CIRCOR International, Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to CIRCOR International's Fourth Quarter Fiscal Year 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 after the prepared remarks. I'll now turn the call over to Mr. David Calusdian for opening remarks and introductions. Thank you, sir. You may begin.

[David C. 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 & Presentations 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-Qs and other SEC filing. 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 16, 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 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 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 A. Buckhout:]

Thank you, David, and good morning, everyone. CIRCOR concluded 2016 with solid fourth quarter performance. Sequentially higher volumes in most of our businesses as well as the positive impact of our simplification and operational excellence action resulted in revenue of $158 million, adjusted earnings per share of $0.48 and improved working capital and cash flow performance. Although volatile energy markets and geopolitical uncertainty affected much of our industry in 2016, we focused as always on the factors within our control. During the year, we continued to build the foundation for strong organic growth, further optimized our organization, reduced structural costs and improved our operational execution; steps that we believe will make us more competitive and profitable over the long term. In 2016, we reorganized the group's structure at CIRCOR, creating the Advanced Flow Solutions group to improve organic growth by better aligning our organization with end market. AFS is a diversified flow technology platform that will help CIRCOR expand penetration in the aerospace, defense, power, process and industrial end market. In addition, this new structure will allow the Energy team to focus exclusively on oil and gas-related market. In 2016, we further strengthened our organization. In addition to promoting Sumit Mehrotra to lead AFS, we named J. Lapointe to head up CIRCOR's Supply Chain function, in addition to his Global Operations role. We welcome Jennifer Allen as our new Chief Legal Counsel. We added new talent in critical areas such as sales, marketing and engineering. And we firmly established a strong product management discipline across the company. Along with building our team, we've increased our pipeline of new products and development, and expanded our presence in new channels and markets both organically and through M&A. In October, we announced the acquisition of Critical Flow Solution. This transaction expands our presence in the downstream refining market with a portfolio of high technology valves and automation equipment for severe service application. In addition, CFS significantly increases our exposure to the high-margin aftermarket business. The integration of CFS is proceeding well. We're excited about the growth prospects for the existing products as well as the pipeline of new products in development. As part of the integration, we will leverage our existing low-cost manufacturing facility in India for CFS product. Operationally, we've integrated CFS into our low-cost sourcing organization and are leveraging our common direct material spend. Through this acquisition, we expect our return on invested capital to exceed our cost of capital by the third year and to be cash EPS-accretive in the first year. With respect to simplification, we've taken advantage of the oil and gas downturn over the past two years to accelerate our simplification and restructuring plan. Let me provide you with an update on our progress against the 2018 targets we set at our Investor Day back in September 2014. As of the end of 2016, we reduced the number of manufacturing facilities from 24 to 15, achieving our target two years early. We reduced the number of suppliers by 49% to 2,550, on track to achieve our target of 1,200. We increased the sourcing spend on long-term contracts with suppliers from 8% to approximately 50%, with a target of 80%. We reduced the number of ERP systems from 24 to 16, versus the target of 15. And we improved our customer on-time delivery from 73% in 2014 to 91% last year. All of our businesses have embraced the CIRCOR Operating System. This operating system is a holistic continuous improvement program that reinforces the culture of excellence and provides the protocol, tools, and accountability necessary to drive exceptional operating performance and better satisfy our customers, all of which translates into better revenue growth and profitability. In 2016, all manufacturing facilities completed site assessment and developed action plans to improve their operational performance on all major dimensions

[Rajeev Bhalla:]

Thanks, Scott. As Scott mentioned, during the fourth quarter, we completed our previously announced plan to optimize our organization. Our new Energy segment, including our recent acquisition of CFS, primarily serves the oil and gas market. Advanced Flow Solution serves a broad set of end market including aerospace, defense, power, process and industrial. The historical results have been restated to reflect this new structure, and we have previously filed a Form 8-K with the revised numbers. Let's review the segment results, starting with Energy on slide four. Energy sales of $89 million decreased 3% (7

