Circor International Inc (CIR) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Circor International's fourth-quarter earnings conference call. Today's call is being recorded. At this time all participants have been placed in a listen-only mode. The floor will be open to questions following the presentation. I will now turn the call over to your host, Mr. Curran McCann (ph) from the Company's investor relations firm. Mr. McCann, please go ahead, sir.

Thank you very much. Good morning, everyone, and welcome to our fourth-quarter earnings call. Our objectives today are to review the Company's recent performance and provide an updated outlook on the start to 2005, with David Bloss, the Chairman and CEO of Circor, and Ken Smith, the Company's CFO. After their comments we will then go to Q&A.

Before we start, two administrative things. First, the slides we will be referring to today are available on Circor's website at www.Circor.com under the link Quarterly Earnings from the investor relations page. Second, today's discussion contains forward-looking statements that identify our future expectations. These expectations are subject to known and unknown risks, uncertainties, and other factors. For a full discussion of these factors, we advise you to read about them in the Company's 2003 Form 10-K, which also can be viewed on the Company's website. Of course, actual results could differ materially from those anticipated or implied from today's remarks.

Now, let me turn the call over to Circor's Chairman, David Bloss.

Thank you, Curran. Good morning, everyone. We have got quite a few things to cover with you regarding our fourth-quarter results today. First I'll provide you an operational update; and then Ken Smith, our CFO, will take you through the financials. Then I'll brief you on our recent acquisition of Loud Engineering, and also the addition of Bill Higgins, our new Chief Operating Officer, who is here with us today.

From an operations standpoint we made progress during the quarter. Our consolidated revenues, incoming orders, backlogs are all up sequentially and compared to the fourth quarter of last year. We continued to implement price increases to our customers, to respond to the higher metal costs. Right now we're about 1 to 2 percentage points behind in recovering these cost increases, and not all of our competitors have instituted similar increases, but a majority of them have.

We're expecting some additional raw material cost increases in '05, but these should be more modest compared to last year, when stainless steel prices more than doubled. We will need to rely on internal cost reduction and possibly additional selective price increases to offset any additional raw material price increases as they occur.

The Tomco consolidation and relocation into Spartanburg, South Carolina, facility and the SSI move into our Walden, New York, plant gave us some problems last year and caused some temporary higher manufacturing costs; these are now under control. Our acquisitions in late 2003 and early 2004 of the DQS, TSI Sampling systems, and of the Mallard hydroseal safety control valves are all performing at or better than anticipated.

Market conditions have improved in some of our businesses during the fourth quarter. The HVAC and processed steel related valve orders were stronger both in the U.S. and in Europe. Our aerospace orders were less than last year's Q4 because of the higher level of orders for switches for military armament applications that we received in late 2003; those were not repeated this year because they were fully supplied during the year.

The big headline for us in the fourth quarter as far as markets are concerned was the resurgence of orders for oil and gas projects internationally. While domestic activity in chemical processing and the related MRO activity in North America improved, our Pibiviesse subsidiary in Italy experienced one of its best quarters in its history. Quotation activity and announced project levels continued to be strong, and we visualize favorable market conditions well into 2006 for Pibiviesse.

I'm sure all of you read or most of you read recently in the Wall Street Journal about the gas to liquids activity going in on in the Persian Gulf and in Qatar. Pibiviesse is one of the selected vendors of four of the severe-service gathering systems for those high-pressure systems. They can go up to 150 bar, 7,000 PSI; and that requires very unique applications and engineering capabilities which Pibiviesse has. As a result we're focusing our capacity on the high-pressure severe-service environments, where the engineering content and competitor factors allow us to achieve higher margins. So from an operations standpoint we feel that we're in much better shape now than this time last year.

Moving on, during the quarter we recorded non-cash charges to earnings of approximately 7.1 million pretax, primarily related to the write-off of slow-moving inventory. We disclosed that earlier in the quarter. As we continue to procure inventory from lower-cost suppliers in Asia and East Europe, and consolidate our facilities in the U.S. and Europe, and challenge ourselves to reduce inventories in warehouses, we have to take a fresh look at our past practices and really cost-justify the amount of inventory we are carrying, leading us to a decision to change our practices and dispose of slow-moving inventories.

This will provide us the benefit of eliminating the rent, the insurance, and then the warehousing cost and free up space for manufacturing. As an incidental benefit it also allows us to receive a tax deduction that reduces our income tax payments in 2005 upon the disposal of that inventory. Our business practices are being revised to prevent a recurrence of these types of overstocking situations in the future.

That's it for my initial comments. Now I will turn it over to Ken Smith.

Thanks, David. I will on now start with slide number 3. As David pointed out, we had a very solid quarter, double-digit orders and revenue growth versus Q4 of 2003. Although I will speak in more detail about each segment, we had good operating earnings leverage in the segments from the incremental revenues. Price increases to customers and our foreign sourcing of lower-cost inventory have helped both segments.

Corporate expenses, however, rose in fourth quarter (technical difficulty) external fees for compliance were $3 million. Earnings per share includes the cost of the non-cash inventory charge Dave spoke of, and our free cash flow regained traction and had a good quarter, at over 1 times net income.

Now I'll turn to slide number 4. The Q4 segment operating income increase was 1.8 million on incremental revenue of 10 million. The non-cash charge of 7.1 million is notable, as David mentioned, for two reasons. First the avoidance of continued carrying costs; and second, the free cash flow that we expect to realize upon disposal and reduced income tax payments.

Special charges in the fourth quarter of 2003 are related to costs for our four facility consolidations, all of which were completed in the first half of 2004. The 2004 special charges were primarily for warehouse consolidations.

Corporate expenses, the period to period differences showed on slide 4 are due to our Sarbanes-Oxley 404 compliance. We had outside auditors perform (technical difficulty) testing of financial controls; and at Circor we're not testing at one location but nine of our largest businesses in a major way, each of which has different ERP systems and financial controls. I will personally be focused on it in 2005, on reducing that cost.

Net interest expense was lower due to our annual principal payments of $15 million each October. Income taxes in Q4 2003, that included an unusual $1.2 million benefit primarily for recognizing tax research credits for prior years.

Turning to slide number 5, cash flow from operations and free cash flow were substantially less than last year, but reasonable at well over 1 times net income. In the caption Other Working Capital, the 30.9 million source in 2003 was outstanding; we included an inventory reduction of nearly $20 million. In 2004 for inventories we actually used $8 million as we increased safety stocks to respond to higher demand; and inventories also rose due to the increased steel costs.

Accounts Receivable was a source in 2004, aided by effective collections as evidenced by DSO of 60 days at the end of 2004, an improvement of 2 days compared to the end of '03; and 2 days lower than September end 2004. However, back to inventory, we are certainly not satisfied with our inventory turns. With Bill Higgins's leadership implementing lean methodologies, we anticipate that 2005 will be the first of many years of steady improvement in turning our inventories faster.

Now to slide number 6, the balance sheet. Our balance sheet continues to be very healthy, with an improved net cash position. Our first priority for investing our excess cash is to fund strategic acquisitions. To that point, in January 2005 we acquired an aerospace subsystems manufacturer in California, Loud Engineering, for 36 million in cash. We are very pleased with the opportunities and capabilities Loud will provide us to expand our service to the aerospace market, and Dave will describe this acquisition in more detail.

Now slide number 7, our instrumentation and thermal fluid segment results. Regarding orders, good news. The two acquisitions of analytical sampling system products in Q4 2003 in the Netherlands and Texas provided incremental orders, as well as the commercial HVAC and general industrial markets were up organically, as was the power generation market for us in Europe.

One of our end markets that continued to be soft this year was Maritime, which includes an important end use customer for us, the U.S. Navy. U.S. Department of Defense has been shifting available monies to the Iraq effort from other DoD groups such as the U.S. Navy, which in turn has decreased orders to our Leslie business unit.

Revenues were net of good news listed on the slide; also customer price increases implemented on new orders received after May 1 of 2004 had a full impact on the second half of 2004 revenues. Regarding operating income and margin, the net change for the quarter reflects good margin expansion on incremental revenue, including the full effect of price increases to customers offset higher costs in steel and utility surcharges. Yet as David mentioned, we have still not fully closed the gap from those costs from raw materials.

Now to slide number 8, our Energy Products segment. We have retitled this segment from its former name, the Petrochemical Products segment, and the only change is the name. There are no businesses or historical numbers changing. We believe this new title better reflects the breadth of end markets served by this group. The order increases in the Energy Products segment benefited nicely from our acquisition in April 2004 of Mallard Controls Company and the international market for large oil and gas projects. We expect that the large CapEx projects, particularly in the Middle East but also worldwide, that are expanding LNG capabilities will sustain healthy order rates for us going forward.

The increase in revenues was the net result of several factors noted on the slide. As for operating income and margin, we had targeted this segment to sustain a minimum of 10 percent operating margins. So it was good to see it achieve such in this fourth-quarter 2004, compared to the fourth quarter of 2003, where the margin was fantastic, primarily due to project pricing. But it was also prior to the run-up of metals costs in 2004.

Now let's turn to slide number 9. On this slide we point out our assumptions for key end markets that we serve and factors we expect will influence the degree of our near-term success. As you can see, most of the end markets we serve are expected to be positive in 2005, with order growth rates in mid single digits.

Now to slide number 10, translating the market assumptions from slide 9 into our business assumptions for the 2005 year. We factored in the following points. The Instrumentation and Thermal Fluid segment is expected to have steady revenues, with strength from aerospace, chemical, and commercial HVAC customers and the expected contribution from Loud Engineering beginning this quarter. Operating margins in this segment are expected to improve on higher volume and price utilization.

In our Energy Products segment, that strong backlog is weighted (ph) to deliveries in the first half of 2005 currently, particularly our second quarter. However, the competition's excess capacity worldwide will keep continued pressure on pricing and margins.

In corporate expenses, I will be working hard to decrease our Sarbanes-Oxley Section 404 compliance cost in 2005. But also there is a new accounting rule taking effect for calendar year companies beginning in July 2005, requiring the expensing of stock options, which for us we expect to be a $1.1 million expense in the second half of 2005.

Regarding cash, we have certain large cast outlays planned for 2005. We did announce in December 2004 an agreement to buy out a 40 percent minority owner in our Chinese joint venture; that will use nearly $7 million but result in Circor owning 100 percent of that Chinese operation.

Our 2005 CapEx is budgeted at $17 million; and that is 8 million for new products, cost savings, and equipment upgrades; plus another $9 million for two new facilities, one in Europe to co-locate consolidation of smaller facilities in Europe, and a new plant in China to replace the current smaller facility being operated by the JV.

As far as 2005 sources of cash we do expect to receive Chinese government relocation benefits of nearly $3 million to aid in the relocation of our current facility to a new and larger site in Suzhou.

As I mentioned earlier, although our tax rate is expected to be 35 percent, our income tax cash payments in 2005 are expected to decrease due to the planned disposal of our majority of slow-moving inventory that we took a charge for in the fourth quarter. At a 35 percent tax rate, that should approximate a $2 million lower series of tax payments.

To summarize our outlook, many end markets we serve are healthy. We have a great start to 2005 with a record backlog and the Loud Engineering acquisition, plus we have a much narrowed operating margin gap for higher metal costs because we have instituted customer pricing increases, and there will be further benefits expected to follow some of the 2005 facility consolidations that we are planning. On corporate expenses I will be certainly focused on reducing the 2005 cost to comply with Sarbanes-Oxley. Now I'll turn the call back to David.

