Karen Howard - IR Jim Lines - President and CEO Jeff Glajch - CFO.

Paul Dircks - William Blair Joe Mondillo - Sidoti & Company John Karla - Oppenheimer Brian Rafn - Morgan Dempsey Capital Management John Bair - Ascend Wealth Advisors.

Greetings, and welcome to the Graham Corporation’s Second Quarter Fiscal Year 2017 Financial Results Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

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

Thank you, Matt and good morning everyone. Thank you for joining us to discuss the results of Graham’s fiscal 2017 second quarter. 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 the commentary that we’re providing here today. If you don’t have this 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, 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.

I also want to point out that during today's call we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation, or as a substitute, for results prepared in accordance with GAAP.

We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. And with that, I am going to turn the call over to Jim to begin. Go ahead, Jim..

Thank you, Karen. Good morning and welcome to our second quarter conference call. Jeff and I will update you on performance in the quarter, and on our outlook. Please refer to slide three.

Our crude oil refining and chemical markets remain contracted, and as a result, revenue in the second quarter of $21.1 million was down 7% compared with the same quarter last year. Also negatively impacting the second quarter was a decline in short-cycle sales, which includes aftermarket.

Aftermarket short-cycle sales in the second quarter were down approximately 20% compared with last year and fiscal 2015. Nuclear market sales were up as we began to convert certain larger orders of backlog. Net income in the quarter was $1.3 million or $0.13 per share. Income in the quarter was positively impacted by insurance proceeds.

Orders of $24.8 million were up 20% compared with this quarter last year approximately 45% of orders in the quarter were as a result of diversification strategies retained through commercial nuclear power and Naval Nuclear Propulsion markets. We did secure, in the quarter, another large order with the U.S.

Navy that is consistent with our stated goal to be a supplier to the submarine and aircraft carrier programs. Backlog at quarter-end of $104 million continued to be strong. I now refer to slide four. Sales to crude oil refining and chemicals and petrochemical markets, along with those to defense in other markets, were down in the quarter.

This decline is reflective of order patterns over the past few quarters, for both the refining and chemical markets. And due to backlog conversion timing for our Navy work. Sales to the power market were up 100% compared with last year.

Domestic sales were approximately two-thirds of total sales, which is fairly consistent with the past few quarters and with our expectations. Jeff, let me turn it over to you for a more detailed review of the results in the quarter.

Jeff?.

Thank you, Jim and good morning everyone. If you can turn to slide six, sales in the second quarter were $21.1 million, down 7% compared with $22.8 million in the second quarter last year. Sales in the quarter were 73% domestic, 27% international. In last year’s second quarter, the sales split was 67% domestic, 33% international.

Domestic sales increased slightly by 1% to $15.4 million, while international sales decreased to 25% to $5.7 million. Gross profit decreased to $5 million, down from $7.1 million last year due to lower margin in backlog, a significant drop in short-cycle sales and lower production volume. Gross margin dropped to 23.7%, down from 31.3% last year.

Last year's margin was favorably impacted by productivity improvements as we near the completion of the CVN 79 project, as well as the vendor settlement which occurred within that quarter. EBITDA margin decreased to 11% from 15% in last year's second quarter, driven by lower gross profit margins.

SG&A spending was down in the quarter by $1.1 million, or 25%. Approximately two-thirds of this reduction was due to the benefit of insurance proceeds received within the quarter with the remaining one-third due to cost reduction programs completed over the last 12 months.

Adjusted net income decreased to $1.4 million from $2 million or $0.14 per share, down from $0.20 per share. The net income number was adjusted for $53,000 after-tax impact for the completion of our restructuring, which has begun in the previous quarter.

If you recall, most of the charges occurred in that quarter, but I noted on the end of July I call, that we would have a small amount of charges hitting this quarter also. Looking at slide seven [technical difficulty] the results, sales in the first-half of fiscal 2017 were $43.5 million, down 14% from $50.4 million in the first-half of last year.

Year-to-date sales were 73% domestic, 27% international compared with 65% and 35% respectively last year. Domestic sales decreased $1.1 million to $31.7 million this year. International sales were $11.8 million, down from $17.6 million last year. Year-to-date gross profit decreased to $9.1 million from $15.2 million in the prior year.

