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

Joe Mondillo - Sidoti & Company Brian Rafn - Morgan Dempsey Capital Management John Bair - Ascend Wealth Advisors, LLC.

Greetings, and welcome to the Graham Corporation's Fourth Quarter and Full Fiscal Year 2017 Financial Results Conference Call. 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.

It is now my pleasure to introduce your host, Karen Howard of Investor Relations for Graham Corporation. Thank you. You may begin..

Thank you, Christine, and good morning, everyone. Thank you for joining us to discuss the results of Graham's fiscal 2017 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 the commentary that we're providing here today. If you don't have the release or the slides, you can find them at the Company's website at www.graham-mfg.com. On the call with me today 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 full 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 website 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, it is my pleasure to turn the call over to Jim to begin. Go ahead, Jim..

Thank you, Karen. Good morning and welcome to our Fourth Quarter and Year End Earnings Call for Fiscal 2017. Please turn your attention to Slide 3. We have a strong fourth quarter with revenue at $25.6 million. It was 15% greater than the fourth quarter last year. We completed in the fourth quarter a large non-typical naval order.

This non-typical order also impacted positively gross profit and gross margin for the quarter. Net income in the quarter of $0.18 per share or $1.8 million. Our fourth quarter performance pushed the full year to the upper range of our revenue guidance. Full year revenue was $91.8 million and it was comparable to fiscal 2016 revenue.

Full year income was $0.52 per share or $5 million, down from $6.1 million for fiscal 2016. Throughout fiscal 2017, we experienced a difficult pricing environment for large order for refining and chemical markets.

This resulted in stiff margin headwind that were partially offset by margin for the non-typical naval order that benefited our third and fourth quarters. Lastly, fiscal 2016 had the benefit of $1.8 million and cancellation charge income that is not routine nor was such a benefit in our 2017 results. Please move to Slide 4.

Refining industry sales continue to be contracted due to the state of the downstream energy markets. In the quarter, refining industry sales were approximately half what they were during the same quarter of fiscal 2016. Chemical industry sales were up 15%.

This is due to ongoing investment tied to low cost natural gas in North America that serves as a feedstock to the petrochemical and chemical plants in North America. Also, we had chemical industry sales for Latin America and Asian markets in the quarter. Power Industry sales were 19% of total sales at $4.8 million.

Due to the non-typical naval order sales, other industry sales were reported at $9.9 million, up $3.3 million from last year and up $2.2 million from the sequential third quarter. We have completed this naval order; therefore, sales to our other industries will be lower as we move across fiscal 2018.

There was a high concentration of domestic sales in the fourth quarter due to nuclear and naval sales being for U.S. customers. Approximately, 30% of full-year revenue was from diversification strategies and nuclear power and naval nuclear markets that aren't correlated to our cyclical energy markets.

I'm going to pass it over to Jeff to go into greater detail about financial results.

Jeff?.

Thank you, Jim, and good morning, everyone. I'm on Slide 6. Q4 sales were $25.6 million, up from $22.3 million in last year's fourth quarter. The sales split was 78% domestic and 22% international compared with last year's fourth quarter which were 60% domestic and 40% international.

As Jim mentioned, it was the completion of our non-typical navy order as well as our nuclear business which favorably impacted the domestic sales in the quarter. Gross margin were 26.3%, up from 20.4% last year. Adjusted EBITDA was 12% for Q4, up from 5% last year.

Q4 net income and EPS were $1.8 million or $0.18, compared with $500,000 and $0.05 last year. Again, all the profitability measures were favorably impacted by the non-typical navy order previously mentioned. On to Slide 7, for the full year, sales were $91.8 million, up slightly or 2% from $90 million last year.

Sales mix was 75% domestic, 25% international, a much stronger domestic weighting than the 63% domestic last year. Gross profit at $22.2 million was down from $23.3 million last year due to the unfavorable mix which drove a lower gross margin at 24.1%, down from 25.8%. SG&A was $14.9 million, down from $16.6 million last year.

The $1.7 million reduction was due primarily to lower commissions which was related to our sales mix to cost controls as well as $759,000 insurance settlement which was reached earlier this fiscal year. EBITDA margin was 10.5% for fiscal 2017, down from 12.1% last year.

