Graham Corp (GHM) 2013 Q2 法說會逐字稿

Greetings and welcome to the Graham Corporation second-quarter fiscal-year 2013 financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, the conference is being recorded.

It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, Miss. You may begin.

Thank you, Dan, and good morning, everyone. We appreciate your being -- joining us here today with the Graham Corporation's second-quarter fiscal 2013 conference call.

On the call we have Jim Lines, President and CEO, and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results of the quarter and year-to-date period and will also provide a review of the Company's strategy and outlook.

There are slides on the Company website that accompany this conversation today. If you do not have them, you can find them and the press release at graham-mfg.com.

As you may be aware, we may make some forward-looking statements during this discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors which could cause actual results to differ materially from what 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 at sec.gov.

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

Thank you, Debbie, and welcome, everyone. Please refer to slide 4. We had a solid quarter, driven by very good execution, control of costs, and being able to pull work into the quarter from our third quarter. There was a challenging year-on-year comparison this quarter due to the high quality of orders converted during the second quarter last year that were not reflective of true market and business conditions at that time.

Upon reaching the midpoint of the year, we are tightening prior gross margin guidance by increasing the bottom end of the range. However, it remains within the range as earlier stated for guidance, and we are projecting a 100 basis point increase to SG&A.

We were pleased with order activity in the quarter, quality and quantity of bidding activity, and we remain encouraged about market outlook over the next several years. Actions management has taken to be ready for and anticipate a strong recovery position us well to capitalize on increased demand.

Please turn to slide 5. We had $25.9 million in sales during the second quarter. Sales to the chemical and petrochemical industries were up approximately 50% from $5.6 million a year earlier.

This is due to conversion of orders for the ethylene market that were for the US, Middle East, and Indian installations. We also had a large order for China that contributed to the strong quarter which was related to the ethylene market as well.

Refining and power market sales provided sequential growth. However, year-on-year each was down due to an unusually strong quarter last year.

Sales to the US were 59% of the total, with international sales at 41%. We do project as we move forward that geographic sales mix will generally be 50-50 international and US.

Referring to slide 6, using the midpoint for revenue guidance we are projecting 6.5% year-on-year growth, representing 21% compound annual growth rate from the cycle bottom. Our businesses had capacity for a greater level of revenue; however, market conditions and orders rates nine to 18 months back were soft, which ultimately flows through as lower revenue levels during the past two quarters.

What is encouraging is that we have the capacity to do more, and the second half of this year will begin to illustrate that. Please turn to slide 7.

We had a good bookings quarter with orders at $25.6 million. The difference between a good quarter and a very good quarter for orders was three days. We expected to secure a large oil sands upgrader order in the second quarter; however, it wasn't finalized until October 3.

The good news is we are off to a good start for the third quarter. It is noteworthy to mention in the quarter there were $5 million in orders for the US refining industry, including one for re-refining of recycled lube oil. Total refining orders globally were $9.4 million including orders for Indonesia, the Middle East, and Canada.

We secured $4 million in orders for biomass energy products. We also secured roughly $2.3 million in orders for the US Naval Nuclear Propulsion Program, including its submarine program.

Referring to slide 8, the benefit of actions to diversify during the downturn are best shown by the level of backlog today, with the addition of a strong power market segment as well as the impact of the Naval Nuclear Propulsion work that appears in the Other segment. Backlog at the end of the last peak on March 31, 2009, was $48 million, with approximately 80% being for refining and petrochemical markets. Today our backlog at the end of September stands at just under $92 million, with refining and petrochemical markets representing 47% of that backlog.

The dollar value of refining and petrochemical backlog is similar at both points in time. This diversity will provide greater growth, and lesser volatility from the cyclical nature of refining and petrochemical markets as we move forward.

It is early to be thinking about the next downturn, but we are. We also believe this diversity will enable us to have stronger earnings at the next bottom of the cycle.

With those remarks let me pass it over to Jeff for more details on the quarter. Jeff?

Thank you, Jim, and good morning, everyone. As Jim mentioned, we have some pretty tough comparables when looking at the second quarter of fiscal 2012, but you will see a nice step-up from the last two sequential quarters.

Starting on slide 10, Q2 sales were $25.9 million, down 23% versus last year's strong second quarter, but up 15% sequentially when compared with Q1 of this year. Sales in the second quarter were 59% domestic 41% international.

In last year's second quarter, the split was 53% domestic, and 47% international. Graham's historic commercial markets continue to be tilted toward the international arena, while Energy Steel is primarily exclusively domestic, and the U.S. Navy of course is 100% domestic.

EBITDA margin for Q2 was 15%, down from 26% last year, but up sequentially from 12% last quarter. Q2 net income was $2.6 million or $0.26 per share, down from $5.5 million or $0.55 per share in Q2 last year, but nearly double sequentially from $1.4 million or $0.14 per share last quarter.

On slide 11, you'll see the gross margin in the second quarter was 30.5%, down from 38.1% in Q2 last year, but up sequentially for the second straight quarter, and 25.6% in the fourth quarter of last fiscal year, and 27.7% in the first quarter this fiscal year. SG&A was $4.4 million in the second quarter, flat with Q2 of last year, but up sequentially from $4.1 million in the first quarter this year. The increase compared to Q1 came through investments being made in our business to support future growth.

Operating margin was 13.4% in the second quarter, down from 25% last year, but again up sequentially for the second straight quarter.

On slide 12, you see that our orders in the second quarter were $25.6 million, up from $23.5 million in the same quarter last year and $19.7 million in Q1 of this year. Our order level and sales were essentially even, with our book-to-bill ratio at 0.99.

As we have discussed in the past, we expect this type of quarterly fluctuation that we have seen, as the movement or timing of a couple large projects, as Jim mentioned, can dramatically impact a specific quarter. We continue to recommend that investors view a longer period of at least four quarters and perhaps longer to better understand the direction of our business. To that end, you can see that our orders over the past four quarters have averaged almost $27.5 million or a total of $109.5 million during that four-quarter period.

Our backlog at the end of September was $91.8 million, down slightly from $92 million at the end of June, as well as down from our $94.9 million level at the end of March. We expect to convert 75% to 85% of this backlog to sales over the next 12 months.

As you may recall, we have three large projects, the U.S. Navy project and two domestic newbuild nuclear projects with multiyear lives, which make up approximately one-third of our backlog.

Two of these projects, the Navy project and one of the nuclear projects, are currently in production with the third project expected to start production in the next couple of quarters. But since all three projects have multiyear conversions, we expect a good portion of these projects to remain on our backlog for the foreseeable future.

Our cash position remains strong and has increased by over $5 million in the first half of this fiscal year to $46.9 million. We continue to have a clean balance sheet with no bank debt. This allows us to focus on utilizing our cash, and if necessary our untapped line of credit, for future will acquisition activities as well as internal growth and investment opportunities.

Finally, on slide 15, this slide summarizes the first half of fiscal 2013. Sales gross profit and EBITDA are all down versus the first half of last year. Again, this was expected as the first half of last year was very strong and not an indication of where the market was in its cycle at that point in time.

I would note, however, that we have generated $6.2 million in cash in the first half of this year.

With that, Jim will complete our presentation by discussing our full-year guidance and providing some comments about our future growth opportunities.

Thank you, Jeff. I am on slide 17. Our guidance for full-year fiscal 2013 revenue remaining in the range of $105 million to $115 million. Gross margin tightened to be between 29% and 31%. SG&A, expected to be between 16% and 17% of sales, with an effective tax rate of 33% to 35%.

We have a very strong view of how our markets may recover over this cycle due to the leading indicators that we see with bid work we are doing, the conversations we have with our customers. And should the cycle recovery unfold as we project, we believe it will be possible for Graham to exceed $200 million in revenue at the top of the cycle.

Please turn to slide 18. With our bid pipeline we are expecting orders to continue to expand as we go into the remainder of fiscal 2013 and into fiscal 2014 and beyond. As we said previously, we weren't waiting for this demand; we have made investments ahead of the demand. That is affecting near-term profitability, but that has been the right decision for management to make, and we will be able to capitalize on a strong recovery that we anticipate will occur as the recovery unfolds.

We do intend to advance our market share in our traditional markets of oil refining and petrochemicals, primarily in the emerging economies in Asia and South America. We will maintain a strong market position in the Middle East. We believe we will continue to dominate the North American market for refining and petrochemical projects.

With the team at our site in Lapeer, we will continue to expand their market reach both within the existing utilities in North America and also moving into international markets. We are focused on the Naval Nuclear Propulsion Program and developing that channel to be a more steady level of business for us. Jeff and his are building the acquisition pipeline.

Because we remain very positive on the outlook, while there is some uncertainty in the near term, we will maintain our patience and discipline for order selection and price management. With that, Dan, please open the lines for questions.

(Operator Instructions) Jason Ursaner, CJS Securities.

Good morning. Congratulations on a nice quarter.

I just have a couple of questions within the guidance, on the SG&A part of it, upping the range to 16% to 17% of sales. Jim, I know last quarter you talked about the additions to the middle of the Company; and on this call you talked more about the strategy to go after international work, the engineering, and the build to design opportunity.

Can you just talk about what that is doing to your SG&A versus -- ? You also moved up your gross margin and I know that your sales guys are partially benchmarked to that as a component of compensation. So just what is driving the SG&A increase in that outlook, considering that it's a pretty big range?

To a degree, Jason, it comes down to order selection and whether the orders are for Company account, where no commission is paid, or where there is a representative involved and commission is paid. What we are seeing in the second half is a sales mix that has a little stronger percentage of orders that have commissions being paid to our representatives around the world versus Company account.

We also had a shift as we got into the Navy project. It has begun to slow down -- not caused by Graham but caused by our customers. And the Navy project has a lower commission level than we ordinarily would see.

So as the mix changed, primarily around commissionable and non-commissionable orders, it has lifted a little bit SG&A. That can vary from time to time.

We do expect that as we hopefully drive revenue higher, we would be able to be at the lower end of the SG&A range. Hopefully that explains it a little bit better for you.

Yes. No, understood. Appreciate the details. Then just second question for me, you mentioned in the orders you got for the quarter, that I think you said $2 million of it was related to Navy submarine work. So I want to make sure I heard that right and (multiple speakers)

Sure. I mentioned that the business had secured just over $2 million, $2.3 million of orders for the Naval Nuclear Propulsion Program, including orders for the submarine program. In rough terms, it was 50-50.

We had received orders for replacement parts for equipment we provided quite some time ago for carriers, and then we have secured a couple orders for sub work still in the engineering aspect of those programs, not for build.

But they are very important orders. They are the important steppingstones to get to that point where we began building equipment for submarine programs.

Got it. And in terms of what is still out there, on the CVN-79, has there been -- obviously you didn't add it to your orders. But has there been any decision on the addressable content that you guys have that is still out there?

There was an order that we were pursuing that we did not win. We did lose it during the quarter. We did aggressively pursue it, but it was a build to print, and the award was placed with the incumbent.

And relative size of that piece relative to the other ones that are still out there?

Relative to the size of the one we had secured, it was a couple million dollars to the large $25 million order that we have for the CVN-79 project. There's a couple more items that could be available of a similar couple million dollar size range.

Okay. Appreciate the commentary and I will let others have a chance to ask questions. Thanks.

Chase Jacobson, William Blair.

Hi, good morning. Nice quarter. Jim, first question for you. Sounds like this oil sands award that you have mentioned could be pretty meaningful. Is there any other detail you can give us there in terms of what project it is going to, or maybe what the size of it is? And does it speak to your confidence in being able to reach the $30 million level of awards that you have talked about in the third quarter?

Again, for the sake of three days, we would have been above $30 million had that order closed in September like we had envisioned. But regrettably it didn't. We could not control the timing any better than we did.

There's only two upgraders that are currently active up in the Alberta area right now in terms of EPC work and RFPs, requests for proposals. This is one of the two. The other one is actively being pursued by us.

The timing is not yet clear. But our team has been working -- honestly, to be candid, we have been working on these projects since 2007. They fell off the table when the downturn occurred and became active again about 12 to 18 months ago.

One finally moved to procurement, and we landed it early in October. But it does give us a positive sense that it is picking up again in Alberta.

We have a really good brand there. We have very good market share for this particular application.

And what really is comforting is our people have been involved in these projects since late 2007, early 2008. And we feel pretty good about being able to pull in the future work.

Okay. That's helpful. Then, another question on the SG&A. You guys have been talking for a little while about potential for SG&A to go higher on an absolute basis; it has trended up the last few quarters. And the guidance assumes that it is going to trend closer to about $5 million a quarter second half of the year.

Looking forward, should we expect it to stay around that level on an absolute basis? And do you think that is the appropriate level? Or do you think that there is still a chance that it needs to go a little bit higher if you want to take advantage of the market as best as possible?

Chase, this is Jeff. With regard to the second half of the year, I am not sure the $5 million level -- certainly averaging it the next two quarters -- is likely. I think if you look at the range we gave and the revenue range, we are not going to be at the top of the revenue range and the top of the SG&A range, if both were to occur.

But certainly if we were at the lower end of the revenue range, it might be more likely to be at the top of the SG&A range from a percentage basis. So that $5 million is probably pushing it for the second half of the year.

On your other question, looking forward beyond that, we have talked about being in the neighborhood of around 15% of sales nominally going forward. And I think certainly in the near term, next couple years, we would expect that to be a reasonable thought process. In the -- and whether it is 15% or 16%, while there is a different there, it is not enough of a difference to dramatically swing our profitability.

But somewhere in that midteens is the place for us to be for SG&A, at least in the next couple of years. We will see beyond that if there is any kind of a step function off of that.

Okay. Then the last question I will ask is, given we are hearing from all the E&C companies about all the opportunities for petrochemical work in the US. Have you seen any change in the competitive environment on those projects as it relates to your products?

Chase, this is Jim. No, we haven't yet, primarily because those have not moved through the sale stages to get to firm RFPs. We are involved in some concept work for the ethylene projects, fertilizer projects; but I would characterize those as early stages, not yet at formal EPC or certainly not yet at RFP stage.

We are expecting decent margin potential from this opportunity in the North American market for petrochemical work.

Okay. Appreciate it. Thanks.

Brian Rafn, Morgan Dempsey Capital Management.

Morning, guys. Just give me a sense on the Ford Class, the CVN-79. Is that work specifically just condensers, or are you guys doing other things on that ship?

There is a -- right now, the order we have is for steam surface condensers. The order that we lost was for ejector systems, and there are some other smaller items that we could pursue that are for vessels or heat exchangers or small evaporation-type ejection systems.

Okay, so there are other things. Have you guys had any preliminary discussions on CVN-80 yet with the Navy?

No, we have not. We still think that's a couple years out.

Yes, that's what I thought. They are just laying the keel on the other one.

What about -- go back to the Nimitz Class fleet carriers, when they come in for their 18-month overhaul. In some of the legacy super-carriers is there any work to go back into? Because certainly the Enterprise is coming off, but there certainly are going to be for the next at least 20-, 20-plus years Nimitz carriers still in the fleet. Is there any other work, ejectors, condensers of that in overhaul that you guys can do?

Sure, Brian. The orders that I mentioned in Q2 of about $2.3 million partly for the sub program, partly for the carrier program, we did receive an order -- which happens about every couple years -- for replacement ejector systems for an earlier CVN carrier that we supplied 10, 15 years ago.

Okay, okay, okay. Then the same question on a legacy basis, you guys -- we were up to your Analyst Day. You talked about certainly the Virginia fast-attack class sub.

How about some of the legacy like the Seawolf or the Los Angeles fast-attack subs? Do you do any work there?

We have not, no.

Is that something that potentially is there? Or is it just not big enough? Or is that something that is where there are legacy OEMs that really have that locked up?

At this point I would say the legacy OEMs have good position. We have not really broken in, Brian, into the sub programs. Once we are into the sub programs, be it the Virginia class or the Ohio class work, hopefully we'll be able to be considered for this type of repair/replacement.

Okay, okay. Once you get in, Jim, as you get to penetrate the Virginia fast-attack class sub, once you put in -- I think you said, I believe you said there were two condensers per sub. Once you are the original OEM on that, when those subs come back in for overhaul, is there any sense that you get maybe a priority or you have some benefit of being the original? Versus having that -- if you are the legacy supplier, that when it goes to overhaul you have some follow-on annuity?

We do view that there is opportunity there, like on the carrier program. There will be some wear parts that hopefully we will be able to enjoy replacement work.

There is a difference, though. Carrier has a life of 50 years.

Right.

Subs don't have that life. They are not in service as long as a carrier.

Right, right, right. Give me a sense of -- you guys talk certainly on the petrochemical side in the different projects. I am assuming that most of that is newbuild and it's also capacity expansion type stuff.

If you look at some of the heavier industries, not specifically petrochemical, but steel or cement kilns, they will do a lot of maintenance work when their industries cycle down. When you have, be it condensers or ejectors or heat exchangers or vacuum pumps installed in some of these petrochemical plants, is there large maintenance work at all? Or is most of that petrochemical work primarily newbuild, new expansion capacity?

As we think about the North American petrochem market and what excites us, it is around the newbuild. However, as the industry gears up to again be a producer in North America of petrochemicals, we have enjoyed some work around repair, replacement, and upgrades of existing facilities to get onstream faster, to take advantage of the lower cost natural gas.

We have some work in our backlog right now that I would associate with that which is revamp, restart, upgrades. But the real exciting part is the newbuilds.

Newbuilds, yes; that is what I would have thought. What are you looking at relative as you build up? You have the $200 million sales relative to the next cycle. How do you see the incremental increase, Jim, in headcount, whether it be engineering or sales? Where do you maybe have some bottlenecks as you move from $115 million up that sales curve to $200 million?

Sure. If we think of our headcount today, which is roughly 350, 360 employees at all of our sites combined, with a run rate as you said of $105 million to $115 million, as we move toward the $200 million, which would comprise sub work, carrier work, our strong refining and petrochem activity, nuclear work, I would see our headcount having to expand by about 100 to 150 people. A good amount of that is in the direct costs, the direct labor area.

Okay.

We have taken some steps to build the middle of the Company ahead of the demand. There is some building that still needs to be done, but the large expansion of the workforce is on the production side, the direct labor side.

Okay. Then the footprint that we saw at Batavia where you guys are, anything as far as buildings? You showed us the brand-new paint and sanding area. What is the physical structure for $200 million in sales?

We believe our roof lines both in Lapeer and Batavia -- you saw Batavia. We believe these roof lines are -- will be stretched, but they can get near to that $200 million.

We think of the Batavia roofline with the outsourcing that we do, that we'll continue to do and perhaps expand a little bit, we think the run rate through what we call the Batavia operations including outsourcing is somewhere between $125 million and $150 million, with some CapEx around equipment, not so much roofline.

And at Energy Steel, when we bought the business, Lapeer, they had upper teens run rate. We viewed that business as having physical plant assets good for $40 million to $50 million.

Okay, okay, all right. That's fair. Good, good. One more.

Given the massive size of some of this stuff that certainly we saw, what are your freight costs like? Are they negotiated? Is that something you bear? Do you put that in the contract?

And maybe what are you seeing freight costs, moving some of these massive things around the world?

Primarily for the international work our freight term would be FOB port of export. And that is -- talking about a $100 million run rate, we're talking 1% to 2% of sales for that type of freight. On the smaller, short-cycle work, it is freight pre-pay and add, or it is ex works.

I appreciate it. Thanks.

Joe Bess, ROTH Capital Partners.

Good morning, guys. Jim, I had a question on -- about the conversations that you have been having with your customers lately. You talked about some of them having their actions a little bit more tentative, then also having customers whose projects are passing that conception stage. Can you talk a little about -- do you think this is -- the order activity is going to increase at a quicker rate, given that these orders are coming closer together?

And what your outlook is for the growth cycle, is it going to be a little bit quicker than you would expect, than a longer process?

That's a great question, the same question you asked me about a month ago. I think it is still too early. But what excites us is the fact that we are bidding these projects and we are seeing them move through their different stages.

It is hard for us to say what the next one or two quarters looks like, just because as we said this last quarter was $25 million; but for the sake of three days it could have been $31 million. And that is meaningful.

But by and large, we are looking beyond the next couple quarters and remaining excited. We have less certainty around what is happening -- believe it or not, what is happening next week, next month, because of the tentativeness of our customers.

We have been chasing some of these orders for quarters and years. And it seems like each quarter they are telling us it is going to close this quarter, get ready; and then we are talking about it the next quarter.

I'm not really giving you an answer simply because it is not clear to me just yet. But I am looking beyond the next couple quarters.

We are remaining very optimistic and we have taken action to get our businesses ready to capitalize on that with the investments that we have made. But near-term visibility is tough right now.

Okay, thanks. Then I know you expect geographically for revenue to be split 50-50 long term. Are you expecting maybe international order rates to increase in the near term compared to US orders? Or is there -- do you expect demand to pick up in one market versus the other, at the start of the growth cycle?

Sure. If we put aside for the moment what may happen in North America around the petrochem -- and again we're very bullish on that, but we don't believe that is the next couple quarters. We would say the growth rate from Graham's traditional markets, oil refining and petrochem, will be stronger internationally than domestically.

Once we have more confidence in the timing and the pace of the North American petrochem renaissance, we could see the sales mix pulled back toward more domestic, less international for our traditional business of refining and petrochem. But it's too early to tell you when that's going to happen and how that looks.

Okay. Then just a housekeeping item. Jeff, can you talk a little bit about the benefit that you had on the interest expense line this quarter?

Sure. We had a couple of items around some tax issues with the IRS that were resolved, one of which was the R&D credit that we have discussed in the last couple of quarters. That finally -- there was final closure on that.

And then there was another one just around a tax accounting change, a couple things where we had accrued interest and ultimately the IRS did not charge us the level of interest we had expected to be charged, or they decided to give us some credit -- or not credit, but not to hold us accountable if they decided to audit a previous year with regard to that one accounting change. So it is really around IRS interest that we had accrued, properly accrued, and the IRS had decided not to charge us, or gave us relief.

Okay, that's right. Then that is going to be done now. We should expect interest expense at normal levels from here on?

Exactly. And they should be at lower levels than you've seen in the last number of quarters, the last six, seven quarters, because those couple of items are no longer accruing interest. So we had a reversal of some of those accruals, and then going forward the interest expense level should be significantly lower than you've seen in the last few quarters. It should be a very small number.

Okay, great. Thank you, guys.

(Operator Instructions) Joe Mondillo, Sidoti & Company.

Good morning, guys. My first question, just wondering how the gross margin and the orders has been tracking? Are we still flattish around that 30%, 31%-ish range?

I think that's fair to look at it that way.

Okay. Then also, does the margin differ at all between any of the three or four different main end-markets that you sell into?

It can. For refining in general, that provides the best margin potential, with North America and the Middle East having the highest margin potential; the rest of the world being down a little bit from North America and the Middle East.

For petrochem, that's a bit below refining. The same comments hold geographically.

For power generation, primarily nuclear, which is mainly domestic, that has a margin potential that is comparable to our petrochem business. And the Naval work is right in the middle of that mix between refining and petrochem, around petrochem.

Okay, thanks for the --

And, Jim, you would add also, wouldn't you, that it can vary a lot project by project as well.

Yes, that's correct, Debbie.

Okay, great. Then, I guess in terms of -- actually just going back to that last question in terms of the US versus international. Has that 50-50 or how you look at the business long term, has that shifted at all over the last, say, 12, 18 months?

It really hasn't, Joe. The wild card, in our mind, is how the petrochem market in the US or North America begins to unfold and the pace of that. To us, that is pretty exciting. To us, that could shift the sales mix to be more heavily weighted toward domestic.

I do think that is a year or two out still because of where these projects are. But everyone is pretty excited about it, as are we. We are ready for it, but we just need to see a little more traction.

And that is same on the refining side?

Yes. We are seeing -- our team is pretty active on refining bid work around revamps. Still preparing for alternative feedstocks or pushing the refineries to produce more diesel or transportation fuels.

We had a very good level of order intake last quarter; about $5 million came from the US refining industry. That is great business for us, and we are seeing a good amount of opportunities in the repair and replacement of the equipment that we had supplied 10, 15, 20 years ago, as I think the refineries prepare for a stronger economy.

Okay. Are we at the very initial stages of these projects, and how long do these projects take? Where do you guys fit in, in terms of that whole time period between start and finish?

Sure. When we are doing our job right, and I think we do it most of the time correctly, we are involved very early. We define the sales cycle as having four distinct phases. We like to get involved in the very initial stage, which we call concept, project concept.

Then it moves on to front-end engineering design. We are seeing a lot of projects right now in that Phase 1 or Phase 2.

Then it moves from the FEED work, front-end engineering design, to the EPC work. We have some projects in that stage right now.

And then ultimately, an EPC is awarded the work and we received the request for purchase, final sales stage. That cycle can vary between normally, ordinarily, Phase 1 through Phase 4, six months to 18 months. As I mentioned earlier on the call, though, some of these projects we have been tracking since 2007/2008.

So it is not just 16 to 18 months, it can vary amongst a longer time period?

Right. I have asked our sales guys to shorten it, but they haven't been able to. (laughter)

What is the volume of the project planning and new projects coming onboard that you are hearing about like? How is that trending?

I would say generally, Joe, it is trending up. We see an expansion, and expanding of our pipeline of bid work, which again gives us the confidence that the decisions we made and are making today -- 12 months ago and are still making today -- about investing in our business ahead of demand have been the right decisions.

We missed it last time. 2004, 2005, we weren't ready. We are more ready this time. Because the --

So with -- production of oil in the US right now is at a 15-year high. It is really growing tremendously given the fraccing and other methods of drilling. You haven't seen, though, a big jump or a big acceleration in these type projects yet, though; is that correct?

From a 30,000-foot level, probably not. We have seen an acceleration of bid work for what we call smaller projects. Very, very important, $0.5 million to $1.5 million; those are great.

You need quite a few of those to get a $5 million aggregate order value, which is what you might be accustomed to seeing from us. But what we are seeing is a good amount of traction on that smaller end of the work, which is transactionally simpler. Order ship cycle is faster. Margin is good. So we are seeing more of that.

Okay. Then last question, just regarding the chemical segment and I guess chemical, petrochemical. It has been roughly flattish. I mean, it seems like it's been improving over the last couple quarters slowly.

I am really wondering if -- I know the ag business -- the ag industry in the US has been booming over the last couple years, and there is tons of projects in terms of fertilizer capacity expansions in the US. Just wondering what the opportunity is there and why maybe we haven't seen a bigger jump in that segment yet.

I just don't think, Joe, it has moved through the sales stage yet. We are aware of all those projects; there is half a dozen or so. I am talking about fertilizer projects, ammonia/urea plants.

Our team, they are involved in discussions with the process licensors, with the companies that we think will get the EPC work. It just has not moved yet in general to what we would call the very active stage of getting ready to buy equipment.

Okay. So just a little early until benefits come?

We think so, we think so. This is a market that we hope to do well in. In the '70s and the '80s, our Company did very well with the ammonia expansion in North America.

We have a great brand here. We are connected well to the process licensors, and I am expecting that we will be in a fair position to win a good amount of that work.

Okay, great. Thanks a lot, guys.

You're welcome, Joe.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Well, we appreciate your time this morning and for your questions. As you can tell, we are very pleased with where we are at the midpoint of the year, and the optimism we see with the second half being stronger than the first half of the year.

And ultimately, we are looking very positive toward next several years as our markets begin to recover. And if they recover as we anticipate, we're looking at a very strong growth cycle, one that we believe is possible to reach over $200 million of revenue across our businesses. And we will keep you updated quarterly on our progress. Thank you.

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