Circor International Inc (CIR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to CIRCOR International second quarter 2013 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'll now turn the call over to Mr. Dennis Walsh of Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

Thank you and good morning everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; Wayne Robbins, CIRCOR's Chief Operating Officer and Fred Burditt, the Company's Chief Financial Officer. The slides we'll be referring to you today are available on CIRCOR's website at ww.circor.com on the Webcast and Presentation section of the Investors link.

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 Form 10-K for 2012 and other SEC filings. 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, August 1, 2013. 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, adjusted EPS and free cash flow. These metrics exclude any pre-tax special charges, restructuring, inventory reserves and intangible impairments. 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 Mr. Buckhout.

Thank you, Dennis, and good morning everyone. Overall, we performed well in the second quarter. Revenue was up 2% organically to $224 million, with adjusted EPS up 27% to $0.81. We are particularly pleased with our margin expansion in the quarter. Adjusted operating margin was up 160 basis points to 10%, the highest level we've achieved in four years.

Revenue growth was driven by our Flow Technologies and Aerospace segments, offset slightly by lower sales in energy. In Flow, sales growth was broad based with strength across most end-markets. In Aerospace, we had strong revenue growth at the fluid control business in California and France, attributed primarily to both OEM and aftermarket demand for commercial single-aisle aircraft. At Energy, sales slightly declined due to ongoing moderation in the short-cycle North American market, driven largely by rig counts, which are flat to prior quarter, but down year-over-year. This dynamic was mostly offset by strong shipments at our large international project business.

During the quarter, we successfully completed our previously announced restructuring initiatives under budget. We saved more than $1 million from these actions in the quarter and as planned, we expect to achieve an annualized run rate of savings of $7 million.

With those actions behind us, we're announcing the first step of an ongoing simplification process at CIRCOR by initiating three new restructuring actions that are designed to reduce complexity, expand our margins and better align our organization with end markets. Unlike the restructuring recently completed, these restructuring actions are not designed to turn around a broken or struggling part of the business. The intent is to address some of the complexity and cost embedded into the way CIRCOR is structured in a way we historically operated our businesses. These actions will be part of an ongoing process of reaching competitive margins in our segments. We'll close two facilities in the US and significantly downsize a third, which will allow us to, first, reduce the overhead in G&A, linked to running and managing these facilities. Second, increase the utilization of our low-cost manufacturing and design capabilities in India. Third, consume excess capacity available on other CIRCOR facilities. And last, better align our business unit structure with common end-markets.

In addition, we intend to rationalize our product line. We will divest or exit certain small non-strategic unprofitable product lines currently sold by these businesses. These actions offer an attractive return on invested capital and are directly in line with our strategy to simplify our somewhat fragmented structure and better align our businesses with common markets.

After Fred provides more detail on our financial results for the quarter, I'll come back with a brief look at what we're seeing in our markets and discuss our priorities going forward. But before I turn over the call to Fred, this morning we announced that Fred will be retiring as CFO once a successor is named. Fred has built a strong finance organization, he's been an invaluable member of the CIRCOR leadership team during the past five years and has been a great help to me, since I came on board earlier this year. I'd like to thank him and look forward to working with Fred and the Board on transition and succession planning over the next few months.

Thank you, Scott, and good morning everyone. Please go to slide 3 which reviews our consolidated results. Scott already provided the high level overview of our second quarter revenue and EPS. So I'll just reiterate that the highlight this quarter was our 160 basis point improvement in adjusted operating margin to 10%. In addition, adjusted operating income was up 21% year-over-year to $22.3 million and backlog of $433.5 million was up 3%.

Now please turn to slide 4, and our restructuring-related charges. The Q2 charges are associated with the 2012 initiated activities in Brazil, California and India. During the quarter, we incurred $2 million in restructuring charges, which was primarily cash. We anticipate an additional $0.5 million in Q3, which will complete the charges on these three programs. We continue to expect annualized savings of approximately $7 million from these actions, with $1.1 million having already improved in the second quarter.

