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Edited Transcript of GHM earnings conference call or presentation 31-May-18 3:00pm GMT

Q4 2018 Graham Corp Earnings Call

BATAVIA Jun 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Graham Corp earnings conference call or presentation Thursday, May 31, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James R. Lines

Graham Corporation - President, CEO & Executive Director

* Jeffrey F. Glajch

Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary

* Karen Howard

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Conference Call Participants

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* Gerard S. E. Heffernan

Walthausen & Co., LLC - Portfolio Manager

* Joseph Logan Mondillo

Sidoti & Company, LLC - Research Analyst

* William Lewis Baldwin

Baldwin Anthony Securities, Inc. - Principal and Co-founder

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Presentation

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Operator [1]

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Greetings, and welcome to Graham Corporation Fourth Quarter and Full Fiscal Year 2018 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Karen Howard, IR for Graham Corporation.

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Karen Howard, [2]

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Thank you, Sherry, and good morning, everyone. We appreciate you joining us today to discuss the results of Graham's fiscal 2018 fourth quarter and full year results. You should have a copy of the news release that was distributed across the wires this morning. We also have slides associated with the commentary that we're providing here today. If you don't have the release or the slides, you can find them on the company's website at www.graham-mfg.com.

On the call with me today are Jim Lines, our President and Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. Jim and Jeff will review the results for the quarter and fiscal year as well as our outlook. We will then open the lines for Q&A.

As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors, which could cause actual results to differ materially from what is stated on the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as with other documents filed by the company with the Securities and Exchange Commission. 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 Jim to begin. Jim?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [3]

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Thank you, Karen. Good morning, everyone. We appreciate your participation in our fourth quarter conference call. I will begin prepared remarks, referring to Slide 3. We had another strong quarter for new orders that totaled $43.5 million. This is similar to the level of orders in our third quarter. In striking contrast to the deepest period of the cyclical downturn in our refining markets, orders in the last 2 quarters totaled more than $80 million. While by comparison, the 4 quarters from the third quarter of fiscal '17 through the second quarter of fiscal '18, the orders during that time frame totaled $55 million. Worth noting is that the bookings for the last 2 quarters were approximately $50 million, removing 2 large orders that we don't believe occur every quarter.

Revenue has started to turn upward compared with the previous 2 quarters. Revenue in the quarter was $22.2 million. Income also showed corresponding improvement with $0.09 earnings per share in the quarter. Full year highlights include a record $117.9 million backlog at year-end. Full year bookings were $112.2 million that included a nice surge in orders from our refining markets. Crude oil refining market orders were 39% of total orders. Also, it was a strong level of orders for our naval end markets that were approximately 25% of total orders for the year. $77.5 million of full year revenue reflected the consequence of the $55 million in orders for the 12-month period I mentioned a moment ago.

We reported $9.8 million loss for the year, which was impacted by impairment and related charges tied to writing down Energy Steel assets, along with, and to a lesser extent, restructuring charges. On an adjusted basis, net income for the full year was $1.8 million.

Please move on to Slide 4. Sales in the fourth quarter were $22.2 million or down compared to a year earlier. However, there is sequential improvement compared to the December ending quarter that was $17.3 million and similar levels for the second quarter that was $17.2 million. Sales to our refining markets were up, while sales to our other end markets were down in the quarter versus a year earlier.

I believe 2018 represents the bottom of the downturn, and that revenues will expand in 2019. There was no escaping the impact of the dismal order level that was anemic across the third quarter of FY '17 through the second quarter of FY '18. Full year revenue was down approximately 18% relative to fiscal 2017, and totaled $77.5 million. 66% of sales were to domestic end markets.

I will let Jeff provide more financial details on the quarter and the full year. Jeff?

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Jeffrey F. Glajch, Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary [4]

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Thank you, Jim, and good morning, everyone. On to Slide 6, please. As Jim mentioned, the last 3 quarters of the fiscal year have been pretty rough, and appear to be the bottom of the downturn, and the financial results are reflective of this. Sales in the fourth quarter were $22.2 million, down from $25.6 million in last year's fourth quarter. The split of sales was 66% domestic and 34% international compared with last year's fourth quarter, which was 78% domestic and 22% international. Gross margins in the quarter were 22.8%, down from 26.3%. Adjusted EBITDA margin was 6% for Q4, down from 12% in last year.