Net income adjusted for [Indiscernible] restructuring charge which occurred in Q1 was $0.56, compared with $0.61 last year. On to Slide 8, we continue to have a very strong balance sheet. Our cash position in fiscal 2017 increased by $8.4 million to $73.5 million or $7.54 per share.

We have strong cash flow from working capital, as well as low capital spending in the year. We paid $3.5 million in dividends in the fiscal year and continue to have a $0.09 per quarter or $0.36 per year dividend rate. Capital spending for the year was very low at $300,000, down from $1.2 million in fiscal 2016, which is also a low level.

You may recall in fiscals 2014 and 2015; we spent over $5 million per year as we pre-invested in capacity and specifically for our navy business. We expect capital spending to return to a more normalized level of $2.5 million to $3 million in fiscal 2018.

We are and will continue to look to utilize our strong balance sheet to opportunistically identify acquisition. With that, Jim will complete our presentation and comment on the market and our outlook for fiscal 2018..

Thank you, Jeff. I will now refer to Slide 10. Refining in chemical markets turned downward in the third quarter of 2015 and have remained contracted. Gross orders in the fourth quarter were $15.5 million and net orders were $9 million after adjusting for backlog cancellations that related to two Latin American refining projects.

I've commented during prior conference calls that this particular down cycle in our energy markets that include refining and chemical industries, has been the worst in my 34-year career. Customers have canceled since the start of calendar 2015, $24.5 million of orders that were backlogged, including $6.5 million canceled during the fourth quarter.

The order environment and impact of cancellations was also [in an underwhelming] [ph] graph shown on Page 10. There has been a scarcity of opportunities. However, we are aggressive and securing what is available to hold or to gain market share and to load our operations. The bidding pipeline is a healthy $600 million to $800 million.

The amount though that is at an EPC bid or purchased stage is not hinting toward a recovery as imminent. Please refer to Slide 11. Approximately, 70% of our $82.6 million backlog on March 31 was for nuclear power and naval nuclear markets.

These two points to the severity of the current energy market downturn and to the importance of our diversification strategies that aren't correlated to energy. 45% to 55% of current backlog is planned to convert across the next 12 months and 35% to 40% planned to cover into fiscal 2020 or later.

Onto Slide 12; guidance for fiscal 2018 is for revenue to be between $80 million to $90 million, gross margin between 22% and 24%, SG&A to be $16 million to $17 million and a tax rate in the range of 30% to 32%. 2018 is set up to be a challenging year and our first quarter is in particular.

The management team will control all that it can control to affect financial performance throughout the year. My side remains on how our company is positioned for growth coming out of the down cycle. We'll continue to not trade longer term value creation or near term earnings. Energy markets will rebound notwithstanding $40 to $60 per barrel oil.

We cannot concede market share in the down cycle and we must be ready to capitalize and take share when spending stronger in the energy markets. We have built an infrastructure to execute our naval backlog. Those costs reside in cost of goods sold.

We cannot unwind those investment based on current backlog and expected naval backlog growth across fiscal 2018. Our nuclear power strategy is about share growth and having capacity and capabilities to execute on that growth. The management team has built up the execution bench and the learning curve is longer than the nuclear market.

Therefore it's difficult to unwind those investments. Lastly, Jeff and his team have built and continue to expand our M&A prospect pipeline. Areas of concentration are in the after markets base, naval nuclear, energy, nuclear power and markets that will continue to diversify revenue. We aren't simply attempting to ride out this down turn.

We intend to be offensive so that growth is strong when energy rebounds where if the energy recovery is tepid, we still grow. Christine, please open the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question..

Hi, guys. Good morning..

Good morning..

Good morning, Joe..

First question; related to your final remarks there, Jim. In terms of being aggressive to the point where your positions the best for if and when the upturn finally does come.

What can you do at this point internally without feeling acquisitions? Setting those aside, what can you do internally to position the company better? I know you expanded capacity right before this downturn unfortunate timing there but capacity-wise, I think you're pretty well-positioned.

So what more can we do to be better-positioned for the upturn in terms of what you're doing internally?.

Sure. There are a number of actions that are being taken by the management team. In our Batavia operation which is principally our energy space as well as our naval nuclear, we're looking at and have implemented process improvement. More simply, it's about being able to execute more efficiently and have more greater capability with our fixed cost.