In addition, as Scott mentioned, we are now implementing three new restructuring actions as part of a simplification process at CIRCOR. Specifically, we are consolidating a flow technologies plant in Texas into our South Carolina facility. And second, we are consolidating our Ohio aerospace operations into our California facility. And finally, we are significantly downsizing a flow technologies plant in New York, which includes exiting about $4 million of non-strategic products. Expanding outsourcing and further utilizing our India operations is a key component of all these moves to reduce complexity and cost.

We expect that the total charges related to these actions will be in the range of $8.3 million to $9.1 million with 20% being non-cash and 80% of cash. About $1 million to $1.1 million of this will be recorded in the current third quarter of 2013. The annualized savings are expected to be in the range of $4 million, beginning in the first quarter of 2014, with a full run rate beginning in the second half.

Now I'll turn to segment performance, beginning with Energy on Slide 5. Energy revenues of $110.8 million for Q2 decreased 2% year-over-year, essentially all organic, which Scott reviewed. The segment adjusted operating margin was 13.8%, up from 11.1% in the second quarter of 2012, primarily driven by improvements in Italy from favorable volume, mix and pricing, and in Brazil, including a $600,000 of restructuring savings. This was partially offset by a volume decline in short cycle distributed valves. I want to mention a 2013 third quarter item. In July, we reached a settlement with a former (inaudible) of Brazil in our dispute over their breach of certain representations and warranties. As a final result, we have received a partial refund of the purchase price, which will result in a gain of approximately $3.1 million in our third quarter results as a special recovery.

Now let's move to slide 6 and Flow Technologies. Revenue came in at $74.6 million, up 6% year-over-year due to higher power generation, instrumentation and sampling demand. The second quarter adjusted operating margins were a record 14.8%, up from 12.8% last year, primarily due to improved volume, associated leverage and productivity across the segment.

Now Aerospace on slide 7. Revenues of $38.2 million were up 6% from the prior year, primarily due to increased volume mentioned earlier. We also benefited from 1% favorable foreign currency fluctuations. Aerospace's margins in Q2 were 8.6% compared with 8.8% in Q2 of 2012 and 3.5% in Q1 of 2013. The sequential improvement is key here, as we delivered $600,000 of the restructuring savings or 160 basis points and have reduced unfavorable start-up production variances for large programs.

Slide 8 shows our consolidated P&L and I'll speak to our tax rate. The tax rate for Q2 was 32.6%, lower than our rate of 35.6% in the same period last year. The lower 2013 tax rate is due to a smaller loss for one of our international subsidiaries, which was not tax benefited in either period. Looking forward, we anticipate our third quarter tax rate to be approximately 24%, benefiting from the tax impact of the Brazil settlement gain I mentioned. Excluding restructuring charges and the Brazil gain, the rate is anticipated to be 29.3%.

Now turning to slide 9, during the second quarter, we generated a positive $9.5 million in free cash flow, $4.5 million more than the second quarter of 2012, primarily due to improved margins and working capital.

And now I'll turn the call back to Scott.

Thank you, Fred. I will provide an overview of our second quarter order intake, as well as the current market trends that we're seeing. Let's start with Energy. Incoming orders were $107 million in the quarter, down 16% year-over-year. The largest driver was the orders in our large international projects business. It's worth noting that we had a difficult comparison to last year due to a $22 million order received in the quarter. In addition, there are several dynamics we're seeing in the marketplace that I'd like to explain.

First, project inquiries and quoting levels remain high. In fact, we saw a slight pick-up in activity in the second quarter. Second, although quotation activity is strong, we've seen an increase in the time it takes between when a quote is placed and when an order is awarded. This obviously suggests the projects are being delayed. Third, we believe we are maintaining share in the marketplace, as our order win rate remains unchanged from recent history. Finally, in the short-cycle market, the US recovery continues to be slow. Rig counts are flat year-to-date and down 10% versus prior-year. It appears there are some distributor inventory corrections negatively impacting the channel as well. We've not seen and do not expect to see a meaningful inflection point on orders in Energy, either up or down versus what we've been seeing year-to-date.

In Flow Technologies, orders were down 6%, primarily due to maritime and sampling project orders, which are both lumpy markets. This does not necessarily imply a trend. In Aerospace, orders were off 6% year-over-year. This was primarily due to declines in our French business that were partially offset by order growth in our California fluid control business.

