Circor International Inc (CIR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Circor International Second Quarter 2009 Financial Results Conference Call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions).

I'll now turn the call over to Mr. David Calusdian from Sharon Merrill Associates for opening remarks and introductions. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Circor International's Second Quarter 2009 Conference Call. On the call today is Bill Higgins, the Company's Chairman and CEO and Fred Burditt, the Company's CFO. The slides we'll be referring to today are available on Circor's website at www.circor.com on the Investor Relations page.

Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to known and unknown risks, uncertainties, and other factors. For a full discussion of these factors, the Company advises you to review Circor's 2008 Form 10-K and other SEC filings. All of the Company's filings are available on its website at circor.com.

Actual results could differ materially from those anticipated or implied by today's remarks. Any forward-looking statements only represent the Company's views as of today, July 30, 2009. While Circor may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so.

I will now turn the call over to Bill Higgins, CEO for Circor.

Thank you, David and good morning, everyone. During today's call, I'll start by providing you with our financial highlights for the quarter and Fred will begin our slide presentation and offer additional details on the numbers. And then, I'll discuss our segment performance and provide you with some perspective on what we see in the end markets and we'll go to questions after that.

So, let me begin with a few comments on our performance. EPS of $0.45 exceeded the high end of our guidance range even though revenues of $164.5 million came in at the low end. EPS outpaced revenue largely due to favorable product mix and productivity in the Instrumentation and Thermal Fluid Controls segment, as well as lower asbestos charges than we had included in our guidance range.

Adjusted operating margin for the second quarter declined to 8.7% from 14.3% on a 20% decrease in sales compared with the second quarter a year ago. Some of our end markets were down more than 50% and consequently, we lost significant volume and overhead absorption. To address the loss in volume and maintain quality of earnings, our teams are working hard to rightsize our cost structures in line with lower demand levels and focus on quality of our earnings initiatives.

For example, total headcount this year exclusive of acquisitions is down over 15% across the Company and by nearly 30% in our Energy segment. Additionally, we continue to invest in critical strategic initiatives such as developing low-cost global sourcing and growth in emerging markets, which will help reduce our cost structure as well as better position us for future growth.

We reported a relatively solid quarter from a bookings perspective despite the ongoing global recession. Company-wide bookings of $169.4 million increased 39% on a sequential basis as a result of longer-term orders for large Middle East energy projects and military aerospace business. On a year-over-year comparison, orders were still down 14% from Q2 2008. Our backlog at the end of the second quarter was $304 million, down 33% compared to the second quarter of 2008, but up slightly from the first quarter of 2009.

So with that, I'll turn the presentation over to Fred.

Thanks, Bill. I will be referring to our presentation slides, starting with slide number 3, financial results, which shows consolidated Circor.

Consolidated revenues for the second quarter of 2009 were $164.5 million, down 20.4% from the second quarter of '08. The decline consisted of 16.4% organic reduction and a 6% reduction as a result of currency impact, which was partially offset by a positive 2% contribution from acquisitions. Organically by segment, Instrumentation and Thermal Fluid Controls revenues declined 10.1% and Energy revenues declined 22.1% in the second quarter of '09 versus the second quarter of '08.

In our discussions today, we will referring to adjusted operating income and adjusted operating margins. These metrics exclude pretax special charges, as well as pretax charges associated with asbestos, affecting the Company's Leslie Controls subsidiary. There is a reconciliation of our adjusted non-GAAP operating income and net income to the comparable GAAP measures available in the financial tables within our financial press release and available on our website.

Consolidated adjusting operating income decreased 52% from the second quarter of 2008 to $14.3 million. On a sequential basis, adjusted operating income was down 35%. The primary drivers of the year-over-year decline have been lower volume, unfavorable mix in pricing, and unfavorable currency impacts. This was partially offset by reduced labor costs, lower material costs, and a benefit from earnings from acquisitions.

Now, let's turn to slide four and discuss additional details of the P&L. The first item, segment adjusted operating income, will be discussed by Bill later. We recorded $3.4 million in asbestos charges, up from $2 million in the second quarter of 2008 due primarily to $1.4 million in lower insurance recoveries as coverage for indemnity has been exhausted and coverage for legal expenses was reduced. This was slightly lower than our guidance around $4.9 million and -- excuse me, it was slightly lower than our guidance and $4.9 million lower on a sequential basis from the first quarter at $8.3 million.

Corporate expenses increased slightly by $0.7 million due primarily to higher professional fees, strategic startup costs in India, and higher pension expense, partially offset by lower share-based incentive compensation. Net interest expense was lower in the second quarter of 2009 by approximately $0.1 million, primarily because we paid down a good portion of our revolving credit facility.

Total debt declined $1 million to $12.1 million on June 30th, 2009 compared with the year-end 2008. Relating to debt, yesterday, we entered into a new 3.5-year unsecured credit agreement that provides for $190 million revolving line of credit with $30 million accordion feature for a maximum facility size of $220 million. In addition, there has been no change in the financial covenants from our prior agreement that we entered into in 2005. We anticipate using this new facility to fund potential acquisitions to support our working capital needs and for general corporate purposes.

Other income and expense was an expense of $0.3 million, down $0.5 million from last year, primarily due to FX re-measurements. Our effective tax rate for the quarter came in at 30% compared to 32.4% in Q2 of '08. A lower tax rate is due to lower income from higher tax jurisdictions. A 30% rate for Q2 compares with a full-year '08 tax rate of 44.9%. However, excluding the large goodwill and intangible impairment charge we recorded in Q4 of '08, the '08 effective tax rate would have been 30.3%.

Now, I'll discuss cash flow on slide five. During the first six months of 2009, the Company generated $9.9 million of free cash flow compared with $26.2 million for the same period in '08. The key drivers of this difference were $18.2 million in net income versus $31.3 million net income last year and an increase in working capital needs for the first six months of 2009 versus prior year.

The increase in working capital needs was primarily due to payables coming down faster than inventories and AR as we significantly curtailed production activities and the associated purchases. We define free cash flow as net cash from operating activities less capital expenditures and dividends paid. And finally, capital expenditures decreased year-over-year to $1.9 million from $3.4 million in the second quarter of '08. Capital spending is primarily focused on new product development and lean initiatives.

Now, Bill will speak to the segment performance and to our markets.

Thanks, Fred. Please turn to slide six and I'll review Instrumentation and Thermal Fluid Controls segment results. Orders in this segment were down 4.5% from the second quarter of 2008 and up 26.8% sequentially from the first quarter. The sequential increase is due to longer-term orders in the aerospace business for landing gear that we'll begin shipping in 2011 and beyond.

Revenues compared to the second quarter of 2008 were down 11.3%. This was comprised of a 10.1% organic decline and a 6% negative currency impact, which was partially offset by a positive 4.8% due to acquisitions. Revenues were up 1.6% sequentially from the first quarter with relative strength in aerospace, power generation, and semiconductor, offset by weakness in other fluid technology end markets.

We ended the second quarter with segment backlog at $178.8 million or an 8.9% increase from last year and a 4.7% increase from Q1. This reflects the strong backlog growth in the military side of aerospace, partially offset by a decline in fluid technologies backlog. The segment's adjusted operating margin was 11.9% compared with 12.6% in the second quarter of 2008 and 12.9% in Q1 2009.

As a reminder, adjusted operating margin removes the impact of asbestos and special charges. The year-over-year and sequential decreases were due to lower sales volume and severance costs, partially offset by a favorable mix, lower material and labor costs, as well as income from acquisitions.

So now, moving to slide 7, I'll cover the Energy Products segment. For the second quarter of the year, Energy segment orders declined at 24.8% compared with the second quarter of 2008 as the order rate for our short cycle business fell sharply. The decline is a result of the rapid reduction in North American oil and gas drilling and production activities, which are more than 50% off the peak levels of last year.

On a positive note, we saw a 59.1% sequential increase in Energy orders from the first quarter of 2009 as we had growth from large international project orders in Q2 for the Middle East. For the second quarter, Energy segment revenues came in at $76.8 million, down 28.6% year-over-year, including a negative 6.5% FX impact. On an organic basis, this is a 22.5% drop in revenue, driven by significantly lower short cycle volume, slightly offset by growth in fabricated systems in North America.

