Graham Corp (GHM) 2012 Q2 法說會逐字稿

Greetings and welcome to the Graham Corporation second quarter fiscal year 2012 quarterly results 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, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, Ms. Pawlowski, you may begin.

Thank you, Claudia. And good morning, everyone. We appreciate your time here today with the Graham Corporation second quarter fiscal year 2012 conference call. On the call I have with me Jim Lines, President and CEO, and Jeff Glajch, Chief Financial Officer.

Jim and Jeff will be reviewing the results of the quarter and also providing review of the Company's strategy and outlook. If you did not get them via e mail, you can find on our website, the slides that they will be using with the presentation. And the website is graham mfg.com.

As you may be aware, we may make some forward looking statements during this discussion as well as during the Q and 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 materially than 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 on the Company's website or at sec.gov.

With that, let me turn it over to Jim to begin our discussion. Jim?

Thank you, Debbie. Good morning, everyone. We appreciate your joining us for our second quarter earnings conference call.

We had a very solid quarter. I wish to commend the management teams and employees at our Batavia, New York; Houston, Texas; Napier, Michigan; and Shouzou, China locations. The teams executed extremely well, had close collaboration for a couple major projects, and together delivered tremendous value for our customers and terrific financial results for the business. I cannot say enough about the fine work our employees do each day, to ensure we remain the supplier of choice to our customers, to develop deep and lasting relations with our customers by helping to solve their challenges, and by adding value during every interaction with us, and to make our businesses better by improving quality, becoming more productive, and by developing ways to improve processes.

Please turn to page 4 in the deck. By expanding our addressable markets during the downturn, we were able to have significant revenue growth in the quarter. Revenues were $33.6 million with power, including sales by Energy Steel, being about 30% of total revenue.

The refining market was strong at 36% of sales. Our other commercial and industrial markets which include our work for the US Navy was about 20% of sales, chemical and petrochemical markets were about 12% of sales.

There was exceptional comparable period growth of 68% along with 25% sequential growth. Short-cycle organic sales continue to be strong, up 30% year on year and up 20% sequentially.

Energy Steel provided $7.2 million of revenue in the quarter. The team at Energy Steel executed extremely well on an order in excess of $2 million, one at the very end of the first quarter that was mostly completed during the second quarter. Actual shipment for that order was completed mid October. This order lifted Energy Steel's revenue above $7 million. Sales were fairly evenly split between domestic and international markets with domestic sales at 53%.

Please turn to page 5. Terrific financial results in the quarter were achieved with net income at $5.5 million or 16% return on sales. Gross margin was 38% with EBITDA margin at 26% in the quarter. These results reflect solid execution by our teams and leverage from high-production utilization in Napier and Batavia operations added volume through our ongoing outsourcing strategies. We had approximately 25% of Batavia's production that was outsourced. The benefit of increased volume from short-cycle organic sales at higher margins and timing of backlog conversion related to recognizing revenue and profit were a couple of refining orders that actually were won in the third quarter and fourth quarter of fiscal 2009. Again, we achieved 16% return on sales, up from 10% year over year, and 12% sequentially.

Please turn to page 6. I'm very pleased by improvement we continue to see in our markets and by order development and margin improvement on orders we are winning. The organic business increased short-cycle sales year over year about 20% with improved margin on those sales. Our larger orders increased substantially year over year about 35% comparing the periods of January through September of 2010 to January through September of 2011. And here, too, margins improving comparing the two periods.

We also had $5.9 million of orders for the power market, including $4.3 million from Energy Steel, $10.9 million of new bookings from chemical and petrochemical markets. Just under $3 million came from the refining markets for new orders. Qualitatively, bidding activity is improving. Outlook long term is very positive. Short term we'll see order levels vary somewhat. But all in all, we're seeing a much healthier market.

