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Graham Corporation (NYSE:GHM)

Analyst and Investor Day Conference Call

September 27, 2012, 12:30 pm ET

Executives

Jim Lines - President & CEO

Jeff Glajch - VP-Finance & Administration & CFO

Alan Smith - VP, Operations

Bob Platt - VP, Sales

Joe Aliasso - General Manager, Energy Steel

Analysts

Jim Lines

Welcome to Investor Day at Graham in Batavia. We are also webcasting this for those that are around the webcast, welcome as well. I am Jim Lines, President and CEO of Graham Corporation. Other presenters today include Jeff Glajch, our CFO; Alan Smith, Vice President of Operations; Bob Platt, Vice President of Sales and Joe Aliasso, General Manager of our Lapeer Operations; not presenting but here as well is Jennifer Condame, our Chief Accounting Officer.

We think we have a very exciting story to tell. We are at a very critical point as we come out of the downturn and are able to take advantage of what we did through the last growth cycle, entering the downturn to expand our business. We have a number of objectives. We want to leave with you today. First is, explain why it is that we believe across this next expansion cycle, we can again double the size of our business, what do we see in our markets, what do we see in the added markets that we’ve added to our business, power, Naval Nuclear Propulsion program. Also, convey to you how we're going to do it; what are the strategies that we're undertaking to achieve doubling of our business across this next cycle. Thirdly, give you an idea of what we're going to look like when we get there.

Financially, Jeff will walk through what will look like at the different cycle peaks. Most importantly, we hope through today, through the presentations that you will see and hear interaction with our personnel, the tour of our facility, you’ll understand what distinguishes Graham from other industrial companies; what makes us unique, what enables us to garner the margins that we garner as we go into an expansion cycle, what is, although volume high mix operations model, what our equipment looks like. And then lastly, at the end of the day we hope that you will share the enthusiasm that we have and the excitement that we have for what these markets offer us, what we are capable of doing, where we are going and why we believe the intrinsic value in Graham’s shares is far superior to the current value of our stock price.

We will of course provide some projections and forward-looking information. I would just request to review the risk factors outlined in our Safe Harbor statement.

Our Vision; the same vision we had in our past is to be a world leader in the design, manufacture and sale of engineered-to-order products to the energy markets. Two key distinctions are highlighted here, engineered-to-order products; what’s important there is those types of products typically are very complicated, very long selling processes, the sales cycle is long; it could be three months, could be 18 months; we like that. We think there is value that we can create; with the use of our equipment we think there is value that we can pull from that sales cycle for the business.

Also engineered-to-order products where we focus on tend to have for the user a high cost of failure; if our products sales and its application for our customer is a very serious issue; our customers going to face. Also, because of the specialized nature of the customs fabrication, the complex order execution, the long sales cycle, we found that this type of engineered-to-order product, the competitors are few. And because the risk of failure is high, the consequence of failure is high, we have seen our customers or often are not make value based purchase decisions rather than who has the lowest price.

The other distinction in this Vision statement is energy markets. We believe in the energy markets, the inherently cyclical, however long-term they provide growth, long sustained growth and we feel, if you’re positive about energy long-term, you should be positive about Graham.

Let’s take a look at where we’ve been over the last six or seven years. We had a very strong cycle 2005 through 2009, just a point of clarification; we are on a fiscal year end March 31st so we speak to fiscal year 2009, that’s not calendar year, that’s the fiscal year that ended March 31 2009. Through that cycle 2005 through 2009, we were able to more than double the size of our business going from $40 million of revenue in 2005 to $100 million in 2009. That was driven principally by two strong markets, oil refining and petrochemicals.

While we grew, because energy markets are cyclical, we thought about how we had to look in an eventual downturn. We didn’t know when the downturn would be; I am not going to say we knew what's going to be 2010, but we knew what would be at some point in our future. So while we grew, we thought about our cost structure had to look; our business wanted to perform during the downturn and perform differently from how we did in the past. So when we got to the downturn and that downturn in our past had been pretty extreme within a 12 to 18 month period of time revenue can drop by 25% to 30%, this last one was little more severe than normal, it fell by about 40%.

But what was different, because we thought about the downturn as we grew is downturn we are able to be opportunistic. Our profitability was satisfactory in our historical past; in the downturn we would breakeven plus or minus a little bit, but this downturn we were strongly profitable, able to be opportunistic. What did we do during the downturn? We are acquired in Energy Steel in December of 2010. We also had a clear focused approach to the Naval Nuclear Propulsion Program. We thought about how our brands fit in those markets and in those applications, were specialized products long sales cycle, cost of failure is very high, few competitors, value based decisions, perfect fits for the Graham brand.

And as we added those two markets to our business and as we come out of this downturn, I believe when the early stages of the recovery coming into the expansion cycle, there were additional avenues of growth. And as you can see, because of the additional of these businesses, these markets, we are able to get back up to $100 million very quickly which was fiscal 2012 and begin to grow from there.

I am also very pleased with the approach of management team took across this cycle. We understand we have to manage our business through the cycles; we just can’t be strong in growth cycle; we can’t loose sight of this type of situation, top of the cycle the bottom of the cycle being different by 30%-ish on revenue and wanting to ensure that we could be profitable. So the management team and our employees I believe figured out in a better way how to manage this business through the cycles.

If we think about where we are going and what our markets offer us, we believe we have the ability to grow our business from a $100 million in 2012 to $200 million or greater across this expansion cycle. We believe the building blocks are in place. The actions we took were the right actions and as our markets begin to heat up and we are into the recovery, we should have steady good, compound annual growth. We feel our traditional markets, the oil refining petrochem, traditional Graham, we feel can reach $120 million to $135 million dollars of revenue in a year across the cycle, because we believe we are entering a very strong growth cycle, similar to the last cycle, could even be stronger based on how long the contraction sticks.

Also, because we weren’t ready last time, we didn’t have the right market share; we were unable to capitalize on all the opportunities our customers wanted to give us more than we could execute, that’s unsatisfactory. We focused on expanding our execution capability. How do we take on more work? We're better prepared for this expansion cycle, the last expansion cycle, so we intend to take more share of this cycle than we were able to last cycle.

With the addition of Energy Steel, we have a new leg to our business, a very strong, definable leg, we didn’t have last cycle. The power market, we believe that market segment can provide $40 million to $50 million of revenue as we go across this expansion cycle. The Navy strategy; we believe that can build out to be a consistent level of work in the range of $20 million to $30 million per year.

As we look at our businesses, the Lapeer side, the Batavia side, we think about a roof line. We feel our roof lines are capable of, Batavia $135 million to $150 million of run rate with some outsourcing. Lapeer, we believe that roof line, when we brought that business, we thought we could 2X that business with no change in the roofline. We still feel that today. So we believe those physical plant assets are suitable for $40 million to $50 million of run rate.

We also have an active acquisition program. Our balance sheet has a lot of available capital. We believe we can get to the $200 million without acquisitions and as we find additional acquisitions that fit our brand to our operations model, are right for us, that will accelerate our growth toward $200 million or push us beyond $200 million of run rate.

At the peak of the last cycle, fiscal 2009, two-thirds or three-quarters of our revenue came from refining and petrochemicals. Power was about 5% and our other markets which are edible oils, HVAC, a variety of other adjacent markets for refining and petrochemicals comprised about 20%. We are really where as I said earlier driven off of two markets. But what we have done, being able to be opportunistic during the downturn, we have added power, we are adding Navy, we are able to take more market share of this cycle than we did last cycle.

So we see and project our business being segmented this way as we go forward and the $200 million opportunity that we see as we go forward is because of the diversification strategies that we undertook. And also the strength of the market expansion that we are going into we feel very confident and not dependent upon acquisitions that we can get to a $200 million business across this expansion cycle.

As we were exiting, actually as we were in the last cycle, the one ending in 2009, we knew that there will be margin headwinds. We anticipated that primarily because we anticipated as we went into this next cycle, the one that’s beginning now in our traditional markets, oil, refining and petrochem, we would have a higher sales mix coming from the international markets that provides a different margin potential. We anticipated that and also with the addition of the Navy business, that’s very good business, that fits into our roof line very well, but it doesn’t provides margins comparable to peak margins of the business was able to garner.

So in response to that, we were not victims of that, we recognized that was coming so we took action. Our strategies there to combat that margin pressure have included leveraging our physical assets, getting more out of a roof line. Alan and his team and Joe and his team have done a great job to drive that. Focusing on speed, turning our production force base over more quickly, over to the shipment cycle lead time, we do see that appreciably; focusing on that, having the whole business from myself to leadership team, to the managers, to the employees focused on how can we become better.

We have always felt, we were very good and we always know we could be better and throughout our company we have a strong focus on improving our business around lead time, quality, Alan will speak to that in his presentation. Also, because our customers will make decisions based on value, they recognize differentiated solutions; we are improving that as well, to hold margins, to improve margins and to capitalize where we can.

As I said earlier, energy markets are cyclical, they are inherently cyclical. We have to manage this business through the cycles. Our strategy has been push to expansion cycles hard, never loosing sight of the downturn. This shows our revenue trend some 1998 onward, as you can see this was a peak, that’s a peak and there are some pretty dramatic reductions in revenue very quickly. But we can’t loose sight of that reality, so we push in expansion cycle very hard, while we think opportunistically about what we want to do during the downturn and want to be ready to do that during the downturn. So we must ensure our profitability is good during the downturn, our balance sheet is ready, and our acquisition pipeline or other strategic option pipelines are open.

I have covered much this already. The actions to get there are take greater share; we left a lot of business on the table last cycle. As some of them are satisfactory to me or to anyone in our company; we never want to loose opportunity to our competition, especially when the customer wants to give us the business. We are more ready today than we were last cycle.

Expand our capabilities to build locally, sometimes our customers mandate that we build locally; we have begun to do much more of that than we have done historically. Alan and his team are driving that; that’s a great way to expand our capacity with the flexible cost and also is a way to get into these emerging markets where they are mandating local manufacture, so we have strategies around that.

We need to win Submarine business, break into the Submarine Program; that’s a key aspect of our naval strategy. We've been a supplier to the Carrier Programs. The key is to win and have a steady level of business coming from the Submarine Programs. Develop our acquisition pipeline; Jeff’s leading that strategy, expand our power market leg with the acquisition of Energy Steel. Our focus on renewable energies and alternative energies, grow that leg of our business to $40 million to $50 million and strengthen our business; give our people the tools to be successful. If you work more quickly, more productively, more efficiently with less errors, that involves hiring, training, IT solutions. Our policy deployment strategies, our performance management strategies are all centered to around how do we grow this business, how do we serve more customers than we are able to serve the previous year?

We are fortunate that Graham has as very strong management team; you’re going to have a chance to meet three of the managers that you don't typically interface with, Alan, Bob and Joe. Joe is our General Manager of the Lapeer Operations. Joe has been with us since 1989. He has been in engineering, product management and general management capacities since that time. Joe is championing our efforts in the Lapeer Operations to expand their product offering, secure our place in the nuclear newbuild market, drive sales into selected international markets and grow our power leg to that level of business that we spoke about earlier $40 million to $50 million.

Jeff Glajch, our CFO, (inaudible) Jeff joined us about three and a half years ago. Jeff comes from our industry. He had previously worked with Westvaco, Air Products, Great Lakes Chemical; he also brought two of the strong acquisition expertise around evaluation, modeling, integration, execution of the acquisition in addition to a strong financial acumen and great general management tool bag. Jeff is championing our strategies around acquisitions and deploying our balance sheet; grow a level of sustained earnings. Also reporting into Jeff are the HR and IT functions; those are integral to our strategies for growth, to ensure our people are ready and the business information that’s needed by the managers is available.

Bob Platt; he is our VP of Operations; I am sorry VP of Sales. Bob joined us about a year ago. However, Bob’s entire career has been in our industries, with manufacturers that’s specialized in pumps and heat transfer equipment. Bob also has experience in engineering, general management and of course sales management. Bob’s role and our strategy is to improve upon our value-based selling process, drive our pricing and order selection strategies, make sure our [captured] ratios are improving but more importantly, if an order is to be won, we wanted to be ground that decides to take the order or not and we have some very specific metrics around that, that we manage our sales force against. We want to be in a position to accept or decline each order. And Bob also is responsible to structure the sales organization, get closer to where the opportunities are and to ensure we are successful.