Backlog at the end of the second quarter was $121.5 million, down 56.9% from the same quarter last year and down 4.5% from Q1. The segment's operating margin was 12.3% in the second quarter compared with 20.4% for Q2 '08 and 18.1% Q1 this year. The year-over-year and sequential declines are primarily due to the rapid drop in the short cycle volume and unfavorable mix and pricing we are seeing for large international projects, as well as costs incurred to reduce our workforce. This was partially offset by lower material prices and reduced labor costs.

So, I'll now turn to slide eight, which reviews our end market assumptions. Let me start with our largest end market, energy projects in the Middle East. We're seeing continued quoting activity in the Middle East and we have recorded a growth in orders in Q2 for deliveries to begin in early 2010. And we continue to see some order delays in the Middle East and pricing pressure is expected to affect margins going forward, but we're not experiencing any backlog order cancellations. And while order visibility is still limited, we're cautiously optimistic about large project opportunities.

Looking at the short cycle business, rig counts are still at a very low level and seem to trying to establish a bottom at or above 900 in the US and even though this is difficult to predict, we suspect that rig counts could stabilize between now and the end of the year. And as we said last quarter, once rig counts stabilize we expect that distributors will need time to burn down excess supply in the channels so that supply and demand can come back into same before we start to see a rebound. Consequently, we're not expecting any meaningful rebound for the remainder of the 2009 from the short cycle business.

Our aerospace business is a tale of two markets, the defense and commercial aerospace markets. The defense side accounts for about half of our aerospace revenues and continues to appear relatively steady in 2009. We are well positioned in defense on the Boeing Chinook CH-47 helicopter program, which is still strong and has proven to be a good platform to be on.

The commercial side of aerospace, however, continues downward and we've seen weakness across many commercial aerospace markets, particularly the business jet aviation market where build rates and spares have fallen significantly in 2009. There's also softness now in Europe, which had been relatively stable until recently. As we mentioned last quarter, we expect the commercial OEM aerospace markets will likely trend lower in the second half of the year and there's a growing expectation that air transport OEM build rates, particularly for narrow-body aircraft will be further reduced in early 2010.

Now, also from a seasonal standpoint, the third quarter is typically slow in the industry because of summer plant shutdowns. The commercial aerospace business, which is the spares aftermarket part of that, which is a smaller part of our aerospace operations, is also down, driven by a reduction in airline passenger traffic and reduced utilization of commercial aircraft.

Let's move on to the HVAC and steam related markets where the story remains similar to last quarter. Commercial and industrial HVAC is soft due to the lack of capital spending. We're seeing little to no new project activity in North America. Our MRO business is still steady, driven by repairs and upgrades of existing systems and we expect that emerging markets will continue -- will grow as we continue to expand our presence in geographies such as China, India, and Latin America.

In industrial markets, orders are softer in general industrial valves that sell through distributors in North America. The European market may have stabilized at this point. MRO activity continues to be stronger than the OEM and capital driven business and while it's a small part of our business, we're seeing some improvement in the semiconductor sector.

In power generation markets, demand is solid in the US and Europe for maintenance, repair, and upgrade work. As we said before, the uptime and efficient operation of a power plant is critical. So, we expect that MRO activity will continue to be relatively strong. Internationally, we're continuing to make inroads in China and India for higher pressure and more engineered products such as valves on turbine systems that require higher safety and reliability standards.

In the chemical and refining end markets, chemical markets are weak while petrochemical markets are still solid, particularly outside of the US and Europe. There has been MRO activity in the US and European petrochemical markets that we're watching carefully for possible signs of softening as maintenance and repair projects are completed. Aftermarket activity continues to be relatively strong as companies focus on compliance, safety, and efficiency.

Our maritime or navy business continues to be steady in 2009. We don't expect maritime to be a high-growth business, but should continue to be stable in the coming year due to the aircraft carrier program we won and for which we received large orders last year. Process end markets continue to be down significantly due to the decline in capital spending. However, those industries continue to invest in maintenance to keep their processes up and running.

This brings us to our expectations going forward. Although it's difficult to predict, we're hopeful that both our short cycle energy and industrial instrumentation markets have reached the bottom or at least the decline has slowed and we might see a leveling off from which we can build.

If that's the case, our customers and distribution channel partners would need time to burn off any excess inventory in the system before a true rebound can begin. And while we are seeing an uptick in orders for the large Middle East projects in the Energy segment, these new project orders are scheduled to begin shipping in early 2010.

We also expect the commercial aerospace market to be sequentially weaker in Q3 as aerospace is slated to the down cycle and therefore expect our third quarter, which is typically seasonally slow to begin with, to be significantly affected by the downturn in most of our markets.

That said, notwithstanding the lack of visibility in many of our end markets, we currently expect revenues for the third quarter of 2009 in the range of $138 million to $144 million and earnings, excluding special charges but including asbestos charges, to be in the range of $0.26 to $0.33 per diluted share.

So, before we go to questions, I would like to leave you with three key thoughts here. First, we're focused on maintaining a high quality of earnings, our teams are working hard to cut costs, reduce inventory to generate cash, and we continue to look for opportunities to consolidate the facilities, rationalize our businesses and accelerate moves to low-cost manufacturing sites.

And as an example, since the beginning of the year, we've reduced overall headcount by about 16% exclusive of acquisitions and the Energy segment is down by more -- by nearly 30% with most of that in short cycle business areas. We're also aggressively obtaining material savings from our suppliers to drive for higher quality of earnings.

Second, we continue to have a very strong balance sheet with a significant cash position and very little debt, and as Fred mentioned, we have a new $190 million unsecured credit facility, which was just renegotiated at competitive rates and has a term of 3.5 years. In times like these, our balance sheet is -- enables us to compete from our position of strength and our strategy is to use our balance sheet to acquire complementary businesses that are accretive and in line with our critical strategic initiatives. So finally and third, we're continuing to invest in our strategic initiatives so that we emerge from this down cycle as an even stronger company.

So with that, Fred and I are available to take your questions.

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. (Operator Instructions).

Our first question today is from the line of Kevin Maczka with BB&T Capital Markets. Please state your question, sir.

Bill, Fred, good morning.

Good morning.

Good morning, Kevin.

I guess first just help me connect the dots between the strong orders and the uptick in backlog and the revenue guidance for Q3. Are you just taking orders that customers don't want the shipments until maybe 2010, 2011? Is that just a timing issue here?

Yes, most of the larger project orders that we've booked in both energy and aerospace are scheduled projects that are delivered later in time. They're not going to be falling into Q3 or even Q4 for the most part.

Okay. And Bill, you said you're cautiously optimistic about the project business. Was there -- whether it be with the strength on the -- in the Middle East or the strength in the military side, was there any particular one big customer or project that really bumped those numbers up so significantly or is this something that's you think is somewhat sustainable?

Well, we -- as we noted, the quotation activity continues. As we've said before, what we've seen is some of those projects have actually been late as we've shown in the numbers here. So, we're cautiously optimistic as that quotation activity continues that we'll see more project work come our way.

Okay. Then, Bill, can you just clarify the statement, you made it a few times that you think the distributors need a couple of quarters to burn down inventory once rig counts bottom out. I guess haven't they been pretty significantly reducing that inventory already and what is it about the two-quarter lag that they need two more quarters beyond eventual bottom at rigs?

It's a rough estimate of once rig counts stabilize. So, assuming that we are stabilizing, we have said before we expect a couple quarters, the channel partners we work with very closely on their inventories, the turns of their inventories, the type of inventory they have on shelf and what they'll need, and we see typically that there are products in the inventory they have burnt down where we re-supply.

But the general business of restocking larger orders, what we will consider as distribution orders, is yet to materialize until their inventories come down further. So, we -- it's -- the burn down rates have been in the slower rate than I think people would have expected, but again we're waiting for the market to stabilize.

Okay. I'll get back in queue. Thanks.

Thank you.

Our next question is coming from the line of Mike Schneider with Robert W. Baird. Please proceed with your question, sir.

Good morning, guys.

Hi, Mike.

Good morning, Mike.

