Graham Corp (GHM) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Graham Corporation Second Quarter Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Karen Howard, Investor Relations for Graham Corporation. Thank you. Ms. Howard, you may begin.

Thank you, Michelle, and good morning, everyone. Thank you for joining us to discuss the results of Graham's fiscal 2018 second quarter and first half year results. 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 the release or the slides, you can find them on 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 first half of the year as well as our outlook. We will then open 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.

I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release.

And with that, it is my pleasure to turn the call over to Jim to begin. Go ahead, Jim.

Thanks, Karen, and good morning, everyone, and thank you for joining our second quarter earnings call.

Please refer to Slide 3 as I begin my prepared remarks. Revenue in the second quarter was down 18% when compared to last year. Revenue for the quarter was $17.2 million. The decline in revenue is correlated to a poor order environment in refining, chemical and power markets during the last 18 months. The management team maintained profitability while facing stiff revenue headwinds. Prior to restructuring, net income was $200,000. Including the impact of restructuring, our second quarter was at breakeven.

With respect to adjusting operating costs, the restructuring decision was difficult. However, it was unavoidable for operating in future quarters at revenue levels commensurate with the recent softer new order environments. We held commitment and investment related to our naval strategy, balanced near-term realities and recovery perspective within our traditional markets and reduced substantially the cost basis of our nuclear strategy.

Backlog at quarter-end held steady at a sequential basis of $73 million. However, as a result of order levels, backlog is down approximately $30 million from 1 year ago. Full year revenue guidance is lowered, and we adjusted downward gross margin expectation. We now have a more clear view of the full year and have assessed the impact of customer delays in placing new orders, which has led to a guidance revision. I will cover guidance more thoroughly with a subsequent slide.

Please move on to Slide 4. Revenue breakdown by key end markets illustrates lack of demand in refining markets during the past 12 months. Refining industry revenue was down 30% compared to last year. Similarly, the nuclear power industry was dramatically -- has dramatically reduced capital spending. And consequently, power market revenue declined measurably or a near 70% reduction compared with last year. Positively, there was a greater than 50% increase in revenue to our commercial and defense markets, driven principally by work for the U.S. Navy as we convert backlog that is for submarine programs and also execute incremental releases of orders for the next aircraft carrier. Chemical and petrochemical industry revenue was up as well as we completed backlog that was for an Asian new fertilizer plant. Domestic revenue continued to dominate our geographic mix at 65% of total revenue in the quarter.

Let me pass it over to Jeff for him to do a more thorough review of the quarter and year-to-date results. Thanks, Jeff.

Thank you, Jim, and good morning, everyone.

Turn to Slide 6, please. As Jim mentioned, Q2 sales were $17.2 million, down when compared to $21.1 million in the same quarter last year. Sales in the second quarter were 65% domestic and 35% international compared with last year's second quarter where the split was 73% domestic and 27% international. Domestic sales were $11.1 million. International sales increased 7% to $6.1 million.

Gross profit in the quarter was $3.8 million, down from $5.0 million last year, primarily due to lower volume as well as working through some pretty rough projects which were booked over the past 12 to 18 months. Gross margin dropped nominally to 22.2% from 23.7% last year.

Adjusted EBITDA margins decreased to 4% from 11% in last year's second quarter, driven by the lower gross profit margins as well as higher SG&A cost. Please note that SG&A in the second quarter of last year benefited from the receipt of a $759,000 insurance proceed.

Adjusted net income decreased to $200,000 from $1.4 million last year or $0.02 per share, down from $0.14 per share. The net income number was adjusted for a $224,000 restructuring charge in the quarter.

Please move to Slide 7 to look at the results of the first 6 months of the fiscal year. Sales in the first half of fiscal 2018 were $38.1 million, down when compared to $43.5 million in the first half of last year. Year-to-date sales were 68% domestic, 32% international compared with 73% domestic and 27% international last year. Domestic sales decreased 18% to $25.9 million compared with $31.7 million last year. International sales, however, were up slightly to $12.2 million from $11.8 million last year.

Year-to-date gross profit was $8.7 million, down 4% from $9.1 million last year. Year-to-date adjusted EBITDA margins were 6.4%, down from 7.9% in the first half of last year. Net income adjusted for restructuring was $1.2 million down from $1.8 million last year or $0.12, down from $0.19 per share.

Moving on to Slide 8. Looking at our operating cash flow and our cash position. We have positive operating cash flow in the first half of the year. However, we paid out $1.8 million in dividends, and our overall cash balance position is down 2% this year to $72.1 million or $7.38 per share.