Reported Q4 net income and EPS was $800,000 and $0.09 per share compared with $1.8 million and $0.18 per share. However, we had a favorable tax adjustment related to the new tax law. Adjusting for that resulted in earnings of $600,000 and $0.07 per share in the fourth quarter this year.

On to Slide 7 to look at the full year results. Sales declined to $77.5 million, down from $91.8 million last year. As Jim mentioned, we worked through a low bookings level, which occurred 12 to 18 months ago. Sales for the year were 67% domestic, 33% international compared with last year, which was 75% domestic and 25% international. Gross profit for the year was $17.3 million, down from $22.2 million, primarily due to lower volume as well as the impact of gross margins being 170 basis points lower at 22.4%. SG&A for the year was $15.6 million, up from $14.9 million last year. However, last year's number included a $0.75 million insurance settlement. When you adjust out for that, SG&A was flat year-over-year.

EBITDA margin was 5.4%, down from 10.5% last year, and adjusted net income was $0.18 compared with $0.56 last year. EBITDA and net income were both adjusted to exclude the impact of the write-down -- the impairment of our nuclear business and related charges, which were booked in Q3 as well as restructuring charges, offset partially by the favorability of one-time impacts from the implementation of the new tax law.

On to Slide 8, please. You see our cash position increased by $3 million in fiscal 2018 to $76.5 million or $7.83 per share. We have good cash flow from working capital, paid $3.5 million -- I'm sorry, from operating cash flow, paid $3.5 million in dividends, and spent $2.1 million in capital spending this year, well above the $300,000 level of capital spending in fiscal 2017. We expect capital spending in fiscal '19 to be between $2 million and $2.5 million.

Our acquisition pipeline continues to be strong. Identifying the correct company to purchase requires diligence and discipline. We were well into a diligence process over the past 2 quarters for a company that -- we would like their management team. However, we ultimately decided the predictability of their business and its market position were too volatile for us to meet the purchase price expectations. Therefore, we peeled off this opportunity in the fourth quarter. However, our business development team, our management team and our Board of Directors are all focused on utilizing the cash in our strong balance sheet to opportunistically identify and close on acquisitions, which have both near- and long-term benefits to our shareholders. We will continue this effort into fiscal '19.

With that, Jim will complete our presentation, and comment on our strong outlook for fiscal '19.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [5]

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Thank you, Jeff. I'll now refer to Slide 10. The uptick in orders the past 2 quarters provides a terrific foundation for fiscal 2019. We remained actively bidding a broad array of projects in all of our markets, and that continues today. Our refining customers released in the third and fourth quarters purchased orders for a number of revamp and upgrades to existing facilities. That is what drove the uptick in orders, as did orders from our nuclear -- from our naval markets.

Note that orders in the fourth quarter were up compared to a year earlier in each of the 4 key end markets. Orders from the refining market were up $10 million. And for our naval end markets, they were up measurably as well.

On to Slide 11. I am extremely pleased by our backlog, which is at a record $117.9 million. The quality of our backlog has improved due to price levels and end market mix for recent orders. You may recall in the past, we noted that refining markets provide the highest margins for new equipment revenue. Thus, the uptick in refining orders is a positive.

Also, we have worked through most of the rough orders in backlog taken at cycle bottom because that was all that was available, and we concentrated on loading our operations. Therefore, margin quality and backlog on average is improving due to the recent orders.

Lastly, our large naval backlog is entering its revenue cycle that extends for 2 to 3 years in certain cases, which, of course, loads our asset base and increases utilization levels. Importantly, 55% to 60% of the 3/31 backlog is planned or projected for shipment across fiscal 2019.

Moving on to our guidance for fiscal 2019. Initial full year guidance is for the top line to be between $90 million and $95 million. Gross margin will range between 24% and 25%, SG&A will be in the range of $18 million to $18.75 million and our effective tax rate will be between 20% and 22%. There is upside potential to top line tied to timing and success in securing various orders from our quotation pipeline. There is some downside risk as well. However, we're optimistic about driving the top line higher.

Sherry, please open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Joe Mondillo with Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [2]

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So my first question's on the SG&A, a little higher than I was anticipating. Is that all related to selling expenses, commissions based on the oil refining backlog that you have that's going to hit in '19? Or is there any maybe compensation that was abnormally low over the last year or 2? Just wondering if you could comment on that?

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Jeffrey F. Glajch, Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary [3]

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Joe, this is Jeff. All of the above. Certainly, there's an impact on low level of compensation that was in fiscal '18. There's an impact of some additional hiring and some resources we're bringing on board. For example, we hired a new vice president of sales in late February. And obviously, we'll have the full year impact of him being on board. And we're looking at adding some key resources to our team as we look forward, not just in the fiscal '19, but beyond, and look to make sure that we're able to take advantage of the opportunities that we think are in front of us in our commercial markets. So as you know, we've been pretty tight on SG&A the last couple of years, particularly fiscal '17 and '18, as we work our way through the downturn. And we're just adding what we need to add, adding some resources, obviously, the comp, as you mentioned, as well as there will be some additional commission activities around some of our refining. So it's really all of the above. And as Jim talked about our range for revenue in our guidance and has a range of SG&A, clearly, if we're, for some reason, at the lower end of that range, revenue more likely will be a little lower than SG&A. At the higher end of the range -- middle or higher end of the range is more likely to occur if we're at the upper end of the revenue range or perhaps if we're, as Jim mentioned, fortunate enough to push beyond that.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [4]

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Okay. Could you talk about the changes that have been made over the last several years? Just I'm going back to sort of the peak of sort of fiscal '15. You saw $135 million of revenue and $18.5 million of SG&A. So I'm now looking at $90 million to $95 million of revenue and pretty much at that sort of peak SG&A. Could you just talk about what changes have been made over the years that are causing sort of peak SG&A when we're not back to peak revenue yet?

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Jeffrey F. Glajch, Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary [5]

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Sure. So part of it, again, is adding some resources to look toward the future. Clearly, you've got some inflationary issues in there, too, that you can't really offset. One of the things -- one of the areas that we've not been impacted by have been rising health care costs. We've been able to keep those under control. So it's really, again, adding to our team, looking toward the future and making sure that we've got a team not just for fiscal '19, but for growth beyond that. If we believe that fiscal '19 is a step-up and nothing beyond that, we might temper -- we would temper some of our additions. But in this case, we believe that there's good chance that there's growth opportunities beyond '19. Though again, we don't have those locked down yet.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [6]

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Okay. And then I wanted to ask about sort of the revenue guidance. It looks like you're about 75% -- almost 75% of your revenue guidance is already in your 12-month backlog. So you have a very healthy 12-month backlog going into the year. Just wondering if you could talk about the short-cycle part of the business, if you could quantify how much that made up in fiscal '18 and how that's trending and if the guide on revenue could be a little light, just given what you do have in 12-month -- in your 12-month backlog.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [7]

