Karen Howard - Investor Relations, Executive Vice President at Kei Advisors LLC Jim Lines - President and Chief Executive Officer Jeff Glajch - Vice President of Finance & Administration, Chief Financial Officer and Corporate Secretary.

Joe Mondillo - Sidoti & Company Bill Baldwin - Baldwin Anthony Securities Gerry Heffernan - Walthausen & Co..

Greetings and welcome to Graham Corporation fourth quarter and full fiscal year 2018 financial results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Karen Howard, IR for Graham Corporation..

Thank you Sherry and good morning everyone. We appreciate your joining us today to discuss the results of Graham's fiscal 2018 fourth quarter and full year results. You should have a copy of the news release that was distributed across the wire this morning. We also have slides associated with the commentary that we are providing here today.

If you don't have the release or the slides, you can find them on 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 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 Securities and Exchange Commission. Those documents can be found on our website or at 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.

Jim?.

Thank you Karen. Good morning everyone. We appreciate your participation in our fourth quarter conference call. I will begin prepared remarks referring to slide three. We had another strong quarter for new orders that totaled $43.5 million. This is similar to the level of orders in our third quarter.

Striking contrast to the deepest period of the cyclical downturn in our refining markets. Orders in the last two quarters totaled more than $80 million, while by comparison the four quarters from the third quarter of fiscal 2017 through the second quarter of fiscal 2018, orders during that timeframe totaled $55 million.

Worth noting is that the bookings for the last two quarters were approximately $50 million removing two large orders that we don't believe occur every quarter. Revenue has started to turn upward compared with the previous two quarters. Revenue in the quarter was $22.2 million.

Income also showed corresponding improvement with $0.09 earnings per share in the quarter. Full year highlights include a record $117.9 million backlog at year-end, full-year bookings were $112.2 million that included a nice surge in orders from our refining markets, with our refining market orders were 35% of total orders.

Also, there was a strong level of orders for our naval end markets that were approximately 25% of total orders for the year. $77.5 million of full-year revenue reflected the consequence of the $55 million in orders for the 12-month period I mentioned a moment ago.

We reported $9.8 million loss for the year which was impacted by impairment and related charges tied to writing down Energy Steel assets along with and to a lesser extent restructuring charges. On an adjusted basis, net income for the full year was $1.8 million. Please move on to slide four.

Sales in the fourth quarter were $22.2 million, were down compared to a year earlier. However, there is sequential improvement compared to the December ending quarter that was $17.3 million and similar levels with the second quarter that was $17.2 million.

Sales to our refining markets were up while sales for other end markets were down in the quarter versus the year earlier. I believe 2018 represents the bottom of the downturn and that revenues will expand in 2019.

There was no escaping the impact of the dismal order level that was anemic across third quarter of FY 2017 through the second quarter of FY 2018. Full year revenue is down approximately 18% relative to fiscal 2017 and totaled $77.5 million. 66% of sales were to domestic end market.

I will let Jeff provide more financial details on the quarter and the full year.

Jeff?.

Thank you Jim and good morning everyone. On to slide six, please. As Jim mentioned, the last three quarters of the fiscal year have been pretty rough and appear to be the bottom of the downturn and the financial results are reflective of this. Sales in the fourth quarter were $22.2 million, down from $25.6 in last year's fourth quarter.

The split of sales was 66% domestic, 34% international compared with last year's fourth quarter which was 78% domestic and 22% international. Gross margins in the quarter were 22.8%, down from 26.3%. Adjusted EBITDA margin was 6% for Q4, down from 12% in last year.

Reported Q4 net income and EPS was $800,000 and $0.09 per share, compared with $1.8 million and $0.18 per share. However, we had a favorable tax adjustment related to the new tax law. Adjusting for that resulted in earnings of $600,000 and $0.07 per share in the fourth quarter this year. On to slide seven, we look at the full year results.

Sales declined to $77.5 million, down from $91.8 million last year. As Jim mentioned, we worked through a low bookings level which occurred 12 to 18 months ago. Sales for the year were 67% domestic, 33% international compared with last year which was 75% domestic and 25% international.

Gross profit for the year was $17.3 million, down from $22.2 million primarily due to lower volume as well as the impact of gross margins being 170 basis points lower at 22.4%. SG&A for the year was $15.6 million, up from $14.9 last year, however last year's number included $750,000 insurance settlement.

