Graham Corp (GHM) 2010 Q1 法說會逐字稿

Greetings and welcome to the Graham Corporation first-quarter 2010 quarterly 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, Ms. Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you. Ms. Pawlowski, you may now begin.

Thank you and good morning, everyone. We appreciate your joining us today on Graham's fiscal 2010 first-quarter financial results call. On the call I have with me today Jim Lyons, President and CEO of Graham, and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results for the quarter and also provide a review of the Company's strategy and outlook during this contraction in the business cycle. You should have a copy of the earnings release that was put out this morning and if not you can access it at the Company's website, which is www.graham-mfg.com.

In addition, we have posted supplemental slides on the websites that provide a visual overview of our results. As you are aware, we may make some forward-looking statements during the formal 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 that could cause actual results to differ from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as other documents filed by the Company with the Securities and Exchange Commission. These documents can be found at the Company's website or also at SEC.gov.

So with that, let me turn it over to Jim to begin the discussion. Jim?

Thank you, Debbie, and welcome, everyone, to our first-quarter conference call. First-quarter financial results were excellent, all things considered. Sales were off 27% when compared with the first quarter last year, but they were in line with our expectation for the quarter. Gross margin in the quarter was unusually high for the level of revenue. We had significant margin lift due to lower cost for materials. Savings in materials looks to have been short-term as we have already started to see material costs rise from their lows. Our procurement personnel did quite well, having been opportunistic while both costs were declining and suppliers were hungry to win new business.

The order environment declined sequentially with new orders at $8.8 million. Quarterly order level has remained erratic during the past year and we expect it will continue to be unpredictable and erratic for several quarters going forward. We continue to be aggressive to win new business; however, customers just are not making purchase commitments at the moment.

On a positive note, new orders through the start of this week were over $5 million for July. Quotation activity is high and we are encouraged about the outlook once the markets do recover. We believe recovery in our markets will be led by the Middle East and Asia followed later by South America.

Recovery in North America is hard to predict, but is not currently in sight for refining and petrochemical markets. In our Middle East market, there are two projects in Saudi Arabia that has been reactivated. Each is a 400,000 barrel per day refinery requiring substantial amounts of specialized equipment like what Graham designs and manufactures. There are also signs of activity elsewhere in our Middle East markets.

China continues to invest in new refining and petrochemical production capacity supported by its economic stimulus efforts. I've been very pleased with our progress to grow our market share in the Chinese refining market. We have won seven orders for large ejector systems required by refineries in China during the past few years, bringing our market share in that period we believe to over 50%.

Also in Asia is activity for fertilizer in petrochemical-producing facilities. Some is revamping work and others are for new plants. Regarding South America in the coming couple of years, we expect to see significant refining and petrochemical projects in Brazil, Venezuela, Columbia, and elsewhere on the continent. As I noted, we are not expecting much activity in the next one or two years for the US refining or Canadian oil sands projects.

In summary, activity in international markets is picking up somewhat and as a result, our sales mix will be more international in the coming years.

It is clear the global economic downturn is having a measurable effect on our markets, the energy markets. Economists, energy producers, and market specialists are revising downward long-term demand forecasts. An example is OPEC's annual world oil outlook, which has lowered its projection for crude oil demand in 2030 by 8 million barrels per day when comparing their 2008 to 2009 forecast. That reduction is appreciable and investment decisions are being evaluated carefully due to changes in demand profile, crude oil pricing, and differentials between cost of high and lower quality crudes, near-term utilization rates, project capital investment requirements, and the impact of proposed energy policies.

This is the period of transition in our markets. However, our commitment to the energy markets has not changed and our belief is demand for energy in all forms, be it fossil, alternate, nuclear, or renewable will continue to expand and create growth opportunities both organically and via acquisitions.

While in this transition or down period, our strategy is to remain profitable. We are affirming the prior guidance for fiscal year 2010. We generate positive cash flow. Cash usage in our first quarter was related to timing, not to structural changes in the business. We continue to strengthen Graham as it currently is through becoming a faster company, internal development, investments in IT and production equipment to improve quality, reduce lead time, and/or expand capacity, continuing to support our customers while they aren't spending, building stronger relationships, staying close to upcoming projects, and to use our strong and flexible balance sheet to enable the Company to achieve higher levels of sustained earnings through acquisitions.

Ultimately we believe this downturn is an opportunity. Our plan is to emerge into the next up cycle with greater market share, able to grow more rapidly than during the past up cycle, have improved operating performance, enjoy greater product and market diversity, and be a supplier our customers want for their engineered-to-order equipment requirements.

Energy markets are inherently cyclical. As we execute our strategy for process improvement and growth, the effects of the cyclical markets will be dampened and earnings we believe more consistent. Predicting the timing for when our markets will recover is difficult. While we see the excellent quotation activity across diverse end use and geographic markets, when customers will step up to the table and place purchase order commitments is not clear to us.

As I mentioned, we are holding our product guidance for revenue, gross margin and SG&A in fiscal 2010. It is too early to begin to frame 2011 and analyzing 2011 scenarios, there's both upside and downside risk from 2010. It is all dependent upon when customers begin making purchase commitments. We will continue to update you each quarter on our market fundamentals and our perspective on how they relate to our business.

Let me turn it over to Jeff now for a more detailed discussion on the first quarter. Jeff?

Thank you, Jim, and good morning, everyone. I will start with a review of sales and operations activity before moving on to our orders in backlog. Net sales in the first quarter of fiscal 2010 were $20.1 million, a $7.5 million decline compared with $27.6 million in the first quarter of fiscal 2009. This level of sales was consistent with our expectations incorporated in our full-year guidance that we provided in May, rejecting a 30% to 40% sales decline in fiscal 2010.

Condenser sales were strong in the first quarter at $5.2 million, 12% above the first quarter of fiscal 2009. These sales were driven by orders that Graham won early last fiscal year. However, sales across all other product categories, injectors, after markets, heat exchangers, and pumps, were off a collective 35% in the first quarter of fiscal 2010 compared with last year's first quarter.

By industry, as expected, we saw a shift away from refining especially in the United States. Sales to refiners were down to 46% of total sales in the first quarter of fiscal 2010 compared with 52% in the same period last year. 24% of sales to the chemical and petrochemical industries up from 19% and 30% were to the power industry and other industrial applications, up slightly from 29% last year.

Graham's sales to the US market in the first quarter of fiscal 2010 declined $8.3 million or 45% to $10.2 million compared with last year's first quarter and represented 51% of total sales. Somewhat offsetting this decrease was a $900,000 increase in international sales to $9.9 million or 49% of total sales. In the quarter, we saw an increase in sales to Asia but weakness in all other international markets.

As we have mentioned in the past, we can have significant fluctuations quarter-to-quarter and it is better to view the trends in our business by looking at the trailing 12 months. As Jim mentioned, looking forward we do expect to see sales mix shifting toward Asia and the Middle East and away from the United States. In the trailing 12 months ending June 30, 2009, sales to Asia were almost 20% of total sales, up from 13% at the end of fiscal 2009.

We had unusually strong gross margins in the first quarter relative to the level of sales. Gross profit was $8.3 million or 41.1% of sales, compared with $12.2 million or 44.2% of sales in last year's first quarter. The quarter's relatively high gross margin percentage was related to the rapid decline in specialty and other material costs used in manufacturing our products, and as Jim had indicated, opportunistic negotiations by our purchasing department. In addition, many of the orders that were shipped in this past quarter were placed before the industry dynamics changed.

As we look forward over the next several quarters, we do not expect to see gross margin levels as sustainable and expect margins for fiscal 2010 will likely be at the upper end of the 28% to 31% range we have previously given as guidance.

For the first quarter of 2010, SG&A expenses were $3.2 million or 16.1% of sales compared with $3.8 million or 13.8% of sales in the first quarter last year. The restructuring that we undertook at the end of fiscal 2009 as well as lower commission costs related to the decline in sales resulted in $600,000 lower SG&A costs compared with last year's first quarter. Per our previous guidance, we continue to expect that SG&A for fiscal 2010 will be in the $13 million to $14 million range.

Interest income in the first quarter of fiscal 2010 declined to $18,000 compared with $131,000 in the same period last year primarily as a result of the significant decline in US Treasury yields. Our investments are in US Treasury certificates with maturities of 91 to 180 days.

Our effective tax rate for the quarter was just over 30%, down from 33% in last year's first quarter. We estimate our effective tax rate for fiscal 2010 to be between 30% and 31%. We are able to maintain our allowable level of tax deductions on lower expected pretax income which reduces the overall tax rate appreciably from the 35% we realized in fiscal 2009.

Given the advantages we gained in material costs in the first quarter, we had a strong bottom line despite the condition of our customers' markets. Our net income was $3.5 million with earnings per diluted share of $0.35. This compares with last year's net income of $5.7 million and EPS of $0.56. We have repurchased 303,000 shares since our share buyback program was initiated early this calendar year and that reduced our weighted average outstanding share level used in the EPS calculations.

Orders in backlog are continuing to show the impact of our customers' reductions in capital investment. Orders received in the first quarter of fiscal 2010 were $8.8 million, down from $27.8 million in the same period last year. As we have mentioned in the past, we expect quarterly orders during this disruptive period in the cycle to be quite erratic and we suggest using trailing 12-month information to understand our order trends.

Geographically first-quarter orders decreased across all regions led by the United States and Asia. As noted in both releases this morning, we did receive a $3.4 million Chinese refinery order very early in the second quarter.

At the end of June 2009, backlog was $37 million, 23% below the $43.8 million backlog at the end of March 2009. We expect 85% of this existing backlog to ship within the next 12 months. The quarter-end backlog number included $4.2 million in orders on hold related to suspended projects. This number is slightly lower than the $4.4 million level at the fiscal year end in March as one order for $235,000 was moved back to active status. We did not have any cancellations or additional orders put on hold in the quarter.

Graham's balance sheet remains strong with cash, cash equivalents, and investments totaling $45.3 million on June 30, 2009, down slightly from $46.2 million at the end of fiscal 2009. We used $500,000 in cash for operations in the first quarter, whereas last year we generated $6.9 million. This change was primarily due to the timing of receivables combined with lower net income.

Our accounts receivable balance was up $16.1 million from $7 million at the end of March, but again this is simply timing. We have seen no appreciable change in uncollectible receivable positions. In addition in the first month of the second quarter, we have collected well over half of the outstanding receivables from July 30 and have significantly added to our overall cash position.

Our cash conversion cycle at the end of the quarter also reflected the timing issue. It was up to 41 days, which compares with 17 days at the end of fiscal 2009. We expect cash conversion to reduce to a more normalized level in the second quarter and to continue to generate cash throughout the rest of fiscal 2010.

We have no borrowings on our $30 million back line and are utilizing it solely for outstanding letters of credit, which totaled $9.7 million at the end of the quarter. Capital expenditures were $80,000 in the first quarter of fiscal 2010 compared with $219,000 in the first quarter last year. We still expect to pursue our capital plan, which is an important part of our internal development activities. And as Jim discussed, this will allow us to be able to capture an even greater market share in the next up cycle. Capital expenditures for fiscal 2010 will be approximately $1 million and half that investment is for productivity improvements.

That concludes my remarks. Jim, I will turn this back to you.

Thank you, Jeff. Operator, please open the call for questions.

(Operator Instructions) James Bank, Sidoti & Co.

Good morning. I knew if I hit star one about 10 times, eventually it would click. Jim, the percentage of backlog that we still have some US or let's just call them domestic products -- projects, how much is still represented in the $37 million of backlog you reported this morning?

I don't have that statistic at my fingertips.

Okay, I guess what I'm trying to get at is the high price inflationary work that clearly worked in your favor with the gross margin, the first quarter here. Is that more or less worked through or is there still some of that still in that $37 million?

We still have in the $37 million sales that will be for the US market. The margin improvement that we enjoyed in our first quarter wasn't so much tied to geographic sales mix, but more tied to the fact that the raw materials market had a rapid decline and our procurement team was able to take advantage of that and come in well below our costs that we had estimated for those projects.

We saw materials hit the floor and remain there for a few months December through March. And our procurement team as they were buying the materials for the projects where revenue was being recognized in the first quarter did a great job to take advantage and be opportunistic at that time. So it wasn't geographic-related in my opinion. It was more the timing of where materials were.

Okay, and also -- I guess then that would imply that it's probably not repeatable, given your guidance.

We don't believe so, no. Now having said that, we're going to be aggressive in the market working with our suppliers. There are times when there's capacity available at a given supplier where we are seeing them come off market pricing. And our procurement team, I'm expecting them to be as disciplined as they were in the first quarter and to take advantage of those opportunities. But we are not projecting and we would not recommend in your modeling to look at our first-quarter margin as being sustainable.

Right, because that leads me to this question in regard of the guidance. To sort of -- to even go toward the high end of your guidance if I want to assume $70 million in sales, maybe only $13 million in SG&A and go to the higher range of your gross margin guidance, I am still kind of hitting sort of a single-digit earnings per share September, December and March quarters of this year. There's so much draconian and obviously grossly different from what you guys did in the first quarter, am I reading this correctly?

James, this is Jeff. Yes, you are.

Okay, fair enough. The tax rate -- Jeff, this is one for you please. The tax rate for the full year, I thought we were looking for 34%, but maybe with the first quarter its 30%. Should I take it down a little bit?

Yes, I think the tax rate for the year we are looking to be in the 30% to 31% range.

Okay. Is that something I should probably use in out years as well?

Depending on how you are viewing the out years, I think if you are viewing the out years with a similar level of profitability as this year, then yes. If you are viewing them with lower profitability, you could probably take it down a point or two. If you're viewing them with higher profitability, you could probably take it up a point or two.

Okay, okay, and then looking at fiscal 2011, the SG&A, I guess what you are guiding toward this year, is this more or less fixed? Could we assume $13 million to $14 million in spend for fiscal 2011?

You know, I think that's going to be a function of to some extent a function of the top line. Clearly if it -- similar to where we are at, I think that's a fair assessment. Again, similar to my comments on taxes, if you go up a little or down a little, there could be a little bit of a swing there. But I think that's a fair assessment as a first pass.

Okay, and then last question, when you guys used the word measurably, and I am not trying to put you on the spot here, but I guess a measurable volatility that you expect in orders, is it something that would look like what happened throughout fiscal '09 kind of -- let me plug it in here? I think we had $27 million in June, then $17 million then down to $8 million, then back up to $20 million. Now we're kind of back down to $8 billion. Is that the kind of volatility we should expect?

Regrettably yes.

Okay, that's all I have. Thank you very much for your time.

Dick Ryan, Dougherty & Co.

Good morning, just a couple questions on the backlog. 85% ships over the next 12 months. Can you give a little perspective of -- as to how much might ship in the remainder of FY '10?

Say that again, Dick.

The majority of it will. There's a little carryover into FY '11. The majority ships in FY '10. But the exception of the 4 million -- $4.2 million that is on suspension, the timing of that, when they are released to proceed is not clear. But we would expect conversion of the majority of the $37 million less the $4 million on suspension in fiscal 2010.

Okay, that was going to be my next question is if you could kind of give a status or an update of the $4.2 million, what could get that either moving to the left or to the right?

In our follow-up with our customers that we do routinely to assess the quality of the backlog, they have only been able to indicate that they are still on suspension. We are projecting they would be released and revenue realized in 2011, but it's hard for them to predict and they are not able to give us reliable indications of when the projects will reactivate, unfortunately. But they are not canceled.

Okay, nothing else was canceled I think you said in Q1. Anything else put on suspension? But obviously not. This $4.2 million was the same from the fourth quarter, correct?

It was actually slightly different. It was $4.4 million at the end of the fourth quarter. We did have one project that was about -- just under a $0.25 million that had been on hold and has been released back into active status.

Okay, okay. On the share buyback, what's left under the program?

The program actually was set to expire, actually had expired in the last day or two. But has been extended by our Board for another 12 months. So there are 1 million total shares less the 303,000 that's already been bought back so there is this just under 700,000 shares available to be repurchased.

Okay, okay. And as you look over the next year or two years if the sales mix shifts more internationally and I think, Jeff, you talked about kind of the tax rate going forward. But that shift more internationally, what could that do to margin expectations, if anything?

Well we've indicated that the 40%-ish gross margin that we had most of last year and in our first quarter, regardless of geographic sales mix wasn't going to be sustainable. We would project at an up cycle mid-to upper 30s for gross margin and near the bottom of the cycle, mid to low 20s for gross margin.

Any significant price pressure going on on the competitive side, Jim?

Yes, we are all very hungry. There aren't many projects where the buyers are stepping to the table. And we are seeing very aggressive pricing by everyone and we are seeing the buyers using that to their advantage. There is price pressure.

Okay, great. Thank you.

Dick, this is Jeff Glajch. I just want to clarify one thing on the backlog. I want to make sure that as you are thinking through this you are thinking through correctly and that we've stated it correctly. When we said that the backlog was $37 million at the end of the quarter and that 85% of that is expected to ship in the next 12 months, that's 85% of the $37 million, not of the $37 million minus what's on hold.

85% of the $37 million?

Yes, inherent in the $37 million is that $4.2 million that's on hold, but our 85% number is off the $37 million, not the $37 million less the $4.2 million.

Okay, great. Thanks, Jeff.

Greg Garner, Singular Research.

Good morning. Just a quick clarification as a follow-up on that last question regarding the backlog. The $37 million, 85% of which is going to be shipped in the next year, that $4.2 million, you mentioned that that may be shipped and most likely would return to an order in fiscal year '10 to ship in fiscal year '11. Is that correct what you said before?

There are orders currently in our backlog. We would project that the customers release the projects and revenue would be recognized in 2011. Of 15% of the backlog that we indicated would not ship in the next 12 months is the $4.2 million.

Okay, I understand that. I just wanted to get the timing for when you believe it would turn into revenues. But it looks like it's probably going to be a fiscal year '11 event. Okay.

For the -- you are mentioning the excellent quotation activity. Can you -- is there any way to qualify that relative to what it has -- the level of quotation activity in the last couple of quarters? I just want to get a sense for is this activity as a result of projects that come back to you for a better price or looking for --? Or are there a lot of new projects out there that they are just several years in advance they want to get pricing on? Can you give us a little color on that?

Sure, a metric that we monitor continually is the level or the value of outstanding firm quotations and reclassify a firm quotation as a project that we feel will move to equipment purchase. The aggregate value of the firm quotations, and we've mentioned this on prior conference calls, really hasn't changed appreciably over the last 12 to 18 months. It's been running around $250 million consistently, maybe down 10%, but back up to the $250 million on average. So we haven't really noticed a discernible difference throughout the cycle in the value of our aggregate firm quotations.

But I want to -- I've mentioned this before. We are not clear. It is hard to predict when the buyers step to the table to make purchase commitments, but we are very busy in our sales management and quotation areas keeping up with all the activity.

Okay and is there quite a bit more activity in the areas that you believe are going to recover more quickly?

Yes, yes. The Middle East, South America, Asia, yes.

And before you've mentioned the margins in China were not the best, but certainly it seems like that's a good revenue growth area. How should I look at gross margins on this international versus domestic? Should I perceive international margins on the gross margin side to be a couple percentage points lower?

That's a fair model to use, yes.

Okay, thanks, and congratulations to the procurement team. They obviously did a good job.

They did and thank you.

Michael Heaberg, Axiom Asset Management.

Jim, quick question. Two quick questions for you. First of all, can you give us some sense of the seven orders you have gotten out of China, what kind of a close ratio you have? In other words, essentially how many quotes does that represent?

For the seven that we won, and these are large ejector systems for a particular service in a refinery, vacuum distillation application, we have made quotations on 12 projects that have proceeded in that timeframe and we won seven, counting the order that was announced yesterday. So it is slightly over 50% -- slightly over 60%.

Second question, a couple of times you briefly referenced acquisitions as a strategy for growth. Can you give us any further color on what you might be looking for there?

Sure, this is Jeff. We have laid out our acquisition thought process and really what we are looking for is one of two avenues, either a geographic expansion -- right now all of our manufacturing is here in Western New York and we believe there's advantage to us to having some -- potentially having local manufacturing in other parts of the world specifically Asia or the Middle East and maybe more specifically China or India. So that's one of our legs we are looking at.

The other leg is more of a product line expansion to offer -- to be able to offer our customers a broader array of products into a similar customer set that we have now. So those are the two avenues we're looking down. We are very active there, but what we are also seeing, we still think we are early in the process and we are very patient.

Thank you.

Rick Hoss, Roth Capital Partners.

Good morning, gentlemen. Question on the geographic distribution, we obviously saw a significant shift away from the United States, which I think you've been fairly vocal about with the expectations that Asia and international will eventually shift to become the majority of your revenues at least in the next several years. There has been quite a bit of industry news out lately. Just two days ago, China National Offshore announcing plans to expand a refinery with Shell. I was hoping you could just give us a little bit more appreciation for the opportunity in China not only from a size perspective, but also from how quickly something like this could ramp and obviously, we'd see it in bookings and backlog. But as far as your expectations for how something could start to contribute in the fiscal timeframe I guess if you could.

Okay, we are excited about the opportunities in China and the magnitude of those opportunities over an extended period of time. We believe China will continue to invest in its refining capacity along with its petrochemical producing capacity. We have seen that in a given year not more than three or four projects move together. There's just a supply-chain constraint there, whether it's the EPC, the technical process license source in China. We have not seen much more than that. So that sort of gives us a frame of the amount of business that would be available in a given year to win. If history repeats itself going forward, and I don't see supply-chain dynamics changing where that three or four becomes 10 in a given year for refining.

Outside of refining and petrochemicals, we are seeing the Chinese customers evaluate and go ahead with integrated refineries, which would couple the refinery with a petrochemical producing plant, increasing the scope for Graham, ethylene plants, other petrochemical producing plants that adds greater opportunity for those three or four projects that are moving together. And also China is involved in new fertilizer plant construction and other petrochemical producing plants such as coal to liquids is another. So China represents a very large opportunity for us. Speaking specifically about refining, we don't see it as much more than three or four projects in a given year.

Okay, and then along with Jeff's commentary a couple minutes ago regarding acquisitive targets, would you consider something in the power generation? And if so, would it be limited to US or would it also be potential for a Chinese firm or a new product that was targeted in China?

We absolutely would consider something in the power generation area and geographically, we would not be limited to the US. It could certainly be outside of the US.

Okay, could you say that if you were looking at expanding your product offering through a product targeted at power gen, would it be more likely to occur in the US?

I'm not -- I don't think we would say that.

