Circor International Inc (CIR) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to CIRCOR International's second-quarter 2015 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 will now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead.

Thank you and good morning everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO, and Rajeev Bhalla, the Company's Chief Financial Officer. The slides we will be referring to today are available on CIRCOR's website at www.CIRCOR.com on the webcast and presentation section of the investors link.

Please turn to Slide 2. 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 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, July 28, 2015. 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 net income, adjusted EPS, and free cash flow. These non-GAAP metrics exclude any pretax special charges and recoveries. A reconciliation of CIRCOR's non-GAAP metrics 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. Please turn to Slide 3.

Thank you, David, and good morning everyone. For the second quarter, we delivered revenue above our guidance range at $167 million with adjusted EPS or $0.55 per share. We delivered solid organic growth in our large projects and control valve businesses that partially offset a significant decline in our North American short cycle distributed valves business. As expected, aerospace and defense was slightly lower than last year due to the exit of our structural Landing Gear product line.

From an orders perspective, in our energy segment, we reported solid bookings in the long cycle international projects business and we expect this positive trend to continue. This strength was more than offset by the expected decline in our upstream North American short cycle bookings. Aerospace and defense orders were lower than expected due to the deferral of certain military programs, most notably the Joint Strike Fighter.

The integration of our Schroedahl acquisition is proceeding well and we are excited about the growth prospects of this business. As a reminder, Schroedahl accelerates our penetration into the high-growth power generation market and significantly improves our presence in Asia. We are in the process of cross-training our global sales force for both Schroedahl and CIRCOR products in order to leverage complementary channels to market. We're making good progress with this effort and our salespeople are getting up to speed quickly.

Operationally, we are focused on reducing material costs by integrating Schroedahl into our strategic sourcing organization to leverage our common material spend. We expect our return on invested capital will exceed our cost of capital in the first year. We continue to expect Schroedahl to be accretive on an adjusted EPS basis in year one.

Our simplification and operational excellence priorities remain on track. Today we are announcing another step in our ongoing simplification initiative. We are closing one of our two Corona, California manufacturing facilities. This is an important part of our ongoing effort to improve the efficiency and margins of the aerospace and defense business. We are outsourcing the commoditized machining operations performed in this facility in order to focus on higher value-added activities that are core to the business, such as product design, assembly, and test. This action will expand our margins while maintaining revenues. This is a significant effort given the number of parts machined in this facility. As a result, we expect to completely exit the facility by the third quarter of 2016. The annualized savings from this project are expected to be approximately $3 million beginning in the second half of 2016.

All of the other restructuring actions that we announced this year are complete. In total, we now expect to deliver savings of $10 million this year from these actions, higher than our original estimate of $8 million. Annualized savings are now expected to be $15 million.

In our energy businesses, we have reduced our headcount by 26% this year. While the restructuring actions taken so far were primarily in response to the market decline in oil and gas, we are taking advantage of this downturn to reduce our structural costs wherever possible. For example, as part of those efforts, we consolidated several back-office operations in North America and we are in the process of consolidating one of our testing facilities in Europe.

In addition, we are making progress on our operational excellence initiative. We are seeing significant improvement in our key operating metrics, including customer on-time delivery, supplier rationalization and sourcing savings. For example, our customer on-time delivery has consistently improved from 73% in June of last year to 86% last month. We are on track to achieve the best-in-class target of 95% by early next year.

In the last 12 months, we've reduced the number of suppliers by 25% to 3,800 today with a target of 1,200 by 2018. At the same time, we've increased the amount of direct material spend on long-term contracts from 8% to 30% today with a target of 80% by 2018. Long-term contracts typically provide for better year-over-year productivity, delivery and quality performance.

Finally, from a capital deployment perspective, I'd like to note that, in the second quarter, we continue to repurchase shares as part of the $75 million program we initiated Q1. To date, we've purchased over 1.2 million shares for about $70 million. We expect to complete the full program this year.

Now I'll turn the call over to Rajeev.

Thanks Scott. Before I get into the energy results, you will note that we've excluded last year's divestitures in our year-over-year comparisons for both segments.

