Circor International Inc (CIR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CIRCOR International's First Quarter 2007 Earnings Conference Call. Today's call will be 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. Curhan McCann from the Company's Investor Relations firm. Please go ahead, sir.

Thank you very much and good morning, everyone, and welcome to our first quarter earnings call. Our objectives today are to review the Company's recent performance and provide an updated outlook on the full year 2007 with David Bloss, the Chairman and CEO of CIRCOR; Bill Higgins, the Company's President and Chief Operating Officer; and Ken Smith, Chief Financial Officer. After their comments, we will then go to Q&A.

But, before we start, two administrative items. First, the slides we will be referring to today are available on CIRCOR's Web site at www.circor.com, under the link Quarterly Earnings from the Investors 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 risk factors, we advise you to read about them in the Company's Form 10-K, which also can be viewed on the Company's Web site. Of course, actual results could differ materially from those anticipated or implied from today's remarks.

Let me now turn the call over the CIRCOR's Chairman, David Bloss.

Hello, everyone. Well, we had a pretty good first quarter this year. We exceeded our expectations with $0.48 per share excluding the special charges related to the closure of one of our plants within the instrumentation group. We talked about this closure last quarter. We continue to enjoy healthy conditions in our major markets. In the energy segment, orders were up 9% sequentially and down 8% versus last year but only because of record project bookings and inventory build-up orders from North American distributors that occurred last year, making that quarter an all time record for orders. These markets appear to be holding at very good levels.

Better yet, the Instrumentation and Thermal Fluid Controls orders increased nicely year-over-year and sequentially. Our improved delivery performance is starting to pay off in those favorable markets. Aerospace orders were down year-over-year and up sequentially due to the timing of military program orders and an unusually high order quarter last year at our Industria solenoid valve plant in France. So, so far, we are feeling pretty good about our market conditions as we ended up the quarter with backlogs at 311 million, an all-time record for us; and I think that almost approximates our annual revenues at the time of our spin in 1999.

So, we are also making progress on improving the profitability of our Instrumentation and Thermal Fluid Controls segment. Although you don't see it yet, we are very confident that you will in the following quarters and Bill is going to provide you details of that. And we are expecting between $0.53 and $0.55 per share for the second quarter, which is about a 33% increase above last year; and we have tweaked our full year prognosis upward slightly and we are remaining somewhat cautious about second half short cycle business within the North American energy markets just because of some feedback that we continue to hear from our distributors of their uncertainty as to the continuity of market conditions going into the second half, although we haven't seen any changes in our order rates. They are still holding at pretty good levels.

So, with that, I will let Ken and Bill take you through the details of our quarter. Then, we will answer questions that you have.

Thanks, David, and I'll be referring to our presentation slides, starting with number three. As David mentioned, we did have a solid quarter, double digit growth in both revenues and earnings and showing margin expansion. For the quarter, the revenue increase was led by our energy segment's organic growth and to a lesser degree our two acquisitions in February 2006, Sagebrush Pipeline Company and Hale Hamilton.

Both segments' revenues benefited from higher volume, particularly our energy product segment's fabrication products, which were sold by Sagebrush and Pibiviesse. Regarding operating income, we had a very good margin expansion in our Energy Products segment, which drove the majority of improvement, and we turn in diluted earnings per share for the quarter that was $0.05 over the top end of our guidance provided in our February 22, 2007 earnings call, principally due to higher shipments than expected.

Free cash flow was slightly negative this quarter and was a direct result of increases in working capital to support our 29% increase in backlog as of April 1, 2007, which is our highest ever.

Now, I will turn to slide number four, which details the P&L. Bill will discuss the significant rise in the segment's operating income in later slides, so I'll add color on the larger variances on the slide, which are special charges, interest expense and income taxes. First, special charges, the first quarter 2007 amount includes $600,000 related to our Instrumentation and Thermal Fluid product segment, closing a small U.S. plant in Connecticut that manufactured components in its Hoke product line, and we recorded severance and certain related costs. There was an additional $100,000 of special charges for reducing the book value of a building held for sale to its now expected market value.

Regarding interest expense, it was modestly higher in 2007 as we borrowed more, while using our cash earnings to fund investment and working capital, again to support the solid order growth and record high backlogs that we have. And regarding income tax expense, the slide shows a large increase for the quarter. Unfortunately, we just earned a lot more money and thus incurred a higher expense. Our tax rate for 2007 is expected to be 32%, which also was the rate for Q1 2006, and the 32% rate for '07 is an increase from the full year '06 tax rate of 30.6%, and this rate increase for 2007 largely reflects the loss of a U.S. tax deduction for export sales that expires at the end of 2006 for all U.S. taxpayers.

Now to slide number five, cash flow. In the cash flow from operations and free cash flow, we've had similar sources and uses compared to a year-ago's first quarter. The most noticeable difference this year between the periods is a little bit more working capital. We did pay down some accrued liabilities in the first quarter '07 compared to a year ago. That should even out over the balance of the year. Regarding receivables, we continue to be effective in managing DSO; and at the end of Q1 '07, we are at a very competitive 60 days. And regarding inventories, we have invested a bit in inventories this quarter to support our highest ever backlog, yet we have also been successful in continuing to receive cash advances from project-related customers to help fund the purchases of long lead time components.

Now to slide number six, the balance sheet. Our balance sheet continues to be very healthy. The increased debt in '06 resulted from borrowing $61 million in February of '06 for the purchases of Hale Hamilton and The Sagebrush Pipeline companies, and this borrowing against our revolver carries an interest rate of approximately 5.8%. Our debt to cap, which as you can see, remains a very conservative 15%.

And now, I will turn the -- our remarks and the call over to Bill Higgins, CIRCOR's President, to speak about our segments' performance.

Thanks, Ken, and I will start with slide number seven, our Instrumentation and Thermal Fluids segment results. This segment is performing as we had expected and communicated last quarter. We believe we have turned the corner and will continue to make more improvement and deliver better results going forward. Regarding orders, the end markets served by this segment continue to be positive, as both Dave and Ken have mentioned. Compared to last year, orders show a slight decline year-over-year because of large aerospace orders booked in Q1 '06; and not shown on the slide, the first quarter of 2007 orders were 12% higher compared to the ending year fourth quarter of '06.

Revenues have grown solidly in our Instrumentation and Thermal Fluids product businesses. The increase in revenues was the net result of several factors. An incremental $2.4 million comes from the February 2006 acquisition of Hale Hamilton in the U.K., which complemented this segment's sales into the general industrial and maritime end markets. Our other continuing business units in this segment benefited from higher volumes and selling prices compared to the first quarter of 2006 and improved factory performance. In fact, our lean manufacturing initiatives are helping us respond to customers faster, resulting in reduced late shipments and faster revenue convergence.

Regarding operating margin, our result of 7.2% this quarter was as expected and as we indicated last quarter. The margin decline from Q1 2006 is attributed to raw material increases for stainless steel and other nickel based alloys that continue to rise, also with higher capacity utilization at critical vendors. We have spent additional amounts to counteract decreased vendor responsiveness and lengthen lead times to receive certain critical parts, and we have invested to expand our low cost sourcing capability.

Further, we have experienced lower factory productivity from the reorganization we are doing and production inflow in a couple of our [business] segments, largely U.S. plants. As we discussed before specifically, measures are being enacted in our Hoke Instrumentation business to counter these factors and improve profitability. They include outsourcing and foreign sourcing to lower the cost of goods sold, focusing our lean manufacturing priorities to achieve more linear and efficient production levels, optimize the use of our capacity and to ensure a predictable flow of material inventory from our global suppliers.