Alan Smith, our Vice President of Operations. Alan joined Graham during his undergrad years as an intern. He started with Graham as a full time employee in 1990, came through the engineering group, product management, general management, Alan’s focus is about leveraging our physical plans and developing execution capacity to take on those orders that Bob can get us.

Alan has bought us a long way in the last four years or five years. There is more that he is able to do and he is focused on and he will touch on that in his presentation. Alan is also, because of the technical nature of that selling process is driving the Naval strategy and also his team is focused on our local fabrication capabilities and he has a great deal to talk about on air reduction and process improvement in his presentation.

And as I think about Graham, I think about the last cycle which was a very strong cycle for us and where we are today. As we entered this cycle versus how we entered the cycle in 2004, we are superior or stronger company; we have more dimensions to our business than we had back then. I believe we’ve been able to amplify the value inherent in Graham and we believe Graham is a very profitable and worthwhile investment to consider.

We appreciate your time today and at this juncture, I will turn it over to Bob to give you an overview on sales side of our business. One housekeeping question sorry Bob. We will run through the presentation today by all of us and then the Q&A session will be at the end.

Bob Platt

Thank you, Jim. I am Bob Platt, Vice President of Sales. I would like to say welcome and to thank you all for being here today. As we look at Graham and our journey from $100 million to $200 million, it’s clear that this is going to require a strong and active involvement by the sales organization.

And the leverage we had to pull to accomplish is pretty clear. We have got to capture a greater share of our traditional markets which for Graham means first and foremost oil and refining and petrochemical. It also means we have to be very proactive and opportunistic with our customers and it means we need the sales organization in place to capture the emerging opportunities before us.

And what I would like to do today is share some insights and how we see that evolving over the next few years. If we look at our traditional addressable markets, we have line of sight to about $700 million and right now this is about 2X of what we saw during the last cycle. Also if we look at where we are in market activity and what we are hearing from customers is actually very encouraging. The feedback they are all seeing growing activity and if we look at around situation, if we look at our quotes. We are seeing quite an uptick in not only the quantity but the quality of the quotations that we are looking at.

We are also seeing the speed at which projects go through their (inaudible) period from original studies to an order placement where over the last downturn that could be measured in years and a lot of stopping points and a lot of a stopping (inaudible) and holding things seem to be moving little bit quicker right now.

We are seeing that our US based projects too in talking to some of the major EPC, the engineering procurement and construction firms around the world the activity they are seeing for US based projects in the refining and in the petrochemical sector at a level and a height that they haven’t seen in many years.

So putting it together, well the leading indicators that we look at are very optimistic that we are at the very early stages of what could be a very strong return of the business cycle. If we look at oil refining, studies we have showed that new global capacity coming online between now and 2017 is something in the range of 7 million to 10 million barrels of oil per day.

And we know from our own empirical data and past history that each million incremental barrel of oil per day represents an opportunity for us of somewhere between $45 million and $60 million. So when we put that together that, that right there is looking like a 60 million to about a 120 million opportunity.

In addition to that, there are other things going on besides the new construction, we see changes in the industry in feedstock supply, there is a migration more away from the light (inaudible) crude oil that’s used as a preferred feedstock to a heavier sale more hydrogen sulfide laden also oil (inaudible) covered oil, this is not as high grade of feedstock, it’s more expensive, more difficult to process and often requires new equipment or a different equipment than what they have. So this is an opportunity for us clean fuels and spending on repairs and replacements and maintenance are also part of the mix as well.

Putting it together what we see and what we expect for demand for oil refining is something in the neighborhood of 150 million to about 200 million annually for Graham. The other key market for us which is petrochemicals is also a market that’s showing signs of life and coming back, in particular market studies on ethylene which is one of the more important feed stocks within the petrochemicals sector and in a pretty reliable well weather for petrochemical in general.

Studies are showing somewhere between 25 and 30 million metrics tonnes per year of capacity coming online between now and 2017. And we know that each incremental 1 million metrics tonnes per year represents about $2 million to $3 million opportunity for us. So that adds to about a $22 million to $30 million a year opportunity just on ethylene.

And then if we look at additional drivers, there is all the other aspects of petrochemical where Graham is very strong such as ammonia, urea, fertilizers these are all on an uptick as well and MRO spending repair and maintenance and operations a part of that mix as well putting it all together we see Petrochem as an $80 million to $100 million opportunity for us annually.

In addition to traditional markets, we have some additional market [legs] that we are looking at and should probably start by saying these are the results of initiatives and a lot of leg work that were taken during the last down cycle to prepare us when the market would return and these are three market legs that were not available to us during the last business cycle.

If we look at the naval nuclear propulsion program what we are looking at there is mainly the aircraft carriers and the submarines and probably from a strategic standpoint the more important is the submarine program all in the navel nuclear propulsion program represents a $35 million to $45 million a year opportunity for us and Alan will be talking about that in a little bit later so I won’t go into further detail right now.

Similarly, power generation and nuclear, we made the acquisition of Energy Steel, you are all familiar with that, and that has got us in the game for nuclear energy. We see that worldwide as $500 million to a $1 billion opportunity. We are looking at that the market there for us is not just new build but replacement units but we are also finding a very interesting market niche in equipment for the storage of spent nuclear fuel.

Joe Aliasso, our General Manager for Energy Steel will be talking about that in a moment as well and the third leg that is very interesting for us is also power generation but it's in the renewable energy, biomass, geothermal, oil recovery and this is a result of just a more concerted and deliberate and focus sales efforts on these markets.

You might have seen the press release that went out this morning. The last thirty or so days, we've had orders totaling $7.5 million just in this sector for projects that were, one was in Latin America, one was in Southeast Asia, one was here in the US and one was in Canada. So we're starting to make penetration into this market and it's not just US based, it's a worldwide based opportunity for us.

If we look at how we're going to accomplish all this, clearly we're going to need a world class organization to world class sales team to bring this about and this brings up the question well how does a world class sales team look like? Well, right now I think Graham we have it. I think what got us to $100 million is what we’re going to build upon to get us to $200 million. I think one strategic focus will be seeing as we grow is probably more of a reliance on direct sales that is company-direct sales versus independent commission representative that’s gets us closer to the customer. It enables a more technical sell and over the course of time believe it's the more cost effective way to approach that and I'll be talking, coming back to that in a moment as well but also a best in class sales organization relies very heavily on technical training and this is something that for Graham is an ongoing thing.

Our sales force as we go out, has a very good understanding, a very deep understanding, not only of our products but of customer’s applications and processes and how the two interact. I mean our people understand very, very clearly how our products influence customer success. If you look at our sales force, we have a direct sales force of 12 people and of those 12; five have been with Graham for 20 years and more. So I think within sales and I think it’s also true for the company in general people come they tend to like it they stay.

In the end, we also focused on strong customer facing enterprise, if you look at Graham and how we go to market its engineers selling to engineers and technical preparedness and technical fluency is an absolute must, without it we won’t get very far and with it all things are going to be possible, but I think it’s a big differentiator between what we have is terms of feet on the street versus some of our competitors.

I think best in class sales organization not only has to understand the products, not only has to understand customers, not only has to understand the interplay between the two, but also the competition strength, weaknesses and for us very important too is pricing, practices, strategies, negotiations, we have a very good understanding when we are on a project, if we know first thing we try to find out is who are the competitors and that instantly starts telling us certain things where our prices, where we think there’s will be compared to ours, how they negotiate, do they come in at a high price and make big cuts, do they come in close to final price and then make very smaller cuts, it’s a very critical piece of the selling process and it really helps us position for maximum price and for maximum hit rate and it’s something we take very seriously, we documented and its part of our toolkit as we go out to the market every day.

Value based selling means, differentiating our offering and also gaining early involvement as early as possible in the sales process doing that, because the early we get in, the more we can control and if not controlled at least influence the selling process. And you say well sure, that’s obvious everyone has that. I would argue no, not everyone does have that, in varying degrees perhaps but also its one of those things that’s a lot and it’s easier said than done.

And probably the best way to a status to give you an example, we had a recent job few months ago. This was a major project for a petrochemical joint venture in the Middle East. The two JV partners one was Middle Eastern, one was American very well known names and we had an engineering firm handling this side of Asia.

And the engineering firm was pushing very hard or some local companies they can dealt with, competitors of ours. Our price was north of $7 million and the going price we are being push to was somewhere between $5 million and $5.5 million. What we did to controlling the selling process and getting in an early involvement, we were able to as we work with the engineer, we were able to find out from the engineers of the two JV partners who was on the bidders list, making sure the bidders list would be honored that they wouldn’t make exception to it, make wavers to it. Validated that and have that before we went in for final negotiation that knowing we were in a strong position we were in, we didn't let the customer know what we knew that the buyers I should say but we knew it.

To get that job would have required a price of around $5.5 million and at the price point we probably would have walked. We held firm knowing what we knew because of the holistic selling approach we took and as a result we didn't budge I think our price moves something in the magnitude of less than 1% and we took that job and a very attractive margins and a good price and really our (inaudible) walk to the sale people because of thoroughness of the job.

What we do as the part of the Graham selling process and Jim alluded to it little bit earlier as well, was we have a very disciplined pricing and order selection process. What does it look at that from the standpoint why we are leveraging our strength? Are we diluting capacity? Are we maximizing price? Are we maximizing all we can do on payment terms, are we pushing cash flow up? Are we doing all we can to get positive cash flow on the job.

The last thing we do as sale people will say just get the order and take it home and be a hero. It’s a very I call it holistic approach to selling. We also have very someone would rigid. I wouldn't call him rigid but very well documented within sales, procedure and practices for adjusting price, changing price, setting price. It’s all driven off of margins, is very well understood and in tier two protocols and procedures we're signing off our fund jobs and for any kind of discounting it’s got to go through a chain of command and approved and I can tell you no salesman has authority or rights to change a price, that’s all got to be done within the sales organization but at my level or Jim’s level more than the demand in the streets and also a key point too is with our direct sales their compensation is a combination of direct and variable compensation and on the variable side it’s tied to the margins on a job. It is not just tied to the top line and with that it’s very effective in getting them and thinking of how do I maximize margin because maximizing margin means maximizing their personal income and it’s a very effective tool in getting alignment between outside sales behaviors and management goals and objectives.

As we position ourselves to take advantage of and to turn this from 100 million to 200 million there is a few points I would like to make with respect to the world, Graham has always been a global sales company but over the last business cycle much if not all of the international sales will handled at Batavia. It means people from here flying around the world, earning a lot of jet fuel, covering the world, covering accounts.

And it’s not the optimum way to do it, if you can be expensive it is not the most cost effective way and it’s also inherently not a good way to develop deep and fruitful relations with customers. We only see them once a year or twice a year and you really can’t gain that traction.

So, what we are looking at going forward is what I would call the China model. What we did in China was, I mean, we have an office now that’s working very well and doing a very good job, but how it started, it didn’t start by parachuting in 10 or 12 people and calling it a company. I mean it started very small, one person to two to three and we scaled up as the business wanted it.

If we look at it now, I believe we’ve got eight people in there in China, in Suzhou, China. All the personnel and all the management are native to the country, but they all speak very good English and as we’ve grown and as they’ve grown, we’ve certainly seen very nice increases in orders. We’ve seen the revenue has come up. We certainly growing our installation base there in a way I don't think we ever could have serving in out of Batavia, but also we’ve seen our margins come up there as well and it’s proved to be a very cost effective way to do it and it's the model we’re going to look at taking this into out of places.

The areas we’re looking at, we’re looking at several, we’re looking at Middle East as the next place we might go. We're looking at Latin America. We're looking at Asia, both North Asia and South Asia outside of China and there is also a possibility we look at Continental U.S. establishing offices in the states here.

So if we look at our goals, reaching $200 million in revenue during the next business cycle is my number one, number two and number three priorities. We have strong evidence that the markets we’re looking at are poised for growth; we think we're at the very early stages of an expansion and we are positioning to take advantage of that.