So we're focused on implementing to [Indiscernible] strategy [Indiscernible] quick response office cell strategies to co-locate key departments in one area to process the orders more quickly and more seamlessly and without the iterative cycle of how our sequential flow of orders happened in the past.

Secondly, we're using the Franklin-Covey [Indiscernible] execution to drive our execution implementation across the workforce, so they're aligned with our corporate strategies for process improvement, for error reduction, for lead time improvement, and ultimately it all leads into better service to our customer.

In the operations area, there's a degree of cross trainings. Our work force is flexible. We do have surges in demand across our different products.

We want to be able to have a workforce that can align with the changes in demand whether it's naval, whether it's surface condensers, whether it's ejector systems, where it’s machining operations or assembly and welding.

We want to make sure that our work force is cross-trained, and able to adjust to surges or changes in demand, so Ellen and his team -- Ellen [indiscernible] daily operation; they've been focused under a roof line and that we've made the significant capital investments that we have, how do we take the team we have and improve the efficiency with which they execute the orders.

That's been our focus [Indiscernible] the team to have the right cost structure and the right productivity for stronger growth - not if it recovers when it does recover because there will be a recovery.

And our nuclear operation led by Frank Helin, he and his team have deployed similar strategies around quick response office cells and project management initiatives to again flow an order more quickly and more productively through the business.

In our business as an ETO business, what throttles our growth to an extent is our capacity [Indiscernible] office. So we've been focused on how do we unlock capacity in our office to execute more and to execute it more efficiently and with less errors. That's what we've been focused on in this downturn..

Okay. And then I guess the other side of the equation is external growth.

Could you update us on the M&A? I think it's pretty fair to say that the progress or steps that we've made with M&A has been a little disappointing over the years, just given that we haven't been able to make anything, but if that's a case in point on this nature of your business and maybe we're not here to expect something, or could you update us on what you're thinking with M&A and the balance sheet?.

To a degree - and we won't go into too many details - an important element of our process is financial discipline on evaluating the acquisition target and when the outlook in the near term is on steady footing, it's challenging to work through devaluation with the first, second or third year of post-acquisition.

So we have had some deals that we've got pretty close to concluding. However, in the end it was a separation in our evaluation of the value of the business and we didn't break our judicious process or how we look at value creation and our return on our investment. So we separated it from those opportunities and we will continue to do that.

While we're eager to deploy our capital we're not interested to do so in a way that elevates the risk profile of our business, or in hindsight creates buyer's remorse. So therefore we've been quite disciplined notwithstanding the organic segments of our business are and recognizing that external growth provides growth during this down cycle.

We won't break our discipline. So we've been very active, but we've been disciplined, Joe..

Okay, thanks. And then can you - taking maybe the equation.

Could you go down through your three major sort of segments of the business in terms of oil and gas, chemical processing and nuclear power and rank which one you feel best about and sort of maybe give us a little color regarding the $600 million to $800 million of quoting or order activity related to each of those segments?.

I’ll stuff through it, we're talking about refining, chemicals and nuclear and I'll add to that the aftermarket segment, fourth element. In our energy space, our team, our company still is long term bullish on refining, notwithstanding where it is at this point in time.

Energy demand will grow, absent a strong growth, there will be a clear focus in our view and from what we're observing on the capital spending by our customers in leveraging what they currently have, getting more out of the existing facilities, meeting demands for more efficient or less environmentally unfriendly fuels.

Therefore, we're focused on the installed base, if you will, the existing operating refineries. There will be new capacity, but over the next few years we'd see the central focus or CapEx around sustaining capital as opposed to growth capital and our sales force has been focused on this now for about two years.

We got out front of it to get closer to the plant level, which is where the demand will be. So long term, I like refining, I still like refining and I think it's a very important market segment for us, notwithstanding a cyclical nature and notwithstanding where it is today. That's where our differentiation is the strongest.

That's where our margin profile is the best and that's where our capture ratio has always been the strongest globally. And there will be a recovery. Although we're not waiting for that recovery sitting on our laurels, we are taking actions.

Refining, long term I still plan to focus our other assets toward the refining sector and be a dominant relevant force in the refining space for what we do. Secondarily and likewise in the petrochemical and chemical space I echo the same sentiments there that I have for refining.