Please turn to page 7. We do feel the recovery is upon us, although it is in the early stages. The benefit of expanding our addressable markets results in full-year sales projected to be between $104 million and $110 million for fiscal 2012. We won't rely solely on the strength of refining and chem./petrochem markets this cycle. It will be refining, chem/petrochemical, power, Navy, and other industrial and commercial markets that will fuel our growth going forward.

Please turn to page 8. We see continued improvement in the refining markets and the petrochemical markets. Asia, we have a lot of activity in our bid pipeline that's for Asia, new refineries for China, new petrochemical plants in India, in Southeast Asia, in China. The Middle East we see activity there coming up. That's not immediately in front of us, but we're seeing it in our pipeline which is a good sign. And equally importantly, we're seeing improvement in the North American market. We have a number of refining projects that we're now bidding for the US or North American refining markets. And also because of the shale gas lines and lower cost natural gas, we're seeing investments that are being considered -- and some have actually gone ahead, and we have orders in our backlog for them -- of investments in new petrochemical capacity in North America. That's all very favorable for us.

The power market -- we're very optimistic about our acquisition with Energy Steel and what we see in the US nuclear power market for life extension and ongoing investment [in] existing utilities. Also, we're optimistic about investment in North America around new plant construction. We are bidding various projects associated with less extension for the existing plants along with new builds for North America.

Alternative energy, as we've said on prior conference calls, has been a bright spot in North America for the last several quarters, and we continue to see a good amount of bid activity for alternative energy projects in North America.

Our ongoing efforts with the Navy for their nuclear propulsion program -- I'm very pleased with our progress. I'm pleased with the execution on the order that we have and where our company is currently situated for future work with the US Navy on not just carriers, but we believe we'll be in a place to win business for additional vessels in our future.

Please turn to page 9. With our strong first half, we've adjusted our outlook for the full year. Full-year expectations, as I said earlier, are for revenue to be between $104 million and $110 million with Energy Steel providing 16% to 20% of total revenue. The organic growth rate will be 25% to 30%. Gross margins are projected for the full year to be between 32% and 33% with SG&A approximately 15% of sales.

Please turn to slide 10. Our priorities in fiscal 2012 remain advancing our market share and maintaining our dominant position that we hold in oil refining and petrochemical markets, continuing to improve our share in Asia, maintaining our strong positions in the Middle East and in North America, and being ready for investment that will be made in South America for new refining and petrochemical capacity.

At Energy Steel, our focus is to expand their capabilities to increase their sales and profit; exploit the benefit of working together with Graham, Graham bringing its engineering and fabrication capabilities to the strong capabilities at Energy Steel; aggressively pursuing the US nuclear utilities opportunities for both new build and investments for (inaudible). We will continue to capitalize or prepare to capitalize on investments the US Navy will make around its naval nuclear propulsion program. And we will continue to evaluate acquisitions to add diversity and further expand our growth.

With that, I'd like to turn it over to Jeff who will provide greater detail on the quarter. Jeff?

Thank you, Jim, and good morning, everyone. As Jim mentioned, we had a very nice second quarter.

If you can start on slide 12, you can see sales were at $33.6 million in the second quarter, more than double last year's Q2 sales of $15.7 million. Of this growth, we had 68% organic growth with the remaining $7.2 million coming from the Energy Steel acquisition.

Sales in the second quarter were 53% domestic, 47% international, similar to last year, though last year was slightly skewed toward international at 52% international.

Graham's historical markets continue to be [filled toward] the international arena, whereas Energy Steel is almost exclusively domestic.

EBITDA margin in the second quarter was 26%, up from 17% last year. Q2 net income was $5.5 million or $0.55 a share, up from $1.6 million or $0.16 a share in Q2 last year.

As expected, Energy Steel continues to be accretive to earnings in the second quarter, as it has in every quarter since we purchased them, and was an important component to our earnings growth this quarter. I do want to note one item. We did incur a $389,000 or $0.04 per share charge in the quarter related to the earn-out provision for the Energy Steel acquisition. This is simply a function of the improved likelihood of paying the earn-outs, not only for calendar year 2011, but also calendar year 2012. We are pleased to incur this charge since it correctly implies that the profitability of Energy Steel has been strong, above the $4.0 million annualized EBITDA level necessary to trigger the full payout in calendar year 2011 and stronger expectations for calendar year 2012 for Energy Steel.