Starting with energy on Slide 4, energy sales of $127 million decreased 15% over the prior year and 12% organically. This was primarily due to lower sales in our upstream North American short cycle business and our upstream instrumentation and sampling businesses. This was offset in part by higher sales in our large international projects business.

Energy's adjusted operating margin decreased 190 basis points to 13.4%, primarily as a result of lower volumes. Restructuring savings and cost reduction actions helped mitigate the bottom line impact, keeping the margins above 13%.

For aerospace and defense please turn to Slide 5. Aerospace and defense sales of $39.7 million decreased by 9% over the prior year and 3% organically. As expected, the main driver was the impact of exiting the structural Landing Gear product line as well as lower sales in our defense businesses.

Aerospace and defense adjusted operating margin of 8.8% increased 220 basis points year-over-year, driven by ongoing operational improvements and the benefit of exiting structural Landing Gear product lines.

As Scott mentioned, we announced the closure of one of our two California manufacturing facilities as part of our effort to improve the operation and focus on the core competencies of our aerospace and defense business. Our adjusted operating margins improved sequentially by 80 basis points and we are on track to exit the year with double-digit margin.

Turn to Slide 6 for selected P&L items. In the quarter, we recorded special charges totaling $7.4 million for restructuring actions, the completion of the exit the structural Landing Gear product line, and acquisition-related costs. To better reflect the Company's performance, we are treating the amortization associated with the acquired intangible assets from the Schroedahl acquisition as a special charge. This was about $2.1 million in the quarter.

Our tax rate for the second quarter was higher than we expected. We had a number of discrete tax items that in the aggregate negatively impacted Q2 adjusted EPS by $0.05 per share. The primary item related to the previously disclosed tax audit in Italy which we settled in the quarter. The adjusted tax rate for the quarter was 34.7% compared to a US GAAP tax rate of 36.5%. We expect our third-quarter tax rate to be about 28%.

Adjusted earnings per diluted share were $0.55 compared with $0.88 in the prior year on a pro forma basis.

Turning to our cash flow and debt position on Slide 7, during the second quarter, we generated $4.5 million in free cash flow, below our expectation. An increase in working capital drove a significant portion of the cash outflow, especially on the inventory side.

Two primary factors drove increase in inventory. First, availability of product for smaller book-and-bill demand has become the most important factor in taking share in our North America short cycle business. We are not seeing a pickup in large stocking orders from distributors. We are adapting to this new reality by strategically holding inventory of parts ready for rapid delivery.

And second, due to strong orders from long cycle projects in the first half, we increased work in process inventory for projects that will ship later this year. We remain focused on improving our working capital position and free cash flow performance.

Regarding our share repurchase program, we spent $53 million in the second quarter. This equates to about 953,000 shares. That brings us to our third-quarter guidance.

Please turn to Slide 8. We expect revenue to be in the range of $155 million to $165 million, reflecting lift from our large project and control valve businesses and lower volume from our upstream short cycle business in North America. And we expect higher sequential adjusted EPS in the range of $0.55 to $0.65 per share, reflecting the benefit from cost reduction, restructuring actions, productivity and the lack of discrete tax items that we had last quarter. For Q3, we anticipate special charges to be in the range of $2.9 million to $3.2 million, or $0.12 to $0.13 per share.

For comparison purposes, the divestiture businesses generated $14.1 million of revenue and $0.06 of EPS in the third quarter of 2014. In addition, our guidance reflects currency headwind of $11 million of revenues and $0.07 per share on adjusted EPS.

With that, let me turn it back over to Scott.

Thank you Rajeev. Let's start with an overview of our current market trends for energy and aerospace and defense. First, energy. As a reminder, about a third of our consolidated revenue last year was in the upstream oil and gas segment. This includes most of our distributed valve and international projects businesses as well as part of our instrumentation and sampling business.

In our short cycle distributed valves business, we expect lower volumes year-over-year due to the lack of activity in North America. While rig counts seemed to have found the bottom, activity is down significantly versus last year. Distributor destocking is expected to continue and will have an impact on our bookings in the third quarter. We are expecting orders and sales to be down approximately 50%, consistent with our discussion during last quarter's earnings call.

We are not currently seeing significant pricing pressure in the distributed valves business. The market dynamic now is more about lower demand, smaller orders and product availability.

Within our long cycle project business, we continue to see positive activity and we are achieving good win rate. We continue to see strength in the Middle East, especially for gas projects. Engineered projects in North America for midstream LNG to downstream oil and gas are running at similar levels to last year.

In contrast to the short cycle business, we are seeing pricing pressure in this market. Our competition is more aggressive than we have seen historically.

In power, the combined cycle segment in North America is doing reasonably well and we are seeing good activity in the emerging markets of Southeast Asia and China. We are also experiencing good quoting and order activity for our recently launched Aeroflow turbine bypass valve. We expect instrumentation and sampling orders to be down year-over-year as a result of a difficult compare with Q3 2014 when we reported strong orders. This business is inherently lumpy and we see fluctuations from time to time. Sequentially, Q3 orders should be about flat, although we expect demand to improve towards the end of this year as we start receiving orders for the Johan Sverdrup project in the North Sea.

In Brazil, we are seeing substantially lower orders and sales as a result of the ongoing issues of Petrobras and the economy in general. We are not optimistic about the outlook in this market and we're working to realign our business and cost structure to adapt to the new outlook in Brazil.

In aerospace and defense, as Rajeev mentioned earlier, orders for certain programs were deferred from Q2 until later this year and into 2016. We do expect a sequential increase in orders in Q3 largely driven by a number of defense programs globally.

Let me sum up by leaving you with three important points. First, with the exception of our upstream North America business, our primary businesses are showing positive momentum going into the back half of the year. In the upstream market, our large project business is expected to continue to see good order activity and higher revenue as we deliver projects from orders won earlier in the year. In addition, we are seeing improved activity in midstream and downstream businesses, especially in control valves and power generation.

Second, we are starting to see the effect of the restructuring that we completed so far this year and savings will improve our results in the second half of the year. In addition, we believe we are turning the corner operationally in aerospace and defense. All the work we've done recently to improve our operations is starting to show in the results. We still plan to exit the year with double-digit operating margins in aerospace and defense.

Third, we continue to invest in growth through the cycle. We are increasing the size, capability and scope of our commercial team and introducing more effective marketing and product management talent and processes. New product development continues to be a priority across the Company. We expect to exit the energy downturn a much stronger company than when we entered. In short, we remain focused on creating long-term shareholder value by investing in growth, expanding margins, generating strong free cash flow, and being disciplined with capital deployment.

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

(Operator Instructions). Nathan Jones, Stifel.

Good morning guys. So, very, very strong results for the second quarter there. You had revenue 9.5% above the midpoint of guidance and earnings 50% above the midpoint of guidance. Can you just talk about what drove the delta to what you were thinking three months ago?

Sure. We did have some good numbers here. I appreciate the comments. Two key factors here. Clearly, we've done a lot on the margin expansion side with respect to cost reduction and taking appropriate actions there. And you see the fact that we've actually bumped up the expected savings from those actions that we are going to see for the rest of this year.

On the top line, no surprise with distributive belts being down substantially as you had expected. But we did see some lift out of Milan in our large project business as well as some of the other smaller businesses there. So those are the two main factors that helped us drive to the better numbers.

As you know, Nathan, sometimes it's hard for us to get the Milan revenue exactly right. It's lumpy. It depends when they ship certain milestones on projects. So that can come in more favorable at times, and sometimes less favorable. In this particular case, it was a little better than we thought.

So I think it sounds like the top line strength was primarily out of Milan. Was that shipping projects early? Was that hitting milestones that allowed you to recognize revenue? Or just any more color you can give there?

Sure. The revenue recognition there is based essentially on delivery. So it is getting those projects delivered and the valves delivered and being able to book the revenue there. This was -- as you would expect, we are always a little cautious on the timing of projects because either we may not be ready or the customer may not be ready, and so we are always appropriately conservative there. In this case, we were able to get those projects delivered and delivered on time. And honestly, the operational improvement that we are seeing out of our Milan business is very positive. On-time delivery has improved, operational excellence is doing well, so we were able to hit those milestones and get those projects delivered.

The other -- just on the bottom line, we did go a little deeper than we had expected early in the quarter. And you see that because we are raising the number for the year-end and the aggregate restructuring saving. So that played a role as well.

Okay. Then just on the long cycle international business here, the Milan business, you are an anomaly in reporting forward orders and an expectation of that trend is going to continue. Is this something that you are seeing in market activity or is this just you winning more business in a market that's flat or down?

I think it's the latter. We are seeing what all of our peers and competitors are seeing with aggregate CapEx being down. What you are seeing in our business is that we are having some success with a few key customers, notably Saudi Aramco in the Middle East but a few others as well. We are able to buck the trend a little bit here as we progress through the year.

And just one last one. Is it necessary for you to be bidding these things at I guess significantly lower margins in order to take this business? Is that something that you're doing strategically? How are the margins looking in the stuff that's going into backlog at the moment?

The margins that are going into backlog here are a little lower than what we've seen historically, but they are still very good. Recognize the fact that, as we reduce cost, we have been able to manage the pricing piece of it as well. So we are driving a lot of productivity out of our sourcing business for example and aggregating that spend. And so some of that does translate into a lower price for the customer. But at the end of the day, they are still good margins.

Okay, thanks very much. I'll get back in queue.

Joe Radigan, KeyBanc Capital Markets.

This is Shane Rourke on the call for Joe. Thanks for taking the call. If you could talk a little bit about in aerospace what you're seeing with the A350. I think there's been a few concerns that there might be some sort of hiccups there. Have you seen anything going on with that model?

I'll jump in and step in as well, Rajeev. We are not seeing any -- if you are referring to perhaps delays in orders or delays in volume, we are not seeing that at this stage. Keep in mind we are a tier 2, so the orders are coming in more or less as expected.

The other thing, just add to that, we have not anticipated any significant ramp up in that program for quite a while. So and Airbus too, they are not going to get the full rate production for a couple of years at least. They do have some normal entry into service type of issues that get managed, but it is not having a significant impact on us.

Okay. That's helpful. And then on the energy upstream business, I think in the prepared remarks you mentioned that you are not really anticipating a pick back up from the destocking that was going on in 1Q. Is that -- do you have any more color on what you expect there sort of over the rest of the year?

Sure. So as far as what we are expecting or anticipating is more or less the volume that we just articulated in the prepared remarks. So, we think sales and orders will be down year-over-year around 50% in Q3 and we are expecting that to continue through the rest of the year.

So I've met with a number of our largest distributors over the last three weeks. They are not optimistic about the remainder of this year from a volume perspective, and all of them are saying they are continuing to destock through the third quarter. So we are not seeing the end of that. I know some of our peers are saying that they believe that it stops. Certainly for our largest customers, our largest distributors, we expect to continue to see the destocking through the third quarter.

Okay. That's really helpful. Thank you, and good quarter.

Kevin Maczka, BB&T Capital Markets.

Thanks. Good morning. So on short cycle distributed valves, you are not seeing price pressure even though volumes are down in about the 40% to 50% range that you expected. Are you expecting two speed price pressure. I guess it's good that you're not but I'm just wondering why not, because that was the experience in the last downturn.

So, I think what's happening is -- I think there are a couple of dynamics here. The first is that where we would probably start seeing the price pressure is when the large stocking orders start to pick up. That's when you get into the negotiations on price. Right now, we are not seeing large stocking orders. We are seeing relatively small, actually very small orders, and a lot of them. So it's much more about availability, about turn time, and about for our distributors moving inventory into the right place to cover the right areas of the country. So, we're just not getting the price pressure. They are small orders. I suppose they don't see the value in spending a lot of time negotiating the price. They're trying to manage their inventory down. And if you have the product, they're going to buy it. If you don't, they're going to move somewhere else.

As volume starts to pick up, I can imagine that -- and they start putting large stocking orders in place, I can imagine you'll get into a price negotiation at that point. But as of now, that's not the big dynamic. The margin pressure that we have is all related to the severe drop in volume.

Got it. And then on the project side, it sounds like you're doing very well there. Your win rates are higher. You are bucking the trend. But there again you are seeing a bit of price pressure. It seems like the concern for most now in that business is more around 2016 than 2015, that maybe some volume but especially some price can weigh on things next year. But it sounds like you are so far offsetting with your own internal cost cuts. So is that something we should be concerned about as we think about 2016, that maybe there's more revenue and margin pressure then or you are not seeing that?