In France, we're seeing weakness on rotor aircraft products due to soft Asian demand. In addition, certain orders were impacted by our recent price increase to address the segment of unprofitable business. Our commercial OEM business continues to be very solid with significant Airbus and Boeing backlog. While we do not expect to be impacted by sequestration for the major programs in our military business, we are seeing some general softness in spares and repairs because budgets are tight.

That brings us to our guidance for the third quarter. Based on our end-market assumptions, we expect that third quarter revenue will be in the range of $212 million to $218 million. This would result in organic growth between 1% and 4% versus prior year. We expect to report adjusted EPS in the range of $0.76 to $0.83. This compares favorably to Q3 2012 adjusted EPS of $0.68, if you use a comparable tax rate to our 2013 guidance.

Let me conclude with a few thoughts on the three priorities I mentioned at our last call, margin expansion, cash generation and growth. Let's start with margin expansion. One of our top priorities is to reach industry peer average margins. In addition to the operational opportunities for expanding margins, like price and productivity, we have a structural opportunity with all the complexity of CIRCOR. We'll be undertaking a number of initiatives over time that are designed to simplify CIRCOR, including reducing P&Ls, rooftop suppliers and management systems. We're taking a step in the right direction with the restructuring actions we announced today, but there will be more work ahead.

Second, we're going to focus on cash generation by putting in place initiatives that we expect will improve our working capital performance. For example, we're in the early stages of creating a global sourcing organization to replace the somewhat fragmented structure that operates at the plant level today. A global sourcing organization will be focused on strategic make versus buy decisions across CIRCOR, as well as tactical supply chain management, price and term negotiations, supplier qualification, as well as supplier delivery and quality performance. An effective global sourcing organization will not only expand our margins, but would certainly improve our working capital performance.

Finally, we will focus on growth. We're in great end markets with energy and commercial aerospace expected to grow at rates up to two-times global GDP growth rates. There are many positive activities going on today at CIRCOR, and on future calls, I will elaborate on some of these activities, as well as what changes I see we can take to accelerate results.

While I'm spending the majority of my time on improving CIRCOR's operating performance today, there's clearly an opportunity to grow through acquisitions. We're focusing on companies and markets that we already understand very well. We like companies with good technology or companies that are positioned in parts of the market where we expect exceptional growth. In addition to strategic fit, the main criterion for an acquisition will be return on invested capital.

As I said on our last call, I joined CIRCOR because of the strong foundation that was in place here and the opportunities that are in front of us. Our efforts to simplify the organization, improve the operation and more aggressively drive organic growth will not happen overnight, but I feel good about where we are and what this Company can become.

With that, Fred, Wayne and I are available to take your questions.

(Operator Instructions) Kevin Maczka, BB&T.

Thanks, Good morning.

Good Morning, Kevin.

First, I guess, congratulations on the quarter and to Fred on your retirement. My first question, I am wondering if we can talk a little bit more about these Aerospace margins. That was the biggest positive surprise for me on the margin side. But if I look sequentially, it looks like you added about $2 million in profit here on very little revenue growth and I think you said the total restructuring savings from the prior actions was only $1 million total for the quarter and not all of that is in Aero. So, can you just talk about what is going there to drive that and how we ought to think about that going forward?

Sure. This is Fred, Kevin. In Aerospace, we had about $600,000 of savings from the restructuring, so that was part of the improvement. We also had lower pre-production costs. As you know, we've been -- we've had a fair amount of pre-production costs for getting these programs up to speed and we had a very favorable quarter in that. So that definitely helps the quarter. That was probably two-thirds of the improvement was coming from those two items. Then the rest was basic performance, mix of our contracts for the quarter etcetera. So it was a good sequential quarter and as we look at the Aerospace business, that's obviously good news for us as we head into the second half.

So just following up on that Fred, the restructuring savings don't reverse, lower pre-production cost, I guess it's safe to assume that that doesn't reverse either and then ultimately where I'm going is the margin level, at this kind of level or maybe even higher, how we ought to be thinking about the second half?

Within our guidance that we've given out for Q3, we do anticipate the Aerospace margins being maybe slightly lower than they were in Q2. Some of that has to do with volume and the summer issues we have annually with our French operations. So, that will bring down a little bit. You're right, the savings will actually increase a little bit in Q3 from what they were in Q2. And the program costs will probably be a little bit higher. We had a very favorable Q2 cost and we think that will probably climb a little bit in Q3. So, all in all, the margins in Q3 will be just probably close to the same or a little bit lower than we had in the second quarter.