For the first six months of fiscal 2012, sales were $58.6 million, up from $29.1 million in the first half last year. Organic growth was $18.4 million or 63% for the first six months, and Energy Steel contributed the remaining $11.1 million increase in sales.

EBITDA for the first half of the year was $13.8 million, an EBITDA margin of 24%. This is up from $4.2 million last year which was an EBITDA margin of 15% in the first half.

Net income for the first six months of the year was $8.5 million or $0.85 a share, up from $2.4 million or $0.24 a share last year.

On the next line, speaking of the backlog in the orders, orders in the second quarter were $23.5 million, up from $10.5 million in the second quarter last year. In the first six months of the year, orders are $42.5 million, up from $18.6 million. Organic growth was 61% of this increase in the first half of the year, with the remaining $9.4 million coming from Energy Steel.

Backlog at the end of September was $75.1 million, down from $91.1 million at the end of March. This drop is not surprising given the strong revenue conversion in the first half of the year. Finally, we have one order for $1 million which is on hold from a customer. This was an order that was put on hold in October 2008, released about a year ago with an expected delivery of December 2012, and is now back on hold.

On to the next slide, gross margin in the second quarter was 38.1%, up from 34% in Q2 last year, and sequentially up from 32.8% in the first quarter of fiscal 2012. SG&A in the second quarter was $4.3 million, up from $3.0 million in the second quarter last year. The increase came from both investments made in our organic business, as well as the addition of Energy Steel. Operating margin in the second quarter was 25%, up from 14.8% last year.

On the next slide, you can see our cash position continues strong with $37.7 million of cash and no debt. While you see a declining cash in this fiscal year to date, as mentioned on the last call, this is simply timing. As our revenues have increased over the past few quarters and projects are in various stages of completion, our receivables and unbilled revenue have also increased. However, as stated in last quarter's call, we expect this will convert to cash over this quarter and possibly the fourth quarter, and in fact, have already seen this taking place in the month of October. We are well positioned to utilize this cash and if necessary some portion of our untapped line of credit for future acquisition activities as well as internal growth opportunities.

We are very pleased with the acquisition of Energy Steel, its performance, the strength of its management team, and its nice fit into Graham. We're continuing to look for new acquisition opportunities going forward. We intend to use the same discipline and thorough methodology as we did with Energy Steel. We believe it's not whether we make an acquisition that is important, but rather that we make the right acquisition.

Finally, on the last slide, the outlook, just to reiterate Jim's comments for the full fiscal year, we expect revenue of $104 million to $110 million and growth rate of 40% to nearly 50%. Of this increase, organic growth is expected to be 25% to 30% with the full year impact of Energy Steel adding the rest. We expect Energy Steel to provide 16% to 20% of Graham's overall revenue in fiscal 2012.

Gross margins for the year are expected to be between 32% and 33%, SG&A at approximately 15% of sales. And as we've stated previously, the tax rate is expected to be 33% to 35%, and we expect to spend $3 million to $3.5 million in capital in fiscal 2012.

With that, I would like to thank you for your time and interest in Graham, and open the line for questions. Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question is coming from the line of Chris McCampbell with Stifel Nicolaus. Please state your question.

Great quarter, guys.

Thanks, Chris.

Where would you say you are in the cycle now?

Chris, I would say we're into the recovery, as I mentioned in the prepared remarks, but in the early stages. And what that means, and if we reflect back to the last cycle, the recovery has an ebb and flow to it initially. It's very hard to predict in the first couple of quarters -- several quarters going into the recovery. But if we look at it qualitatively around what's in our pipeline, how the orders potential orders are moving forward in our pipeline toward procurement and the size of the pipeline beginning to expand, it suggests to us that the worst part of the downturn is behind us and recovery is upon us. And from my view, it's just a matter of timing before the pipeline converts to orders. And we're prepared to execute on those orders better than I thought we executed the last cycle.

And, you know, would you expect your backlog to begin to level out and maybe start working higher or -- how would that relate to where we are in the cycle?

I think that's a very good metric to look at, which is where is our backlog. I just want to speak a little bit about the backlog decline. As Jeff said, we had a strong quarter, $33 million. But one point I want to make is in the second quarter and third quarter of 2009, the Company booked combined $80 million. At some point that gets -- that has to be worked down. And there will be some consumption of backlog where book-to-bill will be below 1. We're going through that right now. We weren't $160 million business at that time, so consequently what you're seeing now is occurring. I think we're at a point now where it's going to begin to level. We're hitting an inflection point, and I think as we go forward we'll begin to see backlog growth.

Great. I'll let some other folks ask questions. But maybe just a little more color on the acquisition front in terms of are you finding things maybe just a little too expensive out there, or are you just making sure you find the exact right fit?

I think more the latter. We're making sure we find the right fit. We're not finding the prices are too high at this point in time, but we want to make sure we find the right fit as we did with Energy Steel.

Yes. It worked pretty well. Well, thanks a lot, guys. Congrats again.

Thanks, Chris.

Thank you.

Our next question is coming from the line of Joe Mondillo with Sidoti & Company. Please state your question.

Good morning, guys.

Morning, Joe.

I was wondering if you could talk about what hit in the quarter that had such a high margin. Was that part of the Navy orders? I'm not sure if you mentioned that in your prepared remarks. And also what kind of margins are you getting in your orders? Have you begun to see any improvement there or is it still sort of flattish? And what is pricing like these days?

Okay. A couple things influenced the quarter. And we'll provide some granularity on that. I mentioned that we had won a couple refining projects in the prepared remarks near the peak of the last cycle, our second and -- third and fourth quarters of fiscal 2009,. One of the projects was put on hold both were put on hold and delayed for a couple of months, several quarters, and now begin to run through revenue. So they had the pricing that was reflective of the environment at that point in time, which was a pricing environment superior to what we're seeing today. We've benefited from those orders pushing through backlog now.

Moreover, we also enjoyed on one of the projects the benefit of being able to lower our direct costs because materials at the time when it was booked and materials when we actually bought the items we would use for fabrication were far less. So our direct cost on that order came down by about 10%, reflective of the higher margin that was realized in Q1 and Q2. So that's an event that really stays within Q1 and Q2.

Also, and I think this carries forward, which is unfortunate, the level of our short-cycle organic sales continues to expand compared to a year ago. That's up about 30%. And our margins are improving. So we have the acceleration of the earnings that comes from improved volume and improved margins with that segment of our business. And as I said, I expect that to carry forward. To give a comparison on that, if we look at the incremental revenue that came year over year from that segment of our business, not quite but almost dollar for dollar of the delta revenue dropped to variable margin. And that was an appreciable effect on earnings in the quarter. And I do believe that carries forward.

Also in the quarter we had the benefit of a very nice order secured by Energy Steel at the end of the first quarter that primarily was executed across the second quarter. Not entirely, but a great percentage of the order was taken in the second quarter. That lifted Energy Steel from nominally $5 million to $7 million. And that was a good order, great execution, great coordination by Energy Steel. (Inaudible) and the team here in Batavia to step up to a very significant challenge and deliver a very important product on time. So that occurred within the quarter.

I just want to talk qualitatively. We see the market environment improving. And one of the things we would look at is the order rate, and we're seeing order rates improve organically for our small business and our large order business. And in both cases, the margin is up comparatively to a year ago.

Then I would suggest or state that the margin of what we're booking now is on average above the average margin of our backlogs, suggesting that in subsequent quarters, we'll have some improvement in margin, not compared to Q2 or Q1, but to what we might realize in Q3 and Q4. So to us that's telling us we're into the recovery. It might be the early innings, but the metrics that we look at would be order development, margin improvement, and the average margin in our backlog all are positive, all are directionally in the right way. And to us, thinking back about prior cycles, those are clear indicators that the worst is behind us.

Okay. So we're in the early innings and we're starting to see going to this margin improvement? Is that sort of it?

We're [now] realizing margin improvement.

Okay. The next question I wanted to ask was in terms of your end markets and in particular the power generation and chemical processing. Power generation obviously saw a big improvement. If you could talk about what you're seeing there and if that's sustainable secular improvement going forward? And also the chemical processing still I mean, you're seeing improvement, but not, I guess significant and still sort of, you know, in the range of where you've been over the last four or five quarters. If you could address that, if you expect that to maybe pick up even more going forward?

Sure. For power, the two aspects of the power market that are currently important to us are renewable energy in the US. We're seeing a great deal of activity in our bid pipeline around those types of projects. And these are projects that have an ASP of $0.5 million to $1 million dollars, and there are quite a few of those. And we've won a number of those already. A great additional incremental work to our business. And we don't see that abating right now. It looks to be fairly strong.

The nuclear segment, to us, that looks to only have upside from where Energy Steel was to where we think we can get to together, Graham and Energy Steel combined. And that has a component of new builds associated with it, an aspect related to life extension for the existing plants, and just ongoing maintenance of the existing plants as well. We see only really significant potential upside there.

Around petrochem, our sales have been down as a percent of overall sales from the petrochem and chem markets. I'd like to point you to our bookings level. From this market segment, chem/petrochem has been about 20% of our bookings. So while the sales are lower as a -- percentage-wise, we're adding into our backlog from the chem/petrochem market. The last time when we thought about -- the last recovery in the early 90s, chem/petrochem led the way in advance of refining. And it seems to be playing out that way again.

Okay. Great. I think that's all I got for now. I'll jump back in queue. Thanks a lot.

You're welcome.

Our next question is coming from the line of Gabe Birdsall with Brasada Capital Management. Place state your question.

Hey, guys. Thank you. Actually the previous two questions covered it for me. Thank you.

You're welcome.

(Operator Instructions) Our next question is coming from the line of George Walsh with Gilford Securities. Please state your question.

Jim, could you comment a bit it's very interesting that you're able to move forward with orders here while there is a lot of headline risk going on between the eurozone and changes in the price of oil, even what's going on in nuclear. Just could you comment on, you know, your customers and how they're moving ahead in the face of some of those risks? It's really, you know, how they feel about their projects and wanting to go ahead.

Sure. The conversations we're having with our customers, while they're worried in the immediate term, the next several quarters there is some worry. But longer term the demand continues to increase. We need to satisfy that demand. And what's great about the space we play in is the construction cycle for new capacity is three to four years to five years. So an investment that needs to be made today to satisfy incremental demand four or five years out doesn't focus a whole lot around the sound bites that we all hear around the economy and the worry that's in front of us as we read the paper and listen to the news. So they're more committed to the long-term fundamentals of the markets.

What's encouraging to us is we have a number of opportunities that we're bidding right now that are for North America, refining. And I would say we didn't have those 12 or 18 months ago. But they're coming through the pipeline now. They are for feedstock diversification and revamps to expand refining capacity in North America. There are a couple of oil sands projects that are moving forward for upgraders which is where our vacuum systems are used. There was about a three year pause in activity there. So that's an encouraging sign. And here too, these are projects that are several years to commercial operation of the new capacity or improvement. Not so worried about what's in front of them today.

Around nuclear -- to us that's really exciting. As Jeff said, the acquisition of Energy Steel has been wonderful. It's a great team. It's a very important market that seems to have strong fundamentals to provide growth for us, not just on one front but on multiple fronts. We believe there will be new utilities built in the US, and we believe we will participate in that, and that's significant. That's a very significant opportunity for us. Around existing 100 or so plants in the US, they're not being wound down. They're going to invest to maintain and improve power output. There's life extension which drives high CapEx to replace existing equipment. The three legs there, not counting international, to us suggests a very long runway for growth and significant growth.

And the Asian markets, that seems to be strong. China is continuing with investments around new refining capacity and new petrochemical capacity. We're winning business for new petrochemical capacity in India. We've won it. It's in our backlog. We have some bids in our pipeline that hopefully we will win around there too. The Middle East, I think that activity is one or two years out, but it's early-stage bidding for us, which is encouraging. And South America we have a number of bids for Brazil, for Columbia, other countries in South America around refining and petrocheml and fertilizer projects, all very promising, all markets where our brand is exceptionally strong.

And again, to us it feels like the worst is behind us. Yes, we all listen to the worry and the doom and gloom and the sound bites we get, but the fundamentals of our market are strong. Long-term investments have to be made to deal with the incremental capacity. And to us it just is a great, a great story, and a great long-term growth trajectory that I think we're going to be experiencing over a number of years.

Okay. And the customers' capital funding they're all in the long-term demand is there and they are able you know, nothing is holding up your funding of capital for these projects?

For the projects that we're working on, which at this stage in the recovery I'm going to argue for a moment are a little smaller than the mega projects that we'd like to see moving forward. But those smaller projects are great. We like them a lot. And the multibillion-dollar projects or $10 million, $15 million orders for us, those aren't moving into the pipeline toward procurement just yet. But they will.

Okay. Do you just have a growth rate for Energy Steel revenues year over year?

Sorry. What was the question?

The growth rate of Energy Steel on its own year over year, its revenue growth rate.

Hi, George, it's revenue growth rate Energy Steel actually had quite a good -- particularly the first half of 2010. They had a couple of large orders that worked their way through. So the growth rate is actually not that significant year over year. But it's really due to timing of a couple of projects they had preacquisition.

Okay.

I'm going to come at it a different way. When we look at Energy Steel as a business we bought in the mid to upper teens for revenue, we see a business that together with the Energy Steel team and the Graham team that $40 million to $50 million of run rate is not out of the question over the next several years. Not this year and not next year, but we think there's that much demand, and we're going to go after it. We're going to do the right things. We're going to position our companies to win that business. And I think it's that strong.

And do you see that being the same way, purely domestic, not moving internationally?

Internationally gives us opportunity. And I said on the prior calls, I believe that's third in our priorities. We want to take care of our home market and go after the great opportunities that we see there, again with investment in the existing plans. And we believe there will be investment in new construction. We want to win there first while we develop our strategy to win internationally.

Yes, because that's a nice healthy domestic market target. Okay. But that's good. Thanks a lot, Jim.

You're welcome, George.

Our next question is coming from the line of Joe Mondillo with Sidoti & Company. Please state your question.

Hey, guys. Just a couple of followup questions. First on the short-cycle business, how much does that make up of your business? And it seemed like last call you were sort of saying that you were thinking that that may subside from the strong levels that you saw in the first quarter. That obviously continued through the second quarter here and you're sort of thinking that can continue. Could you give a little more color on your thinking of that piece of the business?

Sure. Prior to the acquisition of Energy Steel, the short-cycle business was roughly one-third of our revenue mix. With the addition of Energy Steel, I would call it roughly 20% of our revenue mix. What's great about our business model with respect to large projects is we have clear vision into the pipeline that suggests we know it's coming 12, 18 months before it arrives as bookings, and we have visibility in our backlog of 12-ish months. So we have about 24 to 30 months of visibility with our large project work.

For the short-cycle business, we don't have that visibility, in terms of, it doesn't have the same long sales cycle as our larger work. So it's hard to judge the direction of that in the near term. But we do remain positive, again because we're seeing the order development improve, and most importantly, margins improve over comparable periods for the short-cycle business. Again, suggesting we're into the recovery and spending is being freed up.

Okay. Great. And then two other questions. First, I was wondering if you could talk a little bit about the nuclear business or market. Have you started to hear anything in terms of rules and regulations, increased safety regarding, you know, what the regulators have been talking about over the last six months? Has anything sort of progressed there that you may benefit from?

We believe so. We haven't heard much from the utility yet. But the NRC report is clearly indicating that investments need to be made to improve safety around cooling of the equipment during extended power outage. We provide cooling equipment. And the metallurgical upgrades we think also is part of the life extension of the existing plants. And that will affect our potential product supply as well. We thought it was going to be 12 to 18 months before we saw the effects of Fukushima come into the supply chain and at this point I'm still feeling that way.

Okay. Has there been any initiation from that NRC report or is it sort of still in a stalemate in terms of initiating regulation?

I think it's going through its laborious process which is 12 to 18 months.

Okay. Okay. And then the last question I just wanted to ask about was -- are there any opportunities specifically domestically, but I know you also had some in India, but maybe even elsewhere within the fertilizer industry? There's a lot of capacity coming online in that industry and I was wondering if there were any opportunities there.

That's a market sector that's keeping us extremely busy with bid work in Asia, some in South America. There's a little bit in North America. But in terms of our bidding pipeline, there's a lot of work for fertilizer. And fertilizer has two aspects to it. There's an ammonia plant and a fertilizer plant. Both plants require our products. There's very specialized technology in the fertilizer plant where only three companies in the world, Graham being one of them, are the allowed suppliers. So we like the fertilizer market. And we're very actively pursuing those sales opportunities now. One of our sales managers is over with a licensor in Europe right now having conversations around upcoming projects and how we can position ourselves to take advantage of those opportunities as they come forward.

It seems like just hearing from you guys over last, I don't know, 9 to 12 months or so, you're really started to being able to get some traction within overseas markets. Is the US market just much more competitive? Because I know the nitrogen-based fertilizer there's a lot of capacity coming online. Is it just a lot more competitive here at home?

No. I don't necessarily think that's the case. One of the views we had is we went into the downturn. And then around 2009, as we were right in the heart of the downturn, we have felt recovery for Graham, absent of the addition of Energy Steel, would be led by the Asian, Middle East, and South American markets first, followed by the North American market based on how we saw recovery in the North American market materializing. It's moving more slowly than the recoveries we've seen in the emerging markets. That's what we projected. That's how it's playing out. That doesn't suggest in any way that the North American market is more competitive than the international market. It's just the way that the recovery we thought would play out and how it is playing out. But we are seeing some improvement, of course, as we said in the earlier remarks about the North American market becoming healthier. So it's timing of the recovery to put it more succinctly, Joe.

All right. Great. Thanks a lot.

Our next question is coming from George Walsh with Gilford Securities. Please state your question.

Jim, when you have your section in the news release about sales by region, is that I guess particularly in reference to the United States, is that your final customer for the project or it really just who orders it?

The way we define our geographic sales mix is by end-use location.

Okay. Okay. Good. So that's final-end customer. Right. Well, if there's any update, you know, you have the good balance sheet and just focused in terms of your, you know, a little more specifically regarding your acquisition strategy?

George, this is Jeff. Yes. As I think we've talked about in the last couple of calls, we certainly took our we wanted to make sure we took the right amount of time to integrate Energy Steel before looking to the next potential acquisition. So we're relatively early in that process. We took a little bit of a pause for six or eight months post Energy Steel. So we're really early in that process. So not a lot to report at this point.

Okay. All right. Thanks.

Thank you.

There are no further questions at this time. I will now turn the floor back over to Jim Lines for any closing remarks.

Thank you. We appreciate your time this morning and for your questions. Again, we felt we had a very solid quarter. The credit goes to the management team and all the employees of Graham for great execution and their focus on meeting our customer requirements, improving our businesses, reducing lead time, focus on quality and defect reduction. And it's really taking hold and you're seeing it in our financial results coupled with an improvement in our markets. We look forward to updating you on the January call regarding our progress. Thanks again. Have a good weekend.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And we thank you for your participation.