[Scott A. 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 21% in the fourth quarter versus the prior year due the CFS acquisition. Organically, orders were down slightly compared with the prior year, due to the decline in our Engineered Valves and Instrumentation and Sampling businesses. That was partly offset by stronger demand in our short-cycle Distributed Valves business. In our short-cycle Distributed Valves business, orders grew more than 60% from the third quarter off a low base. We are seeing increased customer activity, most significantly in the Permian Basin in West Texas, but also in the Marcellus and Eagle Ford Basins as well. The increase in rig count, and the completion of previously drilled wells contributed to higher order rate. Some of our larger distributors started placing stocking orders in the quarter, a recent development. In addition, we continue to focus on increasing our market share in the midstream segment. We expanded our fully welded ball valve product line last year and made significant progress in getting on the approved vendor list for most major North American pipeline company. In addition, our largest midstream competitor continues to offer long lead times and poor delivery, which has facilitated our penetration into this market. We're optimistic about the quoting and order trends we're seeing in both upstream and midstream North America. So, in total for Distributed Valves, we expect Q1 orders to be more or less in line with Q4 order rate. However, our factories and supply chain are prepared to meet higher demand if the market continues to strengthen. As expected, orders in our long-cycle Engineered Valves project business were down over 50% in Q4 versus prior year. We continue to see headwinds in this market due to ongoing reductions in CapEx, project deferrals, and continued price pressure. While our order win rate remains consistent at historic rate, the orders that we're quoting and booking are smaller aftermarket orders, primarily in the Middle East. Looking ahead, we expect 2017 orders to remain under pressure at least through the first half of the year. As a result, we expect Engineered Valve 2017 revenues to be approximately 50% lower than prior year. Within our Instrumentation and Sampling business, we continued to see relatively low levels of demand for short-cycle aftermarket orders in our upstream, offshore instrumentation business. In addition, in the near-term, we're not seeing many large project opportunities in the upstream oil and gas segment. However, in the downstream market, with ongoing growth and demand for refined fuels, we saw good activity in 2016 in the U.S. and Asia. North American refinery utilization rates have remained high, while chemical processing is strengthening. In total, Instrumentation and Sampling orders were up slightly in Q4 versus Q3. Going forward, we expect to see downstream demand for both sampling systems and instrumentation continue to increase in Q1, more or less offsetting weakness in the upstream part of this business. Overall, we expect Q1 order rates to be modestly higher than Q4, but revenues to be slightly lower. As Rajeev discussed, the downstream refining market for our CFS products is healthy. Quotations and orders for the aftermarket products remain strong, despite some refurbishment delays to the fall turnaround cycle. Some customers have told us that the planned scope of work and schedule for spring turnaround might be too optimistic. Consequently, some aftermarket service revenue is expected to move into the second half of the year. Large capital projects in this business are lumpy and were late in the second half of 2016, with current projects skewed to the middle of 2017. This will affect revenue in the first quarter. As customer budgets get finalized and approved in Q1, we expect the order rates to improve significantly. In certain instances, our international customers are planning to start their 2018 retrofit activities sooner and shift those orders into the second half of this year. So we expect Q1 to be the lowest booking and revenue quarter this year, with improvements sequentially through the year resulting in a strong second half. Turning to Advanced Flow Solutions. Our products serve the aerospace, power, process and industrial end market. Our outlook for aerospace, including defense, remains positive as OEM build rates are increasing, especially for the newer platforms such as the Airbus A350 and the Joint Strike Fighter. In addition, we continue to make progress in our efforts to build our high-margin aftermarket business. These businesses are performing well, and we expect them to deliver growth and margin expansion in Q1 and for the full-year 2017. In our Power & Process business, the power market, while still showing pockets of strong activity, is softening globally and we continue to face the same market headwinds we experienced in the back half of 2016. As you may recall, we saw automatic recirculation valves to pump OEMs for power plant. And these OEMs have been experiencing a decline in revenues globally, and we expect this to continue. However, the quoting activity for control valves into combined-cycle power plants in the U.S. and China is strong, especially for spares and replacement product. For the process market, demand generally follows GDP growth rates. So order rates for this part of our business are stable, with the majority of our volume going into Europe and China. As a result, for Power & Process, we expect order rates to generally be in line with Q4. Our Industrial Solutions business serves many end markets, including the HVAC and maritime market. HVAC tends to be stable, while maritime is more dynamic due to control valve demand from the U.S. Navy for submarines and aircraft carriers. In total, we expect the sequential order rates to be up slightly in Q1, but revenues to decline modestly, as a number of large Navy projects were completed and delivered in the back half of 2015. Overall, we feel positive about the performance of our businesses and the majority of our end market. We're expecting a temporary lull in the top and bottom line in Q1, driven mostly by our Engineered Valves business and the timing of orders and revenue in other parts of CIRCOR, primarily CFS. We're optimistic about the order trend in our North American Distributed Valves business and we're positioned to deliver if that market continues to strengthen. We expect aerospace and CFS to continue to grow and expand margins through 2017. We expect relative stability in the rest of CIRCOR, with revenue more or less in line with the second half of 2016. As a result, we anticipate both revenue and earnings to improve through the year with a relatively strong back half. In conclusion, we remain focused on what we control. We're executing on our simplification and margin expansion action, including our CFS integration. We continue to stay ahead of the market headwinds through aggressive cost action, including reductions in force, furloughs, factory consolidation, and overall cost control. And finally, we're committed to creating long-term value for our shareholders by investing in organic growth and acquisition, expanding margins, generating strong free cash flow, and being disciplined with capital deployment. We believe that the additional steps we're taking to optimize our organization's structure will further position CIRCOR for above-market growth going forward. Before we take your questions, I'd like to note that we'll be hosting an Investor Day in New York City on May 23, where we'll be setting new long-term targets for our operational and financial metric. Please save the date and watch for more details to follow. With that, Rajeev and I are available for your questions.

