Circor International Inc (CIR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to CIRCOR International's fourth-quarter and year-end 2011 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.

I would now like to turn the call over to Mr. Dennis Walsh from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

Thank you and good morning, everyone. On the call today is Bill Higgins, the Company's Chairman and CEO, and Fred Burditt, the Company's CFO. The slides we will 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 Forms 10-K and other SEC filings, including the 2011 quarterly reports on Form 10-Q. 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, February 23, 2012. While CIRCOR may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so.

On today's call, management will often refer to adjusted operating income, adjusted operating margins, and adjusted EPS. These metrics exclude any pretax special charges as well as asbestos and bankruptcy charges related to the Company's Leslie Controls subsidiary. The reconciliation of CIRCOR's non-GAAP adjusted operating income, adjusted net income, adjusted EPS, and free cash flow to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website.

I will now turn the call over to CIRCOR's Chairman and Chief Executive Officer, Bill Higgins.

Thank you, Dennis, and good morning, everyone. I will start with a few brief opening remarks before turning the call over to Fred for the financial overview.

2011 was a successful year for CIRCOR. From a financial perspective, we grew revenues by 20% and adjusted EPS by 8%.

In line with our strategic plan, we made progress on a number of fronts that set the stage for our long-term growth. A few highlights include the following.

First, we permanently resolved Leslie Controls' asbestos liability by funding the trust as Leslie emerged from bankruptcy. Second, we continued to make strategic investments in engineering, proprietary product development, and system integration, resulting in major program wins valued at over $200 million for the Aerospace group on great long-term platforms including the Black Hawk helicopter and Airbus A330.

Third, we expanded into new emerging markets through the acquisition of SF Valves, which provides us with a presence in the large and growing Brazilian energy market. We are investing in Brazil to building a strong local production and service business to supply Petrobras and others in a fast-growing domestic energy market.

Next, we made progress in expanding our footprint and engineering capability in India. We now have more than 100 employees in India and recently broke ground on a new facility that will be used to manufacture control valves for both local and export power-gen markets.

And finally we continue to build stronger leadership across CIRCOR, including the addition of new leaders for our Aerospace and Energy segments as well as a new VP of Human Resources.

Looking at Q4 specifically, CIRCOR grew revenue and EPS in line with our guidance. Revenues were up 12% year-over-year to $217.1 million with positive contributions from all three segments. On the bottom line, adjusted EPS grew 11% to $0.59.

So with that as background, I will turn it over to Fred to review the quarter in more detail, and then we will describe our end markets and provide guidance for our first quarter of 2012.

Thanks, Bill. Please turn to slide three and I will begin with consolidated financial results and then get into the segments.

As Bill mentioned, consolidated revenues for the fourth quarter increased 12% year-over-year to $217.1 million compared with the fourth quarter of 2010, and were up 3% sequentially from the third quarter. All segments contributed to the year-over-year increase which was comprised of 11% organic growth, 2% from acquisitions, partially offset by 1% negative foreign exchange.

Adjusted operating income was $15 million, up 15% from the fourth quarter of last year and down 4% sequentially. Our net income for the quarter was $10.3 million or $0.59 per diluted share, compared with net income of $7.7 million or $0.44 last year. Last year, net income included pretax Leslie asbestos and bankruptcy charges of $2.2 million. Exclusive of this impact, adjusted earnings per diluted share was $0.53 for Q4 last year.

Now I will turn to our segment performance beginning with Energy on slide 4. Energy segment bookings were up 29% year-over-year due to lower international projects as well as a tough year-over-year comparison. This was partially offset by continued growth in North American short cycle.

Q4 of 2010 included a $10 million individual order for pipeline solutions and a strong order level for large international projects. We will discuss this market in more detail later in the call. Ending backlog of $169.3 million was down 6% year-over-year.

Energy revenues of $110.2 million increased 22% due to 19% organic growth, mostly as a result of the strength in North American short-cycle business and pipeline solutions. The remainder of the revenue increase includes 4% growth from the Brazilian acquisition completed in the first quarter of 2011, partially offset by negative foreign currency of 1%.

The segment's adjusted operating margin was 8.4%, up from 6.7% in the fourth quarter of 2010 and 7.2% in the third quarter of this year. The year-over-year increase was primarily driven by improvements in the short-cycle and pipeline businesses, partially offset by the Brazilian acquisition. We will elaborate more on the backlog and the margin outlook later on in the discussion.

Within our Aerospace segment on slide 5, bookings were up 16% year-over-year and down 43% sequentially from the third quarter. The year-over-year increase in orders was due to the ramp up in commercial aerospace production and higher landing gear orders. The sequential decline was due to a $26 million multiyear landing gear order for Sikorsky we recorded in Q3.

We ended the quarter with a segment backlog of $158.3 million, an increase of 8% year-over-year. Revenues of $36 million were up 2% year-over-year, driven entirely by organic growth in all areas, with the exception of headwinds in the CH47 military aftermarket and spares.

Adjusted operating margins were 8.6%, down year-over-year from 14.1%. The margin decrease was primarily due to lower margins at our landing gear operations and increased investments for future new program programs on the A350, 330, and Black Hawk programs. This was partially offset by favorable volume and associated leverage.

Now I'll move to slide 6 and the Flow Technology segment. Bookings were up 5% year-over-year, and if you exclude the unfavorable year-over-year comparison of the LED equipment, which was partially strong in 2010, Flow orders increased 11%.

We ended the fourth quarter with segment backlog of $69.8 million, down 10% from last year and 10% sequentially. The backlog decline was primarily related to softness in the LED equipment as well as delivery of several large Navy projects since last year.

The decrease in LED equipment orders was a result of a slowdown in new plant investment in China driven partially by lower government incentives. Revenue increased 4% year-over-year to $70.9 million, entirely due to organic growth spread across all our markets -- excuse me, I said increased. Increased 4% across all of our markets with the exception of LED equipment.

Flow's fourth-quarter adjusted operating margins were 12.9%, up from 12.5% in the fourth quarter of 2010 and down from 13.6% in Q3. The year-over-year improvement is due to volume, pricing, and productivity partially offset by growth investments focused on growing power generation markets.

Slide 7 includes highlights from our consolidated P&L, most of which we have already focused on. The corporate expenses were flat year-over-year at $6.4 million, and the adjusted effective tax rate in the quarter was 24.7%.

Now turning to slide 8, during the fourth quarter we generated $15.2 million in free cash flow, comparable to 2010. Year-over-year we had higher earnings offset by increased capital expenditures. With that, I will turn it back to Bill.

Thanks, Fred. Now please turn to slide 9 where I will be covering our market assumptions and key growth and profitability drivers for 2012. Let's start with Energy, where we recently hired a new President of the group, Mahesh Joshi. Mahesh has deep industry experience and was most recently president of the centrifugal division of Cameron. We are excited to have Mahesh on board; and building on his experience and successful track record, Mahesh has hit the ground running and will lead the improvement and global growth of our Energy business both organically and through strategic acquisitions.

The North American short-cycle valve business continues to be quite strong. We are winning new customers, taking market share, and performing well operationally. Rig counts, where we have seen a shift from gas to oil rigs, remain high; and demand from distributors continues to be strong. The short-cycle business has been a growth engine and highly profitable in 2011, and we expect it to continue in 2012.

The demand environment for large international energy projects is working through the cycle, with the bottom likely behind us. Pricing and quotation activity seem to be improving, and there is anecdotal evidence that capacity utilization is improving as some suppliers are beginning to extend lead times.

Let me take a few minutes to discuss our margins within this part of the business, as well as actions to improve. In 2011 the large project business was unprofitable, and therefore partially offset the great performance of the short-cycle business. As we've been discussing for some time now, the primary issue has been the low-margin orders that we have had in our backlog.

As we enter 2012, we continue to have approximately $50 million of backlog that was booked in 2010 at margins comparable to the shipments we made during the second half of 2011. We expect most of these orders to ship in the first half of 2012.

In addition to the pricing drag in backlog, there were operational, customer, and supplier issues that contributed to delays in shipping projects on time, resulting in less volume and leverage in the fourth quarter than we expected.

We have taken significant actions in 2011. We will be continuing in 2012 to address these issues, including improved pricing; more efficient factory throughput and supplier management; cost restructuring; and we've added experts from other parts of CIRCOR to improve lean and operational execution. We have begun to see benefits from our actions, although because the project business is long-cycle, it takes several quarters if not a year to show meaningful progress from improvements made.