The critical piece of the execution is the sales organization being on the front end and capturing that. Quality of the people, I think we have it and it’s probably going to be my biggest challenge is maintaining it and growing and aiding that type of quality. The type of people we have, the experience we have, it’s difficult to acquire that in a short period of time, but I think we will get there. Best practices in place, and integrated into our culture as some of the things I have discussed and being strategically located and close to both current and future customers is going to be critical as well.

And as a final point, I would say that what I have talked about here in this brief overview, I would consider this part of an evolving Graham. This I view as an evolution, not a revolution. This does not indicate or we are not thinking of anything that would be described as a step change or any shift in strategy or anything that would be really deviate from the planned of the success that we have had here, it’s an evolvement, it’s not a step change and I feel the infrastructure of the company that got us to $100 million is the same infrastructure that will get us to $200 million. And frankly from a personal standpoint, I think $200 million is something I feel very confident about.

Thank you.

Alan Smith

Good afternoon all. I am Alan Smith; I am the Vice President of Operations and I am going to put a little color on our Naval Propulsion strategy. As both Jim and Bob said, we saw this market as an opportunity kind of diversify Graham; I will say about three years ago as the management team, we looked at the Navy, we looked at the criteria that this customer judges their suppliers by and we saw a good fit. This is a long selling process; failure of these components cannot be tolerated; it’s a very technical sale, extremely technical after the sale and the manufacturing is very complex. So when we reviewed what we are, it’s an obvious fit for us.

In the past, Graham has kind of nibbled that at the Navy; we’ve been in, we’ve been out, while we’ve been suppliers since World War II, we haven’t had the fine direction that we established about three years ago. So when we had that meeting we talked about how are we going to get to the Subs which is as Jim said is the real win, because the Subs are build every year, it’s almost like annuity, once year end, its about $20 million to $30 million a year and that’s what we really want to target and go after.

What we decided to do was to win CVN 79 which we’re building many of you know the main condensers for the latest aircraft carrier. Really use that opportunity to showcase our technical ability and rile the customer and I can tell you it happens and it happened faster than I think either I thought or the rest the management team thought.

Some examples of how I know its happening; we were about a year and a half into the contract and now suddenly get caught from electric bolt, we didn’t even have any quotes of electric bolt, we didn’t have any opportunities like before. They said, we like to come and see Graham, and we would like to audit you and shortly after that (inaudible) called us and said we would like to audit Graham and we would like to see it and then BAE from England contacted us. So somehow the word was getting on how well we were doing on this aircraft carrier.

A couple of other anecdotal examples, last year our buyer at shipyard retired. We had a buyer in the shipyard volunteered to take the Graham accounts. Not too often people volunteer to take on more work. I went down and talked to her and she said, I love Graham; I love working with you guys, you stand behind what you do and you know what you are doing. So I would say you know three years ago, we have a division of like win the carrier, like exceed our customers expectations and I think we're kind of right on course for that.

In the next following slides I will give you an idea how large the opportunity is, so that you kind of frame this $20 million to $30 million annually. The carriers of course are big whales; they are built about very five to seven years now. The opportunity is about $35 million to $40 million. We have opportunities to build mainly condensers which we have in our shop. We have the opportunity to build the main air ejectors. And in the Nimitz-class every two to three-ish years, ship comes in the drydock and they do M&R stuff and that can lead to about orders for us in the low millions of dollars.

The Virginia-class is probably our first chance or opportunity to win a sub. The Virginian ship set is the fast attack nuclear subs. Congress has already approved 33 units; the Navy has an option to extend to 45; currently they build 20, so we have 13 more to go. From what I understand the build out is next year they want to build one sub and then the next following year two per year, so, two, two, two; one, two, two, two. And that for us there is condensers, there is a heat exchanger, high pressure heat exchanger and are ejectors; quantity two for each; just one sub alone is about $15 million to $20 million of Graham opportunities.

And we go to next slide, Ohio Replacement; this isn’t a concept sub. This picture isn’t actually the sub. The Navy has been busy asking us to both to design it for them. They are planning on commissioning this sub or starting to commission this sub in 2021; which sounds like a long way to wait, but the good news for us is this is a long selling process and there is revenue opportunities for Graham starting today.

For those who aren’t aware of the process, it’s kind of a five stage gate process. First they come to vendors and say what they call concept design and it was really like the original RFQ give us about how big it will be, what can it do, about how much will that cost and about how long will it take you to build it. Then from that they down select to what they call preliminary design, which feels a lot more intense, there is a lot more engineering going on, we are actually making some detail drawing; it’s about a six to nine months process. So it gives them a better idea of what the rough order make them to cost; so they are going to spend on it down.

From that they down select to what they call a detail design. This is the nuts and bolts; you do everything. The good news is if you get to down select the detail design, you automatically get gate four and five. Gate four is you build a prototype unit for them to test on a sub and qualify everything and five is the first shift step. So if we get through the first three gates, we get to four and five and we’ve job well done. So I can tell you we’ve got two concept and we’re in preliminary design on the air ejectors, the main condensers and the sea water heaters. So we're at gate two now; everything looks good. We're doing our best to continue with the strategy of win and this for those of you who don’t follow it's going to be huge. The condensers on this sub are almost as largest is the condensers that were build of the aircraft carrier. So this is going to be one big stop. They’re going to build 12 of them over a period of time.

I touched on this a little bit. This work really, really fits us; very high specification, very few competitors that can do what we can do, well procedures for example. They take over a year to qualify in order to comply with all the requirements, all the testing get through all the bureaucracy of the shipyard and the Navy it takes a very long time; you got to be patient, you have to have a model that supports. Welding, all of our welders it’s amazing. Eye test and well test and pressure on top test and they are ready to go. Our welders have gone through this process. There is not a great difference between sub work and carrier work. So we do have a team that we can use right away if successful on the sub work. So it is transferable for us. Specifications are very thick. They are detailed quality, program very detailed, which allows us to leverage our NIII here in Batavia, we are certified as Nuclear NIII and that has a lot of that detail quality to it; we are able to kind of leverage that experience with the sub and the Navy work.

To get ready, because it’s such a long pull before we are to the final stages of ship set, we are able to do improvements to existing roof line areas, upgrade them at a pace to support the program. So in the next two to four years, no huge CapEx, no big buildings or anything like that to support it, beyond that I can’t comment; we have to kind of wait and see what it looks like. We will have to invest in special weld booth, Class 1000, clean room and alike, but as compared to historical CapEx, it’s not really that significant.

And with that, I’ll turn it over to Jeff.

Jeff Glajch

Thanks Alan and good afternoon everyone; it’s nice to see everyone here. As Jim mentioned, I had the opportunity to speak with many of you in the past couple of years. When Jim started out he talked about how we want to grow from a $100 million to $200 million and beyond, and as you have seen from Bob’s presentation and from Alan’s presentation, and you will see from Joe’s presentation, we have a path to get there organically and that’s exciting and the markets are there and I believe we have the infrastructure and the capabilities in place to get there organically.

But what’s even more exciting is beyond that we have the opportunity to grow via acquisition; we have a very strong balance sheet and the capability for business perspective as well as from a market perspective to grow the company inorganically as well as organically. I’ll talk about, I want to talk about us as an acquirer; we view ourselves as a strategic acquirer; what do I mean by that, we are not the kind of company that wants to go in, buy a broken company or buy a company and got the management team and replace them and absorb all that in-house.

Rather what we want to do is, go out and find the company that’s operating well, but has certain limitations and those limitations maybe for example they have reached the plateau because of the capital structure of the company or they’ve reached the plateau because of the management team that’s currently in place or they reached the plateau that perhaps very strong domestically, but don’t have the comfort to do business outside the U.S., one of those, those are the type of things we are looking for, is we want a good management team, a good business model that we can look and say, helping Graham additive of this good business model and grow that company dramatically.

The ideal candidates for us, to be very honestly is a private company that’s not for sale; why do I say that, well, first off you’re generally able to show what Graham can bring out as a strategic acquirer; you’re generally able to get the pricing perspective, a more reasonable price situation and if its a non-competitive situation again you will be able to spend the time to develop that relationship. We’ll certainly consider and we have considered auction processes and private equity sales, but in no situations, maybe I am being a little realistic here, those situations the end of the day it’s price, price, price and in our situation and with a private non-competitor situation, price is clearly important, but it’s not necessarily the only thing that’s on the table.

Our acquisition game plan and this is a game plan that we use as we looked at Energy Steel that we purchased about a little less than two years ago. Jim talked early on we want to be an engineered-to-order products company. We are engineered-to-order the products company to the energy industry and that’s exactly what we want to buy, we want to buy a company that’s engineered-to-order for the energy industry. We believe that there are other companies out there, if they bought a company -- if we looked at companies that were highly engineered products, but a repetitive products that's not necessarily something that we would excel in compared to someone else.

So we want to be engineered-to-order and we want it in the energy industry. As I mentioned, we want a strong management team, a customer in quality focused similar to what we have here in Graham and now what we have in at Energy Steel in Michigan. Those are cultural things and those cultural things for a company of our size are important as we look to buy something going forward.

We talked about the long sales cycle and high cost of failure that’s something that Graham has and we believe that’s something that’s important for us as we look to buy a company. And size wise, we're talking about $20 million to $60 million in revenue; we believe that’s something that we can absorb; when we bought Energy Steel, it was just below the low end of that range, but recognized Energy Steel was the first company that Graham has bought in about 30 years and so we want perhaps to be a little more careful there and we were, but we believe $20 million to $60 million of revenue is a nice range for us and a pretty boarder range.

That being said, we have and we'll continue to look at companies outside that range; we will look at opportunities above that range, look at opportunities below that range. Honestly, what we don't want to do is really don’t want to go out and buy $3 million, $5 million companies because that's a lot of work, and quite frankly the benefit you get from that is not as significant. So we want something of meaningful size and even at the top end of that there will be a pretty big chuck from something like Graham to take off and we believe that we will be able to do that.

The acquisition game plan, a little bit further, I talked just briefly, if you look at our balance sheet, we have $46 million cash position right now. We have no bank debt, with no leverage in place and has not leverage for many years; what would we do and how would we finance it? Well again, we’ll start with cash; the $46 million of the cash. If you look at our current business today, we have a nominal amount of working capital; over the last three or four years it’s been between zero and 5% of our sales, so as we grow from a $100 million to $200 million we are not going to need a significant amount of working capital for that type of growth.

So we don’t have a lot of working cash needs, so I view the whole $46 million as being available for acquisition. Should we be in a situation where we need more than $46 million, our preference would be second to go to debt. Now we are cyclical company and our cycles are pretty long but they are still cycles and what you don’t want to do and what frankly many companies did in the four or five years ago is they leveraged themselves up and then suddenly hit a down cycle and found themselves in trouble; we don’t want to be in that position.

So from our perspective, our thought process is when we put leverage of one to perhaps 1.5 times mid-cycle EBITDA to support an acquisition we would, but not higher than that; and how do I define mid-cycle EBITDA; quite frankly, I am not sure where that is right now and I will tell you I don’t tell believe we are anywhere near there and if you look at our EBITDA from last year which was in the high teens that was suggested even on last year’s EBITDA we can add another $20 million or $30 million of leverage to our balance sheet and we would be safe, but again, I don’t believe that that’s mid-cycle, I believe that’s early cycle, but what we don’t want to do is be a 2.5 or 3 times peak EBITDA which is pretty ugly in a down cycle.

Finally, the equity, I would say it’s not planned, that is accurate with little bit of a caveat there. We don’t want to dilute our existing shareholder base; we are not going to take $10 million shares and suddenly issue 2 million or 3 million shares to go on and buy a company. That being said, if whether it was for to close a deal or for some management retention, if we needed to use a couple of percent of our existing shares, a couple of hundred thousand shares, would we do that, sure, we would consider that; but we are not intending to dilute our existing shareholder base.

Our financial hurdles; these are important to us. A lot of folks when they look at acquisitions, they say I want to be accretive, I want to be accretive, I want to be accretive and that is important and relevant but that’s not what drives our financial decision on an acquisition. We want a return on our cash and cash is the important over there. Return on our cash that exceeds our cost of capital for this type of venture. This type of venture, I view as being pretty risky. Acquisitions are pretty non-risky. And so we view our cost of capital for this type of venture to be somewhere in the mid-teens and we want a cash return that exceeds that cost of capital.

