Graham Corp (GHM) 2015 Q3 法說會逐字稿

Greetings and welcome to the Graham Corporation third-quarter fiscal year 2015 financial results call. (Operator Instructions) As a reminder this conference is being recorded. I will now turn the conference over to our host Ms. Deb Pawlowski, Investor Relations for Graham Corporation. Thank you. Please go ahead.

Thank you, Melissa, and good morning, everyone. We certainly appreciate your time today. You should have a copy of the news release detailing Graham's results that crossed wires this morning. We also have slides associated with commentary that we are providing here today. If you do not have to release or the slides you can find them at the Company's website at www.Graham-mfg.com. I should also note that we did put out a press release yesterday after the market closed regarding our dividend and new share buyback program.

On the call with me today are Jim Lines our President and Chief Executive Officer; Jeff Glajch our Chief Financial Officer; and also Karen Howard, Investor Relations. Jim and Jeff will review the results of the quarter and the first nine months of fiscal 2015 as well as our outlook. We will then open up the lines for Q&A.

As you are aware, we may make some forward-looking statements during this discussion, as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors which could cause actual results to differ materially from what is stated on the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as with other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on our website or at www.SEC.gov.

So with that, I'm going to turn the call over to Jim to begin. Jim?

Thank you, Debbie. Good morning, everyone. I will begin our prepared remarks on slide 3.

Our strategy is straightforward. It is to expand earnings by increasing market share, reducing the impact of cyclicality, and deploying capital to strengthen and diversify revenue streams. We are committed to capturing greater market share regardless of market conditions, be it refining petrochemicals, power, or naval markets, our position in these key markets can be stronger and market share greater.

We have expanded execution capacity and production and order processing in order to support this strategy. Our team has done well to more than double what we refer to as our predictable base. By developing a higher level of predictable base business, we have expanded earnings throughout an economic cycle and dampened the effect of the cyclical pattern of refining and petrochemical markets, which will reduce earnings volatility during market contraction phases.

Cash flow from operations is consistently strong and more than $60 million of capital is on our balance sheet to fund organic and acquisition growth investment. Strategy and resources are concentrated on doubling our business to exceed $200 million in revenue. That is what we set as the next major milestone for our long-term growth trajectory.

Please refer now to slide 4. Third-quarter results were solid and in line with what we expected. Revenue for the quarter was $33.6 million, up 44% from the same period last year. I must take a moment to highlight that this level of revenue and what was achieved in the second quarter is a direct result of investments made ahead of demand. Timing was perfect and execution of investment decisions for personnel, equipment, and facilities were accomplished extremely well by our teams.

Our revenue was driven primarily by conversion of oil sands and petrochemical projects destined for North American end users. You may recall in the first half of fiscal 2014, there were strong orders for North American chemical industries and some of those orders were in production during the third quarter.

Net income was $4 million or 12% return on sales. The positive effect of our expanded capacity and corresponding increase throughput translated into top-tier financial performance. This level of profitability illustrates operating leverage and corresponding profit drop-down from incremental revenue as a result of the previously mentioned investments.

Fiscal 2015 revenue and gross margin guidance are reaffirmed to remain within ranges provided in October.

Moving on to slide 5. Refining industry sales were $12.8 million, modestly above one-third of total sales. Replacement and upgraded equipment were significant in that total. Our global installed base is vast and provides substantial recurring revenue opportunities. Greater than 50% of sales to refining markets were replacements for upgraded equipment.

Chemical industry sales were $9.4 million of which the vast majority was for North American new capacity stemming from investments driven by abundantly available low-cost natural gas. Power industry and other commercial industrial markets that include work for U.S. Navy each comprised 16% to 18% of quarter sales.

Domestic sales were up 26% to $18.3 million as a result of the strong chemical industry new capacity investments I just mentioned.

Please move on to slide 6. This slide depicts the progression of increasing the level of predictable base and less cyclical sales in our business. Our team has moved us from what had been approximately $20 million per year to greater than $50 million for the trailing four quarters ending this past December.