Most important, we have taken action to improve the senior management of our long-cycle project business. In January we changed out the Managing Director and placed Wayne Robbins, our Group Vice President for Flow Technologies, on the ground in Italy full-time to oversee the improvement plan. Let me remind you that Wayne has done a great job improving our Flow Technologies group, with growth and margin expansion for the past three years consecutively. Additionally, most of the senior management team in Italy have been top-graded, and we have confidence that Wayne and the new team working with Mahesh as the new group President will ensure a successful improvement of this business and take advantage of the market cycle as it continues to improve.

The last of our three Energy markets is the pipeline market, which has been experiencing steady demand overseas. In the US the market for smaller-diameter pipelines is strong, particularly around shale formations where infrastructure is being built, while the large-bore interstate pipeline business remains soft. We've been shifting our business model accordingly to take advantage of the growth around the shale infrastructure.

Looking at the Energy business overall, we have a strong short-cycle business, a stable pipeline business, new opportunities in Brazil, and a long-cycle business where the market is slowly improving as we take significant actions to improve performance.

Turning to the Aerospace markets, beginning with commercial aerospace, passenger traffic growth rates began to moderate at the end of last year. However commercial OEMs, particularly Boeing and Airbus, pressing forward with planned production ramp-ups. And we've recently won several large programs. The long-term fundamentals for the OEMs is positive, driven by demographics in emerging markets in Asia-Pacific and the Middle East.

In business aviation, we expect demand to remain flat through 2012 with the one improvement area being the sale of larger business jets.

On the defense side, budget constraints and the wind-down of the wars in Iraq and Afghanistan are headwinds for us. The CH47 program has experienced lower activity in spare parts sales for all of 2011, and we don't anticipate a recovery soon. But other programs won in the last few years, such as the Black Hawk landing gear, have and will continue to help offset this weakness. We are watching the cutbacks in defense and working to expand our commercial aerospace business and diversify our customer base.

In addition to the softness in defense, two other factors relating to the overall landing gear business have put pressure on margins. First, we have continued to make investments in the direct support of new program wins, such as the Black Hawk helicopter, A350, A340, and A330. We should start to see revenue from these programs beginning in 2013.

Second, we've increased the level of investment in people and equipment at the California landing gear facility we acquired in 2010 to expand our commercial OEM and aftermarket capabilities. These investments fit squarely with our strategy and will better position us to meet OEM and aftermarket customer standards and compete more effectively.

Looking at Flow Technologies end-markets, most of the process and industrial end-markets have remained solid with steady improvement during the past couple of years. As we've mentioned before, the one exception is the LED equipment market, which dropped off in Q3 after a number of strong growth quarters. We expect this demand to begin to recover later in 2012 as long-term demand for LED products continues to drive investment in manufacturing capacity in China.

The power generation market continues to be strong especially in emerging markets. Right now in developed economies of North America and Europe there continues to be steady demand for MRO and efficiency upgrades to the existing power plants. This is a market we are especially bullish on, as there are a number of factors that will drive long-term growth.

To capitalize on this market we are making investment in global sales, marketing, and product development. In Q4 of last year we purchased land in India to build a new manufacturing facility. By designing and manufacturing control valves in India, we will be better positioned to capture a greater share of the high-growth domestic and global power-gen industry.

Chemical and refining is a mixed picture. Refineries have excess capacity around the world, and demand remains flat, while oil and gas and petrochemical markets have been improving. In general we expect these instrumentation end-markets to modestly improve with the economic recovery.

In Navy, our business has been steady, although we don't expect it to be a growth market for us. Our long-term visibility is uncertain as defense cuts may delay new ship programs. In the near term, however, the outlook is positive for CIRCOR as we continue to have a strong backlog for aircraft carrier control valves and other international orders.

In the HVAC and steam markets, MRO activity and demand for energy efficiency upgrades is a steady business, although there continues to be little new construction-driven demand in North America and Europe.

So that brings us to our expectations for Q1. Given our market outlook and the investments that we are making in future growth and operational improvements, we expect revenue for the first quarter of 2012 to be in the range of $198 million to $205 million, and we anticipate earnings to be in the range of $0.35 to $0.45 per share. So I will let Fred give you a little additional color here.

Thanks, Bill. In our Q1 guidance we are projecting revenues to be about flat with prior year, as single-digit growth in Energy and Aero is offset by lower Flow from the LED equipment market. To prior quarter we will be lower, as Q4 typically is our strongest quarter and we had some good project shipments in Q4 including pipeline and Navy.

Segment margins we anticipate to be slightly lower than prior year and last quarter, as Energy still has low-margin backlog and some material pressures that won't be offset until our Q2 price increase begins to take effect. Aero should improve sequentially and Flow should be down from lower volume and continued growth investments.

We anticipate corporate expenses to be in line with the fourth quarter, about $6.5 million per quarter. As you know, we don't give full-year guidance, but we do expect full-year revenues to grow in the mid single-digit range with margins improving the second half over the first, primarily as Energy margins and backlog improve.

With that, we will go to questions.

(Operator Instructions) Charley Brady, BMO Capital Markets.

Thanks. Good morning, guys. I just wanted to focus on the Energy segment and the margin picture in Q4 and looking out into Q1. Maybe we can a little more granularity on what happened with margins in Q4 on some of these customer issues or delays. You had been targeting basically a 10% margin for Q4. It doesn't sound like that is going to happen in Q1 either.

I'm just trying to get a sense of -- when do you think it gets back into a double-digit margin in '12?

Charley, this is Fred. As it relates to the Q4 results, yes, we did miss the target. Two major issues that happened.

We did -- sales were lower in the Energy -- in international project business, as well as we had our profitability of our Brazilian operation was not what we had anticipated. So probably they were equally responsible for the miss in the quarter. The revenue miss, it is a combination -- as it was before -- with customer issues, some supplier issues, and some of our own ability to meet shipment targets.

As we go into Q1 and Q2, we still have this backlog. As Bill mentioned we have $50 million of backlog we booked in 2010, and it still has significantly lower margins than we would like and were pretty similar to what we've been shipping the last couple quarters. So that is one of the biggest issues we have going forward into next year.

So it is really the second half of next year where we will see that improvement that we had talked about doing -- getting to earlier.

Are the issues with Brazil and some of the internal issues in getting on-time delivery, is that being resolved? Or when does that get resolved?

I will speak to the on-time delivery issues. Bill went through a lot of actions we have taken, and a lot of changes in people.

So there is a lot of effort, continuous improvement effort. There is a lot of relooking at our systems and how we go to market. We are working with suppliers. So all those things have already being -- been worked on actually obviously for months.

But then that will be a slow improvement over time. This is a long-cycle business, so it takes a while to -- especially for example if you are working on a supplier issue, you are still six months, nine months out if you're working on today's orders. So that is -- we are getting improvements, but it is slow.

On the Brazilian side, again this is a long-term strategy. We knew this was a tough -- I guess [to Simon] a great market, great growth potential; but it is going to take us quite a while to get that operation capable of making, producing, and selling to the large oil and gas market.

So I would not -- we don't anticipate that improvement. It will improve, but it will not have dramatic improvement in the short term.

How much was Brazil a drag on margins in Q4?

As I said, it was probably worth half the miss to the 10%.

Okay. No, that's clear enough. I'll hop back in the queue. Thanks.

John Franzreb, Sidoti & Company.

Could you talk a little bit about the investment cost you expect to incur in the first quarter, and maybe quantify it a little bit or at least put a little color on what you are doing besides some of the reorganization of personnel?

Well, we will continue the investment that we mentioned on the new programs in Aerospace as some of those are longer-term. We will continue building the facility in India. Fred was just talking about the Brazil operations.

I'm not sure that is a lot different than what we've been doing, if that is your question.

Okay, I just wanted to know what there is incrementally any more that we are talking about here. You have twice called out the LED market in recent quarters as headwinds. What is the size of that business? Can you just provide a little color of what you are providing into that market that has been both positive and negative in recent quarters?

Let me give you a little color and then I will let Fred comment on the size of it. We supply equipment that puts air systems around LED manufacturing equipment that goes into facilities. Primarily the market has been driven by Chinese investment in plants, and there are still a number of new plants coming online, new fabs for producing LED lights in China this year.

Just the number of plants put up last year was quite a strong growth area. It slowed it down in 2010 with the cutback in some of the Chinese government subsidies. Some of those subsidies have been put back in place, and the long-term consumption of LED lights for lighting for backlighting and televisions and other things has a really good, long-term growth potential.