We believe that if we get that cash return and we continue to manage our base balance sheet and the acquired company’s balance sheet well that accretion occurs, both in the near-term and in the long-term. So accretion is important but it's not the first thing we think about. It's more a result than it is the driver of the acquisition process.

Our acquisition strategy and this is the approach that we use when we look at Energy Steel. We have really three different focuses on the acquisition side. A product diversification, a market diversification and a geographic diversification and we will look at all three of those simultaneously. We look at them in the last cycle and ultimately bought Energy Steel and quite frankly we’re looking at it right now.

Product diversification; Bob talked a little bit about our sales cycle and the fact that we have a very long sales cycle where we get in very strong relationship with our customers. Well one of the things we’ve noticed is that we have a great product life but it's about this slide and if we can make it this slide, there is a lot more of our customers, existing share of wallet that we can potentially get. So we’ve listed some of the areas that we would be interested and looking at from a product diversification standpoint.

Market diversification and that’s really where Energy Steel fell. So I would say Energy Steel is 90% market and maybe 10% product but the market diversification looking at opportunities that are ancillary to our curve markets, markets that we’ve looked that we might want to get into, or we want to get into and that have a similar structure to the markets that we are currently in.

When we started the process and ultimately landed on Energy Steel, we didn’t start the processing. We want to buy a company in the domestic nuclear power market that was not our specific intent. It was certainly one of many options but it was not our specific intent. When we found the right company and it fit in the right box we said great, let’s move down that path.

You can see in the market diversification there is some pretty exciting opportunities there, some markets particularly the natural gas side and the environmental side there are markets that are pretty healthy right now and we think there is some good opportunities there.

Finally, geographic expansion, that’s something we have looked at and there is a little bit more risk there quite honestly, that’s a scenario where we look to have our own owned manufacturing operations in the region or in countries close to those some of our customers. Right now we have manufacturing operations here in Batavia and in Lapeer, Michigan with Energy Steel but we don’t own any of their physical operations around the world.

Our China office is a great office but it’s a sales and engineering office. It is not a manufacturing facility. So looking at having physical assets on the ground in Asia and the Middle East and South America are certainly things that are appealing to us and something that we are considering through our acquisition processes.

This is a bit of greater metrics of looking at markets and then looking at things that we would like to accomplish and it’s interesting you see a lot of check marks here and as I look through this, each one of those check marks I can identify one, two perhaps three companies that we looked at through the last process or through the current process that fit in here whether it’s consolidating the supplier base. We are looking at either competitor maybe not strong direct competitors but maybe competitors that we run into occasionally and we have had companies we have looked at there.

New or high growth markets we believe Energy Steel fell into that. Certainly a new market and for us we believe the high growth market as well as an adjacent market. So these are all evidence we have looked at and once we get past the strategies we look and say do company fit into these markets and we certainly again have examples of all of those. So we talk a little bit more about our process because it is somewhat unique.

And this where we should looks like funnel which is exactly what it is, we cast a very wide net because we have the three different strategies we’ve talked about and some sub strategies below that we go out and we look at all the companies that are out there, and I can tell you in the last time when we ended up with Energy Steel, we look at well in excess of 150 companies, many of them were private companies, some of them came through but private equity sales, some of them came through companies that work for sale or being aggressively marketed but a lot of them came through us reaching out and finding them.

I would say 150 or more that was a lot of activity, a lot of companies to look at very quickly we paired that 150 down to a much more manageable level a couple of dozen perhaps maybe a little more than that and really what we were doing, they were saying let’s look at the company what they sell. I talked about the fact we want engineer to order products, there are a lot of companies they make engineered products but they are engineered standard products and so very quickly those will follow up the list for example.

Once we identified company’s [responsibilities], our sales or one of the firms that we worked with they help us here, we would reach out to those companies. Marketing Graham has a strategic acquirer explaining this is what Graham would do if we made an acquisition, that was a little harder for them quite frankly to do that a couple of years ago than it is today because we haven’t made an acquisition. So what we were saying, what they were saying to potential companies was trust us this is what Graham would do, believe what we have done with Energy Steel we can now say trust us this is what Graham would do and all by the way this is what Graham did with Energy Steel.

Once we talked to those companies they then came down and there are some companies they said great we love to talk to you and some quite frankly didn’t want to, and we respect that. We understand why folks wouldn’t want to talk to us and so we moved on and we talked to the companies we were interested in talking to and they were interested in talking to us and we talked about their business model. And we talked about their culture, we talked about what they wanted to do and their management teams and we narrowed it down even further to smaller group of companies that we wanted to continue discussions with.

And we will continue those discussions and ultimately purse potential acquisitions. Obviously, at the end of this process last time we ended with Energy Steel and we would hope as we move forward to have that same type of success in future opportunities.

Finally, I just want to talk very briefly about Energy Steel; Joe Aliasso who is our General Manager at Energy Steel and has been there for about four months, five months now. We'll give you a lot more detail about but let me talk about the acquisition itself and then Joe can talk after the break will talk about the business and the markets.

As I mentioned, it was our first acquisition in about 30 years. So it’s not something we had a lot of expertise in-house. Bob I think mentioned that a lot of our employees have been here 20 plus years, that’s fantastic it’s a great asset for the company but we have acquisition in 30 years that tells you that we really didn’t have that capability in-house to do that and part of my (inaudible) being hired was to help with that process but what I found was even though we didn’t have the experience in-house, we clearly have the ability to do it and we just had go through the process as we do with Energy Steel.

Energy Steel met our acquisition criteria. It created market diversification was an ETO business, had a strong management team and ultimately we purchased Energy Steel with 100% with cash; it’s $18 million and then $18 million by coincidence it was about one-time sales but that was not our criteria. I mentioned earlier, our criteria is cash based and that purchase price ultimately was based on forward looking EBITDA of $3 million a year.

So with the time we believe we bought company at six times forward looking EBTIDA. Put it in (inaudible) place to sell or believe that EBTIDA level of $3 million was low and as part of the negotiation process, we agreed to an earn out which if the EBITDA was $4 million and each of the first two years that we will pay an additional $1 million to the sellers. So ultimately, we would end up paying $20 million for a company that had EBITDA of $4 million plus or we will pay five times the EBITDA and that’s where we were at. The first year we paid the $1 million earn out, the first million of the $2 million of earn out we paid that last January. We are expecting to hit that this calendar year and we would then be paying that early in calendar year 2013.

I think couple of things that are important here, we have minimal transaction costs are all in transaction cost for about a $0.5 million which is a pretty low number for an acquisition of this size and for a company of our size which did get some additional external assistance. We got external assistance in helping us ultimately cultivate this acquisition but once we got to the point where we move forward with the non-binding Letter of Intent almost all the work and quite frankly all the work was done in-house.

And it was done in-house why, couple of reasons. One is it was an efficient way to do it but just as importantly once we finish this acquisition, we are going to have to run this business and while it is really nice to get couple of 100 page report from an external provider who does due diligence that you know what all the accounting records there or the sales records there looks nice to give you the book and they walk away, that’s not what we wanted. What we wanted was when we close this deal, we wanted the handbook in our hands that we develop that we understood what was there so that when we had to operate that company on day one and month one and month 10, we would know where we are getting into and we wanted to make sure we can operate it effectively.

And so that’s why those transaction cost were relatively low and I would expect in the future our transaction cost will continue to be that way. Finally, the acquisition was accretive from day one, those transaction cost which occurred in the middle part of December of fiscal year ‘11 calendar ‘10 within that 3.5 month period we actually more than absorbed those transaction costs with the earnings generated from Energy Steel. So we’re accretive in that first quarter.

We were accretive in the third quarter of a year, a third of a year and obviously we have been accretive in our current and in fiscal year ‘12 and now in fiscal year ‘13. So we believe based on the cash generation and how we run the company, that accretion was we expect that to happen. This acquisition has exceeded our expectations in the immediate term and as Joe will talk about, we believe it will exceed our expectations going forward.

With that, I think a 15-minute break could be in order. I think you all know where the restrooms are. We got some drinks here and some additional things and get back together at 2’O Clock that will be great. Thank you.

Joe Aliasso

Okay, everyone, we are ready to get started. Welcome back. Hi my name is Joe Aliasso and I am the General Manager of Energy Steel which is located in Lapeer, Michigan. The closest big city to Lapeer is Flint.

So the plan is to double Graham’s nuclear power business over the next three years to five years while doing it at an expanded profitability rate. This is how it can be accomplished, so prior to the acquisition Energy Steel was mainly a material supplier organization to nuclear power market. So, that’s where most of the revenue was coming from. So we can still expand into their existing utility market and that’s what we will do. We will expand our products and service offering into that market.

And in addition to that, we can enter the spent fuel processing market and after the acquisition we did enter the US new build construction market. So we do have orders secured for that. Also after the acquisition we did enter select international markets and took some business. And we also want to expand beyond the typical [build] to supplier strategy.

Currently, we have supplied products to all 104 US reactors. So each of the utilities has product from Energy Steel. In addition to that, we are working on (inaudible) which was the (inaudible) plant as they are getting running again so we are supplying products there. There are additional orders for that product for that utility but we working on that, so the first 18 months in the nuclear power market. I will explain team and partners in a minute but what we did is we secured a teaming partner agreement and I will explain that on a next slide.

In the US new build market as I said, we won some orders after the acquisition $15 million worth of new orders and also in international markets, we were able to secure $3 million of new orders where China, for mainly China and South Korea. And as Alan mentioned the Batavia facility also was able to re-obtain the Section 3 and they had it back in the 70's and 80's and t hey have just recently reappointed it.

But we have synergy between our two facilities that we can leverage that to obtain additional business. So teaming partner agreement, so what they are is we have exclusive contracts in place for US installations with teaming partners. To name a few partner Denver, Parker, [SPX], [Ring] Valves and Pumps and also ITT. So they are just a few of them. Prior to the acquisition, we had about half a dozen teaming partner agreements in place. And since the acquisition either through renewals or additional ones, or about a dozen and what (inaudible) is they are exclusive agreements with these original equipment manufacturers or equipments that they supplied back in the 70s or 80s to the nuclear power market.

So we have an agreement that we have exclusive rights to either sell, distribute or manufacture that design. So why that’s important? The NRC put out a generic letter or a memo or guideline telling utilities which is who we normally would sell too or we would sale too an OEM that sells directly to the utility.

But they put out a memo or guideline there or existing plants if the existing product is available on the marketplace you must buy (inaudible). But with our exclusive teaming partner agreement in place if they already sold them to the market in the 70s or 80s and then I have what say (inaudible) exchanger and they need another one today and it exist and through our agreement it would exist, we would supply it.

So we would able to supply that product like for like. So the NRC are saying that’s what you got to buy and because it’s exclusive Energy Steel they come to us. This is part of the MRO strategy, so it’s roughly to $500 million in the US and we're currently expanding into electrical components which is something we haven't done before and also we're starting to look into pump refurbishment.

So those are kind of different parts of the MRO market that we haven't been involved in to-date that we're currently starting to get involve in. The NRC continues to offer license renewals to keep this nuclear power plants running for 30 year, 40 year extensions and they have 18 months routine plant outages so this constant influx of business as recorded to keep this plant running.

To get end stand for nuclear stamp there is very few competitors, very few people that do it. It’s a very rigorous profit; you got to have a quality program in place. It’s a three year re-audit process. We send a team in spends four to five days going through every document, very process you have trying to make sure your following what you are saying that meets either your requirements or regulatory requirements.

So it’s not easy to get end stamp or just any shop just can’t get it. So you got to really be dedicated to quality to get it. Energy Steel, all we do is nuclear in that facility in Lapeer. So that’s the mindset that is the culture. We don’t have any production processes going on. So it’s easy for us to handle the nuclear stuff. It is very difficult for a shop that doesn’t specialize in nuclear just add nuclear to their portfolio and you got to be careful when you mingle this process.

Here at Graham because they are not just nuclear they have other avenues going on. And they are going to dedicate some areas and people and teams that will be able to do that. In Lapeer that’s all we do, nuclear that’s what we live by.

For the spent fuel market roughly a $300 million US market, we have been supplying material to a utility in California, so they can build their own spent fuel containers. At this time there is no environmental risk to build these containers because it’s a proven build to print design. So it is more of the build it to the print so it’s a workmanship thing. So there is no environmental risk getting involved in this type of marketplace.

