CIRCOR International, Inc.
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to CIRCOR International's First Quarter Fiscal Year 2017 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. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

[David Calusdian:]

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 referring to today are available on CIRCOR's website at www.circor.com on the Webcasts & 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-Qs, 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, April 28, 2017. 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 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'll now turn the call over to Mr. Buckhout.

[Scott Buckhout:]

Thank you, David, and good morning, everyone. CIRCOR delivered solid first quarter results with revenue of $145 million, adjusted earnings per share of $0.32, and free cash flow of $13 million, all in line with our expectation. In addition, we're pleased to report a positive inflection point on orders and backlogs. Building on the momentum from Q4, overall orders for the quarter were up 35% year-over-year and 26% organically. Orders in our energy segment were up 45% due to strong demand for stocking orders in our Distributed Valves business and the recent acquisition of Critical Flow Solutions. In our Advanced Flow Solutions segment, we reported a 26% organic increase in orders primarily due to bookings on defense platforms including the Joint Strike Fighter and the multi-mission maritime aircraft. We're encouraged by the robust order intake on both sides of our business which should translate into strong top-line growth as we progress through the year. Despite seasonally high disbursements in the first quarter, our working capital and cash generation actions delivered $16 million in cash from operations as we improved our inventory position and receivable collection efforts. Our strong cash flow performance is also tied to our focus on operational excellence in the CIRCOR operating system. Operationally, we continue to make progress in executing our supplier consolidation and low cost sourcing plans. And as you may recall, we've been focused on consolidating our manufacturing footprint and migrating production to lower cost manufacturing locations. During 2016, we closed our production facility in China which was serving our Distributed Valves customers in North America and opened a new manufacturing facility in Monterrey, Mexico. This new facility significantly shortens lead times while also providing a cost benefit. Monterrey will supplement the manufacturing capacity at our Oklahoma City facility allowing us to meet increased levels of demand from our North American customers. Currently Mexico produces approximately 15% of our total Distributed Valves demand. In addition, over time this facility will manufacture products for North American customers and other energy businesses and AFS. With low cost manufacturing facilities in Mexico, India, and Morocco, we're well positioned to migrate additional production to these facilities to better serve their regional markets with a more competitive cost structure. After Rajeev discusses our Q1 financial results, I will provide more context on our order intake and expectations relative to each of our end markets.

[Rajeev Bhalla:]

Thanks, Scott. Let's review the segment results starting with Energy on Slide 4. As expected, Energy sales of $80 decreased 4% year-over-year due to the weakness in our long cycle Engineered Valves business which was down approximately 60% as well as lower shipments out our instrumentation and sampling business. This was partially offset by increasing revenue out of our Distributed Valves business up double-digits sequentially and the acquisition of CFS. Energy segment's operating margin was 8.6%, a decrease of 250 basis points year-over-year. The decline was primarily related to lower volume in our Engineered Valves business where we continue to manage cost through the follow program as well as other cost reduction actions. During the quarter, we incurred approximately $1.6 million for startup cost at our Mexico manufacturing facility as well as a program specific warranty charge. Finally, productivity actions and sourcing savings continue to help improve the bottom-line. For Advanced Flow Solutions please turn to Slide 5. Advanced Flow Solutions revenue of $65 million was down 3% year-over-year but essentially flat excluding the impact of foreign exchange rates. Sales in our power and process businesses were stable year-over-year, the aerospace businesses were flat year-over-year with growth in fluid controls and our UK defense business, offset by lower sales from a low margin commercial actuation program that we exited at the end of 2016. In addition, the industrial solutions business showed a slight decline mainly due to lower Navy program shipments. Advanced Flow Solutions segment operating margin was 11.8% lower by 70 basis points compared with the prior year. This was primarily due to a mixed change in our power and process product line, partially offset by restructuring savings. FX had a negative 20 basis point impact on margins. Turn to Slide 6 for selective P&L items. Special and restructuring charges totaled $1.7 million in the quarter. We recorded $1.6 million of restructuring charges related to the exit of our China and Brazil operations. In addition, we recorded $2.5 million gain as we updated the fair value estimates for the CFS transaction. However that gain was fully offset by $2.6 million charge for the non-cash acquisition-related amortization expense. Given the higher debt levels and interest rates, we incurred approximately $1 million of higher interest expense this quarter compared with the prior year. Our adjusted tax rate for the first quarter was 25% and our adjusted EPS was $0.32. Turn to our cash flow and debt position on Slide 7. We generated approximately $16 million in cash from operations and more than $13 million in free cash flow during the first quarter of 2017. In addition to converting our earnings into cash, we are focused on managing inventories and improving collections resulting in better working capital performance. This brings us to our guidance for the second quarter, please turn to Slide 8. Overall, we expect revenue in the range of $150 million to $160 million and adjusted EPS in the range of $0.38 to $0.48 per share. The revenue from improved order intake in Q1 does not fully offset the expected revenue decrease in our long cycle Engineered Valves business in Q2. However, we do expect the bookings and backlog to support increasing revenue in the second half of this year. Regarding special and restructuring charges, for the second quarter of 2017, we anticipate charges to be in the range of $3 million to $4 million or $0.14 to $0.16 per share. This range excludes any additional fair value purchase accounting adjustments related to the CFS acquisition. We expect our second quarter adjusted tax rate to be approximately 27%. With that, let me turn it back over to Scott.