Strategies for aftermarket, short cycle orders, and long-lived orders for the Navy each contribute to this improvement. The impact of these strategies benefits profitability throughout economic cycles, however, during cycle contraction is when the value of this improvement is most important. Earnings volatility will be reduced enabling us to continue to invest in growth just as we did fiscal 2010 through fiscal 2013 during that market pullback.

I'm going to pass a discussion over to Jeff to go through the financial results in greater detail. Jeff?

Thank you, Jim, and good morning, everyone. I'm starting on slide 8. As Jim mentioned, Q3 sales were $33.6 million up 44% compared with $23.4 million in last year's third quarter. Sales split was 55% domestic and 45% international compared to last year's third quarter which was 62% domestic and 38% international. Gross margins were up 400 basis points to 30%. EBITDA margin was 18% for Q3, up from 11% last year. Q3 net income and EPS was $4 million and $0.39, respectively, compared with $1.4 million and $0.14 in last year's third quarter.

On to slide 9, looking at our year-to-date results. Year-to-date sales were $97.7 million, up 28% from $76.1 million in the first nine months of last year. Year-to-date sales are more heavily weighted toward domestic opportunities this year at 64% domestic, 36% international compared with 57% domestic and 43% international last year.

Gross profit has increased 19% to $29 million, though gross margin is down 230 basis points to 29.7%. The higher gross profit, of course, was driven by increased volume while the lower gross margin was impacted by a very strong product mix in the first half of fiscal 2014.

SG&A was $13.6 million in the first nine months of the year, up only 5% when compared with the first nine months of last year as we have leveraged our overhead base quite well this year. SG&A as a percent of sales is at 13.9% down from 17% last year.

EBITDA margin increased 40 basis points to 17.6% in the first nine months of this fiscal year, primarily driven by the improvement in SG&A leverage which I just mentioned. Net income has increased 35% to $10.6 million, up from $7.8 million last year. EPS was up to $1.04 from $0.78 last year.

On to slide 10. As Jim mentioned our cash position is quite strong at $62.5 million, up from $61.1 million at the start of the fiscal year, though down sequentially from $64.8 million at the end of last quarter. This near-term decreases simply timing of projects and we expect that to reverse in the fourth quarter. We expect to have a strong cash flow in the fourth quarter. As you can see, we've also increased cash over the first three quarters of this year despite having spent $5 million in capital, most of it to expand our Batavia facility. The benefit of this expansion has already been seen as we've increased loading in our plant as this year has progressed.

With our strong ongoing cash generation, yesterday the Board of Directors authorized the doubling of our dividend $0.08 per quarter and $0.32 per year. This is our third consecutive year in which we have increased the dividend, which was $0.02 per quarter prior to 2013 and is now fourfold from that to $0.08 per quarter. Additionally, the Board of Directors authorized a share repurchase program of up to $18 million.

We believe these two capital utilization announcements confirm the strength of our conviction of our long-term strategy, the solid nature of our balance sheet, and, very importantly, the predictability of our ongoing cash flow. Even with the increased dividends and share repurchase program, we are very confident that we have sufficient capacity, whether it be cash or debt availability, to continue to pursue our acquisition strategy.

Jim will complete our presentation and comment on our outlook for the rest of fiscal year 2015.

Thank you, Jeff. I am now on slide 12. We observed a change by our customers this past quarter that slowed the pace of orders. We felt this change by the refining and chemical industry customers as the rapid, abrupt decline in crude oil set in. We expect to experience ongoing order volatility from refining and chemical industries. We do not, however, expect much change from our power or naval markets.

Orders in the quarter were $22.6 million and they were equally balanced between domestic and international orders. Backlog declined sequentially, approximately $11 million. Importantly, our pipeline of opportunities remains elevated and consistent with recent activity levels.

