Karen L. Howard - IR, Kei Advisors LLC James R. Lines - President and CEO Jeffrey F. Glajch - VP, Finance and Administration and CFO.

Joe Mondillo - Sidoti & Company Christopher Mccampbell - Hilltop Securities Peter Rabover - Artko Capital Timothy Curro - Value Holdings Bill Baldwin - Baldwin Anthony Securities Paul Dircks - William Blair John Bair - Ascend Wealth Advisors.

Greetings and welcome to the Graham Corporation Fourth Quarter Fiscal Year 2016 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Karen Howard, Investor Relations for Graham. Thank you. Please go ahead..

Thank you, Brenda, and good morning everyone. Thank you for joining us to discuss our results for the fiscal 2016 fourth quarter and full year. We certainly appreciate your time today. You should have a copy of the news release that crossed the wire this morning detailing Graham's results.

We also have slides associated with a commentary that we are providing here today. If you don't have the release or the slides, you can find them at the Company's Web-site at www.graham-mfg.com. On the call with me today are Jim Lines, our President and Chief Executive Officer, and Jeff Glajch, our Chief Financial Officer.

Jim and Jeff will review the results for the quarter and fiscal year as well as our outlook. We will then open the lines for Q&A. As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A.

These statements apply to future events and are subject to risks and uncertainties as well as other factors which could cause actual results to differ materially from what is stated on the call.

These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as with other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on our Web-site or at www.sec.gov. And with that, I am going to turn the call over to Jim to begin.

Jim?.

Thank you, Karen, and thank you everyone for joining our fourth quarter results conference call. I will begin my prepared remarks starting at Slide 3. For the full year, our cash increased $5 million to $65 million after returning nearly $13 million to our shareholders.

Backlog on March 31 was $108 million, down $5.8 million from the same time last year. This reduction to backlog is largely due to $12 million in cancellations that occurred during the year as customers stopped certain projects because of uncertainty in oil refining and oilsands markets.

Revenue in the fourth quarter was $22.3 million, and for the full year revenue was $90 million. Revenue was impacted by weak market conditions within our oil refining and chemical/petrochemical sectors. We also experienced a decline in short cycle sales along with lower capital spares and replacements to oil refining customers.

Net income in the fourth quarter was $500,000; and for the full year, income was $6.1 million or $0.61 per share. Please turn to Slide 4. The chart on this slide illustrates the sharpness and abruptness of the disruption in the energy markets over the past 18 months.

Year-over-year comparison is markedly off due to dramatic reductions in sales to the oil refining and chemical/petrochemical markets. As percentages of overall sales, refining and chemical/petrochemical sales are within customary ranges.

However, in absolute terms, they are off considerably with refining down about one-third from a year earlier and chemical/petrochemical down about one-half from a year earlier. Domestic and international sales split is typical with domestic sales at 60% and international at 40%. Sales to power markets were up.

That was due to conversion of a large geothermal project for Southeast Asia. Jeff, I am passing the call over to you to review detailed financial information.

Jeff?.

Thank you, Jim, and good morning, everyone. As Jim mentioned, the fourth quarter sales were $22.3 million or down 40% compared with $37.4 million in last year's very strong fourth quarter. The sales split was 60% domestic, 40% international compared to last year's fourth quarter which was 64% domestic, 36% international.

Gross margin was 20.4%, down from 34.1% last year. EBITDA was 5% for Q4, down from 23% last year. Fourth quarter net income and EPS were $500,000 or $0.05 per share, compared with $4.2 million or $0.41 last year. On Slide 7, looking at the full year, sales were down one-third to $90 million.

Sales were 63% domestic and 37% international compared with very similar to last year which was 64% domestic and 36% international. Gross profit dollars were $23.3 million, down from $41.8 million last year due to lower volume and lower gross margin. Gross margin was down to 25.8% from 30.9% last year.

SG&A was down $1.9 million or approximately 10% to $16.6 million, down from $18.5 million last year. EBITDA margin for the full year was 12.1%, down from 18.9% last year, while net income was $6.1 million or $0.61 per share, compared with last year at $1.45 EPS.

On to Slide 8, as Jim mentioned, we returned nearly $13 million to shareholders in fiscal 2016, a combination of repurchasing $9.4 million worth of shares or approximately 5% of all outstanding shares as well as paying $3.3 million in dividends.

In addition, our cash position for the year, despite the $13 million returned to shareholders still increased by nearly $5 million to $65.1 million.