[Scott Buckhout:]

Thank you, Rajeev. Let me provide you with an overview of the trends in our end markets starting first with Energy. Energy segment orders increased 45% in the first quarter versus the prior year due to strong demand in our Distributed Valves business as well as the CFS acquisition. This growth was partially offset by the expected decline in our Engineered Valves and instrumentation and sampling businesses. In our Distributed Valves business, orders more than doubled year-over-year and were up 25% sequentially. We're seeing a significant increase in stocking orders from our larger distributors. In addition we're generating strong order momentum for our midstream applications. Higher rig count and the completion of previously drilled wells especially in the Permian Basin are driving higher order levels. Rig counts in the U.S. are up over 25% since the beginning of the year and up 80% over the prior year. We're optimistic about the positive signs in the market and are actively managing supply chain constraints to deliver against the higher demand. We expect a consistent order rates sequentially in the second quarter Q2 revenue should increase significantly as well as the quarter end backlog. As expected, orders in our long cycle Engineered Valves project business were down in Q1. We're in our third year of low CapEx spend and upstream exploration and production. The market continues to be weak globally with intense pricing pressure from the competition. However customers are signaling a gradual increase in activity as the year unfolds with 2018 spending expected to be higher than 2017. We're currently seeing moderate but improving activity in the Middle East. Outside of the Middle East, a limited number of projects are starting to move forward. Overall we expect continued pressure in this part of our business through 2017, with the second quarter at a consistent revenue level sequentially. Within our instrumentation and sampling businesses, bookings were down year-over-year however we did see sequential improvement in our order run rate. In addition we're bidding on a number of refurbishment projects in the North Sea with Statoil. While we don't expect to begin receiving orders related to these projects for several quarters, a positive sign for the market. We're optimistic for a gradual year-over-year improvement to orders as the remainder of year unfolds. We expect roughly flat revenue sequentially in Q2 with moderate growth in the second half of the year. The integration of CFS is progressing well and remains a high priority. The downstream refining market for our CFS products continues to see healthy levels of activity and we have a strong pipeline of reported projects. The capital infro products are performing well with strong bookings and a healthy order pipeline for both capital and aftermarket projects. We're seeing solid growth for the delta valve aftermarket products. The expectations we provided in February for the delta valve capital project orders are unchanged. While delta valve capital project order intake is lumpy and timing is uncertain, most of the currently active projects are expected to close in the second half of this year. We remain excited about our new product pipeline at CFS. We recently started taking orders for our new isolation valve for refining operations and we expect to begin shipping in June this year. Turning to Advanced Flow Solutions where we serve the aerospace, power and process and industrial end markets. Our outlook for aerospace remains positive on both the commercial and defense sides of the business. We received several large orders in the quarter on our major defense platforms such as the Joint Strike Fighter and the multi-mission maritime aircraft. On the commercial side of the business we're leveraging our fluid and motion controls technologies to win new platforms. In the quarter we were selected to provide the main hydraulic assembly for a confidential commercial program that will now enter the development phase. This major program is a great example of how we're positioning our aerospace business for long-term growth. In our power and process business, the power market while still active has been soft, orders are slightly lower in the quarter compared to the prior year. We're focused on pockets of growth in the U.S. and parts of Asia. The majority of our recent orders are related to aftermarket parts, replacement valves, and services especially for process applications. Based on our opportunity pipeline, we expect project orders to improve as the year unfolds. Near term, we expect moderate growth in orders and revenues. Our industrial solutions business serves a number of end markets including HVAC, maritime, and other industrial markets. As anticipated in our last earnings call, we saw sequential order growth driven in large part by MRO orders for maritime and HVAC applications. Looking ahead, we expect a slight uptick in orders and revenues year-over-year driven by our expanded focus on aftermarket and moderate growth in industrial end markets. In conclusion, with the exception of Engineered Valves, we're optimistic about the market outlook across all of our product lines. We're addressing the cost structure in our Engineered Valves business. We're focused on mitigating supply chain constraints to meet the improved demand outlook for Distributed Valves and at the same time, we're executing on our simplification and low cost manufacturing initiatives with the expectation that will improve margins and working capital performance as our end markets continue to recover. And finally, we remain focused on delivering long-term value for shareholders by investing in growth both organic and through acquisitions, expanding margins, generating strong free cash flow, and being disciplined with capital deployment. The final note before we turn the call over to questions, we're looking forward to meeting many of you at our upcoming Investor Day on May 25 in New York City where we will discuss our long-term operational and financial targets. With that, Rajeev and I are available for your questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Ryan Cassil of Seaport Global. Please proceed with your questions.

[Ryan Cassil:]

I wonder if I could start on the energy side, just given your commentary for orders on the Distributed Valves in the second quarter, I know visibility is limited but could you talk to what you're hearing on the sell through I presume it's pretty positive?

[Scott Buckhout:]

Yes. So we're expecting the rate of orders in dollars that we saw in Q1 to more or less carry through in Q2. So we had I'd say a bias more towards stocking orders in Q1. We're not sure if we're going to see that mix shift or not here in Q2 but we're expecting the rate in absolute dollars to be about the same as what we saw in Q1.

[Ryan Cassil:]

Okay great. And any comments or any surprises on the pricing side there for the Distributive Valves, are you seeing I know people worry about that pricing gets worse if volumes come back potentially are you seeing that or think playing out as you expected?

[Scott Buckhout:]

Actually we're not seeing pricing get worse and we're spending a lot of time on this. I think the right way to say it is that we're discounting less and that the margin in our backlog as we exited Q1 has started to increase rather than decrease. I think availability is playing a role here in the industry in general and in the market in general, us and many of our competitors are trying to ramp up our supply chain as fast as possible and availability is playing a role. So we are discounting less, I wouldn't call it a price increase, our list price hasn't changed but we're discounting less and the margin and our backlog has started to come up.

[Ryan Cassil:]

Okay. And just to clarify, the startup costs for the new facilities that was included in the adjusted number or was it excluded?

[Rajeev Bhalla:]

It was included, so the Energy margins were impacted based on the startup cost, that's right.

[Ryan Cassil:]

Okay. And can we think of that as continuing at about that rate in the second quarter?

[Rajeev Bhalla:]

Yes, let me just clarify the $1.6 million, I just talked about reflects two items a portion of which is the startup cost, you'll see that start to get less as we progress through the year but for Q2 it will be about the same as what we saw in Q1, it's about a third of the total.

[Ryan Cassil:]

Okay. So ex that you guys were still at about a double-digit 10% plus margin?

[Rajeev Bhalla:]

That's right.

[Operator:]

Our next question comes from Nathan Jones of Stifel. Please proceed with your question.

[Nathan Jones:]

I'm also going to speak on Energy and the Distributed Valve business. Scott, last quarter you actually were talking about potentially the opportunity to raise prices with late comps I assume stretching out fairly considerably, demand improving fairly considerably, how are you looking at the potential to actually rise prices throughout the year?

[Scott Buckhout:]

Yes so throughout the year, let me back up, I'll start with what's happening right now Nathan. So when you look at a little sweep of time here on pricing in Distributed Valves, you'd see our margins start to compress over the last year-and-a-half, two years as volumes have come down and the market has turned down. If you look at Q1 and to some degree Q4, you'll see that we're discounting off our price list less and our price -- our margin has started to come back up. We're starting to approach the margins we had in 2014. So we haven't raised prices on our price list. We would look at doing that in an annual basis probably not something we do in the middle of the year but you would see us dramatically cutting back on discounts off the price list as the rest of the year unfolds and that's what we've already started to do, we simply don't have to give discounts right now.

[Nathan Jones:]

And then could you talk a little bit about the supply chain constraint, how confident you are that you can actually make this improved demand, if you've seen any problems with your supply, just any color you can give us there?

[Scott Buckhout:]

Yes. So yes we were seeing some problems with our suppliers and we know that our competitors in the market are having some of the same -- some of the same issues but just to clarify there's two things happening when you look at our backlog in Distributed Valves it's increased in Q4 and it increased again here in Q1. A lot of that is driven by the nature of the orders being stocking orders that are that are meant to be delivered out in Q2, Q3, and/or beyond. So the stocking orders come at the lead time. The other issue is supply chain constraints. So we have we have suppliers that are struggling to ramp up and meet demand. In this case we're doing -- in these cases we're doing two things we have a couple of critical suppliers where we have full time supply chain employees from CIRCOR working onsite at our suppliers to make sure we're maximizing our share of their capacity. We're also in parallel qualifying new suppliers to get suppliers for those products. So we're doing everything we can to manage it but it is one of the constraints as we try to ramp up to meet demand.

[Nathan Jones:]

Given that the suppliers are very experienced in higher demand are you seeing any pricing pressure coming from them to you?

[Scott Buckhout:]

We haven't really had to -- we haven't had to deal with that yet, Nathan. We've actually had discussions around paying a small premium to jump forward in the line here from a capacity perspective but we haven't had to do that yet. So we're not seeing a price increase from suppliers yet there's they're scrambling but they're not trying to raise prices on it yet.

[Rajeev Bhalla:]

And just to add to that Nathan don't forget these key suppliers are on long-term contracts with us, so that's obviously a starting point here. And as Scott mentioned they're not trying to renegotiate these long-term contracts we're just looking at ways that we can avail ourselves of an unfair share of their capacity.

[Nathan Jones:]

Got it. I guess you have 185-ish million of orders and the revenue guidance is a penny below that for the second quarter. Can you just talk about how those orders taken through the year and how we should think about those rolling out and revenue progression as we go through the year?

[Rajeev Bhalla:]

Yes I'm happy to do that Nathan. So let's look at it in two pieces, if we look on the energy side, there is a good portion as Scott just mentioned of those orders that are stocking orders which customer requested delivery dates that are mid-year and into the third quarter as well, so that's a good portion of the growth that you saw there. On the AFS side, if you look at the growth the year-over-year growth in orders there about half of that growth related to these two large programs that we mentioned in the opening remarks, the Joint Strike Fighter and the multi-mission maritime aircraft. And those have deliveries later this year but do also go into next year. So there's a good portion of the backlog we will deliver this year but there will be portion that carries over into the subsequent year.

[Nathan Jones:]

That sounds good. Thanks very much.

[Scott Buckhout:]

Nathan, as the year unfolds we expect revenue to continue to increase fairly through the year. So Q1 should be the low point in revenue for 2017.

[Operator:]

Our next question comes from Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

[Charley Brady:]

Just on the Energy business as we look at the Engineered Valves large project business, I'm just trying to square up make sure I understand if you're seeing an increase in the CapEx but it sounds like but given the length of time on those projects are you looking for bookings to start picking up second half 2017 which would then help 2018 revenue picture or are you -- you think the orders are not going to pick up until 2018 and maybe that revenue pickup is certainly part of 2018 but maybe beyond 2018?

[Scott Buckhout:]

So here is what we're hearing from customers and what we're starting to see. We're starting to see more budgetary quotes come in. We're starting to see more projects start to move forward here in 2017. And our customers I was just in the lease for a couple of weeks, our customers are telling us that 2016 was the low point for them and that activity will start to increase through 2017 and into 2018. So we're expecting that more activity, more orders in late 2017, early 2018 with revenues -- with revenue increases probably starting in Q2, Q3 2018. So that's kind of the current outlook this could obviously change but moderate increasing activity through the year and a better 2018 and 2017.

[Rajeev Bhalla:]

Just to add to that Charley, we are going to we are expecting to continue to get MRO related orders this year as well. So that's the other piece of the equation that we want to keep in mind.

[Scott Buckhout:]

So when you look at 2017 nothing's changed from what we guided in the last quarter, so we're still expecting revenue in line with what we said down about 50% versus prior year and when we look at Q2, we're expecting revenue more or less in line with what we did in Q1.