Okay, got it. Thanks, Fred. And if I could just ask one more, just to be clear on the cost programs that you've already done, the $7 million and the new $4 million program. Based on where you are right now, the $7 million programs is complete. How much of that -- that's a full year run rate, but not a 2013 actual. So how much did you actually achieve or do you expect to actually have achieved by the end of the year and what's incremental in '14 from the prior? And on the $4 million new program, again, Fred, just to be clear, how much of that -- will you actually see it all in '14?

Okay. That's a whole lot of questions. But to answer your question, in the second quarter, we had $1.1 million approximately of savings in Q2 this year. We had a little bit less than that in the first quarter this year and in the third quarter we expect to have $1.7 million -- $1.6 million to $1.7 million savings and fairly similar in the fourth quarter.

Okay. And then your comment on the new program, you'll start to get that in the first quarter of '14 and hit the full run rate by the end of the year, but it doesn't sound like that means you'll get the full $4 million in '14?

That's correct, we will get -- and there are three actions. A couple of them we will get savings starting pretty early next year. So almost a full year of it. And the third, which is the New York action, that's going to take us longer. We won't see that full run rate till the second half. So we will get -- that's a fair amount in the first half, but not the full amount. The biggest savings is coming from the New York. That's the more complex one and that's why that will take us longer to get at.

Okay. I will get back in the queue. Thank you.

Okay.

Nathan Jones, Stifel Nicolaus.

Good morning, everyone.

Hi, Nathan.

Congratulations, Fred.

Thank you.

I guess I'll start with New York, saying as you were just talking about. You talked about exiting some profit lines, low-profit revenue there. When do you anticipate having exited that and how low are the margins on it? I'm just looking to model the revenue difference and the profit difference.

I would say the reduction of that is probably, again, next year event. I wouldn't anticipate anything large this year. And these are relatively unprofitable business. So I would say that they are -- they were not contributing to the business.

Okay. And longer term, Scott, you called out one of the main focus is to get margins up to the peer average. I understand that's a little bit of a longer-term goal. But are you willing to quantify what that would be in each segment of the business?

I wouldn't do it in each segment. But I'd say our peers are at mid teens and CIRCOR, on average, the goal is to get us up to the mid-teens.

It's been, I would say, a fairly quick implementation of this plan with another $8 million to $9 million of expense and $4 million of saving. And I understand that there's probably more to come. In your opinion, how much of the plans that need to be put in place have you actually begun and what more is there to come?

Okay. So that's hard to answer actually. We don't have -- we haven't got the full roadmap of the simplification program at CIRCOR. There is ongoing work, we of -- of course we have things we're working on, we're certainly not ready to discuss specifically what's going to change in the future, but you did hit it right. This will be an ongoing program. This will be probably several years that we'll be working on this.

With respect to other margin expansion opportunities we're working, I'd say, right now, I mentioned the global sourcing initiative early on. We are building up that team and putting the underlying data systems and processes in place to manage that right now. Productivity in the factories is something that we're going to start driving at the CIRCOR level and we're putting again the underlying processes and metrics in place to do that now.

So on the operating side, most of what we intend to do -- it's still early days, but is in work. On the, I'd say the simplification side, there is more to come here. Some of this is obviously driven by our strategy and how we want to line up with end markets that we're still working on. So that's going to take more time to figure out and obviously we need to be very careful how we do this. So that's going to be laid out more clearly over time.

That's good color. Thanks. And one more from me. There's obviously a lot of plans laid out here, a lot of things to do. How do you feel about the level of talent currently at CIRCOR, given all these [planned cuts] , removing structural complexity, the global sourcing organization, M&A, the M&A side of the business, how are you feeling about the level of talent that's currently at CIRCOR, what kind of positions need to be added and where you're at in terms of adding that talent?

That's a good question. So, I have been to the majority of facilities at CIRCOR now. We have about 24 factories and I would say I have been to 80% of them now and it's exactly what you would expect. The CIRCOR, as you probably know, came together through acquisition. We were a spin-out that the original CEO was, I'd say, an aggressive deal-type of CEO and acquired a lot of companies. I think over that time period, there wasn't a lot of aggression. So, CIRCOR operated more like a holding company than a traditional -- what you would expect from a traditional company. And so, we've got a lot of standalone independent units and depending which unit you are visiting, we have pockets of excellence in all different areas. So, some places are very good at innovation and new product development. Their facilities, they're doing a very nice job on measuring and delivering productivity. And so, it depends where you are. So I'd say there's pockets of excellence everywhere. With respect to some of your specific questions about things like sourcing, there really isn't a sourcing organization. So a person that will need to be brought into the organization, we're recruiting for that now, for Head of Global Sourcing. I have the same gap on the productivity side to someone to run the operations from a functional perspective in the factory. So this would be somebody who is responsible for cost, quality, safety, delivery, inventory. All these things and driving initiatives and results. We don't have that person in CIRCOR right now. So that's someone we would need to bring into the organization.

So, a bit of a long answer to your question, but it really depends specifically where you are in your organization. We have pockets of very good things happening in different places at CIRCOR.

So, there isn't a -- sort of increased the depth on the bench and that's, I guess, got to be a high priority, right?

Exactly. I would agree with that.

All right. I will get back in queue. Thanks very much.

John Franzreb, Sidoti & Company.

Good morning, guys. I first like to go back to the Aerospace. How much in product development costs are still embedded in second quarter results?

Of the program cost? It's still significant. I'll get back to you on that one, John, alright. Why don't you go to your next question. I'll just have to (multiple speakers).

Okay. Well, I guess I was trying to lead you, Fred, a little bit, because it was a significant jump sequentially. You had kind of alluded last quarter that you would expect that kind of jump to be realized in the second half of the year, it came a little bit sooner. I'm wondering if that -- once these costs go away, is this business a mid teen operating margin business in 2014, is that what we should be expecting?

To that I would say no. As I think we've said before that really doesn't happen until the A-350 program is up in full production and that's not a 2014 item. So that is -- that will be a headwind until we get that fully up and running.

Okay, fine. Perfect. Secondly, in the Energy business, the margin improvement there, I assume some of it was attributed to the better pricing you had this year versus what you rolled over last year, which had tough pricing on large projects. You suggested that orders are being pushed out again. Are you seeing any impact on the pricing environment as a result of that?

No. This is Wayne Robins. We don't see any real pressure on the pricing right now. I think it's more of engineering capacity and then some caution around making those kind of investments right now.

Engineering capacity at the customer.

At the customer, right.

Okay. Okay. Great. Perfect. And lastly, I think you kind of touched on this Scott in your prepared remarks, but could you just talk about the sequential drop in orders in Flow. You mentioned maritime which is lumpy and Aerospace, just on a sequential basis, what's going on in those two businesses?

Yeah. I think, in Flow, the negative orders in Flow was much more driven by the lumpier parts of our business. So this is the maritime and sampling parts of our business where we tend to get large projects in one quarter and then we may not get any projects in the next quarter. So I wouldn't take that as an ongoing trend. The rest of Flow, we expect to continue on the similar path. So power generation, the other markets that we're in tend to be going well. And we expect those to continue.

So I'd say we're cautiously optimistic that orders in Flow will continue basically on what we've seen year-to-date with the caution that I'll throw out here that we do have some lumpy parts of the business here.

Okay. And Aerospace?

So on Aerospace, about half of our business goes into commercial side of Aerospace. And as you know, backlogs in that part of the industry are quite good. We expect orders to remain quite good in that part of our business as well. So we expect moderate growth in orders in that half of the Aerospace segment.

The other half is quite a mix. As you probably know, the military side of our business, we're seeing some moderation. We're not directly affected by sequestration, but we're still seeing relatively lower orders on that half of the business. So, again, I'm reluctant to predict exactly what will happen there. Some of this business is lumpy as well. But certainly the path that goes into the commercial segment will continue to -- we'll continue to see reasonable growth there.

Then could you just help me on the military side, the spares, the spare parts. Is that a lumpy type of an order pattern, is that uniform throughout the year? Have you seen that kind of flat line? Has it hit bottom? Can you just give me some color on that side of business?

