Graham Corp (GHM) 2016 Q3 法說會逐字稿

Greetings and welcome to the Graham Corporation third-quarter fiscal-year 2016 financial 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)

Also, as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss Karen Howard, Investor Relations. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. Thank you for joining us to discuss our results for the fiscal 2016 third-quarter and year-to-date period. We certainly appreciate your time today.

You should have a copy of the news release that crossed the wire this morning detailing Graham's results. We also have slides associated with the commentary that we're providing here today. If you don't have this release or the slides, you can find them at the Company's website at www.graham-mfg.com.

On the call with me today are Jim Lines, our President and Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. Jim and Jeff will review the results for the quarter and year-to-date period as well as our outlook. We will then open the line for Q&A.

As you're 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.

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

Thank you, Karen. Good morning, everyone. We are pleased to have you with us for our third-quarter conference call. Please turn your attention to slide 3. Third-quarter sales were $17.3 million, and as a result of this level of sales we had to adjust top-line guidance for the year to $90 million to $95 million.

I want to take a moment to address what occurred in the quarter. The quarter had been lightly loaded. This traces back to the level of non-naval bookings in our fourth quarter of fiscal 2015. That was a very light order level caused by our end market's reaction to what was happening with crude oil prices at that time.

Could have been inferred from backlog data we provided at the time that non-naval bookings that quarter were between $10 million and $15 million. We ultimately must deal with that as low sales in a subsequent quarter; that was our past quarter.

This light loading was impacted further by a couple orders -- one that was a large nuclear project, and two or three others that were for North American petrochemical projects where engineering iterations between the customer and us were ongoing, and we could not launch those orders into production to commence revenue generation. Not releasing orders into production as planned due to engineering iterations is rather common, but due to the light load planned in that quarter, the impact was far more pronounced than usual, as there was insufficient other work in process to direct production resources toward.

We have a healthier fourth-quarter loading and see continuing improved production utilization for the first quarter of fiscal 2017. The decline of sales in the third quarter represents delayed revenue and not as a result of canceled orders.

Bookings held up well, and backlog expanded at quarter-end to $113.2 million. Income in the quarter was $1.3 million or $0.13 per share. Cancellation charges from two orders recently terminated by refining market customers provided $1.8 million of pretax other income. I want to point out that neither of these two orders had been scheduled for production in the third quarter.

A little overview on the canceled orders that may be helpful: we began bidding that work in the calendar 2013 time frame. By that time our markets were very active, and it was a strong order environment. It was felt that risk was beginning to build, and we became aggressive at negotiating cancellation language into our contracts.

Admittedly, we did not see this current collapse in oil prices coming, but we did identify based on our experience that risk was increasing. The two orders were secured in the summer of calendar 2014 and placed into extended shipment schedules by our customers as we started entering calendar 2015. The forward thinking action we took 2.5 years ago in how we mitigate order backlog conversion risk led to the benefit of cancellation income this quarter. Indeed, a lot was going on this past quarter; and Jeff and I will gladly reply to questions in the Q&A session.

We continued to be active with our share repurchase plan, having bought back 141,000 shares or $2.5 million in the quarter.

Please move on to slide 4. Sales in the third quarter continued to be dominated by sales to domestic end-users. International sales were 38% of the total. Sales across our key end markets were distributed normally, with refining being the largest end market.

I am passing it over to Jeff to get into the details. Jeff?

Thank you, Jim; and good morning, everyone. I refer you to slide 6. Q3 sales were $17.3 million, down 49% compared with $33.6 million in the third quarter last year. The decrease resulted from a combination of weaker energy markets, coupled with the near-term project delays which Jim just discussed that were caused by customer engineering changes.

Sales in the third quarter were 62% domestic, 38% international, compared with last year's third quarter, which was 55% domestic, 45% international. Domestic sales decreased 41% to $10.8 million. International sales decreased 58% to $6.5 million.

Gross profit in the quarter decreased to $3.5 million from $10.1 million last year due to the lower volumes. Gross margin dropped to 20% from 30% in last year's third quarter. The benefit of the project cancellation payments totaling $1.8 million provided the majority of the profit in the quarter.