During the first quarter, we announced the closure of one of our Hoke Instrumentation plants, with its production now being in-sourced from low cost Asian suppliers. As Ken had mentioned, when talking about special charges this quarter, this plant closing is expected to have a special charge cost in 2007 of approximately $1 million, of which $600,000 was recorded as special charge in the first quarter. The savings from this closure and a foreign sourcing countermeasure and profitability improvement is expected to be approximately $1.5 million to $2 million per year.

Another countermeasure taken by our Hoke Instrumentation business in the first quarter of 2007 was increased customer pricing. Although we have not instituted much in the way of new pricing in 2006, the Hoke products will have a steel related surcharge added for new customer orders, which started last month, for most of our customers. Other actions underway in this segment include a further building of low cost offshore supplier materials, offset material inflation, rearranging our factories for better flow of products, training our workforce and the tools and uses of lean manufacturing and Six Sigma, and improved supplier management and factory planning and execution capabilities.

There's a lot of work underway and we have great teams in place and they are making progress, and we continue to expect to achieve double-digit bottom line results in this segment, as we exit 2007. However, we will remain conservative in our projections until we demonstrate that our actions are taking hold and we are delivering results.

Now, on to slide eight, our Energy Products segment, the oil and gas end markets served by this segment continue to be very healthy for both the large international project business as well as domestic production and distribution. Now, the quarter-over-quarter change in orders was negative. We are comparing the record-setting quarter of Q1 2006, as Dave mentioned. At least half of this segment's new orders come from large projects and the timing of these awards are quite lumpy. Although it's not shown on this slide, Q1 2007 orders were 13% higher compared to the fourth quarter of '06. And, nonetheless, the energy market for us continues to be very strong and that's for the large projects and the distribution orders.

Revenues are a mirror of this significant order growth; both our existing and acquired energy businesses have been very strong. The quarter's increase in revenues was the net result of nearly $18 million from organic increases, which includes about $12 million for large international projects, fabricated systems in North America, plus an incremental $6 million from more standard filled through distribution. This quarter's increase in net revenues also include an incremental $5 million from the February 2006 acquisition of Sagebrush, which produces fabricated measuring and metering control sub systems for the pipeline applications in North American oil and gas markets. With this segment's $194 million backlog at the end of Q1 2007, we continue to expect a solid 2007. As for profitability, this segment' turned a solid operating margin, especially compared to the first quarter of last year and had a 210 basis points margin expansion, a result of a number of factors, including the higher unit volume driven by a market demand into which we have been able to increase prices. Along the same time it's done a great job improving the factory and supply chain performance.

Our lean manufacturing initiatives have taken hold in North America and China, and we have been able to meet the demand with efficient capacity expansion as we grow; and we also enjoy the benefit of expanding our production in our China manufacturing plant, which serves as a key supplier to our North American customers and provides us with a low cost of goods sold.

Let's now turn to slide number nine. On this slide, we point out our assumptions for key end markets that we serve, and nearly all our businesses are expecting a positive 2007. We do have some soft -- order softness in our U.K. Navy business and chemical processing. We expect many of the other end markets we serve, however, to show continued quarter momentum. We have previously described the expected strength of our oil and gas exposure. In our other segments of the Instrumentation and Thermal Fluid Products, we are still anticipating solid order rates from aerospace and power generation globally, and other general industrial sectors.

Now, let's turn to slide number ten, and our expectations for revenue and margins in 2007 are shown here. We have changed some of the numbers on this slide for revenue growth compared to what this slide showed on our last call on February 22nd. We have raised the revenue growth for Energy Products segment, which previously was 7% to 9% growth. On a basis of the record backlog, we were enjoying a strong level of quotation activity. The Energy Products segment is maybe operating at or near peak of this current energy cycle and having already delivered nearly 20% organic revenue growth in each of the last two calendar years. And, therefore, while we forecast healthy growth, we expect it to be less than in the past.

Regarding operating margin and in particular our Instrumentation and Thermal Fluid Products segment, it will take time to fix our supply chain issues and strengthen operations in material management to complete the improvement actions I have described. And as I have stated before, this is no small task. We have much stronger management teams in place; we expect to see steady progress in this segment. Our Hoke product line in Instrumentation brought a little more time and effort to achieve the levels of performance we expect, and we are making solid progress, and, as I said, we have great teams in place.

Although not shown on slide ten, we have provided EPS guidance in our earnings press release for the second quarter 2007 of $0.53 to $0.56 per diluted share, excluding anticipated special charges; and the range of $0.53 or $0.56 is favorable to the second quarter 2006, when we reported $0.40 per share. This is higher than the first quarter of 2007 because of modest revenue increases and sequential margin improvement for both segments.

You will recall our goal is to achieve market improvement in the Instrumentation and Thermal Fluid controls segment. We still expect to see improvement starting in the second quarter; we still expect to exit the year at a run rate of greater than 10% operating margin rate in this segment.

So, to summarize our outlook, we have good end market conditions and healthy backlogs, stronger management teams in place for driving improvement on multiple fronts to grow both the topline and improve performance on the bottom line. We are deploying lean manufacturing methodologies to develop a culture of operational excellence for the long-term benefit of our customers and shareholders. We are rationalizing product lines and consolidating facilities that will reduce our fixed cost and reengineering our supply chain, particularly globally, to take advantage of lower cost of foreign supply.

In summary, this gets us to the full year guidance we've shown on slide number ten. And so with that we would like to open the lines up for any questions you might have.

(OPERATOR INSTRUCTIONS) We'll take our first question from Mike Schneider with Robert W. Baird. And Mr. Schneider, your line is open. Please release your mute function at this time.

Hearing no response, we will move on to Ned Armstrong with FBR and Company.

Thank you, good morning.

Hi, Ned.

Hello, Ned.

Dave, in some of your opening remarks, you had alluded to some caution about certain markets in the latter part of this year. I would just like to see if you could elaborate upon what markets those are and what it is that your customers are seeing that's making them nervous beyond just ordinary caution that one might exercise at this point in the cycle?

Yes, sure, I would be happy to elaborate on it. What I was referring to was the energy markets in North America. Those energy markets are usually smaller independent drilling projects that the operators usually go to this local distributor to get what they need to do the hookups and the completion of the tools, the valves, the piping and so forth. So, they -- these are not big projects, so they take their trucks in the morning and they are going to hook up a couple of well heads and that's how they get their products through our distribution channel. So, that's short cycle business as opposed to the major projects that we are involved with multi-million dollar long lead-time projects that we can be assured of completion and so forth in our backlog.

That short cycle business is one that changes most rapidly, and we stay in constant contact with our distributors. For example, a year ago, we had -- and I referred to it in my comments, we had an extremely high incoming order rate from our distribution in North America because they were anticipating some pretty healthy markets, and they were anticipating maybe some longer lead times from their valve suppliers, so they started launching some pretty healthy orders in order to lock in and that's why I mentioned a lower incoming order rate first quarter of this year versus last year. So, they anticipate what's going to happen in the marketplace. So, we keep in close contact with them and talk to them about their outlooks and so forth.

What is your opinion as to why some of these smaller contractors may decrease their buying? Is it because they are -- profit margins for them are not making it worth it, or they are getting squeezed out by larger competitors? Can you talk a little bit about that?

No, it's nothing to do with market share or pricing. It has to do with activity levels in the North American markets in the drilling activity. The predictions that were out there earlier in the year and late last year was for a slowing down of activity in the second half of the year, and they are just echoing those cautions, and I also indicated that we haven't seen any big change in our incoming order rates at this point. So, -- but we still want to remain consistent with what our distributors continue to hold and which is a more conservative outlook on the second half, and that's the extent of it.

Okay, thank you.

You are welcome.

Our next question will come from Andrea Worth with Robert W. Baird.

Good morning, guys.

Hi, Andrea.