Yeah, it's pretty flat and it's pretty steady order pattern. So that part of the business is not lumpy. We've seen a little bit of moderation in the order rates.

And has that bottomed, do you think?

I'd say it probably has. Yeah, we haven't heard or seen anything that would indicate it's going to go further down. I don't know, Fred, if you want to jump in --

Yeah. I was going to say, it's been pretty soft for quite a while, John. So I don't think -- it's not -- we're not seeing any big change in that trajectory at this point.

Okay. Perfect. Thank you very much guys.

John Moore, CL King.

Good morning, guys.

Good morning, John.

Congratulations on a nice quarter, and Fred, congratulations to you as well. I want to start with, go back to the question on the operating margin targets. And Scott, you mentioned the mid-teens target. That's always been at the segment level, but at the same time your corporate expense at a little more than 3% of sales runs relatively high compared to some other industrial companies and I'm just wondering what opportunities you see to bring that down and if there's anything in your new restructuring initiatives that are addressing that?

Okay. So the -- I will answer the last question first. There is nothing in the new restructuring initiatives that addresses that. I do agree with you, 3% is high relative to peers for corporate expenses. I know, but I'd rather not get into any detailed plans on a specific entity like this until we're ready to -- until we're ready to talk about it, but I am aware that that's relatively high compared to what it should be.

Okay. And then a couple of questions on the Energy segment. I guess I'm trying to -- Fred, maybe you can help me, I'm trying to get a handle on how the energy revenue plays out the rest of this year. I know some large projects can cause a fairly sizable swing in revenue and there was a slowdown in orders at the end of last year. So, I guess, do you have any large projects scheduled to ship in the third or fourth quarter or how do you see the revenue in 3Q and 4Q versus 2Q?

Well, we definitely see some large projects, but of course our whole business is projects. So, in our assumption for Q3, it's fairly consistent with Q2, maybe it's coming down just a hair on that. So we have a good backlog for the third quarter.

Okay. And do you have the fourth quarter scheduled at this point?

Yeah. We do have our backlog for the fourth quarter, but obviously, we don't give -- we are not going to give fourth quarter guidance at this point.

Okay. And the margins, we went through the discussion on the margins in Aerospace sequentially, which was very helpful. And I was wondering if you could kind of go through the same discussion on Energy sequentially, because you saw a very nice improvement there as well?

Yeah. The improvement on the Energy side, again, was primarily related to the Italian business. The improvements we've made in the backlog will help the backlog and productivity there. So that was very favorable in Q2. We anticipate that continuing through into Q3 and the savings from the restructuring, the improvements in Brazil, we expect that to continue also. So I would say Q3 is pretty consistent with what you were seeing in Q2.

Okay. And I imagine you're seeing margins in the large international project business, your Italian businesses are improving. With the weakness in the short-cycle business and rig counts being down, I guess, can you give me an idea as to where the -- what the margin differences between those two businesses is now, is the project business back into the high-single digits?

The project business is into the teens.

Okay, excellent. That's about all I got for now guys. I will hop back in queue. Thank you.

Matt Summerville, KeyBanc Capital Markets.

Thank you. Morning. As far as, Scott, you talked about kind of this next phase of restructuring, its focus is on Flow and Aero. What's your initial early assessment on the Energy footprint as you've gotten in and kind of dug around in that business? What do you think they are doing really well? Where do you think there is the most room for improvement?

Sure. So the Energy business, I guess, first I will comment on the -- as Fred just said, we've fixed a couple of pretty significant problems or at least we've got them going in the right direction, fixed may be the wrong word, but certainly the large project business is moving in the right direction. And in terms of opportunity, I see a big opportunity to continue to grow that business and drive the margins even higher. This whole idea of better sourcing would really help our Italian business. A significant portion of their cost structures is driven by material spend and the vast majority of their material spend today is locally in the Italian market. So the idea of finding lower-cost suppliers would help that business on the margin side a lot. So I'm pretty excited about the large project business from both the growth and a margin standpoint in Energy.