EBITDA margins decreased to 13% from 18% in last year's third quarter, driven by the lower volume. Actual SG&A spending was down by $700,000 or 17%, primarily due to lower volume-related spending as well as the benefit of the restructuring charge that we took in the fourth quarter of last year. Net income decreased to $1.3 million, down from $4 million last year or $0.13 per share, down from $0.39 last year.

Turning to slide 7, looking at the year-to-date results, they were impacted by the weakness in the energy markets. Sales in the first nine months were $67.7 million, down 31% compared with $97.7 million for the first nine months of last year. Year-to-date sales were 65% domestic and 35% international compared with 64% and 36%, respectively, last year.

Year-to-date gross profit decreased to $18.7 million, down from $29 million last year. And gross margins declined 210 basis points to 27.6% this year. The decrease was driven by lower volume and the resulting less absorption of cost.

Year-to-date EBITDA margins were 14%, down from 18% in the first nine months last year. Net income decreased to $5.6 million from $10.6 million or $0.56 a share, down from $1.04 a share last year.

Turning to slide 8, we continued to have strong operating cash flow in the third quarter. For the first nine months of the year we have increased our cash position by nearly $13 million. Our cash position at the end of December was $73.2 million or nearly $7.50 per share for our outstanding 9.8 million shares. In addition to increasing our cash position by $13 million, we've also returned $8.3 million to shareholders. $5.9 million is the repurchasing of stock -- $2.5 million of which, as Jim mentioned, was made in this most recent quarter; and also $2.4 million in dividend payments.

I want to mention our press release from yesterday, where we have increased our quarterly dividend from $0.08 to $0.09 per share. This is the fourth increase that we've made in the last four years.

Our net working capital position at the end of December, excluding cash, is now $7.1 million or 8% of annualized sales. For the past couple of quarters we have been running at a higher level than normal, and we had expected and communicated ahead of time that we would get down to a more normalized level, where we are at right now.

With that, Jim would like to complete our presentation by discussing the market outlook, our full-year guidance, as well as -- we will open the floor up for questions after that. Thank you.

Thank you, Jeff. I now am referring to slide 10.

Underlying orders, excluding the effect of cancellations that impacted the second and third quarters, have remained nominally $25 million in each of the past three quarters. It is challenging, certainly, in the refining and chemical sectors. There is a scarcity of orders, and those available are fiercely pursued.

We cannot control our markets, but we are controlling well how we compete for available business. We are aggressively taking work to load our operations, but we aren't losing selling discipline. There are some rough margin orders entering backlog, and there are others that are more typical.

These statistics I have indicate we are taking share, and our success rate has increased. Our win rate of available dollars for large project work in refining and chemical markets has moved up about 20% compared to the past three years. We aren't victims in this current tough marketplace. We figuring out ways to win, advance share, and to come through this stronger.

Actions taken to improve our performance in the nuclear market are gaining traction. We brought new leadership into Energy Steel to drive that strategy; a new general manager, a new sales manager, and several project management and engineering personnel have been brought into the business the past nine months.

We are beginning to see backlog build and the pipeline diversify and improve in our nuclear sector. We had a solid level of nuclear market orders in our third quarter.

I am on slide 11. We have a terrific book of business that is a healthy $113.2 million. Our diversification efforts are very apparent, with naval work being more than 40% of backlog and power at 15% -- and of the 15%, roughly two-thirds is nuclear market backlog.

Notwithstanding the harsh environment in our refining and chemical sectors, and we are winning there and adding to backlog; plus, our naval and nuclear market strategies continue to present exciting growth opportunities. The strength of our backlog, solid cash generation from operations, and available balance sheet capital enable us to maintain an offensive attitude and to take actions to reposition the Company for a different growth trajectory coming out of this downturn. We continue to bring talent into the Company and have an active M&A program, both of which support our goal of having a stronger business coming out of this market contraction.

On slide 12, please? Revenue guidance has been adjusted down to between $90 million and $95 million due to third-quarter sales. Gross margin and SG&A guidance are unchanged. Our effective tax rate has improved to 30% to 31%.

With that, I would ask Matt to please open the line for questions. Thank you.

(Operator Instructions) Joe Mondillo, Sidoti and Company.

So first question -- just regarding the refining business, could you give us further color on your feeling on that market? I know a lot integrated companies are bringing down their CapEx budgets quite a bit, and I'm sure that's pressuring your business even further.

But the refining space in general has been doing quite strong. So just wondering what your feelings are relative to that as well sort of the maintenance schedules within the refining sector. And also, if you could comment on -- sort of related to that -- if there's any sort of further risks that you see of cancellations within your backlog.

In the refining sectors there are multiple drivers of demand. One, of course, is new capacity. New capacity generally is driven by state-owned refiners and the integrated refiners. Those two segments of our customer base move the needle appreciably.

We have seen a dramatic pullback in spending on new capacity, and it is fair to expect that to remain contracted over the next 12 months. There may be a little work here or there, but it is materially different than it had been for the past several years. Once we saw the contraction take place, the spending pattern certainly changed abruptly.

Another driver is -- we put it into the category of maximizing the asset base of the existing refiners. There is investment that we see there, and we categorize that as revamps; debottlenecking; capacity creep; bottom-of-the-barrel conversion -- trying to get more out of the barrel of crude oil. We see those investments as having some pullback, as this industry has been cash-constrained; however, we expect investment to occur to maximize the existing asset base.

So we are seeing that off a bit, but we are expecting to have that recover ahead of new capacity. We have some opportunities that are a big pipeline for this type of work. We have won this type of work in the past 12 months, and we are expecting it to be fairly stable over the next 12 months.

The third driver in a large sense is the maintenance and aftermarket replacement parts. That had a pullback the past 12 months. We've commented on that on previous conference calls. That we have always considered as a discretionary decision that could span a couple quarters. We don't believe that can be enduring or have a long period of time that we have to deal with that. So we are expecting the refining sector to get back to ordinary spending in its replacement parts and a drop in replacement-type orders that we've seen historically. That's been a very significant segment of our business.

So across the three key drivers: one being new capacity is down; investing in existing assets, be they revamped, debottlenecking, or parts and replacements -- we believe that will start to move back toward normal over the next 12 to 24 months. Admittedly, though, this is a very harsh period of time, and the reaction by state-owned refiners, integrated refiners is different from an independent refiner. However, the two key needle movers are state-owned refiners and integrated refiners.

Okay. That's great color, Jim. Thanks. In terms of the backlog, do you see any further risk of cancellations potentially, or how do you feel about the backlog within refining?

We feel okay. We always do a quality-of-backlog assessment periodically, certainly no less than every quarter as we look at our backlog and the way the backlog is moving. A couple of the two orders that were canceled in the second quarter and the third quarter -- I would point out that we had noted in our Q we had a fairly large amount of orders that were on extended execution. Those ultimately moved to cancellation.

We have now about $10 million that we have noted in the upcoming Q that's on extended conversion. However, we feel that is less at risk, and we are beginning to see some movement on that order, most recently over the last couple of weeks, with a firm commitment to get that order moving off of dead center.

We believe the worst is behind us; however, what we want to get a firm footing on is as our customers come out of their Board meetings in January and February and they have a clear outlook of spending over the next 12 months, I'll be able to comment on that more definitively. So my view right now is absent of getting the direct feedback following Board meetings by our customers.

Joe, this is just one follow-up to Jim's comment. The order that he mentioned that is on backlog is noted in our press release.

Okay, great. And just lastly, the sort of bucket, if you will, that those cancellations fell into -- was that new capacity? Or -- I imagine it's either new capacity or maximizing existing capacity in those --.

One order was for improving existing asset of conversion of a barrel of oil; the other was new capacity in oil sands. Oil sands has hit a very tough patch with where oil is, so that investment in new capacity has been unwound. It represented a termination by our customer. And then the other -- so one was in Canada, and one was in the US. The one in the US was an upgrade or an expansion to improve bottom-of-the-barrel conversion.

Okay. And then I just have a couple questions on margin, and I'll hop back in queue. The SG&A -- it seems like the guidance is implying that -- you know, is that $3.7 million in the third quarter sort of a run rate? Because it seems like the guidance, if you take the midpoint, at least, it could be even under that $3.7 million. So just wondering how your outlook is regarding SG&A, and as you go into 2017, where you are feeling you're going to be relative to that.

The SG&A in the third quarter was a bit lower than we would characterize the normal run rate. There were some volume-related cost adjustments that were taken in the third quarter that aren't necessarily going to be there every quarter. We would expect more in the $4 million to $4.5 million per quarter SG&A rather than $3.7 million that was experienced in the third quarter.

Okay. So if you're at -- if you hit the low end of the revenue guidance to get to even the low-end of SG&A guidance of 18%, the $4.5 million would not fall into the 17% to 18%. Is that correct?

There's always a challenging mathematics problem in the fourth quarter with guidance, and even with a $5 million range -- and you have ranges on gross margin and SG&A. It presents math challenges. But from an absolute perspective, the guidance that I mentioned a moment ago of between $4 million and $4.5 million is probably a more relevant expectation for the absolute spend.

Okay. Thank you. And then just lastly, I just wanted you to comment on the gross margin. The second half of the year here we're looking like we are falling into a range of 22%, 23%. I know the third quarter was abnormally late, even if you're closer to 24% and 25%. Just wondering if you could characterize how you feel about those gross margins. Are they abnormally low for whatever reason in terms of a product mix? Or if we continue to sort of see revenue where we have been seeing it, in the sort of low $20 millions, is there any reason barring a huge turnaround in the oil refining, which -- you carry higher margin, which seems unlikely, in the near term at least -- is there any reason to not believe that sort of 24% type of gross margin is going to change over the next several quarters?

Joe, I think that range -- the range you referring to, 24% or so, is probably a little on the light side in general as we look forward. Certainly our guidance -- and, again, Jim talked about the math challenges of the last quarter's worth of guidance. You have got a pretty broad range, depending on the revenue level you pick and what margin level you pick.

Certainly, the margins are little weaker right now. As Jim mentioned, we have a couple of a challenging -- a handful of challenging orders in the backlog right now but we also have some good orders in the backlog. But I think that obviously we had a low margin -- a very low margin level this quarter, which -- you know, the math brought the average down. But looking forward, I would expect that that low a margin level going forward is probably a little on the light side.

And if you -- what are the drivers to being so light in the back half, other than just volume being down? Is there another factor going forward that's going to -- without assuming volume improves, just for hypothetical reasons, is there another driver or factor that's going to lift up those gross margins?

Was it sort of a product mix and just the way the orders fell in the back half -- the gross margins on those particular orders were light, and so that you assumed they bounce back, looking at the backlog that you have right now? Is that the main reason?

The margin compression is principally due to volume and the underabsorption of our fixed cost. And then, secondarily, for growth we have been adding talent to the organization, principally into our nuclear strategy.

We are expecting to see revenue growth in our nuclear strategy compared to current fiscal year next year. But we are making those investments now to be able to effectively move that strategy upward in revenue growth. So that is impacting to an extent margin in the quarter, and therefore we are projecting growth as we go through the fiscal 2017. But if I had to just summarize what's contracting the margin in the second half of this year, it's volume.

Okay. Okay. Thank you.

Chase Jacobson, William Blair.

Good morning. Nice job on the cancellation clause on those projects.

But kind of with that, Jim, I think it shows your insight into the markets; and you've always had pretty good insight. So just bigger-picture, kind of taking the energy and power markets in general -- really industrial in general -- can you talk a little bit about where you think we are in this downturn? Are we at the bottom yet? How long do you think it takes to recover? Just maybe give us your view as to where we are in this downturn.

Sure. That's a great question. Before I answer that question, I just want to comment, importantly, our preference will always be to finalize a contract. We wanted to ship these orders, would have derived greater income from them.

However, we do take action to protect ourselves, because our most scarce resource is engineering and production. And we safeguard that very deliberately, and when a cancellation happened, expect to be paid. And that's what you saw.

In terms of market outlook, in a whole perspective, not market perspective, we feel -- as we look at the strength of our nuclear strategy and the strength of our naval strategy that counters the impact of where chemicals and refining are -- we think we are moving off of a bottom. That's our perspective from an overall point of view, because we are expecting -- our planning premise and how our pipeline looks.

The data is showing the nuclear strategy is going to be expanding and the naval strategy is going to be expanding over the next couple of years. That seems quite clear to us as we look at the data and the execution actions that have taken place. So that should provide some lift as we go forward.

The question really centers around: where is this business? Where are markets in refining and chemicals? And that's so very difficult to predict. We don't actually know. I'm not going to profess that we know.

What I can say is we are fighting aggressively to win in this contraction, not lose share, also not lose price discipline; and actually expand our share and move into different markets, either geographically or end-use markets where it's appropriate to do so, and in our core areas, and get through this a different Graham with a different growth trajectory. I feel we have a rough patch still ahead of us; we do feel this -- not just me -- in our refining and chemicals markets. And it's going to be countered by the strength of our naval and nuclear strategies over the next two years. I'm not sure that answered your question, but that's our view.

No, no, that's helpful. The second question is: I noticed two things in the orders this quarter -- positively. You had strength in power, and you had better international awards than you did the last few quarters. Are those related, or is this -- you know, is that China nuclear? Is that the revitalization of Energy Steel? Or if they are not related, can you just give more color on what drove those?

Sure. The improvement in the power bookings is tied directly to our strategies and investments to get Energy Steel and our nuclear segment strategy moving in the right direction. We are seeing traction of those initiatives now, as evidenced by backlog building.

The leading indicator for us is the diversity and the size of our bidding pipeline in that segment of our business, and the fact that we have brought in the right resources to help us realize the strategy there. New general manager, new sales manager -- the general manager's lived his whole life in the nuclear space. And he is about my age, so he's had about 30, 35 years in that sector. Project management and engineering management has been brought in over the last nine months, have lived in the nuclear market; they have come from the utility industry or the naval nuclear propulsion program.

These are some very strong performers that are helping us with our execution strategies and our market access strategies. And we feel very positive about where that strategy is and that that should be growing.

On the international side, don't read too much into that. That's somewhat situational. Orders were available, and we won them. I don't see a robust -- we don't see a robust international pipeline right in front of us.

However, with what's there, we are aggressively going after and trying to figure out a way to win, and try to figure out a way to drive our costs down so we can work within the market price. It is a buyer's market. They are hammering the supply chain; the fairly brutal pricing environment, depending upon the geographic location; and end-use market.

But we are finding our pockets of how to win. And we have a wide array of margin work coming into our backlog -- some fine, some rough. But that's what happens at the bottom of the cycle. We are more focused on asset utilization, protecting our share, and crushing the competition where we can.

Okay. And then, I think you probably know what I'm going to ask you, but where are you in the acquisition process? Any update as to what's going on there? You have over $7.00 in cash now.

We do, Chase. We are certainly more active today than we have been in a while. And we are continuing to look at -- have a lot of opportunities, both in our core markets, but just as importantly, or even more importantly, in some of our diversified markets.

So we are starting to see a little bit of movement on price, which is a good thing, too. And I can assure you that the activity level is high -- but the activity level of high ultimately resulting in a closed deal isn't a sure thing. It's more a higher probability that we are successful at some point in the future.

Jeff, without being too definitive, perhaps you can provide some specificity on type of products and type of markets we are actively involved in deal flow with.

Sure -- in a number of areas. So, as I mentioned, on the diversification side we are looking at opportunities to further enhance our nuclear business. We are looking at opportunities to further enhance our defense business. We are looking at opportunities in ancillary markets that are closely related to the markets we currently play in.

And, quite frankly, we are also looking at opportunities in our core markets. Given the weakness in the core markets currently, there perhaps are some assets or opportunities to find someone who maybe has tired of being -- either physically tired or financially tired of being in what is now a weak market. And there's always opportunities as you near the bottom, or around the bottom of a market cycle. So we are actively looking at all of those areas.

Appreciate the color, guys. Thank you very much.

Ryan Levenson, private.

I'm just trying to triangulate a couple things here. The $113 million of backlog -- 45% to 50% of it is going to work off in the next 12 months. Is the $10 million of extended execution in that, say, roughly $55 million of backlog?

We've modeled in some conversion of that in fiscal 2017. We feel with the information and the communication flow coming from that particular customer, that is a prudent judgment at this point in time. So it's not something we converted from modeling.

Okay. But the $10 million is carved out of that $55 million?

I may not have answered it the way you phrased it. In the $55 million -- in the conversion as planned for the next 12 months, a piece of that $10 million is modeled in.

It is counted.

It's counted.

Okay. Got it. All right. And then in your prepared remarks there was a comment that -- you said you have some rough margin orders entering backlog; and then somewhere along the line in the Q&A, I think you also commented on a couple of contracts. I was just wondering if you could be more specific regarding the magnitude of these contracts? Of the roughly $55 million that's going to convert in the next 12 months, what do these rough orders account for? And kind of relative to historical margins, what are the gross margins looking like?

We look at it as a basket of backlog margin. The margin on average is consistent. So when we take the good and the rough ones, it's blending into a fairly consistent level of a basket of backlog. As we have a low-volume/high-mix business, we have orders that can have 10%-ish or below gross margin; and we can have orders that have 40% gross margin. And they range in between there. And there can be an aberration where we have a strategic need to defend a particular customer, defend a particular market, where there might be no gross margin.

However, when we look at it on a variable cost basis, it's incremental at the operating profit margin line, and that's what's most important to us. So we do look at these situationally, and we do protect our turf. And we are more inclined to load our assets and -- rather than chase quality right now, because there is such a scarcity of business available.

I understand directionally what you are saying; I'm trying to get to an order of magnitude. Of the piece of your backlog that is going to roll off in the next 12 months, I guess, what's the blended margin on that?

I believe I answered that. It's consistent with what it had been on average.

On average. Okay.

Basket of backlog on average is no different.

All right. Is there a -- I'm just curious as to why you are noting these particular contracts. Is it that those are all kind of front-end loaded, and then -- so we're going to see a quarter that has more of an impact from that? If it's the same, I'm just curious as to why it was noted like that, if the average is the same.

Let me try to connect the important consideration here. As we look at the next wave of chemical investment in North America, it's dominated by international end-users -- not what the first wave looked like.

An international end-user has a broader supply chain; they have a different view on price versus quality; and we are beginning to see some of that work come into our backlog now. They have a different price point. And there could be more of that as we go forward.

If you look at the composition of the next wave of ethylene production capacity as an example, you will see it's dominated by international players. And they will bring in an Asian supply chain; they will bring in an Eastern European supply chain; and that has an impact of potentially crushing margin. So if that becomes a greater mix of the business, then we might see an averaging down of the margin. So I didn't connect the dots well, but that's what that foretells.

Okay. I think I follow you. And that was all I had, thank you.

John Bair, Ascend Wealth Advisors.

Got kind of three questions. First of all, commend you on pretty good stock buyback pricing. And wondering if so far this year you've been actively in the market buying additional shares back?

Obviously we've reported what we've done through the end of December. We really don't intra-quarter comment on that, other than our program is still active. But beyond that, we don't comment about any, you know --.

Okay. All right. Secondly, in a general sense, to what extent do you -- or what impact do you think the lifting of the crude export ban will have in shifting the focus of shipping refined product -- refined here in the US -- to exports globally, to actually just shipping the unrefined crude out there? In other words, do you think that's going to have an impact on domestic refining activities and expansions or upgrades of existing domestic refining complexes?