It's hard for -- it would be hard for us to tell you really what's going to happen in 2016. But we are not necessarily -- we are not saying we are not seeing the pressure in the market overall. We've managed to react. If you look at what was the mix of our revenue in 2013 and 2014, you would see a much higher percentage of our revenue was offshore. Now, going into 2015 and 2016, it's more land; it's more gas as opposed oil. We are actually doing more power as well. So the ix of our product has changed.

Now, going into 2016, the pricing pressure we expect will continue. We will continue working on the cost, but it's not to say we won't avoid some level of deterioration from price. I think we are all seeing that. The margins are still good. It's still a profitable business that we are winning, but the margins in our backlog are slightly lower than what you would've seen a year or two ago.

The other thing, just to add to that, the orders that we book this quarter especially will be a key indicator to how 2016 is going to look. So this quarter and early next quarter will be a key driver, especially the front part of next year. So that is the other thing to kind of keep in mind.

Got it. And then one more for me. I may have missed it, Rajeev, in your comments, but on the aero deferral, I guess the orders and backlog sequentially came down there quite a bit. Can you just revisit that, what the magnitude was, what you're expecting for the back half of the year and any other color you can give there?

Absolutely. We had anticipated coming into the year the biggest driver was the Joint Strike Fighter program. We expected to get I think it was out with the lower initial production lot 9 into the second quarter here, and lot 10 towards the back end of this year. 9 has moved to the back end of this calendar year and 10 has moved into the next year. So that was one of the big drivers.

The other thing is don't forget we have been on a journey here starting early last year to get out of some of the low margin build-to-print business especially out of our French locations. And so obviously there's been some pressure on orders from that perspective. That is intentional and a good thing. It's really the back business and then the second piece of it is our UK defense business. We are also seeing lower orders there as we completed out some of the UK Navy programs last year. Those are the two or three key elements to the change.

Okay, thank you.

John Franzreb, Sidoti and Company.

Good morning guys. Let's just stick with the aerospace and defense. You've got some low margin business, structural landing business, had some deferrals. Could you just talk about the opportunity pipeline in regards to filling some of the businesses that you exited, and when you expect to finally catch up on that front?

Yes, sure. We have -- we actually spend a lot of time on this. So we are working on -- probably the strongest pipeline of new products that we have in CIRCOR is on the aerospace and defense side. We're trying to change that on the energy side but that's taking some time. So we are working on new products, largely switches and actuation for defense, so we are increasing our penetration on missiles as well as the UAVs. We see both of those as strong growth opportunities.

The other piece that I would say in addition to some of the basic fluid control products and actuation on the commercial side is really MRO. So, we have historically not played a big role in MRO in aerospace and defense. And as you can imagine, we have a pretty large installed base. We are changing that. We are spending a significant amount of time and resources in becoming a bigger player in the markets that we participate in. So, we are seeing pretty good growth off of a small base and that market is focused on the commercial side of the business. And we would expect that to be a pretty significant driver for our growth going forward. And as you can imagine, the margins in MRO are quite good.

I'll just add to that, John, two other items that will help us from a growth perspective. Scott mentioned new products and MRO. Overall production rates at Boeing and Airbus, of those were to increase, obviously those would give us some lift. And there are some good programs in the military side we are on. We were taking a look at the DOD proposed budget the other day and there are a number of nice programs that we are on that are going to get some incremental funding for those particular programs. And that's the other piece that will give us some lift.

Perfect, thank you. And Scott, I want to make sure I understood your comments. You said down 50% year-over-year. Was that comment on sales and was that comment limited to the short cycle business?

Correct. So that's short cycle North America sales and orders down 50%.

I wanted to make sure I understood that. And in regards to the second quarter, what was the contribution of Schroedahl in the quarter on the sales and op margin line? (multiple speakers)

What we have guided, if you recall, we have guided about $6 million in revenue, about $0.08. It came in consistent with that.

Okay, that's fine. And one last question --

You can do the math of the (multiple speakers) there, John, you can do the math.

You talked about the midstream market actually being a positive going forward. Could you just provide some color on what you're seeing in midstream?

Yes. So the midstream market is an opportunity really for two businesses. The biggest opportunity is more on the engineered products side, so out of Milan. We are actually -- I can say a disproportionate share of the product that we're quoting right now is going into midstream, primarily LNG. So if you look at North America, Australia, we're quoting quite a few projects for LNG right now for large engineered valves. We are trying to make some headway on distributed valves in midstream, not as much success as we are having on the engineered valves.

There's also the instrumentation and tapping side especially that could help in that piece of it as well.

And just back to the short cycle business, did I hear in your prepared remarks that working capital is suffering? Because it sounds like you're increasing inventory because the short cycle has gotten actually shorter, so to address the booking term process you're caring more inventory. Did I hear that properly?

That's correct.

Okay. Just double checking. Thank you very much, guys.

(Operator Instructions). Ryan Cassil, Global Hunter Securities.

Nice quarter. I guess I have a question on the short cycle margins. You said you expect to see pricing pressure when the large stocking orders come back. Would you expect -- where are you guys I guess with the simplification in that business, and would you expect that some of the sourcing initiatives and other benefits offset that pricing when you do see it, similar to the long cycle business?

So, yes. Let me step back here. So, a lot of the restructuring that we've done in the energy business, I mentioned the reduction in headcount at about 26% in energy this year, a lot of that, a disproportionate share of that has gone into our short cycle business in North America. Not all of that is volume-related. We are working hard to get structural cost out of this business. So if you look at our SG&A, our overhead, we're going after all of that as part of this cost reduction effort. So of course, as volume comes back, that cost does not come back.

We also spend a lot of time on strategic sourcing and supply chain and simplifying the product line and rationalizing SKUs and suppliers. Again, that's cost that goes out and doesn't come back.

So it's kind of a long answer to your question. As the volume starts to come back in, certainly we would anticipate some pricing pressure on the stocking orders. But we think we are taking a whole lot of cost out right now that won't come back in.

It's hard for me to tell you are they going to perfectly offset, are we going to have bigger margins or higher margins or lower margins. It's hard to say. But I can tell you we're taking a lot of structural cost out of the business right now.

Just add to that, we are working all sides of this, including the volume related actions, to mitigate what we are seeing now. But we are going to need the volume to come back and we're going to be very judicious in how we add costs back, even once the volume comes back.

Sure. Okay. Thanks. And then I guess, just looking at acquisitions, some of the competitors out there have been saying that the smaller mom-and-pop companies are really feeling the pressure of this prolonged downturn and will continue to do so. Have you seen any change in the environment there or the pipeline and multiples that are out there at this point?

So I am personally spending a lot of time on M&A right now with potential partners and targets. I will tell you that it's hard for me to say the multiples have changed, but certainly the results have changed over time. So if you're looking at oil and gas or North America, everybody's results are down. And multiple expectations I don't think have necessarily changed, but in aggregate the prices come down with the results.

We are spending -- I would say I'm spending less of my time on North American oil and gas opportunities and more on international opportunities in power, LNG, other opportunities that are not necessarily in the middle of a cycle right now. So, we will see how it plays out. It's hard, as you know, to predict exactly if and when any of these opportunities are going to actually happen. But I can tell you we are spending a decent amount of time on this right now, and hopefully we will make something happen here. There's a lot of really interesting strategic opportunities out there for us.

Okay. Is it the margin that's attracting you or is it just the right timing and opportunity for some of these opportunities?

We are thinking and looking long-term here. The businesses that are most interesting for us are the ones that have truly differentiated technology, they are positioned well in a higher growth part of the market, so whether it's power generation, LNG. They also ideally would have a strong position in geographies that we see as high-growth as well. So if it were our business, we would like to see a significant presence in Southeast Asia and some of the emerging markets where we see good growth out of power generation. So we are really looking at differentiated technology, high margins and high-growth potential.

All right, great. Thanks guys.

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

Thank you very much. First of all, I just want to thank everybody for joining us this morning and thanks to everybody for your questions. We will take any further questions after the call if you want to call us, and we look forward to speaking again next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference call. Thank you for joining us today.