Maybe just on the third quarter again, can you give us a sense of what your assumptions are for Europe? It seems to me that the businesses in Europe will take an extended holiday this year. What have you heard, I guess, from your customers there and what are your assumptions in this guidance?

Well, I think in general, there's a number of shutdowns both within our faculties, as well as in our customers' that we expect to impact Q3. So, I do think there is a seasonal part and in addition to the seasonal part, there isn't maybe what's been historically the backlog around that seasonal part that would help fill in some of that seasonal drop.

So, I do expect we'll see that this summer in both the aerospace and in some of the other industries. We did mention that we've seen some stabilization in the -- in kind of the OEM on the flow controls side where equipment manufacturers in Europe export to the rest of the world, they are seeing healthier markets as we are in the emerging markets.

Okay. And then, the asbestos assumption built into Q3, is it markedly different from the $4 million we have been discussing as a run rate?

No, it's consistent, Mike. We've stayed around the $4 million mark.

And I know there's some noise quarter-to-quarter in the asbestos expense. But is there anything you'd call out this quarter that would explain it being below expectations?

No, I would just say -- as we said in the past, it's very volatile if you want to look at compared to what we sort of -- we went around our guidance, we were just a little bit better on indemnity and a little bit better on legal costs.

Okay. And then, drilling into specifically instrumentation in the third quarter, it looks like you're expecting it to be down 20%. You call that the commercial aerospace will be weaker sequentially. Is there anything else built into that number because it seems like a fairly healthy sequential decline that really must embed something more than just commercial getting weaker sequentially.

Could -- I just -- just for clarification, Mike, you're talking about Sequential Instrumentation and Thermal Fluids?

Yes.

It's going to be down how much?

20% organically and 16% with the acquisitions.

Okay.

And I'm just curious if there's any other markets in there you would call out that would be sequentially weaker other than commercial aero?

The aerospace part, as we mentioned, is weaker and it's weaker now in Europe as well. On the instrumentation side, some of the instrumentation that we sell through distribution is weaker. We've seen a little bit of softness in pockets, the Gulf Coast petrochemical activity seems to have slowed down a little bit. So, that's at risk in Q3, whereas maybe we have better business outside of the United States there.

But the weakness in the quarter is pretty widespread. It's not any specific one business that's driving it.

Yes, the other thing is if you think of our steam related businesses, this summer is typically a seasonal slowdown as well.

Sure. Okay. And then, orders within Instrumentation and Thermal Fluid, how big is the landing gear order that was booked this quarter?

It was -- as we said in the press release, it was -- most of the uptick in the orders was primarily the aerospace orders.

Okay, all right. And then, just a second question or next question on Energy. Can you give us one level more of detail as to just how the short cycle versus long cycle businesses declined year-over-year versus the 28% you posted? Just rough ranges to get a sense of what direction the businesses are going versus at 28%, 29% decline on average.

It was primarily the short cycle business that drove the year-over-year decline.

And with rig counts down 50%, was that business down 50% or more in revenue?

More than 50%. From our production standpoint, more than 50%.

Production and sales?

And sales as well.

Okay. And then, in the orders within Energy, I believe you booked a [Clan] pipeline order this quarter. Was that most of the sequential uptick for the Energy business this quarter, that one project?

It was a part of it, it wasn't all of it. Yes, we had a number of other orders in there as well.

That was probably about $20 million, is that a fair range?

I don't have that number.

Okay. I'll get back in queue. Thank you, guys.

Our next question is from the line of Jamie Sullivan. Please state your question.

Hi, good morning, Fred and Bill.

Good morning, Jamie.

Good morning, Jamie.

I'm wondering if you could talk about some of the pipeline of orders, the quoting activity. Are you seeing some stabilization as the pricing is recalibrated and that's part of why you're seeing some of the orders come through?

I think it's probably helped, but that's speculation that there's been expectations that capacity was available and material prices have come down the last year, so the quotes -- quoting activity, some of it was to go back over projects that have been let yet, so -- as well as possibly a stabilization in oil prices and oil prices coming up a little bit may have driven the decision making process, but again it's speculation.

Right. Okay. Then, anything in -- on the military side in the defense budget, positive or negative that you're seeing that developed since the first quarter?

I think it's too early to call. We haven't seen anything positive or negative that we'd be able to pin anything on at this point. I think we have to wait another quarter or two.

Right. Okay, so even on the proposals for Chinook F-22, C-17, all of those still kind of up in the air as to what's going to happen?

Well, it's not in the sense of the Chinook, I mean we talk about booking this order that begins in 2011. I mean, it's basically a recommitment to the Chinook program, so that one is in good shape.

Okay. And the others are still being debated?

Yes.

Okay, great. And then, with the new revolver, it sounds like M&A may become a little bit more part of the strategy here over the next year or so. Can you talk about the pipeline there? Any activity, how pricing is moving for you guys?

The activity has come up, obviously from last year, the end of the year where there was very little activity in M&A. We see more and more at least discussions. There is definitely a concern about the uncertainty looking into the markets and the pricing and evaluations. But we think this is a case where time is in our side and as we get sort of the trailing 12 months behind us that established the new levels we are at today, it's time to put our capital to work.

Right. Okay. And similar types of businesses that you're looking at there, aerospace, aftermarket, MRO type businesses?

Yes.

Okay, great. Then, I was just wondering what on the restructuring programs, how -- do you feel like you're -- you've done most of the work on that front and if you can just sort of size the -- what you see as the annualized savings from those programs and how much you've recognized so far?

We -- I don't think we're not -- certainly not done, we have more work to do in the next couple of quarters, but especially the Energy segment, we've done a lot of changes as Bill mentioned, in excess of 30% or close to 30% in headcount reductions.

We don't quantify the number and that's because there's a difference between taking it out on a just a variable basis where you would normally take people out and then, there's also obviously some of the semi-fixed costs you're taking out. So -- but it's been significant, obviously not as fast as volumes are going down, we are being pretty severely impacted by the lost absorption and some of that semi-fixed costs that are stickier in this environment.

But we've also worked hard to reduce inventory, we've taken inventory down. If you exclude acquisitions, it's something like $25 million, $26 million, I think, since the beginning of the year. So, we're driving hard to reduce inventory at the same time, as well as the investment we've made in India and continue to make in China to move more production to those locations.

Okay, thanks. And then, just last quick one on tax rate. What you would be thinking there, I guess, in the near term?

Well, the tax rate, we do see coming down beyond the 30% again and just sort of helping in the guidance, our benefit in Q3 will be, we think, around $0.02 compared to Q2.

Okay, great. Thanks a lot, guys.

Thanks, Jamie.

(Operator Instructions).

Our next question is from the line of John Franzreb with Sidoti & Company. Please state your question, sir.

Good morning, guys.

Good morning, John.

Is the retool on the 30% drop in the overhead in the Energy side that you expect the recovery in that market to be a lot longer than maybe we're seeing a turnaround in the other side of the businesses?

The drop in the short cycle business? Sorry, I didn't hear your question clearly.

I'm just -- I mean, I was looking at the reset in the number of people you've cut in one side versus the other and I was just wondering if you take away, is that -- it's going to be a lot longer before we see a return in the energy side of the market?

Well, that's a big question obviously is when you see the big rebound. Hopefully, a rebound in the short cycle business, which is where most of the --

And I think across the board, all our businesses have a plan that we're going to align our cost structure to what we think demand is going to be looking out quarter or two, not looking out a couple of years. And the other lean activity we've done and we continue to drive aggressively is to build a -- is to build a process that can be able to cycle. So, it's a combination, but we're not waiting to expect the market to come back. We're going to make the adjustments we need to make, as well as invest in the lean and the better process so we can perform better as we come back up.

Do you have another set of cost reduction activities that you're thinking about going forward or do you think that you -- pretty much what you have to do from here to the end of year is what puts you on par of what you going to be at?

There's a lot underway right now and we have further in front of that as well.

Okay. The -- can you update us on what's your global sourcing initiatives are looking like right now?

Yes. We began -- of course, we are developing a capability to not only purchase and manage supply from overseas, but then develop on-the-ground capability and so, we've invested in addition to the facility we have in China for example, we've opened up offices we've incorporated in India, we've hired a team of people and looking at opportunities to manufacture as well as source and develop product and software over there.