Moving out to slide 13. Backlog is diverse and well balanced across key markets. While down sequentially, I am pleased by the quality and strength of our backlog. 37% of backlog is for refining markets, 23% for the chemical industry, 21% for naval markets, 11% for the power markets.

Backlog conversion is 70% to 75% over the next 12 months; 15% to 20%, 12 to 24 months out; and 5% to 10% beyond two years. Importantly, approximately one-third of backlog is from customers or markets not served five years earlier.

Slide 14. We confirm that revenue will be in upper half of the $125 million to $130 million range. Gross margin will be between 30% and 31% for the full year. SG&A will end the year between 14% and 14.5% percent of sales. And our tax rate is expected to be between 32% and 33%.

Melissa, please open the call now for questions. Thank you.

(Operator Instructions) Jason Ursaner, CJS Securities.

Obviously a lot of focus on oil, and you are very cognizant of the decline in prices clearly had an impact on orders. But just overall a high level, maybe could talk a little bit about what you see this doing to the long-term cycle. And obviously, not asking you to call bottom on oil or anything like that, but as we do see capital spending coming in in some of the major oil companies, does this push out some of the cycle you've been hoping to see especially in the petrochem side, or is it more just leaving at sort of open-ended at this point?

To be candid, this is so recent. The last quarter has been rather dramatic if we think about the drop in oil. It was quite precipitous about two months earlier. So we are all, all of us, we're all trying to ascertain and have a better understanding of the near-term and long-term implications of this. If I think about the underlying fundamentals, what drives demand for Graham -- this is more of a long-term comment, Jason -- I don't see change.

Energy intensity, a growing population, emerging -- developing emerging economies, feedstock diversification. All of those drivers in our petrochemical refining markets still are intact long term. And also importantly, Jason, as it relates to Graham and the diversification strategy that we undertook three or four years ago, we now are less concentrated in those two key markets with the addition of our naval strategy and with the addition of a stronger power segment. But I know this question and most of the focus is on our oil markets and petrochem markets.

Now, clearly, there are some near-term headwinds that we are all trying to understand. I can't really comment, just as you said, I can't call a bottom for oil. I wouldn't know how to do that.

But what I can say is we are focused on out hustling our competition, serving our customers better than our competition, doing our engineering, our fabrication. All of those things that Graham does extraordinarily well, we'll stay focused on. Regardless of the market environment, we intend to take market share, and we'll drive through this pullback, whatever the duration is, and come out of this pullback stronger.

Okay, and just maybe following up on part of that answer. On the other side of it, the things that are in your control. Clearly, you're not getting a lot of credit for it, but maybe more specifically, maybe you could just talk about what you're seeing in fabrication, execution some being existing projects. And then the potential CVN-80 bidding, the submarine program, and you alluded to the nuclear market as well.

Sure. That's how we -- clearly, there's a very difficult external environment, but the way we've always thought about our business, our job is to control to the utmost what's in our control. That's how we sell, that's how we execute the orders. That's how we fabricate and how we focus on productivity and quality.

And if I just think about the remarkable performance year to date and how this year will finish up compared to the prior three years, thinking about with our guidance is and using the midpoint, about a 25% lift in top line. None of it from pricing, all of it volume. And our business, our operations team, the entire team is just driving this business really well. And I can say this past year, we elevated our performance and thought differently and acted differently than we had in my tenure here.

And it's been a remarkable accomplishment. I know it's not immediately being reflected in our market price, but I think there's external -- in our market value, there's external factors there. But if I think about this long term and what we've just done as a team, it is remarkable and it sets us up for success as we drive through this pullback.

Okay and just last question from me. The share repurchase authorization -- you walked through some of the conviction in cash flow. And obviously, understanding the macro is an uncertainty right now, how should we balance the cash flow, the sizable cash balance on the balance sheet? And just how aggressive are you likely to be with some of the authorization there?

Jason, this is Jeff. We are still in the process of structuring out the repurchase program that was just authorized yesterday. Relative to the -- also to this authorization program. Again, at $18 million, it is less than 30% of our current cash position. We expect our cash to continue to increase and so, as I mentioned earlier, we were quite excited about the opportunity to look for acquisition opportunities, particularly in this market pullback time period where perhaps valuations will get a bit more reasonable.

Okay, I appreciate that. I'll jump back in the queue. Thanks, guys.

(Operator Instructions) Brian Rafn, Morgan Dempsey Capital Management.

I hope you guys are in the snow shovel business being out in New York. You poor guys are getting pounded. So, my thoughts are with you.

Can you give us a sense, a little bit Jim maybe relative to kind of what the pace and cadence of your short cycle order business is? Kind of how you see business, how business is falling through. Is it getting tougher? Are the bids getting more competitive? Just on the short cycle side.

Short cycle actually has held up well and end of the short cycle is certainly some of our aftermarket work. As we think about that period-over-period or sequentially, it's been rather strong, which has been encouraging. And not only has the volume been up meaningful amount, the margin has held as well. So that's a very good signal. At this point, I can't point to any directional changes because I don't see them up or down with our short cycle work; it's holding very strong and very steady.

Okay, okay. A little bit more of the strategic question for you, Jim. Relative to your kind of your -- the infrastructure and throughput efficiency, the capacity you guys put in Batavia for your $200 million kind of sales goal. As you go out over the next five to 10 years, is the capacity at Graham at Batavia sufficient to go beyond that $200 million or when you set up kind of the next three to five-year plan after you reach that $200 million, would that really require another kind of capacity addition in manufacturing at Batavia?

If I think about -- that's a great question. And as I think about it today from the status quo perspective, our operating efficiencies, our productivity, and where our equipment to produce our products are today, I believe the roof lines are sufficient in Batavia and Lapeer, supplemented by our degree of outsourcing which is somewhere between 10% to 15% generally to drive beyond $200 million.

As I think about how we been addressing through constraint management and our focus on productivity and throughput leadtime reduction, I believe three or four years forward, continuing with the hard work that our team has been doing in those areas, we can push that volume even further.

Okay, all right, that's fair. Good, good. I appreciate that. I got on the call little late and I didn't hear your opening comments. I'm just -- for my edification on the naval strategy, you can follow the U.S. Navy military site and various websites and publications, but as it applies to you guys in the last quarter have any developments or made any progress on either the Virginia class attack sub or some of the Ohio class ballistic missile subs, the new class coming out as it applies to you guys?

We commented I think it was two conference calls ago that we have bids in the pipeline for that type of work. And at that time, I expected that those orders would close in six to nine months, and I still expect that to occur. So we're actively in the bidding process.

Okay, okay. And then, has there been any in that bidding process on the carrier side, Jim? CVN-80 Enterprise, have they done anything relative to that? Because I think you guys are, correct me if I'm wrong, you've got some work on the Kennedy CVN-79. Is there anything on the Enterprise, or is that still open for bid or to develop further going forward?

You are correct; we do have work on CVN-79 that that's in our backlog now and has been since late 2009. Initially, the carrier programs were envisioned, the new generation of carrier, 78, 79, 80, to be built on five-year centers. What we're seeing now, with some budget constraints and also how the Navy is thinking about their fleet of vessels, it might be more like six- to seven-year centers between 79 and 80. So we haven't begun to see any real bidding activity for 80 yet.

Okay, well, initially that was three to four years going back to the (inaudible). So it's extending out, all right, good answer.

Jeff, let me get a question -- Jeff, you guys added your treasury repurchase program, $18 million you talked about. What is kind of your philosophy behind that? Is that -- in some companies you use it to immunize option grants. Other companies use it more as a catastrophic safety net for (technical difficulty). I was just wondering what is your philosophy?

Brian, you broke up a little bit there, but with regard to our philosophy, it's really not to offset option issuance or restricted stock issuance because that's not a significant number for Graham. Rather it's -- we look at is a way to return some cash to shareholders and, as I mentioned earlier, the mechanics around how we're going to proceed with this are being developed currently.