We continue to be pleased with our expanding acquisition pipeline and hope to be able to utilize some of this cash to grow our business inorganically in the future.

Capital spending in the quarter and the first half of the year has been fairly light at only $400,000 through the first 6 months of the year compared with $200,000 in the first half of last year. However, this year, we do expect to spend quite a bit more in the second half of the year and believe that we will be spending between $2.5 million and $3 million in total capital for the full fiscal year.

Jim will complete our presentation by discussing the market outlook and our updated guidance.

Thank you, Jeff. I now refer to Slide 10. The trailing 12-month net order chart that tallies new orders less the impact of cancellations describes the unprecedented severity and span of the current disruption to our refining and chemical markets, along with the difficult period the nuclear utility market is experiencing. I want to review what we are doing in response to this. We are aggressively pursuing the work that is available. We are attempting to not break pricing discipline, as that is very important long term. However, we will step in to protect share, win strategic orders and take work sensibly to load our asset base. Also, we're focused on expanding market share. We cannot control direction of our markets. However, I do strongly feel we can always control market share and be aggressive to pursue the work that is available. I don't feel our market share for the work that was awarded in the recent past has moved downward by any measure.

We are also directing resources into the plants. We will identify early and potentially create demand for our products by working at the plant level rather than remaining as focused, as we usually are, on the EPCs. It is here that we feel capital spending will begin to pick up first. We have clear focus on our M&A pipeline in order to add products, bring new markets or enable us to leverage our assets to drive growth.

Lastly, we are engaging outside consultants to work with management to identify what unrelated markets we could enter and add value for those customers.

Moving on to Slide 11. Backlog at quarter-end held at $73 million. Backlog has a large percentage tied to the U.S. naval market, and we project 50% to 55% of our backlog will convert over the next 12 months. 35% to 40% of backlog is projected to convert 2 years or later from now.

Moving on to Slide 12. Fiscal 2018 full year guidance is for revenue to be between $75 million and $80 million. Gross margin is projected to be between 21% and 23%. Our SG&A expense is projected to be between $15 million and $15.5 million, and our effective tax rate between 28% and 30%.

Michelle, I would ask you to now open the lines for questions.

(Operator Instructions) Our first question comes from the line of Joe Mondillo with Sidoti & Company.

Wanted to clarify, Jim, 2 initiatives that you mentioned in -- at the tail end of your prepared remarks in terms of trying to find, I guess, growth and be prepared for the upturn. One was you mentioned you hired some consultants to investigate if, I guess, if your products offering or what your capabilities are could be used for other customers. If you could expand on to that and if there's any sort of outcome or any sort of feedback with the consultants yet. And then secondly, you also mentioned CapEx coming back. I guess, at the plant level first before, I guess, major EPC work. If you could expand what you're thinking of -- what you meant by that, that would be helpful.

Joe, we are in the early stages of working with the consultants. I would expect over the next few quarters to be able to talk more definitively about their views. Our view is we have some very unique capabilities, unique capabilities that relates to fabricating very complex weldments in large vessels to very close tolerances. We have an operations model that's unique to a very customized, low volume type of product flow. We have some very unique engineering capabilities around mass transfer, heat transfer, fluid flow and equally importantly, chemical design and fabrication expertise. And then also, we have a strong team on the customer-facing side that can work with our customers on how best to integrate our know-how into their processes. It is possible there are additional markets that we haven't moved into that would value what we provide and that, more importantly, we can create value for them. And we've engaged some outside resources to help us open our thinking to where else we can take our very unique capabilities to diversify our revenue streams and provide a more long term, stable level of top line and bottom line. So we are in the early stages of that. I can't comment too much further on that other than I did want to share that we've begun that exercise. And then secondly, to your second question, Joe, we've been focused on the plant level for maybe the last 2 years as we got into this downturn. We understand and feel very firmly that where the focus lies right now is on asset base maximization, getting the most out of the current installed base that our end markets have. And we see in the chemical industry and the refining industry that there will be brownfield investments or investments in the existing assets to get more out of them, to improve the quality of the product that they deliver to their customers, to operate more efficiently. And by having our technical resources in the plants, having the important conversation, diagnosing and identifying opportunity to unlock capability at the plant level, we think that can drive more quicker return CapEx that will move more quickly than long-cycle large project, new capacity work. We have seen some positive signs there, and I'm still very strongly convicted toward that's the right strategy during this downturn. Has it manifested into a strong uptick in business, new orders just yet? No, but there's a lot of positivity in the work that we're doing and the closeness that we're getting to our customers, we do feel this will pay off.

So sort of related to that and just general in terms of your overall business or at least the core energy part of your business, with the industrial sectors seemingly improving not just in the U.S., but globally, certainly, I would think chemical processing, are you beginning this, in terms of your bidding and quoting activity, are things picking up at all? Or is it still sort of slow and sort of at the bottom and maybe that will come in the future?

Joe, our business sense on the direction or those as lead measures that foretell the direction of our business, we have strong positivity about those lead measures and early indications. We tend to be a later-cycle business in terms of recovering relative to what you might see upstream or midstream or the industrial space. What our markets serve are refining, are chemical industry markets. They serve the industrial segment. So as we see that begin to show signs of improvement, that has, in the past, been a great lead measure for the direction of our business a few years forward. So with that, we have positivity. It has not yet shown up in a material way into our bid pipeline other than we still have a very strong pipeline. It's rather diverse. But importantly, it hasn't moved -- the pipeline hasn't moved from concept or early engineering activity to EPC bid or closer to procurement. The great thing, though, is we're involved in these projects. We're involved early, as we always are. And again, we're seeing the lead measures suggesting things are improving, and we would expect to see our pipeline move to the right with the right being more toward procurement over the next several quarters. I can't call -- are we at the bottom? I can't call if the pickup is next quarter or the quarter thereafter other than our lead measures are telling us things are starting to improve.

Okay. And is that for both refining and chemical processing? Or would you weight one better than the other? And do you see orders of either of those sectors may be improving in the next couple quarters? I know you said you may not be able to tell, but just the 2 sectors, which one do you feel more better about, I guess?

I'm going to answer it this way. I feel that new capacity petchem will come first. And then more global new capacity refining will come second. However, we do see some refining existing plant investment that's right in front of us. We also see some petrochem work that's right in front of us -- that's already in front of us. Over the next few quarters, there should be some projects that close that have some global diversity. However, by no measure am I suggesting that the strong wave is in front of us, but we are seeing some opportunities that are presenting themselves that should close this quarter or next quarter.

Our next question comes from the line of John Bair with Ascend Wealth Advisors.

My first question regarding CapEx, you've addressed that. My second question is, given the difficulty of the last couple of years in the -- in your marketplace, has that changed your parameters or your outlook on the size of a potential acquisition that you would consider at this time?

John, this is Jeff. The -- it has not changed the outlook on the size that we would consider. We're still considering the -- as we've targeted a $20 million to $60 million range, but very willing to look below that or above that range.

(Operator Instructions) Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities.

Congratulations on the way you've managed the balance sheet in your company here during these tough times.

Well, thank you for that compliment.

Well, you've got yourself positioned here to take advantage when the green shoots start showing up here. Can you talk a little bit -- I think you indicated that you feel pretty comfortable that your market share has held in there during this tough period. Can you offer color on where you think, from a product standpoint, Jim, you're likely to see -- when you talk about investing in productivity equipment and existing asset base and so forth, which of your important product lines are most impacted there? And are any of those product lines that we're going to talk about, do they have much variance in their individual profitability? Or are they all pretty much similar, whether it's jet ejectors or condensers or heat exchangers, things of that nature?

The focus that we have on the installed base, which is quite rich being an 80-year old company, it will drive, we feel, ejector system sales, both into the refining and possibly into the petchem area. What's nice about the ejector system business or product line is that it drives the aftermarket long term because the uses of ejector systems are in corrosive and erosive environments, and there's a wear aspect to their performance. So therefore, we like to drive ejector sales because they feed long term our aftermarket stable base. In the chemicals area, we tend to see more surface condenser activity because those are critical for the most important process units in the chemical industry. They have a longer life. It's a great product. It's a great quality. It lasts a long time. We tend to typically see a replacement of the unit as a capacity expansion or after 30 or 40 years, they want to replace the unit entirely. 25 to 40 years, they want to replace the unit entirely. It doesn't drive the same level of aftermarket, but again, with an installed base and our company basically was built around the U.S. chemical industry in the '60s and the '70s, there's a richness of our condensers installed base that's mature, aging. And as these plants benefit from low-cost natural gas as their feedstock, they're looking to eke out more capacity or restart some idle plants. And we're seeing some strong opportunities for our condenser work. On the overall margin profile, I don't want to get too granular on that. We tend to think of our ejector systems as having a higher-margin potential than our surface condensers product line will.

And regarding kind of "nontraditional markets," I know that you, in the past, have had some sales into the pharmaceutical industry or pharmaceutical area. Is that a viable -- do some of your products have good opportunity there? There seems to be pretty good CapEx going on in that segment of the economy worldwide.

We have, over the history of Graham, been in the pharma markets. It's more of our what we classify our short cycle, our less project-oriented products, our heat transfer products and some of our smaller ejector vacuum systems. They don't tend to drive the same margin potential because the applications are less critical, believe it or not, in the pharma industry. So we do play there. It's a segment of our business. We've not generally found it to be a large needle mover because the average selling price of a pharma order for us is under $100,000, whereas the average order into refining or chemicals is $500,000 or more.

Our next question comes from the line of John Sturges with Oppenheimer & Co.

I have to tell you I remain impressed with having handled this for a long period of -- it's been so difficult for your industry. What I'm curious about is the hurricanes that we've seen in the last couple of months, whether they may have [in fact] redirected some of the attention from your customer base towards emergency repair as opposed to capacity improvements or expansion.

We haven't seen, in the past, where an event such as that has created significant demand for repair or replacement. Our equipment is large weldments, static equipment. It doesn't get affected by being flooded necessarily. It's too early to make this call, but what I am hopeful for is perhaps a rethinking of the way the industry went in refining around -- in the surface -- or the turbine exhaust application, they've elected to go motor drives for most of the services over the last 10 or 15 years rather than steam surface condensers, one of our product lines. When a plant floods and electrical motors are immersed in water, those plants shut down for a long time. And there's a very significant capital program to get those plants up and running, whereas a turbine driver that requires a condenser weathers a hurricane differently than electric motors do. So I'm hoping that reshapes the thinking in the industry and returns to the desirability of surface condensers. It's probably getting a little too detailed, but some of the customers we've spoken to, they actually value the turbine service with a surface condenser because it's more reliable to power outages, which happen with floods or other events that shuts the whole plant down. It ruins the catalyst bed. It's a very costly process, whereas a turbine exhaust condenser and a turbine just keeps running for several minutes without the severity of what happens with a short-notice loss of power. So I'm hopeful of a mindset change.

Is that a short term -- is the decision to have electric motors more a shorter-term cost issue? Is that what the factor is in the thinking?

They thought it was a bit more of reliability. And also, it has a different environmental impact potential.

Right, right. But it sounds like it's possible with the larger capital expense after a disaster that, in fact, the net, obviously, where reliability and the overall environmental expense could be higher for the electric motor option.

Right. That's what -- again, I'm not making any call here. I'm just sitting back, thinking is there a derivative of this that would benefit us? And I just shared that.

Our next question is a follow-up from Joe Mondillo with Sidoti & Company.

So I wanted to see what your -- you mentioned market share in your prepared remarks. Just wondering, are competitors underpricing you guys aggressively? And if so, are you losing any market share, I guess, in the near term of this sort of recovery at all? Do you see that happening?

We offered in our prepared remarks, and this is a very important element of our product positioning, our brand strategy. We try to not disrupt our pricing discipline. However, we are seeing at times, and this is not pervasive, so please don't overreact to it, but we are seeing some international competition try to find entry into our markets, and their pricing structure is ridiculous. It's -- we don't believe it's sustainable. It might be an entry-point decision, and it makes no sense to us. The amount of money they're prepared to leave on the table is -- they're bad managers. And I don't think it's enduring. However, we are seeing some people trying to snipe and win business with leaving large sums of money on the table. We don't work that way.

I guess, what I'm trying to get at is, is the environment maybe a little better than what your results are portraying? And just in this very early part of the recovery, at a very severe bottom, the downturn that you're experiencing a challenge with pricing and actually, the environments actually a little better than what your results are showing and that may be are couple quarters down the line, pricing will eventually sort of normalize in that you can see sort of that recovery. Is that happening? Or is that not -- am I overstressing that?

No, I don't think you are. Thanks for clarifying because that's a relevant consideration. When you look at our business and our backlog conversion what's reflected in the earnings of our business today is the pricing environment 6, 12 months ago. I think Jeff made a remark in his prepared commentary that we're working through some tough orders that were taken 9, 12 months ago as we defended share or fended off someone trying to buy an entry point into a critical market. I can say this directionally from one of our profitability measures of how we look at our product profitability, what's running through backlog now in revenue, what's in future backlog has a higher profit potential.