As we discussed throughout the year, our accounts receivable and unbilled revenue at the end of last fiscal year was quite high and we have expected this to convert to cash and that occurred over the first three quarters of the year.

The reduction in cash in the fourth quarter was expected and primarily due to the repurchase of shares, and our year-end cash position was where we expected it would be given those share repurchases. Capital spending for the year was $1.2 million, down from $5.3 million in fiscal 2015.

The higher level of capital in fiscal 2015 included the investments in Batavia to support our U.S. Navy activity. We continue to look to utilize our strong balance sheet with $65 million worth of cash and no bank debt to opportunistically identify acquisitions.

In this regard, we have hired a Director of Business Development who will work with Jim and I to further drive our acquisition efforts.

He will also assist Graham in looking at organic growth opportunities, including but not limited to market expansions, sales partnerships, and other avenues to take advantage of our strong brand and reputation in our key markets. Jim will complete our presentation and comment on our view for fiscal year 2017..

Thank you, Jeff. I am now referring to Slide 10. Like the sales slide discussed previously, here too the severity of the energy market downturn is evident in order rates. Orders for fiscal 2016 were $84 million. Net orders reflect the impact of energy market cancellations from backlog.

In the past 12 months, we have had $12 million of orders cancelled and $17 million of orders cancelled during the past five quarters. All were from the oil refining and oilsands markets. This is a particularly difficult downturn.

They always feel brutal when in the middle of the downturn; however, this current downturn is more severe than the 2008-2009 downturn and the 1997-1998 downturn. It does now look as though it will be worse than the 1981-1982 downturn. We aren't sitting back waiting for the eventual recovery.

We will fight aggressively for every order and defend vigorously our market share. We are also deploying sales resources into the plants. Customers delayed maintenance and turnaround spending over the past 12 to 18 months. We feel spending at the plant level has to come and cannot risk unscheduled shutdowns or safety issues.

Our early involvement will be important to capitalizing on revamp, turnaround, and ordinary maintenance spending from the refining and chemical sectors. Market diversification actions certainly have helped on a consolidated basis deal with the energy sector pullback.

We continue to experience improvement in our pipeline of opportunities and orders for the nuclear utility market. Orders are up about 50% comparing fiscal 2015 to fiscal 2016 for the nuclear utility market. Also strategies to secure market share within the U.S. Navy nuclear propulsion program have delivered strong results.

We continue to actively bid significant opportunities with the U.S. Navy, some of which are expected to close in fiscal 2017. Our bid pipeline has contracted approximately 20%. Trailing 12-month quotation activity is between $600 million and $800 million, rather than $800 million to $1 billion, as it had been in our previous past few fiscal years.

Also, procurement decisions have slowed. Our bid pipeline size and quality has remained a strong leading indicator. We will continue to monitor our pipeline closely to be ready for the eventual recovery within energy markets. Please move on to Slide 11. The importance of diversification strategies is shown in the top pie chart.

Naval and nuclear market backlog is approximately 60% of total backlog. These are markets or customers we did not serve five years ago. This has provided backlog stability and will result in reduced financial volatility over time. Our backlog has a longer conversion duration than prior to five years ago when 85% to 90% would convert over 12 months.

We project current backlog will have 45% to 50% convert within 12 months; 10% to 20%, 12 to 24 months; and the remainder converting two years out or farther. I am on Slide 12. We are operating in a challenging period with a great deal of uncertainty surrounding our energy markets.

We aren't intending to play defense or simply weather this downturn waiting for the eventual recovery. What we do now and during the cycle bottom sets the stage for future growth. We aren't willing to trade immediate earnings or compromising capabilities, capacity and growth potential coming out of the downturn.

We will structure costs with long-term growth as our top priority while managing to an acceptable profit level considering the reality of where we are in the cycle. We cannot meaningfully affect demand for our products or control external market forces.

We do have clear focus on those aspects of our business that are within our control, such as managing order opportunities and pricing to secure work that is available to leverage our capacity and the investments we have put into our businesses; improving our customer value drivers including our selling processes, order management processes, process and product quality, and overall service provided to customers.

We are also focused on developing our workforce and unlocking their capabilities to drive productivity, quality, lead time, safety and customer service improvement. Lastly, we are committed to finding opportunities to deploy our capital to expand and diversify revenue opportunities.

We are experiencing greater receptiveness of owners to engage in M&A discussions with us. We clearly are not on solid footing for developing guidance or near-term projections due to much uncertainty within the energy markets. There will be an unevenness to quarterly revenue and income across fiscal 2017.