And year-to-date adjusted EBITDA margins were 8%, down from 15% in the first-half of last year. Net income adjusted for the restructuring, which occurred primarily in Q1 was $1.8 million or $0.19 a share, down from $4.3 million or $0.43 a share last year.

Looking at slide eight, we continue to have positive operating cash flow, and in the first-half of the year up $3.3 million, of which we paid approximately half of it, or $1.7 million, in dividends to our shareholders. Our cash balance is up $1.2 million from the end of the fiscal year to $66.3 million, or just under $7 per share.

Capital spending has been very light this year. Year-to-date at only $200,000 compared with $500,000 in the first-half of last year. We expect full-year capital spending to be between $500,000 and $1 million. Jim, with this -- Jim will complete our presentation by discussing the market outlook and updating our full-year guidance..

Thank you, Jeff. Please refer now to slide 10. Trailing 12 month orders by market provides context for the extent of the decline in our traditionally strong oil refining and chemical and petrochemical markets.

Refining and chemical and petrochemical markets orders on a trailing 12 month basis are down approximately 30% and 50% compared with trailing 12 month orders at the end of second quarter for fiscal ’16 and for fiscal ’15 respectively.

Importantly, orders from our nuclear power and Naval Nuclear Propulsion markets comprised approximately one-third of the $78.8 million in trailing 12 month orders at the end of the second quarter. The importance of strategy executed at the new markets is abundantly clear. Without those orders today from market we were not in prior to fiscal 2010.

So it would be a punishing period for us. The bidding pipeline is holding at between $600 million and $800 million on a trailing 12 months basis. However, conversions to orders still remains slow. On to slide 11, we have built a terrific backlog of work that stood at $104 million on September 30th.

Due to strength of diversification strategy, approximately 60% of backlog is from new markets, not served prior to 2010.

Also, and due to the magnitude of our naval market backlog, backlog conversion to sales is more extended with 50% to 55% planned to convert during the next 12 months, 5% to 10% planned to convert 12 month to 24 months and 35% to 40% converting beyond two years from now. I’ll now refer to the guidance slide.

We have tightened upward revenue guidance to be between $85 million and $95 million. We have lowered gross margin guidance to 21% to 23%. This is due to the forecast of level of short-cycle, including aftermarket sales in the second half of the year.

New orders for short-cycle work were off in the first-half, and we project that will carry into the second half. The gross margin from aftermarket is strong, which isn’t a surprise. And with less waiting from aftermarket and other short-cycle work in the second-half, we must project a lower gross margin.

SG&A is projected to be between $15 million and $15.5 million. Full year effective tax rate is anticipated to be between 30% and 31%. With those brief remarks, Matt, please open the line for questions. Thank you..

We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from Chase Jacobson from William Blair. Please go ahead..

This is Paul Dircks, how are you today?.

Good morning Paul..

Thanks for taking my questions here. First one, Jim, can you talk a little bit about the changes you’ve seen in the short-cycle market here over the course of the first-half of 2017.

At least, in our opinion that’s one of the biggest variances here between last quarterly call and this one, and obviously your outlook for the balance for this fiscal year.

Can you talk a little bit about how that market has played out? How that’s varied from what your initial expectations were, and how you see it trending from this point forward?.

Paul, that’s a very good question. We have seen some slowing in that segment of our business. It started to materialize more pronounced in the quarter -- in the second quarter from a bookings point of view. And some of those orders do come-in and out in a quarter. So, therefore, we began to see that decline somewhat.

The extent of decline is a bit unexpected. We don’t feel it's of a long duration. We think it will begin to recover. We haven't begun to see that yet. However, we don’t believe that it's a long-term impact, it's more transitory.

And we think also because it's within our aftermarket segments for the more routine type aftermarket orders, those decisions, I mean, you’ve heard us say this before Paul. We think those transitory or temporary decisions are discretionary and they can be done in short intervals. However, they are not long lasting.