[Charley Brady:]

Okay. That's helpful, thanks. And Rajeev I just want to clarify the commentary on the Q2 restructuring and the plant startup costs, so of the million six a third of that was planned startup and in Q2 there's still a little bit of that but not so not as much maybe it was 500,000 or 530,000 if I do the math less than that in Q2 but still a little bit of planned startup, is that right?

[Rajeev Bhalla:]

That's right, you have that right.

[Charley Brady:]

And as Q2 -- after Q2 is the planned startup that cost goes away?

[Rajeev Bhalla:]

We will have some in Q3 and then it should dwindle to something so much small as we ramp up production the back half of this year.

[Operator:]

Our next question comes from James Picariello of KeyBanc Capital Markets. Please proceed with your question.

[James Picariello:]

Just a housekeeping item to start out your, could you provide what the organic backlog number was within Energy if we exclude CFS?

[Scott Buckhout:]

The organic backlog let's say -- so we the backlog, the $146 million let me just take a moment to look up it's up about 19% but I think CFS was little under $40 million of that, so think of it about $106 million is organic and about $40 million was CFS.

[James Picariello:]

Got it, appreciate that. Yes so I guess staying on CFS, revenue was pretty solid in quarter and orders and visibility seem to be improving. What is the outlook for this business in 2017 it seems as though there is some longer-term projects that the timing is still uncertain, so just wondering what the outlook is in terms of may be sales contribution for this year?

[Scott Buckhout:]

So I'll just change a little bit about what you said here, James. The first quarter on revenue CFS is the low -- the lowest quarter on revenue that we will have this year, so we expect revenue to increase in Q2, then again in Q3, and then again in Q4. And so we're in three of the four pieces of CFS, we're seeing strong orders and strong quoting activity, the three being TapcoEnpro aftermarket, and capital projects, and then delta valve aftermarket. The delta valve capital project piece we saw low orders in Q1 we're expecting relatively low orders in Q2, there is some things that could happen that could change that but relatively low in Q2 with the majority of the orders we expect this year, we expect to close in the second half of this year. So you should see an increase in orders from Q1 to Q2 for CFS for sure but the back half should be quite good on order intake with CFS.

[Rajeev Bhalla:]

To add to that James that is consistent with what our expectations were when we spoke in February. So really know change relative to that profile.

[James Picariello:]

Are refinery maintenance schedules improving?

[Rajeev Bhalla:]

Well if you recall when we talk in February we talk about the fact that relative to our products, we were seeing a bias towards the fall turnaround versus the spring turnaround and that still remains the case. So we are expecting to have a much stronger fall turnaround the season for our products than the spring.

[James Picariello:]

Okay. And then just for more sticking on the Energy piece, it seems though you guys continue to gain stronger traction with in midstream, could you just talk about what the backdrop is there are you gaining share and what's the growth outlook for the year? Thanks.

[Scott Buckhout:]

So we do believe we are still gaining share in midstream. We continue to take customers from our top competitor in the market here in North America. We are qualified on about more than 11 different midstream players that we want qualified to sell to before on their proven vendor list now and we're gross taking distributors, so this is driven by two things broadly one is the focus we've put on midstream in the expanded product line that was part of that, so we expanded our welded body product line to address a broader part of that market. But two is the struggling competitor just to be very honest. We have a competitor that has really struggling with both lead time and service in general and so we have a lot of customers knocking on our door trying to get standing qualifies and asking us to quote. So we're benefiting from that and we're seeing order intake come from that but we have good momentum, I think you'll see that build as the year unfolds.

[Rajeev Bhalla:]

In fact just to add to what Scott mentioned James the -- this -- we're skewing some of these orders towards the midstream side as I looked at what's happened in Q2, I'm sorry Q1 and as I look ahead. So it's a good new story.

[Operator:]

[Operator Instructions]. Our next question comes from Jim Foung of Gabelli & Company. Please proceed with your question.

[Jim Foung:]

So maybe we just talk about the cost reduction actions just chart on the restructuring actions for 2017, you have savings of $11 million, how much of that is going to flow through the bottom-line? And I guess, what did you see in Q1?

[Rajeev Bhalla:]

Hi Jim, yes good morning, it's Rajeev. The $11 million is the full benefit for the full-year for all of those restructuring actions that we show on that chart recognize that we will continue to take may be smaller actions as opposed to large programs $11 million reflects the large programs and you can look at that essentially pro rata through the quarters for this year in terms of the benefit to the bottom-line and what we don't disclose on that as I just mentioned are some of the other smaller actions that we will continue to take as we manage the portfolio of the business.

[Jim Foung:]

And if you took similar actions together how much you think it could result in terms of cost savings?

[Rajeev Bhalla:]

Well if you think about it from a margin standpoint, Jim, we've had a significant headwind if you look at Energy margins for the first quarter with the volume drop in Engineered Valves as well as the warranty and startup cost offset in part by the CFS contribution, we in large part we offset a majority of that headwind with productivity and restructuring. So think about it this way you did 11.1% margin in Q1 of 2016 for Energy and we had just reported to you 8.6%, so that's down 250 basis points but 200 basis points relates to that warranty and startup costs, so think about the rest as being by 50 basis points. And so we are able to mitigate a substantial portion of the headwind from the volume drop and its impact on margin through restructuring and productivity.

[Jim Foung:]

Okay. And then can you just talk about you are just discounting less on Distributed Valves. How -- I guess in terms of percentage wise how much less do you discount? I mean the lesser discounts just flows through the bottom-line for you right?

[Rajeev Bhalla:]

Yes it does flow through the bottom-line. I don't how to give the -- I don't know that I could comment.

[Scott Buckhout:]

It will be hard for us to give you percentage there Jim because obviously it's competitively sensitive to start talking about giving less discounts to a particular area versus not --

[Rajeev Bhalla:]

On a specific product line --

[Scott Buckhout:]

Yes but think about it this way, we are seeing good incremental drop through in the Distributor Valves business and it will get better as the year progresses especially as volumes ramp up and we get some of the startup cost behind us.

[Rajeev Bhalla:]

Jim, the other way to think about it is our margins are pretty close to where they were in 2014, when this was much, much bigger business right. This was a lot bigger business that we've taken a lot of cost out for sure but a lot of that is improving price here over the last couple of quarters as well.

[Jim Foung:]

Right. So just on lower volume compared to 2014 getting better margin on. So the direction is very positive and then just the last question, can you just talk a little bit about the instrumentation business because that's being weak for a while. Is that just the power OE business is weak for you, I mean I guess what how do you see that market unfolding for you for the rest of the year.

[Scott Buckhout:]

So on instrumentation and sampling, we saw a bit of a drop off in the middle of last year and Q3 was the low point and we've seen fairly steady improvement in order intake since then, and that continued here in Q1 and we're expecting that to continue in Q2 and beyond the year. We're expecting gradual improvement in order intake on instrumentation and sampling, so you'll see revenue sequentially be around flat in Q2 versus Q1 but then you should see some moderate growth through the rest of the year. What we're seeing in the market here is this business is probably one of our more balanced businesses across upstream, midstream, and downstream. What's happening on the downstream side is petrochemical is looking pretty good for us right now especially on the sampling side, so we're selling and quoting a lot of sampling products in petrochem right now. Refining is still little slower and we're seeing some delays in the refining side. Upstream we're seeing early signs of improvement I mentioned that we were quoting an offshore platform with Statoil in the first quarter that's obviously upstream, we are the incumbent there, we have the installed base there, so we have a very high probability of winning that project but that won't turn into revenue until two, three quarters down the road here. So I'm optimistic here, I don't think we're going to see a V-shaped recovery in instrumentation and sampling but I think we're going to see moderate growth through the remainder of the year starting here in Q2.

[Rajeev Bhalla:]

Just to add to that Jim, in Q2 of 2016 was a very good and strong quarter for that business, so it's a little bit of a tough compare for this quarter and consistent with what Scott just said, it will improve as the year unfolds.

[Operator:]

Our next question is a follow-up from Charley Brady of SunTrust Robinson Humphrey. Please proceed with your question.

[Charley Brady:]

Thanks. Just a quick one to clarify on the Q2 Energy revenues. Did I hear you correctly that you expect Q2 energy to be flat with Q1 energy revenues?

[Rajeev Bhalla:]

No, may be you heard me talking about Engineered Valves that will be flat to Q1 but Energy revenue in overall will increase from Q1 to Q2.

[Scott Buckhout:]

Yes, so just recognize if you look at it sequentially versus year-over-year you're going to have different answer but year-over-year we would expect Energy revenues to be up but may be down slightly organically. I don't think we have CFS in there and then sequentially we would expect it to be up nicely.

[Operator:]

That concludes today's call. Thank you for joining us today. You may now disconnect your lines and have a wonderful day.