Graham Corp (GHM) Q3 2020 Earnings Call Transcript

Greetings, and welcome to the Graham Corporation Third 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Howard, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Doug, and good morning everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 third quarter and year-to-date 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 do not 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; Jeff Glajch, our Chief Financial Officer; and Alan Smith, our Vice President and General Manager of our Batavia Facility. Jim will start with a strategic overview of our business and provide our outlook for the remainder of the fiscal year. Jeff will review the financial results for the period, and Alan will provide an operations overview. 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's my pleasure to turn the call over to Jim to begin. Jim?

Thank you, Karen. Good morning, everyone. We appreciate you joining our third quarter earnings call. I will begin with a strategic overview to highlight the focus of management and provide commentary regarding progress during the quarter. Jeff will provide a deeper review of financial results and Alan Smith, Vice President and General Manager, will provide a review of operational performance. Please turn to slide 4. An important strategy for us is to reduce volatility of our financial results by strengthening and expanding predictable revenue streams. Energy end markets will remain volatile and periods between peaks and troughs appear to have shortened. The naval nuclear propulsion program will provide predictable revenue that leverages our key assets of engineering, complex project management, quality processes, and large-welded fabrication expertise. I like the naval work for several reasons: one being, it is a long-lived backlog providing vision into a multiyear base loading of our fabrication assets; second is the competition is limited and international companies are restricted from bidding in most cases; lastly, engineering, program management, quality control, and our operating model required for this work result in high-entry barriers. Ultimately, customers in this market value what we do exceptionally well. The Navy strategy has been successful, with current backlog for this segment at approximately $60 million. Our naval strategy leadership has us participating in three different nuclear propelled metal programs, two different submarine classes, and an aircraft carrier program. We want to produce different and more equipment for these programs. Over the next 12 months, we hope to secure the supply of two new components: one for a carrier program and the other for one of the two submarine programs. Demonstrable evidence of our success in the naval program driven by Alan Smith and his team is the increasing percentage of backlog that is one sole source. All our work for the first decade of this strategy was competitively bid. We now are seeing certain procurement done with sole-source bidding. Moreover, many of the initial orders were first-time fabrications of very complex weldments and material combinations; production R&D and developing efficient build flow methods along with production jigs and fixtures are needed with first-time fabrications. Productivity and process improvement for live fabrication efficiency gains will be reflected in better and more predictable margin as we move into repeat fabrications. We did add another order into backlog during the third quarter that was in excess of $5 million for the Naval Nuclear Propulsion Program. M&A focus is in the defense and aerospace end markets. We continue to actively engage in discussions with companies serving the Department of Defense. Our current portfolio of components provided to aircraft carriers and submarines, along with new components we plan to break into, is our view. Without M&A, we expect to have revenue between $20 million to $30 million on an annual basis in the near future. We are seeing M&A deals within defense end markets being both negotiated in auction processes. Valuation multiples vary greatly where multiples below 10 times next 12 months EBITDA seem to be nonexistent unless the business is broken and above 15 times isn't uncommon. Finding the right fit, where growth in combination benefits are assured, is crucial. We will maintain our discipline for strategic fit, value creation, and financial return metrics. Another more predictable revenue stream is derived from our installed base. From the installed base, revenue takes two forms: one is conventional replacement parts and in-kind replacement equipment. The other is revamp and retrofit. Graham enjoys a sizable global installed base with a great installation record in North America. In the last 25 years, Graham supplied equipment valued at more than $650 million that was delivered into North America. Moreover, with the equipment we delivered in the 1970s and the 80s, we estimate that our North American installed base approaches $1 billion. Hereto, this segment is not as volatile as large capital projects in the energy markets, with parts and replacement equipment having modest volatility, while revamp and retrofit is less variable than capital budget investment. Our customers generally invest to keep their plants operating well. Also, our thesis appears to be correct: that certain regions such as in the U.S. and Canada will leverage their facilities to get more from them before investing in new capacity. Regions with dense installation populations are the U.S. Gulf Coast, the Mid-Atlantic States and the West Coast plus Alberta. Customers need our knowledge and expertise to identify performance risk and what may be limiting throughput or impacting product quality. We are localizing performance improvement engineers in key regions to focus on our installed base and to assist our customers. We doubled the size of our performance improvement technical service organization in the past two years. We are currently building out our U.S. Gulf Coast performance improvement engineering team. Two engineers were placed in the territory in 2018, and we expect to add two more in the next six months. These individuals focus on our customers' plants and our installed base, which will be in addition to our historic focus on EPCs and OEMs. Typically, I should