Just to continue on the energy theme, I am wondering if you can give us a sense of how that MRO business did perform during the quarter. Was it similar to in line with how the average of the segment kind of 35% organic or is that business more slower than the overall average?

You are talking about the distribution business?

Right, the MROKF.

Yes, well, sequentially it was up pretty nicely. I think it was probably up 20 some percent sequentially. And as I said a few minutes ago, versus last year, it's down probably about 8% to 10% because of the order of magnitude of anticipation orders and inventory orders booked by our distributors last year in the first quarter. The second quarter, the third quarter and fourth quarter of last year, they sort of leveled off and the first quarter of this year is consistent with those following three quarters. So, that tells us that the markets are doing fine; and, in fact, we enjoyed seeing that uptick in the first quarter versus fourth quarter.

Ken, I am just trying to address your guidance of -- you increased it to 9% to 11%, so just given such a strong growth rate that you saw this quarter, that would essentially imply really low single-digits, actually even flat growth during the remainder of the year in this business. Just curious, is that just all purely conservatism on the MRO front, or is that just your different comparisons, when your [FE] orders are shipping, just kind of give us a feel of why that growth rate is expected to be so low?

Well, as Bill indicated in his comments, we've had two years of over 20% growth in this business. So, you have to look at it realistically and say how much longer can that continue. Even though we are not seeing signs of it, our distributors are holding caution to the wind to us, and they haven't changed their position very much in the last four or five months. So, we would be less than genuine if we adopted a forecast that reflected higher levels than what our distributors are continuing to tell us that could happen. So, that's -- we could show numbers that are higher, but we would be less comfortable with those at this time. At the end of the second quarter, obviously, we'll be able to have a better insight into the second half, but until then we chose to be on the conservative side.

And just looking at the second quarter specifically, you did have some declines in order rates. Does that mean we should probably expect a significant slowdown in growth in the second quarter in the energy business, or does the backlog still support nice double-digit growth there in the second quarter?

In total energy, the backlog represents a good to healthy growth pattern for us. Project work has been very healthy and continues to be high quotation levels. Our backlogs at Pibiviesse are still at record highs and these were booking into the second half of '08 now in Pibiviesse on project work. So, that all tells us some good things.

And then just pushing over to the instrumentation business, I think Bill had mentioned that you are expecting an improvement in the margin in the second quarter. Is that a sequential improvement or I guess more importantly is that a year-over-year improvement that you are expecting to see in that business already?

As we communicated last time, Andrea, we are expecting sequential improvement beginning in Q2, so it's about Q2, Q3, Q4, and that would also be a year-over-year improvement.

And also year-over-year improvement?

Yes.

Okay. And just, what's driving that specifically? Margins actually kind of -- it actually decelerated sequentially in the first quarter, so it seems like maybe you actually increased your expenses. Just a lot of those expenses start falling off as you have kind of made these investments, or kind of just walk us through how these margins -- how you expect them to increase year-over-year?

Well, the primary driver is all the change that we are working through the instrumentation business, particularly our Hoke business where we -- as we communicated last time, we have put a new management team in place there. In the second half of last year, we have done a lot of hard work. We just closed the facility in Connecticut, a machining manufacturing operation, improving our overhead. We are far more productive rearranging the factory floor with a whole setup of lean cells and just overall, there is a lot of work going on right now that looks -- shows up as cost on the bottom line that we are going to -- we are seeing the productivity, we are seeing the on-time delivery and the throughput in the factories go up significantly and it just takes a little bit of lag time for the profitability to hit the bottom line as we watch the cost curve.

Okay. And then, just one final question there. I just saw on your slide, you moved the chemical market over to a softer market. Just wondering where that's coming from; just by all accounts we hear from that market is still very strong, at least globally. Just curious what changed the market for you?

I think we have seen a little bit of softness in the North American chemical area, probably not the same globally. I think that's pretty much localized in North America, a little bit of slowdown there and it's just as more of that chemical industry moves offshore.