Thanks, Ken. As Ken and I stated we believe that we are starting '05 in a pretty good shape. Some problems, consolidations, are now under control and our backlog is strong. The markets seem to be stable, some of them fairly strong; and price increases have been implemented to help offset the higher material costs.

We started our journey towards a lean culture, and we believe it will take at least 3 years to achieve that first benchmark of operational improvements. As a demonstration of our commitment we recently announced the addition of Bill Higgins are our Executive Vice President and COO of the Corporation. Bill has a strong background in manufacturing management and in lean Six Sigma environments within the Honeywell Allied Signal organization. We are very pleased to have him on board, and he's getting acquainted with the various businesses of Circor; and I expect him to be an active participant in these quarterly conference calls in the near future.

Before we open the lines for questions I would like to briefly review -- there should be 2 additional slides if our technology works correctly that you can see and view -- regarding our recent Loud acquisition. We disclosed it last month. Loud Engineering is a manufacturer of landing gear systems, nose wheel steering assemblies, and related components for the military aircraft including the Chinook 46, 47 helicopters and the F-16 aircraft.

Loud presents us with the opportunity to expand our aerospace offering. It gives us a greater critical mass and platforms to work from. And because of its location it allows us to consolidate and leverage the support services with little risk of losing engineering and other critical personnel and resources.

At a purchase price of a little over 2 times sales, it initially looks pricey; but given its attractive margins and the purchase price equated to a trailing EBITDA multiple of 6.8 times, excluding any synergies that we bring to the table. In addition our leverage and growth opportunity should make this a real winner for us, and we expect to add almost 8 to 9 cents to our EPS next year excluding any consolidation costs. That is excluding any consolidation costs as we marry these two businesses together.

That's it for our prepared remarks. We will now open the lines for any questions that you may have.

(OPERATOR INSTRUCTIONS) Michael Schneider with Robert W. Baird.

Couple of questions. I guess I am trying to understand what the base business is doing and adjusting it for the price increases that have gone through. Maybe first on the Instrumentation segment. It looks like orders were up 10 percent; but if you scrub it of acquisitions and FX, they were down. They were basically flat to maybe down 1 percent in the quarter. You went through the end markets; but I guess my gut tells me that if you're flat including price increases, that unit orders are actually down, call it mid single digits.

Is my logic correct? I guess why would these markets despite the strength you noted be down year-over-year?

We did have a note; in some of the defense aerospace markets we did have a very strong fourth quarter 2003, which was a sizable piece of the strength for aerospace in this segment in the fourth quarter of '03. So that's a notable reconciling item to part answer your question.

But for the most part the other businesses that comprise this segment had -- they were close to being I'd say positive. In particular what I can recall is the military aerospace a year ago was quite strong, and it's not in the fourth quarter this year.

How much was the military business off, year-over-year, in rough numbers?

I don't know. It could be 3 or $4 million.

And in percentage terms?

I haven't (ph) done this segment's revenues, which -- so it's 3 out of 50 million; so about 6, 7 percent.

Okay. I meant just the Navy business year on year, what the percentage decline would be.

Navy business to this particular segment? It's probably close to 5 percent.

Okay, 5 percent of the segment's revenue.

Maybe around 4 percent.

So in other words, year-over-year was off hard.

Yes.

It was the Navy business.

That's right. Navy, and you also refer to my comments, Mike, about the switch orders that we received fourth-quarter last year for armaments; and that was a big number for us last year. Obviously we were just going into the conflicts at that time, and they were using armaments quite heavily, and that's fallen off. We've replenished their needs for those at this point in time, so we did get a repeat of that big quarter either. So you have got a lot of mix of things going on in that segment.

Maybe you can, helpfully, you can understand kind of my I guess intuitive disconnect here. Is that we've got orders basically flat to down finishing the year-to-year; yet you are projecting 6 percent growth for the segment overall even before Loud. Maybe you can just give us some color as to what's going on under the covers that gives you so much optimism for '05, despite what the orders look like in the segment for the fourth quarter.