They are large containers and they are roughly 80 inch to 100 inch diameter vessel 16 feet to 20 feet long. When they are being ordered, they are ordering them in batches of 10 or even 100, so there is large quantities required and what happens is when the spent fuels is done producing the steam which makes electricity for the nuclear power plant, they have to store these fuel rod somewhere. So the NRC that you need to put, leave them onsite for a year to allow the stuff to cool, so they have to store these continuous on site in order to cool the spent fuel rod. So there is always orders out there in the marketplace, it's routine orders to get for the spent fuel processing and it's a large market. Right now, there is no national repository for spent fuel. So right now all the facilities are storing it onsite until they decide on a central location in the U.S. to store it; due to large size of the vessels and the quantity of them, it may require expansion at our Lapeer facility.

Again, very few competitors in marketplace, because you do have to have an N stamp, so again, for the same reasons, and due to the large size of containers, you got to have the sharp space, you got to have the mindset. So again, there is a high barrier-to-entry to this, so just not anyone can come and do it and there is high cost of failure due to the large size, the tolerance into make them and also, you know, the quantity of the containers and the size of the containers.

And one thing I didn’t point out, glad you said that, a typical order value size of one container, I don’t know they’re buying more than one is roughly $0.5 million on average. Along with that, there is special tooling that’s required to handle them and that’s roughly $400,000 order size, so that just gives you the order of magnitude of a typical container.

For U.S. newbuilds, again after the acquisition, again because Energy Steel prior to that was mainly a material organization. We got involved with Westinghouse AP1000 design and we are able to secure $15 million of orders for the four reactors that are currently under construction. They are kind of slightly behind schedule, so 2016 to 2018 is kind of the general time when these new reactors should be up and running; they have had some delays at site.

And because of the acquisition and waiting for all the dust to settle and get everything going we didn’t make the first wave of the initial purchases when these reactors were first came on to the marketplace, so we missed out on parts of the opportunity. So if another new reactor were to come up we estimate it’s roughly $30 million to $40 million of opportunity for Graham and Energy Steel in the way of heat exchangers vessels and structural support. The portion we are involved in, we are able to secure $15 million of these four reactors.

One of the longer term technologies for newbuild is an SMR, which is Small Modular Reactor, which is roughly a 300 megawatt or smaller reactor versus the traditional 1,000 megawatt or larger and the word modular leads you to believe that pre-fab or as much as can be done in the factory prior to going to site, so it cuts down on construction cost and time to get them built. So this is something that probably won’t happen this decade in terms of actually operating them; it’s in the prototype stage.

The DOE is providing funding for a few of these companies that have come up with the design concept to build those, to test it out, so it’s still in that prototype stage where future potential that will definitely, most likely will be a technology that will come out onto the marketplace. We expect roughly $3 million to $4 million per reactor of opportunities when they do take off and we are actively involved in the development of this prototype and the concepts, we are working with the companies that are actually in that stage.

Longer-term potential, we are going to try to penetrate deeper into select international markets. As I said with our teaming partner agreements, they are mainly for the U.S. or domestic marketplace, but they also have products they supplied internationally that we’re trying to leverage and still have that same teaming partner agreement for international business. So we’ll expand beyond our U.S. business base with exclusive agreement and try to get international. International is three to four times the size of the U.S. market, so it’s a gigantic market.

We do have the Graham china office which we will use to help us to build strong relationships in China and Indonesia to help us win business, because in that area the country or the world it’s all about relationships and that’s how to be in the game. And as I mentioned, China and South Korea, we after the acquisition were able to get involved and we were able to secure $3 million of orders for China and South Korea.

Another way we can expand is to become more than a build different supplier which is what we typically do with our teaming partner agreements we are building to somebody else’s design. If we can replicate Graham Batavia’s process and offer classes and mechanical engineering capabilities and come up with designs and products then we can do that for the nuclear power industry; what that will mean and take is, we may need to add additional mechanical engineering capacity and capabilities will appear and we will train or possibly add additional sales focus and product specialization because as Bob Platt mentioned Graham is all about consultative selling, engineer-to-engineer talking so we are trying to replicate that process in this segment of the market.

Thank you. Alan is going to talk next.

Alan Smith

Long time no see. Raising the bar, so we spent the first half of the discussions giving you guys indication of what the market is, is $200 million really possible and can we get it? For my see on the execution side, I believe the market wants to give it to us, I believe the sales team can get it. So the second half of the story is can we execute it? So I want to give you some indication on our execution capabilities and what we are doing.

So we're talking about doubling business, so that means we need a step change in our capacity, our ability to process the order. And as Jim said, we're going to do it by leveraging our facility; we believe there is a lot we can do, I'll share that you with later in the presentation and I believe it’s possible. What's really important and you heard over and over again, our selling process, our specialization, our engineer-to-engineer conversation, that all goes into our brand, you know the brand is entrusted to the customer and the supplier. As we double the business, we can't affect our brand; we got to make sure that we deliver with the same quality to tomorrow what we deliver today to our customers.

So when I think about, I think about it in three simple buckets, people, process and capital investment is the way to get there. We are the people, I will give you more color later on, but we are going to need add more people, we need to get more out of our people by giving them the tools to perform their jobs and our processes we need to extend our continuous improvement and mindset and improve our processes to get faster so that we have turnover, mainly we want to reduce our lead time. In capital investment, again give the place and tools they need to reduce lead time and process the orders to our customer’s satisfaction.

Last year we made a concentrated effort on getting our new engineers or new employees both in the plant and in engineering up to speed as quickly as possible; when I was hired in 1990, I was hired as a Project Engineer and back then prevailing thought was, why is it take five years to get by 85% and I can tell you it took me about five years to get by 85% that’s probably the expectation and the results are the same. And so, what we did last year is we said, we need these engineers to be faster so that we can maximize on this up coming ways. To do so, we took a two pronged approach; we held the internal training classes. Last year we had 50 training classes for our engineers inside, namely the training classes were conducted by our more experienced employees, but we also had our vendors come in and teach them how valves work and controls work, so they were really, really exposed to a lot in that year.

We also, we changed our mindset; the reason it took five years to learn is when I want to learn ejectors, I had to go to John and when I want to learn condensers I had to go to Tom and it wasn’t written down and I had to write it all down and that was a very slow process I tell you, because I did lived through it. What the team did is they wrote nine design guides. We took specific products and we created a cook book for these new engineers, because we know we have to grow the staff. We hired about eight last year. We are hiring this year. We will probably hire again next year. We wanted a cook book approach that we could give them the Graham text book to help them come up to be faster. So we also did that last year and that’s a program that we’re continuing on with this year.

We also need to be as flexible as possible. You hear a lot of time on Jim’s calls, our orders, our business is lumpy. We have monster quarters, and not monster quarters and from the execution side that’s very challenging because we have fixed amount of people. So we need those pieces to be as flexible as possible. We have made a shift in the last two years on how we view the engineering department. We used to be very sequential. The engineer would do this technical stuff that would go to a designer and then it would go to a CAD person and then they are back for checking and all the stuff. About two years ago we created what we called the Blended Engineer. We taught our engineers how to do CAD. We taught them how to do design and of course we taught them the engineering side. We now collocated them in groups of five and what we do now is we give the team a project and we say we allow them to chose who is going to do the engineering, the drafting or a design based on the customers demand or the output. So they all pitch in and help each other and they are kind of more and the engineer up today does not look like engineer of when I joined in 1990.

In the plant, we cross traded 35 men last year; all of who was a rail drill operator, this is what I do and if I don’t have work, I don’t have work. Nowadays it's not quite that way. We cross train them in operations that makes sense, so we did 35 last year; we identified people this year, so that when that lump hits the plants we can move guys around and adjust to it in order to reduce their lead times and get more out of this six roof line that we have.

Here is Zero Defect Culture; this is important. We are engineered to order; everything we built, we haven’t built before; we haven’t design before. It is truly a unique item, not like building printers where there is a new product development group that works out all the bugs and then it gets released. We are live as soon as engineering drawing hit the floor. We need to make sure that the team is doing everything they can to make sure their work is accurate. We want to get rid of rework because rework consumes capacity, both in the office and in the plant; we don’t want to give (inaudible) for the same reason.

So we worked with Franklin Covey and they give us a really nice process to attack; we work in NCRs in our culture. In short, what the organization does is we set a wildly important goal; it’s so important it’s wildly important and we focus the employee and only give them two or three goals. We are not an organization that gives employees 10 goals. They have two or three goals; if you stop the employees in the office, I am sure they can tell you what their wig is and they drive to it.

What’s unique about this and why I love it so much is two unique things. Its process demands accountability by the people on the front line, weekly accountability and acts on lead measures, which I love. So the quick example of lead measures, I am constantly trying to loose 10 pounds, I am constantly unsuccessful, but mostly because I act on late measures; I step on this scale every morning and unfortunately it says the same number every morning, so when I step on that scale that just tells me everything that I did before the last time I step on the scale.

What Franklin Covey says, Alan you are doing it backwards; you can’t change legs; you need to work on leads. So Franklin Covey taught to me, I should watch my calories or account my calories and I should exercise. And if I do cut by 500 calories in extra and expand 500 calories in exercise, the scale should take care of itself, because I have setup lead measures that influence the outcome that I want. This is throughout our company now.

We tried it in three areas last year, purchasing for non-conformities, our vendors have the biggest amount of non-conformities as a still category. I gave purchasing a goal of reducing it by 24%, I asked them to reduce 20% it were just at 24%. This year all of operations which is, the departments after Graham receives the POs for shipment are executing a rig on air ejectors. I asked them to do that because this will give us the path.

The viably important goal; on-time delivery is I think metric that -- a legging metric that shows you how you are doing on your goal of reducing errors; outcome have been very successful in moving the bars when it comes to on-time delivery. That four or five years ago we were about 84%; this was all products. This was past year we were about 96% a little bit better, still more we can do; I know we can still push that and I am really excited about the accomplishments that the Graham team has made on this metric.

This one says a lot; lead time, if we are going to leverage the assets that we have, we have to get faster so that we can get more through it. The graph on the right shows you that we've cut 2.5 months out of our lead time, our overall lead time, both the shift. In engineering, they've cut three to four weeks out of their lead time. We didn't do it just by ourselves, we had make our customers part of this process. So we will in the past, we would send out drawings that our customers approve, as that took two weeks great, if it took four weeks or six weeks well you know that's how long you take the customers, nothing you can to do. We got rid of that attitude and we called the customer, hey can we fly to your place and help you understand, is there anything that you need to us through. And the team has really reduced the time it takes, of that two to four weeks, half of that has been in getting customers to get up the data better. We also if we see problems going into the job, we tell them right away to see if we can work through it faster.

The white bar is the plant, that’s kind of the effect of the CapEx in cross training and focusing on on-time delivery. They have been able to squash their lead times also. So we didn't do it on our own; they are customer’s part of the solution. They have been happy to be part of the solution because they want their products, so we're all in alignment on the goal here and we’re seeing the results.

Jim talked about getting Batavia to about 140 through producing here and producing without using our variable production models. This model we kind of stuck our toe in the water, understood it and expanded it. So in the last five years, we’ve expanded by 2.5 times of what the first year was. Now we are up to 50,000 hours outsourced. Two reason to be outsourced; we’ve used up our capacity in Batavia and/or customer requirement caused us to meet the build in the country; very big in China and all that China orders is a portion that must be build in China. So those are the two levers that caused us to go to outsourcing. China kind of looks like a downward trend and that should point in time, we have three big projects going on in China and if were to graph FY ‘13 it’s going to be much higher than ’12; so just timings, there is no negative trend going on in China.

CapEx; we have very simple process; come October we say what are the bottlenecks in the business and can capital help us relieve the bottleneck. So over the last five years, it depends, just over $9 million and it’s been a targeted approach to kicking through capacity. And the tour, I know the tour guides will point out some of the major CapEx and they will give you a description of the savings that we have experienced.

I’ll try and give you some quick highlights of bigger impact that we’ve had from CapEx; welding is what we do. Already to 50% of all labor hours involve welding, so it’s a big piece of what we do. From a capital side, a very small piece; we spend a little over $0.5 million in last five years, but it’s got a big, big return. And top left is orbital welder; we used to outsource the welding of a tube to a plate. We were subject to the vendor schedule and it is limited capacity. We now have many heads, many people trained and we now can control our schedules much easier.

Sub-arc is what we used to weld are really big shelves. We love this because it has a really high first cash yield. That's important because our customers actually require us to x-ray weld to make sure there is no defect so again high pressure failures. So there are a lot of quality requirements around that. Sub-arc is very, very high quality process.

The one on the end is the pipe works [Miller]. We actually help [Miller] develop this product. This product can do three different processes with one welding machine and we literally use to use three different weld machines to do what this thing can do. It offers SD card. So the welder can save the parameters or we can give the parameters, to pop it in or automatically the machine does what it needs to do.

We are kind of ingenious manufacturing team have together like four or five different items and [Miller] came in and said what you’re doing. This looks strange. It did look strange and we told them that we actually kind of invented this for them. So they went back, they thought we had some good ideas. They thought that they had something that they could market. Three years later, they came up with a pipe work that basically had every feature that our guys kind of put into a welder. So it's a nice story of the great machine.

[Weld Lab] I told you about the Navy weld procedures are very difficult and takes a long time. Even commercial weld procedures can take a long time. Last year and the year before we average, we created about 45 different weld procedures through our Weld Lab. We have been able to reduce lead time because we can do all the testing in our Weld Lab and certify in our Weld Lab but before they was (inaudible) they could take two or three months.

We also used the Weld Lab to train our welders then we get a new welder in, we have a lab instructor, he spends time with the welder gets them qualified, gets them to understand Graham quality and what we are expecting and then releases them to production. A nice thing about that is there is not as much of a drag on production as they are trying to bring in new staff because they are coming with some skills into the production area.

Three high level things we are looking at performance, we got to do things right at the first time every time that’s the zero defect culture that we are talking about that we are using the process (inaudible) recovery process to drive to the organization.

We want to meet all of our deliveries and they are on-time. So important we actually component of our employees and bonus is based on-time success rates and lead time. We can’t leverage a facility if we don’t get faster beyond time metric to make sure that we still even though getting faster and promising sort of lead times, we had our promises.

I think that’s it from me. Thanks.

Jeff Glajch

Thank you, Alan. As you have seen through all the presentations today we have talked about what our strategies are to growth with business from a $100 million to $200 million and beyond. What I would like to do is just kind of walk through some of the financial items around the company, give you a comfort level that not only do we have business plan, sales plan, operations plan; we also have financial structure that can clearly support this strategy.

One of the things for those of you who have been involved with Graham for a while and certainly listening to the team today you would probably notice we managed for the long-term, we are not managing for this quarter or next quarter, we are managing for many-many years looking out many years.

The idea being that this company has been around for 76 years, we are stewards of this company and we want to make sure the company is stronger in the future that it ever has been in the past and it will continue for another 76 years.

I talked about our balance sheet a little bit earlier. We have no doubt on our balance sheet. We have a lot of cash in our balance sheet when we want to use the cash for. Well first off Alan talked about the capital expenditures we spend in the last five years; we will continue to have a moderate level of capital expenditures within the business to support our existing business and to support the growth that we need to have both year as well as our facility in Michigan.

Our acquisitions I spent some time earlier talking about acquisitions. We have a very strong balance sheet to support acquisitions going forward and really those top two are really the focus on where we expect to utilize our cash going forward.

The other three the dividend policy we certainly pay a small dividend and then we will continue look at and how that should be going forward. Share buybacks, we have a share buyback in place, has been a place with number of years. We have the ability to purchase up to a million shares. We purchased about 365,000 of those million shares. The vast majority of about three years ago and the stock price was $8 to $9 a share. Even though we have the ability to buy million shares back that is not a requirement, we don’t feel obligated to buy a million shares. We will buy it back, if we believe the prices are inappropriate place to buy that.

Our working capital needs are very minimal. As I mentioned 0% to 5% of our revenue and working capital to the last many years and currently our needs going forward we expect to be relatively small.

Our balance sheet I did mention we have no doubt. I did also mention that we would be willing to pull one to 1.5 times kind of the mid-cycle of EBITDA should the right acquisition opportunities become available just to give you a quick idea of our financing opportunity or financing structure.

We do have a line of credit with Bank of America today it used to be $30 million by a year and half ago, coincidental with the acquisition of Energy Steel when we renewed it, we took that down to $25 million but we also as part of taking it down to $25 million put in the (inaudible) feature on it within a very, very short period of time we can take that $25 million to $50 million should we need it.

Right now the only thing we use that line of credit force is for letters of credit for our international opportunities other than that we are not tapping it. So we have a very open financing structure should we find the right acquisition opportunity, the cash is easily reachable. I think this is important slide. I think many of you have seen this slide; it talks about the Graham business over the last 20 or so years. And if you took it backwards from the early 90s it will be very similar in the 70s and 80s as it looks in the 90s but what's important here is that a little line of demarcation occurred about five years or six years ago.

If you look at the Graham back in the 90s and early part of the last decade what you saw was a company that at its peak would be about $50 million company and top of that cycle and EBITDA margins 10% or 11% and then when a down cycle as Jim talk about down cycles typically 20%, 30%, 35% drop in revenue. We saw that in fiscal 2004 in those down cycles, instead of being a $50 million company we've been somewhere in the high 30s low 40s instead the EBITDA margins being 10% or 11% they would be zero or they might even being negative that was the old Graham.

And I think if you look at 2006 forward you see the new Graham. 2006 to 2009 through the last up cycle you saw a growth in revenue not only hitting the $50 million mark, we are hitting well beyond that and a lot of that sort of worked and Alan and his team have done to expand our capacity, to give us the ability to go beyond $50 million.

Interestingly, in fiscal ‘06, ‘07, ‘08, and ‘09 each of those years we were capacity limited and quite frankly we couldn’t have done any more revenue in fiscal ’06 then we did in fiscal ’07 and then we did each of those years there was more out there and we just couldn’t get out because we didn’t have the capacity.

We believe we have more capacity today. You saw the EBITDA margins. We at the beginning of that they were in the low-double digits but all of the sudden fiscal in ‘08 and fiscal ‘09 they go from 10% or 11% up into the mid 20’s which is obviously very strong performance not too many manufacturers have EBITDA margins in the mid 20’s and there were a lot of good things that happened in the market was red hot, the pricing was very good but quite honestly we managed our way through that and took advantage of those opportunities.

When you look at fiscal ‘10 and ‘11 and also the down cycle, it not just a normal down cycle but a very steep, very quick down cycle where we went from a $100 million in revenue. So if you looked at the absolute bottom point in middle of fiscal ‘10 and early fiscal ’11, we were in a run rate of about $55 million. So we drop revenue almost in half and even we drop revenue almost in half that EBITDA margin still stayed in the mid-teens. So if you look at this what you see is take the old Graham and compare to the new Graham, you see the ability to generate more revenue but you also see EBITDA margins which have grown I will say a 1000 basis points but I think the math will suggest you I am being conservative.

We have got both in the up cycle and the down cycle the ability to garner very strong returns and we are in a much better position today and this is the new Graham and this is the change in the company and all of the things you have heard today about where we have been and more importantly where we are going, we believe in this type of an economic environment a stronger returns in up cycles and even when down cycle hit.

So we got a strategy to grow this company $200 million and beyond. As Bob talked about we have expanded our addressable market. We have expanded the markets that we’ve historically been in, the oil refining market, the petrochem markets, some of the alternative energy markets. We’ve also gotten into new markets such as the nuclear market with Energy Steel.

Capacity utilization. That’s going to help us get there. Alan’s talked about how he has expanded our capacity. As I mentioned, back in fiscal ‘09, we had $100 million which was great but that’s all we can do there. We believe we now have the capacity within our system to do twice that and it is because of the work we’ve done to expand our capacity and now we need to take advantage of it.

Then finally, the strategic use of our balance sheet. Energy Steel was our first acquisition but it certainly not going to be our last acquisition. We have the ability with the profitability of cash that we’ve generated over last many years, and quite frankly the cash we expect to generate over the next many years to grow the company inorganically as well as organically.

So that target of $200 million, we heard the markets there. We heard the capacities there and we believe we have the ability to go after it.

Alright, quickly talk through, maybe not so quickly, talk through some cycle points. Just to give you a little bit of a feel and this is similar to the slide I showed which showed the EBITDA margins. This really looks across a number of cycles and if you look back at the bottom of the earlier cycle and this will be in late 90s, early 2000s, again $40 million company. Gross profit margins in the teens, EBITDA margins at or below zero.

Last cycle, top of the cycle, we got to $100 million in revenue. Gross profit margins in the low 40s. With the SG&A in the mid-teens, we ended up with mid-20s type of EBITDA margins.

The bottom of the cycle which was down fiscal ‘10, fiscal ‘11 timeframe, revenue dropped as low as the mid-50s. Gross margins in the upper 20s, above 30% and the EBITDA margins were still double-digit EBITDA margins.

And I will point out and many of you I am sure are aware of this, a double-digit EBITDA margin from manufacturer even in a good time is pretty darn good and we're doing at the absolute bottom of the cycle. So where we headed and I talked about long-term and this I think shows you we are thinking long-term, we are obviously thinking about the top of the next cycle but you know what we are thinking about when that next down cycle is. They might be four years out, five years out, six years out who knows but it’s going to hit at some point in the long-term.

But if you look at the top of the cycle, we believe and we have talked about today revenue of $200 million or above. Gross profit margins in the mid to upper 30s. Now why aren’t we saying 40 or 41 like we got last time, but you know what may be we get there but we have suggested to people if you are going to model our business model, model that mid to upper 30s because we may not have the pricing power or the hotness of the market that we had in the last cycle that allowed us to get that those outsized margins.

So mid to upper 30 gross profit margins we think is reasonable. Mid-teens SG&A again it’s kind of where we were at the top of last cycle and fairly close to where we are today and if we continue to grow may be we see some efficiency there perhaps, but at the same time we also may need some step changes in investment and people that may keep us in their mid-teens, and it gets you to low to mid 20s EBITDA margins. Again, almost when we were at the top of the last cycle we may get to those numbers that we were in the last cycle, may be but we would suggest if you are going to model a little conservatively.

And then finally looking at the next down cycle because it will be one day, again we don’t know when it is, we didn’t predict the last one. We are unlikely to predict the next one. We want the bottom of the next cycle to have revenues better than the top of the previous cycle, so above that $100 million range, we talked about a 120 to 40 for illustrative purposes here.

We believe gross profit margins again mid to upper 20s and we will continue to have a mid-teen EBITDA margin, so we believe that we can be a company that’s very, very profitable in an up cycle and quite frankly pretty [darn] profitable even in a down cycle.

Finally through all the discussions we have heard today, we talked about growing the company from the $100 million where we are today or little over $100 million to $200 million and beyond. Certainly opportunities are our historic core markets, Bob talked about them, the opportunities and we are going after the addressable markets and we are going after a the significantly greater today than they were for us three years or four years ago on the top of the last cycle.

The power market. Joe talked about our opportunities within the Energy Steel and nuclear business we also have opportunities in renewable energies. We believe the ability to grow that market is pretty down significant for us.

The Navy, Alan talked about the Navy that we have been in or out of this historically but now we are in and we are in here to stay, we got the carrier orders, we got some opportunities of the submarines in the short-term and then longer term we have greater opportunities with both the submarines as well as continuing in the carrier and so our ability to grow there.

Then finally acquisitions, we didn’t put the Energy Steel acquisitions in there so it’s kind of start right now at 0. Future acquisition we have opportunities to grow that business and to grow our business the acquisitions we have the balance sheet to do it, we have a process so we believe is effective and it’s the right thing for our shareholders and long-term we believe we have the ability to grow on all four of these avenues.

With that I would like to pass back to Jim for some closing remarks and then some questions. Thank you.

Jim Lines

Thank you, Jeff. I’ll be brief, so we can have a good Q&A session. We are going to try to have a hard stop around 3 O’clock so that we can then have the plant tour but if you want a few minutes over that will be fine. We still have time for a good plant tour. The Q&A session we think is important.

