Graham Corp (GHM) 2008 Q4 法說會逐字稿

Greetings and welcome to the Graham Corporation fourth quarter and fiscal 2008 year-end conference call. 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. It is now my pleasure to introduce your host, Ms. Tammy Poblete, IR for Graham Corporation. Thank you, Ms. Poblete, you may begin.

Thank you and good morning, everyone. We appreciate your time with us today. You should have a copy of the news release that details Graham's financial results for the fourth quarter of fiscal 2008 year-end that we released this morning. If not you can obtain a copy from the website at www.Graham-mfg.com. With me here today are Graham's President and CEO, Jim Lines; and Chief Financial Officer Ron Hansen. Jim and Ron will provide their plan comments first and then we will open it up for questions.

As you are aware we may make forward-looking statements both during the call and in the following question and answer period. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what we discuss here today. These risks and uncertainties are available for you in the press release itself as well as with filings the Company has made with the Securities and Exchange Commission. With that let me turn it over to Jim to begin the review and discussion. Jim?

Thanks, Tammy. And good morning, everyone. I will not talk much about 2008 as Ron will provide those details, other than I wish to acknowledge it was a solid year for our Company and I want to congratulate our team on exceeding revenue and profit goals that were set for the year. Our team did a tremendous job.

fourth quarter bookings were strong at over $35 million. Since our last conference call for the third quarter, we have seen certain projects accelerate that contributed to the strength in bookings. Expanded backlog to $75 million and provided great visibility into fiscal 2009. As a result, we have increased our revenue guidance for fiscal 2009 to 15 to 20% growth from $86.4 million last year. This is much improved over our initial expectations of 10 to 15%. Our positive outlook for the next few years has been constant due to the continued anticipated strength from refining and petrochemical Markets. Various data points are used when assessing the near and long term strength of our primary markets. A key indicator is growth in backlog at engineering procurement and construction contractors. There has been a very good correlation between the backlog for the EPCs and our bookings and backlog. The EPCs we routinely survey and who are winning the refining and petrochemical work are, Floor, Jacobs, Shaw, Foster Wheeler, [Teknipe], JTC, Toyo, Technicos for Unitas, and GS Engineering and Construction. Our activity with these contractors continues to be high and they too are forecasting growth during the next couple years.

(Inaudible) Publishings hydrocarbon processing industries semi-annual box score update is indicating year-over-year growth for active projects is 7.4%. There are about 300 more projects active as of February 2008 compared to February 2007. Thirdly, our quotation activity also correlates well to bookings and then to revenue and backlog. The level of our quotation activity continues to increase and from that we expect there to be growth for current year bookings and revenue growth for fiscal 2010. The value of our trailing 12 month quotation activity is up 30% from 12 months ago. I consider this to be the best barometer for assessing the likelihood of near term growth.

For the near term, there are many large refining and petrochemical projects primarily in Asia and the Middle East moving through front engineering and design which we refer to as feed package on to EPC award. For example, there are projects for a 400,000 barrel per day refinery for Aramco and Conoco Phillips in Saudi Arabia. There's another 400,000 barrel per day Aramco Totale refinery in Saudi Arabia. A 250,000 barrel a day Al Shaheen refinery in Qatar. We've identified as many as 17 new refineries in China that are scheduled to be built, many of which will be integrated refinery and petrochemical plants in India, SR, Bangalore, IOCL, Batinda refinery projects are active. There is refinery work in Vietnam, Malaysia, Indonesia and Thailand. Dow and Aramco have a massive integrated petrochemicals project at Ras Tanura in Saudi Arabia. We're seeing refinery work in South America. We expect oil sands activity to commence next year. U.S. based refineries will continue to invest in feedstock diversification and bottom of the barrel conversion initiatives. As you might imagine, I remain quite optimistic about the coming couple years.

We are continuing to invest in our operations to expand revenue and improve profitability. Our ongoing investments in welding, burning, and machining equipment along with work flow improvement and gains in quality are showing up in our performance. Our capital plan for fiscal 2009 is approximately $2 million. About two-thirds is is for productivity and one-third maintenance. IT investments will enable better leverage of our existing infrastructure. Subcontracted fabrication remains an important facet to expanding capacity. We subcontracted 9 to 10% of our production hours in fiscal 2008 and about 5% during the fourth quarter. In fiscal 2009, there is planned to be greater use of subcontracting with emphasis in Asia. Our plan is to subcontract between 12 to 15% of our production in 2009.