[Operator:]

Thank you. Our first question comes from the line of James Picariello from KeyBanc Capital Markets. Please go ahead.

[James A. Picariello:]

Hey. Good morning, guys.

[Scott A. Buckhout:]

Morning, James.

[Rajeev Bhalla:]

Morning, James.

[James A. Picariello:]

Just to confirm a comment made regarding Engineered Valves, did you say that revenue is expected to be down 50% for the year? Or did I miss...

[Scott A. Buckhout:]

That's correct. No, you heard that correct.

[James A. Picariello:]

Okay. Okay. And then, yeah, I guess just to sort of marry what was said last quarter regarding the expectation that that business would be down 35% through the first half, and now you're indicating that the first quarter will be down 60%, has anything dramatically changed? Or are you just providing more color on the outlook for this business?

[Scott A. Buckhout:]

Yeah. I would say nothing has dramatically changed, other than, we just have three months more history and three months more discussions with our customers. So, if you look at – we provided guidance for the full year on this, basically because there's a lead time associated with what's happening here. And we believe that – well, let me tell you what our customers are telling us. We need stability of somewhere above $60 a barrel before these large projects are going to start to come online, stability meaning two to three quarters of consistent pricing at that level. So, when we look at our pipeline of new projects that we're waiting for decisions on, and we look at the lead time, which we're quoting about 25 weeks, it's not hard to see that this year is going to be a down year. Even if we see a pickup in orders, which could happen in the back half of this year, it's unlikely that we're going to see the revenue in the back half of this year, given 25-week lead times that we're quoting. So, that's essentially what's happened, a little more insight into what's happening with our customers and how they're thinking about it, and three more months of history in terms of order intake.

[James A. Picariello:]

Okay. No, that's very helpful. And then, regarding the commentary around refinery maintenance schedules getting pushed to the spring and the lower CFS aftermarket mix, particularly in the first quarter, is that pretty broad-based, or is that just a few customers with CFS? And then, overall, what are your full-year expectations for CFS revenue contribution at this point, given what you're seeing?

[Rajeev Bhalla:]

Sure, James. Yeah. Let me take that. Yeah. So the push-out from the spring to the fall is with specific customers, some of the larger customers that we are close to, and do the planning with them and the scoping of the work with them. So it's more in line with that. With respect to expectations for the full year, the end market is strong, it's good, we like it. As you know, there's two parts of this, there are capital projects and aftermarket as well. And we have a strong installed base. So the maintenance side of it, we do expect to see some growth there. And also the penetration with some (24

[James A. Picariello:]

Okay. If I can just fit in one more. Regarding Energy's orders and backlog, can you just provide the CFS contribution? Or maybe I missed that.

[Rajeev Bhalla:]

Yeah. The backlog at the end of the year is a little over $40 million, $45 million for CFS. And the book-to-bill was just under 1 for the quarter, for CFS.

[James A. Picariello:]

Okay. Thanks, guys.

[Rajeev Bhalla:]

Welcome.

[Operator:]

Thank you. Our next question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Please go ahead. Mr. Charley Brady, your line is now live.

[Charles Brady:]

Yes. All right. Hi, guys. Sorry about that. Hey, just on the orders, can you give us the pro forma numbers on the new segmentation for Q3 so we can look at what it did sequentially in Q4?

[Rajeev Bhalla:]

Yes. Charley, for Q3, we don't have the CFS numbers specifically, but I would expect that the book-to-bill was probably 1 in Q3 as well. But I don't have good Q3 numbers prior to the close of the deal.

[Charles Brady:]

But do you have it just for the – under the new – or at least for Advanced Flow under the new segmentation? So, if you can pro forma it back or not?

[Scott A. Buckhout:]

I think (26

[Rajeev Bhalla:]

Yes. Okay. Yeah. No, you're right. So, let me – I actually don't have that in front of me. Oh, give me a second here. I do.

[Charles Brady:]

I can get it to you offline later, if that's fine.

[Rajeev Bhalla:]

Yeah. You're looking for orders and backlog, right?

[Charles Brady:]

Yeah.

[Rajeev Bhalla:]

Yeah. So the orders for Q3, under the Advanced Flow Solutions was about $56 million, and for Energy was about $55 million. And then for Q4, with CFS, Energy is at $85 million and Advanced Flow Solutions at $57 million.

[Charles Brady:]

Got it. With regard to CFS, when the deal was announced, there were some new products that were in the pipeline where they've got two primary products, but there were I think three or four in the pipeline, they were going to get rolled out I guess over 2017 and 2018. Any kind of update on kind of where that stands right now?

[Scott A. Buckhout:]

Yeah. So, yeah, just at a high level, they have three products that they're in the process of launching in 2017. It's still early 2017 now, so nothing's actually been launched yet, but in the second half you'll see the cadence pick up. The first product that you'll see us launch is a new isolation valve that we'll be launching. I think it's in Q3 that that one goes live and then there's two more that should launch later in the year. So we still feel good about it. We're spending time on it. We're putting resources against it and we're hoping to see good growth in 2018 from the new product.

[Rajeev Bhalla:]

And Charley, well, just to add to that, Scott does a regular review on not only just the integration status, but also on the new product development status and what's going on there. So we're keeping a close eye on it.

[Charles Brady:]

Okay. That's helpful. And just one more for me, and maybe you've covered in your prepared remarks, but just on the CFS on the cost savings and the integration, can you just give us a little bit more information about, as you've gone through it and now you've owned it for a few months, expectations today as opposed to kind of when you bought it? Do you – in line or do you see – I want you to dig in to whether you've seen a little bit more you can get out of it or kind of how does that shake out?

[Scott A. Buckhout:]

Yeah. So I'll start with that. So the majority of the cost savings that we saw coming into this were on the sourcing and supply chain side, and I think it's safe to say we've validated all that. We'll start seeing those savings hit the P&L in the back half of this year and flow through in a much bigger way as we get into 2018. There is upside on the cost that we did not expect and did not build into our models when we went into this acquisition, and that's what I mentioned on the call, which is manufacturing CFS product in India. We have an existing factory in India. It turns out that CFS team was already looking at manufacturing in India before the acquisition. They do a lot of business in India and in the East in general. So we intend to transfer manufacturing, over time, to India. So we'll start manufacturing for the India market and for the East first and then, over time, we expect to leverage India for global markets as well. So, that's nothing we built into our initial models. The savings from this would be upside on that.

[Charles Brady:]

Thank you.

[Rajeev Bhalla:]

Thanks, Charley.

[Operator:]

Thank you. Our next question comes from the line of Matt Summerville from Alembic Global Advisors. Please go ahead.

[Matt J. Summerville:]

Thanks. Just a couple of questions. First, the delta if you look at, I think it's slide nine here from your presentation today, you're looking for $11 million in savings in 2017. I think when you reported Q3, that number said $7 million. And I'm just curious as to whether that delta has to do with sourcing synergies you see with CFS, or if there's something else driving that step function change there?

[Rajeev Bhalla:]

Yes. Sure, Matt. Good morning. I'll handle that. This has not got anything to do with CFS or sourcing. These were actions that we took in the fourth quarter to reduce head count further, predominantly in our Energy business as well as in AFS. And those actions will start to give some contribution in 2016 and you'll start getting more in 2017. So the incremental going from $7 million to $11 million is associated with head count actions we took in the fourth quarter.

[Scott A. Buckhout:]

The actions that we took were fairly wide across the organization. It wasn't a clean discrete project. So we didn't really announce it. But we have continued to reduce costs and take heads out of the company to respond to the downturn in Energy.

[Matt J. Summerville:]

And then, just as a follow-up, can you give a little bit more granularity maybe regarding how much revenue you think moved out of the spring turnaround season to the fall turnaround season as it pertains to CFS, and maybe if there's some way to describe kind of the weighting, if you will, first half/second half maybe in percentage terms of revenue for that business, because it obviously moved the needle from a profitability standpoint in a meaningful way?

[Rajeev Bhalla:]

Yes. What you normally see when you actually have the maintenance activity is that a bump-up of about 10% to 15% in that particular quarter from maintenance activity. It's about that amount that kind of moved to the right here. And then, from a weighting standpoint, you probably see a little more than half, maybe two-thirds of the revenue – maybe a little more than two-thirds of the revenue in the back half versus the full year.

[Matt J. Summerville:]

Got it. Thank you.

[Rajeev Bhalla:]

Welcome.

[Operator:]

Thank you. Our next question comes from the line of Ryan Cassil from Seaport Global Securities. Please go ahead.

[Jacob Schowalter:]

Morning. This is Jacob on for Ryan.

[Scott A. Buckhout:]

Morning, Ryan.

[Rajeev Bhalla:]

Good morning, Ryan.

[Jacob Schowalter:]

Good morning. This is Jacob on for Ryan.

[Rajeev Bhalla:]

Hi, Jacob.

[Jacob Schowalter:]

Could you guys touch on pricing within the upstream Distributed Valves business? Is it pretty stable versus what you were seeing three to six months ago? Or have you seen any changes there?

[Scott A. Buckhout:]

So I think the easiest way – the short answer is it's stable to what we were seeing three to six months ago. So we are not seeing the ability to increase prices at this stage yet. It's an ongoing discussion. But, as of now, it's more or less stable to where we were three to six months ago. And I think it's also important to note that certainly, for the last 12 months, our pricing in Distributed Valves has been lower than what we were seeing two years ago. So we are experiencing pressure. It's not worse right now, but we haven't taken the opportunity to try to raise prices yet. So we'll see as the market continues to evolve here, if we have an opportunity to raise prices, we will; but we haven't yet.

[Jacob Schowalter:]

Okay. In SCHROEDAHL, perhaps you could touch on how the acquisition has been going from sales synergies and a margin standpoint?

[Scott A. Buckhout:]

So I'll break it into two pieces. So the market – we'll start by talking about market first. So they sell mainly automatic recirculation valves into power, oil and gas, and then, say, general industrial as well. On the power and oil and gas side, we're seeing some headwinds in this business, like we are in most of our other businesses. That is certainly affecting the top line. From a sales synergy perspective, we're executing more or less as planned. And you of course have a different market than what we expected two years ago. So the revenue isn't what we expected it to be this year, but it's largely market-driven as opposed to synergy-driven.

[Rajeev Bhalla:]

And, Jacob, just to add to that, if you recall, our goal here is to really drive more of that SCHROEDAHL product into the various channels here, not necessarily looking at revenue synergies with other parts of CIRCOR. So, that's what we continue to focus on.

[Jacob Schowalter:]

All right. Thank you.

[Rajeev Bhalla:]

You're welcome.

[Operator:]

Thank you. Our next question comes from the line of Nathan Jones from Stifel. Please go ahead.

[Nathan Jones:]

Morning, guys.

[Rajeev Bhalla:]

Hey. Morning, Nathan.

[Nathan Jones:]

Just a follow-up actually on Jacob's question about pricing in Distributed Valves. I think it might have been a year ago or something, Scott, that you said you thought, as that market improved and distributors started placing larger stocking orders, you might see some further pressure on pricing. Your comments to Jacob's question would seem to go the opposite direction, and that you think you may be able to actually raise price as volume goes up. Can you just talk about how you're thinking about that now relative to maybe how you were thinking about it before?

[Scott A. Buckhout:]

Yeah. I remember the comment, and the comment really was around the large stocking order. So, up until last quarter, we really weren't receiving large stocking orders. It was largely the book-and-bill, the orders that we turn in a day or two. And nobody was bothering to negotiating much price on that. So we were anticipating that when the stocking orders started, they might actually take the time to start trying to push the pricing down. We haven't seen that yet, Nathan. We are having more conversations about is there an opportunity to raise prices. We know that our competition has been trying to raise price. We don't exactly know how that's going yet, so we're trying to get some insight on that. But right now nobody has been pushing our price down on the stocking orders. So, so far it hasn't gotten worse. But, Nathan, our pricing right now is lower than it was in 2014.