We have developed a range of potential outcomes bounded by revenue between $80 million to $95 million, gross margin between 24% to 26%, SG&A between $17.5 million and $18.5 million, and we project our effective tax rate is between 32% and 33%. I ask that we now open the line for questions. Thank you..

[Operator Instructions] Our first question comes from the line of Joe Mondillo with Sidoti & Company. Please go ahead with your question..

So first I was wondering if you could provide some color on what you're hearing in terms of your oil refining customers, and I know the downstream part of the sector is doing a whole lot better than the other side of the sector, and so it seems like that side is actually doing quite well.

However, I know the integrated companies are sort of slashing CapEx across the board. But having said that, you would think, I mean I would think at least that the downstream given the solid fundamentals that they still have would actually come back sooner than the other side and that maybe you see some projects that are being put on hold.

So I'm just wondering, what's your sort of outlook, what you're seeing there, do you see projects that are potentially just being put on hold and that you could see orders start to recover later this year, what are your general thoughts on your oil refining customers?.

It's a good question, Joe, and this is Jim. I'm going to answer this across our segmentation of the refining customer base. If we think of new capacity, which largely comes out of the state-owned refiners, we are not seeing much in our bid pipeline around new capacity in the immediate term.

We do feel of course that new capacity investments are necessary to satisfy the underlying demand. However, we don't expect much new capacity from an order point of view over the next several quarters to perhaps four or five quarters.

What is encouraging is many of our refining customers recognize during this period of time, it's about asset utilization and leveraging the infrastructure that they have.

Therefore, we are having some positive discussions about investments that might be made, which we categorize as revamps and capital spares, to improve the operating economics of their existing assets. We do think that will take place. We did see a pullback in that area past 12 to 18 months.

That was a discretionary decision we felt to a large extent around maintenance and capital spares. We are expecting that to begin to pick up.

And those can be meaningful, those can be several hundred thousand dollars to a couple of million dollar type projects, and we feel as strongly about that such that we have deployed our resources, our sales resources, and customer facing resources toward the plant, to get into the plant level to make sure we have IDed those opportunities early and have a longer period of time of investing our resources and knowledge base toward those opportunities such that we are assured of capitalizing on those when they do materialize.

So, as I bifurcate our opportunities from responding between new capacity which we are not seeing much optimism about in the immediate term and compare that to investments in existing assets, we are more positive about investing in existing assets.

And if we segment our refining bookings or sales over a decade period, roughly two-thirds of our sales are categorized as revamps or capital spares or maintenance spares and about one-third is for new capacity. So I think that frames the sector fairly well for you..

Okay, that's helpful.

So when we look back at 2014-2015, what was sort of the dynamic between new capacity versus revamp?.

It was very sparse on the new capacity and very large on what we call revamp and capital spares. You may have recalled conversations that we had on prior calls about metallurgical upgrades or revamps to improve the run intervals between scheduled turnarounds.

What's most important to a refiner is onstream, and they are trying to push the duration of the scheduled turnarounds which had been historically four-year intervals to six-years and eight-year intervals, but doing that by enhancing the metallurgy or upgrading the metallurgy and the equipment in their facilities, so we saw a very nice burst of business in 2014 and 2015 around that.

As the economics changed with the drop in crude oil, we saw some of that pull back, but we do remain encouraged about that behavior and expect it to come back to some extent as we get into 2017..

Okay. And then on the chemical/petrochem side of things, that has also certainly pulled back a whole lot. The backlog is near the low for the year at the end of 2016.

I'm a little surprised just given some of the fertilizer in the agriculture sector and elsewhere, but obviously the industrial sector overall has been struggling a lot, what is your general outlook on that part of your business?.

We're not as surprised about where that market is right now. You might recall, I guess it was three years ago, mid 2013 when there was a substantial surge of chemical/petrochemical orders that we had secured that were for North American ethylene plants, fertilizer plants.

That was a massive wave of new construction, and we enjoyed a very high success rate there. We saw that begin to taper off about 18 to 24 months ago, and it has stayed in that pulled-back range. We're not surprised by that because so much new capacity was being built out.

What we are seeing, and these are smaller projects but they are very important, they also drive longer term aftermarket opportunities because of the type of sale it is and the type of product that it is, we are seeing now the eventual – eventually they would get to the downstream value-add or derivative plants, petrochemical plants that are downstream of the ethylene plant as an example or a methanol plant, and those orders are coming in.

Now those orders can be between $0.25 million and $2 million depending upon the particular process. So we are seeing some of that. That's coming into our backlog again. From a higher-level point of view, we're seeing the North American petchem market play out as we would have envisioned it would play out, notwithstanding what's happened with oil.