So we do expect to see, as we move into fiscal '18, a more normal level of our short-cycle work. At this point, we haven't begun to see that yet, but that’s our [indiscernible] for the more near-term. And it came relatively quickly in our second quarter. We can't really define what caused it.

However, we’re not seeing it abate as we go into this current quarter. So, therefore, our gross margin projection did come down a bit as a consequence of how we’re viewing the short-cycle work converting into sales during third and fourth quarter..

When the market does recover, is it your early expectation that there could be some incremental pressure on this aftermarket margins once those orders and sales are recorded?.

The industry, as a whole, is intensively focused on cost. We’re not anticipating a materially different margin profile from the segment of our business as we move into fiscal '18. We have seen some compression there on the booked margin and the realized margins, some of that’s due to mix.

But I have leave you with we are seeing a focus on cost and focus on cost pressure. But having said all that, we do expect to fall within our normal band of aftermarket margin..

Maybe taking a bit of a step-back, and certainly appreciating the gross margin pressure from the aftermarket and short-cycle businesses. Looking forward, how should we think about your outlook for utilization, given the fact that you were able to sequentially grow backlog here in the quarter.

And then there are a number of other prospects ahead to further grow that backlog in upcoming quarters as you guys continue to execute on your diversification strategy..

What was important to bear I mind and we have gotten it out in front of this in our prior commentary. We’ve been in the market, being aggressive to hold share, take share, and take strategic orders. And then some of those larger project orders have had some challenging margins. But that was the nature of the work that was available at the time.

We’re happy we took it. So while we will see improved utilization as our production hours begin to increase, we are going to deal with some margin headwinds on the type of orders that we took to leverage our asset base and make sure our team had it worked on.

But I do want to comment that while utilization will inch-up, we’re not necessarily going to have the same leverage in operating profit because of the margins we took some of this work at..

Last question from me, obviously, this quarter we saw another leg down in the legacy market backlog. And I guess as you think about that and you’re planning towards fiscal year 2018.

Does that backlog level and the continued weakness we've seen in the short-cycle business, consider additional restructuring actions as we head into fiscal ’18? Or do you feel as if the business is appropriately sized for this energy market downturn that we’re currently entering?.

We aren’t anticipating having to adjust costs lower, reflecting our view for perhaps we’d have begun the bottom in terms of our traditional markets, refining and chem., petrochem.

We have to bear in mind the long-term, and I will be, and the management team, will be prepared to think more long-term than managing a couple of quarters if we do have a couple of rough quarters coming ahead. I'm not projecting that we will, I'm just giving you. Our attitude is we're looking at this long-term we're.

We’ll take the actions that we need to manage a couple of quarters. But I'm not expecting that to come at the expense, and we’ll resist that urge to effect our long-term growth potential.

And that's paramount in the mind of our management team to be ready to capitalize on the upturn and to conceive some profitability at the costs to move more quickly through an expansion cycle..

Our next question is from Joe Mondillo from Sidoti & Company. Please go ahead..

Wondering in the $6.9 million of orders that you’ve mentioned that were halted within the oil refining business, was that included in the quarter-end backlog? And also is that -- are you assuming that is shifted out this fiscal year, is that included in your guidance?.

First question, that is in our backlog. And we don’t have a defined delivery date for those three orders. And they are not reflected in our 2017 guidance for revenue..

Joe, just to clarify, there is no change in that -- those three orders. SO they were on-hold to previous quarter..

And do you think is that --- what is your feeling on that? Is that just a wait and see and eventually if things continue to stabilize and improve that they'll come back? Or do you think there is a risk of you losing those orders?.

I won't provide too much specifics. But we do have a couple of orders two of the three orders are on-hold for management's reasons to put them on hold. We see credit risk in the countries that we’re transacting this work-in. And therefore, we want to have some cash flow coming in before we make commitments to advance the order.

That’s how we’ve managed contracts in these regions before. So, therefore, we placed them on stop, and we won't advance the order until we receive some payments. At this point, we’re not anticipating payments to come in a timely way.

And we won't advance those orders in backlog until we do receive upfront money to cover our risk to execute that contract. On the other order, I think they are still going through some engineering considerations and final financing for the project.

And we’ve got those orders relatively early, and we’re just in a wait mode for them to advance the order and tell us to proceed. This one is on-stop because of our customer. We have no identification of when that stop will be lifted. We don’t expect it to have any effect, as I said earlier, Joe, on fiscal '17 revenue.

And at this point, we actually being conservative, we haven’t modelled it in our internal management projections for '18..

And, Joe, the last order that as Jim mentioned is the majority of what's on-hold from a dollar perspective. The two orders are smaller than the -- combined they’re smaller than the one that’s on the customer as opposed to [indiscernible]. .

With the backlog of refining falling sequentially, it looks like you have about $10 million backlog within refining. The petrochemical came-up a little bit sequentially. I imagine the oil -- the U.S. Navy coming up sequentially, won't hit this year.

So with net-net refining and chemical net-neutral Navy probably not going to hit this year, you can correct me if I am wrong.

What was the thinking behind bringing-up the revenue guidance on the low end at least?.

One clear thing, it was action that we took in anticipation of orders that we would receive to get in a position to execute them quickly, should be receive them. And we did receive a significant order from one of our key markets, and we do feel we’ll be in a position to move quickly and get some revenue recognition on that.

But that was because we spent six-months in advance getting ready. So, we got the order. We could move on it. And that’s out of the ordinary for us to be in that position, but we took that step because we felt strongly confident that we would be successful. And we wanted to be in a position to move rapidly once we got the commitment.

And the tightening upward of the revenue guidance reflects those actions by management a couple of quarters ago to be in a position to move quickly..

In terms of the insurance proceeds that you received in the quarter.

What was that related to exactly?.

Joe, we have, as you are aware, we have ongoing legal expenses related to decades old asbestos exposure. We generally have -- we get both of the suites, we'll go through them and ultimately we will be dismissed from those suites, but there are legal expenses that are incurred.

We had identified an insurance carrier who had -- we’ve coverage with many years ago, and identified are they were going through liquidation. And so we proactively were able to reach an agreement with them for payment stream.

And while that payment stream was been over multiple years given their precarious financial situation we decided to monetize that and take that in the quarter. And to take that this year and receive that cash, which we have received. Those are expenses that are ongoing over multiple of years.

And we felt that it was important to disclose that we’ve received these proceeds, and they really cover some expenses as occurred in the past, and some current expenses that we see in the current year..

Okay, and just lastly, and I'll hop back in queue. You guys used to -- you still do. But you measure sort of a -- you just had some sort of way of, a unique way, I think it was, for measuring quoting activity within bidding and stuffs like that. I think it got up to as high as $1 billion at some point a couple of years ago.

Just wondering what that graph looks like, are we still sort of declining on an activity basis? Or do you see things stabilizing, or what are you seeing there?.

That is a graph that we have on our management dashboard. It's trending in between $600 million and $800 million, which is consistent with what we had mentioned on the call on the quarter ago. So it's within that band. We think it's hanging -- it will hang in that area.

We’re not expecting further erosion from the $800,000 to a $1 million down to $600,000 to $800,000. We’re expecting to remain in that range as we go forward..

So do you think -- does that give you indication that maybe things are stabilizing?.

That would be, again, we look at those quotation pipelines as one of our lease measures, and we would look at that very carefully. We don’t project yet that it's necessarily bottomed and bounce off the bottom. However, we do expect it to stay within the band that I just mentioned.

What's also important to bear in mind is, while it still is a strong proposal book of business, the conversion to orders is very slow, is at a historic low. So while we have that enormity of opportunities, $600 million to $800 million, the conversion to a booking is actually at a historic low level. Not a surprise for where we are in this cycle.

However, what we like to see is that hit the inflection point, begin to grow. And then we know 12-18 months out, we’re going to be coming out of this and back into an expansion place. So we’ll watch this very carefully. It's on our management dashboard and we talk about it all the time..

Our next question is from [John Cower] from Oppenheimer. Please go ahead..

Couple of my questions have been answered, so I'll start with acquisitions. You are still hunting, I presume.

I'm wondering given the prolonged state with which we have been, in industrial manufacturing weakness, if you’re seeing spreads get a little more reasonable, or if they’re still too far further?.

John, the pricing is coming down a little bit, probably not as quickly as we certainly would like. And we are still, as you noted, there is very actively looking. But it's really a matter obviously binding that one company that’s the right [indiscernible].

But we are being very active in our process and are hiring those business development director back in May has really helped us broaden their net..

I guess, I’ll leave that, I won't pursue that further. If I look at the refining business, in general, I could see because of fair amount of assets that are up for sale or are recently sold.

Am I being too bias to assume that there is some correlation between that and possibly your short-cycle business or?.

We have not made that correlation, but it's a plausible one. One thing that we have seen historically when a integrated company divest its refining assets and then an owner-operator takes them over.

Once they take control of that asset, we’ve seen in the past, a step-up in investment as they look to leverage those assets differently than an integrated refiner would, that’s -- perhaps more integrated company that’s more focused on the E&P side of their business.

So we have seen, in the past when that occurs, it's favorable because they are focused on leveraging their infrastructure and getting more out of a bottom of -- more out of barrel of oil. And that tends to be very helpful to demand for our products..

Our next question comes from Brian Rafn from Morgan Dempsey Capital Management. Please go ahead..

Give me a sense, you talked capacity utilization.

How many shifts are you guys running labor-wise at Batavia and then Lapeer, where are you...?.

We’re running, for our Batavia operation, fairly consistent to our normal practice, which is two shifts. Although, the second shift isn’t as staffed as the first shift. And for energy steel, the Lapeer operation because of backlog conversion and where their business was, they’ve been running two strong shifts..

And give me -- what might be a sense of what's your capacity utilization might be, is it....?.

Of our physical plant, I would say we’re probably running at about 50% of what our roof-line can handle..

Give me a sense as you guys look, obviously, your building to that the next stage $200 million in sales. You don’t want to lose certainly technical skills, capacity. Are there things that this is somewhat for long, or are the things that you guys can do? I’m thinking expanded vacations, unpaid leave, 30 hour work, salary reduction.

What are the types of things you can do to maintain your labor-force without doing headcount reductions?.

So those types of measures are certainly available to management. And we have to look at that at a point in time when it would be relevant to consider such actions. I tend to take, not just I, our management team takes balanced approach of -- we also need to ensure we have retention. We have an engaged workforce.

And they’re in it with us through the bottom of the cycle, and they are on our team coming out of the cycle. So we need to manage their engagements and their affiliation with our strategies and with management. So we tend to be very careful on such actions and we will in the future. Although, I'm not saying those aren’t unavailable to us..

Well, you had a great culture, certainly. Give me a sense, the U.S. Navy has certainly announced now for the Colombia fleet ballistic missile sub, some advanced procurement between 2017 and 2020. I missed, you guys mentioned something about a large order. I must not have grabbed the press release.

What -- are you seeing anything on the new Colombia fleet ballistic missile sub, any work there?.

We did pick-up some work in this past quarter. We’re not in a position to disclose that in any detail other than we can say, we've indicated, we want to participate in the submarine Ontario programs with a certain product set and it's within those -- within that strategy. It's nothing out of the ordinary course..

And looking at the -- in the congressional research service, the Navy has come out of the 30 year shipbuilding. And I'm just wondering, they are looking to deliver one Colombia hall per year between 2026 to 2035. Obviously, that's fairly out. But that would be multiple hauls being manufactured at growth, in the Newport News probably in early 2020.

Did you guys see any pressure of demand as you guys look to the Navy and become -- you’re certainly apply prime supplier.

Is there a possibility that there may be some fairly significant expansion, or it might probably a little too far out?.

With investment we make to expand the roofline and prepare for potential Naval work, we think we've made the infrastructure investments that are necessary less a few more modern machine tools that we might need to bring in for what our appetite should be over the next five to 10 years. Now, if we’re presented with an opportunity to take on more work.

And importantly, we feel we are in a position to execute that work successfully, we’ll deploy more capital to take on those opportunities.

But as we looked at our sphere of opportunities and where we were focused, we've built the infrastructure and the organization to accommodate that additional work we have to talk about and understand if we need additional roofline and facility expansion to accommodate that..

The visibility is way out, so I appreciate the color there. Anything when you guys look at you condenser work for the Navy like, with the carriers in that. A lot of defense primes and subcontractors complain about the Military constantly doing change orders on specifications and requirements.

In your work for the Navy, is that pretty much engineered in, and does the Navy pretty much, like a fixed engineering design or is there a constantly vacillating on specification and functionality changes?.

The engineering churn or the way in which an order flows-through to our business is not going to similar from the orders that we get from the refining petrochemical market. That’s why we felt we had an appropriate operating model and execution strategy for the naval work. For us it's a normal fair. We deal with it all the time.

You might hear us lament about it, but that’s our operating model. That’s what we do extraordinary well. What we hear, from a complimentary point of view, because we are very adept at this in our commercial work is we’re a supplier to the naval program that’s very proficient at this. And we don’t make every change an issue.

And we have fluidity and an adeptness to get back on track. And they see us as a supplier that’s different from the ordinary largely focused on the naval work supplier. It's a part of business but it's not all of our business.

So we have skill-sets and sensibilities from what we’re hearing that deliver different performance than the typical supply-chain that just serves the U.S. Navy, and that’s a great compliment that our team has earned.

And I am glad to hear that our customer in this context to shipyards and now see have identified as a unique characteristic of ground that’s different from their ordinary supply-chain..

When you guys look at, certainly -- you certainly have an aptitude on the M&A front. Jeff you said that you are seeing a little bit of multiple compression, or whatever.

Would you say the number of deals available, or what is your sense that you seen more distressed credits? And are you looking primarily for more higher quality going concerns and maybe turnarounds?.

Brian that’s a good question. We are actually seeing more that are distressed situations, or that are companies that are clearly heading in a bad direction. Those generally do not interest us. Typically in those situations they’re selling assets more than anything else. And that’s not something that’s particularly interesting to us.

I mean, obviously, if there was a particular asset that we found appealing, we would look at it. But we’re really looking for operating businesses that are profitable. So while we’re hearing more of those recently, it's really not an avenue that we’re pursuing particularly hard..

Thank you. Our next question comes from John Bair from Ascend Wealth Advisors. Please go ahead..

I am little late in this call up a little bit, I am calling from Cleveland. So I’ll staff off by saying Go Tribe tonight to the distress of those in the Midwest. And regardless to have the series plays out one of these things is going to end their draught.

And I think that’s certainly a good way of looking at how this long stretched-out distressed market has been for the energy sector. So, anyways, trying to lighten things up here a little bit for you this morning. If you had to lift one thing that you are most optimistic about, whether it's in the near-term or perhaps over the next 12 to 24 months.

What would that be as far as your business goes?.

I only get one?.

Well, if you have multiple that would be even better. I mean, you’re cash positioned and it's seems like oil prices are stabilizing out. So hopefully we are at a trough..

So, let me just, at a high level, walk-through, but maintains our optimism and our positivity around the long-term thinking. One is the stage of our backlog conversion for the naval work. You’ve heard that Jeff and I talk about going into ’18 and ’19 we begin to convert that large backlog into revenue. So that is set-up that's being executed well.

And we believe that will be realized. So, therefore will have the lift that we had been indicating to everyone was coming, materializing when we said it would come across fiscal ’18, into ’19 and into ’20. So, that's very strong and encouraging and gives us very positivity. And no particular order.

While Jeff intimated very well, there is still as a gap between seller value and perspective buyer value at least in the deals that we've been chasing. And we have had some that we just couldn’t close that gap. There were a couple of terms apart, and we're not prepared to step-up to that.

But what I'm happy about is we brought in our business development to director to work with Jeff, and our pipeline of opportunities and our dialogue there is much more frequent. So I'm very pleased about the focus we have there.

I can't revise that we’ll close the valuation gap or not, but I'm very pleased with the opportunities and the number of conversations that we are having.

And that we actually got pretty far along on a couple of opportunities where we just couldn’t close to gap, which was while unfortunate but fortunate that we’re able to get to the table and have those definitive conversations. And then on the refining chemical side, this is a tough downturn.

You’ve heard us say that -- you heard me say, looks on the gray head, one in the room, that this is a tough downturn, more difficult than the previous downturn, more difficult than the downturn going back to the early 80s. And indeed we feel more different today.

However, our actions that we're taking and we’re getting closer to our customers, we’re trying to spend more time with the opportunities that are developing and emerging, and doing so earlier. So we were redeploying our sales focus into the plan. We had an EPC centric sales focus by-enlarge.

We still have very important focus on the EPCs, but were moving our resources into the plants, and to the end-user, because that's where we feel aftermarket will turn quickly, revamps, and debottlenecking will be where the investments will come first into the recovery.

And then we plan to be the ones that are there early, engaging those opportunities, and be the one to capitalize on those. The time to do those things is when no one spending money. And we’re jumping into those situations, while they are not spending money. And we feel we’ll benefit from that when does recover.

And eventually, we will be bouncing out of this. And we're not, I guess, on another optimistic side, we’re not a victim here. These are the markets we've chosen to play in. And we're taking the right actions. We have the right attitudes. We have the right long-term perspective in the entire organization to get through this downturn.

And what's most important on the backside of downturn is we've done something to change to our growth trajectory, and I'm really pleased across the fronts that we’re acting upon that we will be in a position to be able to do that..

And can just say hang-in there, and keep swinging away. I was wondering too, on some of those lines. You've long stressed that you've won orders based on the reputation as opposed to pricing on the business and so forth. But I am wondering if that is still the case, or whether the rather slow-type market.

Is there much more pressure on pushing your bid cost down, which I would assume is being reflected in your lower overall margins.

Is that a fair statement?.

It's a very accurate statement. It's a bottom of the cycle fundamentals. We saw it in the late 90s. We saw it again in the late 2000s. We’re seeing it again today, where there is a greater fixation on first costs than lifecycle costs.

And we have many discussions with our sales folks that are addressing these more price focused decisions of where do we want to play, when do we want to play, when do we want to react in that manner. Because at times, you can refutably harm the market price.

And these have been transitory-type actions by our customer base that in our past that haven't been enduring. So it really test one’s metal. We believe we lead with value. We believe we lead with technical superiority. We expected to be paid for that. I expect our sales guys to derive differentiation and sell at a premium.

However, in the bottom of the cycle, that does test our metal. And our sales folks are doing a great job to get us in the position to have the right intel, and ensure we make the right decisions. You’ve heard me say a couple times of prior calls, and again this call.

We will take orders aggressively to secure strategic orders as to hold market share, or to keep a competitor out of a area we don’t want them in. And we do that judicially. And we try not to harm our value proposition and convey to the market that we are price leader, because that’s not we are. We lead value. We lead with expertise.

And these decisions are tough. Once we were in late 90s, going through it again in the late 2000s. And our value proposition John, I think is still sound, it still is enduring. But it does test your metal how longer this goes on.

And I have a pretty strong fortitude in this regard of who we are, what I expect from the market place, what I expect from our sales folks. And I don’t facilitate too often..

Great, very good, and having a rock solid balance sheet certainly helps weather the storm. So good luck and again, Go Tribe. Bye..

Our next question comes from Chase Jacobson from William Blair. Please go ahead..

Just a couple of quick follow-ups if I may. Jim, you had mentioned earlier that one of the actions you guys took was to get ready strategically in case an order came, so you’d be able to ramp on that more quickly in the event that it did.

Now that it has, does this action ramifications for Graham’s to that -- Graham could win yet more work from this key customer, or in this market sector? Or was this a discrete one-off opportunity with no real follow-on opportunities that could follow from your strategic actions ahead of time to be?.

The case that I cited was more specific to a one-off. However, what we do to with some regularity is when we’re feeling our positioning on an opportunity is relatively strong and the design to the best of our knowledge is frozen, if you will. We will move in advance of an order to get into the engineering and start our work.

So when we do receive the order, we’re able to convert that more quickly. That's our normal. We do that more regularly than we've conveyed before. But that's more, again, situational. We look at each of those situations. We’re in a position when this is just timing, and we have the engineering capacity, yes-no let’s get in front of it.

It's very critical, deliverable that we have to have, whether it's the engineering deliverable or the hardware deliverable, let’s give ourselves the opportunity to be successful by moving in advance. So we do take on that risk.

And then of course in the year we probably through it at a half of dozen times a year or so to dozen times, and the situation, the opportunity that I cited was more specific. And so I don’t want you to think there is more for that one to come when we do take those actions with some frequency..

You had also mentioned earlier about the reduction in planed capital expenditures here for fiscal ‘17.

Was that specific to some of your preparedness for Navy work? Or was it related to the growth investments that simply because of the energy market downturn, you could defer to next year or the year after?.

With complete tender part of it was our band was in capacity to deal with what we are doing on the execution front, and then execute some capital plans. I have spoken with our operating managers and said I want renewed focus on deploying capital to bring our cost basis down, or to create opportunity to take on more work.

I recognize we had -- we can do this or that and we focused on revenues and order conversion. And we took less -- we had less commitment toward our capital plans. So you’ve seen the result of that. But I have met with the team and said I want some actions taken here during this downturn.

So we are coming out of this operating differently with a lower cost basis and with higher productivity. So that's what happened during the downturn and you’re not struggling, you’re dealing with the order execution and sometimes you have to make that trade-off. I would call it a time based trade-off..

Last question from me, on the power market, and this hasn’t really been a major focus of this call thus far. It was good to see the shipments in the quarter. But orders in power over the first two quarters of fiscal ’17 have been low.

What's your expectation here near-term in that business? Obviously, you've been investing in personnel over the last year or two to improve your customer facing opportunities.

And maybe you could also tie that into what your current view is of the nuclear power aftermarket, and some of the new-build nuclear opportunities that you are pursuing in the U.S.

and China as well?.

Well, no doubt about it, Paul. We need to turn the backlog direction upward. And the first two quarter order levels were light. And we have the benefit of a stronger backlog going into this year. Our team is in the field. Our team is creating opportunities. We have a rich pipeline of opportunities.

We are seeing some slowness there in converting our pipeline to bookings. And also we’re seeing a -- which is new for the nuclear market, a stronger prioritization on price. And that’s affecting our -- that has affected our success rate for the margin on some of that work that was placed.

The nuclear utility market is looking to lower its capital costs and operating costs, and they’re pushing that into supply-chain. So, that is having an effect to a degree on where we want to play, and what are our capture rates has been. But in the end, summary comment, we got to grow backlog. We got to continue to expand that strategy.

We have the right team in place led by nuclear veteran, nuclear market veteran [Frans Gillan] and he’s done a great job to bring in the infrastructure for his team to be successful. And our intent on turning that around and expanding that backlog, and therefore expanding our revenues. But you are accurate the first two quarter has light order intake..

Is there anything in the near-term horizon regarding the new-build nuclear opportunities, U.S.

or in China?.

There are 12 new reactors up for procurement in China. Round numbers two-thirds of those are Westinghouse AP1000, one-third our CAP1400 Westinghouse copycats by the Chinese. And we are following those opportunities. We expect those to close over the next 18 months.

And we are hopeful, because we got the four reactors -- for the four reactors Sanmen and Haiyang. We were participating in those projects through our China office. So, therefore, we are focused on winning some of that work. And then for Summer and Vogtle, the two U.S.

new-builds, there is work we’re pursuing there in addition to the work we’re wrapping up, and some of it's fairly sizable. And we have some meetings coming up where we’ll meet key decision makers there to try to secure some more work for the Summer and Vogtle projects.

That whole supply-chain has really been strained in trying to bring those projects to conclusion. And we think we have the right formula, the right execution capability, the right focus on risk management. And we’re going to convey that to them that we’re ready, we want this work and we can deliver it.

And our job is to convince them that we can do just that. So, there is more opportunity there..

That’s good to hear. Thank you, guys..

Thank you, Paul. Well, thank you everyone for your questions. We had a good call. We discussed the number of the near-term and longer-term implications of the markets on our business. And we look forward to, Jeff and I, look forward to updating you on our next call in about three months. Thank you..

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