The Companywide effort to capture the greatest possible share of the current strong demand for our products and gain greater leverage has taken place in engineering to increase capacity through IT and improved process work flow, in sales with a disciplined product pricing policy, rigid order acceptance criteria, and new profit metrics, outsourced fabrication, investment in work flow, quality, lead time reduction, and equipment for operations, product estimating and procurement groups remained current on our costs during a time of volatile metal pricing, a change from a volume focused manufacturing platform to a flexible capacity based platform for our low volume, high mix business. These efforts enabled our Company to expand from $41 million of revenue in 2005 with 261 employees to $86 million three years later with 313 employees today, and to $100 million or more in fiscal 2009.

Looking beyond fiscal 2009 I continue to believe the future for our Company is bright. Beyond the longer term refining and petrochemical market story, there are opportunities in power generating markets of the U.S. which are becoming active. We expect it to be robust globally as well. Other end use markets that require our products are alternate energy, which is here to stay, fertilizer markets are to be active with the growing need for food worldwide, and freshwater is scarce. These markets are process industries in need of engineered to order equipment. Our Company has an excellent and respected brand. Our financial position has never been stronger and these process industries are looking for engineered to order equipment providers to solve their operating, reliability and capacity needs.

In these markets, our end use applications, quality, a strong customer centric culture, specialized engineering know how, custom fabrication expertise and product reliability are differentiators that lead to customer loyalty and we believe above average margin potential. I believe Graham can become the world leader in the design and manufacture of engineered to order products for the process industries. Ron, I will turn it over to you.

Thank you, Jim. I will start by discussing the fourth quarter, followed by our annual financial performance. With some fiscal 2009 forward-looking information mixed in. In the fourth quarter of fiscal '08 which ended March 31, net sales were $22.8 million, a $1.9 million increase compared with net sales of $20.8 million in the fourth quarter of fiscal '07. Condensor sales grew to 30% of total net sales in the fourth quarter of fiscal '08 compared with 19% in the same period the prior fiscal year. Ejector system sales were 28% of total sales in the fourth quarter of fiscal '08 compared with 40% in the same period last year. The change in sales between condensors and ejectors is not indicative of future sales and we expect both products to remain strong and take turns leading quarterly sales in the future.

Aftermarket sales also grew year-over-year from 15% of net sales in the fourth quarter of fiscal '07 to 23% in the fourth quarter of fiscal '08. This was a result of a couple of large orders. We expect as the number of installations containing Graham equipment grows worldwide our aftermarket sales will increase as well. These sales require very little capacity and yield good margins. The percent of total net sales attributed to domestic customers dropped slightly to 50% in the fourth quarter at fiscal '08 compared with 56% in the same period the prior year. Strong international sales to the Middle East, Asia, and South America accounted for the shift between domestic and international sales this quarter.

Gross margin in the fourth quarter of fiscal '08 was 39.3% up from 29.2% at the same period last year. The improvement was largely driven by the increase in operating leverage due to efficiencies gained in engineering and manufacturing, as well as our continued selectivity in orders accepted. SG&A expenses were $3.3 million or 15% of sales in the fourth quarter of fiscal '08 down slightly from $3.4 million or 16% of sales in the same period last year. Here too SG&A, we continue to manage cost very prudently.

Interest income was $227,000 in the fourth quarter of fiscal '08, up from $160,000 in the fourth quarter of fiscal '07. Interest income was generated from $34.7 million in short term investments, safely invested in U.S. Treasury notes. Our fourth quarter fiscal '08 effective tax rate after a trueup adjustment was 28.3% compared with a tax benefit of 18.6% in the same period of the prior year. In the fourth quarter of fiscal '07, we recognized a $1.6 million R&D tax credit. Net income was $4.2 million or $0.83 per diluted share in the fourth quarter of fiscal '08 up from $3.4 million or $0.69 per diluted share in the same period last year. As noted, included in the fourth quarter of fiscal '07 was a research and development tax credit of $1.6 million or $0.33 per diluted share compared with $234,000 or $0.05 per diluted share in the fourth quarter of fiscal '08. Now I will comment on the annual results.

