Greetings and welcome to the Graham Corporation First Quarter Fiscal Year 2020 Financial Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Karen Howard, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Diego, and good morning, everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 first quarter results. You should have a copy of the news release that was distributed across the wires this morning. 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 period 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 slides. And with that, it's my pleasure to turn the call over to Jeff to begin. Jeff?

Thank you, Karen, and good morning everyone. If I could – have you turned to Slide 4, I want to start of my remarks by noting that we completed the divestiture of our commercial nuclear utility business, Energy Steel, in late June. Energy Steal’s results are in the first quarter, but I want to focus on the ongoing business, so I will node when I include or exclude the Energy Steel numbers. Q1 sales were $20.6 million down from $29.6 million last year. The first quarter of last year had a very large Canadian oil sands refining project, which used high cost raw materials and hence it was higher than typical contribution to revenue. That project alone was over one third of sales in Q1 last year. Within the first quarter revenue, there was $1.3 million of sales related to Energy Steel and $2.9 million of sales in last year's first quarter. Q1 net income was $82,000, $0.01 per share. In Q1, we incurred $900,000 loss related to Energy Steel split fairly evenly between operating results in the quarter and losses related to the divestiture. Orders in the quarter were $15 million, $3 million of which were for Energy Steel. Backlog at the end of Q1 was $117.2 million. This is down from $132 million at the end of March, however, over half the reduction was due to pulling up the Energy Steel backlog, which was $8 million on March 31st and $9.8 million on the day the business was divested. If you return to Slide 5, I noted the sales reduction of $9 million in Q1 of the previous slide. Sales split in Q1 was 70% domestic, 30% international compared with last year's Q1, which was 46% domestic and 54% international. Domestic sales were up $1 million, but international…

Thank you, Jeff. Good morning, everyone. Thank you for joining our first quarter results conference call. My remarks begin on Slide 8. Revenue in the quarter was comparable for refining and chemical, petrochemical end markets. Revenue to refining end markets was $7.5 million in the quarter, and to chemical, petrochemical end markets, it was $7.1 million. Compared to the same quarter last year, refining end market revenue was down approximately $12 million. This is due to, as Jeff had highlighted, a large Canadian oil sands metallurgical upgrade order that skewed year-over-year comparison. There was a percentage of that order in the second quarter of last year; however, it will not skew year-over-year comparison to the same extent as in the first quarter. Revenue to chemical, petrochemical end markets was up $3 million compared to last year. Power industry sales, which includes sales to the commercial nuclear utility market, were down $1.7 million compared to last year. Sales to other end markets, including defense, were up $900,000 from a year earlier. We continue to have a strong domestic waiting to our sales. Domestic revenue represented 70% of total revenue and is up 7% from a year ago to $14.4 million. International sales were down nearly $10 million from a year earlier to $6.2 million due to the previously noted Canadian oil sands order. Full year revenue is expected to fall between $100 million and $105 million. This excludes revenue from the commercial nuclear utility business. On a comparable basis, fiscal 2019 revenue, excluding the commercial nuclear utility business, was $83.6 million, therefore, on a comparable basis; we expect 20% to 26% top line growth. Please turn your attention now to Slide 9. The bidding pipeline is strong and active. Order timing for large projects remains difficult to predict. A couple of…

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Theodore O’Neill with Litchfield Hills Research. Please state your question. Theodore O’Neill: Thanks very much. Thanks for the good outlook for the year. The question I have for you, Jim and Jeff, is talking to customers, looking at the sort of softness in orders in the quarter, is any of this related to either weather or sort of shifting views on tariffs coming out of the United States?

Hi Theo, good morning. This is Jim. Theodore O’Neill: Good morning.

No, we really didn’t identify anything that was correlated to weather or trade policy, and specific – specifically the tariffs. What we have seen is, in one case, it was a very protracted negotiation once the customer set their site to finalize the purchase order, took about four weeks to settle commercial terms and delivery schedule, and everything else in the company is a complex purchase order. We were able to land that order in July, but it fell out of the period of June in that particular case. In another case, it was just the pace at which Latin American transactions can move, and they can move at their own pace. But we are seeing that shift from the first quarter to the second quarter in that particular order’s case. We feel very good that it should close in the second quarter. So nothing related to tariffs, nothing related to weather, just the pace at which these transactions, at time – at times, can take to close, to come to closure. Very difficult to predict. Theodore O’Neill: Yes. So it’s just a matter of it falling from one quarter to the next quarter. We’re slipping into Q2.

In the cases that I cited. One we’ve able to close, and the other one we’re still in the hunt for but we’re expecting to close it in the quarter, of the two that we felt would close last quarter that did not. Theodore O’Neill: Okay, thanks very much.

You’re welcome. Thanks for your question.

Our next question come from Joe Mondillo with Sidoti & Company. Please state your question.

Hi, guys. Can you hear me?

Yes, Joe. We hear you fine.

Good morning.

Good morning. So wanted to address the guidance first off. So it’s definitely a new sort of even mention that suggests a pretty big pickup in the second half or at least a pickup in the second half. And I’m wondering what market – of your sort of three main buckets, oil refining, petrochem and navy, where is most of that coming from? Or is it sort of broad-based?

We would – looking at our backlog conversion, there is a large uptick in the second half that would be for the refining end market and also a strong revenue level from the chemical petrochemical. And also, compared with the first quarter, we would expect for the naval end market revenue in the second half quarter-by-quarter to be stronger than the first quarter. So pretty well spread out.

Okay. And – so that’s relative to your backlog and what you can see, and I understand that you have the visibility for that. But one thing that I was wondering if you were going to recognize and book pretty good pick up in revenue, you also pointed out that you are anticipating a book-to-bill ratio above one. In the first quarter, it was below one. And – so you also mentioned in your prepared remarks that your pipeline is pretty strong. What gives you the confidence, though, that you’re going to be able to see a pretty good pickup in orders?

The maturity of the bids in our pipeline and our understanding of the timing, while it’s been difficult quarter-to-quarter, we have three quarters to pull these in. And in some cases, we’ve been in the hunt now for over a year for some of these projects. And one case it’s been over five years. And we have a pretty good view of the basket of opportunities, and we don’t expect to get them all, but there is enough opportunities with a closing horizon of being fiscal 2020 that we have the confidence level to come out and get in front of it now, a book-to-bill will be above one and then further supplemented by our timing expectations for some naval work in the year – new orders, sorry. So we're expecting to add to our naval backlog and those have months in which they can slide but typically not multiple quarters. So we do have a good view that the book-to-bill should be above one for the reasons that I just cited.

Jeff, If could just have one additional thought on those regarding the revenue in the second half of the year. The projects have a relatively tightly defined delivery date, so while they have slipped a little bit on the order side, the ones that we’re expecting to come through in the near-term that will ultimately impact the second half of the year. The delivery can slip because of the customer shutdowns, customer timing, so that gives us a high level of confidence on the revenue timing in the second half of the year in Q3 and Q4.

Okay. Understand. Last question just regarding the acquisition process and how that's going in the balance sheet and everything wonder if you could give just sort of a broad update on that. And then if you could also address sort of how you process in terms of trying to find acquisitions and go on about that, and strategy overall has changed versus when you acquired Energy Steel, I'm just curious in how that's evolved over the last 10 years?

Sure. On your first question on the pipeline, it does continue to be strong, we have...

I'm sorry, can you hear me?

I'm sorry, Joe, can you hear me all right.

Hey guys, how you are doing?

Sorry. On your first question, Joe the opportunities in our pipeline are pretty strong – quite strong actually. We're focused on opportunities in the naval market. We're focused on after market or non-large capital opportunities in the commercial market and all of those areas are looking strong and we continue to have a number of opportunities directly in front of us, but as you know from the past you have to get one over the goal line and to get one of the goal line, you've got to go through quite a lot of due diligence. Regarding your second question, which was how, has our process changed? I would say the process hasn't changed a lot, but I think there is a key addition to it, which is improved capabilities, so that is why we brought in a Director of Business Development a few years ago, who's done a great job of really expanding that pipeline, expanding our access points. In the past, it was a part time job for a small number of us here and we would certainly use external advisors. We continue to use external advisors, but with our Director of Business Development, Chris Johnston onboard, he's done a great job of really building that pipeline up. The internal pipeline that he's driven and the number of opportunities, the breadth of opportunities today are far greater than they were at any point in the past.

Jeff, I just want to also add that part of our process improvement, if you will, following the Energy Steel acquisition is, as we look at the businesses and end market fundamentals and the potential volatility in those end markets, we have a scenario analysis to analyze the business cost, the flexible cost and what happens in unexpected collapse of the end market, and how can the business look if revenue went down 15%, 20%, 25%, 40%. As we experienced with Energy Steel and how flexible might cost bases be for that business to survive in an end market collapse such as we experienced with Energy Steel and the nuclear utility market. And some markets may not have that variability, but that's part of our scenario analysis, and analysis of the business and what we might under the what if scenarios.

Thank you.

Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please state your question.

Hey, good morning, Jim and Jeff and…

Good morning.

Good morning, Bill.

Congratulations on the hard work and looks like just beginning to really pay off for you.

Thank you, Bill.

I'm going to ask you, on the $15.1 million in order flow, can you break that down for us between the segments of your business, the chemical refinery, Navy and power?

It was, obviously, a light order level. So we had our typical run rate for what we call our short-cycle work, which goes across a lot of end markets with the exception of Navy. We had not much from the Navy on that large project sides. So it's mostly refining and chemicals.

And, Bill, I did note in our call that $3 million of that was the commercial nuclear utility business, which of course, we don't have any more. So the mark, the core refining and petrochem mark is where the remaining – essentially all or most of the remaining $12 million.

Yes. Okay. Okay. And on your short-cycle business, I'm sure you described it before, but kind of refresh me. What – what's general nature of that business? What types of services and products are you involved with your short-cycle business? And I assume short-cycle – less than – just less than 12 months, not less than 12 months?

To fit into that distinction, it typically comes in and out within a week to two quarters is what overall fits inside that work. It's – they are less transactional in nature in terms of how complex the order process. A large percentage of that is spare parts and in-time replacements that make up the short-cycle work. And then also, we have some smaller product businesses. A business that is less ETO, and they tend to come in and out in three months. So it can be a new product sales, and it also can be replacements, spare parts and services like that.

And primarily going into the refinery and petrochemical markets?

On the aftermarket segment, it's largely refining and chemical, petrochemical end markets. For the new products, it can go across all industries, general industrial, also refining and petrochem, pharmaceutical, some cannabis; we sell into the cannabis end market, as an example.

So I guess, currently, at least on the aftermarket business, the drivers I guess are equivalent utilization and then just link the time the installation's been installed, how long has it been out there?

You're right. We are very fortunate in that we're an 80-year-old business. We have a massive installed base, a massive installed base in North America, but also around the world that drives a pretty steady drumbeat for aftermarket. And we're not being passive there either. We've made some investments in the organizational structure and the location of personnel where the installed base is high where we're, over time, intending to drive the aftermarket segment of our work to higher levels than it had been historically by getting closer to the end user, providing our services to help them, improve operational reliability and to forecast time to replace the equipment better. And that we believe, will really pay off in affiliation that the customer has with Graham, but also improving our revenue and profitability from that segment of our business.

Absolutely. Do you all – I missed it do you all breakout or I get some indication of what part of revenues historically have been aftermarket? What part of your revenues are generated aftermarket?

Over the years, we've been on and off. So no intended purpose for being on and off. But if I sight it in the past, what we had said our aftermarket, parts and replacements was on the order of 20% of revenue. But what had been missed when we did a deeper dive, so much of our work, because of the installed base, is coming from revamped de-bottle neck and larger project work. So in total, we tend to think of Graham's revenue being somewhere between 30% to 40% derived from our installed base. It could be a revamped, could be de-bottle neck large project work, but it's from our installed base or replacing somebody else's equipment and then also the classic parts and replacements. So it's more akin to 1/3 plus or minus of our revenue is derived in some manner from the installed base.

And that would be calculated using probably over a complete cycle, right? Averaged over a period of time?

Yes. We tend to look at things in five-year, 10-year snapshots.

Five-year, right, right. Jim, based on the fact your work is so specialized as your engineering content and then so forth, does that mean that competitors that have a very difficult time going into your installed base and trying to take that aftermarket menace away from you?

Yes. We think that's a pretty high moat because we don't disclose the details of our designs. And it's difficult for us to actually go in and dissect our competitor's installation. It can be done, but it's hard. So typically it's a complete replacement when you're going into a competitor's equipment as opposed to a partial replacement. Some of our systems have five, six, seven components put together to work, and it's very difficult to go in or have a competitor go in and replace component three, seven and six and guarantee the overall system. The OEM is best suited to do that.

Very good. Sounds like that puts you in a real good position and to real benefits from this focus that you're putting on the aftermarket. Good luck, it’s a test.

We think so. We've assembled a great team. They are doing a great job for us.

Yes. Thank you.

You’re welcome.

Thank you. [Operator Instructions] Our next question comes from John Blair with Ascent Wealth Advisors. Please state your question.

Thank you. Good morning, Jim and Jeff.

Good morning.

Good morning.

Hey. Just wondering if you had any loss of backlog as a result of the Philadelphia Energy Solution's refinery fire and shut down. And if there is any indication or you get any sense that that lost refining capacity might be picked up by other operators not in a sense of, hope my understanding is that's going to be shut down, but another refinery, another operator refinery in another part of the country might try to pick up that lost capacity.

Hi John, to the first question, we can't identify anything that's material with respect to reduction of our backlog tied to Philadelphia Energy Services. Nothing meaningful there. On the question of should that refinery be disabled or shut down and its capacity has to be picked up by other regional refiners or other refiners in North America? That would directionally favor us, but typically if you look at the refineries that running at 90% to 95% utilization. Philadelphia Energy Systems is part of the North American refining base, is meaningful, but on lower end of the barrels per day. So we would anticipate that the refining asset base in North America would pick up the slot.

Yes, with 335,000 barrels a day something like that, I believe it was. But I didn't – just was trying to see if you thought maybe – or there had been any indication from some of your other customers that maybe that would cause them to look to expand some of their operation whether it's regional – on a regional basis or elsewhere. So I guess your answer is you don't have any indication if that's the case.

No. They represent about 1.5% of the refining asset base in North America that number you decided. So we would anticipate that could be absorbed within the 90% to 95% utilization level that refiners are running today.

Okay. Very good. That's all I had for today. Thank you.

Thank you. John.

Good bye.

Yes. Bye.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks.

Thank you, Diego, and thank you everyone for your questions and listening in on our conference call today. We look forward to updating you on our progress at the end of the second quarter. And as we have any meaningful orders, we'll endeavor to announce them with the press releases as they come in to keep everyone informed on the progress of new orders and backlog build. So thank you very much. Have a good day.

Thank you. This concludes today's conference. Thank you all for your participation. You may disconnect your lines at this time. Have a great day.