So we are going probably a three- or four-quarter slowdown as the demand catches up with the capacity. So we expect and our customers are telling us we expect to see that pick back up towards the second half of 2012. I don't know, Fred, if you want to comment on the size of the business.

Yes, and the size of the business is -- due to its large cyclicality has been large. It has been between $20 million and $40 million. So it is a good size business for us.

And Fred, right now it is running at the lower end of that range, or no?

Well, it is not at that level. Yes; on a run rate basis it is running at the lower end right now.

Okay. Regarding the roughly a third of the energy backlog that still has -- call it the $50 million spillover from 2010. You said you expect that to all ship in the first half of this year. How does the margin profile look like for the balance of that backlog?

Just to clarify, we expect most of that to ship in the first two quarters; there probably will be some leakage into the second half. But the bulk of it obviously in the first.

That's helpful.

If you look at our bookings that we've been able to take since that time, we've had a significant improvement in the margins in the backlog. So we don't to exactly quantify it, but it has been a material improvement. And we expect that hopefully to start to gradually improve some more.

Okay. Thanks a lot, Fred.

Matt Summerville, KeyBanc Capital Markets.

First, Fred, just a question on pension. Can you review what your pension funded status was at the end of the year; what you incurred in expense in '11; what you will incur in '12; and then any cash contributions you plan on making, please?

Yes. I don't have that right in front of me. I will get you that in a minute, Matt. I will come back and answer that.

No problem. I have a couple more here.

With regards to the Energy business, if I think back, we heard that the second half of '10 was going to get better. In early '11 we heard the second half of '11 was going to be better. And now we are here in early '12 hearing that the second half of '12 is going to be better.

And at that point it sounded like it was mostly a backlog issue. Now we've been hearing still a backlog issue; and you have quantified it, so we appreciate that. We are having some customer things, some supplier things. We're having our own issues with on-time delivery.

It sounds to me like internally this business is getting worse, not better. Can you help convince me otherwise?

I think there is a fair point that the business has been more challenged than we thought. We have a very good, much better improved view of the backlog, the pricing in the market. We've put controls in towards the end of the first quarter of last year around higher pricing. And with the long lead time that just takes a period of time to get through the backlog.

The backlog we are looking at today, much of it was shipped at the very end of 2010, when we showed pretty significant increase in bookings. Unfortunately, that was done at lower pricing.

So there is a combination of things. We had expected to get more volume through in the fourth quarter, and we did struggle with the flow of material, getting material on time, getting it through the system, and shipping it.

So that, we do own the operational miss there. But the fundamental issue here is pricing in the backlog, and that backlog not moving through faster than we had hoped to get it through.

So perhaps some of these other issues that you and I mentioned are resulting in that backlog moving through your P&L effectively slower than you otherwise would have expected. Then, I guess Bill, is there any way that you can lead us down a path to help understand if that $50 million is priced at X, the stuff you are booking now is priced at X plus how many basis points? Are you able to give any color on that?

We haven't disclosed that. We do track it (technical difficulty) detail at the business. But we haven't disclosed that to the market. But it does improve.

When we talked about getting to 10%, we took that into the equation. So we expect, again, as we get through that $50 million to see a significant improvement in the second half of the year.

So in the second half, we should see 10%; not in the first. I am talking to OP margin in Energy.

But I guess as you think even just a little bit longer term about this business, where can the margins go? For example, are you looking at an exit rate in '12 at 10%, or something better than that?

It should be better than that. It will take --

The other thing to consider for the overall Energy group, and we are talking about the Energy segment, the short-cycle business -- as we talked a little about it at a conference last week -- has been operating in the high teens. So as the short-cycle business historically has been a lower profitability business, the project business has been as high in the past. So driving improvement in the project business should get us well into the teens, at least in out-years. Not so much in 2012, but as we go forward it should be a mid-teens business.

In absolute dollars, if we can switch gears over to Aerospace for a moment, obviously you have talked about the A350. You have talked more about the 330 and the Black Hawk, I think. How is the CIRCOR's RD&E expense, either as a percent of Aerospace revenue or just in dollars?

Is it moving from -- did it used to be $5 million and now it's $10 million and it is moving to $15 million? Can you help frame up how that looks in '11 to '12 to '13? That would certainly help us, I think, model those margins more accurately.