In fiscal '08, we set new records in sales, net income, bookings, and backlog. Net sales were $86.4 million in fiscal '08, a 31.3% increase compared with sales of $65.8 million in fiscal '07. This was the fourth consecutive year that we achieved double digit sales growth with a four year compound growth rate on average in excess of 22% for annual. Geographically, U.S. Sales in fiscal '08 contributed 54% of total sales while 15% of sales were to Asia, 12% to the Middle East, 9% to South America, and the remaining 10% to other international markets. In fiscal '07, 50% of sales were to the U.S, 17% to Asia, 23% to the Middle East and the remaining 10% to other international markets. In absolute dollars, export sales increased $6.7 million in fiscal '08 compared with fiscal '07.

Refinery market demand drove sales in fiscal '08 with 43% of total sales up from 35% at fiscal '07. This also drove demand for ejector systems to 42% of total sales in fiscal '08 up from 33% in fiscal '07. Sales to the petrochemical market were slightly down in fiscal '08 to 31% compared with 39% in the prior fiscal year. Again, we expect both ejector and condensor sales to remain strong as well as both the refinery and petrochemical markets. Our orders in fiscal '08 increased to $107.1 million compared with $86.5 million in fiscal '07. In fiscal '08, domestic orders contributed 63% of total order s or $67.5 million while export orders were 37% or $39.6 million. In fiscal '07 domestic orders were 47% or $40.7 million and international orders were 53% or $45.8 million. Despite an overall decline in export orders, orders to China for new installations at South America and Canada for unconventional fuels were up in fiscal '08.

Looking ahead, we feel global demand for our products will remain strong and we will continue to choose those orders that make the most sense to us. Gross margin for fiscal '08 was 39.5% compared with 25.6% in fiscal '07. The gross margin improvement was impacted by increased efficiencies in engineering and manufacturing and greater leverage of manufacturing cost.

Total outsourced hours in fiscal '08 were approximately 10%. We believe with further efficiency improvements and a balanced outsourcing strategy, we will continue to maintain our gross margin in the upper 30% in fiscal '09. In fiscal '08, is SG&A expenses were $13.1 million or 15% of sales compared with $10.8 million or 16% of sales last year. Higher variable cost related to increased sales and net income increased actual SG&A expense. We expect SG&A expenses to be approximately 15% of total sales in fiscal '09. Fiscal '08 interest income was $1 million, almost double interest income of $516,000 in fiscal '07 due to an increase in investments of 144%. The fiscal '08 tax rate was 32%, up from 12% for fiscal '07 which as noted already reflected a $1.6 million R&D tax credit. We expect a tax rate of approximately 33% in fiscal '09.

Fiscal '08 net income was $15 million or $2.98 per diluted share compared with $5.8 million or $1.17 per diluted share in fiscal '07. Our operating performance in fiscal '08 further solidified our already strong balance sheet and cash position. Cash and short-term cash had investments on March 31, '08 were $36.8 million up from $15.1 million on March 31, '07. There was $11.3 million in letters of credit outstanding and no borrowings under our $30 million line of credit as of March 31, 2008.

Net cash provided by operating activities increased to $19.7 million in fiscal '08 compared with $5.2 million in fiscal '07 due to higher net income, use of deferred tax assets, and less operating working capital requirements. We reduced our cash conversion cycle from 51 days at the close of fiscal '07 to 31 days at the close of fiscal '08, which we were able to accomplish by reducing our accounts receivable and inventory balances. Average working capital to support sales was 3% of sales in fiscal '08 compared with 8% the prior year. Capital expenditures were $1 million in fiscal '08, approximately 60% of CapEx was for plant enhancements. CapEx for fiscal '09 will be approximately $2 million with an estimated 34% for plant machinery, 53% for IT, and the remainder for other investments. Spending in fiscal '09 will further support our efforts to increase productivity and capacity in both engineering and manufacturing.

That concludes my remarks for today. Jim, I pass it back to you.

Thanks, Ron. Operator? We could open the call for any questions now.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from James Bank with Sidoti & Company. Please state your question.

Hi, good morning.

Hi, James.

Congratulations on a great quarter, guys.

Thank you.

In regard to the backlog, is aftermarket parts a part of that backlog number?