Yes, I'd be happy to. Two things. One is basic field knowledge of capital spending from some of our major customers. You know, this group focuses on the HVAC segment, commercial construction; and then it goes into chemical processing with the instrumentation side of the business as well as aerospace. So all of those pieces tied together.

It's hard to follow (ph) through all of those, but in total the big winners that we see coming forward is the chemical processing side. BASF, Dow Chemical, our major customers in that arena, and we're locked in with them on their major projects going forward next year. We see the general industry improving. The aerospace is picking up a little bit for us; we are not counting on big growth there, but some commercial spending is going to increase in the aerospace side.

And we're hoping that the military side of the business comes back to us in some of the maintenance side. Also the Navy side of it, we are hoping a little bit of that rebound from the low levels last year. We think the budgets were cut dramatically and they need to at least maintain -- come back with some maintenance level spending.

On the (technical difficulty) other side of it, at the latest conference, Gabelli, I presented 4 slides that gave some independent economic indicators that seem to have correlated historically with order patterns for each of the four major markets that we serve. Those individually pointed upwards, and we are relying somewhat on that as well.

That is helpful; thank you, David. Final question on that segment is HVAC. We've been kind of waiting for a rebound in the spending levels here for several years now. It's probably just been human optimism as each year, why we are projecting it up. Do you have any evidence as to why that will be a better market in '05?

We can only point to projects we're quoting (ph) on and what the reps tell us out there, as they're doing a lot of the engineering work on some of these projects. So we are relying on that information base. Plus we had a fairly decent winter months, early winter months for our expense operations up in Walden, New York. So that gives us some pointers as well.

I appreciate it; I will get back in line.

Charlie Brady with Hibernia Southcoast.

Sarbanes-Oxley, any idea what the magnitude of that is for '05?

I am certainly hoping to reduce it by several hundred thousand dollars. But I have, since I feel largely responsible for it in Circor, a big task to commonize and standardize a lot of the procedures and controls that we have, so that we don't have 9 flavors of what is performed and tested in the Company. But I'm certainly looking to reduce that through a number of techniques, one of which is standardizing what we do across the Company, particularly the major locations.

Does that involve, at some point down the road, does that involve a new system-wide type of ERP system? Or can you do this with the existing infrastructure that you now have?

There are a number of techniques and methods you can use to reduce and standardize without having to invest in new ERP systems. However, we do have selected organizations that are interested in upgrading some of their older systems. We are going to begin to look and evaluate as the benefits of doing something for those is made (ph) possibly across the Company. But I can make a big dent in the spending of ours, Sarbanes-Oxley costs, without the benefit of that kind of a program.

In addition, Charlie, this is Dave, we need to consolidate some of the centers that we have for internal control purposes, sort of behind the curtain functions, to reduce the number of sites that we have to audit and test and document every year. So that is another task that Ken and I and Bill are going to be looking at closely.

We could not do that -- we didn't have enough time from the announcement of Sarbanes-Oxley and the understanding and appreciation of the requirements of that Act to do that beforehand. We have to knuckle down and document and test our existing practices. So now that, once we get through this phase of it, we get through the reporting of this year, then we will be able to sit down and do a post mortem and take a look at where the opportunities are for us to reduce the number of sites.

Would you expect overall corporate expense in '05 to be down or up versus '04?

I expect it to be a little up, because if I was to even pull down Serbians by $1 million it's going to be offset by our new -- that's cash -- that is going to be offset by a non-cash expense with the stock options of almost an equivalent amount.

Plus in 2005 we're going to record at corporate not only Bill Higgins, a new COO role that's leading our lean methodologies; but we have also got some consulting fees to help us implement lean in an organized and quick manner that we're going to bear in 2005. So I expect 2005 corporate expense net net net to be a bit up; but those are the dynamics underneath.

In regard to that, Charlie, the consultants tell us that in their experience they have been able to offset their initial costs of consulting in savings from the operations. We are not baking that into any assumptions that we're putting forward to you.

Switching gears for a second, on Loud, is there any benefit to Loud from the supplemental budget that the President put out a couple days ago?

Yes, there is. We were delighted to see, a week or two after our closing of the Loud acquisition, that Boeing was awarded an $11.7 billion contract for new aircraft, new helicopters, on the Chinook program. So that tells you that the program has had a long life and it will continue to have a long life. And we're delighted with that.

Great, thanks very much.

Ned Armstrong with Friedman Billings Ramsey.

With regard to your margins, where over the long term do you think that they can rise to? Do you think that they can go further than you have them going next year?

I believe they can, obviously because of the types of things we're focused on to improve our operating performance over the long term. That is going to have some nice bottom-line effects going forward.

Of course in the Energy Products segment we're continuing to battle and will the commoditization of some of that product line. The Pibiviesse operation is focusing on the higher margin severe-service applications. Some of the technologies there are quite unique and we're able to charge accordingly for those. But those are big project-oriented orders and it goes through cycles, as you know. So there will be peaks and valleys in the Energy Products Segment. In the Instrumentation and Thermal Fluid Control businesses, I think we're coming off of a period where we've gone through a lot of consolidations, and we feel that those are -- those expenses of those consolidations should be behind us. And as we move forward and become more efficient, we will be able to step up the profitability of those businesses.

What type of magnitude are you anticipating?

Tough to read. We don't give really long-term projections in that area. But I would hope to be able to see in the mid teens for the Instrumentation and Thermal Fluid Control businesses, and to stay above 10 percent in the Energy Products businesses.

Is that 10 percent, does that take into effect both the peaks and the valleys?

I would say yes. Because in good times, you should have majority of that sector being made up of Pibiviesse type product, and in the softer times less, but it should range between 8 to 12 percent.

And the Italian unit of ours in the segment does have a relatively lower amount of fixed cost to it with a higher proportion of variables. So that helps protect the achievement of that 10 percent even (indiscernible).

Those are our estimates.

Thank you.

Richard Glass with Morgan Stanley.

Can you guys just give us a little more color on, really on two issues. One is where you're pointing Bill Higgins, and how long do you think it really takes to have an impact. I mean, you talked about bringing inventories down this year; you guys clearly have a lot of inventories or over-inventory; is the first issue.

Then can you give us some color as well on buying in the rest of the JV interest in China and putting up a plant there, and what that gets you as opposed to what you had with the JV?

Good questions. The first one is on our focus on inventory management and where we are applying our new resources and mainly Bill Higgins in our lean effort. Bill is entirely focused on that side of the house. We've selected our major facilities that have the majority of our inventory in North America to implement the lean objectives. We've gone through training of employees. We've gone through the assessment of the facility on a macro basis to identify where the gaps are that need to be attacked in priority. Actually Kaizen events are occurring in our facilities right now. We've done three or four already and will be stepping up that pace throughout the year.

We hope by the end of the year to be able to answer your question in a little more clarity. Because until you get really into the depths of the issues on the shop floor, and the batch processing that's going on, and the effort that it takes to convert to single-piece flow, we really are hard pressed to give you an exact answer.

You will see some progress in inventories this year. That's what our current view is. You will see that accelerating next year. And by the end of year 3, you should see us performing in at least peer group comparative inventory turns; which I say are between 4 and 6 times. So that's the effort there.

As far as our Suzhou operation is concerned, we benefited from owning 60 percent, only having to invest in 60 percent of that business since the inception, when I formed it in 1995. Our joint venture partner is a valve company that felt that they needed a ball valve line to sell into their Chinese markets and joined us in that effort. As time went on they found that our higher-quality products that we put into that factory didn't sell very well to the Chinese market; and they really never used their 40 percent. They subsequently then, therefore, asked to bow out of the joint venture; and we will supply them on an as-needed basis.

So we did benefit from that involvement in the past. It was a decision we had to make and one we gladly made, because we were using probably 75 percent of the capacity of that business. This gives us an opportunity to lean that factory out, at the same time, expand it.

Also the government wanted us to move from our facility in downtown Suzhou, which is a historic site; it's an old -- our joint venture partner is an old valve company. Therefore we were located within their facilities, and their whole facilities are going to move. This allowed us to separate ourselves from their physical location in their new site, move to another site, expand it, and add distribution and space for other Circor product lines to create a beachhead in China to start selling our products into the Chinese market other than ball valves.

So it's a 3-dimensional, 4-dimensional type of deal for us; and we felt a compelling investment and return on investment. Historically that return on investment of -- what did we invest initially, $6 million into it -- I've got to say it has returned greater than 25 percent return on investment after-tax for us. So it has been a great investment for us and we expect it to continue.

All right. I'm sorry. Are you done? Okay. Is this accretive to buying the remaining JV, as well as providing you some more opportunities? Is that the right way to look at it?

Yes.

In terms of what Bill Higgins is doing, as long as we're talking about this, do the lean objectives -- is it really just on the inventory side? Or are there opportunities in terms of the manufacturing footprint? Or how should we look at that longer term?

Lean encompasses all sorts of aspects. Bill, if you want to add a few comments feel free. We're going to look at the total business, front office, shop floor; and our objective is to improve inventory turns, reduce floor space, improve productivity, shrink lead times, and improve our performance to our customers. Bill, you want to add to that?

In the beginning the focus is certainly on process excellence, process throughput, inventory reduction, and turns. As we go along though, we will free up a lot of space. We will be using less inventory, using it faster, and that provides an opportunity to do what we want with the footprint. It will definitely provide us more space to work with.

Thank you.

Michael Schneider with Robert W. Baird.

Guys, maybe on the forecast for the instrumentation business. Again, you've got 6 percent revenue growth expected in '05. How many points of price does that include?

You've got some carryover effect from the partial year price increases, late year price increases that we had last year. I think that's probably 3 points of that, should be about 3 points trade.

Switching to the energy side. Again I am not sure what to make of this, if this was a backlog issue, but revenue in the quarter was in effect down 1 percent organically, if you scrub it of currency and acquisitions. And I guess along those lines, I guess I'm surprised to see your forecast for just 4 percent growth in the energy business in '05, despite the increase in orders and backlog. Could you give us some color as to the moving parts now in that segment in '05?

That is on the revenues, Mike?

Yes.

Pibiviesse had a particularly strong Q4, '04; I'm sorry, '03. They had higher revenues in the fourth quarter of '03 than they did in '04, even though they had a bonanza year including the fourth-quarter 2003 time frame. Ali (ph) had a strong quarter, Pibiviesse had a strong fourth quarter in '04; it just wasn't as high as they had it in the prior year's quarter. So that's one of the dynamics in there.

How about the other businesses? I've just forgotten the other businesses' name within petrochem?

The KF and Telford?

Yes, the KF operation, more a commodity business and certainly more MRO dependent. What is happening there in terms of sequential trends?

We are seeing some improvements there, obviously. The activity in the North American markets has improved. We've seen it continue through January and we're hopeful that that continues throughout the year.

That's been hard to gauge for us in the last couple of years. There's a number of things going on. In the Canadian market you always have the weather patterns that affect things; and the successful completion rates also affect it. So it's been fairly difficult for us to try to track that on any long-term basis.

KF is the most probably price sensitive or price vulnerable. What is the update there? Did they in fact post lower margins year over year in the fourth quarter and for the year? Then what's the outlook for '05 given the pricing trends?

I will answer that. But sequentially, to your prior question that Dave answered, they did have sequential revenue growth of almost 10 percent.

But that's seasonal because of Canada, right?

That's just the U.S. market all by itself. Certainly in Canada they had almost stronger growth than that. But KF domestically, just looking at the U.S. part of the business, had good revenue growth sequentially.

And if we were too true up the operating margins on an apples-to-apples basis for KF this year, this fourth quarter, to a year ago's fourth quarter they did have improvement in margin this year. Yes, operating margin.

Is pricing yet to flow through entirely in that division for '05?

I think that will be -- part of that revenue growth that you see on the slide 10 is still reflective that there is some incremental pricing improvement there. But I believe they've also are going to -- are contemplating or putting through a new price increase that will help them as they get into the second quarter, third quarters of '05.

I guess this all strikes me as overly conservative for the energy business in '05. You've got orders for the segment of 14 percent organically in the fourth quarter; so you starting the year with a strong order and backlog pattern. You finished margins well above where I would have guessed, at 10 percent at the end of the year. You've got some pricing flowing through. You've got strong energy dynamics, a better MRO market probably globally. Why only 4 percent revenue forecast and basically flat margins?

We hope you are right and that we are being conservative here. We'd like to overachieve. But also there's some new technologies in some of the Pibiviesse orders, in this gas to liquid environment. You're talking about 150 bar pressure, 7,000 PSI, 28-inch valves weighing 60 tons.

What happens to the metallurgy and the deformation of the ball and the seats and how they marry together, that take some time to work through. I think we are trying to be balanced in our projections here of the timing of shipments and our ability to meet the specifications that these customers are requiring on a timely basis and on a cost basis.

So you could be right. We've added new sales managers in some key areas of the markets for some of our domestic operations. I think that will prove themselves to be additive to our sales volume next year. But we probably are a little cautious in that regard as well. But at this point we will have a better picture at the end of midyear obviously than we do now as to the legs of that market and our ability to meet the demands of this technology.

Okay, then switching gears to the expense for stock options, Ken. The 1.1 million, is that entirely going to be run through the corporate expense line as we see it?

Yes.

Okay. Despite the fact that some of those options related to the segment leaders, presumably?

Right.

Then that would imply the operating margins you've forecast for each segment do not include any effect of the stock options?

Correct.

What was my final question? I guess on Loud, yes, there's the supplemental budget that came out, and that is a short-term win. But when you look at the number of projects that are being at least slated for cancellation or reduction or delay, there's a number of aviation, both helicopter and airplane projects, that are on the chopping block.

Did you go through the backlog of Loud, program by program and backlog backlog item by backlog item, and compare it against the rumored list of chopping block items; and get comfortable that you didn't buy into in effect a false backlog?

We can absolutely confirm to you that we did that process and we feel very comfortable with the forward-looking forecasts that were provided to us and the projects that they work on. You have got to also take into account that a large portion of Loud's business is overhaul of existing fleet, and that overhaul program is in the budgets, is being supported. The Chinook 46, 47 aircraft make up a vast majority of Loud's business; and those platforms are long-lasting.

What has the growth rate of Loud been over the last 3 years?

Quite healthy, above 10 percent.

Organically?

Yes.

Okay. Thanks again, guys, I appreciate it.

Charlie Brady with Hibernia Southcoast.

I just wanted a little more (technical difficulty) on the gas to liquids opportunity. How much -- I mean these plants are obviously 5, 6, $7 billion in size to build these GTL plants. What's the -- as a percentage as it like 1 percent of the total cost, or half a percent? What is the positive impact on it per plant, if you assume a 5 or 6 billion?

I can relate to you that portion which we are most focused on, because Shell is working on some projects with us about the size of the ones you just referred to. We focus on the higher engineered, the severe-service, the higher pressure applications. There are some commodity sides of that that would just fill up our capacity with lower-margin stuff. So of a facility of that size, 5, $6 billion in size, we would probably get a look at 3 to $5 million worth of products.

Great; thank you.

With that ladies and gentlemen, we have no further questions on our roster at this time. Therefore Mr. Bloss, I will turn the conference back over to you for any closing remarks.

The only closing remark I have is to thank everybody for listening in; and we look forward to seeing you in a couple of months to review the results of our first quarter. Thank you again for listening.

Ladies and gentlemen, this does conclude the Circor International's fourth-quarter earnings conference call. We do appreciate your participation, and you may disconnect at this time.