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Joe, this is Jim. Let me talk about this in a little detail, really coming out of respect of what's tugging at us as management that caused us to put the guidance where we put it. We see some risk in our naval backlog execution not tied to us, but tied to our ability to get it into the revenue cycle, as it correlates to designs being frozen and releases from our customer to proceed with fabrication. That's a fairly sizable risk. We feel very confident that we're going to drive through that and get that revenue converted. However, we do see some risk there. And it's fairly measurable. And as a result, we've come in with a guidance that, as you've suggested, the backlog would infer a 75% setup, which is at the higher end of what our historical range would be. We typically think in terms of backlog entering the year represents 60-ish percent of revenue for the full year, although it has been at cycle bottoms as low as 70%. So we're just a little bit cautious on some of the first-generation design work for the Navy that's in our backlog. And can we flow it into the revenue cycle as we've modeled? We've been a little cautious with respect to that. On our short-cycle work, compared to the 2015 time frame that you cited around SG&A, we're off about 20% from that level, but we're up about 10% from when it were bottomed. So we are seeing some improvement there, but it's still down. I am not seeing at this point in our quotation activity or selling activity where it's implying to us that that's returning back towards the 2015 level in fiscal 2019. Around the SG&A adds, as Jeff said, we're taking a more bullish look at multiyear expansion cycle, which we feel rather confident about, but we're going to meter in the additional hires and the expansion of our workforce according to how we see the pipeline translate into orders. We've put forward a more bullish outlook for SG&A spend. However, as Jeff had indicated in his remarks, we're going to be mindful of how quickly we add those expenses. But this gives you the range on the upper end that supports our bullish multiyear outlook. If that's not playing out as we envision, we'll adjust accordingly. So really around the guidance, which is the biggest question that you had, we have some concern about naval backlog conversion not tied to our ability to execute it, but tied to our ability to get it to the revenue cycle after we are released by the shipyards, and the designs are frozen. We have no control over that. And as a consequence, we've been more measured. And also, with that in mind, we still need probably about $10 million to $12 million of large project work that's not in our backlog to fill out the year. The pipeline seems fine, but we've been chasing these bids for several quarters. Our customers keep pushing some of these to the right. We have some very strong optimism. We'll be in a better position after this quarter closes -- the first quarter, sorry, after the first quarter closes to have a clearer view of where the naval work is and what we've been able to close in the quarter to begin to fill out the rest of our year. In my closing prepared remarks, I've mentioned that we are optimistic about driving the top line higher. I just wanted to share with you at what's tugging at us, and what caused us to put the guidance where we put it initially.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [8]

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Okay, that's helpful. So just to clarify on that, though, the $67 million, it comes out to be, if you do the math, roughly of 12-month backlog. Is that including some of this questionable Navy backlog? So some of that could be pushed out beyond 12 months?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [9]

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Right. If we took the midpoint of the 55% to 60%, it basically represents $68 million of the $118 million that's planned for fiscal '19. Of that, somewhere between 5% and 10% of that number is that risk, as I cited, related to our ability to get naval work into the revenue cycle. And we have to bear that in mind. If it goes well, we're going to plow right through the guidance range. If it doesn't flow as we expect, we have to make it up with new orders. And the timing of those new orders could affect us. But that's a quarter-to-quarter effect, not an indication of this -- the cycle recovering.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [10]

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Okay. That's good color, Jim. In terms of the short-cycle work, what does that generally, on an absolute revenue basis, quantify to annually?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [11]

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It's typically -- you maybe have heard us say over the years, we're 1/3 short cycle, 2/3 project work. In terms of absolute dollars, we tend to think in the range of $25 million to $30 million for that short-cycle work on an annual basis.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [12]

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Okay. And that's -- you said that's growing roughly -- it's off 10% percent from the bottom. So it's growing maybe around 10% annually right now?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [13]

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Well, let me just -- I probably wasn't clear. We're off about 20% from the 2015 peak. We're up 10% from the trough. And '19 was comparable -- I'm sorry, '18 was comparable to '17.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [14]

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Okay, okay. That's good color. And then the 12-month backlog or the near-term backlog, how does the gross margin of that backlog compare to the 24% to 25% that you guided to for the year? Is it pretty much -- pretty comparable?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [15]

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It's -- without getting too granular, but more on a qualitative basis, what we have stated in my prepared remarks, what's coming into backlog is superior to what was coming out of backlog. And that's averaging up our overall margin in backlog, which is great, and that's reflective of a little bit of a move upward in our overall gross margin. If we pushed through the top line guidance, and we load our asset base a little higher, we'll see that gross margin inch up.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [16]

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Are any of these big -- like 1 or 2 of those big oil refining projects, are any of those super-high gross margin? So if you don't see sort of another one of those orders, fiscal '20 potentially could see a tough comp? Just wondering if there's anything really boosting the gross margins this year. Just want to be cognizant of that.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [17]

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No. There's nothing as an outlier that shot up -- well, not shot up, represents why the gross margin's where it is. The large project we spent some time talking about in the third quarter has a very high material content, which has an effect on some of our margin profile. But I'm not judging that '19 is an outlier on the upside relative to where to expect '20 to go toward.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [18]

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Okay. And then just in terms of the Navy backlog over the next couple of years, say, this backlog that's potentially at risk does end up falling into fiscal '19, just wondering sort of expectations for fiscal 2020. I know some of the -- that big order in terms of the summary and backlog back in 2015, I think, it hit, it's finally sort of coming -- it's starting to be shipped essentially. And I think fiscal '20 was supposed to be a much stronger year than even fiscal '19. So I'm just wondering if sort of everything hits in terms of timing right now, what does '20 look like relative to '19? And I think '19, you sort of mentioned on the last call, was going to be potentially flat to up 40% or so. If you could give us a little color around how to think about that part of the revenue for the next couple of years.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [19]

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Sure, Joe. The comment that I made around '19 and the risk of naval backlog conversion, I would suggest that's a quarter to a couple quarter risk. The backlog is not at risk in a broad sense. It's just a timing risk. From our modeling of how we see the backlog for the naval strategy rolling out, we're into the peak revenue cycle in '19, '20 and '21. And we're expecting it to move beyond the $20-ish million level as we're in '20 and '21. It's at the revenue cycle now. And the citing -- what I cited about risk was a 1- or 2-quarter potential delay in getting that work into the revenue cycle.

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Jeffrey F. Glajch, Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary [20]

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Joe, this is Jeff. Just to add one additional point here. As Jim just mentioned, we expect to be in the 20 -- north of $20 million in fiscals '20 and '21. That would be growth off of our current expectation of fiscal '19. So we would expect, whether the revenue hits as we're expecting it will or if there's a delay of a quarter or 2, as Jim just mentioned, in fiscal '19, in either case, we would expect fiscal '20 to have revenue beyond what fiscal '19 is for the Navy.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [21]

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Okay. And fiscal '19, you're tracking at about what?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [22]

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We haven't explicitly said that. But we would be, at this point, somewhere in the mid to upper teens, depending on what happens with the -- probably mid-teens is probably a better way to put it, depending on what happens with the couple of orders that have the potential of being delayed a little.

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Operator [23]

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(Operator Instructions) Our next question is from Bill Baldwin with Baldwin Anthony Securities.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [24]

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A couple of questions here. Jim, it's been a while, but I know at one time, you fellows were talking about peak cycle objectives with the revenues, I think, targeting an area of $200 million. Is that something that you're still referring to? Or is that still a benchmark that you're looking at as far as the next peak cycle? Or has that changed from the last time you talked about it?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [25]

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That certainly is an objective and a goal, and to achieve that will require putting our capital to work through M&A or other forms of business combinations. Organically, in a classic sense, we won't get there organically without an M&A strategy. But we still have that as our -- where we want to go and where we think we can go. And we have the dry powder to get there.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [26]

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And the -- when you kind of model that out, where do you think your gross margins could normalize at in a good environment for you? As you look out over the next several years, the cycle is moving up. You're obviously getting a little bit better gross margins in your backlog. I think you indicated you made some capital spending improvements -- I mean, capital spending to improve productivity and so forth. Is there a level that we should be using, Jim, looking out for gross margins that would be in the 25% to 30% area rather than a 23% to 25% area?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [27]

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We still think of our gross margins sort of as a mid-cycle margin in the upper 20s, lower 30s. Now what needs to be borne in mind is the weighting of the naval strategy as we grow, and we are intent on growing that segment of our business. I make that remark because the naval program has a higher gross -- I'm sorry, lower gross margin, but is accretive or blends in fine at the op margin line. So we're less focused on gross margin for the naval strategy, but it blends in at the op margin line. So I just wanted to be -- make sure everyone's mindful of the naval program because its material intensity does carry a different weighting of gross margin than our ordinary core work.