Okay, and then just one other question relative to that. As you guys talk about that treasury purchase, are there any worries? I think one of the things that we have running small microcap is everybody always talks about liquidity and float and that type of thing. Does that also go into your thinking relative to how much you guys would actually repurchase?

Yes, it does.

Okay. All right, guys. Thanks a lot, appreciate it. Good job.

You're welcome.

Chase Jacobson, William Blair.

A couple of questions on margins. First, the SG&A was a little bit lower this quarter. You talked about lower selling commissions. Can you comment on that? And then also on the gross margin, I was surprised to see it down sequentially given the favorable mix and the fact that I think some of those lower margin projects last year are complete or at least near completed.

Was there -- what was going on there with the gross margin? And should we still expect it to pick up? I think your guidance implies that it does pick up the fourth quarter. But are we still going to see ramp in gross margins over the next few quarters as the better price projects flow-through?

This is Jim. Regarding the gross margin, we still have some orders and backlog that were won 15 to 12 month ago. Let me just give a perspective.

From June through December of 2013, we had booked about $90 million. We still have $25 million of that work in backlog as of 12/31/2014. Some of that work we took defensive action to preserve our market share or to keep low-cost international competition out of key customer accounts. Those decisions are still in backlog to an extent and they still will be in backlog throughout the fourth quarter and into a bit of our first quarter.

Now, what's actually happened is and as we talked about when we won this businesses is it all came too fast. It would not be executed within the timeframes that were outlined by our customers, and that indeed has played out as we thought and still have that work in our backlog, a good amount of that work in our backlog. I'm very happy we won those orders, but we're still dealing with the margin compression that is a result of those types of orders. And they are in our Q4 and they spill a little bit into our Q1.

Jeff, do you want to handle the SG&A?

Sure. On the SG&A, Chase, with regard to when we spoke last quarter around perhaps commissions being higher in the second half of the year, that did not occur as much in the third quarter as we had thought might.

However, if you look at our guidance for the year, given that we're a little below 14% as a percentage of revenue for SG&A and we're having a guidance of 14% to 14.5%, that little bit of a step up might occur on a percentage basis in the fourth quarter, not dramatic but a little bit in the fourth quarter. So, we would expect SG&A in the fourth quarter could be a little bit higher than it has been as a percentage of sales on a year-to-date basis.

Okay, and then on the predictable base business, just considering that it's grown at a pretty good rate here. Can you remind us how that is or is not reflected in the backlog?

Sorry, I interrupted you.

No, go ahead.

It is in the backlog in a couple of different ways. Part of it is what we call our short-cycle backlog that typically comes in and out within a quarter, maybe four months. And that is somewhere under $10 million at any given point in time. That segment of this predictable phase.

Also in there is the naval work and that's more long-lived backlog, but that becomes predictable once we have booked it and it's in our backlog. We have vision to the conversion cycle that lifts up our predictable base. And it's also not aligned with the oil and petrochem cyclicality.

So those are the key things as well as the power, the energy steel aftermarket segment is in there as well. Add those up and some of our other small product strategies, that takes us from what had been a $20 million-ish type of segment in our business to something around $50 million for the last four quarters.

It's been a great strategy, and it really will appear more important at points of market pullback. As that predictable base is elevated to the extent that we have just talked about, that's hugely helpful to reduce earnings volatility, which was the intent of the strategy -- to dampen the cyclical nature of our earnings so we could invest and stay strong through a downturn and be opportunistic and come out of any downturn stronger.

Right, okay. And then just one last one, Jeff. As it relates to the share repurchase, I certainly understand that the current marketplace is not reflected in the long-term value, but share repurchases have always been at the lower end of your priority list for capital allocation. I was a bit surprised to see it here.

What is the read from this as it relates to your acquisition strategy and the acquisition pipeline as it stands today? Because I'd imagine that that there are some good prices out there market. So any comments around that would be helpful. Thanks.