It could go either way.

Okay, because I think you have been fairly clear about indicating a desire to expand your capacity in China for your -- more of your refining product. But looking at power gen, I was curious to see if it would be focused in China as well or if it's just sort of regionally agnostic.

We are regionally agnostic. Obviously if we are -- if we look at a US example, we would certainly want a situation where we could export also. But we are agnostic on where that actually occurs.

Okay, thank you, gentlemen.

(Operator Instructions) George Walsh, Gilford Securities.

Jim, I wonder if you could speak a bit to the motivations in the macro decision making for the purchase commitments of clients and customers in relation to you are seeing it now with what's impacting them as raw costs? And perhaps the crack spread between sweet and sour crudes or in any other macro factors that the current status then maybe think that may change in the future to motivate them.

George, what we see in the US market in particular for the refining sector is a number of things are affecting investment decisions. One being a reduction in demand, another being consistent with reduction in demand utilization levels for US refiners has dropped from low 90s to low 80s and projected to go further into the upper 70s over the next 12 to 18 months. Also the spreads, many of the refiners had made significant investments to have feedstock diversity, be able to process poorer quality, lower cost sour crudes, the spread or the differential between sweet and sour has narrowed. In some cases there is no difference.

And that's affecting their profitability and also -- and lastly and very largely is the energy policy that is being contemplated, which may be punitive to refiners, refiners that process sour crudes, refiners that have emissions -- large emissions of carbon. So there's several variables that are affecting investment decisions in the US.

If we move outside the US, and look at the Middle East or Asia, that's more triggered we felt by the costs of the projects coming down. We've seen in Saudi Arabia a couple of project announcements have come up where they are proceeding now with two or three refineries in Saudi Arabia linked to a reduction in the cost to build the plant. One was noted to be about a 20% reduction from $12 billion to under $10 billion.

So there and we had mentioned in prior conference calls our customers were moving to put projects on hold six to nine to 12 months ago while they expected costs to come down and they've seen costs come down. We think they've hit the inflection point and are starting to come up and hopefully that's the catalyst to get back into investing.

Jim, is that mostly raw materials or are they actually getting them rebid a bit because there's competition for work, there's lower margins on the part of engineers and others involved with the project?

These two factors. One of course is as you said, raw materials. Secondly, to their advantage there is a scarcity of major project work available right now. Maybe one or two at a given point in time versus going back 12, 18 months ago where there were many, many available at a given time. So they are being opportunistic in negotiating with the EPCs and negotiating with the equipment suppliers to get very good pricing. So not only has raw material costs come down, they are also being more aggressive with their procurement strategies to lower their costs further.

All right, very good. Do you think that something like the energy policy like cap and trade, I don't want to say dies or something, but if it really does not go through, that would have a major impact for the refiners that they would know what -- they would have a better idea what they're facing in the future?

Yes, yes, that would help.

Because even Valero on their call, they were quite adamant that they felt this was not a good policy and was very punitive for them.

That's correct, yes.

Okay, also M&A, I was just curious, one of the outlines you gave for parameters was a revenue stream of about $60 million. How do you look at that? Is that something where you are looking -- obviously you are obviously looking at other cyclical companies and businesses. Is that something where that is peak revenue or that would be the current run rate or just how do you view that?

This is Jeff. I think the $60 million that you commented on is really the -- we've looked -- we are looking at a range up to 60 and not that we wouldn't go above or go below the bottom part of our range, which we've suggested in the past to be maybe $20 million. But we are looking at it as a steady state. That wouldn't be a peak number and that wouldn't be a low number. More an average type number.

Okay, very good. All right, thanks. Once again, congratulations on managing well in a tough quarter.

Thank you. At this time, we have no further questions. I would like to turn the call back over to Mr. Lines for any closing comments.

Well, thank you, everyone, for your interest and your questions and we look forward to updating you after the second quarter. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.