When you adjust out for that, SG&A was flat year-over-year. EBITDA margin was 5.4%, down from 10.5% last year. And adjusted net income was $0.18, compared with $0.56 last year.

EBITDA and net income were both adjusted to exclude the impact of the write-down of the impairment of our nuclear business and related charges which were booked in Q3, as well as restructuring charges offset partially by the favorability of one-time impacts from the implementation of the new tax law. On to slide eight, please.

You will see our cash position increased by $3 million in fiscal 2018 to $76.5 million or $7.83 per share. We had good cash flow from operating cash flow, paid $3.5 million in dividend and spent $2.1 million in capital spending this year, well above the $300,000 level of capital spending in fiscal 2017.

We expect capital spending in fiscal 2019 to be between $2 million and $2.5 million. Our acquisition pipeline continues to be strong. Identifying the correct company to purchase requires diligence and discipline.

We were well into a diligence process over the past two quarters for a company that, we like their management team however we ultimately decided the predictability of their business and its market position were too volatile for us to meet the purchase price expectations. Therefore, we peeled off this opportunity in the fourth quarter.

However, our business development team, our management team and our Board of Directors are all focused on utilizing the cash and our strong balance sheet to opportunistically identify and close on acquisitions which have both near and long-term benefits to our shareholders. We will continue this effort into fiscal 2019.

With that, Jim will complete our presentation and comment on our strong outlook for fiscal 2019..

Thank you Jeff. I now refer to slide 10. The uptick in orders in the past two quarters provides a terrific foundation for fiscal 2019. We remained actively bidding a broad array of projects in all of our markets and that continues to-date.

Our refining customers released in the third and fourth quarters purchase orders for a number of revamp and upgrades to existing facilities. That is what drove the uptick in orders as did orders from our naval markets. Note that orders in the fourth quarter were up compared to a year earlier in each of the four key end markets.

Orders for refining market were up $10 million. And for our naval end markets they were up measurably as well. On to slide 11. I am extremely pleased by our backlog which is at a record $117.9 million. The quality of our backlog has improved due to price levels and end market mix for recent orders.

You may recall, in the past we noted that refining markets provide the highest margins for new equipment revenue. Thus, the uptick in refining orders is a positive. Also, we have worked through most of the rough orders in backlog taken at cycle bottom because that was all that was available and we concentrated on loading our operations.

Therefore margin quality and backlog on average is improving due to the recent orders. Lastly, our large naval backlog is entering its revenue cycle that extends for two to three years in certain cases, which of course lowers our asset base and increases utilization levels.

Importantly, 55% to 60% of the 3/31 backlog is planned or projected for shipment across fiscal 2019. Moving on to our guidance for fiscal 2019. Initial full year guidance is for the top line to be between $90 million and $95 million. Gross margin will range between 24% and 25%. SG&A will be in the range of $18 million to $18.75 million.

And our effective tax rate will be between 20% and 22%. There is upside potential to topline tied to timing and success in securing various orders from our quotation pipeline. There is some downside risk as well. However, we are optimistic about driving the topline higher. Sherry, please open the line for questions. Thank you..

[Operator Instructions]. Our first question is from Joe Mondillo with Sidoti & Company. Please proceed..

Hi guys. Good morning..

Good morning Joe..

Good morning Joe..

So my first question is on the SG&A. A little higher than I was anticipating.

Is that all related to selling expenses, commissions based on the oil refining backlog that you have that's going to hit in 2019? Or is there any may be compensation that was abnormally low over the last year or two? Just wondering if you could comment on that?.

Joe, this is Jeff. All of the above. Certainly, there is an impact on low level of compensation that was in fiscal 2018. There is an impact of some additional hiring and some resource we are bringing onboard. For example, we hired a new Vice President of Sales in late February and obviously we will have the full year impact of him being onboard.

And we are looking at adding some key resources to our team as we look forward, not just in the fiscal 2019, but beyond and look to make sure that we are able to take advantage of the opportunities that we think are in front of us in our commercial markets.

So as you know, we have been pretty tight on SG&A last couple of years, particularly in fiscal 2017 and 2018 as we worked our way through the downturn and we are just adding what we need to add, adding some resources.

Obviously, the comp, as you mentioned, as well as there will be some additional commission activities around some of our refining system. So it's really all the above.

And as Jim talked about our range for revenue in our guidance and the range for SG&A, clearly if we are, for some reason, at the lower end of that range revenue, more likely to be lower SG&A.

The middle to higher end of the range is more likely to occur if we were at the upper end of the revenue range or perhaps if we are, as Jim mentioned, fortunate enough to push beyond that..

Okay. Could you talk about the changes that have been made over the last several years? Just I am going back to sort of the peak of the fiscal 2015, you saw $135 million of revenue and $18.5 million of SG&A. So I am now looking at $90 million to $95 million of revenue and pretty much at that sort of peak SG&A.

Could you just talk about what changes have been made over the years that are causing sort of peak SG&A when we are not back to peak revenue yet?.

Sure. So part of it, again, is adding some resources to look toward the future. Clearly, you have got some inflationary issues in there too that you can't really offset. One of the areas that have not been impacted by have been rising healthcare costs. We have been able to keep those under control.

So it's really, again, adding to our team, looking towards the future and making sure that we got a team not just for fiscal 2019 but for growth beyond that.

If we believe that fiscal 2019 is a step-up and nothing beyond that, we might temper some of our additions, but in this case we believe there is good chance that there is growth opportunities beyond 2019 though again, we don't have those locked down yet..

Okay. And then I wanted to ask about the revenue guidance. It looks like your about almost 75% of your revenue guidance is already in your 12-month backlog. So you have a very healthy 12-month backlog going into the year.

Just wondering if you could talk about the short cycle part of the business? If you could quantify how much that made up in fiscal 2018 and how that's trending? And if you know the guide on revenue could be a little light, just given what you do have in your 12-month backlog?.

Hi Joe, this is Jim. Let me talk about this in a little detail. Really, coming at it from the perspective of what's tugging at us as management that caused us to put the guidance where we put it.

We see some risk, again, in our naval backlog execution, not tied to us but tied to our ability to get it to the revenue cycle as it correlates to designs being frozen and releases from our customer to proceed with fabrication. That's a fairly sizable risk. We feel very confident that we are going to drive through that, get that revenue converted.

However, we do see some risk there. And it's fairly measurable. And as a result, we come in with a guidance that, as you suggested, the backlog would infer 75% set up which is at the higher end of what our historical range would be.

We typically think in terms of backlog entering the year represent 60%-ish of revenue for the full year, although it has been at cycle bottom as low as 70%. So we are just a little bit cautious on some of the first-generation design work with the Navy that's in our backlog and can we float into the revenue cycle as we model.

We have been a little cautious with respect to that. On our short cycle work, compared to the 2015 timeframe that you cited around SG&A, we are off about 20% from that level, but we are up about 10% from when it were bottom. So we are seeing some improvement there. But it's still down.

I am not seeing, at this point, in our quotation activity or selling activity where it's implying to us that that's returning back towards the 2015 level in fiscal 2019.

Around the SG&A, as Jeff said, we are taking a more bullish look at multi-year expansion cycle, which we feel rather confident about but we are going to meter in the additional hires and the expansion of our workforce, according to how we see the pipeline translating to orders. We put forward a more bullish outlook for SG&A spend.

However, as Jeff had indicated in his remarks, we are going to be mindful of how quickly we add those expenses. So this gives you the range on the upper end that supports our bullish multi-year outlook. That's not playing out as we envision, we will adjust accordingly.

So really, around the guidance which is the biggest question that you had, we have some concern about naval backlog conversion not tied to our ability to execute it, but tied to our ability to get it to the revenue cycle after we are released by the shipyards and the designs are frozen. We have no control over that.

And as a consequence, we have been more measured and also with that in mind, we still need probably about $10 million to $12 million of large project work that's not in our backlog to fill out the year. Pipeline seems fine, but we have been chasing these bids for several quarters. Our customers keep pushing some of these to the right.

We have some very strong optimism. We will be in a better position after the first quarter closes to have a clear view of where the naval work is and what we have been able to close in the quarter to begin to fill out the rest of our year. In my closing prepared remarks, I mentioned that we are optimistic about driving the topline higher.

I just wanted to share with you what's tugging at us and what caused us to put the guidance where we put it initially..

Okay. That's helpful. So just clarifying that though, the $67 million, it comes out to be, if you do the math, roughly of 12 month backlog, is that including some of the questionable Navy backlog.

So some of that could be pushed out beyond 12 month?.

Right. We took the midpoint of the 55% to 60%. It basically represents $68 million of the $118 million as planned for fiscal 2019. Of that, somewhere between 5% and 10% of that number is that risk, as I cited, related to our ability to get naval work into the revenue cycle. And we have to bear that in mind.

If it goes well, we are going to plow right through the guidance range. If it doesn't close as we expect, we have to make it up with new orders and the timing of those new orders could affect us. But that's a quarter-to-quarter effect, not an indication of the cycle recovery..

Okay. That's good color, Jim. Thanks.

In terms of the short cycle work, what does that generally, on an absolute revenue basis, quantify to annually?.

It's typically, you maybe have heard us say over the years, we are one-third short cycle, two-thirds project work. In terms of absolute dollars, we tend to think in the range of $25 million to $30 million for that short cycle work on an annual basis..

Okay. And you said that's growing roughly, you talked 10% from the bottom.

So it's growing maybe around 10% annually right now?.

Well, let me just clarify, I probably wasn't clear. We are off about 20% from the 2015 peak. We are up 10% from the trough and 2018 was comparable to 2017..

Okay. That's good color. And then the 12-month backlog or the near-term backlog.

How does the gross margin of that backlog compared to the 245 to 25% that you guided to for year? Is it pretty much pretty comparable?.

Without getting too granular but more on a qualitative basis, what have stated in my prepared remarks, what's coming into backlog is superior to what was coming out of backlog and that's averaging up our overall margin in backlog, which is great. And that's reflective of a little bit of a move upward in our overall gross margin.

If we pushed through the topline guidance and we lowered our asset base a little higher, you will see that gross margin inch up..

Are any of these big, like one or two of those oil refining projects? Are any of those super-high gross margin? So if you don't see sort of another one of those orders, fiscal 2020 potentially could be a tough comp? Just wondering if there is anything really boosting the gross margin this year? Just wanted to be cognizant of that..

No. There is nothing as an outlier that shot up, well not shot up, represents why the gross margins were it is. The large project we spent some time talking about in the third quarter has a very high material content, which has an effect on some of our margin profile.

But I am not judging that 2019 is an outlier on the upside relative to where to expect 2020 to go toward..

Okay. And then just in terms of the Navy backlog over the next couple of years.

Say this backlog that's potentially at risk does end up falling into fiscal 2019, I am just wondering sort of expectations for fiscal 2020? I know some of that big order in terms of the submarine backlog back in 2015, I think, is finally sort of coming, starting to be shipped essentially.

And I think fiscal 2020 was supposed to be a much stronger year than even fiscal 2019. So I am just wondering if sort of everything hits in terms of timing right now, what does 2020 look like relative to 2019? And I think 2019, you sort of mentioned on the last call, was going to be potentially flat to up 40% or so.

If you could give us a little color on how to think about that part of revenue for the next couple of years?.

Sure, Joe. The comment that I made around 2019 and the risk of naval backlog conversions, I would suggest that's a quarter to a couple quarter risk that the backlog is not at risk. In a broad sense, it's just a timing risk.

From our modeling of how we see the backlog for the naval strategy rolling out, we are into the peak revenue cycle in 2019, 2020 and 2021 and we are expecting it to move beyond the $20-ish million level as we are in 2020 and 2021 at those revenue cycle now.

And what I cited about risk was a one or two quarter potential delay getting that work into the revenue cycle..

Joe, this is Jeff. Just to add one additional point here. Jim just mentioned, we expect to be in the north of $20 million in fiscals 2020 and 2021. That would be growth off of our current expectation of fiscal 2019.

So we would expect whether the revenue hits as we are expecting it will or if there is a delay of a quarter or two, as Jim just mentioned, in fiscal 2019. In either case, we would expect fiscal 2020 to have revenue beyond the fiscal 2019..

Okay.

And fiscal 2019, you are tracking at about what?.

We haven't explicitly said that but we would be, at this point, somewhere in the mid to upper teens depending on what happens with the, probably mid-teens is probably a better way to put it. Depending on what happens with the couple of orders that have the potential of being delayed a bit..

Okay. Great. All right. Thanks. I will hop back in queue in case anyone else has anything..

Thank you Joe..

[Operator Instructions]. Our next question is from Bill Baldwin with Baldwin Anthony Securities. Please proceed..

Hi. Good morning Jim and Jeff. Thank you for your time..

Hi Bill..

A couple of questions here. Jim, it's been a while, but I know that one time you fellows were talking about peak cycle objectives with the revenues in the target area of $200 million.

Is that something that you are still referring to? Or is that still a benchmark that you are looking at as far as the next peak cycle? Or has that changed since the last time you talked about it?.

That certainly is an objective and a goal. And to achieve that will require putting our capital to work through M&A or other forms of business combinations. Organically, in a classic sense, we won't get there organically without an M&A strategy.

But we still have that as our where we want to go and where we think we can go and we have the dry powder to get there..

When you model that out, where do you think your gross margins could normalize in a good environment for you? As you look at over the next several years, the cycles moving up, you are obviously getting a little bit better gross margins in your backlog. I think you indicated you made some capital spending to improve productivity and so forth.

Is there a level that we should be using, Jim, looking out for gross margins that would be in the 25% to 30% area rather than 23% to 25% area?.

We still think of our gross margin sort of as a mid-cycle margin in the upper 20s, lower 30s. Now what needs to be borne in mind is the weighting of the naval strategy as we grow. And we are intent on growing that segment of our business.

I make that remark because the naval program has a lower gross margin, but is accretive or blends in fine at the op margin line. So we are less focused on gross margin for the naval strategy, but it blends in at the op margin line. So I just wanted to make sure everyone is mindful of the naval program.

Because of it's material intensity, it does carry a different weighting of gross margins than are ordinary core work..

And Bill, this is Jeff. Just on top of that, at those hot gross margin level that Jim mentioned, the upper 20s to low 30s,, the way we think about modeling the business at that point in time would be looking at our targeted EBITDA level. We have targeted an EBITDA level of around 17% through a full cycle.

We think we could be in that upper teens certainly from an EBITDA margin standpoint at those margin levels, as Jim mentioned..

At mid-cycle, so to speak?.

Right..

Right. Okay.

Secondly, talking about that the Navy, can you give us a little bit of a picture looking out over the next year or two or so, Jim, as to what the horizon looks like as far as potential new navy orders in terms of where they might be coming from, the types projects and the size of the orders potentially?.

There is a high level of enthusiasm in the naval community, the shipyards, the supply chain, the government as well because of an ambitious program to expand the fleet of the naval vessels. So we are expecting over a longer period of time to see that create stronger demand for us.

To complement that further though, we are not satisfied with the number of components that we are providing to the U.S. Navy and our team is tasked with how do we expand our supply, how do we do more work for the U.S. Navy and should we be successful with that, we see our naval strategy expanding even further.

So we have a strong surge of demand that's coming from an expanded build program and then we intend to complement that by doing more components and supplying additional equipment to the naval programs that we are not currently providing.

Timeframe to do that, I am not going to cite that other than we are pretty pleased with where that strategy is going and our tactics to continue to grow our naval revenue and also a receptiveness from the Navy and their shipyards to what else can Graham do that support available programs..

That's good. That's super. You guys are doing a good job there..

Our team is doing a great job..

Absolutely. On the petrochemical and chemical front, I assume that these are some of the programs or projects that are getting pushed to the right.

But do you see traction begin start to kick in there as fiscal 2019 proceeds?.

Bill, we think we are in the early stages of the second petchem wave in North America. We do have a number of bids that we have made, some are pretty aged where what we are characterizing as the second wave. We have been hunting these projects for a good while.

We think a handful of those close across fiscal 2019 for North American petchem ethylene capacity, ethylene revamp downstream derivative plants. We do have a fairly good size, dollar size of opportunities that are in front of us over the next few quarters that we are focused on.

A lot of resources have gone in to support that selling process and we expect to be successful in several of those projects. So that's very encouraging because it complements delays on top of what we think is improving refining fundamentals on top of where our naval backlog is in terms of its revenue cycle.

So we are believing at an inflection point and revenue will begin to expand off of, it's not hard to do whilst in a trough, but we are bouncing off the bottom and heading into a more expansionary phase which is -- go ahead..

I am sorry, Jim. Go ahead..

I was just going on, again, circle back to which is why we are bullish on adding to SG&A because we see a multi-year view year..

Absolutely.

And lastly, can you give us a little color what you are seeing internationally as far as refinery, petchem, so forth and kind of the sectors geographically, with Europe, Middle East or in Latin America, Canada?.

Sure. We are seeing, which is good finally, some new capacity projects come into our bid pipeline for the Middle East or China in the refining space, which we hadn't seen in a couple o years. And some of these are fairly large projects. Certainly, the ones in the Middle East. China is more typical of the project size.

The timing of these projects are still not yet clear, but what's important is they have entered our bid pipeline. They seem to have strong fundamentals. They have a national interest, in some cases, where these refining investments are being made. So we feel very, very good about that.

And there is a number of those, just not one or two, in the Middle East. And there are several coming up in China. With respect to South America, boy, if I think of the today versus 2013 and 2014, the wave of work that was building up in 2013 and 2014 was just incredible for Latin America.

We are not as positive about the timing of those projects today. We still think that sector is going to be contracted for a couple more years. In Canada, we don't see much of the oil sands area for new capacity, although the oil sands for us, once we have installation, it's a great driver of aftermarket and revamp and metallurgical upgrades.

So we do see that from our installed base. There was just a report that came out today regarding Canada petchem, a massive wave of new investment in Canadian petchem over the next decade. We have some of that work in our pipeline, particularly for Alberta new ethylene projects and expansionary investments there. And that's sort of our home turf.

We feel very good about those opportunities and our ability to be successful there. And again that report just came out today which was a very bullish outlook on Canadian petchem investment tied to low cost natural gas or monetizing their natural resources differently. That's very positive..

Very good. Well, congratulations to you and your team, Jim, for a job well done during this tough period. Now you are in a position to capitalize on all of that hard work..

Thank you very much, Bill. We appreciate the compliments..

Our next question is from Gerry Heffernan with Walthausen & Co. Please proceed..

Good morning Jim. Good morning Jeff. Thank you for taking the call..

Hi Gerry..

Hi Gerry..

In regards to the, I guess we are using the term base business, so the business that comes in through, the revenues that come in through a year that are not really part of the backlog at the end of the year and they are completed before they would be in backlog at the end of the next year.

And that has stayed relatively steady at least at 10% above the trough but about 20% below the peak.

So understanding that, I was curious to know if that type of business falls into any one particular segment of the four segments that you identify in the press release?.

Sure. It tends to come from our installed chem., petchem base. A fair percentage is from that sector. And also our refining sector because it's a good element, a large percentage of that short cycle work in and out in a quarter, in and out in a year. I am sorry, that number I cited for Joe. That also is our parts and replacements.

And so that's from our petchem market and that's from our refining market. More than half of it is from those two sectors..

Okay.

And as you just said, that a lot of it has to do with parts and replacement, I presume normal wear and tear stuff that you have a pretty steady order flow on that?.

That's right. It does have a little bit of variability. But nothing like our project work. And we cited for Joe that we see that level of business typically between $25 million and $30 million on a per annum basis. And the parts business is somewhere around half of that..

Okay. I don't think we spoke about this specifically yet today. If they did, forgive me for just going down on it. The power segment, obviously a huge challenge in the last year. We obviously see the very large increase in backlog.

Can you talk to the power segment how you see things there? Was there anything dramatic in that step up in backlog which pretty much seems to me we have talked to that backlog as being refining and petchem?.

The power sector, to use your verbiage, is challenged. And we have seen some improvement in our nuclear power backlog. We haven't seen improvement in our renewables backlog which is geothermal waste to energy, biomass to energy. That can vary tied to legislative policy in North America.

We have seen our nuclear backlog come up off its bottom over the last several quarters. And renewables, I would say, is contracted at this point in time..

Okay. And for you, I would think the renewables we get into the biodiesel and things like that. And the biodiesel tax credit stuff still seems to be mired in DC. I am guessing that has some effect on the way that market works for you..

Certainly the tax policy, legislative policy can create strong periods of demand and then also when policy changes the demand goes away which is what we have seen over the last number of years. At biodiesel or green diesel, we tend to put those sales into our chemical industry sales, if you will.

When we talk about power, it's more of electrical generation power, alternative energy in that context that's for power generation..

Very good. Thank you for the clarification. And one final thing, Jim, you mentioned the early stages of a second wave petchem cycle and mind you, I will not hold you to the specifics of your answer here.

How long would you consider a wave to be? What's the time cycle of a wave?.

What we are reading is the second wave and how we are interpreting what we are reading and what we are hearing from the marketplace, it will be more protracted than the first wave but it won't be the rush of opportunity that we saw in 2013 through 2014, which really that wave spanned about two-and-a-half to three years.

We think this wave will be more elongated and go from 2018 through 2022..

I would imagine that a wave of an elongated nature would enable you to handle order flow in a more efficient manner.

Is that correct?.

It certainly is helpful to Alan and his team who runs the operations when it doesn't come in a massive surge. The drawback on our sales side is, we like the pricing power which comes with the surge. So it's the yin and the yang of that.

Another element that maybe we have talked about previously on our calls was the second wave, for North America it has a higher tendency to have international project sponsors. And they have an appetite for a different supply chain and a different focus on cost versus lifecycle costs. First cost versus lifecycle cost.

So we are seeing a different margin potential in the second wave than we saw in the first wave..

Okay. And I greatly appreciate the time you are affording me here. If I can ask one last question in regards to input costs.

Can you just give us your view of the effects of metal prices giving our on again tariff issues as well as labor pricing and your ability to get labor, your status of your staffing and any concerns you may have or what you are seeing as far as compensation wage pressure?.

Sure. On the input cost side, we have seen metal costs rise. We all looked at each other with awe. 15 minutes after the tweet went out around the tariffs, our North American supply chain raised their prices 15% to 20% that day. And it is still sticking.

However, we have been able to drive that cost increase into our prices and into the market where it does come into play as if we are in the international markets where our competition will not have to deal with a tariff related cost basis. We do.

And therefore we could be entering an international sales opportunity with a different cost basis than our competition does. In North America, we are protected because of the tariff but remarkably, like I cited, in snap of a finger, certain of our input costs went up 15% to 20% in a morning. But we were in front of that. We were watching that.

Our supply chain folks did a great job of building up some inventory with a lower cost basis and then also making sure that our estimating team understood the costs of what would be going into inventory or for input cost for future projects. And our goal is to push that cost right into our customer wallet so we don't have to deal with that.

And we have been able to do that. On the labor side, we have, again this is illustrative of our longer term bullish outlook, we are adding to our direct labor force. We have a pretty good ramp up strategy for that.

I am not sensing that there is an impediment in our ability to hire that talent nor has there been wage pressure that our wages are inappropriate or what the market is asking for or what the new hire is asking for. So I do expect we will be able to buildout our direct labor workforce and align them with our capacity needs as we grow..

That's great. Thank you very much for your time today..

Thank you Gerry. Good to hear from you again..

We now have a follow-up question from Joe Mondillo with Sidoti & Company. Please proceed..

Hi guys. Just a couple of things. I was wondering if you could update us on, I think it was late last year or in the second half of last year calendar year, you were talking about how you are working with consultants regarding ways to utilize Graham's capabilities to try to find maybe potential new revenue streams.

I was wondering what the outcome of that was? If you found anything?.

The report of their, it provided us a perspective on handful of markets that we are not in currently that would value our ops model, our customer facing model. One of the highlights that came away is that there likely is more than we can do with the U.S. Navy and related adjacencies to the U.S. Navy. So we are certainly focusing our efforts there.

And some of the other areas, as management we are not quite as certain we belong in those areas although they have strong growth rates. We are not certain of the pricing is right and the product characteristics match our brand and how we can create value. But it was a very good exercise, very good process.

We came away with a few nuggets for us to think about. And we came away with some conclusions that we don't belong in certain markets..

Okay. Great. Actually, that's all for me. So I appreciate you taking my follow-up..

You are very welcome..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the conference back over to management for closing remarks..

Well, thank you Sherry. Thank you everyone for your time this morning and for your very detailed questions as you asked Jeff and I to clarify our outlook and what's behind some of the numbers. Just as a summary, we are exceptionally excited about where our backlog is.

We are very pleased with the quality of our bid pipeline and our view over the next couple years is markedly different from it what was 12 to 18 months ago.

And we will update you on our guidance and our outlook as we move into the next quarter and we get this quarter behind us that helps us set the foundation for where the year can really end up and we will update you in August. Thank you very much for your time. You have a good day..

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation..