Greetings, and welcome to the Graham Corporation second quarter fiscal year 2011 quarterly results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, IR for Graham Corporation. Thank you, Ms. Pawlowski. You may now begin.

Good morning, everyone. We appreciate your joining us today on Graham's fiscal 2011 first quarter financial results call. On the call I have with me today Jim Lines, President and CEO of the company; and, Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results for the quarter and also provide a review of the company's strategy and outlook. On our Web site at www.graham-mfg.com, you will find both the press release as well as supplemental slides that are posted there, which Jim and Jeff will be referring to during the formal part of their discussion. As you are aware, we may make some forward-looking statements during the formal 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 that could cause actual results to differ from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at the company's Web site or at sec.gov. So with that, let me turn it over to Jim to begin the discussion. Jim?

Thank you, Debbie, and good morning, everyone. As a reminder, Jeff and I will refer to slides posted on our Web site during our discussion this morning. Beginning on slide three, as you can see revenue in the second quarter was $15.7 million. We believe the second quarter represented the end of a four-quarter in duration of steep contraction in revenues, but we anticipate the bottom is behind us. Recovery of the market is expected to be gradual. There was 17% sequential revenue growth comparing the second to the first quarter. We expect revenue will continue to expand in each quarter for the remainder of the year. Our full-year revenue guidance is unchanged at $65 to $72 million. Turning to slide four, international markets continue to drive our business. Though there are opportunities in domestic markets, Asia, Middle East and South America are providing a greater number of opportunities. Revenue in the second quarter was driven by orders that are for Columbian, Venezuelan, and Mexican refineries. Asian market segments were more diverse with revenues coming from orders for fertilizer, ethylene, refining and power generation projects. We also are converting now backlog comprised of a number of different orders for Saudi Arabian refinery projects. Sales to domestic markets included refinery, fertilizer, power generation, primarily renewable energy markets. Turning to slide six, we had a couple light quarters for new orders. Second quarter new orders were $10.25 million bringing first half bookings to $18.6 million. Second quarter had 30% sequential growth versus the first quarter, but $10.5 million is still a low level of bookings in a quarter. Our exceptionally strong and high backlog level is a solid foundation to build upon and to soften the effects of the low level of new orders during the past two quarters. We are projecting…

Thank you, Jim, and good morning, everyone. We are reiterating our previous revenue guidance for fiscal 2011 of $65 to $72 million. So the full year sales are expected to increase 5% to 15% compared with last year. We expect growth in the second half of the year compared with the first half of the year with sequential growth of approximately 25% to 50%. In the second quarter, the trend towards higher international revenue continued with 52% of the total revenue coming from outside the US. The split by region in the international arena does fluctuate based on specific project timing. As Jim mentioned earlier, Latin America and South America, as well as Asia, were strong regions this past quarter. On the next slide, you will see our backlog continued very strong at over $83 million. Although it is down 12% from the record high of March 31st, it is still 10% above the previous record achieved at the peak of the last cycle. The US nuclear carrier project is a big component of our backlog. We began limited production this past quarter a little earlier than planned. Though we expect to continue work on this project in the second half of fiscal 2011, we will recognize only a small amount of revenue for the project this fiscal year. We do, however, expect to see a more meaningful revenue recognition for the project next year. From our backlogs, 60% to 70% of it will convert to sales we believe in the next 12 months. This is less than the normal 85% to 90% that we see and the primary difference is due to the long conversion time on the navy project. As of the end of June – the end of June, we have three projects totaling $5.4 million on…

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) One moment while we poll for questions. Our first question comes from the line of Rick Hoss of Roth Capital Partners. Please proceed with your question.

Hi. Good morning.

Good morning, Rick.

Hi, Rick.

Jim, reading through the press release, it seems like the booking commentary is a little bit more upbeat than it has been in the last, I don't know, say, three quarters. Am I reading this correctly or no?

We continue, Rick, to see a very positive – a number of projects in our pipeline geographically and end-use market diverse, which is good; so refining, alternative energy, petrochemical, geothermal, all areas where we have strength. And the pipeline continues to expand. While having soft bookings in Q1 and Q2, we don't think the underlying demand drivers have changed. Again, we talked in the past about it being a timing issue as to when orders are won. We continue to feel bullish about the outlook based on the proposal work and the sales work that we're doing. And we do remain positive. But predicting the timing for when orders will be placed has been very, very difficult the last many quarters.

Does it seem like it's closer now or noticeably closer than, say, in the last two calls that we've had?

It's hard to judge. I felt it was close one quarter ago. I thought it was close today. But until we get to the negotiating table, it's really hard to predict. And even the negotiations tend to be more extended than normal. When I say normal, it's going back a couple of years. In general, qualitatively, we're very optimistic about the near term. The predicting the timing of translating the pipeline into bookings is very difficult, Rick.

Okay. That's understandable. Now, in the third quarter and the fourth quarter of '11 you've discussed the margin – gross margin implications of the competitive environment. Are you seeing competition continue on? And do you expect to see this as below 30% type of gross margin in the projects that you're bidding on currently?

That may very well be possible with the bookings over the next quarter or two. The driver that will give a number of opportunities that come to closure at a given point in time, when there are very few results in a hyper-competitive situation, which is what we saw 9 to 15 months ago, we expect it to slacken a bit in terms of margin pressure. But until we see the pipeline move toward procurement, we're expecting very competitive pricing from our Asian and European competitors just as we have seen.

Okay. And then looking at this productivity slide, slide 13, it says a pretty impressive difference between the two cycles. Can you give us examples of the productivity initiatives that you've implemented over the last, say, 12 months? And are these largely complete or is there – would there be enough additional projects that would increase this further, all else being equal, in other words sales being steady?

Right. By no means do we think we're done with our attention on improving our business and its operating performance. We have made substantial strides and investments over the last two or three years. You could add this with our capital plan, with our continuous improvement efforts, with our IT initiatives to become a faster, more efficient company. If I were to give an indication of where we are in the race, we're probably a little bit beyond the midpoint. There's still a lot that we can do. There's a lot that we're going to do. And we did this with an intent, of course, to serve our customers better. But we also recognized, when we were in the middle of the last cycle, we would be facing more price pressure or margin pressure. And our response to that had to be business improvement. So we focused on this a couple of years in advance before it actually materialized, and again the benefit of it is evident the last four quarters. So we're true to this. We believe in it and we're not through – and we'll never be done improving our business.

Okay. And then, Jeff, one for you, tax rate. How do we look at out-year type of a tax rate, 32-ish%, is that fair?

Yes. I think, Rick, it's – 32%, 33% is probably a fair view looking forward.

Okay. Thank you very much.

You're welcome, Rick.

Thanks.

(Operator Instructions) Our next question comes from the line of George Walsh with Gilford Securities. Please proceed with your question.

Jim, I'd also like to make just a little bit on that slide number 13, page 13, it really is a testament, as you said, to the changes that have been brought about in the company in being able to better exploit the cycle. I wonder if you could – maybe that but also waiting in the sense of the difference in the type of cycles that there may have been in pricing, in the type of business. And I'm really bringing this up in reference to how you see the next cycle coming in terms of is it the type of cycle of this job, the type of business you're doing, the type of cycles you're getting, whether it's more international versus domestic in addition to the improved deficiencies that you brought to the business.

Okay. There's a lot of course that went in to the cycle-over-cycle improvement. Much of our strategy, if you go back, and George, you were with us in 2006 and 2007 when we had throughput issues, we were constrained on capacity. We really centered our sights around how do we gain incremental throughput recognizing that the incremental revenue and therefore the incremental profit, it was just substantial in our business for the amount of leverage that we have. But we focused on gaining capacity across the company to execute more orders. And that began to, of course, improve the dropdown to the bottom line, improved the EBITDA margin. But we did have a very strong cycle, this last cycle. The waiting was largely domestic. About 60% of the revenue was for domestic markets, which would have a better transactional cost basis and a better margin potential. But we knew that would be short-lived and we focused on again improving our business to position ourselves to be cost competitive with acceptable operating performance in an environment that was not like this past operating cycle. We don't believe going forward – going into this next cycle, it will be as heavily dependent upon the domestic markets. It will have a greater waiting toward international markets, as we've mentioned Asia and Middle East, South America. And the improvements we put in and the improvements that we plan to still put into the business, we'll counter balance it and hopefully off-set that margin pressure that we expect to face in terms of pricing – competitive pricing.

Okay. And can you elaborate a bit on your acquisition progress and what – how close you may be or what kind of styles and things that we might see?

George, Jeff Glajch here. Yeah, as we've talked in the last couple of calls, we continue to meet with potential candidates and we have certainly, I'd say the past six months or so, come into a number of good opportunities. And at any point in time, we're talking to couple of fairly serious candidate and we're hoping that something moves forward in the near future. But our premise upfront was making sure we found the right company, the right markets and do it at the right price. So until we've got that all nailed down, we won't necessarily close anything. But that being said, we certainly, at any point in time, have a couple of – well, I'll call it serious or hot candidates going on.

Okay, and there's a likelihood these deals would be cash, all cash, or would it be some stock or stock?

I would assume they would be all cash. There certainly could be a scenario where it could be cash and a little bit of stock. But our intent is not to delude our existing shareholders. So our going-in plan is all cash.

Okay. Thanks a lot.

You're welcome.

Our next question comes from the line of Dick Ryan of Dougherty. Please proceed with your question.

Good morning. Say, Jeff, I think you talked about one contract being released that was on hold and there's two still on hold. Is there any commonality between those contracts whether it's in a specific industry segment or geographic region at all?

No, Dick. There really is not and we're pretty optimistic that at least one of those will be released very soon and hopefully the other one, not too long in the future.

Okay. On your order activity, you've flipped the switch more towards international. Can you give a sense of what the pipeline of opportunity looks like, whether that's a qualitative or quantitative assessment? And are there challenges coming in to your bidding process with raw material prices?

I'll take the second point first. We don't really see a lot of challenge with respect to raw materials. Clearly, we're seeing a run up in the cost of copper. When we think of our material mix as a business, copper is a large percentage of our material purchase. But the process that we have around bidding, bid validity, and then post-award, after we have an order, being able to secure volatile pricing and also commodity pricing. We don't see much risk there. We think we can reflect in our bid prices the current cost of the commodity. So we've been able to manage that fairly well over the last few years. When we look at the pipeline from an end-use market standpoint, Dick, a lot of the work that we're seeing is for refining applications. We have refining opportunities, and we spoke about this in the past, in the Middle East, in China, in South America. Also, which is nice, we've seen some early stage petrochemical work. We've won recently a few ethylene projects in Asia, one for India, one for Taiwan. There are other ethylene projects in our bookings pipeline, our potential bookings pipeline. We see that as a precursor to the recovery of the petrochemical markets. Also we're seeing a fair amount of activity in the fertilizer area, and that's mostly international work. That's an area that we've been strong in over the years. That would be ammonia plants and urea fertilizer plants. Very specialized technologies where there's fewer competitors for those application. And in the whole market, alternative energy, there's a large population of bids that we have for alternative energy in North America. Biomass energy, waste energy, and those areas were Graham has had a reputation going back to the 80s and servicing that market.

To move some of those projects forward, does anything have to get – get further released and more definitive plans coming out of Washington for an energy program now?

I think for the alternative energy opportunities in the North American market, they do pace at a relatively slow stride. There's a permitting process. There's a public debate process around it. It's a lengthy upfront cycle to get those projects started to get some momentum going. I think the energy policy is fairly clear around renewables and the subsidies in support for renewable energy. I think the rest is just the political environment or the administrative process of getting through the hurdles that have to be jumped over or equipment can be bought and the facility be gone.

Okay, good. Thank you.

You're welcome.

Our next question comes from the line of Walter Lang with Avondale Partners. Please proceed with your question.

Hi. Can you hear me?

Sure.

Yes.

Thank you for taking my call and congratulations on your continued progress in a challenging environment. This is relative to last question as well and you mentioned as in the first question. On the press release, the opportunity in renewable energy, could you provide more insight into that? Is it limited to North America? Is there an international opportunity? The first question, you had mentioned geothermal, if I heard you correctly. And then you mentioned, in the most recent question, biomass energy, waste energy. It would seem to me intuitively it's a limited opportunity relative to petrochemical, but simply to provide more insight into that opportunity? I'd appreciate that.

Okay. When we look at renewable energy, our initial focus has been in the domestic market. But to be fair, there are other opportunities globally for that. We see renewables being pushed in Asia as well. It's in Europe, where we don't have a very strong position to be fair. But we see renewables as being global oriented. But our initial focus, because of cost pressures in the local Asian markets, we feel a better probability of success in our home market initially. For geothermal, that certainly has a very large international component to it and a satisfactory domestic component to it. Internationally, we've been successful in the Ring of Fire in Southeast Asia, Indonesia, the Philippines. We have installations in those areas. We're seeing work coming from Central America. We haven't won that yet, but we've have some bid opportunities there. And then in North America for geothermal energy on the West Coast, in the California area, we have a good install base there. We have a number of bid opportunities that were in early stage bid work on for those projects.

Thank you.

You're welcome.

Our next question comes from the line of Brian Rafn of Morgan Dempsey Capital Management. Please proceed with your question.

Yes. Good morning, guys.

Good morning.

A question for you on the Gerald R. Ford aircraft carrier, a new class replacing a Nimitz carriers, are you guys seeing where the pressure that Gates is talking with DoD? Are you seeing any ongoing pressures to cut costs relative to your deal with new partners?

We haven't seen pressure with respect to the order that we have in-house on CVN-79 carrier, the Gerald R. Ford carrier. We are aware of the cost pressures for the Department of Defense, the Navy program, and certainly everyone sensitive to costs creep and driving down purchase prices. But for the order we have in backlog now, we haven't had any pressure on that.

Are there any incentives built into that to recover a lower cost?

No.

Okay, okay. Given the fact that this is the first carrier of this class, does your being a vendor on this supplier, does that help you guys at all in winning business on the next carrier?

The order that we won for CVN-79 is the second carrier in that class of carrier. We did not – we did the first carrier about five years ago, we did not win that project. But we actually won that the order for the second carrier.

Okay.

We think success going forward with the Navy really stands from executing well the contract, maintaining schedule, and above most importance is the quality of the fabrication of the product. And we think Graham executes extremely well and delivers a super product. And we will deliver a super product to the Navy that positions us well for future work. At this point, we've had a very satisfactory interaction with the Navy. They've been very pleased with our first year progress on the order. And we're trying to position our company to be a larger supply to the Navy for their Naval nuclear propulsion program.

Okay. Does that go beyond – just specifically carriers into – you're not doing battleships anymore, but certainly cruisers and frigates?

It does go beyond carriers. There are other vessels that this would apply to, submarine in particular. There's more work on the carriers as well that Graham could provide as products for, not just the order that we want. So we see additional opportunities for carrier work. And we see different classes of vessels where we can provide our products as well.

Okay. If you look back over your past cycles, can you give us a sense – in the conversion of the number of bid quotes to actually converting to an order booking, are you – is it ten to one, six to one, five to one? And as get into a new up cycle, what are you seeing on bid quota activity versus what order bookings are?

With our sales cycle, Brian – our bid cycle, we are normally involved very early in projects. We want to be. We're involved sometimes 12, 18, 24 months before the equipment is going to be bought. And we do track what we call our raw capture ratio, which is the number of orders versus the raw bids that we did. That's not a clear indication of success. But that really hasn't changed a whole lot over the last 20 years or so that we've been looking at it. It's fairly flat. What we tend to look at is a real capture ratio, which is the wins versus the losses for those projects that actually went ahead. And as the projects begin to move through the pipeline, gets towards purchasing, that's the real metric that we want to look at; how successful have we been in closing. If I look back over the 12 to 15 months ago when where we were in at a tough economic period, we saw our real capture ratio go up. As we were aggressively focused on where the opportunities were, we had our sales team and our business position to win the orders. But I believe we took market share because of our strategy to be close to the customers through the downturn so we can identify where the pockets of business was and we could win it. We actually moved forward – moved up our real capture ratio.

Can you talk and put a numeric – a quantitative number on what the raw capture was over the last 20 years?

It varies by product. But to give you an average number, it's about one, and eight to one, and ten.

Okay, okay. And then, how has the real capture ratio from a quantitative standpoint changed or upgraded?

I don't want to get into too many specifics, but it's somewhere between one out of two to three out of four.

Okay, okay. And then finally, you guys talked about – and I picked this up. Correct me if I'm wrong. You talked about hiring engineers or hiring labor, what specifically?

Yes, we did. As we're seeing our revenues expand, working through our backlog, we are in a position now where we are judiciously hiring both from the direct labor area as well as in our engineering group. We did make some reductions during the last – during the downturn when our revenues were at the bottom. More of the reductions are on the direct labor side as well as some of the support staff. As we're moving forward, we are essentially rehiring in the direct labor side and continuing to enhance our engineering organization.

Would that be tens of individuals or in the hundreds? But it will–

No, no, no. It's a relatively small number. It's a handful each quarter, handful being three to five each quarter after the last quarter and maybe a couple of quarters going forward.

Okay. And then, if you guys just talk a little bit about what kind of capitalized multiple assignments on EBITDA are you seeing in the M&A side? Are they coming down? And where are they today?

Sure. EBITDA is certainly better today than they were, say, 12 months ago. I would say we're in a – 12 months ago, they were looking at – people were looking at peak earnings of the past cycle and putting the multiples that were, in my view, out of range 9, 10, 11, 12. We're certainly in a range now, where we're in a four to five to seven range. And I'm certainly much more enthusiastic not only where the pricing is, but at the quality of the companies that we're able to talk to right now. So we're much more enthusiastic about the opportunities that are out there today than, say, 9 to 12 months ago.

Good. Thanks, guys. Keep up the good work.

You're welcome. Thank you.

Your next question comes from the line of Tom Spiro with Spiro Capital. Please proceed with your question.

Yes, Tom Spiro, Spiro Capital. Good morning.

Hello, Tom.

Hi. Jim, I noticed in the 8-K filing today that yesterday, the Board made a number of changes to the company's by-laws. And I was curious what led to those changes and what the thinking was.

Hi, this is Jeff Glajch. Actually, the changes, most of them were more – by-laws have not been updated in a little while, and really to be more in line with some of the Delaware corporation laws, and nothing really substantial in there. It was cleanup activity.

Okay. Thanks you very much.

Sure. You're welcome.

Your next question comes from the line of Rick Hoss with Roth Capital Partners. Please proceed with your question.

Hi, a couple of follow-ups. First, Jeff, your SG&A commentary three to five per quarter, would that add, say, maybe $1.5 million to SG&A on a full year basis if we're thinking about fiscal '12?

With regard to headcount additions?

Correct.

Again, that's three to five in the next couple of quarters. A good number of them are in the production area, so they would really fall under cost of goods sold. While we're definitely hiring in engineering, but it's just a couple of individuals, and some of those costs would follow into SG&A. And then the piece of that, the engineering cost that is in the gross, but in the cost of goods sold category. So it's not a significant increase to SG&A.

Okay, okay. And then, Jim, no mention of China, I think in the press release here. I know historically you've had a very good success rate in China. And certainly, there's a lot of – you have a lot of headline with refinery expansion, new builds, and (inaudible), et cetera. Can you give us an update on what you're seeing in that market, and your role there and your position?

Sure. We're still very positive about the long-term prospects in the Chinese refining market. It had been relatively slow for several quarters. We're seeing new bid work coming up now that hopefully will result in orders over the next few quarters. The pipeline of refinery expansions and grass roots facilities is quite large and multi-year. So we're very pleased with our success rate and our position going forward to capitalize on that opportunity. And the lack of comment now stemmed from there wasn't much that's happening over the last few quarters.

Okay, okay. Thank you. That's it. Thanks, Jim.

You're welcome.

Our next question comes from the line of Dick Ryan with Dougherty. Please proceed with your question.

Say, Jim, just to follow-on to the Navy opportunity, you mentioned specifically submarines, can you give us a sense of what that market might look like versus carriers and what you need to do to start going after some of that business?

Sure. To the qualified as a supplier for the submarine program, there are a number of things that have to occur. We've begun many of them. We've had meetings with the contractors and the procurement companies that will qualify us as an approved manufacturer. We also have some security clearances. We have individuals in the facility to complete. And that's a process that doesn't happen – it doesn't happen quickly, but we're moving on that. And it really comes down to the belief of the contractor, in this case it will be Electric Boat and Northrop Grumman; and the procurement company that does the purchasing of the vessels being satisfied with Graham's quality control, their production capability; and our commitment to a long-term strategy to support the Navy. And we've been very, very clear that we have a long-term vision to be a supplier to the Naval nuclear propulsion program. We have our assurances that we're going to be in it a long time. And we want to build a strong leg in our business supporting the Navy. And that was – that's all part of our process. It just takes a little bit of time.

What's the build cycle of a submarine versus carrier? I mean is there more in the budget for those platforms versus carriers or the Wasps, or–?

In general numbers, there's a carrier that starts construction about every five or six years depending upon Congressional budgeting. But that's roughly what the timeline is. One comes along every five or six years. The submarine has a greater frequency. There's one or two every two years. And the fleet per submarine is to be – what we're reading about 30 of a particular class of submarine; and the carrier, the fleet is about 10.

Okay. And your dollar opportunity, how do you splice that, one versus the other?

Quite honestly, I think in terms of all in, if we look at the opportunities for carriers and subs, I think the carrier provides a little bit more. But I think they're comparable in terms of the accessible opportunity for grab if we can look at what we can provide with engineering know-how or fabrication know-how and our sub parts contacts administration capabilities.

Okay. Thanks, Jim.

You're very welcome.

(Operator Instructions) Our next question comes from the line of George Walsh with Gilford Securities. Please proceed with your question.

Jim, is there any update at all in the oil sands market that has been mentioned or talked about previously is a potential area that could be a big area for the company, anything going on there?

That hasn't changed in the context of what we have voiced previously, and that we continue to see investment that's happening on the SAGD side, the production. And that has to occur first before investments will be made in new upgrading capacity. We see the new upgrading bid opportunities are moving forward. We're in some early stage bidding now for a few different upgraders. And we think it's moving at a pace that we had predicted, which we thought was around 2012 is where we'd see much on the upgrader side. But investment is happening on the production side, which has to occur first.

Okay. But it's 2012 forward in terms of being more meaningful for you?

That's our expectation. We hope it's sooner, but that's our expectation. And our planning is around that.

And obviously, it's influenced by the general price of oil anyway.

That has an effect.

Right. Okay. Thanks, Jim.

Thank you, George.

Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed with your question.

Yes, just a follow-up – clarification question, you mentioned one or two submarines a year, I think what you're referring to are attack subs. Would you guys also be looking at talking to the Navy about their next – the ballistic missile subs that are replacing the Ohio class Trident?

Yes, our focus is on the submarine program. There's a Virginia class. There's the Ohio class. And then, there's the next generation of subs. And we hope to participate in all of it.

Okay. And of the work that you're doing on the carriers and you talked about other vessels, would either the amphibious carriers, the Wasp class or Tarawa, or the Littoral combat ships, would they also be in that broader vessel nuclear propulsion?

At this point, Brian, we're focusing on the Naval nuclear propulsion side of the fleet, which is where there's specialized engineering know-how, specialized manufacturing, not that the other vessels don't require specialized production of products. But we're making our focus in that area, around the Naval propulsion program.

Okay. Thanks much.

You're welcome.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you. We appreciate your time this morning and your interest in the company. And we look forward to updating you again in January. Bye.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.