securities

Okay. And $25 million surface condenser, just what percentage of that still in backlog versus revenue recognition?

James Lines

About half, about half of it remains.

Jason Ursaner - CJS Securities

Okay, great. I appreciate that. Thanks.

James Lines

You're very welcome Jason.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Mr. Lines for any concluding comments.

James Lines

We thank you for your time this morning and we appreciate your questions as we discussed Q3 and our outlook as we move forward. We had some very good discussion around markets and direction of our business. We appreciated your questions. And we look forward to updating you on our fourth quarter conference call late May. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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's CEO Discusses F3Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts