Circor International Inc (CIR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to CIRCOR International's fourth-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 David Calusdian from 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; and Rajeev Bhalla, the Company's Chief Financial Officer. The slides we'll be referencing 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, 10-Q, 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, February 19, 2016. 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. The 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. CIRCOR concluded 2015 with solid fourth-quarter performance as we demonstrated continued progress on our margin expansion and simplification strategy.

We delivered revenue of $165 million and adjusted earnings-per-share of $0.63, consistent with our guidance. We delivered solid year-over-year organic sales growth in our large projects business, as well as our Control Valves business. This growth was more than offset by the continued decline in our short-cycle Distributed Valves business, as well as softness in the upstream portion of our Instrumentation & Sampling business.

Aerospace & Defense sales were down year-over-year, primarily due to a difficult comparison with prior-year when we completed a large UK Navy program. In the fourth quarter, we saw an increase in orders for fluid control products out of our California business, primarily on military platforms.

We improved our free cash flow to $28 million, driven by better working capital performance. Working capital and cash flow continue to be a top priority for us.

Our restructuring and supplication actions delivered the expected $12 million of savings during 2015. This contributed to year-over-year consolidated margin expansion of 50 basis points to 10.2% in the fourth quarter. Our Energy team has done an excellent job of aligning our cost structure to the lower Energy market, ultimately delivering 13.4% margins in the quarter.

In Aerospace & Defense, our margin expansion initiatives led to double-digit margins of 10.4% in the fourth quarter, up 560 basis points year-over-year. Our efforts to simplify CIRCOR, which began in 2013, are progressing well. As a result of the current economic climate, we've been accelerating our simplification initiatives and the rationalization of our operational footprint.

Let me give you an update on the major restructuring actions we announced last year. Production at our manufacturing operation in Brazil has essentially ceased and we are in the process of winding down the business. This closure permanently removes a high-cost negative-margin business from the CIRCOR footprint, and puts us another step closer to achieving our long-term margin targets.

In July 2015, we announced the closure of one of our two California manufacturing facilities as an important part of our effort to improve Aerospace & Defense margins. The plan is on track, and we expect to exit this facility by the end of the third quarter.

I'd like to provide you with an update on our progress against the targets we set at our Investor Day conference back in September 2014. At the end of 2015, we have reduced the number of manufacturing facilities from 24 to 18. The Brazil and California closures will put us at 16 by the end of the third quarter.

We've reduced the number of suppliers by 34% to 3,300. We've increased the level of sourcing spend on long-term contracts with our suppliers from 8% to over 30%. We've also decreased the number of P&Ls from 22 to 16, and reduced the number of ERP systems from 24 to 18.

In addition, we've maintained a strong focus on growth. We continue to carefully invest in sales and marketing, new product development and engineering, while we improve our operations. Our fourth-quarter customer on-time delivery was 90% compared with 73% in 2014.

So, overall, we delivered strong results in a difficult market while we significantly improved our operations. After Rajeev discusses our Q4 financial results, I will discuss our outlook for 2016 with a review of our end markets.

Now I'll turn the call over to Rajeev.

Thanks, Scott. As a reminder, we've excluded the 2014 divestitures in our year-over-year comparisons for both segments.

Let's start with Energy on slide 4. Energy sales of $124.4 million decreased 24% from the prior year. We delivered strong organic sales growth in our Engineered Valves business as well as the Control Valves business, especially into the power generation market. But that was more than offset by the continued and significant decline in our short-cycle Distributed Valves business. Short-cycle Distributed Valve sales declined 65% from the prior year, and over 20% sequentially, as North America rig count and well completions continued to decline.

We also saw year-over-year softness in the upstream portion of our Instrumentation & Sampling business. Our restructuring and cost-cutting initiatives helped to mitigate the impact of margins from lower volumes. We achieved an operating margin of 13.4%, a 120 basis point year-over-year decrease. Our ability to deliver double-digit margins in the face of a 24% revenue decline highlights the strong actions taken to mitigate the volume-driven margin erosion.

For Aerospace & Defense, please turn to slide 5. Aerospace & Defense sales of $39.8 million decreased by 6% organically, in part due to a difficult comparison with 2014 when we completed a large UK Navy program. The decline was also due to pushouts of deliveries for certain large military programs, most notably the F-35.

Aerospace & Defense adjusted operating margin of 10.4% increased 560 basis points year-over-year and 130 basis points sequentially, achieving our goal of exiting the year with double-digit margins. This was primarily driven by ongoing operational improvements and the benefit of exiting the structural landing gear product lines.

Turn to slide 6 for selected P&L items. We recorded Q4 special and restructuring charges of $4.5 million. This primarily consisted of $2.2 million of acquisition-related amortization expense and $2.1 million related to the exit of our manufacturing operations in Brazil. With the end of production in Brazil, the remaining shutdown costs are expected to be about $1 million in the first quarter and $500,000 for the rest of the year.

Our tax rate for the fourth quarter was 25.6%, much higher than the fourth quarter last year. You may recall that we recorded a benefit of $0.21 per share in the fourth quarter of 2014 when we utilized our foreign tax credits, resulting in a much lower tax rate. For the first quarter of 2016, we expect our tax rate to be in the range of 28% to 29%. Adjusted earnings-per-diluted-share were $0.63, in line with our guidance and lower than the prior-year, given the impact on our bottom-line from the decline in volume.

Turning to our cash flow and debt position on slide 7, during the fourth quarter, we generated $28.4 million in free cash flow, which brings us to $16.6 million for the full-year 2015. The improved cash flow is a result of better working capital management, and we expect this trend to continue in 2016. In Q4, we also completed our $75 million share repurchase program.

This brings us to our guidance. Please turn to slide 8. We expect revenue to be in the range of $135 million to $145 million, based on the backlog in our large projects business, growth in our Control Valves business, a continued decline in our short-cycle Distributed Valves business of approximately 60% year-over-year, and flat revenues in our Instrumentation & Sampling as well as Aerospace & Defense businesses.

We expect adjusted EPS in the range of $0.38 to $0.48 per share, reflecting the benefits from cost reductions, restructuring actions, and productivity. For Q1, we anticipate special charges to be in the range of $2.5 million to $3 million or $0.10 to $0.15 per share.

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

Thank you, Rajiv. Let's start with an overview of current market trends for Energy and Aerospace & Defense. First, Energy. Energy segment orders were lower overall in the fourth quarter, primarily driven by weakness in our upstream North American short-cycle business, where market dynamics have not changed and demand is down significantly year-over-year.

Rig count continues to decline, with total US rig count at about 540 or 60% below last year and 35% lower than the end of Q3. Distributed Valve orders in Q4 were down approximately 65% versus last year. Distributors continue to reduce inventory, or, in some cases, hold inventory at very low levels while expecting us to carry the inventory instead. We've adapted our operations to this new reality and we believe we are gaining share in this market.

We recently signed two new distributors in the US, displacing the competition. In addition, we are quoting a number of North American pipeline projects, a relatively new market for us. Over the last year, our Milan and Oklahoma City operations have been accepted on to the approved manufacturers list for 8 pipeline companies. This quotation activity has picked up within the segment, especially for our fully welded ball valves used in natural gas pipelines.

Our long-cycle Engineered Valves business saw an increase in orders year-over-year and sequentially, largely driven by strength in the Middle East. We are seeing good activity in the US and Canada for LNG. Elsewhere in the market, we are seeing increasing market headwinds as we enter 2016. We see very little activity in Asia, Europe, and Latin America. We expect modest growth in the first-half, based on our backlog, with the second-half of the year to be determined by current order intake.

Overall, we are quoting more projects, but the average value of the projects is lower, and the sales cycle is longer. Pricing pressure continues to be strong, but this is partially mitigated by lower cost for raw materials that we buy.

In our Instrumentation & Sampling business, we are seeing decent quoting activity in downstream oil and gas, and in LNG. There's also good activity in the Middle East. Most of the business is coming from ongoing MRO and safety upgrades as opposed to large capital projects.

Order intake seems to have bottomed out in the middle of last year, but has remained relatively stable since then. We expect orders in this business to be flat to slightly down in 2016, with some potential upside, driven by a number of large projects in the pipeline.

In our Control Valves business, we are seeing a healthy pipeline of power projects and good quotation activity in Asia and North America. In addition, the Schroedahl acquisition is opening up new opportunities for sales growth of Schroedahl products and legacy CIRCOR products, as we expected.

Aerospace & Defense bookings were slightly lower than prior-year. As we enter 2016, we expect to see growth from most of the commercial OEM platforms, especially the A350 program and the expansion of our MRO business. Overall, we expect Aerospace & Defense orders to be about flat in Q1, with order growth increasing to low single digits as the year unfolds. Going forward, we are focused on supporting higher OEM production rates, driving new product development for both commercial and military platforms, and growing our MRO business.

Let me sum up by leaving you with three important points. First, we are reaping the benefits of our margin expansion initiatives across CIRCOR. We've been taking advantage of low volumes in our energy business to drive simplification at a much faster pace than we initially anticipated. We'll continue to be aggressive with cost take-out at CIRCOR. We are in the planning phase on a number of structural initiatives that we expect to announce later this year.

Second, we continue to invest in growth -- geographic expansion, sales and marketing, and new products. For example, we are investing in the Middle East, where we are expanding our presence to be closer to our customers. We are investing in new products for power generation and LNG as well as certain aerospace and defense markets. And we're taking advantage of our competitors' instability to hire their best sales leaders and engineers.

Third, we have an active M&A pipeline, and we are currently exploring a number of proprietary opportunities for our Energy group. We are still in the early phases of building a pipeline on the Aerospace & Defense side.

So, in summary, we are focused on what we control. We are effectively managing our business through the market downturn in Energy, while we built a foundation for long-term value creation. We're 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.

I'm going to start on Aerospace & Defense for a change because nobody wants to talk about oil and gas any more. You have obviously some more visibility into what demand is on that side of the business than you do, I guess, especially on the Distributed Valve side of the business in Energy.

You are talking about orders flat in the first quarter, increasing to low-single digits in the second quarter and as the year progresses. You've got a facility closure to finish later on this year. You've got to the double-digit margin levels that you were talking about last year by the end of 2015. How do you progress from there to that mid-teen level that you've been targeting that I think you laid out on the Analyst Day in 2014?

Okay. So I'll start and, Rajeev, you can jump in.

Sure.

So, the -- there's still a lot of opportunity in our Aerospace & Defense business. If you were to segment it and look at it by business unit, you would see some very profitable businesses and you would see some businesses that continued to struggle.

The struggling businesses are getting a lot of attention right now, so we are continuing to work on, I'd say, two paths here. One is the ongoing structural problems we have with cost -- so you referenced the factory closure that we are in the middle of doing right now. There will probably be more structural cost take-out in Aerospace & Defense over time.

The second piece is we have some unprofitable programs that we are still dealing with. So it comes down to renegotiating prices and/or exiting the business if we have to. So, it's really digging into the portfolio and addressing the portfolio.

So, overall, we are still confident that this is a mid-teens business and that we can get there. We have a path that we feel pretty confident with. It's just a matter of time and execution.

And let me just add to that, Nathan. So, Scott talked about the operations side and the unprofitable programs piece. The demand on the top-line is also going to help us get those margins up, both in the commercial and the MRO side, as we push hard on capturing more of that MRO base that's frankly our installed base. So, it's a top line operations and the exit of some unprofitable programs.

So, if I can just talk about the unprofitable programs for a minute, I know there is some that you've got out of before. Are these things that have long lifespans? Are these things that will go away sometime in the near-term by themselves? What kind of recourse do you have on those kind of contracts? How do you get out of them if you need to?

So, there's a -- there's two -- broadly speaking, there's two types of businesses that we are in, in Aerospace & Defense. We have build-to-spec, which is products that we design, we own the design, and we're the only ones that can manufacture it. And then there's build-to-print product that we have. And as a general rule, the build-to-print is a lot lower margin than the design-to-spec.

And so if you look at what we've been doing over the last few years, we've been shifting the mix of this business more towards design-to-spec and away from build-to-print. And so we expect to continue doing that.

So if it came down to exiting, we are usually talking about a small build-to-print program that's either generating losses or very low margin. In most cases, we can reason with the customer and negotiate a better price, because it's usually a situation where they are not going to get a better price somewhere else. So, that's the exercise that we are going through and really getting down to the SKU level and SKU profitability, and addressing it at that level.

And along those lines, as our operational performance improves, Nathan, you can expect that, obviously, what we can ask for and get, from the customer, improves. And those go hand-in-hand.

Yes, that makes sense. Scott, you mentioned -- and I know you're probably not going to give me too much information on this, for the restructuring programs that you are looking at that can come later on in the year. Any kind of magnitude that you could frame for us there?

Sure. So, if you go back over the last couple of years, you'd see a bit of a bias towards the Aerospace & Defense side and relatively small -- smaller projects, we'll say; maybe low-hanging fruit might be one way to look at it.

As we are entering 2016 here, we are spending a lot more time on the Energy side, where the projects will be significantly bigger; also take longer, but have a bigger impact on the Company as a whole. So, what we are working on right now is both. We have some projects on the Aerospace side but we are also spending more time on some larger -- we'll say more impactful projects on the Energy side. And we'll be giving a lot more detail on that later this year.

All right. Thanks very much, guys.

Nathan, one more thing on that. Just in general, the strategy here on fewer moving parts, fewer facilities. So, consolidation of facilities will continue to be a theme here. But also, you'll see us start to shift the center of gravity for our manufacturing away from higher cost locations, and leveraging more of the low-cost facilities that we have today.

Great, that's helpful. Thank you.

Thanks, Nathan.

Joe Radigan, KeyBanc.

This is Shane Rourke on for Joe. Good morning. So, when it comes to the large projects, I guess on the last call, you had some of that activity kind of moving to the right. And I'm curious, in 4Q, was that still the case? Were some of those projects coming to fruition? And are you still not seeing any cancellations? Just sort of what's going on there?

So, yes. On the large projects, I think maybe the way to break it into two pieces -- so, in terms of our backlog, we are not seeing any shifts in the current backlog in terms of delivery dates. We're not being asked to renegotiate prices in the backlog. So we feel pretty good about the backlog that we are entering the year with. And that really takes us really through the summer in terms of volume and revenue in that business.

In terms of the orders that we are quoting now, there's -- probably the right way to think about this is we are quoting more opportunities than we have historically, but they are smaller. And so if you look at the aggregated quoted revenue that we are sitting on right now, it's lower than what you would have seen six months ago.

We are also seeing that the amount of time between when we quote and when a decision is made is getting longer. So, we are definitely seeing a change in the market. As I mentioned earlier in the call, the pricing pressure is still there. But we had a decent quarter on orders in Q4. And how our orders come in here in Q1 and early Q2 will determine how well we do in the second-half of the year.

Okay. That's helpful. And then switching gears just a little bit to Defense. So, the budget is out. I'm kind of curious if the numbers there change your outlook at all, just as far as the programs that you are on specifically?

All right. I'll take that, Shane. The budget is actually favorable overall relative to our programs. There are puts and takes within a particular set of programs. But overall, we do see the larger programs that we were on getting funded. And that obviously helps us. The question always comes into play is timing. And what is proposed in a budget versus what actually gets appropriated and then executed on, can often vary. But overall, it's favorable.

We feel pretty good about the -- certainly the -- as the year unfolds, the organic growth in this business should pick up. The challenge we have occasionally here in the short-term that we are dealing with is inventory levels at our customer base. So we are on good programs, but we are pretty far down the supply chain here.

So, there are times when our inventory -- our customers' inventory will affect our near-term demand. But overall, we feel good about the organic growth in this business, both on the military side but also on the commercial side.

Okay. That's great. Thank you for the time.

Thanks, Shane.

Kevin Maxa, BB&T.

I guess back to Energy. So, can we start just by looking at the big buckets within your Energy segment, the Distributed Valves, the projects, the Instrumentation & Sampling, and the power-gen? And just, as we exited 2015, resize each of those for us? And you gave some color on the Q1 outlook. I'd like to just make sure I revisit that and talk about the outlook for those for the year. I think maybe the power-gen is growing but the others have some obvious headwinds.

Yes, sure, Kevin. I think the -- you're right. The power is growing. Overall, if you were to just look at a smaller pie in the aggregate, the relative proportion aren't dramatically different. Obviously, the sizes and the slices are smaller here.

In terms of the upstream project as well as short-cycle business being a significant portion, I think it approximates closely to one-third still. And then, as you get into power, is up between 5% and 10% of the total slice. Aerospace, as you know, a little over 20%. And then you've got the rest -- the mid down -- midstream, downstream and industrial pieces there. So, it's not a huge shift dramatically as you look at 2014 versus 2015.

I think if you were to break the businesses -- the business into the four pieces that we talked about -- Engineered Valves, Distributed Valves, Control Valves, and Instrumentation & Sampling -- historically, Distributed Valves was significantly bigger than the other three segments. That's not the case any more.

So, when you look at Distributed Valves, it's smaller than the other three segments today. And, in general, the other three segments are more or less similar in size.

Okay. And Distributed Valves, I think you said in the first quarter, that one still has a harder comp. You are down about 60%. That's about $100 million-or-so business in 2015, and I guess we're looking at double-digit decline there for 2016 as well, if current levels hold.

Correct.

Yes, and what you -- yes, exactly. So where we exited the year, the run rate we exited the year at in 2015, was much lower than how we entered 2015. So we saw a decline through the year. So you are right -- the year-over-year compare in Q1 is pretty significant, 60%.

Yes, but if you take that run rate, as you suggested, Kevin, you would see a significant decline year-over-year in that business.

Yes. Now, maybe I missed it, but did you give an outlook for the first-quarter on the project side as well? And if not, can you do that?

We did. We did. And we have good firm backlog in the projects business, and so we are going to deliver that. And that should give us some lift year-over-year.

And sequentially.

And sequentially, yes.

All right. So the project side up year-over-year sequentially, and sequentially in the first-quarter. But then after that, we start facing some declines, and some of this pricing pressure starts to roll through eventually?

Yes, we will anticipate some pricing pressure there. The top-line is going to be driven by what we book in the near-term here. And that's a key focus for us, is getting those orders in to help shore up the back-half.

Got it. And then just anything you can say -- you mentioned the two new distributor wins and quoting some new pipeline projects that are newer to you. Anything you can say about how needle moving those maybe?

Sure. The -- obviously, in this kind of tough demand environment, picking up any new distributors, even if they are small, that incremental demand is helpful. The midstream pipeline part of the market has not been one that we have historically spent a lot of time and focus on. There is growth there.

As you know, a lot of pipelines are being built. And so getting -- kind of laying the foundation over this past year of driving into that market is going to really help grow the demand there. So, it may not move the needle today, but it clearly will help us definitely this year.

Got it. Okay, thank you.

Hey, Kevin, I misspoke earlier. I want to just correct something. When we were talking about sequential revenue in Engineered Valves, it's actually going to be down from Q4 to Q1, not up. Orders will be up and not revenue. So, I said the opposite earlier. I just wanted to correct that.

Okay. Thank you.

John Franzreb, Sidoti.

Hi, Scott, it seems to me that you are kind of hoping that Energy orders are stabilizing at the current $95 million to $100 million level. Can you just talk a little bit to that and why you have that kind of confidence? Or is that not the case?

So, I'm not sure that I would say it that way. We are -- maybe if I can break it into pieces, it's easier for me to answer your question.

So, in Distributed Valves, we are expecting, we'll say, a slower decline as we come into the first-half of this year. We're not expecting a meaningful recovery at all in Distributed Valves this year. And if you look at Q3, Q4, and then Q1 of this year, we are expecting some level of ongoing deterioration but not nearly as dramatic as what we saw last year.

In Engineered Valves, we are expecting, more or less, some moderation, if you will. So if you look year-over-year in our Engineered business, we are expecting to be flat to slightly up in 2016 versus 2015.

Instrumentation & Sampling, flat to slightly down. We have an upstream portion of that business that is very likely to be down. And it started coming down in the middle of last year. And it seems to have flattened out, and we're not expecting a big change. Most of the business we are getting in upstream out of that business now is MRO safety upgrades, smaller book and ship type of business. So we're not counting on large projects in that business in 2016, so we are expecting flat to slightly down there.

And then Control Valves, we are expecting growth. Control Valves, we sell largely into general industry and power-gen. And we are seeing, particularly on the power-gen side, we are seeing pretty good trends, good order activity and good quote activity, particularly in Asia and North America.

Okay. And last quarter, if I remember correctly, you said that the pricing pressure was most acute in the Engineered Products side, and projects that were bid to -- on Distribution. But the real book and turn business wasn't feeling significant pricing pressure. Is that still the case or no?

Yes, that's still the case.

Okay. And could you give me a sense of the commodity cost-benefit that you achieved in 2015 and what are baked into your expectations in 2016?

Sure, John. This is Rajeev. The commodity side clearly is a tailwind and helps, but it is not huge in the sense that what we buy and the types of materials we buy, and where we buy from, relative to those long-term agreements. But it is -- it's clearly a tailwind that helps mitigate some of the margin pressure we see when the topline declines as much as it does here.

So we do see it a little more on some of our castings and forgings, as you would expect. And many of those we've actually entered into long-term agreements as well. So there is some tailwind, but it's not of the magnitude that I would highlight.

Okay. Fair enough. And I guess one last question. The timing of the realization of incremental restructuring benefits, how does that progress as the year goes forward?

Yes. The 2015 actions that we announced last year, excluding the closure of the California facility, are more frontend-loaded in the first-half. And then obviously the California facility closes at the end -- by the end of the third quarter, so that you'll get a little bit this year, and then it will flop into the subsequent year.

So you do see a little more year-over-year benefit in -- from those restructuring actions in the first-half. And then with respect to Brazil, as you recall, we did about $5 million of operating losses. We -- when we talked about this at the closure, we did not anticipate the $1 million of loss I spoke about in the opening remarks for the first quarter. So just keep that in mind. But we should still get the full $13 million that we announced in November for 2016.

Got it, got it. Thanks, Rajeev.

The mix may be a little different but we'll get the full amount.

Great. That's helpful. Thank you.

Good. Thank you.

(Operator Instructions) Ryan Cassil, Seaport Global.

Just related to that last question -- and I know you haven't given the incremental restructuring actions you're talking about, but based on when you give those, are those going to be more of a 2016 benefit or more of a 2017 benefit, based on when you can implement those actions?

They would probably buy us until 2017. We hope to get some benefit into 2016, but if it is -- the big structural type of actions will probably fall more into the 2017 forward timeframe.

Okay. Okay. And then just going back to the bookings, particularly on the project side, if you guys were able to kind of sustain this bookings run rate on the project business through the first-half, what is that -- what would growth look like in the second-half in the project side?

If we were to sustain what we saw in Q4, Ryan? Are you suggesting what we think we could get in Q1?

Yes. In Q4.

Yes, we've got what we -- if we got the Q4 run rate for the rest of the year, we'd be flattish.

Okay, okay. Sounds good. And just looking at the -- last one from me -- looking at the decremental margins, kind of mid-teens last year in the Energy business. It seems like they are getting a little bit stronger in Q1. How should we think about the decrementals as we move through the year, and as you guys apply some of these cost actions? Should they be improving, I guess? If you could give a little color on the cadence. Thanks

Yes. So, 13.4% Energy margins, as I think you are referring to just Energy in Q4, pretty strong relative to the topline, as we noted. As we look at 2016 here, the goal is obviously to keep driving some margin improvement here, but the topline is going to matter. Because at the end of the day, the decrementals are running close to about 30 -- between 33% to 35%. So, you'd have to do, absent the topline, it's really not sustainable from a cost reduction standpoint.

So -- but with that said, Scott outlined kind of the various sectors that we are in, and the puts and takes there, where we are seeing some growth and where we are seeing some pressure. So a key here is to keep driving those margins.

Okay. I think in prior calls or in conversations, you guys had expected to keep margins in Energy flat to slightly higher in 2016. In the current environment, do you think that's still a possibility?

At this point, it is. At this point, it is.

Okay. All right. Thanks, guys.

Thanks.

Jim Foung, Gabelli & Co.

Good morning, Scott and Rajeev. I was pretty impressed with the corporate expense as percent of sales, like 2.5%. Is that kind of a real structure change here that we can see the expense at this level going forward?

Yes. So, there's a couple points here. So, appreciate the comments there, Jim. The -- as you look at the fourth-quarter, we actually were able to get a little bit of favorability relating to stock compensation and some other aspects that we adjusted for in the fourth quarter.

So, as you look ahead, our run rate is probably a little higher than what you saw in the fourth quarter, but it is also an area that we focus on for cost reduction and cost control. And so you're seeing the benefit of both -- you're seeing the benefit of cost reduction and cost control, combined with the fact that we had a little bit of favorability. I wouldn't expect what you saw in the fourth quarter to be what you would see each of the subsequent 2016 quarters.

Okay. But it won't be margin high, because you're really kind of simplifying your organization from what Scott said earlier about all those metrics. And so could see just a kind of a -- inflation plus growth going into 2016 more, okay?

That's probably a fair assumption, Jim.

Yes, I guess so. And then I guess there's a lot of talk about Russia and Iran coming together with some Navy pricing agreement or production agreement on oil. And oil is kind of -- prices are starting to firm up. And I was just wondering, if we see oil prices continue to move up from current levels, how quickly would your Distributed Valve business improve? And how quickly would you see the impact in your bottom-line?

Well, it's really hard to know exactly, Jim, but I think that it would happen pretty fast. And the reason I say that is that there is a lot of wells have been drilled and capped and not completed. And when we -- where we really benefit is when they complete the well. They complete the well and connect it to the gathering stations. That's really our sweet spot; that's where we sell a lot of product.

So all these wells that haven't been completed are sitting out there waiting to go. Once the oil price crosses a certain threshold, obviously these guys are going to move into action pretty quickly. And that would benefit us. So, our -- what we've seen in the past and what we're seeing in the market, we would expect that our Distributed Valves business would come back very quickly.

Just remember also, we've just experienced painful destocking over the last year, year and a half or so, Jim. So, the distributors are keeping an awfully low level of inventory and often having us hold it. So, if demand comes back and production goes up, I would expect there to be stocking orders that come in and really give us a lot more lift and tailwind as well.

That's terrific. So, I guess in the aggregate, if you look back 12 months, how much business have you kind of lost, so to speak, from the Distributed Valve group?

So, if you look at our revenue in 2014 and you compare it to our current run rate, we're down over 60%.

That's correct.

Oh, okay, down 60% -- okay. And so that's a potential that can come back with the restocking and strengthening demand as oil prices firm up?

Correct.

Okay, that's all I have. Thanks so much, and look forward to seeing you guys next week.

Thanks, Jim. Yes, looking forward to seeing you too.

Charley Brady, SunTrust.

We selected -- on the Aerospace, your comment about the build-to-spec versus build-to-price in the mix there, that's interesting. Can you tell us what that mix looks like today? And kind of where you think you're trying to move that to over some period of time, maybe two years, three years?

Yes. So, we -- we're -- this is an estimate. We really look at it by product line. But I'd say in total, if you looked at all of Aerospace & Defense, about 70% of it is going to be design-to-spec and about 30% will be build-to-print. And in general, as I mentioned, the build-to-print margins are much lower than the design-to-spec margins.

And we've been moving that over time, transitioning that over time. So, a lot of the business that we've talked about, the bigger nuts that we've exited over the last couple of years, like the structural landing gear, in general, this has all been build-to-print type of business, where we don't own the design; we're basically contract manufacturer. And the margins, in some cases -- well, they're always lower, but in some cases, they have been negative in the past.

So, the transition -- we were probably closer to 50/50, maybe 55/45 two years ago. And we've been slowly moving that, changing that mix.

Okay, thanks. And just on Energy, just to clarify and make sure I heard correctly, you say you expect 2016 operating margin in Energy to be flat with 2015, despite a revenue decline? And that's, I'm guessing, a function of Brazil going away?

Yes. And what -- in response to that question that Kevin asked, that would be the expectation there, all else being equal relative to the topline. You know, clearly if demand drops on the large project business for us or further on the Engineered Valves -- I mean on the Distributed Valves, that can change the equation. But we are driving for at least keeping the margins level.

The biggest challenge we have on the margins year-over-year really is Distributed Valves. So if you look at the decline from last year to this year, the difficult compare from Q1 to Q1, that's really the issue we have. It's not so much pricing; it's really the DV volume coming out of the business that's giving us the headwind.

Okay. And just on the -- how much of the inventory are your distributors making you carry now versus kind of historically? Can you put some framework around that today to give an order of magnitude?

And the second part to that -- when we get this pickup in Energy at some point in the future here, do you think distributors end up carrying the same level of inventory we had, before we went entered the downturn? I would guess probably not.

And do you have any sense of kind of how much below previous normalized distributor levels they might end up winding -- I guess what I'm trying to get to is, you're down 60% at distributor level. You probably don't get the full 60% back. How much of that do you think you end up getting back when the market kind of normalizes?

Yes, it's a good question. And as you suspect, it's a hard answer, given the variables that go into that equation. But I would estimate that we are probably carrying 20% to 30% more inventory relative to what we might have done historically, in an up-market. And you're right -- if you're down 60%, it's not all going to bounce back immediately here. But I think that's the rough order of magnitude that I would estimate at this point, Charley.

Thanks, guys.

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

Okay. Thank you for joining us this morning.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.