Just recapping, you heard how we believe and why we believe we can get to doubling the size of our business. Bob, Joe and Alan framed the market potential; we talked about how we are going to get there, what are the strategies that we have in place on the sale side, the operation side. We also have the acquisition strategy that's building pipeline is building.

We don't necessary to need acquisitions to double our business, but we find the right acquisition as we did last time, we will execute on that acquisition, double our business more quickly or pushing revenue further than $200 million through the cycle.

I hope through what you heard today, you began to understand the business as we understand it, understand the markets as we perceive the markets and a better appreciation for the capabilities of our company and why it is that we believe across this cycle we can go from $100 million to $200 million or beyond.

And with that I would like to open up to Q&A and that’s questions and that team will answer them.

Question-and-Answer Session

Unidentified Analyst

Okay. First question I had was what you need to see to justify establishing some local manufacturing presence in China versus just outsourcing?

Jim Lines

What we need to see there is we're looking at very carefully at it, Jeff, myself, Alan we've all been into a number of shops in China taking a look at them. Bob in his previous roles has been in China. He was responsible for operating China business in (inaudible) area. One of the things that unique to Graham is our customers aren't always looking for what's the best price. So at this point, a China manufacturing solution from our view serves the local market almost exclusively. Our customers in refining space, in the petrochemical space they have what’s called an approved manufacturers list.

We don’t see where they accept; actually they prohibit the use of China materials and use of China product. So what we need to see is more receptants in the marketplace for the use of China built products outside of China. Now we may look to move more quickly because we see demand so significant in China that we need a local solution but our thinking right now is we want a more global solution and we are uncertain at this point if we can practically drive a global solution to a China operations decision.

Unidentified Analyst

On adjacent markets why don’t have exposure to LNG, it seems like a natural fit given your exposure to some of the other gas liquids in petrochemical markets and does entry into an adjacent market have to come through M&A or can it be done in-house?

Jim Lines

So there are two questions there, Graham had been in LNG up through about the mid-90’s. Our steam turbines were recorded in the LNG plants for the mechanical drives on refrigeration processes. What happened is economy of scale. The plants became larger and the LNG trends became larger and it became more efficient. This technology advanced in the size of the plant advanced, they use gas turbines rather than steam turbines. Therefore, our steam surface condensers were no longer recorded. We are in the LNG process with our current product portfolio yes to a little degree.

So that is an area that we have as Jeff showed a market diversification opportunity whether acquisition can we develop products possibly but I would think more quickly a solution would come through acquisition. That is part of our acquisition criteria, we are looking at the growth that we see there. Yes; and we're thinking about LNG, we're thinking about midstream, we're thinking about upstream. We are more a downstream company. We think if we can move up to the midstream or upstream, there is a higher sums of money that we know are being spent every year, we want a piece of that. So LNG or midstream or upstream is part of our criteria how do we break into those markets.

Unidentified Analyst

Yeah Jim, tell me, you talked about roof line capacity. Tell me about brick and mortar expansion of the facilities. Tell me about the ships you are running now, the ability to flex with overtime; what you might use and kind of third-party outsource staffing? And then how do you maintain in a downtime your core competency and welding there; you know, you look at someone like Boeing, you know, they use people, they use technical skills they go for a win. How are you kind of those four as you look at capacity?

Jim Lines

Sure. On the bricks and mortar operations, Alan do you want to offer your insight on that?

Alan Smith

Okay, right now we're currently running one and half shift. So it's a matter of acquiring labor to somewhat double what we do in Batavia. So that is why, I guess that we’re confident, we can leverage the facility because we’re underutilizing it from a staffing standpoint.

Jim Lines

And on the retention, I am not sure when you walked into our four year downstairs, when it came through the door to your right as a plaque. On that plaque lists all the employees that have 25 years or longer of tenure in our company. It’s a massive plaque. The average tenure of our work force is about 20; whether they are in the office or in the plant, because of what we do, it’s so unique, our operations model so specialized, the skill sets of our employees so long to invest and then develop and become proficient, we work real hard to have a company, a culture where employees want to stay where together we build a great business, together we enable employees to have long careers and build a successful career.

So we work real hard with our management process, our engagement of the employees in helping us to be successful; letting them know that they are valuable, they create the wealth within the business, they own the customer experience and through that thinking, thinking about the employees, I think we have had a real fine job done by people before me and the management team that we have now to focus on retention.

The key issue that we have really is as Alan expressed is adding to that work force, bringing in those skill trades, bringing in the welders, bringing in the engineers, bringing in the machinists. So when Bob sells it, Alan builds it and that’s where we have HR strategies focused on right now is building that organizational group, take advantage of the opportunities in the marketplace.

Yes, we do offer, the question was around benefits, if that’s part of it. I think that’s part of the equation; I think a bigger part of the equation is the experience, the ground experience in terms of being part of something special, being part of a team that has a shared vision, being in a company where the employee is valued and the contributions are recognized. And then around that we have the benefits package and a wage package, that’s a step; some of that is the DB plan, some of that is our profit sharing plan, our 401(k) our employee stock purchase plan. Together we can build a great enterprise and thus ever important the employees as a whole that we think a lot about them and how we un-tap the marked up potential in our employees and we need them to be here long time to help us do that.

Other questions?

Unidentified Analyst

Yeah. In response to this gentleman’s question, you said there wasn't a big demand; you didn’t sense a large demand to build a plant in China because outside of China that products don’t seem to be in demand; is there a large demand within China, is there any obstacles to you not having manufacturing in China with respect to the government or the…..?

Jim Lines

Well that’s a question and if I didn’t answer that fully and I had a gig. That’s my fault as well. As we look at an operating footprint, footprint in China, we have been using the [should we do] model right now working with subcontractors to make sure we understand the consistency of the demand, the price point in the marketplace, profitability within that price point, I think, I feel, we feel, we feel our strategies of growth in China. This maybe something we have to actually move more quickly on. We’re trying to understand can we get that model, the operations footprint to work outside of China and I don’t like having an in country solution for China, but I need an in country solution in India and I need an in country solution in the Middle East; that becomes costly in a cyclical business. So we're moving in a measured pace; I would say to you China is enormous in terms of this opportunity, we all know that. We're still in our analysis stage of within the market price point, we need a distribution model that is profitable throughout the cycle and we're thinking about that. Hopefully, that answers your question more fully.

Unidentified Analyst

In one of your slides you had your products surface condensers, steam ejectors, pump systems and heat transfers. Could you talk about where they were in 2012 and as you double your sales what do you think it would roughly be like by this product category?

Jim Lines

We're on the slide in your deck Bob around the product sales. As we think about going from where we are today $100 million to $200 million and more, we mentioned our traditional products what Alan’s going to have to build is $135 million to $150 million. Where is that growth going to come from? I mentioned that we left a lot of opportunity on the table last cycle, because we couldn't execute. We couldn't take on more ejector work. We couldn't take on more surface condenser work because as we couldn't execute it as a business.

The growth is going to come from more ejector systems, more surface condensers, more selective liquating vacuum pump packages and Bob has strategies on pushing the smaller, the short cycle segment of our business farther as well; where heat transfer products, some small ejectors system, so across our traditional portfolio of products we are going to see growth across all four of those, move from $70-ish million or $80-ish million to $135 million to $150 million. The big needle movers will be more ejector systems, more surface condensers and Bob has a very important initiative to push the smaller end of the business up quite a bit.

What’s important about that? That gives that bottom of the cycle protecting measure, because that small business is what’s cyclical. As we push that up, the more it is today that tends to be a very plus or minus 10% or 15% through a cycle, the big ones varies from 100 to index 30; that’s tough to manage. As Bob pushes that smaller end of the business up through his sales strategies and Alan through his execution strategies that dampens the impact of the next cycle; that’s very important if we didn’t articulate that part of our thought process strategically is to push the base up, the less cyclical base up, and dampen the impact of the cycles in future downturns.

Unidentified Analyst

(Question Inaudible)

Jim Lines

That’s a great question; it’s a question we get all the time. Right now, as we think about the Naval strategy and the budgets, what we are hearing from our contacts at the shipyards, which is our primary customer base and what we are reading through the congressional reports is the funding for the carriers has been decided that is going to be a 10 carrier fleet, not a nine carrier fleet. Let me just explain that, whether it’s 10 or nine, still is huge for us; whether they come every five or six years or six or seven years, it's a massive $35 million to $40 million opportunity per carrier, so that doesn’t change our thinking whether it was 10 or nine. The sub programs, with how the defense of our nation’s been perceived and importance of the sub program fitting into that, we're not identifying that there is risk around the sub programs for funding. If there is any risk, its timing year-to-year not whether they’re going to build subs or not.

Unidentified Analyst

With the navy work and the energy work through Energy Steel, is there a security clearance for your engineers, your welders, your workers, is there that and is there a process through the State Department or the DOD when you are doing work in China, I am assuming you are doing on maybe, their nuclear facilities?

Jim Lines

Sure. As it relates to the naval, the defense, Jeff, you want to speak to security process or Alan do you want to speak to it?

Jeff Glajch

Sure. With regard, the question was around security clearances on our naval business as well as security clearances if necessary for some of our commercial business outside of the U.S. With regard to the Navy, the carrier project that we have had a certain level of security clearance which we executed on that project. The submarines, because we will have access to additional information, classified information, require Graham and certain individuals who have access to that information to get additional security clearance first for the site and then for those individuals, each one of them will be working on it. We have the security clearances for the site as we need them. We have a process for those individuals who need access to that information and all those individuals have gotten a security clearance.

And then as we move forward, there may be some additional individuals in the manufacturing site that will require security clearance, so we are out ahead of that, it’s a process that you need to go through, takes a good amount of time, but we have been out ahead it the whole time and it is not post down and we have been as I said quite a bit of ahead. With regard to the commercial business and what we are required there, a lot of that is around IATA; Alan can answer that, he can probably answer it well; I can answer it too.

Again, we ensure that all of our the IATA requirements are followed within Graham and that’s really around any kind of shipment of material or anything that can be used for other uses beyond what they are prescribed to use. So we do follow all of those, we have processes in place here to ensure that and should there ever become an issue we believe that we followed all the steps and then some that we should.

Certainly, I’ve got a couple of questions over the web, one of the questions was that we had, this is really for if someone listening in, that we did not anywhere in here put up our guidance or reaffirm our guidance for fiscal ’13?

And we did that primarily, because we were focusing this activity, looking forward to many years looking forward not specifically ’13. But the answer is, yes we would reaffirm our guidance for fiscal ‘13 today that the same guidance that we put out in July, late July of 2012.

Second question, I think was around the CVN 79 and how much of that we are doing in this fiscal year, how much revenue we are going to recognize?

In our plan and in our guidance, we had a range and we are within that range and rather than getting into specifics of exactly how much, we expect to execute this fiscal year I guess what I would like to say is that we are continuing within the range that we expected and our guidance is not changing because of the how much production was done on CVN 79.

Unidentified Analyst

Thank you. Three questions if I may.

Jim Lines

One at a time.

Unidentified Analyst

One at a time, one for three different members of the executive team. First, Jim for you, given the breadth of opportunities, the resurgence in U.S. petrochemical interest and some of the filing opportunities, realizing of course that orders can shift from quarter-to-quarter, how quickly do you foresee average orders trending out from the roughly $22 million that we’ve seen recently; of course with the $30 million being able to stay in that?

And my second question is for Alan would be, with the reduction in lead times by 2.5 months, realizing it’s also a difficult question to answer, but how much would you attribute that to lower demand and what would you foresee for that at the peak of the next cycle, as far as potential times?

And then my third question for Bob would be, obviously taking on much more control of the direct sales force, how do you see that interplay with your current number of independent sales reps and just how much growth do you need to go through as far as growing the direct sales force to the $200 million kind of goal?

Jim Lines

Well, that’s been a very consistent question that we get on every conference call or when we meet with the investors in one-on-one meeting, and so we need to say that’s the catalyst that shows that we’re expanding in June ’14. What I can share with you is that the pipeline of bid activity is very strong, and so we say that for quite a while now. We had recent announcement today, Bob spoke to that of $7 million of orders, $7.5 million worth of orders; that’s added to an announcement earlier in the quarter of about $3 million worth of order, so give you an idea that in this quarter we've announced around kind of $10.5 million worth of new orders.

What we’re faced with right now I think is more of a timing; as we looked at coming into this quarter, actually as looked at coming into the first quarter we expected a far stronger quarter than we had; we loose the projects. Our customers are very cautious right now on making their final investment decisions. The projects aren’t being shelved, and still very positive, the orders are going to be placed; we think we're in a position to win new orders, but they carrying out of quarters that we thought that would be closed in and that’s a difference between having a $22 million quarter in some cases and $35 million, $40 million quarter in some cases, because some of these projects are pretty large.

Now the sad part of it, some of these projects we were actually bidding in 2008 are still here. They went on pause, then the downturn occurred and if I think of the oilsands projects we've been working on, we were bidding those in 2007 and 2008. We still are on tracking; we’re still pursing those; we’re hearing they are going to close relatively quickly, orders are going to be placed and that's what we face and that's what’s been difficult for us to really kneel down then start to have a booking’s run rate that’s moving towards $30 million.

What I do like about this is that pipeline of bid work is expanding; demand is not changing; it reminds me again of how we felt in 2003 and 2004 because that point it was the third or fourth year of a contraction in our markets and we had a very key leading indicator which was our bid activity. We knew the flood gates are going to open and it just was a matter of is it this quarter, is it four quarters out. I feel the same way today. And it is very possible in what we are seeing that we could have a $30 million book this quarter right in front of us, next quarter and the quarter after that, what we really need to see is sustained bookings activity.

I can tell you our quoting activity and the activity of our sales team is very high and all I hear from those guys is, get ready; Alan, better get ready because we are going to book it and those are the same remarks I heard from the sales teams back in 2003 and 2004 and they didn’t let us down, so they have their right to the ground and figure on the poles, they know more about what’s going on than I think many people do and I trust that read that our sales people have; that was not a great answer, but it’s the answer that I can give to you. Alan?

Alan Smith

So if I understand your question, it’s how much of the lead time is due to capacity maybe under utilization. Sure, so just to remind you guys, I think you know from our guidance, our backlog has been very high for a very long time. So from a plant perspective, we have not been under utilized; if I look at April, excuse me in April, I took the guys off overtime; they have been on overtime for 18 months and they have been working between 10% and 20% OT for those 18 months and they were tired. So it does not feel like an underutilized plant at all out there. From and engineering perspective, Jim talked about $30 million month to quarter, to give you a sense for how long it takes to process those orders. The office lead times, if I look at all the office processes is about four months to five months. So if sales has a light bookings quarter that doesn’t mean that operations is light. We're still trying to follow what was booked before. So, in fact Jim knows that I am a competitive person. So we have this side back going on. You remind me that you could book more in the last peak if I had capacity and my (inaudible) backed in, is I want to make you eat those words of this cycle. So we have a little competitive thing going on but we’ve not been in the situation we’ve been underutilized or below 100% capacity?

Bob Platt

Thank you, Alan. So the question of sales force and sales force [composition], what we're looking at when we talk about direct sales is not necessarily to place or push aside sales reps. So I think we have a hybrid model that we're going to be staying with certainly through the next cycle. We may be shifting the emphasis more, putting more direct sales into some of the areas we’ve identified geographically where we see opportunity and certainly what's being looked at to is maybe a more reordering of our customer base where direct would A accounts, reps might handle, the B or C accounts but it's not an either or. I think going forward, we certainly be looking at both, but the thing to bear in mind too is two X of sales does not mean two X of sales staff. We're looking at only very minimal, very specific, very discrete additions of feet on the street. We run a very flat organization within sales. We're not looking to build out the infrastructure or management levels. It's going to be very small, doubling sales, how much we would add to the sales organization is going to be a small fraction of 2X.

Jim Lines

We have a question from our webcast member. The question was around petrochem or ethylene expansion, the numbers Bob sighted of 25 to 30 million metric tonnes per year of additional capacity expected to come on stream over this cycle, what’s the geographic make up of that?

What I think is pretty exciting this cycle versus last cycle is that the cost of natural gas, there is a very strong likelihood of petrochem investments in the United States. We didn’t have that last time. When you go out in the plant you will see an ethylene plant condenser that’s for our US ethylene facility that’s upgrading. We will see an ethylene plant series of condensers that are for Saudi Arabia out in our plant. Geographically, we are expecting the ethylene opportunities to come from Asia, China, Southeast Asia, from the Middle East, from the US and to a degree from South America. This [stays] it was life cycle with the exception of the cycle we have in US.

Jeff Glajch

From a point in time looking backwards not forward, we are hiring plants in place to ensure that we build our staff in order to handle the future capacity needs that’s the sales team operating in.

Unidentified Analyst

First of all I really appreciate you are holding the meeting. It was I think it’s pretty interesting and it’s very interesting and I appreciate all the effort that went into it. Just a couple of questions may be you could talk about since I think that proxy is probably the most important document any company usually publishes may be you could talk for few minutes about alignment and I know there were some comments in here about using Franklin Covey to measure things and people generally get paid to, they do it they get paid to do it and I am wondering from your perspective these goals and objectives that you have set for the company maybe you could talk about the reflection, their reflection in terms of management compensation? And also your direct shareholdings, management shareholdings and what you would like to see over the next three years?

Jim Lines

The compensation committee of the Board of Directors has been very active with management to align the comp plan to strategically where they want to go. Together the board and management is a [lot] of step of what we need to do, how we are going to do it, what the key performance measures are with the current compensation plan, it is a high leverage to pay for performance. It’s a mix of performance vested restricted stock [buy] to meeting objectives three years forward. And those are granted annually and we project this management through our [strap] plan scenarios of where we will be on that income and profitability three years forward. We hit it or we don’t. The special target max, though there is an aspect to pay for performance there. On the annual incentive plan, we all pay for performance. We establish a budget on that income number and we also have a working capital metric and we hit that or we come below it or above it, we reward it accordingly.

So there is a clear alignment on pay for performance. But most importantly, there is, the comp plans have been moving into the strategic plan to compliment and support it and management and our compensation committee and the board as a whole worked together to device that within outside consultant. We use (inaudible) as our outside consultant, so when you look at the ISS evaluation of our comp plan, the variable compensation [VSR] there appears to be a clear alignment from that independent evaluator and I’ve been very pleased with the way the board has (inaudible) itself in the strategy that is the development and then ensuring the compensation plan moving into that, and as part of our performance management and policy deployment we then push that down to our teams.

The teams below Bob, Alan, Joe, Jeff they are linked to that. With either their wig, lively important goal, we also have what’s called smart goals Specific Measurable Achievable Relevant and Time based that connects to growth, profitability or strategic objectives. So the current company from I would say front to back is connected to where we are going and how we need to get there this year plus three years.

Unidentified Analyst

I think that's important point and you wouldn’t know it from the turnout at this meeting but this is supposedly a pretty difficult environment for microcap companies in terms of from a regulatory perspective I would think being in New York state, being in a manufacturing business represent its own set of challenges and I am just curious. I don't necessarily want to ask the question have you thought about sort of another route for this company which is possibly taking a private or you look at the opportunities, you look at the balance sheet, you look at all the stuff and I don't know what your public company costs are for example your expenses. But what are the challenges that unique challenges that you guys face being as small as you are in an environment where the markets in general at the moment are really sort of focused on larger companies?

Jim Lines

That's a great question. So you weren’t going to ask the question but you did anyways? Here is how we think about it. I think about it and I believe our management team a lot. It all starts with what must we do strategically to serve our customers. We are not going to we haven’t managed a quarter just to manage a quarter, we are not going to manage a year simply to post stellar performance, we know how to do that.

In any given year we could have improved financial performance but we have a vision on where we are taking this business and it’s not about what we are going to do in 2013, we are going to do across the cycle, across several cycles and we think long-term. We don’t make short-term decisions because we are a public company.

That may sound (inaudible) obviously there is pressure but I can only share with you my part centre around strategically how do we meet demand in the marketplace that our customers are creating for us, how do we beat our competition, how do we ensure that we are doing the right things for our employees with our sales strategies for investments in Alan’s area, to fulfill a multi-year strategy not a point in time best financial performance.

So far we haven’t had this is going to be my point of view disappoint in our financial performance with that type of thinking. We are a public company obviously that I can just say we don’t think quarter-by-quarter, we don’t think year-by-year. We think of vision, mission, specific actions to fulfill that mission and we believe as long as we are making the right calls along the way, the financial performance falls out appropriately.

Unidentified Analyst

I guess my question is either for Joe or Alan or may be a combination of Joe and Alan there is lot of discussion about nuclear power, nuclear propulsion, nuclear certification. Usually in those circumstances you need to be designed in. You seem to feel that you have the opportunity to gain additional content even though a lot of these programs were designed maybe years, decades, possibly decades ago. How do you go about breaking into those markets and are you able to do that yourself or is that going to require a teaming partner that can you just maybe explain that process?

Alan Smith

Certainly on the navy side, for the Virginia (inaudible), there is a designed incumbent but what's unique to the navy is they issue build-to-print drawings. So, say for instance, on the new [hire] replacement class, if we get the detailed engineering, the navy owns those drawings and design. So at their option, they could replace us with another vendor if they chose. We're at a unique situation where the incumbent, I believe is stumbling a little bit and we're shining on the carrier work. So we're in a point in time where I believe we're going to leverage, our strength and then (inaudible) in order to gain access into a kind of close market.

The incumbent is DC Fabricators. On nuclear plant, I think everyone speak for Joe. I think he is running into same thing I am is that the Lapeer plant is basically a build-to-print plant and going forward, there are some synergies between Joe’s plant and our plant. We have a lot more engineering capacity than Joe’s plant has. So we have the opportunity to use our engineering expertise to help him secure some orders and then anything over 40 tonnes because they have lifting capacity issues, he would bring into Batavia. So we can be a manufacturing arm for Joe going forward.

Jim Lines

Just a little further on the power generation side, the nuclear side while it is build-to-print for Energy Steel’s traditional business what we bought as we think about the AP1000 projects that we have orders on now for the four reactors in North America. Had we owned Energy Steel before we did, we could have gotten some of the instant order work but that way for procurement had already passed us by. While they believe they are going to build [cookie] cutter AP1000 plants designed at once and built it many times. An AP1000 in the Southeast has different criteria than an AP1000 in the Northeast has different criteria than AP1000 that’s being built in China because they are designed specifically around the environmental and the climate in that particular area.

So there is opportunity in the new construction or our engineering specialty on the process that he transfer mechanical design side on the existing utilities where Energy Steel primarily is, there is an aspect there that’s important which is why we bought the business as well. So another criteria that we had in our evaluation, those utilities have a design life of 30 years or 40 years. If you have life extension or a power upgrade of that utility, there is new engineering being done. We want to have the heat exchanger perform more heat rejection. We want to upgrade the metallurgy of the process vessel that’s where we can come in with a Batavia based know how that Joe needs to build into his business or we can elevate our margin potential because we are adding engineering capability rather than a build-to-print response.

So that’s in our vision of where we are taking that business. It’s not built in a day but there is a lot of opportunity for ETO type solutions even in the existing utilities around life extension or power upgrades and for the new construction because they are all uniquely designed for that geographic location.

We have one more question.

Unidentified Analyst

Not just a carrier these limits for Batavia, America (inaudible) carrier and then also micro magnetic (inaudible), are any of these transformer technologies available to expand your condenser (inaudible)?

Alan Smith

What our other product opportunities are there for us in the Navy? We haven’t seen along the lines which you described as coming to us. What we are seeing in the navy request of us are we are well (inaudible) for us. They will have a supplier who made a specific valve and that supplier no longer can --- is in business anymore. Graham can you build this for us and it’s along the lines of what is our netting more welding and more machinery as what we are seeing.

Jim Lines

There is opportunity outside of the navy. We focused on the navy. Our strategy has always been go in early, win, own that opportunity, great job. but around strategic defense of the nation there is other opportunities, there is space based laser technology, land based laser technology in between space and land based laser technology that requires vacuum technology to evaluate the performance of those apparatuses. We were involved in that work back in the late 90s, it didn’t go very far but it still available as opportunity around the strategy defense initiative for our nation. So there is more than we can do with our technologies that we currently have around government DoD type activity.

I want to make sure you kick the tires and see our plant and I would like to --- please ask your questions of anyone who is your tour guide?

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