There was just so much capacity that was coming on six, seven or eight ethylene plants, four or five fertilizer plants in North America. That's an immense amount of investment. We capitalized on that. We had a fantastic success rate. However, that did not have any endurance really beyond the first burst of business.

We do expect it to be followed up by a second wave. We just haven't fully identified when that second wave will come, a second wave of new capacity..

Right. So, Jim, this is I believe the first conference call where you sort of cited the bid pipeline is down 20% and maybe had more of your commentary regarding potentially the downturn worse than 1980-1981. Certainly you're expressing a little more certain realism about this downturn and how severe it is.

Has anything really changed though over the last six to nine months? It seems like your revenue has been fairly stable. The gross margin has been fairly stable.

Has anything changed over the last quarter to make you feel maybe a little more cautious or concerned going forward?.

The lead measure that we place a great deal of confidence and directionality on is our bid pipeline, and we saw it begin to contract appreciably relatively quickly here, not in the last though one or two quarters.

And also as we look at the quality of our pipeline, you might recall that we have spoken about there's three or four, four sales stages, in how our large capital projects move through the sales process; concept, FEED, EPC bid and then an RFQ for purchase.

Not only have we seen the bid pipeline contract a little bit, we've also seen projects disband, owners or sponsors are stopping the projects, and we've seen the projects move not to the right toward procurement but move or stay in the FEED or pre-EPC stage.

So we have looked at the directionality of our pipeline and the size of our pipeline and have always felt that's been our most reliable leading indicator, and that gave us some more confidence to speak more definitively about how we feel this downturn will rollout. It was not something we could've done six months ago or nine months ago.

It was too early..

Okay.

So that was over the last say three to five-month period would you say or is it shorter than that?.

Yes, I would say, as I look at some statistics that our team has put in front of me, it looks like the inflection point was around November-December timeframe..

Okay.

And then regarding this $6.4 million order that was on hold, what are your general thoughts on that, could that be cancelled or what are your thoughts on that?.

These are there's two orders. Both of them are for Latin American state-owned refiners. One of the orders actually is the remaining half of a larger order which was somewhere around $8 million to $10 million. They have chosen to cancel half and proceed forward with the second half. However, we haven't been able to clearly define their schedule.

Is there risk? There certainly can be some risk. However, we've gone through their project evaluation shelf, the projects they didn't want to proceed with, and we are waiting on a full release to get into production and move through revenue conversion on that.

For the other order, that's a bit of around our credit risk profile and we wanted to make sure that cash flow is reliable, and the way we are operating with this particular segment of the Latin American refining base is we have demanded cash before we commit costs. So we are waiting on the cash flow to come in and we can't predict that timing.

That's how we are managing the credit risk around that particular customer. We don't want to get out ahead of ourselves on extending credit and it's an order that we've had for a bit of time but we won't really move forward until there is a progress payment made to us..

Okay, great. I'll hop back in queue for now. Thanks a lot. Appreciate it..

Our next question comes from the line of Chris Mccampbell with Hilltop Securities. Please go ahead with your question..

I wanted to first say that obviously you've all done an exceptional job in managing through this cycle and really through a number of them, but have we reached a point where employees and shareholders would be better served by being part of a larger company through an auction process, and if not, what would drive that decision?.

This is Jim. My view is, no. Clearly we are in a contraction. There is a contraction all around the peers that are serving the energy sector.

As we look at our strategies for growth, the naval strategy, the traction we have there, the diversification strategy into nuclear and how that's beginning to have traction, and also the deployment of capital strategies that we have and the conversations that we are having, the M&A targets, management and the Board's firm belief is, the best value creation is to stick to the strategy, keep a long-term view and execute to the strategy, and that will deliver the value creation that's necessary.

We don't feel now is the time to lose our independence and drop our strategy..

Okay, thanks..

Our next question comes from the line of Peter Rabover with Artko Capital. Please go ahead with your question..

Maybe just to follow-up on the last one, I mean if somebody came along and gave you a pretty good offer, would you guys consider it?.

Of course. That's our fiduciary responsibility. Certainly we have had discussions among management and the Board that if an offer were to be made, it would be given due consideration. That's our responsibility.

We are not narrow-minded around value creation for the shareholder short-term and long-term, and if there was a bona fide legitimate offer that created value more quickly than our strategy, it would be given due consideration, I will assure you of that..