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Jeffrey F. Glajch, Graham Corporation - VP - Finance & Administration, CFO and Corporate Secretary [28]

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And Bill, just on -- this is Jeff. Just on top of that, at those gross margin levels that Jim mentioned, the upper 20s to low 30s, the way we think about modeling the business at that point in time would be looking at our targeted EBITDA level. We've targeted an EBITDA level of around 17% as to a full cycle. We think we could be in that upper teens, certainly, from an EBITDA margin standpoint at those margin levels, as Jim mentioned.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [29]

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At mid-cycle, so to speak?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [30]

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Right.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [31]

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Right. Okay. Secondly, talking about the Navy, can you kind of give us a little bit of a picture looking out over the next year or 2 or so, Jim, as to what the horizon looks like as far as potential new Navy orders in terms of where they might be coming from, the types of projects and kind of the size of the orders potentially?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [32]

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There's a high level of enthusiasm in the naval community, the shipyards, the supply chain, the government as well because of an ambitious program to expand the fleet of the naval vessels. So we are expecting, over a longer period of time, to see that create stronger demand for us. To complement that further, though, we're not satisfied with the number of components that we're providing the U.S. Navy. And our team is tasked with, how do we expand our supply? How do we do more work for the U.S. Navy and, should we be successful with that, we see our naval strategy expanding even further? So it's -- we have a strong surge of demand that's coming from an expanded build program, and then we intend to complement that by doing more components and supplying additional equipment to the naval programs that we're not currently providing. Time frame to do that, I'm not going to cite that, other than we're pretty pleased with where that strategy's going and our tactics to continue to grow our naval revenue, and also a receptiveness from the Navy and their shipyards to what else can Graham do in support of the naval programs.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [33]

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No, that's good news. That's super. You guys are doing a good job there.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [34]

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Our team's doing a great job.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [35]

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Absolutely. On the petrochemical and chemical front, are you -- I assume that these are some of the programs or projects that are getting pushed to the right. But do you see traction beginning to start to kick in there, you think, as fiscal 2019 proceeds?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [36]

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Bill, we think we're in the early stages of the second pet-chem wave in North America. We do have a number of bids that we've made. Some are pretty aged for what we're characterizing as the second wave. We've been hunting these projects for a good while. We think a handful of those close across fiscal '19 for North American pet-chem ethylene capacity, ethylene revamp, downstream derivative plants. So we do have a fairly good size of -- dollar size of opportunities that are in front of us over the next few quarters that we are focused on. A lot of resources have gone in to support that selling process, and we expect to be successful in several of those projects. So that's very encouraging because it complements and lays on top of what we think is improving refining fundamentals on top of where our naval backlog is in terms of its revenue cycle. So we are believing we're at an inflection point. And revenue will begin to expand off of -- it's not hard to do off of a trough, but we're bouncing off the bottom, and heading into a more expansionary phase, which is -- go ahead.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [37]

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And last night -- I'm sorry, Jim. Go ahead.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [38]

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I was just going to, again, circle back to, which is why we're bullish on adding to SG&A because we see a multiyear view here.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [39]

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Yes, makes a lot of sense, absolutely. And lastly, can you kind of give us a little color on what you're seeing internationally as far as refinery, pet-chem so forth and the kind of the sectors geographically at Europe, Middle East or in Latin America, Canada?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [40]

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Sure. We are seeing -- which was good, finally. Some new capacity projects come into our bid pipeline for the Middle East, for China and the refining space, which we hadn't seen in a couple of years. And some of these are fairly large projects, certainly the ones in the Middle East. China is more typical of their project size. The timing of these projects are still not yet clear, but what's important is they've entered our bid pipeline. They seem to have strong fundamentals. They have a national interest, in some cases, for why these refining investments are being made. And so we feel very good about that. And there's a number of those just not 1 or 2 in the Middle East, and there are several coming up in China. With respect to South America, boy, if I think of today versus 2013 and '14, the wave of work that was building up in 2013 and '14 was just incredible for Latin America. We're not as positive about the timing of those projects today. We still think that sector is going to be contracted for a couple more years. In Canada, we don't see much in the oil sands area for new capacity. Although the oil sands for us, once we have the installation, it's a great driver of aftermarket and revamp in metallurgical upgrades. So we do see that from our installed base. There was just a report that came out today regarding Canada pet-chem, a massive wave of new investment in Canadian pet-chem over the next decade. We have some of that work in our pipeline, particularly for Alberta new ethylene projects and expansionary investments there. And that's sort of our home turf. We feel very good about those opportunities and our ability to be successful there. And again, that report just came out today, which was a very bullish outlook on Canadian pet-chem investment tied to low-cost natural gas or monetizing their natural resources differently. So that's very positive.

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William Lewis Baldwin, Baldwin Anthony Securities, Inc. - Principal and Co-founder [41]

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Very good. Well, congratulations to you and your team, Jim, for a job well done during these tight periods. And now you're in a position to capitalize on all of that hard work.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [42]

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Thank you very much, Bill. We appreciate the compliments.

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Operator [43]

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Our next question is from Gerry Heffernan with Walthausen & Co.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [44]

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In regards to the -- I guess, we're using the term, base business, or the business that comes in through -- the revenues that come in through a year that are not really part of the backlog at the end of the year, and they're completed before they would be in backlog at the end of the next year. And that has stayed relatively steady, at least, it's 10% above the trough, but about 20% below the peak. So understanding that, I was curious to know if that type of business falls into any one particular segment of the 4 segments that you identify in the press release.

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James R. Lines, Graham Corporation - President, CEO & Executive Director [45]

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Sure. It tends to come from our installed chem -- pet-chem base, a fair percentage of that sector, and also our refining sector. Because it's a good element, a large percentage of that short-cycle work in and out in a quarter, in and out in a year -- I'm sorry, that number is cited for Joe. That also is our parts and replacements. And so that's from our pet-chem market, and that's from our refining market. More than half of it is from those 2 sectors.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [46]

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Okay. And as you just said there, a lot of it has to do with parts and replacement, I presume normal wear-and-tear stuff that you have a pretty steady order flow on that?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [47]

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That's right. Yes, it does have a little bit of variability, but nothing like our project work. And we cited for Joe that we see that level of business typically between $25 million and $30 million on a per annum basis, and the parts business is somewhere around half of that.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [48]

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Okay. I don't think we spoke about this specifically yet today. If they did, forgive me, for I just blanked out on it. The power segment, obviously, a huge challenge in the last year. We have -- obviously see the very large increase in backlog. Can you talk to the power segment, how you see things there? Or was there anything dramatic in that step-up in backlog, which pretty much seems to me we've talked to that backlog as being refining and pet-chem?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [49]

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The power sector, to use your verbiage, is challenged. And we have seen some improvement in our power -- our nuclear-powered backlog. We haven't seen improvement in our renewables backlog, which is geothermal, waste to energy, biomass to energy. That can vary tied to legislative policy in North America, but we have seen our nuclear backlog come up off of its bottom over the last several quarters. And renewables, I would say, is contracted at this point in time. And...

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [50]

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Okay. And for you, I would think the renewables would get into the biodiesel and things like that. And the biodiesel tax credit stuff still seems to be mired in D.C. I'm guessing that has some effect on the way that market works for you?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [51]

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Certainly, our tax policy, legislative policy can create strong periods of demand. And then also when policy changes, the demand goes away, which is what we've seen over the last number of years. Biodiesel or green diesel, we tend to put those sales into our chemical industry sales, if you will. When we talk about power volts, it's more of electrical generation power. Alternative energy, in that context, is for power generation.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [52]

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Very good. And one final thing, Jim. You mentioned the kind of the early stages of a second wave pet-chem cycle. And mind you, I will not hold you to the specifics of your answer here. How long would you consider a wave to be? What's the time cycle of a wave?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [53]

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What we're reading is the second wave. And how we are interpreting what we're reading and what we're hearing from the marketplace will be more protracted than the first wave, but it won't be the rush of opportunity that we saw 2013 through 2014, which really just that wave spanned about 2.5 to 3 years. We think this wave but will be more elongated and go from 2018 through 2022.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [54]

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I would imagine that a wave of an elongated nature would enable you to handle order flow in a more efficient manner. Is that correct?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [55]

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It certainly is helpful to Alan and his team, who runs the operations, when it doesn't come in a massive surge. The drawback on our sales side is we like the pricing power, which comes with the surge. So it's the yin and the yang of that. Another element that maybe we've talked about previously on our calls, with the second wave for North America, it has a higher tendency to have international project sponsors. And they have an appetite for a different supply chain and a different focus on cost versus life cycle cost -- first, cost versus life cycle cost. So we're seeing a different margin potential in the second wave than we saw in the first wave.

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Gerard S. E. Heffernan, Walthausen & Co., LLC - Portfolio Manager [56]

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Okay. And I greatly appreciate the time you're affording me here. If I can ask one last question in regards to input costs. Can you just give us your view of the effects of metal prices giving our on-again tariff issues as well as labor pricing and your ability to get labor, your status of your staffing and any concerns you may have or what you're seeing as far as compensation wage pressure?

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James R. Lines, Graham Corporation - President, CEO & Executive Director [57]

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Sure. On the input cost side, we have seen metal costs rise. We all looked at each other with awe 15 minutes after the tweet went out around the tariffs. Our North American supply chain raised their prices 15% to 20% that day. And it is still sticking. However, we've been able to drive that cost increase into our prices and into the market. Where it does come into play is if we're in the international markets, where our competition might not have -- will not have to deal with a tariff-related cost basis. We do. And therefore, we could be entering an international sales opportunity with a different cost basis than our competition does. North America, we're protected because of the tariff. But remarkably, like I've cited, in the snap of a finger, certain of our input costs went up 15% to 20% in a morning. But we were in front of that. We were watching that. Our supply chain folks did a great job of building up some inventory with a lower cost basis, and then also making sure that our estimating team understood the costs of what would be going into inventory or for input costs for future projects. And our goal is to push that cost right into our customer's wallet, so we don't have to deal with that. And we've been able to do that. On the labor side, we have a -- again, this is illustrative of our longer-term bullish outlook. We're adding to our direct labor force. We have a pretty good ramp-up strategy for that. I am not sensing that there's an impediment of our -- in our ability to hire that talent, nor has there been wage pressure, that our wages are inappropriate for what the market's asking for or what the new hires are asking for. So I do expect we'll be able to build out our direct labor workforce, and align that with our capacity needs as we grow.

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Operator [58]

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We now have a follow-up question from Joe Mondillo with Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [59]

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Just a couple of things. I was wondering if you could update us on -- I think it was late last year, in the second half of last year calendar year, you were talking about how you're working with consultants regarding ways to utilize Graham's capabilities to try to find maybe potential new revenue streams. I was wondering what the outcome of that was, if you found anything or...

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James R. Lines, Graham Corporation - President, CEO & Executive Director [60]

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The report out there, it provided us a perspective on a handful of markets that we're not in currently that would value our ops model, our customer-facing model. One of the highlights that came away is that there likely is more that we can do for the U.S. Navy and related adjacencies to the U.S. Navy. So we're certainly focusing our effort there. In some of the other areas, as management, we're not quite as certain we belong in those areas. Although they have strong growth rates, we're not certain that the pricing is right and the product characteristics match our brand and how we can create value. But it was a very good exercise, a very good process. It came away with a few nuggets for us to think about, and came away with some conclusions that we don't belong in certain markets.

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Operator [61]

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

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James R. Lines, Graham Corporation - President, CEO & Executive Director [62]

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Thank you, Sherry, and thank you, everyone, for your time this morning and for your very detailed questions, as you asked Jeff and I to clarify our outlook and what's behind some of the numbers. Just as a summary, we're exceptionally excited about where our backlog is. We're very pleased with the quality of our bid pipeline, and our view over the next couple years is markedly different from where it was 12 to 18 months ago. And we'll update you on our guidance and our outlook as we move into the next quarter and we get this quarter behind us, that helps us set the foundation for where the year can really end up. And we'll let update you in August. Thank you very much for your time. You have a good day.

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Operator [63]

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Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.