Okay. So the pricing, that would insinuate that pricing is actually starting to already normalize then? Or are you -- or you're just being a little more disciplined. And while orders continue to really remain weak in maybe an improving environment, you're just being more disciplined with pricing so that your backlogs improving in terms of a margin standpoint? Just trying to...

I don't think we have -- we don't have the abundance of opportunities where we can be selective. It just is a reflection of, I think, more qualitatively and also from that profitability measure of revenue cycle versus what's in the backlog that the environment is more favorable to improved profitability on what's being booked versus what was booked 12 to 24 months ago.

Joe, this is Jeff. If you were to go back and listen to some of the prepared remarks from 3, 4, 5 quarters ago, I believe you will find that we made some commentary around some pretty rough orders that were booked at the time that were -- some of them were orders that the pricing -- we had competitors perhaps that were being overly aggressive on pricing. And I don't know, I'm not sure we used the word crazy pricing, but we probably were thinking that. Those were the orders that are currently working through backlog now and have depressed our profitability levels. As Jim has said here, the orders that are coming into backlog are better than the orders that are working out of the backlog right now, which is kind of why we believe that perhaps you'll see a little bit of improvement going forward. But again, it's not the quantity of orders that are improving. It's the pricing level of the ones that we're taking in versus the ones that we're converting right now.

It's an important consideration also that we monitor the direction of our bid pipeline and trying to discern when there is a turn, when we've met or hit the inflection point. So we don't miss a stronger pricing environment simply by just not being discerning about what's going on in our marketplace. And I have experience because we missed this upturn in 2005 that ran through our profitability and revenue cycle in 2006. You probably won't go back 12 years ago, but I made the comments at that point in time that we missed it, and we took some orders not fully appreciative that we had hit the inflection point and things were marching forward in a more positive way. I can't guarantee we'll hit it exactly correct, but we're watching this very carefully. So we adjust our pricing discipline and the assertiveness that we'll put toward our value proposition so we don't miss the upturn fully. And we're ready for it. So I am -- we are watching this. Our sales folks are watching this very carefully because it's so critical. An order decision in our business that we've taken today, if it were a rough order, it shows up 7 through 12 months after that decision when the market observedly is already turning around and the questions are what's happening here? So we are very judicious and mindful of watching that quality and direction of our bid pipeline so we don't miss it, and we're ahead of it.

Okay. Just one last follow-up clarification question related to this in terms of the pricing environment. Have you started to see the environment, your competition adjust a little bit differently than compared to what you saw a year or 2 ago when pricing was below normal and sort of out of whack? Or are you still seeing those pressures?

I'm going to respond this way. Most of our competition, in our view, from us watching them and our competitive intel, is they are formulaic. They have a standard margin they try to hit, and they don't alter. We have a different model. We situationally assess and we situationally price, and we price differently by situation. Our competition, they want margin x and they price for margin x, notwithstanding the competitive situation and the market environment generally. So we've seen them being more formulaic. We threw that process out of our business 10, 12 years ago.

Okay. I also wanted to ask you on the Navy business. So the orders in the quarter for Navy and other seemed very strong. Could you comment on what, I guess, entered the backlog in terms of orders for the quarter? And then also, I wanted to just clarify sort of your outlook for the Navy business for the next -- rest of this year and into next year. I think I have in my notes that in the past, you've sort of -- your outlook was that the Navy revenue was going to be off a few million dollars in fiscal '18 relative to '17. And then potentially almost double to the $20 million range or so in fiscal '19. I just wanted to see if that outlook is still what you're anticipating relative to what you see in the backlog.

What we're seeing with our naval work is revenue starting to climb compared to where it had been last -- where it will be this year and where it was last year. So we are expecting a revenue growth for fiscal '19 compared to fiscal '18 and fiscal '17. Fiscal '18 and fiscal '17 will be comparable. What we can begin to talk about just in general terms, and I will not and cannot get into much detail, we have begun to get some initial work for the next carrier order that we've been chasing for a while. We won some of this incrementally over the last year. It's been through our revenue cycle. It's in our revenue cycle. So positively, it appears as though we will be the victor for the next condensers for the next carrier. And again, that strategy has been playing out very well. We don't have the order fully finalized. However, we have received incremental releases, and that's what you identified in the last quarter and that also is what came into Q2 of fiscal '17.

Okay. And then just last question for me related to the Navy. I believe in the past you have looked at sort of profitability of the Navy work as less than sort of your average gross margins, but it requires much less SG&A. So net-net, at the operating income line, it should be sort of similar. But since -- over the last year or so, obviously, your operating margins have dramatically changed a little bit. So just wondering if you could just talk about profitability of the Navy work, if you could help us understand how that flows to the bottom line relative to other type of work relative to the cost structure that you now have.

The Navy work, on average, will go in at the gross margin line a bit below what our ordinary work is. However, as you said, Joe, at the operating margin line, it tends to average in similarly. What you might be observing with respect to our operating margin and where it had been historically, that's just the nature of the low revenue that we have as a company relative to a fairly fixed cost and G&A. So therefore, up margin is down because we haven't been able to peel cost out of there commensurate with the decline in revenue. But if we look at it from the way we measure profitability of an order, it's as I said, the naval work -- or as we've said previously, Joe, the naval work will come in a bit below our average gross margin and come in just fine at the operating margin line.

I know it's a little early to tell, but with the big -- the large amount of work that you're going to be flowing through in fiscal '19, is it fair to say that maybe your gross margins are going to be fairly comparable to fiscal '18 due to the fact that maybe those carry lower margins?

Our view right now, and we're not making quantitative commentary around 2019, is with the backlog, as we mentioned in our earlier remark, that appears to us in our profit projections to be sitting with the higher profitability than what's running through the revenue cycle the last 12 months. So that work is richer in margin than what we've been running through revenue. Should we be able to be successful with our bid pipeline and loading up our asset base? I think directionally, you're thinking is correct -- is incorrect. We would expect to see gross margin improve in '19 relative to '18.

Joe, just to verify a little bit your thinking on the profitability of the Navy business. When we speak of the Navy being less profitable at the gross profit level and equivalently profitable at the operating income level, we're -- our reference point is more a normalized business environment. Obviously, in a depressed business environment, as we've seen depressed on the core business, the refining and petrochem side, those margins are significantly depressed from normal -- what we would consider normal or an average across the cycle. Our Navy margins are not affected by that. So while they might be at a lower level than an average point in the cycle, they may not be that as big a difference compared to where we are today because of the depressed margins in the refining and petrochem side sector because of the lack of volume. Hopefully, that helps a little bit.

Our next question is a follow-up from John Bair with Ascend Wealth Advisors.

First off, I wanted to echo others' comments about your ability to maintain a really strong balance sheet through tough time. I wanted to circle back to the comments about the post-hurricane recovery situation and wondering if you're able to provide a cost comparison to try to encourage the -- a shift back to your condenser work, your product line versus the electric. Is that something that you can do? Is that something that you're pursuing or considering making those kind of arguments to customer -- your customer base?

Indeed, what we are -- what we've identified through some interviews is that this is a reality. The consequence of those decisions. Refiners situationally view them through a different lens. But in general, the loss of power and the way a motor shuts down and refinery shuts down has a consequence that's different than when a turbine shuts down and loss of catalyst, loss of product is different. So we need to develop the marketing information so we can have the right conversation. It's just something we've become aware of following some of these recent events. We need to dig in and make sure we have the technical pitch and the value proposition correct and start to influence thought in this direction because our judgment is it's real, and perhaps we can sway the thinking.

And is that something that you could apply to other areas not just in the Gulf Coast, but in the Caribbean in general or even in the Asia regions where they have their own weather conditions and issues?

Yes. We haven't -- petchem has typically stayed with a steam turbine, with a condenser. Refiners, again, depending upon the refiner and depending upon the region, may have moved a decade, 1.5 decades ago to be more committed toward motor drives. This is a recent event. Again, we're going to develop the technical marketing information and do more customer interviews and see if we can build a case again to change the way they think about this. But the reality was just occurred.

Our next question is another follow-up from Bill Baldwin with Baldwin Anthony Securities.

Just quickly, Jim and Jeff, I don't know whether you gave color on this or not. If you did, I apologize, but is the main reason for the revenue guidance reduction related primarily to the spending in the nuclear power sector of your markets?

Not mainly. It's primarily due to the lack of orders over the last 12 months in the chemical industry and the refining industry. And I would give that a weighting. That's over 75%. And there is some contributing factor tied to the nuclear market, but it's not the overweighting factor.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Thank you, Michelle, and thank you, everyone, for your time this morning in our conference call and for the Q&A session. We appreciate your interest and the detail of your probing into our business, and we look forward to updating you in January. Have a good day.

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.