Great, thanks. Wanted to maybe follow-up, I know in the past you've talked about that the path to kind of stability is stability of oil prices.

What's the new I guess metric to look for?.

For the stability of oil prices? I didn't mean to laugh, that's just a difficult one for us to – it's a constant question that we are testing. We don't have a way to definitively project where oil is going.

What we do view and what our thesis is and remains is the underlying drivers that will create the need for new capacity is population growth, rising urbanization and growing middle class globally, and refining investment and chemical investments must be made over time. Are we in a cyclical downturn? Yes.

Is underlying demand expanding? We certainly believe so. The view that I have and our team has which follows historical response that occurred in the pullback from 1999 through 2004 is, the longer the contraction and the lack of investment in new capacity, the stronger the wave of investment that would be in front of us will be.

And if this is a two, three or four year duration pullback, I'm not making that call, but I'm saying by comparison, and it's like what happened the last downturn which spanned four or five years of underinvestment, that wave of investment, the super cycle, the mega investments that occurred, was just extraordinary and we saw that forming in our bid pipeline about two years before it materialized, now I believe if this is a long-duration, it will play out in a similar manner.

This time though we will be ready because we have made the investments in people, we have made the investments in infrastructure, we've made the investments in quality and process change, we'll be more ready this time than we were last time..

Peter, this is Jeff. I've just got one follow-up to that. During the time period that we're looking at, obviously continuing our investments in our core businesses, our historic businesses, we are also looking at growth in our business on the Navy side and the nuclear side.

So different from Graham historically, we've got some other growth engines that we are going after right now and that we expect to see growth. We already have the Navy opportunities in our backlog and we expect as we get into fiscal year 2018 that we will see growth there.

And on the nuclear side, as Jim mentioned, we've seen a pickup in orders on the nuclear business, so we expect to see growth for the nuclear business. So we are not just sitting waiting for the refining market, petrochem markets to eventually recover, we're going after some other markets also..

Okay. First of all, thanks for all the color. You guys have just said on the past calls that the path to growth is less volatility of oil prices from your customers. And so that's why I followed up on that.

But I guess what would you say guidepost still for us as outside investors to look at, continued overcapacity or I guess capacity utilization on the refiner side, like how long can they keep running at whatever they are running at?.

They are running at a very high utilization and that certainly is something that they will be looking at and it puts some strain in the capacity if there are unscheduled shutdowns or plant turnarounds that tightens up the supply when they are already running at 90 plus percent utilization.

Again we feel – so what are the lead measures? We'll be as transparent as we can on the transformation of our bid pipeline as we go forward. That's always been our best lead measure.

What I would look at also, what we do look at as a management lead measure is how is our customer base changing, meaning are the EPCs starting to build their backlogs, are they beginning to win the FEED and concept work or the EPC work. Once they win it, then it moves into the supply chain, us as an example.

So that's also a nice lead measure that's more readily available to someone like yourself and our bid pipeline, if you will. But we will be openly discussing that on subsequent conference calls.

And also the financial health of the state-owned refiners and the major integrated refiners with E&P operations and what are they saying, what their capital plans are.

If we look at a macro of the composite of investment by the energy integrated companies, year-over-year successive decline in capital spending on the order of one-third last year and projecting another one-third this year, that's a pretty meaningful reduction in capital investment in new capacity, plant maintenance, revamps.

I would look for the directionality of their capital investment plans to hit an inflection point and move up. That would also be a lead measure that might happen ahead of our bid pipeline or ahead of the EPCs. Here's our thesis honestly. Notwithstanding where oil is long-term, whether oil is at $40, $30, $50, investment must be made.

And if we think about, and this is what we do think about, if we reflect back upon where oil was in 2000 through 2003, it was $25 a barrel, and at that price point a massive mega-cycle set up of infrastructure buildout that was like what we hadn't seen at any time before that. So that was where it all began.

Obviously, stronger oil price might advance that more quickly. However, supply and demand has to be satisfied we feel long-term and the underlying demand is increasing and therefore new capacity and investments in existing assets must come. There's not a disruptive technology that's displacing crude oil..

Great. I really appreciate all the color. I'll hop off now but keep weathering the downturn..

Our next question comes from the line of Tim Curro with Value Holdings. Please go ahead with your question..

I'm new to analyzing the Company, so forgive me. You guided $18 million on SG&A, and that's about the level when your revenue was about 50% higher than what you're guiding to.

Can you explain that?.

Sure. I'm sorry, say that again.

50% higher?.

