Graham Corporation (GHM) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Graham Corporation Second Quarter Fiscal Year 2018 Financial 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. Karen Howard, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Mitchell, 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 maintains profitability, while facing stiff revenue headwinds. Prior to restructuring, net income was $200,000. Including the impact of restructuring, our second quarter was a 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 environment. 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 one 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'll 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 the refining markets during the past 12 months. Refining industry revenue was down 30% compared to last year. Similarly, the nuclear power industry 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 US 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 was 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 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 margin decreased to 4% from 11% in last second quarter, driven by the lower gross profit margins as well as higher SG&A costs. Please note, the SG&A in the second quarter of last year benefitted on the receipt of $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. Then net income number was adjusted for $224,000 restructuring charge in the quarter. Please move to Slide 7 to look at the results of the first six 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 adjustable 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 cash flow over the first half of the year, however, we have 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 in the first half of the year has been fairly light at only $400,000 through the first six 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 twelve 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 typical 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 are focused on expanding market share. We cannot control direction of our margins, 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 with the work that was awarded and 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 EP seats. It is here that we feel capital spending will begin to pick up first. We've 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 US 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 two 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.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi guys, good morning. Wanted to clarify Jim, two initiatives that you mentioned 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 your products offering or what your capabilities are could be used for other customers, if you could expand under that, if there is 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 major EPC work. If you could expand what you are thinking of - what you meant by that, that would be helpful. Thanks.

Joe, we are in the early stages of working with the consultants. I would expect over the next few quarters to be able talk more definitely about their views. Our view is, we have some very unique capabilities. Unique capabilities that relates to fabricating very complex governments and large vessels to very close tolerances. We have an operations model that's unique to a very customized more volume type of product flow. We have some very unique engineering capabilities around mass transfer, heat transfer, fluid flow and equally importantly the 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 or know how into their processes. It is possible there are additional markets that we haven't moved into that would vale what we provide and that more importantly, we can create value for them. And we've engaged some outside resources that help us open our thinking to what else we can take our very unique capabilities to diversify our revenue strengths and provide a more long term stable level of top line and bottom line. So, we are in early stages of that, I can't comment too much further on that, other than I didn't want to share that. We've gotten that exercise. And then secondly to your second question Joe, we've been focused on the plant level for maybe about last two years, as we got in this downturn. We understand and feel firmly that where the focus lies right now is on asset based maximization given the most side of the current installed base that our end markets have. Then we see in the chemical industry and refining industry that there will be blown field investments or investments in 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, dive nosing and identifying opportunity to unlock, capability at the plant level. We think that can drive quicker returns to CapEx that will move more quickly than a long cycle large project, new capacity work. We have seen some positive signs there and I'm still very strongly convicted towards that's the right strategy during this downturn. As it manifested into a strong uptick in business, new orders to shed, no, but there is lot of positivity in the work that we are doing and the closest that we are getting to our customers, we do feel all this will pay off.

So sort of related to that and just in general in terms of the overall business or at least the core energy part of your business. With the industrial sectors seemingly improving, not just in the US, but globally, certainly I would think chemical processing. Are you beginning this in terms of your bidding and coding 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?

Sure, our business sense on the direction or those as lead measures, that foretell the direction of our business. We have strong positivity about those weak measure and early indications. We tend to be a later cycle business in terms of recovering relative to what you might see upstream or mid stream or the industrial space, but our markets serve, our refining our 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 direction of our business a few years forward. So with that we have positivity. It has not yet shown up in the material way into our big pipeline, other than we still have a race long pipeline that'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 are seeing the lead measures suggesting things are improving, we would expect to see our pipeline move to the right - with the right being more towards procurement over the next several quarters. I can't call we at the bottom, I can't call 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 maybe improving in the next couple of quarters? I know you said, you may not be able to tell, but just the two sectors, which one do you feel more better about I guess?

I'm going to answer 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, most of them in front of us, over the next few quarters there should be some projects that are close. And to have some global diversity, however, by now measured 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.

Okay, I've a few more questions, but I'll let someone else have a chance. Thanks a lot.

Thank you, our next question comes from the line of John Bair with Ascend Wealth Advisors. Please proceed with your question.

Thank you, my first question regarding CapEx you've addressed that. My second question is, given the difficulty in the last couple of years in your market place, 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. It has not change the outlook on the size, if we would consider, we're still considering the - as we targeted a $20 million to $60 million range, but very willing to look below that or above that range.

Okay. Alright, thank you very much.

[Operator Instructions] our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.

Yeah, good morning Jim and Jeff and congratulations on the way you've managed balance sheet and your company here during these tough times.

Thank you for that compliment.

Well, you've got yourself positioned here to take advantage when the green sheets start showing up here. Can you talk a little bit - you indicated that you're feeling pretty comfortable with your market shares 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 are talking 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 are 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 systems 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 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, that's a great product, a great quality that 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 head of the unit entirely, 25 to 40 years, they want to replace the unit entirely. It doesn't the drive the same amount aftermarket, but again with the installed base and our company basically was built around the US chemical industry in the 60s and the 70s, where there is a richness of our condenser installed base that's mature, ageing and as these plans benefit from low cost natural gas, there's the feed stock, we're looking to eek up more capacity or restart some ideal plants and we're seeing some strong opportunity for condenser work. On 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 marginal potential than our surface condensers product line Bill.

And regarding non-traditional market, I know that you in the past have had some sales into the pharmaceutical industry or pharmaceutical area. Is that a viable - some of your products have good opportunity there, there seems to be pretty good CapEx going on in that segment I think as the economy grow up?

We have over the history of Graham, than in the pharma markets, it's more of our - what we classify our short cycle or less project oriented products, our heat transfer product with 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 founded to be a large needle mover because the average selling price of a pharma order for us is under 100 or 100,000 whereas the average order into refining the chemicals is $500,000 or more. Okay, well thank you very much for your time.

Thank you, thank you very much.

Thank you. Our next question comes from the line of John Sturges with Oppenheimer & Company. Please proceed with your question.

Good morning. I had to tell, I remain impressed with how you've seen of this prolonged period of - is been so difficult for your industry. What I am curious about is the hurricanes that we have seen in the last couple of months whether they may have in fact redirected some of the attention from your customer base towards not just repairs as opposed to capacity improvements of expansion?

No, we haven't seen in the past where an event such as that as created significant demand for repair or replacement. Our equipment is large, well manned, 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 or rethinking of the weighting industry went in refining around and the surface can or the turbine exhaust application. They have elected to go motor drives from most of the services over the last ten or fifteen 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 is a very significant capital program to get those plants up and running. Whereas a turbine driver that because the condenser where there is working differently than electric motors do. So I am hoping that reshapes, thinking in the industry and the terms to the desirability of surface condensers. Sorry to get into a little too detail, but some of the customers we have spoken to, they actually value the turbine service with the 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 dead, a very costly process whereas the turbine exhaust condenser and a turbine just keeps running for several maintenance without the severity of what happens with the short notice, loss of power. I am hopeful other of a mindset change.

Is that a short term as a decision to much motors more to determine cost issue. Is that with the factor is in the thinking.

We have thought it was a bit more of reliability and also it has the different environmental impact potential influence.

Alright. But it sounds like it is possible with the larger capital expense after a disaster that [indiscernible] obviously very reliability and the overall environmental expense to be higher, so they like take more option.

That's what - again I am not making any call here. I am just sitting back thinking there's a derivative of this that would benefit us and I just share that.

I appreciate it. Thank you, nice work.

Thank you.

Thank you. Our next question is a follow up from Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi, guys. Thanks for taking my follow ups. So I wanted to see what your - you mentioned market share in your prepared remarks, just wondering are competitors under-pricing 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 that this not pervasive. So please don't over react to it. But we are seeing some international competition try to find entry into our markets and their pricing structure is ridiculous. We don't believe it is sustainable, it might be an entry point position and it makes no sense to us. The amount of money they are 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 try to snipe in win business with leaving large sums of money on the table.

Would you - I guess what I am trying to get at is the environment maybe a little better than what your results are portraying in this very early part of recovery at a very severe bottom of the down turn that you are experiencing a challenge with pricing and actually the environments actually a little better than what your results are showing and that maybe in a couple of quarters down align pricing low eventually sort at normalize and that you are - these sort of that recovery is that some - is that happening or is that not, am I over stressing that?

I don't think you are eventually clarifying because that is the relevant consideration. When you look at our business and our backlog conversion, what's reflective in the earnings of our business today is the pricing environment six to twelve months ago. I think Jeff made a remark in his prepared commentary that we are working through some tough borders that were taken nine twelve months ago as we defended share or defended off someone trying to financially 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 is running through back log now in revenue. What is in future back log has the higher profit potential.

Okay, so the pricing that would insinuate that pricing is actually starting to already normalize and or are you or you are just being a little more disciplined and while orders continue to really remain weak and may be an improving environment you are just being more disciplined with pricing so that your backlog improving in terms of a margin stand point?

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 is in the back log that the environment is more favourable to profitability on what is being worked versus what was worked 12 to 24 months ago.

Joe, this is Jeff. If you were to go back and listen to some of the prepared remarks from three, four or five 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 with being overly aggressive on pricing and I mentioned we using very crazy pricing but we probably were thinking that. And those are orders that are currently working through back log now and have depressed our profitability level. As Jimmy said that as that here the quarters that are coming into back log are better than in orders that are working out of the back log right now which is correct what we believe that perhaps is seeing little bit of improvement going forward, but again it's not the quality of orders that are improving, it's the pricing level of the ones that we are taking in versus the ones and we are converting right now.

It's an important consideration also that we monitor the direction of our bit pipeline and trying to discern when there is a turn when we met or hit the inflection point, so we don't miss a stronger pricing environment simply by just not being concerning about what is going on in our market place and I have experience. We have missed this upturn in 2005 that ran through our profitability and revenue cycle in 2006. 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 that we will hit it exactly correct, but we are watching those very carefully, so we adjust our pricing discipline and the assertiveness that will put toward our value proposition so we don't miss the up-turn fully, and we are ready for it; so we are watching this; our sales folks are watching very carefully because it is so critical and order decision in our business that we have taken today, if it were a rough order, it shows up 7 through 12 months after that decision when the market obstetrically is already turning around and the question is what is 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 are at it.

Okay. 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 when compared to what you saw a year or two ago when pricing was below normal and sort of out of whack, are you still seeing those pressures?

I have got to respond this way. Most of our competition, in our view, from us watching them and our competitive intel, if they are formulaic, they have a standard margin they have tried to hit and they don't alter. We have a different model. We situationally assess and we price differently by situation. Our competition, they want margin X and they price for margin X. That was standing in the competitive situation of the market environment generally, so we have seen them to be more formulaic. We threw that process out of our businesses 10 to 12 years ago.

Okay. I also wanted to ask you on the navy business, so the orders in the quarter for navy and other seem very strong. Could you comment on what - I guess, in terms of backlog, in terms of orders for the quarter, and then also I wanted to just clarify sort of your outlook for your navy business for the next, you know, rest of this year and into next year. I think I have in my notes that in the past you 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, you know, doubled 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 are seeing with our naval work is revenue starting to climb compared to where it had been last - where will be this year and where it was last year, so we are expecting revenue growth for fiscal '19 compared to fiscal '18 and fiscal '17 - fiscal '18 and '17 will be comparable. What we can begin to talk about just in general terms, and I will not - cannot give in too much detail, we have begun to give some initial work for the next carrier order that we have been chasing for a while. We won some of this incrementally over the last year. It has been through our revenue cycle - it is in our revenue cycle, so positively it appears as though we will be the victor for the 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 then also what came into Q2 of fiscal '17.

Okay, and then just last question from 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 growth margin, but it requires much less SG&A, so net and net at the operating income line, it should be sort of similar, but over the last year or so, obviously, your operating margins, you know, have dramatically changed a little bit, so just wondering if you can just talk about profitability of the navy work, if you could help us understand how that, close 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 end at the gross margin line, a bit below what our ordinary work is; however, as you said, Joe, at the operating margin line tends to average in similarly. What you might be observing with respect to our operating margin where it had been historically, that is just the nature of the low revenue that we have as a company relative to a fairly fixed cost and G&A, so therefore Op margin is down because we have not 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 is as I said the naval work where 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.

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

Our view right now, and we are 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 that what is running through the revenue cycle of the last 12 months, so that work is richer in margin than what we have been running through revenue. Should we be able to be successful with our bid pipeline and loading up our asset base? I think, directionally, your thinking is incorrect. You would expect to see gross margin improve in '19 relative to '18.

Okay.

Joe, just to clarify 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, our reference point is more a normalized business environment obviously, in the depressed business environment it has been seen depressed on the core business through 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 all they have 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 sector because of lack of volumes. I hope this helps a little bit.

Okay. Yeah, that does. Okay. Thanks all, appreciate that.

Thank you. And our next question is a follow up from John Bair with Ascend Wealth Advisors. Please proceed with your question.

Thank you, appreciate you are taking this follow-up. First-off, I want to echo others comments about your ability to maintain a really strong balance sheet through this 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 a shift back to your condenser product line versus the electric. Is that something that you can do or is that something you are pursuing or considering making those kind of arguments to customer your customer base.

Indeed, what we have 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 of difference than when a turbine shuts down and loss of catalyst and 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 have become aware of following some of these recent events. And we need dig in and make sure we have the technical pitch in the value proposition correct and start to influence thought in this direction because adjustment is that 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 Asia regions where they have their own weather conditions and issues?

We haven't - petchem has typically stayed with a steam turbine with a condenser. Refiners again depending upon refiner and depending upon the region may have moved a decade and decade and a half ago to be more committed toward motor drives. This is in vision of events again we are made to develop the technical marketing information and do more customer introduce and we can build case again to change the way they think about this that the reality of what's just occurred .

Leverage that global warming issue. Thanks a lot guys, good luck.

Thank you.

Thank you. Our next question is another follow up from Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.

Okay, 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 nuclear power sector of your market?

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

Okay, thank you.

You are welcome.

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, Mitchell. And thank you everyone for your time this morning on our conference call and for the Q&A session. I appreciate your interest and the detail of you 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 time. Thank you for your participation and have a wonderful day.