Yes, yes it is.

Okay. And I'm trying to get down to the margins here. And from a pricing perspective, North America, you guys tend to get better pricing, right?

Yes. That's right.

And Ron, I'm sorry, I couldn't catch that. What was the percentage of your orders going forward that's from North America?

You mean the backlog that we booked?

Yes.

One second.

You said it, I just couldn't jot it down quick enough.

Yes, our orders for fiscal '08, 63% of the orders were for export business and then domestic business, authentic 7% was for export.

Okay, so I guess what I'm trying to get at is with that in the aftermarket business and the operating improvements you guys have going on, what's sort of keeping you hanging on to that low end range and the gross margin guidance and you're saying it's going to be the high part of 30% but sort of keeping that 37% out there. What's keeping you leaving that unchanged?

There were a couple things, and we need to look at our business a couple of different ways. One is quarter by quarter which is very difficult to predict with respect to the gross margin but just to give you some sense going forward, we expect that the gross margin can exceed 40% in a quarter and it may fall below 40% in another quarter. From a modeling perspective which is what we're trying to provide the guidance is we would advise modeling of financial performance in the range of the upper 30%, between 37 and 40% gross margin but we fully expect with the drives we have in the business to be able to push this business harder, to be able to generate improved profitability and I expect that there will be gross margins above 40% in quarters into fiscal 2009; however there can be quarters that will be below 40% so on average we'll be in the upper 30% range. Also, looking at the sales mix going forward, we've mentioned that we're going to continue to rely upon outsourced production, expanding our capacity through sub contracting. We've talked in the past how that inherently has a lower gross margin potential. That doesn't affect our ability to generate improved earnings but it does have the affect of lowering margin percentages as compared to a percent of sales.

Okay, that's very helpful and I guess the fact that you had about 10% subcontracted this year versus I believe last year, correct me if I'm wrong, somewhere in the 13% range and you're thinking it might do closer to 12 to 15%, and '09 is why you hang on to that low end?

That's correct, James.

All right, thank you for clearing that up and again, Ron, you said it so quickly your tax rate for fiscal 09 you anticipate 33%?

33.

Okay. And could you just prioritize the use of cash?

Well, again, from operations growth, we believe our cash we're generating from operations itself will support our sales growth. We are looking next year to maintain the accomplishments that we have achieved in reducing our cash conversion cycle to the low 30s to mid 30s and we are looking to maintain our low percent of working, operating working capital to support sales. So from an operations perspective we do not really see utilizing that cash except for the CapEx that we talked about. We really have no debt to pay off, so that cash that we use that we are generating from operations excess and the cash we are going into the year will not be used for operations growth or to support growth. Beyond that, the cash that we are accumulating we do plan on reinvesting in the business as we are and using that for our growth opportunities, acquisitions, joint ventures and other opportunities as they become available to us and they make sense to us, but at this time we do not have any immediate information to announce or that we are really close to looking at.

Okay, any potential of a dividend hike?

Really at this point, that's not on our discussion of duties.

Okay. Great. That's all I have, thank you.

You're welcome.

Thank you. Our next question comes from [Chris McCampbell] with Stifel Nicolaus. Please state your question.

Good morning, gentlemen.

Hi, Chris.

At the end of Q3, you had talked about an increase in foreign competition and I know you had some concerns about some pricing pressure. Has something changed in the last three or four months to I guess alter your outlook there?

Well, one key change is we won $35 million of orders in the fourth quarter which gave us very clear visibility to the composition of our backlog entering fiscal 2009. Now, we were in tough competition situations for many of those orders. We were successful. Our sales team, engineering teams were able to win those orders against the foreign competition in some cases at a premium to the competition which is how we typically sell; however until we finally negotiate the orders and close the orders in favor of Graham, there is difficulty in predicting the potential margin in the bookings pipeline because of the competitive pressure that we have seen; however in our fourth quarter our team did a fantastic job to win the orders and win orders at a premium.

Would you say I guess the differentiation that you're seeing out there, is it just quality from Graham standpoint that allows you all to I guess keep the pricing the way it is?

There are a couple of factors. Certainly it is quality. Now quality spans more than simply equipment quality. The sales model that Graham has developed and evolved over the years is one that is very supportive and consultative to our customers, very early in the project inception, much before money will be spent. We approach it that way because we feel in that way, we can integrate our equipment into the customers process in a better way than our competition can and we're involved in these projects much earlier that allows us to manage the selection, manage the design, and manage the integration of our equipment in a more favorable way with respect to profitability than we believe our competition can. It's not uncommon for us, Chris, to be involved in a large project two years before the capital purchase is made and there's four distinct phases of the sales process that occur, with the fourth being purchase order placed with Graham or a competitor, we're in Stages 1, 2, and three where no money is being spent, that's our sales model. We approach it that way because we believe the quality of our consultative selling and engineering resources will be applied in Stages 1, 2, and 3 enable us to be awarded via a premium in pricing. We're viewed as a support partner by the EPCs, engineering, procurement and construction contractors and the end-users as a Company, maybe the only Company in the world that knows best how to integrate a vacuum system or surface condensor into their process.

Well, that's great. I guess one other thing, you've been building your cash and it doesn't seem like you're interested growing the dividend, so are there any gaps I guess that you see in your business where you might be able to fulfill a need to grow M&A wise? And if there are, what would that gap I guess be?

Well, we certainly see the best use of our cash as reinvesting it in the business for growth. My vision for our Company is to double the business, double the revenue over the next several years via our continued organic growth expansion that's been ongoing. As Ron mentioned we've had about a little over 20% compound annual growth rate organically over the last four years. We still have a positive outlook going forward organically but in addition to that, we feel an acquisition can further propel our revenue and our profitability and create sustainability of the profitability long term. We don't have a target that we can talk about at this point, but that's where we feel the best use of our cash can go to secure profitability going forward for the business.

But Jim, are there like industries or what kind of like the acquisition criteria?

Well, the acquisition criteria remains in what we refer to as the process industries, where, and that would involve refining of course, petrochemical, power generation, alternate energy, geothermal, coal to gas, those areas where an engineered to order solution is required because of the uniqueness of those applications and the criticalness of those processes, we think it's there where the Graham brand is already well respected, the Graham brand is known, we know how to sell into those applications, and that's where we think we can add additional value to our business through an acquisition.

And I guess the acquisition candidates that you would look at would be obviously accretive to situations, not long term investments where you'd be building a sales model that wouldn't be immediately accretive?

Correct. We would not, we would prefer of course and we would focus on very quickly returning value and being very quickly accretive to our earnings.

Okay. Well, great quarter guys, thanks.

Thank you very much, Chris.

Thank you. Our next question comes from Vincent Damasco with The Colony Group.

Yes, thanks, gentlemen. Great quarter as well. Regarding the Totale and the Conoco announcements I guess of a month or so ago, are you guys currently engaged with them or with any of the E&C firms to helping the feed stage of those projects? And then if so, I guess when would potentially be any orders that would fall through for you guys?

Well, there has been a couple of Conoco announcements, I just want to make sure, I'll just step through them. We have the Conoco-Phillips and Cono joint venture project is already in our backlog called the WRB project that was a refinery upgrade to be able to process better crude oil from Canada, we've also won in our backlog the Conoco-Phillips joint venture project in Saudi Arabia for an ethylene plant. We've had those two project announcements previously. There are other Conoco-Phillips projects in our potential bookings pipeline but the two major ones which typically what happens is is by the time they've been announced in the press we've either won it or we've already shipped it.

So with the Conoco Aramco and the Totale Aramco announcements, those have already been either ordered and shipped?

Those unique in that they were very early stage announcements. We typically don't see that. But those have been announced, they haven't even been in some cases over to the EPC yet. They're in the front end engineering design package phase, very early. Those are refineries that are planned to come on stream in 2012 and 2013. Conoco-Phillips, Saudi Aramco and Totale Saudi Aramco. The start up dates for those are 2012, 2013.

So if you're going to pursue those opportunities if you're possible or invited to, we're thinking maybe two years down the road?

First, we will go after those aggressively and I would expect to see bookings in the next six to 24 months and revenue in the next 12 to 30 months for those projects.

Okay. Fair enough. Thank you very much.

You're welcome.

Thank you. Our next question comes from [Chad Woodson] with Paradigm Capital Corp.

Hi, thanks for taking my call. I'm kind of new to the story so excuse me if I'm a little bit behind. I was just wondering at the start of the call you mentioned a lot of these refinery projects in Saudi that are going on with Aramco and Totale and some of the stuff in Qatar. Could you kind of, and I've been through your presentation from a recent conference. Could you give me a sense of, of all of these refinery projects that are going on around the world? Where are you providing your products and where do you have exposure?

Okay. Well, from a geographic point of view we're involved in projects of course in North America, in South America, in the Middle East, and throughout Asia. Where equipment is required in a refinery, there's two key areas. One of course is, I say of course, vacuum distillation where our large ejector systems are required. Every refiner that's producing transportation fuel has a vacuum distillation application, and that's where our ejector systems go. That separates the crude oil into different fractions that can then be processed into transportation fuel, aviation fuel, diesel, kerosene, whatever the refiners output objectives are but then downstream with the vacuum distillation column where the bottom of the barrel conversion occurs, that's where there's high pressure, specialized processes that require our surface condensors that are associated with compressors that manage and move gas from one high pressure location in the refinery to another. So those are the two key drivers for our equipment and refinery, vacuum distillation and high pressure applications which are referred to as a hydro cracker, a hydro treater, hydro desulphurization, fluidized catalytic cracking units, those are the applications where our surface condensors are required.

Okay, who do you guys compete with? I know there's some other broad process industry companies, but nobody really speaks to it as specific as you guys do.

Well, unfortunately we do have competition but the competition is very narrow. One of the reasons is the applications are very specialized and the refiners over the years have narrowed down the supplier list to very few that are on their approved manufacturers lists. So for an ejector system in a refinery for vacuum distillation application, there may be only two to four allowed suppliers. For a surface condensor, the same applies there too because the applications are considered critical to the process. They work or they don't work, and they tend to go with the companies with the proven reputation, the proven know how that have the consultative sales team in place that can effectively integrate the equipment into the process. So we do have competition, we have European competition, for ejector systems, we have North American competition at times for the ejector systems. For the surface condensors it's a pretty fragmented supplier base but there are few suppliers that are allowed to bid because of the very tightly controlled approved manufacturers lists prepared by the refiner.

Okay. That helps, thanks a lot.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from George Walsh with Gilford Securities. Please state your question.

Jim and Ron congratulations on a great quarter and a great year, and great job on the whole team there.

Thanks, George. Our team did a wonderful job.

Yes. I found it very interesting when you outlined the capital expenditures for the year, it looked like it would be about $ 1 million in IT, and it looks like the biggest spending you might have done since you first did the IT initiative a couple of years ago, which had some nice, obviously some great productivity enhancement contributions. Could you elaborate a little more on where you'll be spending that money and how you expect it to contribute?

Well, our IT expenditures, one major project that we have going among several other projects for this -- and I'm not talking about this current year, not other IT projects that are in their early development planning stages but one major project is our engineering, what we call engineering intent and our integration with our 3D CAD system project which will enable us to continue -- now we brought that project online as it relates to our condensor projects development which as we've seen substantial productivity gain greater than 25% in that area and the upfront part of the engineering and designing of condensors as well as improvements in the quality of the end product, as far as -- which helps our manufacturing which also leads to greater productivity in the manufacturing side of the business.

Currently, we are taking that same software development that was created in house and we are expanding it to our ejector projects which we will hope our ejector project phase will be done this year, so by the end of this year, we will have both our condensors and our ejectors which are two of our driving sales on products, where we have substantial improvement in the best practices and the capacity improvements within those areas.

Beyond that, we are also developing IT expenditures to help enhance the plant and get better operations planning in the plant and improve productivity there as well as the overall within the Company higher visibility of data which will help us be more efficient throughout the whole office and our operations. Our main focus within our IT is to improve our productivity so that we can get greater leverage. 22% of our total sales dollar is in payroll dollars, so when we talk about leverage, we're talking, 2007 our contribution margin dollar drop down from contribution margin dollars to PBT was a little over 35%. This past year, it was 81% George, to follow-up on what you were talking about as to the advantages that we have seen. Well, we plan to continue to, as we grow -- be able to grow the business without having to proportionately increase our labor cost, so as well as working smarter, we're also able to get better leverage through working faster. So that's without getting into all of the little details the overview of where -- how we're spending our IT dollars.