Yes, in 2014 you had $18.5 million in SG&A and $135 million in revenue. Now you're guiding to increased SG&A from $16.5 million to $18 million but your revenue is going to be $90 million or thereabout, $45 million lower than in 2014..

Sure. Some of that is tied to variable compensation directly correlated to sales, which is employee and independent representative commissions and how that sales mix might vary past cycle to what we are projecting going forward.

And then also there was a large component in this past fiscal year tied to variable compensation, I'll call it pay-for-performance, and the performance metrics weren't met. So therefore that aspect of expense contracted appreciably.

And whether or not the pay-for-performance is met in fiscal 2017 or 2018, that would have to be seen at the year close, but there was a large contraction in variable expense tied to revenue and pay-for-performance..

All right, thank you..

Our next question is coming from the line of Bill Baldwin with Baldwin Anthony Securities. Please go ahead with your question..

Jim, with the lifting of the export ban and the narrowing of the spreads now between Brent and WTI and so forth, is that going to change the competitive dynamics between our domestic refineries and say refineries in Europe and Latin America, and could that mean that perhaps there's just going to be more [indiscernible] longer-term coming out of the international market for that?.

That is a possible consequence of lifting of the export ban, and rather than seeding the domestic refineries, the crude oil will seed international refineries. We have a rich installed base around the world. We look at it this way.

If the new capacity is being sighted in the Middle East or South America or in certain locations in Asia or also in North America, we have shown an ability to capture a strong percentage of that share.

However, I do feel the consequence of what's occurred with policy change is it potentially will change the investments that were to be made in the North American refinery assets..

Could you repeat that last statement? I missed that.

What was that again about changing the investment in North America?.

I think it will have an effect of reducing the investments being made in North American refining assets..

Okay.

Do you perceive the Gulf Coast refineries continuing to be primarily dependent on heavy crudes rather than using more the light crude than on the Permian and Eagle Ford, are they going to continue to import the heavy crudes out of Mexico and elsewhere or do you see them making investments perhaps to be able to process more of the lighter crudes? I know Valero has done some investment.

Do you see some other folks perhaps doing that or not?.

Sure.

It's an interesting dynamic that they are faced with because they just went through roughly a two decade period of time where they have invested in their infrastructure to process the heavy and sour crudes coming out of South America or Mexico, which actually aren't ideal for processing the sweeter light crudes or the oilsands – I'm sorry, the shale oil type crudes.

And there is a blending dynamic of when they are trying to blend that shale oil with their conventional sweet or sour crudes that is also undesirable.

I do feel the industry is trying to figure all this out in terms of how to handle the available light crudes now coming from the shale basins which are very light, very sweet, easier to process, they produce a different slate of outputs than heavier crudes, and I think the industry is still trying to sort out the long-term implications of that.

Our thesis would be, CapEx will come from it..

And that would come into some of your product category, right?.

Right. We're typically on the front-end of the refinery where they start to separate the crude oil into different constituents, it's called the distillation process, that's where we work, and they will configure that to efficiently process the crude slate.

If the crude slate is heavy, sour, sweet, light or shale oil based, they will get that process to be as efficient and economic as possible..

Okay.

And lastly, Jim, do you have any insights as to what the dynamics might be or what's going on in China refinery market?.

We do. There was a very significant buildout in refining capacity, rough numbers, from 2005 through 2012 or 2013, and it was about a 50% increase in refining capacity that was built out. We enjoyed a very strong share of that when that was happening.

However, under the current policy and the current growth projections for China, we have seen a three year I'll call it a stoppage, it's more extreme than a contraction, a stoppage of the capacity investment.

The dynamic at play, and we're trying to understand how it plays out though, is that firstly, that wave of investment from 2005 through 2012 was state owned driven, PetroChina, Sinopec and CNOOC. Those companies right now aren't necessarily due to government constraints investing in new capacity.

What we're seeing now though is independent and private refiners permitted by the government to build new refineries. How fast that goes is yet to be seen but we see a fair amount of bid activity from what we are calling non-state-owned refiners in China. Now we've been bidding these for a couple of years now. They haven't moved to a conclusion.

It's been a tough three years in China to predict timing of projects closing, but there has been a dramatic change. And if we think about 2005 through 2012 compared to 2013 through 2016, it's a markedly different timeframe..

Does China still import a lot of refined product or are they self-sufficient in that now they are all internal? That 50% increase in capacity, are they self-sufficient internally and do they run at pretty high utilization with those refinery assets at this point?.

