Graham Corporation (GHM) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Graham Corporation First Quarter Fiscal Year 2019 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Karen Howard, Investor Relations for Graham Corporation.

Thank you, Dana, and good morning everyone. We appreciate your joining us today to discuss the results of Graham's fiscal 2019 first quarter results. You should have a copy of the news release that was distributed across the wire this morning. We also have slides associated with the commentary that we are 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, 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. Those documents can be found on our website or at 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 Jeff to begin. Jeff?

Thank you, Karen, and good mooning everyone. If you could turn to Slide 4 of the deck. First quarter had revenue of $29.6 million, which was up 42% compared with the first quarter of last year. However, a portion of that approximately $3 million of the revenue increase was due to the adoption of the new revenue recognition standard. So excluding that, our sales were up 27%. While we will not speak in much detail about the revenue recognition standard update, I'd suggest that if anyone is interested there is a very well written detailed analysis of it in the 10-Q, which we will be filing early next week. And I want to complement our internal team led by Jennifer Condame, our Chief Accounting Officer who complied all of that work and did all the work internally and did the write-up that you will see in the 10-Q. Net income in the quarter was $2.3 million or $0.24 a share. The impact of revenue recognition was only $0.01 a share out of that $0.24 with very minor impact on the profitability in the quarter. Orders in the quarter were $22 million. Our backlog remains strong at nearly $115 million. If you turn to Slide 5 to talk a little more detail about the quarter. As I mentioned earlier, sales were $29.6 up from $28.9 million last year. The split of sales domestic versus international over the past couple of years has been two-thirds of three quarters domestic sales, however, in this quarter domestic sales were only 46%. This was driven by one very large project in Canada, which represented more than a third of the revenue in the quarter. We would not expect this shift to be permanent, but rather one or two quarter impact due to that particular order. Gross profit was up $7.1 million up from $4.8 million in the previous year. Our gross profit margin was up $130 basis points. If we adjusted out the revenue recognition, adjustments, the gross profit margin actually would have been closer to 26% in the quarter because the $3 million of income in our revenue was at a very low gross profit margin. EBITDA margin was 11.1% versus 8.3% driven by the stronger gross profit margin and as I mentioned earlier earnings per share were $0.24 up from $0.10 last year. On the Slide 6, from a cash position standpoint our cash decreased slightly in the quarter down $1.2 million, this is just due to timing of some working capital and nothing beyond that. We did pay out $900,000 in dividends in the quarter. As you may have noted last night we announced that we are increasing our dividend from $0.09 to $0.10 a quarter, so our quarterly dividend will be approximately $1 million per quarter going forward. Cash on hand at the end of the quarter is $75 million or $7.66 per share. We continue to look to utilize this cash to find an appropriate acquisition candidate or candidates. We're continuously working very higher in that regard, however, we are also keeping our discipline in place and will not make an acquisition for acquisition state, but rather we want to make an acquisition, which will add to earnings in the cash flow for our shareholders. Capital in the quarter was very low at $200,000 relative to our expected capital for the year $2 million to $2.5 million, again this is simply timing and this should be nothing to be beyond that. With that, I'd like to pass the phone over to Jim Lines to talk more about the outlook for the rest of the year.

Thank you, Jeff, and good morning everyone. Please turn your attention to Slide 8. Quarterly revenue continues to reflect improved fundamentals in our oil refining markets. At our first quarter revenue from refining markets was two-thirds of total revenue or just under $20 million. It's important to qualify the refining revenue. There are two factors that boosted revenue during the quarter. First as you may recall from prior conference calls, the order with specialized with high cost material was secured in our third fiscal quarter of 2018 that now is in its revenue cycle. Due to the high material costs it of course elevates revenue. If materials from more standard revenue would have been several million dollars low in a quarter. Secondly, our operations team developed with that particular order welding methods and took other actions that resulted in markedly greater productivity enabling the production process to require less hours, which allowed revenue previously planned for the second quarter to be realized in our first quarter. The benefit realized in the first quarter were lower somewhat, what had been previously planned revenue for the second quarter all-in-all a terrific job by our operations team. Revenue from our other markets was down, however, I view that more of a timing issue as backlog for those end markets has increased. Revenue in the quarter at $29.6 million or $3 million less if we exclude adjust as outlined revenue caused by an accounting standard change is a terrific start to the year. That's fiscal 2019 as well for appreciable growth compared to fiscal 2018. Adjusted domestic sales were 46% of total, again that is somewhat distorted by the high material cost order that was for Canadian oil sands up greater service. We are currently projecting full-year revenues between $95 million and $105 million. And now we will reference Slide 9. There was an easy comparison to order level one year earlier nonetheless orders are up across all key industries. There was good oil activity in the quarter for the U.S. petrochemical second wave expansion having orders for net and for ethylene plant rebound and for downstream new petrochemical capacity. We also had improvement in order levels from our commercial nuclear market. Bookings were $22 million off compared to 40 million in the previous two quarters, however, with a healthy level of high quality orders. Our Trailing Twelve Months order trend is encouraging with a net $123 million as of June 30. As we drop off $17.1 million from the second quarter of fiscal 2018, and add a new orders across this current quarter we now are in, we should anticipate the Trailing Twelve Months order trend will continue to increase. On to Slide 10, consolidated backlog remains healthy at $115 million. Our work for the U.S. Navy continues to represent a sizeable percentage of a total. On June 30, Navy backlog was 56% of total. It is important to compare and contrast backlog one-year earlier to that of the date to illustrate how brand has accelerated from the bottom a very severe downturn. On June 30, 2017, backlog was $73 million with non-Navy backlog being approximately $26 million. On June 30, 2018, backlog is up $42 million overall from one-year earlier and with non-Navy backlog at approximately $50 million, it has nearly doubled compared to last year. Importantly, order quality has improved as well resulting in greater backlog with stronger margins. We continue to benefit from an extended backlog for 55% to 60% will convert within the next 12 months. The reminder provides a production based loading in more two or three years onward. On to Slide 11, the positive developments on the order front enables us to modify upward full-year guidance. I'm pleased to provide the following improved guidance. Revenue is expected to be between $95 million and $105 million. Gross margin will range between 24% to 26%. SG&A spend will be between $18 million and $18.75 million. Full-year effective tax rate is projected to be 20% to 22%. With that, Dana please open the line for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Joe Mondillo from Sidoti & Company. Please proceed with your question.

So, I was wondering, I went back and looked at when was the last time you saw this kind of revenue and even if you exclude sort of the $3 million of low margin, last time it was around 2013, 2014 and we were at around 30% gross margins and I don't even think refining was as big of a percentage as the total as it was this quarter. So I am just wondering how you would characterize I guess maybe the pricing that you saw within the work that you did and shipped in the quarter relative to the past. And sort of how you’re thinking about your orders and your market going forward regarding I guess pricing and gross margins?

Sure it’s a great question and thank you for bringing it up because it does require some clarification. What has pull down margin in the quarter was the high cost material order which was rather appreciable as Jeff had mentioned it was maybe product third of the revenue in the quarter was from that specialized high material content order. That will have a tendency of pulling down gross margin on average and that's what occurred. If we normalized the material content to more traditional types of equipment of materials the margin would been more reflective of typical margins, but importantly so that was dealing the order that we got back sometime back and I was running to the revenue cycle. What I can say or qualitatively is what's coming into backlog what’s building for future revenue is of a superior quality, superior margin to what has been running through revenue that’s not necessarily in the immediate next quarter. But more looking out a few quarters forward with the bookings that we've been able to secure and the quality of those bookings we should begin to see margins move up to a higher level. So I would say Joe what you saw in this quarter while that revenue level was comparable to the revenue level of two or three years back, the margins were not it was because of the material content and you don't get the same margin bounce on high material content.

And then just sort of thinking about the cycle in general - you sort of peaked I think around 30 low 30% range in gross margins in the last peak. Just wondering sort of how you're seeing differences play out with this cycle and how you think about where your gross margin can go, I know maybe it’s a little below average even though operating margin there so maybe it sort of similar but let’s just take Navy out of the equation, looking at your core business do you think you can surpass the last of peak or the last two peaks we've seen sort of downtrend from 40% two peaks ago, 30% last peak just wondering sort of how you think about the cycle and the kind of work that you're getting and pricing and where you think your gross margins can go in this cycle?

There is lot in that question so let me try to parse it apart. The 2015 fiscal year at 135 million with 31% gross margin plus or minus by no means were we in full stride of the cycle peak that was the initial pick up coming off of a fairly flat three years in a row. We did not projected at that point in time that we were into a strong pricing environment, but it was more mid-level pricing environment so the gross margin reflected that even though we had high volume. We didn’t have strong pricing power at that point in time. We have strong pricing power at the fiscal years 2008 and fiscal 2009 where gross margins eclipsed 41% in both those years. 2015 was no nowhere near that not are we near that today. However if we look at our business going forward and as you cited that maybe we generally extract that as consolidated results because it does we said this consistently it will pull down gross margin but may be work because of its material content the type of contract it is. However, it averages in at the op margin line fine. We would anticipate as we get to the next peak with some strong pricing fundamentals the gross margin on a consolidated basis should be in the low to mid 30% including maybe. Our core work would be stronger of course.

And then I wondered if you could sort of comment on a couple of your end market specifically the order in chemical processing I know we saw that press release that you put out obviously things are starting to sort heat up there. Just wondering if you could comment on that and how you're seeing sort of the pipeline of projects do you think orders continue to ramp up going forward. And then also power gen has been really a weak area of your business. It seems like we’re starting to see some life there a little bit anyway. I'm wondering if you could sort of provide some color on that?

Joe we do see the chemical industry primarily in North America moving into a second wave of investment. That's not necessarily always going to be new capacity because we are seeing Brownfield investments for revamp the debottlenecking, starting up ideal facilities. So we did have a fairly large order in this last quarter that we would call a revamp was coming from our installed base. And that we also have some new capacity orders that came in the last quarter for new petrochemical capacity. We have a pretty good batch of opportunities in front of us for North American petchem and also some international petchem that should break over the next couple quarters. We are seeing directionally an improvement in the petchem market where we expect to see a stronger order environment. And we’ll come down to our ability to capture those orders we feel strong about some and we feel some are more risky. But in general directionally the petchem market is stronger today than we would say it was 12 months ago. Regarding the power market and I think your question related to the nuclear market. The power market as a whole, the nuclear market we seen our backlog expand somewhat for the nuclear market it was - I don’t want to diminish the great work that our team had done but it is coming off of a trough type of backlog level. In the nuclear market but our backlog for the nuclear market compared to about a year ago was up about 50%. So the team has done a good job to turn that around and I get that backlog to a healthier level for the nuclear market. Our power generation market outside of nuclear we simply serve principally the renewables market. And I would characterize our positioning there is we’re more opportunistic when we see an opportunities for the right order and go after it aggressively and tuck that into our backlog. We’re not a strong player there across the power market primarily because that has inferior margin potential to the rest of our work. And also the commercial terms can be onerous. So therefore we look at those opportunities situationally and opportunistically grab that work when it makes sense.

And couple more questions, just I wanted to ask about the tariffs and installation and inflation that we’re seeing on the material side of things. I know directly I don't think you're that exposed to which is given how your business model works or what not. But I was wondering what you're hearing in terms of your customers and specifically sort of projects that you're looking at installing into. Are you concerned at all is there any risk of any sort of slowdown in demand as people sort though be put pause on certain projects or certain CapEx spending given the uncertainty now, And then sort of just waiting until they sort of have a little more certainty or are you not really hearing anything like that?

Well it has elevated the cost basis for us and therefore the purchase price that our customers pay for goods like ours. And everyone is experiencing the same type of issue. Once the tariff was tweeted, our input costs for certain commodities went up in one day 18% to 20% and that was through across of the supply chain to our end markets. So it is causing an impact to the cost of the projects for our customers. Having said that though we haven't seen that affected at this point the pace of these projects or will be correlated to a tariff impact. What we are hearing is the procurement functions of our customers saying too bad, deal with it, get your cost down we’re not paying for it. So we’ll deal that as we can. What really has impact Joe I would say more meaningfully in the international markets, where to a similar degree our international's competitors haven't had a step up in cost because they use an international supply chain. We use a domestic supply chain or we’re using an international supply chain and as a tariff put on it. So therefore the input costs are a competition seed for international work is lower, and that's having effect on our margin potential with international work. That's where I see the biggest issue, and actually we've met with our congressman recently and we talked about the impact this is having on industrial companies and Graham in particular. And he just asked us to put on our national hat, think about the nation and don't think about ourselves. And it is impacting us but I think long-term, this will get right at over time, but it's having a short-term impact.

So, just to follow on the last sort of commentary, do you think that gross margin cold either see a pause in the expansion that you're seeing in terms of the orders or even a downturn considering not only I would imagine currencies also a competitive disadvantage just with the dollar sort of increasing. So dollar increasing your competitors cost decreasing, do you think you could see maybe a pause in gross margin expansion within the order books?

I think where this has an impact in our business is in the chemical sector, petro chemical sector, primarily internationally but for our refining markets. I'm not judging where this will have a large impact on us, and in the petchem market, it's actually a nice geographic swing back toward investment North America, where we will see some international competition in North America, but not of course in every project. So, I think through our order selection process and the discernment that we exercise on the type of orders we take and the margins that will take those orders at, I think we'll be okay on balance. Q – Joe Mondillo: And then last question that I wanted to ask was the SG&A, I understand what's going this year with your SG&A budget. Just wondering sort of as we look – just thinking theoretically sort of going into 2020, how are you thinking about that budget. Do you think you potentially put a complete pause on sort of hiring at least in the sales department and you potentially see some attrition to some extent. And so maybe we don't see a whole lot SG&A expansion in 2020 or how are you sort of thinking about that coming off of not 2019 year that we already know is up pretty significantly year-over-year?

We're thinking about it this way, we're expecting at this point in time a multiyear expansion across our markets. And we intend to capitalize on that and we need strong channel management to be able to do that. We don't anticipate Joe that SG&A will increase in proportion to the revenue expansion we're expecting and particular from 2019 to 2020. But in absolute terms it is likely – highly likely that the SG&A spend, the S spend will go up. As we ready our organization to capitalize on the opportunities and then secondarily, we have a richness of long tenured employees. And we need to ready the organization for their eventual departure to do something different. And we're bringing in some new talents to ready the organization and to have sales continuity five years forward as an example. And there's a fair amount of time that's necessary to ready an individual that he or she ready to go in and sell to our customers with the methods and the strategies that we deploy. So therefore we need to bring these individuals on early and we haven't found anyone that we've been able to hire away from a competitor or type of the industrial peer, that's a plug and play. It takes a fair amount of time to get these individuals ready to sell the way we sell and how we are optimize price. So therefore I would anticipate the absolute spend to go up, but not in proportion to the revenue expansion, at least across 2020 relative to 2019. Q – Joe Mondillo: And if I can squeeze in just one last one also – your backlog declined a little bit in the first quarter and I know just given with all the press releases that you put out in terms of some of these orders. You have a lot of project work in fiscal 2019 that's going to fall off the backlog. Just wondering sort of what your thoughts are on landing more orders this year and what you're sort of thinking yearend backlog would looks like relative to the strong backlog that we saw entering this fiscal year. Do you think you could at least regain enough orders to sustain where the backlog was entering this year? Do you think that potentially could be some growth or do you think there is a risk that backlog is down year-over-year at the end of this year?

A fair question and I'll give you my judgment right now to land at the midyear – midlevel of our guidance which is of 100 million. We see a robust pipeline of opportunities in our bidding pipeline that we are expecting to close in the next one, two or three quarters. My judgment is we'll continue to build a great backlog and expand our backlog and we're building on our organization accordingly on that premise. So that's the conviction that I have, we're readying for multiyear growth. Multiyear growth would suggest a strong order environment with building backlog.

Joe, this is Jeff. If I could just add one more comment. Jim talked in his prepared remarks about how our commercial backlog has doubled over the past 12 months. Our expectation is, Jim is talking about the backlog growing as that we will see continued growth on our commercial backlog.

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

Been a bit of slog but it looks like cycles turned. I'm curious about – couple years ago you had your own welder training program in order to – because you had some difficulty finding training personnel to meet the demand at that point. It looks likely you're going to see similar rise in demand. So, I'm just curious how you're handling labor because it's certainly not gotten easier to hire people these days?

We are seeing a shortage of qualified skilled trade’s people. However, that cannot deter our ability to grow. Therefore we've actually - and we are investing to expand our welding training lab, roughly doubling its capacity of what it had been. We're going to build our own workforce. So, we'll be bringing an entry level people, we'll train them the ground way. We'll get them ready. And even if we hire from the outside, it's very common that a welder, and ASME welder from the outside, is not accustomed to the type of welding and the auto position and the geometries that we weld with our large fabrication and large weldment's. So, therefore there's a long training period as well with a trained person to enter the ground, production organization. So, we've looked at this quite simply. We have an ability to grow the strong demand in front of us. We have to build our own workforce. We'll look at both the combination of hiring talent and – the skill talent is already ready. And also building our own workforce through our training programs or educational programs, and as I just said, we're doubling – we intend to double the size of our welding training lab so we can put closer to 10 people through our training program at a time.

And I'm curious, you had made a capacity – you would create – the finalizing capacity build several years ago. Is there additional capital spending required say in the next couple of years? Or can you meet it with the current capacity ability?

As we look at the roof lines a - roof line, we think is suitable for normally $150 million to $160 million of run rate. And then our peer roof line with a nuclear market, that's suitable for $40 million or $50 million of nuclear work. So, put that in the context, we think we have ample roof line for some growth for some time. However, I don't want to put a caveat out there. We are looking at and having some discussions with the primes to the U.S. Navy. And if we're able to expand our product offering there it may require a facility expansion for those specialized items that we will build there. But that would only be – should be secured that incremental type work with the U.S. navy. All very positive but that would be the reason why we would have to have a facility CapEx if we take on incrementally more naval work that wasn't modeled into our facility expansion plan.

I was curious of that expansion and in Graham or would it be I mean Batavia going forward into Michigan?

That would be in Batavia.

Our next question comes from the line of [indiscernible] from Desjardins Capital. Please proceed with your question.

Can you talk about your operating cash flow expectations for the rest of this year particularly regarding working capital, I know that was fairly large investment for working capital this quarter and understand how that flows through rest of the year?

We expect our operating cash flow to be positive for the year, to be quite strong actually was obviously be paying a dividend off of that and we have our capital investment but we expect to be positive. As we grow, we will see some increase in working capital. If we look at our networking capital as a percentage of sales, at the end of this last fiscal year it was a little over 2% when you look at it today versus trailing 12 months sales, it is at about 4% which is still a very, very low level and the type of level that we typically target were typically between zero and 10% and timing of specific projects can move that in the quarter but we expect to stay at that low level. So we will see some increase in absolute working capital dollars as we move through this early part of this expansion yes, do we think it will dramatically impact our cash position relative to where is that answer of that is we do not.

And can you talk about your expectations for Navy bookings for that 12 to 24 months?

We would expect over the next 12 to 24 months not the next one or two quarters but that in longer timeframe while we’re actually going to convert a fair amount of our backlog, our vision and expectation over the 24 months period is that we will add in absolute terms to our naval backlog and have the higher naval backlog at the end of fiscal 20 compared to where it is today.

But it sounds like that there is going to be ebbs and flows in that just based on the timing of this leverage and the timing of that quarter?

Sure.

Our next question comes from the line of [indiscernible]. Please proceed with your question.

My first question is, is there any seasonality to how the bookings come in?

Not really, there can be some seasonality to our aftermarket which is a lower segment of our business in terms of the amount of dollars that are booked, we don’t really view ourselves as a seasonal business from a revenue or order intake perspective, although there is some seasonality around when our customers place aftermarket orders.

And then my next question is could you please tell us what the core commission fees are of Graham and then relate those to where you guys are looking for and how you’re going about looking for a way to put all the capital to use?

We look at ourselves as having a number of key core differentiators and we look for partners and acquisition targets with similar capabilities, one is the way we go to market, the way we sell, the way we create value for our customers and the opportunity management, we provide immense amount of engineering support to our customers while they are evaluating how do you build the new facilities or you ramp the existing facilities and integrate products into their projects. There is a knowledge gap that we built with we have sales personnel and application personnel come in and provide technical expertise on how to integrate our products into the process, that is unique capability, there is a fair amount of expense in our business to be able to do that. However we create a lot of value and we think we extract lot of value, that is the key differentiator on our customer phasing platform. The second key differentiator and very unique capability that we have is large project management, we take on very large, very complicated projects for the fixed price and there are always issues that arise in executing those contracts, the designs not frozen, there is engineering churn, there is engineering iteration. We have a model that we are very depth at being able to do that complex contract management with engineering change given when production, so we are not a high volume low mix business, we’re a low volume high mix business but the particular operating model and there is particular operations, function in the office that we would look for businesses with similar capabilities and not all industrials posses that capability. A third differentiator is we’ve built incredibly complicated equipment to watch my tolerance, it’s very large fabrications but can be the size of the small home where we’re held to 1000s of niche tolerances on critical dimensions, capability of Graham’s production personnel and manufacturing experts to construct these large developments to high quality requirements, a lot of interaction with our customers, there is a very unique capability, sell that and we look for businesses that have similar characteristics of specialized custom fabrication to the exact tolerances and value is not an option because the cost of value are severe for the user and we look for again a business with that type of capability and the fourth is cultural sensibility of support to the customer for what we sell. We have an aftermarket team that provides great deal of technical support once the equipment is in operations to understand how the improved performance, how to mitigate operational risk and ensure the customers meet their operating objectives and maximize their resources to produce the products and time produced. So there is four key differentiators that are the value drivers for Graham and how we serve our customers and we look for complementary cultures and capabilities within the target that we’re looking at.

Our next question comes from the line of Bill Baldwin from Baldwin Anthony Securities. Please proceed with your question.

Jim. Looking at a tremendous longer and longer term and if you deem that to be competitive in the international arena. If you come to that conclusion that it makes sense to focus M&A activity on trying to identify the capabilities overseas. That will allow you to be able to offer the same value added proposition there that you do here based upon your specialized building et cetera et cetera.

Sure, we have had that and our business planning analysis and I can just share with you where our sensibilities are right now there's of a very large psychodynamic as in the energy markets where there's a strong demand of there is a steep drop off, what occurs when you have bricks-and-mortars at international operations you have a higher fixed cost and higher breakeven that you have to deal with a very severe cyclical downturn coming at some point in time but with elected to do was use a shared margin model where we find fabrication partners. But we don't all the bricks-and-mortar but we work with high caliber high quality fabrication partners that. With the need arises we put work into their operations there are orders and therefore we don't have that fixed cost and then secondarily what we've found through our analysis here is we would have to have an operation solution a suitable for China, which is different than what suitable for India would be different suitable for self this Asia. So therefore we chose not to have an operating footprint that's global simply because the elevators are breakeven and are fixed costs that we can ensure that any type of cycle dynamics of the energy markets goes through a sort of chose to share the margin and have a variable cost model. So If you do so what you're saying is you can find qualified welders and train crash people outside the United States to be able to advocate your equipment to the tolerance, the tolerance as required by the by utilizing the common of the shared model. We have been able to do that, the way we do that is we actually put our personnel, there were a little bit different as well from our peers our competitive peers, who like to place an order with a fabricator and don't have the same level of surveillance that we're part, when we put an order into a Chinese company or an Indian company as an example or an Asian company. Our fabrication in quality specialists are in that facility regularly and we owners are badge, it’s our quality it has to be built to our standards and that's been something that the end users have noticed when we do a shared margin model, it is very comparables to a grand products being built because we make sure our fabrication specialists are there and they’re building to our exacting quality standards, don't produce a product that's of a quality standard at a low cost region that's more customary we produce it to our quality standards.

And then once the product - once your equipments installed and up in operating. The service and support that equipment from your United States based.

We typically do, we haven’t built out a localized performance improvement organization in the international markets but we do have a fairly large team here in our headquarters of the T.V. that will go into Thailand go into Southeast Asia, go into China, go into India, go into South America and provide performance a proven analysis or refinery budget chemical user from Batavia we send them over and they do if there long-term you might localize that capability but that's in our long range planning, not the next one or two years forward.

But right now you find that works effectively for you that you can support that equipment from the U.S. and…

We have yes and it's typically paid for it – it's typically a fee based opportunity for us so therefore we've actually built out our organization if I thought about where it was five years ago, it probably now have two and a half times the capacity to provide service in the market than we had five years ago because we've got to do that work force.

Very good so it looks like then if may be, you can be competitive on some international projects through the shared model it just might not you know financially passed through to Graham like it would on domestic order but you can still protect your market share over there and protect your brand internationally.

Indeed and let me just cite some success, if I thought - if we look at China in particular we had zero market share in the return to respond to market for ejector systems up until 2006. We put a strategy in place to penetrate, participate and expand market share in the China refining market ejector systems and from 2007 through today, we’re the key application, improved banking distillation. We have somewhere between we believe 40% and 50% market share with a shared margin model.

Outstanding.

Thank you.

That utilizes in your experience center for standard to capture that business but then executed through the shared model.

In this particular case we did localize and have a subsidiary structure set up in to Suizhong, China to actually do the technical selling and the customer facing side of order management supported by our technocrats here is the home office but we have localized a team in China that has about seven or eight personnel there to serve the China market. There was a clear directional strategy that we've been to in that take that beachhead and we've been successful, we're not turning our attention, our attention to other international markets and are evaluated deploying a similar concept and other high growth regions.

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

The domestic refining market seems to be running at near full capacity. And I was wondering if you’ve seen any meaningful uptick in expansion bidding opportunities there. In other words are these markets operator starting to look to expand their capacity either add-ons or perhaps even some new Greenfield type expansion.

We had a batch of work that's secured to running through our revenue cycle now that I would characterize as those types of debottlenecking capacity increase projects with the North American refining market. So we have others in our bid pipeline that are potentially going to break over the next year or so. So we have begun to see that as they look to leverage their asset base, get more out of it but rather than add incremental Greenfield capacity, the industry of course is trying to figure out how to get more with what they have and they’ll do incremental strategic investments around bottom of the barrel conversion, feedstock flexibility and those are investments that we lived on for the last two decades, three decades in the North American refining space because it has been any capacity to speak of that’s our home turf. They continue to invest get more of these assets and that we’ll be there to help them do that.

And in the last call I asked about this but I’ll re-ask it again, with a little more attention being brought about with the IMO low sulfur diesel for the tanker market up both market whatever. Just wondering if now there's more attention being paid to that I think some reports that say anywhere from a 0.5 million to 1.5 million barrels a day may not be capable of being refined to meet those standards. So wondering if you're seeing anymore, or seeing any increase in your customers or potential customers to address that?

I’ll be honest with you and Jeff and I get those questions quite regularly and we haven't had much in any commentary from our end markets about needing to do anything with the exception I have heard it for the first time within the last two weeks of refiner doing an investment correlated to MARPOL or IMO standards. So we haven't really noticed an uptick that would correlate to the lower pollution standards for bunker fuels with the marine vessels. However I have heard remark finally once, from one of our refiners for a project that we’re working on.

Okay, very good, good quarter congratulations and thanks for the dividend increase.

You’re welcome. Thank you.

I have had the stock since when you weren’t paying any dividends, so it’s been nice to see that and client say the same.

Well thank you very much for sticking with us for that period of time.

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Thank you, Dana. And thank you everyone for your time on the call this morning. We’re pleased to update you on the progress as we enter into fiscal 2019 and also to update our guidance to reflect a stronger outlook that we have for the year. And Jeff and I look forward to updating you on the next conference call in one more quarter. Thanks again have a good weekend.

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