There are some, I'd say, some businesses that we're looking at in terms of strategic fit inside of Energy. We have some businesses that where we think we can command very good margins and get good growth and then there's others where perhaps that's not necessarily the case. So I think there's more work to do on figuring out where we're going on Energy overall from a footprint standpoint, from a business mix standpoint. But at least the large project business and the short-cycle businesses are both businesses that I think we can do little more to grow with in the future.

As you think about the channel inventory comment you made in North America on the short-cycle business, are you seeing the rate of sell into the channel, it accelerates downward or is it getting less negative or more negative, is really the question? And then, well, I'll leave it at that.

I don't think we know. It really depends on which customer you talk with. We do get feedback from customers on what they're doing with inventory, but it tends to be mixed. So I'm reluctant to give you any kind of overarching guidance on this, because we don't really know at this point.

Thanks, Scott.

(Operator Instructions) Charlie Brady, BMO Capital Markets.

Hi. Thanks. Good morning, guys.

Good morning.

Just your comment on the Aerospace business, in that you had some price increases that went through that impacted some of -- I guess some of the orders. Can you quantify that a little bit more? Is your business that's -- is that a market share loss, is it kind of a temporary thing that just went away from you that you can recapture?

Hey, Charlie, this is Fred. This is business that we make [builder print] business. So this is not our strategic IP business, this is some [builder print] business, where we just you know -- the margins have not been where we want them to be. So we've just raised prices and tried to bring that to the right level and we're not too concerned about losing certain orders, because again, it hasn't been -- if the customer is not willing to pay the prices, we're comfortable letting some of that business go.

(multiple speakers) business is negative margin.

Yes. So, it's not a huge item for us, but on a year-over-year basis, it was big enough to mention.

Yeah. They bid some of this business that if it does go away, we're still better off. It's not a positive on our bottom line.

Okay. And then just in terms of the restructuring, in the release you talk about reducing number of ERP systems. Can you just -- can you expand on that a little bit? How many ERP systems are you running now? Is this -- are you migrating to a single or maybe two ERP systems and what kind of timing and/or expense would, beyond what you've already identified would that involve?

Right. That's a good question. We have more than 20 ERP systems and we have -- we have a portion of that are old enough that they're no longer supported. We do not intend to go to one or two, there is no ultimate goal here to get CIRCOR onto a single system. We will chip away at this over time. Every system that we eliminate will have to stand alone as an investment. I don't know what the end number will be, I don't know if it's 15, I don't know if it's ten, it will obviously depend on the number of entities we end up with. But I will say that there is no big bang investment coming, there is no goal to get all of CIRCOR onto one system, that's really not the intent here. So I hope I didn't imply that.

This is a part of the process of simplification. We will have a standard system as we make acquisitions or as we roll over old systems into new systems. We will go to one single standard. But we don't have an ERP strategy that's ultimately going to end up with one system. I think as we start to get to fewer systems, the return on investment of course starts to get more and more difficult. So we're not going to take it below that level.

All right. That's helpful, thanks. And just kind of -- I guess you, segued into a little bit, a question on M&A. You're divesting some stuff, but I guess on the other end of it, can you talk about the pipeline, or potential pipeline, is that something that you're still actively involved in looking at or is that kind of back-burnered for a little bit?

Yeah, we have a pipeline. There was a pipeline when I arrived and of course there is still activity happening in the market. So we're staying engaged. I can't tell you it's my top priority. I think the Board has been pretty clear and I'm in full agreement that the real priority here is to get the operation moving on the right trend, focused on getting the margins moving in the right direction and stabilize what we're trying to do internally.

And so, I won't say we're not going to do a deal. Of course, we don't always control the timing of when the right acquisition and the right sale will happen. And so we're active. There is a pipeline, we're having discussions, but it is not my top priority at this point.

Okay. And just one more. Fred, when you talked, you mentioned, I think that there's still $0.5 million or so on the legacy restructuring. That's incremental to the one plus -- $1.1 million in Q3, correct? So we are looking at maybe like $1.5 million, $1.6 million in Q3 all in?

Yeah, from a ground zero perspective, right, we -- about $7 million on annualized basis.

Okay, thanks.

Thank you. There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Scott Buckhout for closing comments.

Okay, thank you everyone for joining this morning. We look forward to see many of you on the road in the weeks and months ahead and I appreciate your time and attention today.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may disconnect your lines at this time.