Okay. And then just a final question. You've (inaudible) about your corporate expense went from $16 million to $16.5 million. What's driving that increase there?

We are anticipating, we got a few consulting projects that we are going to engage some site professionals on some development efforts for ourselves that's going to the increase.

Great, thanks, guys.

Our next question will come from RBC Capital Markets, Mark Grzymski.

Good morning, Dave and Ken. Can you hear me, and I apologize if you can't?

We hear you fine.

Okay, great. Just curious, I guess the oil and gas business, curious is the raw material environment hurting. You talked about it hurting gross margins in the instrumentation business; I am just curious if it's impacting the oil and gas market?

No, it's a different set of circumstances in the energy business. We are able to pass on price increases as we incur higher raw material costs in that market. Speaking on the instrumentation business, our market share there is high as in the energy business where we are probably number two in the world in the (inaudible) market. In the instrumentation business, we are trailing number three, again some very formidable competitors who have [50 and 25, technical difficulty], and they've chosen not to increase prices over the last couple of years almost. That's been one of our frustrations in that product line, where stainless steel prices have all increased substantially yet they've chosen not to raise prices and we are waiting for that to happen, and we are doing as much as we can in those niche markets, where we have unique products and relationships and applications that are unique. We are raising prices where we can, but it doesn't make up for the increase. So, you have different dynamics of market share and behavior of the market leaders.

Okay. And maybe from a different direction, since you are a major player in the oil and gas market, I am curious if it's becoming more competitive from a pricing standpoint since everyone knows how strong this market is?

Well, I think what's been (technical difficulty) capacity. I mean it's a healthy market, but you have to -- you have to have acceptances and approvals at the end user level. Those all take time. So, new entrants into the markets are time to do. We are major distributors in the U.S. market and we are major end users over the past 20 plus years in developing these relationships and product recognition. So, we are in very good position there. And capacity is constrained at the raw material level; the lead times are quite long, and our Chinese operation has been allowing us to really gain market share because of our ability to ramp up our capacity over there and at very attractive prices. So, we are benefiting from strategic moves we made years ago.

Okay, thanks for that, Dave. And also just finally, and this is a broader question but given the strength in the international oil and gas market, and that strength being there last year as well. I am curious if you could describe the differences right now in the international oil and gas market as opposed to the domestic markets?

Yes, well, there is a lot of spending going on in the Middle East. ExxonMobil is spending the -- they've announced publicly I think last quarter I mentioned $20 billion a year in capital spending, and we are a major supplier to them as an example. Shell in the North Sea is starting to reactivate some projects and have some pretty heavy maintenance programs going on to their existing platforms. So, the project work is quite healthy, and we have hitched ourselves into a portion of that market where it's a strong play into where they are spending money. That is in the LNG, the high pressure gas systems, cryogenic high pressure valves is one of our specialties; and we are one of the few people that can do the types of sizes and pressures that are needed in those environments. So, the market is moving in our direction where it will be hitting our strength as well.

And would you say that the LNG market, and I think I asked this last quarter, is that slightly softer than it was last year in U.S.?

In the U.S.?

Correct.

That's hard to gauge; it's hard to gauge. In the U.S., we sell through distribution, and once it gets into the distribution, we have a pretty hard time trying to track LNG or natural gas to oil. And that's a tough question; I would have to do some research to answer that.

I will try to do it for you. Great, thank you for the color. Appreciate it.

Moving on, we will hear from Morgan Stanley; it's Richard Glatz.

Hi, guys, nice quarter.

Rich, thanks.

Maybe I will suggest you can limit people to say 15 questions and force them to get back in the queue as well, but just an editorial comment. On the Instrumentation, to sum up what was asked earlier, get a little clarification, it sounds like you guys are being conservative overall, but on Instrumentation, is it fair to say that the expense items that are running through which will lead to -- the diminishment of those will lead to higher margins basically that -- those are in your control, the instrumentation margins moving up isn't predicated on, say, getting in very favorable orders or price increases or something that's out in the market?