I believe they are still an import nation and their refineries were built not with a Western orientation. The good refineries, however, they don't have the complexity of a Western refiner. They also don't have the efficiency that you would typically see in a Western refinery.

What we think is going to be occurring will be investments in the existing refining infrastructure by Sinopec, PetroChina and CNOOC to leverage those existing refineries to produce higher-quality fuels, reduce environmental footprint and be more energy efficient.

So while it won't necessarily be new capacity in a classic sense, we do expect to see capital deployed into the existing refining base by those state-owned refiners. We don't think that happens in 2017, our calendar 2016 or 2017, but we expect that to be coming, and that's what's being telegraphed by those state owned refiners..

Okay. So right now they produce what, a higher percentage of the low end of the barrel than a typical U.S.

refiner, a lot more distillate fuel type of thing?.

They don't necessarily have the – they've not invested in conversion technology, hydrocrackers, hydrotreaters, desulfurization. We call that bottom of the barrel conversion to get more lift out of the barrel to create the transportation fuels, the value products.

So they have a refining complex that isn't efficiently processing a barrel of oil and they can do more..

Thank you very much..

Our next question comes from the line of Paul Dircks with William Blair. Please go ahead with your question..

So a few questions from me. First one, on the Navy strategy, we saw the recent contract for initial advance procurement efforts on the CVN-80.

Is the timing of this contract within the industry, is that in line with how you guys have been thinking about your potential timeframe for an award on the carrier program?.

To be candid, Paul, we thought it would be closed and the vendor selected by now for the components that we are providing. However, not too dissimilar to CVN-79, there have been several bid extensions and refreshes of the bid and we're in another refresh right now.

Our view is, we feel that CVN order for what we are bidding, someone will be awarded that business in fiscal 2017, and we're going after it and we feel we have a good shot to secure it and the timing is fiscal 2017 as best we can judge. But we've gone through two bid extensions now and we're into our third..

So did you guys had similar bid extensions when going after the CVN-79 in the past?.

Yes, we did, correct..

Okay, thank you. That's helpful. Now shifting to the power market where you guys have been investing in personnel and executing new growth strategies there. Obviously that market had strong backlog growth in fiscal 2016, particularly here in the back half of the fiscal year.

Should we have the expectation that orders could continue around the kind of level that you guys have been able to book over the last couple of quarters into fiscal 2017, or is this going to be more of a longer-term order growth scenario that we should expect from the power market?.

I'll answer it two ways. I have that expectation that the team delivers those bookings. However, I think there will be some ebb and flow to it just because of project timing and the lumpiness of how that market releases orders.

What I can be encouraged by and what we are encouraged by is the pipeline of opportunities continues to expand and be more diverse and our customer facing strategies are working. And so we do expect over a longer period of time to see backlog and bookings grow. It won't necessarily be sequential quarter to quarter..

Understood. That's helpful. Now switching back to your legacy markets, obviously you've touched upon the difficulty of this downturn essentially could be the worst in 30 years.

How would you characterize your ability thus far to defend share in North America and how would you characterize the current competitive dynamics, have they worsened since – you mentioned your bid pipeline beginning to contract at the very end of calendar 2015, would you say that competitive dynamics have held steady since that point or have they continued to worsen over the course of calendar 2016?.

We think it's been stable. Anecdotally we can point to some very harsh competitive situations where we stepped in and held share or where we have lost. We don't necessarily overreact to more anecdotal type situations, although they are real, they do occur. I look at it on average.

I don't, our sales folks and business leaders don't feel the competitive dynamics have materially changed over the last three, four, five quarters..

Understood.

Given the nature of the downturn and how difficult competitive dynamics are, have you internally considered taking additional cost cuts and/or has the nature of this downturn affected or changed your focus for potential acquisition opportunities?.

We are constantly looking at our cost basis aligned with our long strong strategies. In the prepared remarks we made a comment that our vision and our direction is more long-term oriented, recognizing of course we have to deal with the realities of this downturn. We are looking at our cost always.

However, we are more inclined to trade some near-term earnings, deal with the cycle bottom with some compromise on financial performance to have the capacity and the potential to grow quickly with our strategies that are working extraordinarily well, which is the naval strategy, the nuclear strategy, and to be in a position to capitalize and not limp into a recovery from the energy markets.

In our historic past, we limped into a recovery and it took us a couple of years to tool up then. We don't want to miss that.

We think from a share point of view – I'm sorry, market price point of view, we can garner valuation expansion on our multiple by being able to grow more quickly through the diversification strategies that we invested a considerable amount of money in and also being ready to capitalize on the eventual recovery.

Having said all that, of course we'll watch the realities of the near-term financial performance of the business, but our sights are set on executing the strategy and longer-term value creation, not managing quarter to quarter.

You had a second question?.

Yes, I was going to ask just kind of leading into that on the acquisition front, if the competitive dynamics has caused, now that you've been able to more accurately diagnose the nature of the downturn, if that's changed your M&A focus? And I guess also related to that too, you had mentioned in your prepared remarks some of the encouraging discussions you're having with potential targets.

Is that a by-product of more of a realistic valuation, set of valuations being requested by these target companies or are there other factors in play that you think are creating more of an engaging dialog between Graham and potential companies to acquire?.

This is Jeff. On your question with regard to valuations, they do seem to be improving a little bit, not quite as quickly as we'd like, but they do seem to be improving based on other companies' view of the downturn and its duration.

With regard to what we are looking to do, we have been very interested in finding opportunities to grow inorganically, and given the pause in the markets or the downturn in the markets right now, we're certainly more aggressively looking.

So I think that's probably driving us to be more aggressive on one hand, and the valuations being a little more realistic is certainly helping that also..

I appreciate the color. Thanks guys..

Our next question comes from the line of John Bair with Ascend Wealth. Please go ahead with your question..

I had a question also regarding acquisition opportunities, and just wondering because you've been holding pretty steady for the last couple of years looking at targets, and I'm just wondering if your potential targets are also evaluating this downturn and trying to ride it out and therefore are anticipating or hoping for a turnaround and therefore aren't really coming off their valuation metrics that might be more appealing for you to move forward on that.

Is that a fair statement?.

John, there's a little bit of a bifurcation from a target perspective. There are some targets who are, we are seeing some valuation, again valuations getting a little bit better, and perhaps some of them having a concern about the length of the downturn.

At the same time, we have seen a handful of targets who are no longer interested in looking at selling because they have seen enough of a reduction in their business that they feel that at this point in time perhaps they would be undervalued relative to their expected valuation.

So we have seen a few folks take themselves off the market, but those who are staying on the market I think they are getting a little more realistic about what the valuation should be, and that's encouraging to us..

Okay.

And is it also, thinking along those lines, you're looking at – so you mentioned early on that you've hired somebody in to help you with those strategic opportunity evaluations and so forth that there is another product line shall we say that you might look to go into to complement now your nuclear with the traditional petrochemical and refining businesses?.

John, that's a good question. Couple of things. First off, we have always looked at kind of two avenues from an acquisition standpoint.

One would be investing or reinvesting in our historic core markets and the second would be more diversification, whether it's enhancing the markets that we have diversified into already, that being the nuclear or the Navy, or it's diversification into other markets that have similar characteristics to our business but maybe a little bit off from where we currently are.

So that has always been part of our acquisition strategy. With regard to the individual coming onboard, he actually has not started yet, he is starting in a few days. We are looking to have more resources to focus on the acquisition opportunities.

And this is the position that we have been looking to fill for quite a while and we were just looking for the right individual who'll have that mix of helping us on the inorganic side as well as the organic growth opportunities, and we are very pleased that we found an individual who fits both of those criteria.

And again he'll be starting in a few days but it gives us another some more resources to go after the acquisition opportunities..

That's good.

One another quick one, do you anticipate continuing share buyback at this point or where do you, kind of what's your outlook on that I guess?.

John, the share buyback is still, if you recall, about a year and a half or a little over a year ago when it was approved by the Board, it was for up to $18 million. We've utilized just over half of that. And as I said, as we said at the time, we could certainly use a portion of it, we could use half of it, we could use all of it.

We haven't changed our view on the buyback. It's still active. But whether or not we buy back shares is really situational, as it has been throughout the process so far..

Right, very good.

One last quick one, just maybe real incidental I guess, but given the fire situation in Canada and the impact there, have you seen any increased activity or inquiries about replacement needs from some of the oilsands customers that you might have in that area?.

No, we have not..

I didn't know how, I don't know how badly some of their operations may have been affected, so just kind of a throw-that-out-there question for you..

No, we have not seen an uptick in requests from oilsands..

All right, very good. That's all I have. Thanks..

Thank you. This concludes today's question-and-answer session. I would like to turn the floor back over to management for closing remarks..

Thank you, and thank you everyone for listening in on our conference call and for a good set of questions that we went through subsequent to the prepared remarks. We look forward to updating everyone on our progress and our outlook for the markets in our mid-summer conference call. Thank you again. Have a good afternoon..

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation..