Graham Corporation
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Greetings, and welcome to the Graham Corporation First Quarter Fiscal Year 2015 Financial Results. At this time, all participants are in 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 you to Deborah Kozlowski [ph], Investor Relations of Graham Corporation. Thank you.

[Karen Howard:]

Thank you, Jerry. Actually its Karen Howard of Investor Relations with Graham, but Deb is here with us as well. But thank you and good afternoon everyone. Thank you for joining us to discuss our results for our first quarter of fiscal 2016. We certainly appreciate your time today. You should have a copy of the news release across the wire this morning detailing Graham's results. We also have slides associated with the commentary that we are providing here today. If you do not have the release or the slides, you can find them at the company's Web site 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 of the quarter as well as our outlook. We will then open up 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 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. And with that, I'm going to turn the call over to Jim to begin. Jim?

[Jim Lines:]

Thank you, Karen, and good afternoon everyone. Welcome to our first quarter fiscal ‘16 conference call. I am on Slide 3. We are executing our strategy to expand earnings by focusing on our distinct assets, be they be our selling process, or our engineering capability, custom fabrication capabilities, along with our capital asset to capture greater market share and to expand our business. We’re focused on improving the level of our predictable base business. And in diversifying and strengthening our revenue streams. Our key markets are refining, chemical, petrochemical markets, power generation and serving the US navy. Short term objectives include driving topline growth through capturing greater market share. Our near term objective is to expand revenue to over $200 million across this cycle. In longer term, continue to leverage our distinct capabilities via diversification and expanding market share to continue to grow value for our customers and value for Graham. Please turn to slide 4. Highlights for the first quarter include revenue at $27.6 million, which compares to $28.5 million for the first quarter of fiscal 2015, down 3% year-over-year. First quarter net income was $2.4 million $0.23 per share this is consistent with a year earlier with net income at that period of time, $2.4 million or $0.24 per share. Return on sales was 9% in the quarter. Backlog remains strong at $110 million. We also took action to level backlog conversion and spread revenue conversion across several quarters and addressing the change in outlook in our markets. We’ve also scale back our costs via action has taken at the end of the fourth quarter to reduce our fixed cost base. I’m on to slide 5. First quarter sales were 36% from international markets compared to 22% last year. This was driven by increases due the Middle East as well as our other markets. We did have strong refining industry sales, with refining industry sales just under $8 million; chemical and petrochemical processing industry sales was just a bit above $11 million in the quarter; power industry sales $3.7 million. Our annual revenue for the trailing 12 months is $134 million. Slide 6, please. I spoke a moment ago about the uppers and our focus on expanding our predictable based business. I’ve been very pleased with our progress there. Compared to 10 years ago, we’ve expanded that by 2.5 times from what had been around $20 million back in the mid-2000 to just over $50 million last year, fiscal year ’15. Our goal and our expectation is to exceed 60 million from this segment of our business, which includes the nuclear market MRO, executing our naval strategy, our aftermarket strategies and our short cycle new equipment sales. The important aspect of this strategy is we’ll reduce earnings volatility as this segment is less cyclical. I would like to turn it over to Jeff to review the financial performance.

[Jeff Glajch:]

Thank you, Jim, and good afternoon. We’re on slide 8. As Jim mentioned, our sales in the first quarter were down a little bit from the previous year, yet our gross profit level was similar to slightly above as we saw our gross profit margin increased by 130 basis points. The 130 basis points increase was driven by the mix of products that went through our facility in the first quarter versus last year. EBITDA margin was flat for the year and our EBITDA was down slightly and our earnings per share was off $0.01 although the earnings from a dollar standpoint were equivalent. On the slide 9, our cash position remained strong. We saw cash increase by $2.3 million in the quarter. This was driven by our cash provided by operations. Capital spending was relatively low in the quarter at $300,000 and we do continue to expect capital for the full year to be between $2 million and $2.5 million. I do want to comment just briefly on our stock repurchase program, which was approved in January of 2015. We had not purchased any shares through the end of the first quarter to the end of June. However, since the beginning of July, we have purchased approximately 75,000 shares at a total cost of $1.4 million in the month of July. While the stock repurchase program is important, it is secondary to our intent to utilize our cash balance to invest in both the organic growth and the majority of that cash balance is really focused on investing in acquisition opportunities to grow our business inorganically. With that I’d like to pass it back to Jim to discuss the outlook for the remaining part of fiscal ’16.

[Jim Lines:]

We continue to have order volatility due to end market fundamentals. Approximately 32% of our first quarter’s new orders were from the refining industry. We are continuing to have a difficult time predicting when orders will release from a refining or petrochemical market. While we have a healthy pipeline of opportunities, timing uncertainty is still in front of us. Geographically first quarter orders were approximately two-thirds domestic, one-third international. On a trailing 12 months basis, the order level was just under $130 million. Onto slide 12. We still have a very strong, a terrific backlog, that $110 million, it’s very diversified and it shows the strength of our naval strategy, which represents almost half of the backlog, at this point in time 48%. Importantly 55% of our backlog is from customers or markets our company did not serve five years ago. Our backlog is different, which means to be borne in mind, in that it is more extended in terms of the conversion cycle. At this current point in time 45% to 50% of our backlog will convert over the next 12 months or nearly, going back several years ago that was closure to 90%; and today 40% to 45% of our backlog converts 24 months or later from now. We are confirming 2016 full year guidance is unchanged with revenue between $95 million to $105 million; gross margin ranging between 26% and 28%; SG&A as a percent of sales expected to be between 17% to 18%; and our effective tax rate of 32% to 33%. While we’re managing through a difficult set of market fundamentals, in the refining and petchem markets, our strategies and our vision is on growing Graham long term expectation to continue to grow Graham with our near-term goal of exceeding $200 million of revenue across the cycle. With that I would like to turn the call, Jerry, over to Q&A.

[Operator:]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions]. First question is from Joe Mondillo, Sidoti & Company. Please go ahead.

[Joe Mondillo:]

First question, just wondering if you could talk about sort of the oil refining business in general; it seems like the orders were pretty solid in the quarter. It doesn’t seem like you have a ton of visibility any color that you can give for what your feeling with your customers is -- it seems like the refiners in general are actually doing quite well; so, any other color that you can give us regarding products or demand there?

[Jim Lines:]

You are correct, Joe, that the refineries themselves are doing quite well financially. We still do have a great amount of bid work for the global refining market. The behavior of the refining industry really depends upon what type of refiner it is. Our national oil companies, they're still in a unpredictable period with regards to when they will release orders due to financial constraints they are having tied to the price of oil. That is similar to what we are seeing that integrated refiners who have both exploration and production along with refining assets, while the refining assets are performing extraordinary well, they are still conserving cash and pulling back on the CapEx in the near term to address the headwinds they are having on revenues and cash flow. For an independent refiner that's where we are seeing some vitality and the most enthusiasm, but perhaps a little better predictability around order timing, because they are less affected by the price of oil. In general we still remain very encouraged by the level of activity in the refining sector as our gauge being the amount of bid activity. However we’re still regrettably at a point in time, Joe, where we don't really have an easy methodology to predict when orders are going to be released.

[Joe Mondillo:]

So for you has anything really changed over the last six months has it been sort of just sort of this wait and see uncertain type of time over the last six months or is anything over the last two or three months gotten you any more positive or negative at all?

[Jim Lines:]

We’re still in this bogey area. The recent fall back from what had been roughly $60 a barrel to roughly $50 a barrel; that has a negative implication because we were beginning to believe we are on stable ground at around $60 of barrel. In our view the catalyst for getting back to business as usual is stability around the price of crude oil such there is predictability on projecting financial returns and they are solid foundation from which they project. So we really haven't had feedback from our customers saying the catalyst is now in front of them and they are feeling very encouraged in short term. What we are hearing is that these are short term headwinds. Long term investments will be made with discretionary decisions to delay investments for maintenance type purposes. That can only be done for short period of time. So we do expect that our level of orders that would relate to more of refinery upkeep or investing in Brownfield asset, we’ll return to normal before large CapEx for new capacity. And that’s a very important segment of our sales it can be of equal importance to new capacity. So we think that occurs sooner than investment in new capacity. And as I said those discretionary decisions to delay those types of investment, they can only be done for a short period of time in our view.

[Joe Mondillo:]

Okay. And then I thought it was interesting in regard to your domestic versus international orders. The domestic orders have actually been relatively stable for the last five quarters, if you take out the Navy order that you saw in the fourth quarter. What is your sort of thoughts on that, I mean I would have thought North America would have been relatively big as well, as the international field. But what your thoughts on domestic sort of holding up it seems like on the order side?

[Jim Lines:]

Within our domestic sales, going back to our predictable base; excluding the naval type work, our short cycle work; our nuclear MRO work much of our aftermarket largely is domestic oriented. So that’s fairly stable, less cyclical and when the large capital work globally pulls back that becomes a more important waiting of our overall order. So there is that effect that plays. And we’re also seeing some investment by the refining and petchem market in North America. Although by no means is it predictable or like 18 months ago, but we did win another ethylene project and we have won some refining work in this last quarter, which was encouraging. But it’s not indicative of the rapid pace we saw for order placement 24 months ago.

[Joe Mondillo:]

Is there any difference in margin of the work that you do internationally versus the domestic work?

[Jim Lines:]

In general, yes. North America provides the best margin potential. However, some international work is comparable depends on the region and we view the Middle East and some South American opportunities as providing similar margin potential as the U.S. whereas Asia has been of a different margin potential. Not bad, just different, well it’s a worse. But it’s not horrible.

[Joe Mondillo:]

So regarding the backlog, and foreseeing domestic orders hold up international sort of be a little weaker; are you seeing sort of a mix shift in gross margins in the backlog? And also just regarding gross margins, if you had a very good first quarter, it seems like the low-end of the guidance would imply very low gross margins even lower than when we saw in the 2009, 2010 downturn. So that sort of a two part answers and then I’ll get back in queue. Thanks.

[Jim Lines:]

Sure. As we look at the orders being booked and from an accounting margin at order entry, they are strong. When we look at the absorption and factory utilization as our throughput drops, that’s where you begin to have the margin erosion. So while we have, and has brought accounting margin, that’s assuming some level of absorption; as our utilization declines, as our revenue drops, where we have an absorption effect that’s counter balancing that. In general, we are expecting because of the under loading in our facilities to have that margin penalty which is what our guidance reflects.

[Joe Mondillo:]

Okay. And then I guess the second part of the question which just relating to the guidance in terms of a low-end of the gross margin guidance that would imply the gross margin would have to fall off pretty big sort of to the mid 20s. Is there a quarter or two that we should expect a possibility of that?

[Jim Lines:]

If we think about our order pattern from Q3 to Q4, striking the navy work, there is a fairly appreciable under loading of our operations as that backlog converts into revenue. That will begin to show up in Q2. And it is just the timing of backlog conversion and it is the fact that we have to deal with the level of bookings that we had in Q3 and non-naval bookings in Q4. So that will have an effect due to the leverage that we just spoke about into options of overheads while the booked margin looks fine. The actual translation of that margin to a realized margin due to absorption negative impact shows up in Q2.

[Operator:]

Next question is from Paul Dircks, William Blair. Please go ahead.

[Paul Dircks:]

Good just a couple of questions here from me. First question I have is also related to the backlog. It looks as if you had a nice uptick in power woods during the quarter. Was this due to any particular projects or is this is more a sign of some of your enhanced focused on driving growth at Energy steel?

[Jim Lines:]

We’re focused on driving growth long term in Energy steel. That has not been realized yet. I would not, at this point, encourage projecting from the power market orders in Q1. We haven't had the lift yet that we were anticipating from our nuclear utility strategies.

[Paul Dircks:]

Okay. That's helpful what was behind the award performance in the quarter in Power?

[Jim Lines:]

It's the timing of the non-nuclear related orders that aren’t there always. They are more of a one off from renewable energy markets.

[Paul Dircks:]

Got it okay that's helpful. Any update you guys can provide on the timing of the next navy carrier award?

[Jim Lines:]

The best we can judge is it should be out for bid in calendar ‘15 and we would expect to be placed in calendar ‘16 as best we can judge. So it could be of fiscal ‘16 bookings but more likely of fiscal ‘17 quarter.

[Paul Dircks:]

Okay. That's also helpful. Two more from me quickly here; maybe this more of a qualitative question, but how does the margin profile of some of the recently booked award tier in your legacy markets, compared to that of your legacy markets awards back in fiscal 2010 coming out of that downturn?

[Jim Lines:]

I would say on average, they are up a little bit that was a tough time in 2010, with some of the work that were secured. I can’t say though while we’ve had okay margins that we secured, there are some incredibly rough margin opportunities out there. And some of that we didn’t win. And that we’re seeing our competition dockyard to rise it as a applying reckless pricing policies. So we’ll have some situations where we will step in to protect our trough, our market share and prevent an entrance into a key account, but thus far answering your question we haven’t really seen that as affecting our booked margin and backlog but I want to be clear there is some tough step out there that we may take.

[Paul Dircks:]

Is some of that tougher pricing domestically or more internationally?

[Jim Lines:]

Its generally more internationally, but we are seeing, I don't want to have this get too much weighting but little more anecdotal but we are seeing at times in our domestic market, it depends on the end user, there is sensitivity to price versus value and we have seen some usual behavior with certain of our customers. I want to characterize it as anecdotal but it’s though enough that, it’s on a radar screen.

[Paul Dircks:]

Okay, that’s helpful color. And then final question for me seems if you guys are being more let’s start certainly which are commentary regarding acquisitions. Maybe you could talk about how you are evaluating in the prospects out there in the marketplace. And is your expectation for pricing further improve for us in the targets are considering or has it already improved. What’s really driving your – what seems to be incremental confidence and making in acquisition?

[Jeff Glajch:]

Paul, I think it’s more incremental focus that necessary confidence. But I guess from that focus perhaps one get additional confidence. As we look at this time last year, when we have very strong organic ramp ahead of us, we had take in the foot off the accelerator a little bit and looking at acquisitions. We have refocused both management and the Board is very supportive of our acquisition activity and we have moved that up on the agenda of things to look at. So it’s really more focused at par rather than anything beyond that. With regard to pricing, pricing still a little bit reach right now, there is a lot of buyers chasing thing. So we haven’t seen a meaningful dropdown and price yet but we’ll certainly keep our eye on that.

[Operator:]

We have a question from [indiscernible]. Please go ahead, sir.

[Unidentified Analyst:]

I had a few questions if you don’t mind. One maybe if you guys can talk about your backlog and your recurring business. How much of your recurring business is in the backlog or should we think of those two separately?

[Jim Lines:]

I’m going to give it my definition to make sure, I’m collaborated to your question. Our recurring backlog or our predictable backlog which I put in as aftermarket and some short cycle work, ex-Navy is typically around of our backlog we have now probably 10% to 15% of the backlog, it’s into that category. If we include Navy, which we all characterizing as our predictable base, because of its long conversion cycle than that’s near to 60%, 65% of our backlog.

[Unidentified Analyst:]

Okay. So the $50 million to $60 million number that you’re talking about that part of it is in the backlog?

[Jim Lines:]

Yes.

[Unidentified Analyst:]

Okay, that’s good. And I think the first color answer a lot of this, but maybe I wanted to follow-up on the refining in petrochem market. Is there anything that you guys look at longer term that kind of drive to market that you’ve noticed over the year? Is that the spread WTI spread or the capacity utilization something that we could probably pay attention to as well?

[Jim Lines:]

Capacity utilization certainly comes into play. It primarily correlates to the price of crude oil from what we have seen and they attend to come in very, very tightly clustered inclement and as our refiners are focused on economy of scale, example when I started at Graham 30 years ago, will scale refinery may have been 150,000 barrels per day. So therefore to get 1.5 million more barrels a day, there was 10 refining projects. Today a world scale refinery is 400,000 barrels per day and you may have seen the press release for the Kuwait, Al-Zour Refinery is 600,000 barrels per day. So therefore an incremental 1.5 million barrels per day to be able to show refinery capacity instead of 10 opportunities there may be site. So it’s a different dynamic and they come in larger increments and then more clustered from what I would characterize as the 80s or 90s.

[Unidentified Analyst:]

Okay. That's very helpful. Thanks. Have you guys looked at what the impact would be if the oil export market has been repealed or -- would be repealed, how that would affect the refining markets?

[Jim Lines:]

We are being able to export that would be helpful to us and I think that would then drive more investment in the Brownfield sites that are already here which move more quickly, I do view that as advantageous to us. I can comment on whether or not that's highly probable.

[Unidentified Analyst:]

Right. Just wanted to see what you guys are thinking on the impact of that. And I guess the last question and I know you touched about the acquisition. So maybe on a larger scale, how do you guys think about capital allocation longer term and especially given the large cash balance that you have?

[Jim Lines:]

We think about capital allocation on the balance sheet our primary focus is to use that for growing inorganically even in the acquisition, that is our foremost focus. And then we obviously have a share buyback in place, but that's a very distant second to utilizing for acquisition. If I can take a second cut at that also, if you look at the way we think about our annual cash flow, from earnings from operations, our main focus there is to reinvest in our business and there is enough annual cash flows that we are investing in our business is more than covered by that annual cash flow and then secondarily on the annual cash flow is payments of dividends. And obviously we have enough cash flow to do both on an ongoing basis. So the annual cash flow is organic growth and dividends and the balance sheet is acquisitions and the buyback is the distant second.

[Unidentified Analyst:]

Okay. I mean there are metrics return on cash, return on capital, what are you guys looking at in terms of it?

[Jim Lines:]

Yes, I mean we are truly focused on a return on capital. If you look at our return on capital, we look at it in total capital and then we look at it excluding cash, given our large cash balance but we believe long-term is most important look at it including cash which puts the requirement to get some return on that cash. So the return on capital is very important to us. So obviously we do not have debt, so return on equity return on capital pretty much is the same.

[Operator:]

We have question from Brian Rafn, Morgan Dempsey Capital Management.

[Brian Rafn:]

Let me ask you, Jim, you had some very good color on what you talked about in the refinery area relative to kind of maintenance. They can only put it off so long. If the pent up demand there is delay and see maintenance cycle versus new capacity, could that be put off for months of is that 18 month, couple of year, how long can they forego that discretionary?

[Jim Lines:]

This would be my judgment or my observation. I think those discretionary decisions around maintenance, revamp replacement has a several quarter duration, not too much longer than that because the wrong decision there and unscheduled shutdown is very dramatic and traumatic. So I feel it is shorter in duration than 18 months as an example.

[Brian Rafn:]

Okay. All right good answer, let me ask with the investment you have guys done in the last several years getting your $200 million sales revenue long term goal, real plan is investment CapEx, employees, if we have a kind of allow here with the oil and gas the spot rates, what are you guys doing relative to SG&A headcount, are you furloughing people, extending vacations or you -- as your usage your utilization of employee talent can you find other jobs, short cycle work or whatever to do?

[Jeff Glajch:]

We’re focused on keeping the team and not taking near term action for few pending on profitability and the mandate to the sales organization is to focus on volume in less focused on the quality of the order intake and drive order intake and drive uptake utilization and give our team what to do and that's focus on our short cycle segment or after market segment and any capital sales that are out there, we are taking an urgent view that we want that work, we’re not being in prudent about our pricing policies and pricing discipline but we are chasing volume to fill up our capacity and give our team work to do, so we don't have to implement countermeasures. We do have counter measures that our employees that if our scenario analysis is different than what our judgment has been, we will take further action. However we realize the order intake, we utilize our assets both physical plant and people if you don't have to execute our countermeasures and that's hope.

[Brian Rafn:]

Okay. No its good, good appreciate it. Let me ask you Jim, on the navy side, one other things that navy is doing certainly well its surface fleet both the carriers now a new Zumwalt DDG Destroyer there is some massive increase in the electrical capacity generation of those ships, where the carriers is the most carrier or some of the smaller ships, the cruises and destroyer its lasers and electromagnetic rail guns, when you guys move from CVN-79 to Kennedy, the CVN-80 The Enterprise is the same, I think its condensers that you guys put in, do you see specification size technology change between carriers?

[Jim Lines:]

We haven't seen the use of the non-steam [indiscernible] system, affecting the size of our surface canisters. Therefore 78 appears to be the same size as 79 appears to be the same size as 80 or 81, we’re not seeing those progressive changes in carrier architecture affect our equipment.

[Brian Rafn:]

Okay. All right good and then just anything on the next generation fully ballistic missile sub rumor for the Ohio class for you guys in the sub area?

[Jim Lines:]

Nothing new to report there and bearing in mind there is little bit we can say other than on prior calls we have acknowledge that we are excusing our strategy which involves participation in the two submarine programs and we have entered both with some work in our backlog.

[Brian Rafn:]

Okay. Jeff your price on treasury purchases, you had an overall value but do you know of share purchase by chance?

[Jeff Glajch:]

Not at this point I will not put that out to know.

[Operator:]

We have a question from John Bair from Ascend Wealth Advisor. Please go ahead sir.

[John Bair:]

So I couldn’t make the meeting this morning but I’ve got a question kind of going back to this refining thing is that I understand that the capacity utilization in the U.S. is something in the order of the mid-90s and on that basis it would seem to me that there would be a lot of interest in expanding the capacity of existing facilities and so forth and I’m wondering if you have any sense that perhaps projects to do that expand or upgrade might be being push off into the winter months when traditionally gasoline demand is lower and maybe there will be some release of projects at that time?

[Jeff Glajch:]

John, we haven’t notice that what you commented on. What we have noticed you hit very important point and I confirm. We remain very, very committed and very bullish long-term about energy, about domestic refining, about global refining. What we’re seeing now is focus on maximizing what they get from the existing assets, refining assets. We need to make certain investments Brownfield investments to improve, they call it yield conversion or bottom of the barrel conversion, to make sure they are optimizing from a barrel of oil input into the refinery, they are converting as much as possibly can to valued refine product such as transportation fuels. And in variably those capacity improvements to create a refine products effect to installation columns, affect the downstream processes where our equipment is. We’re involved in those critical processes and as they’ll be bottom neck or look at how to improved yield conversion. We benefit from that greatly and that’s what we’re seeing the attention now by the refiner, because those have a quick payback the ROIs or the rate or returns are strong and those seem to pass through relatively quickly to the budgeting process. That doesn’t mean a flood gates opening, but we’re seeing enough conversion that it has includes about Brownfield domestic investments, which we categorize those capacity creep.

[John Bair:]

Maybe out California, they’ll start opening some stuff up and I’m [indiscernible] out there or happy with their high prices. On a related note, earlier this week I saw an article that indicated three pretty significant projects in Egypt. One was $1.5 billion modernization project another one was a $1.4 billion project expanding an existing refinery from a 100 to 160,000 barrels a day and then two other refining upgrade. So my question here is, I’m sure you aware those if I am. And we’re in the process one those things get let go sort of speak or commission. Do you come into the, potentially come into the picture of picking up some of that business?

[Jim Lines:]

In general terms keeping in a timeline. If the refining project is five years in duration, we typically or participating in the what’s that are in the first 6 months to 18 months and then the revenue recognition is 12 each to 15 months after we could be award. We’re often considered a long leader critical item in the refining process and we might be involved in the first way of procurements, which is it might happens earlier six months in that five year timeline. So we tend to be in the first one-third rather than the second one-third of the cycle.

[John Bair:]

Well one of the them was first the operational by late ’16 or ’17 one of the total, $1.5 billion modernization upgrade and total project was close to 3 billion. So we think hopefully you’re in there it doesn’t matter going to be close to it. But and to your comment earlier Jim about world class refining project or facility be in 400,000 barrels a day. What that mean that those larger projects, what that mean larger dollar order for Graham?

[Jeff Glajch:]

It does mean the order size would be larger, but from in a general sense due to the economy of scale going back to the example that I cited for a set of 10 smaller orders adding to a total aggregate opportunities that might be five or six, but generally because of economy of scale the total dollar spent for six will be less than one of them spent for 10.

[John Bair:]

Okay.

[Jeff Glajch:]

So the order side in isolation is larger, but a I wanted to let you know really we are thinking about it in terms of incremental capacity in the dollar potential.

[John Bair:]

Right. Okay. And one last quick question is with your capital expenditure plans on are there anything that you are seeing on the horizon beyond the $2 million net you are expecting to this year, beyond that is you kind of hoping other than just minor things or, kind of sit back and wait and see how this plays out over the next six to 12 months.

[Jim Lines:]

We will be watching the market fundamentals, it's not our intent to play defensively. We are thinking right now with the investors that we are - the last couple of years or the last six to seven years, we have invested $80 million of capital. We want to digest that grow into that make sure we optimize that. And in that context we would have CapEx mirror to depreciation related 1.5 time depreciation as more normal. However, having said that there is clear mandate by the operations team to create throughput to create productivity. And as we take on additional work, the additional -- work it could be so large CapEx that would be around machining type of equipment. Not to the latitude of $6.5 million remain more set of $2 million or $3 million, we might have a $4 million $4.5 million a year tied to a particular situation. So that's how we are thinking about it. But I just want to let you know we are taking over this invested which is a fair amount of money. We are making sure we have optimized a utilization that investment and getting the - turn from that and tasking the team to leverage that. However, we are also tasking the team to meet productivity and improve throughput and if that means capital and it has an appropriate equity based return we will fund that investment.

[Operator:]

Ladies and gentlemen at this time there are no further questions.

[Jim Lines:]

Thank you. Thank you Jerry. We appreciate everyone's time on the call and for your questions and we look forward to updating you on the next conference call. Thank you. Have a good day.

[Operator:]

This concludes today's teleconference. You may disconnect your lines this time. Thank you for your participation.