That's representative thing to say, Rich. We are basing our margin improvement on things we have within our control.

Okay. So, it sounds like you guys are being conservative and that's good. And then, the second question and final is on inventories and I realize you had obviously a big topline gain here, but when should we expect to maybe see some more progress on the inventories coming out, some dollars coming out of working capital there?

I think that one is the one we're starting to see a little bit of movement on, but overall the numbers look pretty flat. We have added inventory as we grow with order rate. I think it's probably the latter half of the year we start to make that progress. What we are seeing on the factory floor is a better throughput; our on-time delivery, our past skews, our responsiveness, our lead times are all improving. That's got to happen before we will see the inventory turns actually improve; as we relay out the factories and change the process then we can benefit from the inventory turns going on.

All right, well.

And it's a little bit early right now; I don't want to get ahead of ourselves here.

But, it sounds like we are making progress then?

Yes, I think we are and we are on the cusp of showing that in the numbers. But, also, we are asking on -- some of these large projects, we are asking our customers for advanced payments as we procure the material on some of these long lead time things. So, on our balance sheet, you will see $25 million of advances received from customers so that we could bring in this inventory. So, balance sheet doesn't allow us to net those numbers together.

Okay, all right.

There is a couple of minor places where we have had a little bit of inventory like when we closed the facility in Connecticut. We added some buffer stock as we outsourced. So, some of those things will burn off, but those are minor pieces. The longer-term change is still underway.

All right, sounds good, thanks guys.

Our next question will come from Charles Brady with BMO Capital Markets.

Hi, thanks, good morning, guys. I just want to go back to the -- on the energy products and your topline sales guidance for '07, that's kind of back to what Andrea's question talked about and as far as conservatism, you're back into the math, your assumptions for the rest of the year are pretty low. Is that a function, and is your conservatism, I guess, a function of just what your visibility is, as far as how far out can you see your order intake coming on your Energy Products side?

Our conservatism is a function of experience in the industry because if you look back on the cycles that have occurred in this short cycle business, they are pretty dramatic. So, things can happen pretty quickly both upwards and downwards, and so it's pretty hard to gauge. So, we are just taking a look at our distributors and using the same forecasts that they are using in their prognosis. They haven't changed in the last four or five months. During these next couple of months, we are going to be getting back to them to have a re-gauge. But, you also have to consider that we are at very high levels in this market as well. So, even showing flatness in the second half is a pretty good activity level for that market.

Are you capacity constrained? If the work was there, do you have a capacity to do greater than your sales guidance?

In short cycle business, we have been very successful of leading out our U.S. operations as well as ramping up our China operations. So, we are not capacity constrained in the short cycle business. The project business, which is a longer cycle, or as Dave mentioned earlier, we are planning out into 2008.

Okay. On the Instrumentation side of the business, if you look into your distribution sales channels there, do you have a sense of sort of what inventory levels within the channel looks like? I know you don't get a sense of because of (inaudible) distribution, what -- your visibility is a little bit limited, but do you have a sense of sort of the inventory levels within that channel?

We have a little bit of visibility into that and we are watching it. The inventory levels in the channels have actually been improving and that's meaning that the levels are probably a little bit lower and the turns are probably a little bit higher than they were six months ago. And from our standpoint, that's primarily a function of our improved operational performance.

Thanks very much.

Moving on, we will take a question from Steven Raineri with Franklin Advisory Services.

Good morning.

Hi, Steve.

Hey. What percentage of the energy business is short cycle?

It varies quarter by quarter as we ship project activity, but order patterns -- incoming order patterns is probably 45% short cycle right now, 55% project work.

Great, thanks a lot.

You are welcome.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. I will turn the conference back over for any additional or closing remarks.

Okay, well, thanks everybody for calling in. We hope to see you next quarter, and in the meantime we will be taking another look at our short cycle business with our distributors and may be able to give you a better feel for how that second half looks then. Thank you.

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.