Yes, well, that's great, particularly the contribution margin. Is there anything as you mentioned, Jim, about getting and reaching your goals of doubling the size in the next couple years? Is it anything with a physical footprint? Batavia has to increase or is your initiatives in China would be taking that physical production or does the IT and other efficiencies contribute to that or kind of a combination of all thereof?

Well, with respect to our current plant, Batavia, I don't see addition to our roofline. With the vision we have for what we can do over the next few years improving our operating efficiency, increasing our scalability, this is what the IT investment pertains to, a high mix, low volume businesses, they're very transactional. There's a lot of cost latent in the business for the transactional activity that occurs. As we implement our IT strategies, we can scale the business, reduce the transactional cost, and that along with the operational efficiency improvements that we're putting into the plant will enable us to expand our capacity under our roofline for Batavia. Going further, a manufacturing presence in Asia is a likely outcome in our future.

Okay. Now, with alternative energy, I wonder if you could elaborate a bit more on certain markets. Nuclear plants for instance that have been getting more attention and some press and with foreign markets but even in the United States, is that something you'd be participating in?

We are continuing to evaluate that, nuclear is interesting to us because there too, it's a very critical sale, very complicated sale, very engineering intensive. They buy a differentiated solution not based on cost but based on a whole variety of other factors including quality and the manufacturing capability of the Company, so we are looking at nuclear. Now one of the aspects that's challenging the power generating market today which is really no different from what the energy market has been feeling for the last two or three years is the cost of those projects have doubled over the last seven years. The cost of a Power Plant in 2000 is about half what it's projected to cost today, so that's affecting, we believe, the pace of additional power generating capacity whether that be fossil based, nuclear, geothermal, and that's all coming into play but to answer your question, we see geothermal and nuclear as areas that we tend to focus on and we will have a position in, I believe, in the future.

Yes, because I've seen some presentations and it's just very heavy engineering and it would just, I presume a lot of ability for process engineering like you do.

It is and another nice factor, because of the lack of spending over the last 15 years by the nuclear power generating market, there's a very tight supply chain for suppliers that have the ability to provide nuclear certified equipment, and that's a real challenge for the nuclear power generating market because the U.S. based suppliers that can provide equipment to the U.S. nuclear fleet that's going to be built are very few. It's about half of what it was 15 years ago, so we see that as advantageous for a Company like ourselves and we continue to watch the pace of the nuclear buildout and you've heard me say this now over the last couple conference calls, we are continuing to watch it.

Yes, but you are certified for that, so you'd be one of the providers?

We were in the past because of the lack of spending and because of the fixed cost in an organization to be nuclear certified compliant, we did not maintain our certification; however we know how to do it, we have done it and if we need to, we will do it again.

Okay, and so something can be done fairly quickly given your history or?

Yes, we think it takes about 18 months to go through a certification process and be audited by NuPick or another auditing firm that supports the nuclear power generating market.

Okay, very good. And not to monopolize but just another area that is an alternative is processing of synthetic fuels. Is that, once again I think that would seem to be something that would be a strong point to you. Is that something you're seeing activity in or is it something you can participate in well in the future?

That's a great comment, George, that's very current. There was an article in the May issue of Chemical Engineering Magazine which is a monthly periodical that speaks to this issue directly. The North American refiners, there's considerable project work in the queue and already awarded in some cases to revamp and reconfigure existing North American refineries to be able to reprocess effectively synthetic crude oil produced in Alberta and as we've talked about in the past the buildup in Alberta is is projected to increase capacity from 1 million barrels today to 4 million barrels per day of synthetic crude oil by 2020. We're seeing right now, some of it is already in our backlog, some of it is already being converted to sales, reconfiguration, revamping of existing refineries to be able to process synthetic crude oil. We see that as ongoing. There's a number of projects in the potential bookings pipeline for U.S. based refineries to revamp and reconfigure those refineries to process either SYN bit or DIL bit from Alberta.

Okay, and is that part of the oil sands or is that even in addition to that?

That's in addition to the oil sands. There's application for Graham in the oil sands upgrader which converts the oil sands to a synthetic crude oil so there's applications for equipment in Alberta both our ejector systems as well as our surface condensors, and then the synthetic crude oil is piped from the upgrader to a U.S. based refinery for processing in the refinery into transportation fuels. The existing refinery is not configured appropriately to be able to process economically the synthetic crude oil produced in Alberta.