And in the aerospace group, when we acquired the Bodet firm in France, we also acquired with it a company called ATLAS, which is based in Morocco, which is a low-cost site. So, we have a low-cost manufacturing factory in Morocco that predominantly is focused on the aerospace although in the industrial part where they are, there's also electronics and other European manufacturers. So, we're leveraging at three locations now, China, India, and Morocco to develop a low-cost footprint for our operations and supply chain management.

Great. Thanks a lot.

Thank you. Our next question will be coming from the line of Thomas Brinkmann with BMO Capital Markets. Please state your question, sir.

Good morning. I apologize in advance if my questions have already been covered. I joined the call late due to conflict. Just curious about some of the new statements in your 2009 market assumptions. You talked about how industrially Europe seems to have stabilized. I'm just wondering if you can talk about that as well as the improvement in semiconductor activity after you said it was off sharply last quarter.

Yes. We -- semiconductor, I'll start with that one, is a very small part of our business overall. So, it's probably more of a market piece of news than it affects Circor, but we do service, sell products through into the LED side of semiconductor and that seems to pick up, largely driven by growth in China.

That's the similar refrain when we think of the thermal fluids businesses that we have where we sell products that go on equipment manufactured by exporters out of Germany and other places that ship equipment around the world, and they are seeing a rebound or continuation of growth in emerging markets in China and others and that's where that comment comes from that we've seen a little bit of stabilization in Europe, particularly around the manufacturers of equipment that's exported.

Okay. And then, next, just given some of the softness in some of the energy end markets, I'm wondering if there's any pricing pressure that you're seeing relative to obviously a lot of capacity that's unused out there in the marketplace?

We expect to see pricing pressure. We've seen a little bit in some of the thermal fluids side of the house and we expect to see it in the Energy side as well.

Okay. And then finally, I guess is it still current, the information that you've talked about the past, about having your energy exposure split about 70% gas and about 30% oil, is that so current? And I guess, would the M&A outlook be for you to strategically change that or do you sort of agnostically -- sort of agnostic on the mix of that as you look at acquire new businesses?

Well, on the Energy side, that is an appropriate approximation, the 70-30 split. We like natural gas space, it's particularly hard-hit right now, but it is an area that we would continue to grow if we had the right opportunities, as well as some of the other areas in the business outside of Energy we talked about, aerospace and thermal fluids areas.

Okay. That's all I had. Thank you.

Thank you. Our last question is a follow-up question from the line of Mike Schneider with Robert W. Baird. Please state your question, sir.

Bill, on the pricing issue within Energy, you mentioned you expect to see pressure ahead. I guess what have you seen thus far and maybe just use as examples things you've booked this quarter, how far has pricing declined? I guess in my travels you've been through, the European competitors suggest that project pricing is down 20%, but I guess your material costs are down substantially as well. If you could just update us on both fronts?

The material costs are down, capacity is available. So, that works to our favor. There is pricing pressure. We are not going to see the kind of premiums that we saw when the markets weren't tight last year. So, if you look at our markups on our projects, they are going to be less. I don't see how a quantitative number for that or --

Well, I think we've talked before about comparing to the last year. We're probably seeing 300-basis point to 500-basis point impact depending on -- in the -- I'm talking about the project business, that type of impact on pricing.

And indeed, Energy margins were down 6 points sequentially, but obviously on much lower revenue. How much of that pricing pressure is actually in this quarter's margin of 12.3% or is that really yet to flow in?

A lot of it is in the -- some of it -- but it's still -- is not the full amount, but we've seen a fair amount already in Q2.

And in Q3, I think you've talked just generally or conceptually that you would expect this cycle to hold Energy margins above 10%. Is the present margins on Energy are going lower from here on the lower revenue in Q3, but do you believe you can still hold 10%?

It's going to be tough, but we -- we are -- that's we're still shooting to do.

Okay, thank you.

At this time, we've reached the end of the Q&A session. I'll now turn this conference back over to Mr. Bill Higgins for any closing or additional remarks.

Well, thank you everybody for your interest in Circor and we look forward to talking to you at our next call. Have a good day.

And that concludes our conference call. Thank you for joining us today.