Sure. The thesis we have is -- actually, in my opinion, it has two phases to it. The initial reaction that we are seeing in the industry to the lifting of the export ban is the shale-related crude oils, the light, low-sulfur content, easy-to-process crude oils are being exported because the North American refining base has already been invested into being able to process heavy sour crudes, and they don't process well the light sweet crudes that come out of the shale oils.

So we are seeing that being shipped over to other regions. That's more of an immediate effect of that, as refiners are not equipped to process Bakken or Eagle Ford Shale type crudes efficiently.

Longer-term, though, with the US being able to ship to international markets refined products, I do think it supports investment in the asset base here, with capacity increases, debottlenecking, brownfield investments that have been the lifeline of Graham for the last four years in the refining sector in the North American market. So I am pretty optimistic about it longer-term.

I think the immediate reaction to it is: shift the crude oil that can't be processed efficiently right now to the export markets. Longer-term investments will be made is our view. That's the thesis we have.

Okay. And this is kind of a new development, I guess, with the lifting of the Iranian embargo type stuff. Do you have any sense or can you comment at all what your sense of their internal or their domestic refining capacity is, and how much upgrade might be there? Just kind of give a sense of what potential market opportunities might be there.

It's quite immense. We have a very rich installed base in the Iranian refining and petrochemical sector, when we could trade with them. What's disappointing is that the European suppliers are moving more quickly than the North American -- or the US-based suppliers based on the actions their governments are taking. I'm hoping we come to the table and have a chance to play. But our nation seems to be moving a bit more slowly.

I can tell you, though, the Iranian market, if they have money to invest -- it's not quite like Saudi Arabia, but it's not too far behind. And I want to play in that if we can as a US-based company. But I fear we might be a little bit behind with the --.

Is there any way to partner up with those European companies to get a jump on it?

I still think --

Not necessarily your direct competitors, but -- for example, I think I saw something about Total working out some kind of an arrangement; they were going to invest money in the Iranian market.

Right. So it's a little more precarious for us. Total is French; we are US, and we have to operate under the US trade restrictions. And if we -- we can't -- it's complicated.

Yes.

We will certainly try to find a way to win. It's not as straightforward as I would like it to be at this point in time, and we are all hearing in political pundits that the Europeans are moving more quickly to secure this type of business. But we do have a very rich installed base in refineries in Iran, in ethylene plants and ammonia plants and petrochemical facilities throughout Iran. And I want a piece of that work. I want a piece of that work.

Fair enough. Last question: in December I saw an article that Pemex had announced $23 billion CapEx plans over -- wasn't definitive on the number of years, but I'm imagining but five years plus, whatever. And some of that was addressed towards development of clean fuels.

So the question is twofold. Number one, obviously I am sure you've got a pulse on all that -- what they are planning on doing -- and if you might be able to comment somewhat on that push towards the clean fuel aspect and what your involvement in that is?

Sure.

Not necessarily just with Pemex, but as a general question.

With respect to investment in Latin American refining assets for clean fuels, for feedstock diversification, that's a fairly active bidding area for us. But I'm going to be candid: we've been chasing these opportunities for three, four, five years.

The announcement that you cited around Pemex, which cites Salina Cruz, Carterita, Tula, Madero refining projects -- we've been chasing all those projects since probably before this decade. And should they materialize -- we are hopeful they do -- I can tell you our folks are all over it. The timing of it is very difficult to identify; and that's not just with Pemex, but it's throughout Latin America.

I can tell you, though, we have IDed the projects. Our folks have been on it, our folks have been on it for multiple years. And just continue to watch those projects and be hopeful that we can win some of it.

Very good. Thank you very much.

It appears that there are no further questions at this time. Management, would you like to make any closing remarks?

Thank you, Matt. We just appreciate your time today for our third-quarter conference call and the Q&A session that we had. Look forward to updating you, which won't be until May, when we have our fourth-quarter results.

Thank you very much. And as always, Jeff and I are always accessible for one-on-one conversations. Feel free to reach out to us. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.