CIRCOR International, Inc.
Q3 2016 Earnings Call Transcript

Published: 29 Oct 2016

[Operator:]

Good day ladies and gentlemen. Welcome to the CIRCOR International Third Quarter 2016 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 introduction. Please go ahead.

[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 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 two. 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, October 28, 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 margin, 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 measures 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.

[Scott Buckhout:]

Thank you David and good morning everyone. CIRCOR delivered revenue of $135 million and adjusted earnings per share of $0.46 for the third quarter of 2016. Revenue declined 15% organically, reflecting the ongoing oil and gas downturn. Despite the cyclical headwinds facing our Energy business, we continue to focus on what we control. In the third quarter, we negotiated an important strategic acquisition, further reduce costs and improved our working capital and cash flow performance. The supplier quality issues we noted in the second quarter in our Aerospace & Defense business continue to impact our revenue in the third quarter, but as of today they've been resolved. We expect stronger performance from Aerospace & Defense on the top and bottom line going forward. Please turn to slide three. On October 13th, we closed on the acquisition of Critical Flow Solutions. This acquisition is consistent with our discipline capital deployment strategy. CFS brings an impressive portfolio of high-technology valves and automation equipment for severe service applications and diversifies our revenue base. We're especially excited about increasing our exposure to the high-margin aftermarket business and expanding the percentage of our portfolio that serves the more stable downstream refining segment. CFS has been able to generate strong margins due to its unique technology, large install base and high proportion of aftermarket sales. We believe the margins are not only sustainable, but can be expanded as we deliver synergy. We expect this acquisition to deliver a strong return on invested capital. Innovation and technology development are core strengths for CFS. They have a strong and active pipeline of new products in development with significant growth potential. CFS has an excellent track record of successfully commercializing new technologies. We will integrate the CFS acquisition into our Energy Group as a new product line focused on the downstream refining market. Please turn to slide four. Consistent with our simplification program, we're optimizing CIRCOR's organization structure for growth by better aligning our operating segments with end markets. The Control Valves product line which serves the power, process and industrial end market will be moved out of the Energy Group and combined with our Aerospace & Defense business to create a new group called Advanced Flow Solutions or AFS. This will allow the Energy team to focus primarily on oil and gas related markets. AFS will be a diversified flow control technology platform that will help CIRCOR accelerate growth in the aerospace, defense, power, process and industrial end markets. In addition, this new group will serve as the platform to acquire and integrate innovative technologies in adjacent flow control markets. Sumit Mehrotra will lead this new Group, which will be headquartered in Corona, California. Sumit currently serves as CIRCOR's Senior Vice President, Global Supply Chain & Product Management. We expect to complete this reorganization in the fourth quarter of 2016 and report the year-end results consistent with the new organization structure. After Rajeev discusses our Q3 financial results, I will provide more context on our expectations with the review of our end markets.

[Rajeev Bhalla:]

Thanks, Scott. Let's start with Energy on slide six. Energy sales of $100 million decrease 19% from the prior year. As Scott mentioned earlier, our results reflect continued weakness in our Energy end markets, including a sharper than expected decline in our short cycle instrumentation business. As expected, engineered valves, revenue began to moderate in Q3 versus the first half of the year. The Control Valves businesses were flat sequentially, but lower versus last year primarily due to weaker industrial end markets, particularly in Europe. Distributed valve revenue in the quarter came in as expected, essentially flat to the prior quarter. Energy's adjusted operating margin was 11.4%, a decrease of 400 basis points year-over-year. This was primarily due to lower volumes across all product lines and pricing pressure across most of the portfolio. Productivity actions, restructuring and sourcing savings help to mitigate the bottom line impact. For Aerospace & Defense, please turn to slide seven. Aerospace & Defense sales of $35 million were down $1.3 million year-over-year, primarily due to the negative impacts on FX. The supplier quality issues in our Defense business that we noted last quarter have been resolved, but they did have an impact on third order shipments and margin. This impact was partially offset by higher commercial sales of our fluid control products. We expect to recover most of these delayed shipments in the fourth quarter. Aerospace & Defense adjusted operating margin was 9.7%, an improvement of 60 basis points versus last year, despite the delay defense shipment. The restructuring and cost reduction actions helped to expand our margins over the prior year. We expect to exit Q4 with solid double-digit adjusted operating margin. Turn to slide eight for selected P&L items. There are number of moving parts of the consolidated results that requires some explanation. Overall, our adjusted tax rate for the third quarter is a net benefit. During the quarter we recorded a tax benefit that increase EPS by $0.10 a share. We decided to repatriate some of our international cash. Based on our current international tax position, the different in cash is between the two jurisdictions resulted in a benefit. We recorded $4.7 million in special and restructuring charges. These charges relate to reductions in force and facility exit costs of $2.8 million and the non-cash acquisition related amortization expense of $1.9 million. In the second quarter earnings call, we discussed a non-cash accounting charge related to our closed pension plan. That charge will not be recorded in the fourth quarter and approximate $5 million. As Scott mentioned our adjusted earnings per diluted share were $.046. Turning to our cash flow and debt position on slide nine. During the third quarter we generated approximately $21 million in cash from operations and over $17 million in free cash flow. Our continued focus on working capital is beginning to show in the results. We saw an improvement in all of the components of working capital which contributed over $50 million to operating cash flow. This brings us to our guidance, please start the slide 10. Overall, we expect revenue in the range of $145 million to $155 million and adjusted EPS in the range of $0.35 to $0.45. This guidance includes revenues of approximately $18 million from the CFS acquisition, relating to the period from mid-October to the end of the year. I would like to note that the CFS revenues are affected by the timing of refinery turnaround which generally occur in early spring or the fall. As a result you should generally expect lower aftermarket revenues sequentially in the fourth quarter. CFS fourth quarter revenue contributes an adjusted EPS of $0.10 per share reflecting a tax rate of approximately 38%. This fourth quarter guidance range reflects a $0.03 per share impact from higher interest expense based on the higher borrowings for the acquisition. Finally, we expect the adjusted tax rate on a blended basis to be approximately 28%. The adjusted EPS guidance does not include amortization related to recently acquire intangible assets. Consistent with the treatment of the Schroedahl acquisition, we will report the CFS related amortization expense as a special charge. Regarding special and restructuring charges for the fourth quarter, we anticipate charges to be in the range of $7 million to $9 million or $0.29 to $0.32 per share. Included in this range is a non-cash accounting charge related to a closed pension plan of approximately $0.18 per share as discussed earlier. However, this range does not include any intangible amortization expense related to the CFS acquisition. The valuation of acquired assets is currently underway and we expect it to be substantially complete before year-end. 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, first Energy. Energy segment orders were lower overall in the third quarter versus the prior year, primarily due to continued weakness in most of our energy end markets. And our short cycle distributed valves business we are cautiously optimistic that the market has bottomed. We are starting to see a slight increase in activity with our mid tier distributors at the end of the third quarter and this is continued through October. For Q4, we expect some sequential growth in our order intake, driven by the increase in rig count and the completion of previously drilled wells, especially in the Permian basin in the West Texas. For midstream applications we continue to qualify our trunnion and fully welded ball value products with pipeline companies. Recent qualifications include Williams and Kinder Morgan. During the quarter, we saw a double-digit sequential increase in midstream orders. The third quarter order intake in our long cycle engineered valves business was weak for both new projects and MRO. The bright spot for this business continues to be in the Middle East, however the competition and related pricing pressure is intense. In addition, we're seeing delays in projects in the Middle East which is a relatively recent development. Given the weak orders in the third quarter, we anticipate a significant reduction in our revenue in engineered valves in the first half of 2017 compared with the first half of 2016. Order intake from now through the first quarter of 2017 will determine the strength of our revenue in the second half of next year. In our control valves business, the power market is still active, but softening globally resulting in increased competition. The pipeline of power opportunities remains healthy in China and in the U.S., but we increasingly witnessing project delays. In addition, the industrial market in Europe and China is weaker and pump OEMs are experiencing declining revenues. Pump OEMs are a major customer segment for Schroedahl's automatic recirculation valve. As a result control valve is expected to remain at current revenue levels for the remainder of this year. As I mentioned earlier, we saw a sharper than anticipated drop in short cycle orders in our upstream instrumentation business in the third quarter. We experienced the slowdown in MRO orders in the North Sea. In addition, the orders we expected to receive in the third quarter from the Johan Sverdrup project has been delayed. Healthy activity in our downstream sampling businesses is helping to offset some of the decline we're seeing in the upstream portion of this business. Stronger sampling product sales in North America are being driven by stricter regulations on fugitive emissions in refineries. Our closed loop sampling systems meet the stringent regulatory requirements. Overall, we expect slight deterioration from the Q3 order run rate through the remainder of 2016. Turning to Aerospace & Defense, our outlook for this segment remains positive, on both the commercial and defense side of the business. Orders are often lumpy given how the customers place orders for large platforms. Recall that we had very strong order intake in the second quarter this year. Q3 year-to-date book-to-bill ratio is 107%. Boeing and Airbus are continuing to ramp up production rates for both narrow and wide-body platforms. In addition, we're making progress in our efforts to build our high margin aftermarket business and expect sales in 2016 to double over a relatively small base in 2015. We expect strong revenue in the fourth quarter and enter 2017 well-positioned to deliver growth and margin expansion So, in summary, as we enter Q4 our revenue run rate is modestly improving in our short cycle distributed valve business and we expect control valves to be flat. We expect instrumentation and sampling to be slightly below Q3 levels for the remainder of 2016. For engineered valves, we expect flat revenues sequentially as we deliver on the backlog, however we will see a significant reduction in revenue in the first half of 2017. Aerospace & Defense revenue should grow significantly in the fourth quarter of 2016 as we deliver on our backlog and shipments that were delayed by supplier quality issues in Q2 and Q3. We expect this business to continue to grow and expand margins in 2017. In addition, as we enter the final quarter of the year, we remain focused on what we control. We're executing on our simplification and margin improvement actions. We continue to stay ahead of the market headwinds through aggressive cost actions including reductions in force, furloughs, factory consolidations and overall cost control. And finally, we're committed to creating long-term value for shareholders by investing in organic growth and acquisitions, expanding margins, generating strong free cash flow, and being disciplined with capital deployment. We believe that the additional steps we're taking to optimize organization structure will further position CIRCOR for above market growth going forward. With that, Rajeev and I are available to take your questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

[Nathan Jones:]

Morning, guys.

[Scott Buckhout:]

Hey, morning, Nathan.

[Nathan Jones:]

I wonder if you could give us a little bit more color on the expected reduction in the engineered valve business in the first half of 2017, given that, you know, the backlogs it's pretty much baked for the first half of next year, maybe frame it up with some numbers for us on what we should expect going into that first half of next year?

[Scott Buckhout:]

Sure. So, we -- yeah, as you said we're -- the numbers are -- the backlog is secure for the remainder of this year and it's playing out exactly as we expected it to. Going into the first quarter of next year, low order intake this quarter-end and last quarter is going to lead to a drop. We're looking at a revenue decline for the engineered valve business somewhere in the 30% to 40% range in the first half of next year.

[Nathan Jones:]

Okay. That's helpful. And then you did talk about some project delays, intense price pressure in the Middle East and things like that in that business. Can you talk about how you're thinking about your approach to that market in terms of having to absorb fixed costs versus taking projects with -- without much margin if any at all on them? And just how that's changed as you've gone through this year?

[Scott Buckhout:]

Sure. Yeah, a couple of comments here. So, the -- we are not putting negative margin projects into our backlog. So we're being very disciplined about that. We do believe that some of our competitors are putting negative margin projects into their backlog right now. We haven't done that this point, and we don't intend to. We have a couple of benefits that our competitors don't have. One of the issues that our competitors worry about is engineers. They have talented engineers that they don't want to lose in a down-cycle and they don't want to lay them off. We have the benefit of being able to redeploy engineers to other parts of our business which we've already started doing. We've also started taking cost out that we can take cost out. So we started furloughs and layoffs in our engineered valve business already. And so because of the lead time here we're going to be able to manage the cost structure very well much, much easier than some of our short cycle businesses. So, going forward, we don't really intend to change our stance here. We don't intend to take negative margin projects. We're not at a point where we're desperate or we think we have to do that to absorb costs. And I don't think we're going to get to that point. I think we can manage our cost structure with the diversification of CIRCOR better than some of our pure play peers who are only in project businesses and have no choice, but to try to absorb all this engineering fixed costs.

[Nathan Jones:]

Okay. It sounds like your outlook for that market that doesn't improve at the moment, so we probably shouldn't really expect the run rate from the first half of 2017 to change in the second half of 2017, you know, unless something significant changes in the marketplace, is that fair?

[Scott Buckhout:]

I'm not sure I would say that with much certainty, Nathan. I think that if you -- look, we tract these things very closed. If you look at our pipeline of quoted projects it's pretty large right now. The issue is really the delays to decisions. It could. It could be significantly better second half than the first half next year. I don't know how I'll put my bias on this. The activity is there. The projects are there. I don't know that they're going to be decided in time for us to have a good third quarter or fourth quarter next year, but we'll see. The way you said that was a little more certain than what I would say. It's still -- the second half of next year still open for us.

[Rajeev Bhalla:]

And just to add to that, Nathan, the area that we also quoting a lot on -- continues to be the Middle East, Saudi, Kuwait, Oman that neck of the woods.

[Nathan Jones:]

Okay. And I guess those things could improve fairly rapidly if oil prices improved or at least maintain the lack of volatility that had over the last few months?

[Scott Buckhout:]

Yes. I think you could say it that way, or you could say we've got some large projects that are -- that have been quoted and are sitting out there today with oil prices where they are. If those gets decided in our favor, the outlook for the back half looks pretty good.

[Nathan Jones:]

Okay. Thanks very much. I'll get back in the queue.

[Scott Buckhout:]

Okay.

[Operator:]

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

[James Picariello:]

Hey, good morning, guys.

[Scott Buckhout:]

Good morning, James.

[James Picariello:]

Just from a higher level here, if Middle East project work is, you know, on a reset here -- just a temporary reset it seems, how should we think about maybe the net positive impact on the short cycle distributed valves business in North America just because maybe this project work on pause indicates some sustainability or stability in the price of oil here, how are you guys thinking about that?

[Scott Buckhout:]

So, I'm not sure I -- I'll try to answer your question if not just maybe you could ask it again. I think what you're getting at is the relationship between our long and short cycle business and demand in general. And I think -- let me talk about short-cycle first. At $50 a barrel we are seeing increased activity. It's nothing to get too excited about. But clearly there's a clear trend towards more quoting, more orders and we're expecting sequential growth from, as you know, very the base here in Q2 and Q3 of 2016. So the activity is largely happening in Texas, in the Permian. And I think $50 a barrel you're going to see modest growth in our short cycle business in North America. $60 to $70 a barrel, it sustained. I think the whole -- our whole business outlook will change. I don't think at $50 you're going to see a significant change in long cycle large projects. $50 just isn't enough. But somewhere between $60 and $70 a barrel, I think large project start to come back into play, and I think you see a more broad recovery in North America in short cycle. So it won't just be the Permian and a few basins I think you'll see a broader recovery in short cycle at $60 to $70. So, we're watching it closely. At $50 we're happy to see some growth here in North America in short cycle, but we don't expect a broader recovery in long cycle or even broader recovery in short cycle in North America.

[Rajeev Bhalla:]

And just to add to that, James. Look up again when you talk about the Middle East and the projects there, there's a lot of interplay outside of just kind of the oil price standpoint, whether it's social, political and otherwise. So there are a variety of factors that come into play relative to what decision may be made whether to put project going forward or not.

[James Picariello:]

That's helpful. And then regarding CFS you didn't make the common around seasonality with respect to downstream refinery maintenance. Can you just expound on that? And basically -- and more or less talk about whether CFS is in any way exposed to sustained refinery maintenance push outs which have been going on for some time, any color there will be helpful. Thanks.

[Rajeev Bhalla:]

Sure. So, let's talk first of all just kind of on what happened doing the year. As we mentioned on the prepared remarks refineries do turnaround generally twice a year and the springtime can be the end of February to early part of May and in the fall towards the end of August to the early part of October. And so when we talk about the aftermarket piece of both Delta valve and [indiscernible] the scope of work at a particular turnaround after particular point in the year to determine the level of revenue. So you kind of have that sequential impact going from the third to the fourth quarter or even from the second into the third quarter. And usually it's around 15% to 20% of the aftermarket revenues can be can be affected when you move sequentially from the third to the fourth quarter With respect to kind of push out point you made, let's remember that one of the key benefits of the CFS business is a very large installed base, especially with the tactical and pro side and having a significant installed base there helps mitigate what may happen in a particular refinery. So they're well over 220 refineries worldwide with maybe 1,000 coca drums. And so as when those come up for overall repair, you know, that's an opportunity for both Delta valve and [indiscernible] to gain some revenue. So you may have an individual push out, but overall the large installed base helps mitigate that.

[Scott Buckhout:]

And I think the other point to make on that the Delta valve piece of the businesses is that while they do have aftermarket and refurbishments happen on the unheading devices about every six years, this is a safety related item. The large majority of the capital spent and safety is usually one of the last areas to get cut. So the penetration that we expect in this product is unlikely to be cut from capital budgets, and I think the maintenance fits into the same category. So in the Delta valve side, I wouldn't expect to see as much seasonality.

[James Picariello:]

Got it. Thanks. I'll get back in the queue.

[Scott Buckhout:]

Thanks.

[Operator:]

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

[Charley Brady:]

Thanks. Morning, guys.

[Scott Buckhout:]

Hi, Charley.

[Charley Brady:]

Just a question on this realignment of the segments that you're going to do at year-end, is that resulting -- is it more kind of on paper or is that resulting in, you know, potentially charges or any kind of accounting treatment is going to happen? And if so is that recaptured in kind of numbers you laid out for us on that slide for guidance?

[Rajeev Bhalla:]

Yeah, I'll tell you what I will get to charges in a second, but why don't I just turn it over to Scott to talk you on why we're doing it and then we will come back on your question.

[Scott Buckhout:]

So the org change, it's certainly not just on paper. I mean, we are realigning the whole organization here. I think we were headed in this direction. This was going to happen with or without CFS. We were going to be moving the control valves group and combining with Aerospace & Defense. We probably would have done it closer to the end of the year without CFS, but CFS became somewhat of a catalyst to go ahead and can do it now. The broad reason for doing this is not so much related to cost and restructuring. It's much more related to growth. So creating the AFS group is, is creating a platform for us to address the broader market and more aggressively diversify the company not only from an end market standpoint, but from a technology standpoint. There's technologies out there that are clearly going to converge with what we do here at CIRCOR that we need to participate in and want to participate in. And this new AFS organization will more easily allow us to participate in that. It also has the benefit of creating an energy group that is maybe homogenous is not the right word, but it’s kind of pure play oil and gas much simpler way to go to market and consistent way to go to market in that business now. And we can do the same thing on the AFS side with how we organize the commercial organization. So what you'll see going forward is a more aggressive CIRCOR from a growth standpoint organically, but also from an M&A standpoint as we move forward. So with respect to charges and cost, there are some cost savings associated with this reorganization, but they're not large, they're not something that we're going to call out specifically. But, yes, there are some savings associated with the reorganization.

[Rajeev Bhalla:]

So -- and just to add to that, so we do not expect there to be any significant charge here, hopefully net benefit at the end of the day. But as Scott mentioned it's focused on growth. As we do the realignment here we will restate the prior year's Charley and we will file that obviously with an 8-K and you'll have access to the historical information on an apples-to-apples basis.

[Scott Buckhout:]

And I think the other thing to mention is that we've been making some commitments and some forecasts on Aerospace & Defense independent of the rest of the business and we will follow through and report that out for you at the end of the year on how we close the Aerospace & Defense.

[Charley Brady:]

Thank you. That will be helpful to have. Just switching gears for seconds. As you look at that backlog and ExxonMobil out today talking about having maybe a deep book 4.6 billion barrels of reserves because of low oil prices and the results were down pretty year-on-year. I'm just wondering as you look to your backlog particularly on the project side, is any of that at risk, have you done a risk assessment to see that maybe that stuff actually, you know, what you think is going to ship -- lined up shipping it doesn't get cancelled?

[Rajeev Bhalla:]

Yeah, we have actually Charley. We looked at very closely and we do on a regular basis. At this point we do not see a risk of cancellation and deep booking here. These projects, as we've talked about our focus in the Middle East and those parties are going forward. So it is an area that we watch closely. Nothing material at this point that jump out from a risk standpoint.

[Charley Brady:]

Are you experiencing any issues with selection on receivables either in the Middle East or elsewhere?

[Rajeev Bhalla:]

The receivables -- two points here. First of all, a little slower on the collections especially in some of our customers in the Middle East. And then the only other area that we have some exposure to is Venezuela and that we have disclosed that in the past and there are some receivable there that are -- that have not been fully reserved at this point that we are working hard to collect.

[Charley Brady:]

Can you quantify -- if it’s in K I will look at. Can you quantify -- I am assuming it’s kind of…

[Rajeev Bhalla:]

No. I will be happy to do that. There's about $2 million of net receivables from Venezuela that's outstanding.

[Charley Brady:]

Thanks very much.

[Rajeev Bhalla:]

You are welcome.

[Operator:]

Our next question comes from the line of Jim Foung with Gabelli & Company. Please proceed with your question.

[Jim Foung:]

Hi. Good morning, guys.

[Rajeev Bhalla:]

Good morning, Jim.

[Jim Foung:]

I just wondering you talked a little bit about the Aerospace & Defense that you resolve the supply issues and then you expect to have this ketchup shipment in Q4. Could a bit quantify the amount of the shipment in Q4?

[Rajeev Bhalla:]

Yes, Jim, we -- there is probably about $2 million to $3 million of sales that we will catch up with here in the fourth quarter that we missed in the third quarter?

[Jim Foung:]

Okay. And how are you to resolve the supply issue, did you find other supplier?

[Rajeev Bhalla:]

No, we work closely with our customer and the supplier to work through the process at and manage it collectively. So we do collectively with the customer and the supplier and ourselves.

[Jim Foung:]

Okay.

[Scott Buckhout:]

Jim, I don’t know if we mentioned this before, this is a customer directed supplier that we've been working with. So we had the customer heavily involved in, helping us solve the problem.

[Jim Foung:]

Right. Right. And just swing back on CFS, I just wanted if you could just comment in terms of the order rates you're seeing here in the aftermarket, I mean in that downstream business. I mean, are you concerned that there might be pressure even though you have a large installed base in that business.

[Rajeev Bhalla:]

So, Jim, at this point we are not seeing any pullback or retraction with respect the order rate here. With that said, the order rates are lumpy and can be lumpy especially on the capital projects as well as even the aftermarket side. Because it often depends on -- not just the timing, but also the scope of work that occurs during the turnaround. But at this point we're not seeing anything negative with respect to the order rate.

[Jim Foung:]

Okay.

[Scott Buckhout:]

The order rate tend to be lumpy, but the revenue not as much.

[Rajeev Bhalla:]

For the capital projects.

[Jim Foung:]

Well, I guess it concerns the customers even in the safety and aftermarket business. Customers are still conserving cash and they just cautious in general in you're spending.

[Rajeev Bhalla:]

That's true. You go to see that.

[Jim Foung:]

Right. Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ryan Cassil with Seaport Global Securities. Please proceed with your question.

[Ryan Cassil:]

Good morning.

[Scott Buckhout:]

Good morning, Ryan.

[Rajeev Bhalla:]

Hi, Ryan.

[Ryan Cassil:]

Did you touch on the lead times perhaps in CFS and on the project side another stack up to the engineered valves? I my guess this is going to be more of a backlog business that we're looking at on the project side. Any color that will be great.

[Rajeev Bhalla:]

Sure. On the projects I believe that's about a year. Especially Delta valve side it's about a year. It's a little lower on the tactical and pro probably around seven to nine months.

[Ryan Cassil:]

Okay. Great. And margins, you know, just trying to back in Q4, it looks like for CFS kind of a mid-teens margin, if I'm not off there, is that more like a 20% type margin at peak turnaround season?

[Rajeev Bhalla:]

You're wrong there. Mid-teens margin is what we're seeing here. And obviously you can get into high revenue, higher peak you should do better than that.

[Ryan Cassil:]

Okay. Great. And then last one for me. On the midstream continuing to get approvals with some of these newer larger customers, bit of a smaller market there from a competitive standpoint than other areas that you participate. And have you seen any changes in competitive dynamics as you break into that market?

[Rajeev Bhalla:]

Yeah, we actually have -- and you're right you do get your competitors there. And as you get qualified and I think a lot of the oil -- the pipeline companies -- the oil service companies are actually qualifying fewer supplier, so that's a good thing. I think the M&A activity that we've seen in the industry have had an impact here and then our case it's actually a bit beneficial as we've worked with, you know, directly with those pipeline companies. So -- and I would say net positive at this point.

[Scott Buckhout:]

The other thing I think to add to the midstream that is helping us to be -- just real clear on it is that we have one very large competitor in North America who is struggling with lead times and struggling with capacity and that's helping us a lot. And so we are having I think more success and more receptive customers because of the struggles they are having with their existing supplier.

[Ryan Cassil:]

Okay. Great. Thanks. I will turn it back.

[Rajeev Bhalla:]

Thanks, Ryan.

[Operator:]

Ladies and gentlemen, this does conclude our call today. Thank you for joining us and you may disconnect your lines at this time.