Maybe I can help you there a little bit, Matt. The expense or the incremental expense that we are putting against these programs is again probably 200 to 300 basis points. And it has been that way. It'd probably be a little closer to 300, it will be around 300 probably in 2012. It has been more like 200, and I think it was like 150 last year.

So that is the biggest investment. That excludes the California acquisition activity, which again is more of an integration, getting a facility prepared for the long-term growth.

Got it. Then, Fred, do you have that pension stuff?

Yes, I do. Just -- pension is about 80% funded; and the cash contributions, I think you asked, in 2012 are going to be about $2 million we think at this point.

Okay.

And expense in 2011 was $1 million; I think in 2012 it might be slightly lower.

Got it. Thank you, guys.

(Operator Instructions) Alex Blanton, Clear Harbor Asset Management.

I was going to ask about the Energy backlog, but I think you have covered that pretty well. But going on to the guidance -- can you hear me?

Yes.

The guidance for the first quarter, $0.35 to $0.45, I am looking at the Thomson ONE consensus for the quarter was $0.60. Now that is only comprised of three analysts, but I am wondering why there is such a big difference there.

The consensus for the year is $2.80. But if you are starting off with a midpoint of $0.40 for the first quarter; and you do $0.40 in the second quarter; and then you get back to the $0.70 a quarter rate for the second half, based on what you said before, it looks like for the year it would only be $2.20.

I realize you are not making -- giving us guidance for the year. But the $2.20 would be only slightly higher than the $2.10 you just did. How do you explain the consensus numbers being so far away from what the Company is really doing? That is the concern here in terms of the Company's communications with the Street.

Alex, this is Fred. I think it is pretty straightforward. I think there's two things that are called the differential between what you are talking about, the Street, versus what we talked about in Q4 and our guidance.

The first is Energy margins. We had anticipated getting to the 10% range in Q4. We've talked a lot this morning about why that is now not going to happen till later. That is probably the biggest.

And the second is I think our volume is slightly lower than the Street anticipated at the time. I think some of that is probably the drop-off in the LED market, which again the Street I don't think totally appreciated that.

I think those are the two biggest drivers. Again, I don't run their models. But that would be my summary of really the biggest gap between.

I understand the reasons for the gap. But my question really is -- why is there a gap? Why didn't the Street understand all these things ahead of time, so that the numbers they were using would be closer to reality?

I can't answer that question other than what we have talked about this morning. I think we've explained why we did not hit where we were anticipating.

I understand that, but apparently investors did not know that this was happening. I'm just wondering, does the Company have any plans to really improve the communications between the Company and the analysts?

Because clearly the numbers in the consensus numbers for the first quarter and for the whole year were way away from what the Company was really doing. Did the Company really look at those numbers, the consensus numbers, and say -- gee, maybe we ought to communicate better because people's expectations are way too high?

These things really affect the price of your stock, you know. If expectations are way above reality, does the Company have a need to resolve that difference, and let people know what is really happening ahead of time?

You obviously follow us, so we only give guidance out a quarter. We did hit our range in Q4. I think we have communicated where we think we are coming in. And as we always say, things always change, and we are giving you an update as we always do on what we have seen in the changes.

I understand that, but -- I'll take this off-line. It is just that there does seem to be a lack of communication here when the analysts' estimates are so far away from what the Company is actually doing. Anyway, I'll get off and let someone else ask a question. Thank you.

John Franzreb, Sidoti & Company.

Just regarding the change in the rig count mix, from oil from gas, can you just talk a little bit about the pluses and minuses of that change, how it does or does not affect you?

In the mix, John, we look at the total rig count activity. That is really the best indicator for us. There is a secondary effect depending upon the installation, the geographic infrastructure, depending upon the shale formation or the location in the US or Canada.

If there is more oil or more gas, we might sell a different size set of valves. For instance we might sell larger valves for natural gas and smaller valves for oil in some cases. But it depends on the infrastructure that is in place, so it is different.

Really for us when we look at the top-line numbers of rig count activity, whether it is oil or gas, correlation with our demand is pretty steady.

Okay, so it is really a neutral effect is really -- you can't call out one way or the other, just looking at the numbers on an absolute basis?

At the aggregated level you wouldn't see the difference. We would see it regionally.

Okay. You talked a little about supplier lead times in the large project market. Could you just provide a little bit more color on that, Bill? Just help me with that.

Is, it is anecdotal. As you probably know, it is hard to get capacity utilization understanding in the large project business. But there is not a lot of suppliers with large forged ball valves that go into the higher applications in oil and gas.

So we try to get a sense of where is the capacity, and that that drives the pricing behavior in the market. Anecdotally we are seeing some signs of lead times going out for certain pieces of equipment -- and around the world, not just in one location. So we are seeing a slight increase in lead times at suppliers, which indicates to us there is a supply constraint and people are having a struggle delivering to the times that they committed to, say, six months or a year ago.

We take that as an anecdotal sign that the market is filling in, that there is enough activity out there in the large-project business that, if that continues, we should see an improved pricing environment.

Okay. Thank you very much, guys.

Marty Pollack, NWQ Investment Management.

Yes, I guess following up on Alex Blanton's question, I think this is I guess the one thing that I'd just like to understand from the guidance, the limited guidance for Q1. Clearly the Street had expectations of a higher number. But as we move into Q2, Q3, certainly in the second half based on what you are saying about the recovery in the Energy margins in the second half, is there a comfort level that -- forgetting Q1 -- that is going to lower full-year earnings targets, but overall the other quarters look more or less doable, if you could say that? Just based on what is essentially certainly improvement into the second half, maybe Q2 also suffers. But if you could just maybe provide a little bit more color on those other quarters that would be helpful.

I think that is a fair comment. We expect the second half -- and in general across the businesses, not just the Energy project business which we have been focused on, but across the businesses we expect the second half of the year to at least gradually improve.

In the project business, the big swing has been the profitability in backlog. We had expected to get more volume through in the fourth quarter. That volume slides into the first quarter, with lower profitability.

So that is why we are saying it is going to take us a couple of quarters to get that $50 million approximately -- get that $50 million of lower-priced backlog through, which sets us up for improved second half of the year in the project business.

Presumably, whether you provide guidance or not, as you might have seen the estimates for Q3 and Q4, I'm just wondering whether the better than exit rate of 10%, which is what you are implying, would suggest that you're comfortable, let's say, with any notion that the second half could be significantly better or, let's say, in line with what some of the thinking is out there. Again, I know I'm kind of pushing you towards a guidance number, but I'm just trying to get a sense of that, whether second half actually will be significantly better, near what would have been expected.

Same question I guess; just trying to get a little bit more handle on whether that exit rate really does influence the way the third and fourth quarter finish the year. Again, it is the project, Energy segment itself.

We haven't -- we don't give full-year guidance because there is a lot of volatility in many of the end-markets that we serve. But assuming the markets hold steady and if not slightly improve from where they are, again we would expect to see a second half of the year that is better than the first half of the year.

Yes. Just one last question. I may have missed this, because I think I missed the first couple questions in the Q&A.

The investment drag in Q1 and any of that Q2 that continue, have you quantified that number?

We haven't really quantified that number, Marty. But as you said, most of those -- that investment has been going on in Q4 and Q3. So we talked about the Aerospace ramping up just a little bit more with some of these other programs; so that is going to be going up a little bit.

The power generation investment will impact the Flow margins during the next year slightly, which will bring them down slightly, maybe 50 to 100 basis points. But there isn't any really more -- it would be incremental. I think the point is really that those investments are continuing.

Okay. Thank you.

(Operator Instructions) Charley Brady, BMO Capital Markets.

Thanks. Just a follow-up. Maybe I missed this, but I want to be really clear on the Q1 and your guidance. Are you anticipating Energy products operating margin to be down year-over-year?

On the Energy side?

Yes. I mean you did 6.4% margin in Q1 of last year. Would you anticipate q1 of '12 to be below that level?

No.

Because you have got a lot of projects going to a lower margin.

No, we don't -- the guidance is not lower than last year.

Okay. On the revenue side in Q1 for the three segments, are you anticipating them all to be up year-over-year?

In Q1?

Yes.

Actually not. We would expect Energy and Aero to be up; and Flow to be down slightly, again because of the LED equipment market.

Great. Thanks.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Bill Higgins for closing comments.

Thank you, everybody. We appreciate you joining us this morning and we look forward to speaking with you on our next call. Thank you.

This concludes today's conference. Thank you for joining us today. You may disconnect your lines.