North America is going through its investment in new petrochemical capacity. We benefited from that, we're now seeing the downstream investments behind the big ethylene plants or the methanol plants. So we have some of that going through backlog and now we're seeing a building pipeline of the next wave of the new ethylene capacity in North America.

Will it be as strong as the first wave? I don't think so, but it's starting to stage up and we've had a strong capture rate and a nice margin profile there as well. Globally, refining and petrochemicals, we’ll invest in new capacity because energy demand aligns with global GDP growth and there will be global GDP growth.

So therefore, there will be demand for new capacity with plants and we will win in those opportunities just as we have in the past. In the nuclear space, that market is going through an adjustment tied to a low cost natural gas, actually. That's probably the root case.

Yes, there was the Fukushima [ph] event that slowed investment, but primarily, it's now around getting the economics right for the operating plant that are in place to be competitive with low cost natural gas. And we're seeing into the supply chain cost improvement, productivity and I think there will be a shake-up in the nuclear supply chain.

We plan to be a strong player, a relevant player in the nuclear market.

We have a small share, so therefore we're a small fish in a very, very large pond and we believe we know how to grow our share in the nuclear space, notwithstanding the supply chain pressures that are being put on as a result of a nuclear promise that has been implemented in nuclear market.

And aftermarket, that's always been a very stable area for us. It does have some cyclical nature to it, but it doesn't have the gross variation that we see in our large capital projects that we're bouncing off of the low period in the aftermarket. We've talked about that in the last several conference calls, actually.

We are anticipating and we are reading reports that are CapEx or spending, MRO spending will increase in the aftermarket space as we work through calendar '17 into '18 [indiscernible] focus on concentrating our sales effort at the plant level. We pay dividends.

While I'm very encouraged to cross those for segments that are not naval nuclear and in terms of our bid pipeline, we're seeing petrochem be stronger right now, relative to refining. We think that's a point in time type of phenomena. They do tend to jostle and switch importance over a cycle start, end of a cycle, peak of a cycle.

One can be stronger than the other. Long term though, we'd see refining being very important having about 30% or 40% of our sales mix; chemicals 20% to 30% of our sales mix, we don't see that changing in our bid pipeline suggest there's no change there long term. I think I've answered much..

Okay. Yes, that was really good. Thanks a lot. I appreciate that. Just one last follow up and I'll jump back in the queue here. Regarding the aftermarket MRO spending and maintenance fees, especially on the refining part of the business, I'm hearing that maybe turn around.

Currently, even as we speak right now, plants coming down provides some maintenance.

Just wondering more specifically regarding that topic, are you able to still give in the model of the overall industry, capture fully what you've captured in the past and it's just the case in point of demand coming back or are refineries doing more in-house maintenance that's maybe adding to the rest of the aftermarket part of the investment.

And then just to add to that, could you specifically provide a little more color on your commentary that you said at the end of 2017, 2018, you're hearing about tomorrows spending coming back?.

Sure. The turnaround, our team, our sales team, our customers facing team, they've been focused in spending more time at the plant level as opposed to the EPC or major OEM. We are having conversations, about '18 turnaround activity, '19 turnaround activity.

'17 turn around activity, we would have either won that or lost that, but we're not talking about the '18 or '19 turnarounds. The refiners still are focused on yield improvement which means getting more out of a barrel of oil, converting a barrel of oil into more transportation fuels.

They're also investing on processing efficiently to different types of feed stocks -- where there's a heavy feedstock or a light shell-based feedstock. There will be investments to be able to operate the process units efficiently there.

We don't see a structural change in our ability to participate in that or how that work will flow through the supply chain from a process licensor to an EPC, to a supplier like Graham. We don't see that work coming in house.

We still see the same participant along that value chain and we haven't seen an alteration in our ability to be successful with that and more importantly with investments that we're making of getting closer to the end user, spending more time with the end user as they develop these turn around, we do feel that will support margin and also work strong capture rate when money is spent.

On the MRO side, the more routine spares, last year was down above 15% compared to the level of routine spare parts activity the last four years, margin has held up but the volume was down about 15%. This cannot persist. An unplanned shut down, safety risk, environmental risk are all very high.

We felt that these are point in time delayed decisions, they are not structurally changing the way in which they will procure spare parts and in reports that we've seen, there aren't many but we've seen a few that are suggesting a step up in MRO spending in the refining space across calendar '17 and '18..

Okay. Thanks a lot. I appreciate you taking my questions..

You're welcome, Joe..

Our next question comes from the line of Brian Rafn with Morgan Dempsey. Please proceed with your question..

Good morning, Jim. Good morning, Jeff..

Good morning, Brian..

Good morning, Brian..

Let me ask you. The Trump administration on the navy side jumped out with a lot of discussion about a 350 ships, surface navy, but in the budgets general, maybe it's kind of put a focus on parts and readiness for the first year. We're seeing a lot of cannibalization of marine and naval air wings and fighters that aren't ready.

I'm just wondering, as you guys have been involved with the navy, If you dial back any of your expectations on ship building in either the Virginia or the fleet strike carrier or the New Columbia boomer, from what you've had, say, maybe pre-elections to maybe now, it looks like we're getting a little bit of an extension on some of those delivery schedule..

In a broad sense, no. We haven't altered our view of the build schedule; the one that's been difficult to nail down is the next carrier. You've heard us talk about that as CVN-80 project. They were tending to build carriers on five year centers. We're now looking at the spend between $79 million and $80 million to be more like seven years.

However, the new administration is suggesting they want to move to 11 or 12 carrier fleet, which should shorten the integrals. This is not in the next couple of years that would manifest itself. We're on a decadal basis, as opposed to a couple year basis.

However, we view that very positively because of our position in the carrier and the size of those carrier orders for us. I'm going to comment, Brian, we haven't seen a need to change the cadence at which we'd see our naval revenue flowing..

Okay. I appreciate that. With the new class of Ford fleet strike carriers, is your content, has it changed at all? I believe you guys went on the board. You are on the Kennedy and with CVN-80 enterprise, there's a learning curve to how they build these new Ford class carriers.

Are you seeing any greater content expected if you were to maybe end the bidding process for CVN Enterprise from what you got from Kennedy?.

Our scope between $79 million and $80 million is anticipated to be comparable in terms of the type of product..

Okay. Right. I think you guys are very wise. You've certainly built capacity in Rocklin [ph], you've talked about CapEx. You don't take the knee-jerk in putting a lot of talent out in the street and cutting head count.

Are there any things that you guys can do? Maybe short week cycles, 30 hours, 25 hours, furlongs, extended vacation, that kind of [indiscernible] period of slowness and retain the real content of your labor without sending your labor to the four wins [ph]?.

Certainly retaining our talented work force is paramount and the options available for us to try to manage through this typical down turn are available to us. Nothing is off the table, so we will consider any avenue that allows us to preserve the long term capabilities and the long term value creation of the team that we've built.

So everything has been [indiscernible], nothing is off the list..

Okay, all right. Anything that you guys kind of look to feel a little bit? Any maybe statement, big quarter activity, maybe you're looking at from a project where some of the maybe the short cycle work that you might fill in.

Or is that somewhat is depressed is what you're seeing in the big project?.

Here can be a deceiving element of our business into the weeks like we are. Our quote count which is an indication of how active we are is fairly stable. It hasn't really gone up or gone down to any measurable degree. The ideal value of our number of opportunities would be the monthly or on a trailing 12-month or 6-month total basis.

What is different is the advocate value. Whether we're bidding something just for an example, that's $2 million or we'll bidding something at $500,000. The resources required to put that bid together and comparably, the resources required to execute that order through the office are really no different.

So therefore an opportunity set, in terms of number of opportunities is the same. The aggregate value of the opportunities is down about 20% or so, but we're as just as busy as we generally have always been with a number of opportunities.

That's a unique aspect of our business, but when the value declines and then our capture ratio is the same, that map suggest the avenue is going to decline..

Yes. I think it's a fair comment, Jim. Was the Trump administration the passage of the pipeline construction? Can you talk about opening, drilling on public lands, certainly going after shrink in the EPA.

Does that give you or foster a better outlook for kind of domestic oil and gas refinery with maybe a little more friendly fossil fuel strategy coming from the current administration versus Obama's administration..

Certainly, Brian. As you entered, the sentiment is more favorable for fossil-based. The administration has that attitude. How that actually blows through to our customer and then through the bid pipeline and to orders, some are smarter than me.

Probably you can answer that question and then when there's a new administration four years or eight years later, their view could be different as well. The comments that we hear are more long term in nature and directional as opposed to the effect our business. I like the positivity of fossil-based focused as it would relate to our business.

How enduring the desires of the current administration are, it's hard to say..

Okay. I certainly appreciate that. You said I think that in your three-four year career of the turn down cancellations in the oil and gas [indiscernible] difficult as you've ever seen. On the back side, inevitably, population grows, economies get better, TDP global growth will recover.

How explosive and how much pent up demand might you guys see historically if you could put a little bit of color or visibility.

Do you think that the ramp up might be slow and tepid, or might there be some real pent up demand if you want to be in the position to capture once this moderation passes?.

The view that we have is the longer the contraction, the stronger the wave of new investment becomes. When we think about the down turn before, the last downturn, the 1998 downturn that happen to span five years.

That wave of energy-based investments was incredible and was saw it building about two years before manifesting itself in terms of new order sales.

I'm not suggesting it plays out again, but the thesis be as underlying demand continues to develop and investments is not tracking that, that pent up investment need will be met and that's our long term thesis as it relates to energy.

I don't like a long down turn because it's tough to manage that long down turn, hold on to your competencies with realities of what that down turn mean. But in my position, I had to look through the down turn, make sure we do the right things in the down turn, but be ready for that eventual recovery and capitalize on it.

So along down turn in my estimation, results in a stronger wave of capacity investment when it does occur..

Our next question comes from the line of John Coehler [ph] with Oppenheimer. Please proceed with your question..

Good morning, gentlemen.

How are you doing today?.

Good morning, John..

All right. Quick question on the SG&A expense, it looks like it's up a little bit year-over-year and maybe I missed it in the commentary, but I'm just wondering if you can or your expectation for '18 over '17..

Hi, John. This is Jeff. If you think about our SG&A for last year was just $14.9 million. We have the insurance settlement in there which was almost $800,000. If you back that out, our run rate was around $15.7 million. In this year's guidance, it's $16 million to $17 million. We had a low commission level last year's due to our mix of sales.

Our range is really based on a little bit - obviously adjusting out the insurance settlement and then getting back to a more normal mix under commission side..

Great. Thanks a lot..

Sure..

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

Thank you. Good morning, gentlemen..

Hi, John. Good morning..

Hey. I've got two questions. The first one, going back to the nuclear power business. In the last, say, six months, 12 months, there has been a considerable number of announcements of projected closures to nuclear power plants and I realized that the projected time frame of course is four or five, six years.

And of course there's a lot of discussion about issuing or creating zero emission credits at the state levels to try to for the power companies to try to figure out a way how they can keep these things running.

So I guess the question is if you have any sense of what you feel the likelihood of those being created and issued and how that might affect ultimately the nuclear power business if in fact a lot of these plants are being shut down. I think I can think of about six, perhaps eight off hand that have been announced..

Sure. The U.S. base nuclear fleet, one could bifurcate it to those that operate in regulated markets, those that operate in deregulated markets. Were you been advised mostly of the shutdown that has been in deregulated markets and will those come to fruition or not, that will depend on how the state responds.

You might recall that New York State with the announcements of potential one or two closed nuclear plants, they stepped forward, leaned forward and put in tax are rebates that protected the profitability of the utility relative to alternative electrical producing facilities. So there was another state that also responded in a similar manner.

It will come down to will the states lean forward in the deregulated markets to protect that fixed load, based load utilities that are environmentally friendly that are up and running and the rate payers, that could be dealt with the rate that are being charged to the consumer and how the state leans forward and supports that.

It's hard to fully understand the direction of this because there's a lot of dynamics at play. We've seen, as I've said, some states lean forward and other states whether they do or don't are among certain. That is a risk. Longer term, let's play that out. Let's say 8 do eventually wind down, 8 out of 100.

There still is a pretty large install base of 90-ish or so operating plants.

We have a relatively small share of their spend or strategies about getting more of their spend and then secondarily, there will be a market created around decommissioning and handling dispense fuel from the shutdown utilities and is there an opportunities for us to plan that space, that is becoming available, should shut down of these power plants actually materialize and our team is spending time understanding the decommissioning segment and placed fuel segment of the nuclear value chain.

We aren't really altering the long term our view of what a strategy can go.

John?.

Yes. That sounds actually more encouraging than I would have thought. I guess to your point of trying to expand your market share, you're going to then somewhat of a shrinking market could actually be a benefit to you.

Is that a fair statement?.

Our next question is a follow up question from Joe Mondillo with Sidoti. Please proceed with your question..

Hi, guys. I'm not sure if that last question answered.

Hello?.

Yes, I'm here..

I just had a couple of follow up question. Thanks to that. I just wanted to ask about the growth margin that you saw in the quarter that you just reported. The percentage of oil and gas revenue that we saw on the quarter, was I think the lowest in over 10 years we've seen the company in. Oil and gas usually carries the higher margin.

So seeing such a small percentage of the revenue being driven by oil and gas, I'm surprised to see such strong growth margin. I know the quarter benefited from some navy work.

So I'm wondering if you could comment on that and is there any change of expectations on the growth margin of your Navy work going forward? But now you said in the past that you expect that needy work to be a little under company average in terms of growth margin..

Joe, on the gross margin for the quarter, you are correct on what you noticed with regard to the refining market and you are also correct that normally, our naval business is that our lower gross margin.

But the non-typical order that we have that affected us in both the third and fourth quarter, the naval order was there's a higher gross margin than in normal Navy work. That's what helped us in the quarter. I think we mentioned also helped us last quarter, but that does not changed our expectation going forward of the normal naval gross margin..

Okay. And in terms of your outlook for the Navy business itself, you mentioned in your press release that you anticipate $9 million to $12 million of revenue to be converted in fiscal '18.

What was the Navy revenue in 2017 and can you give us ballpark expectations on what you're looking at relative to what you have in backlog for fiscal '19?.

The '17 naval revenue was about 15% of sales and our backlog conversion is as you noted from our press release, estimated to be between $9 million and $12 million and in addition to that, we are expecting quarters in fiscal '18 that contribute to the revenue in fiscal '18.

So from a modeling point of view, we would expect a year-over-year to be between 85% to 100% on a comparable basis? We don't have that working our backlog yet, the additional work..

Do you expect maybe to be down in fiscal '18 relative to that?.

We expected to be between 85% to 100% of '17..

Okay.

And then '19?.

As we think about '19 and '20, compare it to '17 we expect growth relative to '17's number..

Okay. And we talked in the past, I think about that you could maybe achieve 20 to 25. Is that 20 to 25 on top of the 14, or 20 to 25 total in terms of what maybe....

Sorry, Joe. That number that we cited in our conference calls or in our investor information that would relate to total naval sales in a given year..

Okay. And just lastly on that topic, why? I'm surprised because I was anticipating going for Navy to be a ramp up going forward.

Why is '18 down from '17?.

We have not been able to secure. We have a lost bit. We have not been able to secure the next large carrier order..

Okay..

When that does come, you might recall in 2009 when we secure the carrier order or the order of $25 million and we spent a good part of '16 and '17 being ready. So when that does come, we're able to put it quickly into operations..

John, I think there's one additional point here, too, that we had expected if we went back 12 months from now we had expected fiscal '17 to have less maybe revenue than fiscal '16.

But because of the non-typical that we've discussed last quarter and this quarter, that actually led to significant year-over-year growth through '16 to '17 that was not anticipated at the beginning of '17. So that step up that we were expecting from '17 to '18 actually occurred from '16 to '17..

Okay, made sense.

And just lastly, do you see any risk of not winning the carrier?.

Well, one, there's always a risk. We are very confident at the dialog that we've had, but with candor [ph], it's still the orders in our backlog. It's always a risk of losing it, although we have shared and we feel very confident..

Okay. Great. Thanks a lot. Appreciate it..

Thank you, Joe..

Our next question is from John Bair with Ascend Wealth Advisors. Please proceed with your question..

Thank you. I don't know what happened there.

Can you hear me okay just fine?.

Yes. We hear you fine. Thank you..

Good. What I was saying when I cut off, it actually sounds a little more encouraging than I would have anticipated with regards to the nuclear plant and what's going on there. The other question I had was I was rather impressed that at a visit up there in Batavia about your list of plaque of long time 20 year plus employees.

I'm just wondering given this long drag out and the operating overhead pressures and so forth.

Are you finding it difficult to replace those that perhaps you're retiring or can you address the manpower aspect of keeping everybody cross trained and that kind of thing?.

Sure. I'm going to address it from the perspective of where we saw risk and what we've done. There had been a long indoctrination and training cycle to bring new employees into production roles or office roles, engineering, design drafting.

Three or four years ago, or no, five or six years ago, we identified that as a strategic risk that would impede our growth. The human resources department and the management team put together an on boarding and that training program to bring new employees into our company and develop them to be proficient more quickly.

When I join the company 30-40 years ago, your freshmen year was three to five years long. Now through the steps that we've taken, that freshmen year, it's somewhere between 12 to 18 months.

So we've got Nat putting our know-how into our processes and providing training tools that allow an employee to join our complicated company and become proficient more quickly.

Secondly, employees are the backbone, of course, of every company and they're the backbone of our company and we needed to recast Graham as an employer of choice on our community so we could attract the talent whether it be the welding personnel, the machining personnel, production labor or engineering, accounting, sales.

Our HR folks did a great job of recasting the Graham brand as a strong employer, a company that challenges its workforce, engages its workforce, hold them accountable for driving the strategies and making them part of the strategic growth. So we've repositioned our company in terms of how we attract and retain talent.

So I think in response to the question that you've asked, you've done a good job to prepare for the consequence of that -- that you saw which missed the 25-year employees and the loss of know-how.

We got at that somewhere about a decade or half of a decade ago and have done a good job to mitigate that risk around retention and does a seamlessness with which we would move forward as we lost a long tenured employees.

I'm not going to say it doesn't hurt when you lose a veteran of 30 or 40 years and they're know-how and they've been there and done that. They've seen no situational circumstance sand know how to navigate them, but we've done a great job in transferring the know-how quickly into the worker..

That's good. Encouraging when upswing eventually comes, you don't want to be caught short there, so that's very good. Appreciate that. So that's going forward..

Our next question comes from the line of Brian Rafn with Morgan Dempsey. Please proceed with your question..

Yes, I'll just -- I think you guys talked about CapEx for the next fiscal year being $2.5 million to $3 million; just wondering kind of where that is maintenance-wise, capacity-wise -- where -- what kind of target are you looking at spending on?.

A large chunk of that relates to our naval growth strategy and some new machine tools that allow us to do certain parts more proficiently.

And we made an investment with the CVN-79 order and making a comparable investment around hopefully, with support of the CVN-80 order that provides our workforce with the right tools to deliver the appropriate quality that AV mandates. So about two-thirds of that CapEx is around our naval strategy..

Okay. Let me ask -- you said that you thought your content would be similar; you know, between CVN-79 and Kennedy versus the Enterprise.

Is there any cost savings or time savings that you guys have on preliminary bids with the navy between carriers that if the programs don't change engineering specification-wise that there is not a ton of wasted time and effort in the uniqueness between one carrier to the next.

I'm just wondering, how much if you were to lose that how much is kind of wasted time and effort other than just discussions?.

Once the design is set for the vessel, so 78 was the first vessel of that class and then 79 was awarded while that first generation was being built so there still was some engineering churn as you get into the third, fourth and fifth; they're -- build the print and the engineering -- the innovative engineering is pretty much behind.

Now for the Columbia that you had mentioned as an example, that's all next-generation design, so there is an immense engineering effort there that will go across the first sub and probably into the second sub.

And then of course, if the navy is always looking for working their productivity work under the cost improvement and that's the value they see with Graham as we bring our commercial susceptibility [ph] into the naval market and we're constantly make off and challenging why is it this way? What it cannot be that way? We can do it more efficiently with less cost.

To bring a perspective of design for quality and design for manufacturability and cost reduction, the navy does value. So important that – you know, well share with everyone that we bring a new perspective to the naval supply chain that they see a great deal of value which is uncompetitive and driving cost down without compromising on quality..

Thank you. Ladies and gentlemen, due to time constraints, we have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments..

Thank you, Christine. And thank you everyone for your questions and time on the call today. We appreciated updating you on our fourth quarter results and full results for fiscal 2016 and we look forward to catching up with you on the next conference call. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..