highlight that 30% to 40% of revenue is derived in some way from our installed base. Fiscal 2020 to-date has greater than 35% of new orders derived from our installed base. M&A deal generation is centered also on the installed base to add products and/or services. Deal multiples in this vertical aren't as rich as defense multiples. However, we're finding scalability and growth for these types of companies to present some challenges. When taken together, the naval strategy and our predictable base strategy are estimated to, in combination, approach $50 million per year in revenue in the coming two years. Upon achieving that level of predictable revenue, it will dampen the impact of our highly cyclical, large crude oil refining and chemical project work. Also, trade policy and tariffs on certain materials have affected competitiveness in international markets and, in certain instances, it has impacted us in our domestic markets. We are also observing customer acceptance of low-cost regions for the fabrication of critical components such as our ejector systems and steam surface condensers. In response, and actually to reposition our competitiveness and to expand market share, the global fabrication supply chain is being more aggressively used by us. In the last 18 months, more than $35 million in new orders were secured by executing differently to increase market share where previously we were unsuccessful due to cost. Four of the projects were for international crude oil refining projects that will add to our installed base, which will ultimately drive follow-on revenue in the coming decades from revamps, retrofits, and spare parts. In the past, we approached using the global fabrication supply chain in a limited or targeted manner. Now, we are proactive and aggressively attempting to change participation, create broader execution scale, and expand market share. Three critical facets of this strategy to expand market share are controlling quality, achieving predictable results, and protecting our IP. We are building out our supply chain management and quality surveillance organization in support of this strategy. Early success, as cited a moment ago, are validating we have a good formula for success. Bringing on new fabrication partners can lead to missing financial projections for a given order. However, thus far, planned and realized margins have not varied too greatly. The unique or differentiating elements of Graham's IP will be closely controlled as we execute the strategy. We are not releasing or disclosing our differentiating capabilities. That will remain closely protected. We exercised the strategy approximately 20 times since 2006 and we have safeguarded our critical IP along with realizing satisfactory financial results from those orders. Since launching this strategy more aggressively, we secured six large orders during the last 18 months. When taken together, expanding predictable revenue streams, repositioning execution strategy to take more market share in underserved segments, and M&A to add new revenue will result in strengthening shareholder returns, more consistent financial performance, and an increase in cash generation to reinvest into the business. I will now refer to slide 5. I am pleased with our strategy to change execution to shift competitiveness within markets where our share had been low or where we chose in the past not to participate. Since initiating the strategy, as I said a moment ago, over $35 million has been secured, including an order in the last quarter. In that most recent case, the customer and the end user are both new to Graham. Fabricator and partner selection is critical. We have a proven process within China. The success of that is being deployed into other Asian countries and certain countries in Europe. Quality control, on-time delivery, and cost efficiency are important performance measures for this strategy. I am pleased with how well we are executing the strategy and achieving realized margins within the market price for this segment of our end markets. By developing global fabrication partners, it provides tremendous execution capability with a variable cost. So we aren't adversely changing our fixed costs. This work, due to sharing margin with our partner, can look different at the gross margin line but blends in fine at the operating margin line. Importantly, we also reach into non-traditional markets for Graham, such as emerging markets where hydrogen fuel delivery systems, natural gas engines, or natural gas delivery systems, applications involving supercritical fluids, and applications in cryogenic services. In certain applications, Graham products have high differentiating barriers that limit competition. Year-to-date there were orders within our short-cycle products that were supporting OEMs or end users for natural gas delivery systems, supercritical carbon dioxide extraction, hydrogen fuel delivery systems, and so on. These are smaller dollar value orders that fall into our short-cycle segment. However, in the long run, they can become more frequent and more predictable, thereby, further expanding predictable revenue streams. I will now move on to slide 6. We confirmed full year revenue guidance that will be between $100 million and $105 million. This revenue guidance is predicated on executing a quick turn Navy order in the fourth quarter that was currently in backlog. We feel confident that we will be able to do that. Secondly, Jeff and I were on a conference call this morning with our Managing Director in China. We have some large work being done in the fourth quarter in China that's being recognized on a complete contract basis, not percent complete basis. We've been advised this morning that the local government authorities are prohibiting workers from going into the factory for this period of time. We'll have to monitor the progress of that. This is happening in real time and it may affect our ability to land within that guidance projection. We just learned that this morning when Jeff and I were on a call. Gross margin is expected to be between 21% and 22%, and this has been adjusted downward from previous guidance. SG&A spending will be between $17 million and $17.5 million. Our effective tax rate is approximately 20%. I would now like to pass it over to Jeff for him to review the financial results.

Thank you, Jim. Good morning. If I could have you move to slide 8. Revenue in the third quarter was $25.3 million, up from $17.2 million in Q3 last year. Q3 net income was breakeven compared with $95,000 or $0.01 a share last year. I will speak more to our Q3 results on the next slide. Orders in the quarter were $20 million and our backlog now stands at nearly $123 million. On to slide 9. Q3 sales were up significantly versus last year. However, we had a poor mix of projects converted in the quarter. Sales in the third quarter were 53% domestic and 47% international. In last year's third quarter, the mix was 83% domestic and 17% international. The increase in sales in the quarter was all in the international markets, primarily from outsourced fabrication work. Gross profit in the quarter increased to $4 million from $3.7 million last year. Though the sales level increased significantly, the mix of projects was very unfavorable as well as the amount of short-cycle aftermarket work was lower than normal. Due to this mix change, gross margin was 16%, down from 21.8% last year. We believe the poor mix of projects will shift to a more favorable mix in the fourth quarter and beyond. In addition, we continue to see an improvement in margin in what is going into backlog compared to what is coming out of backlog. EBITDA margins in the quarter were just above breakeven, down from 4.5% in last year's third quarter. Net income was breakeven, down from $95,000 or $0.01 a share on a reported basis and $500,000 or $0.05 a share on an adjusted basis. On to slide 10 looking at year-to-date results. Sales in the first nine months of fiscal 2020 were $67.5 million compared with $68.2 million in the first nine months of last year. Note that last year had a much stronger first half than second half. Per our guidance, we're expecting the opposite and a strong sales quarter in the fourth quarter. Year-to-date sales were 65% domestic and 35% international compared with 63% and 37% respectively last year. Year-to-date gross profit was $13.7 million, down from $17.1 million last year, and gross margins are down at 20.3% versus 25.1% in the first three quarters of last year. A favorable mix impact of the third quarter is the main driver in the reduction in gross profit margin and dollars. Year-to-date adjusted EBITDA margins are 4.8%, down from 12% last year. Nine-month net income is $1.3 million or 13% per share on an as-reported basis and $2.2 million or $0.22 per share on an adjusted basis, compared with $5.6 million or $0.57 a share on an adjusted basis last year. Moving to slide 11. Cash is at $70 million, down from $78 million at the beginning of the fiscal year. This reduction is simply the timing of working capital and we expect it will reverse over the next one to two quarters. Capital spending has picked up in the third quarter and is now $1.4 million through the first nine months, similar to last year. We expect significant capital spending in the fourth quarter and full year capital spending of $2.5 billion to $2.8 billion for the full fiscal year. As Jim discussed, we continue to expand our acquisition pipeline and despite high prices in that arena, we are pleased with the list of companies we are considering pursuing. Alan will complete our presentation by providing more depth in our operations in Q3.

Thank you, Jeff, and good morning, everyone. I'll provide commentary at an operations level. I'd ask that you refer to slide 13, please. $25.3 million in sales for the third quarter reflected the benefit from our increased use of our global fabrication supply chain to improve participation in market share in the segment of the refining market that we previously were not focused on. The $5.6 million increase in refinery sales in the quarter compared to a year earlier is principally due to this strategy. We are executing a large Mid-East new capacity refining product using Asian fabricators to expand our execution capacity and to improve our cost. This happened to be a price-centric decision by the EPC consortium involved which necessitated a different execution plan. We haven't generally observed this for the Middle East refining applications. We plan to complete this order in the fourth quarter. The chemical sector sales more than doubled in the quarter compared to last year due to ongoing investment in North American petrochemical plants tied to low-cost feedstock advantage stemming from shale-derived oil and gas. Commercial sales, which include the Navy, increased by $1.6 million due to Navy backlog progressing into fabrication. Our geographic sales mix is close to 50-50 domestic and international due to the aforementioned Mid-East order. I would expect domestic sales to range between 50% and 75% in the long run due to the strength of our naval backlog. As Jim noted, fiscal 2020 revenue is expected to be between $100 million and $105 million. The risk is a short-cycle Navy order in backlog. It is set up to complete, but our customer always can, in fact, order completion in a negative way. My conversations with the customers suggest that we will complete this order within the fourth quarter. Moving on to slide 14. The higher level overview of the trend line is that we escape the cycle bottom for non-Navy orders, having essentially doubled our trailing 12-month order levels when compared to the low watermark in the first half of fiscal 2018. We do have rather large orders from time to time, be they from Navy or other end markets, which can create spikes such as the one seen in the second quarter of fiscal 2019. We are enjoying a consistent level of orders from our installed base. These orders come in two forms: one is a typical spare parts or in-kind replacement; the other is retrofit or revamp type orders. Year-to-date orders derived from the installed base represent approximately 30% of the total orders. More importantly, the installed-base orders typically have the highest margin potential. We did add approximately $8 million of new work into the backlog from our naval end market year-to-date. A portion of the $8 million came in the form of change orders for scope modifications to existing backlog and the larger percentage for additional components. Most importantly, there is an active pipeline in excess of $50 million of new naval opportunities projected to close within the next 12 to 18 months. Lastly, there's a large grouping of bids that will require us to utilize our global fabrication supply chain strategy, which totaled $75 million and is planned to close in the next 12 months. We are not expecting to get all of it; however, we are in a good position, I believe, for certain targeted projects. I expect the trend of the line to head upwards across the next several quarters. Finally, I'll wrap up on slide 15. The backlog is healthy at $123 million, with naval orders representing just over half of the backlog. Refining backlog expanded to 30% of the total. I highlight this as compared to a year ago because refining backlog is up 20%. Importantly, refining backlog provides higher-margin work when compared to the chemical market backlog. Lastly, backlog conversion is 55% to 60% across the next 12 months and 25% to 35% will be completed beyond 24 months from now. Operator, please open the line for questions.

Thank you. We will now begin our question-and-answer session. Our first question comes from Joe Mondillo from Sidoti & Company. Please proceed with your question.

Hi, everyone. Good morning.

Good morning, Joe.

Good morning, Joe.

So, first off, I went back to look at your 12-month backlog, and I sort of compared it to your trailing 12 months of revenue. Compared to a year ago, it's actually very similar. But over the last eight years, it's actually one of the highest that you've seen in the last eight years. So I'm just wondering. I know you're not giving guidance on fiscal 2021 quite yet, but just could you talk qualitatively on how you think you're positioned heading into fiscal 2021?

At a qualitative level, Joe, we are projecting and expecting that there will be year-on-year growth in 2021 versus 2020; that the year is not fully set up, but it's at a very good point at this juncture with where we are entering the year. We have probably six more months of booking large project work that could contribute to revenue in fiscal 2021. The pipeline looks ample. The backlog is set up for execution. So it does suggest and direct us towards thinking that 2021 will be a strong year for Graham.

Okay. I have a couple of questions about gross margin. It seems that the international work you did, particularly in the Middle East, along with some outsourcing of fabrication, may have led to the low gross margins. If that's accurate, was this something you didn't expect? With a significant backlog and only two quarters remaining in the year, I would have thought this would have been anticipated. Could you clarify the reasons behind the low margins we observed this quarter?

Certainly. Joe, as Jeff mentioned in his prepared remarks, we did experience some impact. I don't want to downplay the effect of the lower-margin work we converted. Our book of business has varied margin profiles, with some strong and some less favorable. As we entered the third quarter, we had a specific plan for execution and labor allocation for a certain mix of work. However, due to starts and stops or other factors, we had to allocate work into a lower-margin backlog, which diverged from our initial model. This shift impacted our profit generation potential and reduced margins. We approached the international refining project and the global fabrication project with a clear understanding of their margin potential, so that did not surprise us—it aligns with our margin expectations when we booked the order. The key issue stems from how we allocated production hours within our diverse backlog.

Joe, this is Jeff. One additional comment. We also had on a relative basis a lighter quarter of aftermarket and short-cycle sales, which, as you know, are at a higher margin for us. So that also contributed to the difference between what one would normally expect compared to what we actually saw from a margin perspective.

Okay. I just want to clarify my understanding. Is this backlog work something you can fulfill in different ways, or do you have a backlog of various orders that, because of customer timing, led you to prioritize lower-margin work instead of the higher-margin items for future quarters? What’s the situation?

It's more similar to your latter description. We had work in progress that generated a range of gross margin per production hour. What actually occurred is that we channeled work into orders with a lower gross margin per production hour than we had predicted for the quarter or for the second half. This situation occurs in our large projects, naval work, and energy market work. It's frustrating because nothing is fundamentally broken in our business. This outcome is a result of the significant variability in the margin profile of our backlog. The positive aspect is that we have an operating model that allows us to adjust our production resources and channel work into our work in process, as we have enough of it to effectively deploy those resources into other projects. This variability in gross margin per production hour is just part of the mix and calculations. The upside is that this suggests a stronger margin in the future.

That's what I was just going to clarify. So the future couple of quarters or a few quarters you're pushing out higher margin work. So that should actually benefit you going forward, I guess, in the next couple of quarters?

Sure. We ultimately need to deliver that higher-margin work, and it will flow through in subsequent quarters.

Yes, I apologize for the interruption. An important point related to what Jim mentioned is that we haven't observed any cost increases that would have impacted this quarter or that would affect us in the future. The same project work is ongoing, and the margins we recorded, along with our expectations for executing these projects, align with the costs we anticipated when we booked them. Unfortunately, as Jim pointed out, some of the less favorable projects were executed this quarter, which is promising for the future.

Okay. I understand. I have one last question about gross margins, which is more of a long-term inquiry. I looked back at the period from fiscal 2012 to fiscal 2016. During those four or five years, around 30% to 35% of your revenue came from your higher-margin refining business. Currently, your refining business makes up an even larger portion of sales, but back then you had gross margins of about 30%, and now you're closer to 20%. I'm curious if anything has changed since that time. Do you believe you can return to gross margins closer to 30%?

I'll answer the second question first. We do feel that the margins that were exhibited year-to-date are not reflective of the margin profile of this business as we get some of the backlog behind us that reflected decisions we made 12, 18 months ago when the order environment was different. And then secondarily, as you might recall, and as Alan said, refining provides our highest-margin potential. However, within that end market mix and a geographic mix that can affect margin. So North America work is the best. Middle East work under normal circumstances is the second best. In this particular case, I think Alan or I had mentioned that we had a price-centric purchase decision from an EPC that was not typical. Again, we booked it. We understood the margin. We're realizing our booked margins. So nothing is surprising us there. It just didn't carry the margin profile of a classic Middle Eastern project. But Asia, depending upon as we shift our mix to where new capacity might be coming from as we deploy the global fabrication strategy, we will be bringing in work from the refining space that has a different margin projection than as you thought about Graham and the refining activity, a decade ago because we're shifting our position where we didn't serve that market fully before. We can add that work into our business. It's going to be additive at the operating margin line. But, it can come in as a compression at the gross margin line, that type of work.

Okay, I have one last follow-up on this. North America has been weaker than expected for several years, which might explain why the margin profile hasn't been as strong as it was in the past. Do you see any catalysts or growth factors that could lead to an uptick in work in North America? Specifically, everyone's discussing our status as the biggest oil exporter and our independence in oil. However, this view is somewhat misleading because our refineries are unable to process a significant portion of the oil we're producing. Are there any insights or indicators about whether refineries are considering investments to utilize this oil or any other factors regarding refining in North America?

Alan pointed out in his remarks that our new orders year-to-date from our installed base accounted for 30% to 35% of the total. What's significant is that much of this is coming from the refining end market. This tells us that, as Jeff mentioned, the margin on the work going into our backlog is higher than the margin on what's being released from backlog in recent periods. This improvement is mainly because our mix is becoming increasingly North American and refining-focused. This indicates a better quality in our backlog with the new additions. Overall, we are feeling more optimistic as we look ahead compared to looking back.

Okay. I have several more questions. But I will let someone get a chance. Thank you. Our next question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.

Thanks very much. Jim, in your prepared remarks, did I hear correctly that there were jigs and fixtures you had to build out in Q3 in order to execute on a contract that you'll have in your account in Q4?

I made a comment in my prepared remarks about first-of-a-time fabrications that require jigs and fixtures. That was not a drag on the third quarter. If I represented it that way, that unto itself wasn't an issue. What I was trying to refer to was our first decade was competitively bid work and some first-time fabrications. So as we look forward, having those fabrications behind us, where we built the collateral fabrication assets that we need for future production, the repeat builds, the margin profile of our naval work will become stronger. However, we're dealing with the backlog. Our strategy is to enter the market over the last decade. Very pleased with what we've done and the execution of that strategy, the future looks stronger than looking backward.

Understood. And on China, I'm hearing anecdotally that no one's going back to work until after February 10. Is that the sort of thing you're hearing?

The call that Jeff and I were on mentioned that our office's location decision was made on February 9. We haven't yet received a timeline for where our equipment is being built, but they're currently on a shutdown for Chinese New Year, so there hasn't been any progress on advancing that particular order. However, this situation is evolving in real-time for all of us. If we received an update today from a proactive call that Jeff and I made to our team in China regarding the status of that order, which we anticipate completing this quarter, we shared in the prepared remarks what we learned, namely that the government has not allowed workers to return to the factory. The return date is still unclear, but we expect to have better visibility by the middle of next week, and we will monitor how this develops. There's not much we can do at this point; while we are somewhat affected, we're not entirely powerless.

Got it. And Jeff, just following up on the gross margin question. Does outsourcing necessarily produce lower margin business for you?

In some cases, it could be aligned with our current margin levels. If we consider the margin levels that our business typically operates at, which, as Joe Mondillo mentioned, were around 30%, that might be a bit more difficult to maintain consistently in an outsourced scenario. While some projects may meet that level, overall, it may trend a bit lower over time.

Okay. Thanks very much.

Thanks, Theodore.

I would like to elaborate on that. The market segment we are targeting with our strategy is one that we previously underserved, and it has different pricing potential and cost characteristics. We anticipate that most of the orders will have margins similar to our overall business currently. However, we do not expect that this market segment will yield margins as high as those we typically achieve.

Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Thank you. I have a couple of follow-up questions. Alan, in your comments, I believe you mentioned a change in the execution plan. Can you clarify what that change was?

Sure. To support the expansion into a more price-focused buyer that Jim mentioned, we're establishing a Southeast Asia supply chain. In doing that, we need to ensure that our vendor oversight processes are well implemented. It's important to us that the products being produced, even though they're not made by Graham employees, meet our quality standards. Therefore, we need to maintain tight quality surveillance and oversight with the vendors to ensure we produce a quality product that reflects our brand.

Okay. So was that related to the Asia project or was it related to the Middle East project for the E&C buyer?

Yeah. That Middle East project was built in Asia, Southeast Asia.

Okay, okay. Thank you. And then also related to your comments too, I heard of the number $75 million potential project pipeline with other work besides Navy, but what was the number that you said for potential navy backlog that you can compete for in the next 12 to 18 months?

Yeah. In the next 12 to 18 months, that's in excess of $50 million.

Thank you. Following up on that, when you mention executing a shorter cycle Navy project in the fourth quarter, could you clarify what that entails and what type of equipment is involved?

It's a long lead material order that our naval customers provide us occasionally. Some of these orders are used to mitigate time-based risks and manage material costs. Essentially, it's an order that supports our future project.

Tate, we have experienced similar situations in previous fiscal years where there are significant orders along with a minimal amount of fabrication work associated with them. These orders may ultimately be part of a larger order, as we have seen in the last couple of years, but there is no guarantee of that. We have encountered a few of these in the recent fiscal years, specifically in 2017 and 2018.

Okay. Thank you. And Jeff, also one of your earlier comments, what usually historically has caused less aftermarket orders in a quarter that you mentioned?

The aftermarket orders are considered part of our predictable base. Over a 12-month period, they tend to be quite consistent. However, there can be fluctuations in a particular quarter, with changes ranging from 15% to 20%, as we experienced this quarter. These variations are mostly due to the timing of orders. Several factors can influence this, such as holiday seasons in December, how plants are placing orders, or their budgets. We may see a temporary increase or decrease in any given quarter, but we don't usually overreact unless we notice a sustained trend. So far, we haven't observed that; this quarter's orders were simply lower than what we would typically expect.

Okay. Thank you. Jim, one last one for me. You mentioned steeper cycles in previous earnings calls too for refining and chemical work. I mean why is that? I mean is it foreign competition or lower budgets? Or what's different today than previous cycles?

What we're observing today is a difference in geographic mix. When we reflect on the surges from 2006 to 2009 and the mid-decade surge, it was primarily in North America and the Middle East, where we are not yet seeing strong activity in the Middle East. We're witnessing more international work but not as much coming from Canada, which had previously been a strong area for us due to the oil sands. Overall, about a third of the orders we've received year-to-date have come from our installed base in the form of large projects that were revamped or retrofitted, mainly pulled from the North American refining market, which has always been a healthy margin spot for us. Currently, the geographic mix is not the same as it was earlier in this decade or during the 2000 to 2010 period.

Okay. Thank you. Thanks for those comments and have a good rest of the day.

Well, thank you. You as well.

Unfortunately, we are out of time for questions. I'd like to hand it back to management for closing comments.

Well, thank you Joe and Tate for your comments this morning. We appreciate the depth with which you probed Alan, Jeff and myself. We look forward to updating everyone on our year-end results as we wrap up the year, and that will be probably not until May, right?

End of May.

So again, we'll be advising if there are any large new order announcements worthy of press releases and we look forward to updating everyone as we wrap up the year and have our year-end result conference call. Thanks for your time today. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.