Okay. And is the oil sands picking up now, do you hear signs of that or is that still a little bit more in the future of terms of more activity for you?

Well, we saw it stall about six months ago because the Province of Alberta was changing the profit-sharing scheme between the province and the upgrader or the oil sands producer. That's working itself out and we see, as I said in the pre-recording, activity for the oil sands commencing again in the coming year, although it did go on about a six to 12 month stall because of this profit-sharing modification by the Province.

Okay, all right great, thanks, Jim, and thanks a lot.

Thank you, George.

Our next question comes from Vincent Damasco with The Colony Group.

Thanks, gentlemen. Just to follow-up on that discussion on kind of priorities of either acquisitions or maybe the growth investments, Jim, you mentioned a laundry list of interesting, sexy areas of nuclear, geothermal, petrochem, coal to gas, et cetera. Is there a way you can rank those for us? Because I think everyone for the past few quarters has been very interested with what you're going to do with the cash on the balance sheet? And just maybe if you could handicap the likelihood of you guys maybe moving into nuclear or going into some other alternative energy avenue? And then secondly, on nuclear obviously having end stamp approval is critical there. What did you guys do in the past and would you, if you do indeed go into nuclear, what would you actually try to do?

Okay. I will answer the second one first because it answers the first one.

Okay.

As it relates to nuclear. In the past, we have provided equipment to the nuclear power generating market. Our product offering was very narrow. I think too narrow, quite honestly, to support the investments that we would have to make to maintain the nuclear stamp. That is an area where I see the viability and the potential for an acquisition; however, I don't have much to say about that other than I think our existing product offering is too narrow. There's a lot of opportunities for process equipment like we can produce or where we have engineering know how for the nuclear market, we would have to develop new product or acquire new product to effectively provide a greater scope of supply to the nuclear market.

With respect to the other markets I mentioned which are under the umbrella of a process market, the energy market, really the target for an acquisition supplies typically those markets already, just as we do. We supply refining. We supply petrochem. We supply geothermal. Those are process applications requiring our type of equipment, large, metal, fabricated equipment, custom fabricated, specially integrated into a process, so it's not so much market oriented as opposed to we already have the sales channels we believe to take us to those markets. It's the fabrication capacity or location to effectively serve where the orders are originating or where the end use is. Does that answer your question?

Somewhat. I was, I guess if I can read that back to you, I guess what I hear is that, if you're going to be in the process industry whatever acquisitions or maybe products you develop internally will likely serve multiple end markets, as they currently do now, at least on the condensing front. And then the nuclear side, historically were you guys waiting to either GE boiler or kind of a Westinghouse type of design on the nuclear side and depending on where the market goes forward in the order process it looks like Westinghouse is getting a little bit more attraction domestically. Are you guys looking to kind of work with them a little bit more closely or?

It's not so much the designer of the reactor that's important to us. It's the EPC that's responsible for the erection of the nuclear power plant. Where our equipment had gone in the past really wasn't associated with the hot areas per se where it was radioactive near to the reactor. We were on the peripheral equipment, let down coolers, yes, that is hot, that's reactive but we were peripheral support equipment that wasn't directly associated with the power generating reactor. So, our focus will be to maintain contact with the EPC so the process licensors that are erecting these facilities, make sure we understand the scoping definition for what they require for these units. There's two or three different reactor designs with different requirements for the equipment scope. The equipment list, our objective is to work with the licensors or the EPCs to make sure we understand what their current or future needs are and what our product mix has to be to effectively support that application.

Okay, thank you.

You're welcome.

Thank you. There are no further questions at this time. I'll turn the conference back over to management for closing comments.

Thank you. I wish to conclude with thanking everyone for listening in this morning, for your questions and comments about our Company. This is an exciting and impressive time in our history. We continue to do the right things, to expand our sales base, improve operational efficiency, reduce lead time across the Company, build on the existing strengths of our employees, develop improved relationships with our customers, and manage both cost and cash while experiencing growth. 2009 is shaping up well. We expect 15 to 20% top line growth and gross margin in the upper 30% range. We see our future as bright. I believe the best days for Graham are ahead of it, not behind it. Thank you.

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