With regard to our acquisition strategy, it doesn't change it at all. Again, is about 30% of our current cash -- less than 30% of our current cash balance. As I mentioned in the prepared remarks, I expect a strong fourth quarter, so our cash balance at the end of the year excluding this repurchase should be up meaningfully from where it is today. And as we look into fiscal 2016 from a cash perspective, we continue to expect to be generating strong cash.

So the amount of this buyback, while I think meaningful from a stock perspective, does not dramatically impact our overall cash position. So we got a good amount of cash. On top of that as we've talked in the past, we have a good debt capacity level, should we need to use it. So we don't look at this -- while this is certainly a use of some cash, it could've been used for acquisition. We don't look at it really is competing with that strategy at all.

And to your question on pricing, we are starting to see some improvements in the price of opportunities and the cost of opportunities, but again it's a relatively recent phenomenon within the last few months. And so, we'll have to see how that pans out -- if there are potential opportunities, if sellers have readjusted their expectations, or if they are still holding onto elevated expectations. But it does look like prices are coming down certainly in our sector for opportunities.

Chase, I just wanted to echo Jeff's comments and also elaborate a bit. Capital allocation, the priorities are still as they were. They are on funding growth, be it acquisition related growth or investment in driving our existing businesses.

And as we've done scenario analysis of the repurchase impact as well as our cash flow analysis over the next three or four years, along with the probable size of transactions for acquisitions, this does not in any way affect or change our focus on growing this business. And it's to deploy capital in this manner when it's appropriate to do so to repurchase shares, but by no means -- and we went through this analysis quite deliberately over the last several months to make sure the scenario analysis we did, we are going to still drive this business, execute the strategy. And those are the priorities for capital allocation, and this is secondary.

Okay, very helpful. Thank you.

You're welcome.

Dick Ryan, Dougherty.

Thank you, say, Jim a question on the backlog. It looks like that $7.8 million that has been on hold is still there, release date, calendar 2015. Has that slipped your expectations for the release of that? Has that slipped and can you kind of discuss what bucket that is in? Is that a refining or petrochem or something else?

Sure, that order is for Canadian oilsands. And in addition to that order, we've secured another one which is not currently on hold. However, this order that you've referenced and the second one we're watching very carefully because there is a susceptibility to that second order being placed on hold due to the current environment for how the oilsands companies are seeing their cash flows.

So we're watching that. In total, those two orders so somewhere between $8 million and $10 million, in total. One we know is on hold, the other one we're watching very carefully, and the bucket they are in is oilsands.

I don't think they're subjected to cancellation or cancellation risk. I believe they will just be slowed down.

Sure, any other pushes that you've seen in the backlog?

Not as it relates to the backlog, other than the comments I made during the remarks to Chase's question, which we had expected, which was the push to the right of backlog conversion of that surge of work we had in the North American petrochemical orders. That really is not related to project risk or price of oil. That was just the practicalities of the supply chain being able to execute all of that business in a short period time.

So other than that, other than the two that I have just mentioned regarding the quality backlog or backlog risk, we haven't identified a concern at this point time, Dick.

What you sensing on the power side, maybe specifically in the nuclear efforts?

There, we still remain very optimistic longer term. As I mentioned last conference call, that we're not market limited. So our focus on the management team and Energy Steel is to open up that funnel of opportunity so we see more opportunities, take share. I believe there's rich opportunity to grow that business. Admittedly, and to a large degree frustrating at this point, it's been a range-bound business since we bought it. It hasn't really grown. However, it's been an important contributor to our bottom line and top line, but we haven't been able to break through the range over the last four years.

However, and, again, I'll leave it with this. We are not market limited. We need to resolve channel management and access to the customer. And we have individuals that are assigned to that task.

Is that something that can be achieved internally, or is that something in the M&A side that could help move that ball faster?

Certainly, the latter is a possibility. The resources and the investment in personnel have been on the internal side.

Great, thank you.

You're welcome.

John Bair, Ascend Wealth Advisors.

I was wondering if you -- I know it's a little bit early here with the prices, crude prices dropping down quite a bit. But I'm wondering if you're seeing any indication of a pickup in interest or bids from areas or countries that are net importers in the sense of expanding their infrastructure for energy petrochemical power activity? Are you seeing anything in that regards yet?

Not yet. Again, this external environment really just came on in the last two to four months. So is quite recent. It was extremely precipitous and abrupt. So we haven't really seen a change in our bid composition. However, I think the question -- I'll try to answer this way.

The implication of lower crude oil affects our customer segmentation differently. We don't believe there's any meaningful impact on our customer segment that's related to the naval strategy or the power strategy. As it relates to our customers in oil refining or petrochemical markets, they are affected differently.

A state-owned refiner that has an energy resource such as oil is impacted pretty significantly by what's going on. A multinational integrated company that has E&P, exploration and production, refining and downstream assets. We believe they're going to be affected in their downstream assets because of the limit on cash flow from their E&P division.

For an independent refiner that takes that crude feedstock as a input, they are going to benefit from, of course, the lower cost of that input. And then, the same type of scenario analysis or discussion pertains to the petrochem depending upon, are they part of an integrated oil company or are they an independent petrochemical company?

So it does affect this differently across our customer segments. What's important, though, to bear in mind is, as Graham has diversified over the last four years, five years, if we thought about Graham historically, our market concentration in oil refining and petrochem was approximately 75% to 80%.

If we think about our sales mix today as an approximate number, that concentration is more the range of 50%. Still fairly concentrated but not to the degree we were before. And again, the predictable base strategy is to drive that higher. The diversification strategies -- those all were intended to support Graham through the cyclical pattern of oil refining and pet chem. So when there are pullbacks, Graham's profitability is strong, vibrant, and we're taking action during downturns to invest growth and diversification and acquisitions to come out of any downturn stronger. The worst thing we want to do is not take advantage of what a downturn provides us, which is opportunity to come through it stronger.

And I think I've answered your question and added a little more.

Okay, thanks. And one other add on to that is historically if I recall, activity in South America is not that significant a portion of your business. Are you seeing any opportunities to expand your presence and activity in that area?

South America has -- you're right -- historically sort of been under the radar, but it has represented between a minimal amount to approaching 10% of our sales. We had a very good South American component actually this year in terms of our sales and incremental profitability from that.

We have a number of bids in our perspective opportunity pipeline that are for South America, for Venezuela, for Colombia, for Ecuador, Latin America, including Pemex. Very significant projects in our core areas, and we have fantastic long-term relationships with many of these national oil companies. So that's a sense of strong optimism.

Longer term, I'm a bit more concerned about those opportunities converting in a timeframe I thought they would convert six months ago to how I think they might convert now. I believe they're going to push out because of how low oil prices affects those nations.

I think it all dependent on how low this level either goes, or whether we stabilize out come back up again, what the timeframe on that is.

With regards to your comment on Pemex, any sense there with the change in their outlook or bringing in outside companies to help them rejuvenate their industry, their energy exploration industry? Is that -- are you seeing any effect of that or potential -- more dialogue might benefit you?

Sure, we do view that very positively, and we should be a benefactor of that longer term. Again, as I remarked a moment ago, we have a number of very significant bids for the Latin American countries. Mexico being one of them. Our sales people have been in those territories most recently as this past week managing those accounts, updating our situation on the opportunities. I do feel, my judgment is those projects will likely slow down because of the impact of incoming revenues for those countries tied to lower cost oil.

Very good, thank you very much.

You're welcome.

Brian Rafn, Morgan Dempsey Capital Management.

Yes, Jim, just kind of a high-level strategic question. Given some of the political uncertainties, Iran with its nuclear program, Russia and the Ukraine, China with its anti-access/area denial, what is your sense of the tone of geopolitical politics impairing order rates on some of your international business versus the last couple of quarters? Are we in a steady state? Is it getting worse? Is it getting tougher? Is it being delayed. I'd like to hear your comments kind of quarterly on that.

That's a big question. I would say we haven't, on the geopolitical front, noticed anything that I would say materially changes outlook simply because of the geopolitical front.

We do certainly -- this is geopolitical because there could be an underlying geopolitical aspect to the price of oil. That does impact petro states significantly, and we do have a lot of business annually, 10% to 20%, that is tied to petro states.

Now, we could argue: is that a geopolitical strategy? I would say yes. So I think that has an implication potentially, but, again, Brian this is so new. We are all trying to just catch our breath, do the scenario analysis, and understand directionally what it really will mean, and who and how will parties be impacted. I haven't given your great answer, but that's the only answer I can give to you right now.

No, I think that's a fair answer. You're not seeing anything -- that's kind of what I was looking for. Let me ask you from another strategic -- from the standpoint of the refinery industry. We've heard a lot of guys talking about the Renaissance in oil exploration in the United States. We source about 10 million barrels, we use about 21 million, 22 million, and a lot of companies who come on say we are going to be at parity by the early 2020s.

On the same side as it applies to you guys, the refinery side, you hear stories about, well, we haven't built refineries since the late 1970s. Is there some point where we get to a point where the refinery industry really has to start putting on new plants, or can they constantly just get us by with the next level of maintenance?

Well, they've done very good over the last 40 years. I think the last refinery was 1976 to maximize what they can get out of the existing assets. However, the comments about new refining capacity not since 1976 can be a bit of a misrepresentation. Because if we think about the investments done by Motiva. Think about the investments done by Marathon Garyville adding each 300,000 barrels per day of new capacity at a brownfield site.

To me, that's a new world scale refinery that was put into North American refining asset base but not considered new refining capacity. To us, it felt the same as a new refinery. Same order opportunity. So there is a bit of an accuracy or inaccuracy depending upon how you want to interpret it, but we've seen capacity creep, brownfield capacity expansion in the North American market.

Graham lives very well on the North American refining base. Whether it's revamp, debottleneck, capacity creep, feedstock diversification, or what I would refer to as new capacity. And I do refer to the Motiva investment and the Marathon Garyville investments as equivalent to new world scale refining capacity. (multiple speakers)

Okay, good. And then just one for Jeff. Have you seen any decremental change in multiples of EBITDA in some of the deals? Obviously, the oil thing again is kind of a short -- it's just happened within the last quarter. Have you seen maybe anybody pull deals or opportunities that you guys might be looking at? Obviously, as multiples come down, they are more attractive for you, but then sometimes sellers vacate the transaction. I'm just kind of wondering what you're seeing.

Again, it's so -- things are so new there's really nothing meaningful to report at this point. This has really been, as Jim mentioned, although prices of crude oil have been dropping since the summer, the real meaningful adjustments started happening around Thanksgiving or so. At this point, it's really too early to tell anything.

All right. Thanks, guys.

Thank you, Brian.

Thank you. There are no further questions. At this time, I'd like to turn the floor back over to Mr. Lines for any final comments.

Thank you, Melissa. We appreciate the questions today and your interest in Graham. We'll have another conference call, I think, at the end of May. I will update you on the year-end results and our outlook at that point in time. As you've heard from our remarks and via our press release, we are very optimistic about our long-term outlook for the Company.

Our share repurchase program and step up in dividend are our strong convictions about our long-term view of where this Company is going and our cash generation capabilities. And our performance in this first three month -- quarters of 2015 is indicative of the operating power of our business, and that we did investments to expand capacity at the right time. And the team did those investments extremely well. And the leverage we garnered from those investments has been extraordinary. So we are very optimistic.

We'll manage our way through whatever pullback might occur, and our intent is to come out stronger. And we'll update you quarterly and on the next conference call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.