[Nathan Jones:]

Yes. Understood. And that's at least a positive that it's not getting any worse, and it sounds like you see the potential for it to get a little bit better. It doesn't appear really the Distributed Valve business to have ramped up with rig count yet. I think some of our checks would suggest that there was still some inventory out there in the channel that had to be burnt through, but maybe that's gone now. Can you talk about maybe how orders have progressed through the fourth quarter and into 2017? And how you would see that ramping up as we go through 2017 against what's been a pretty large increase in the rig count off the bottom?

[Scott A. Buckhout:]

Yeah. So the difference in Q4 versus Q3 where we saw a significant increase in order was all around the large stocking orders, which typically come from our customers with a lead time, as opposed to the book-and-bill. So, when you look at it, if you break our order run rate down into those two buckets, the book-and-bill and the large stocking orders, almost all of the increase is coming with large stocking orders. So that book-and-bill rate hasn't changed a lot. So we're still churning through that at the rate we've been at for the last six or eight months or so. The stocking orders can come with lead times anywhere from 15 to 20 to 23 weeks. So you'll probably start seeing the revenue from that anywhere from three to four months after we get the stocking order. So the increase in orders you saw in Q4, we'll start seeing that revenue play out here at the end of Q1 and into Q2. And the second part of your question was, what are we seeing in orders coming into 2017. The trend really hasn't changed. We're still getting large stocking orders more or less at the same rate we were in Q4. Our book-and-bill trend has remained more or less the same as it was in Q4. So we're anticipating similar order intake in Q1 as we had in Q4. We're expecting revenue will start to pick up here in the back half of Q1 and into Q2.

[Nathan Jones:]

That's helpful. And I do appreciate the transparency on the outlook for the year on the Engineered Valve business. I think that's very helpful. Can you talk about pricing now? I know you'd had a large competitor in that industry that was pricing very aggressively there. Have you seen any changes in that behavior over the last quarter?

[Scott A. Buckhout:]

The short answer is no, we haven't seen any changes. So the market really remains for us unchanged over the last three, four, five months. And so you know we've had relatively low order intake the last two quarters, and we don't really see that changing here in the short-term. So the low order intake is driven by our refusal to race to the bottom here. So we are walking away from some orders when it gets to a point where it just doesn't make sense to take it. So, that's largely driving our outlook for the year, is the current market situation.

[Nathan Jones:]

And I know you'd said that basically the same thing on the last call, that you weren't going to go down and compete at that level on price. You maintain that outlook and plan to continue to maintain that posture?

[Rajeev Bhalla:]

We do. We do. Yeah. I mean, a lot of the work that we've done to reduce cost obviously helps us compete, but we're not going to go into negative margin business here, Nathan.

[Nathan Jones:]

Okay. Fair enough. Thanks, guys.

[Rajeev Bhalla:]

You're welcome.

[Scott A. Buckhout:]

Nathan, one more comment on that. We have, in the last 18 months, taken a tremendous amount of cost out of this business, and not only in just the operating cost and the structural cost of the business alone, but in the design of our product as well. And we're still running into these issues on competitive pricing. So we're pretty confident our competitors are taking loss projects in the hopes of maybe getting change orders to get it above breakeven.

[Nathan Jones:]

Great. Thank you.

[Rajeev Bhalla:]

Thanks, Nathan.

[Operator:]

Thank you. Our next question comes from the line of Jim Foung from Gabelli & Company. Please go ahead.

[James V. Foung:]

Hi. Good morning, guys.

[Scott A. Buckhout:]

Morning, Jim.

[Rajeev Bhalla:]

Hi, Jim.

[James V. Foung:]

Hey, Scott, maybe just talk about the midstream oil and gas business. It seems like you're making a lot of headway there. And I guess, will it be baked into 2017 and the potential for positive surprise in that segment?

[Scott A. Buckhout:]

Yeah. You're right. I'm glad you asked, Jim. The midstream has been an initiative for us since really the downturn started. You might remember, a couple of years ago, we really didn't have much presence in midstream at all. Our orders in – well, let me back up a little bit. In terms of penetration into the market, over the last 12 months, we've gotten onto the approved vendor list for 11 midstream companies in North America. And these are the big guys. So we feel pretty good about that. In addition, if you look at our order intake in 2015 to 2016, our orders almost doubled from 2015 to 2016 in this part of the business. So it's still relatively small for CIRCOR overall. Directionally, it's about 5% of our revenue. But we're excited about the trend, and we're excited about the progress we're making in the market. I think it's fair to say that we have a competitor who is helping us, with some difficulties with delivery, difficulties in turning around quotes, and getting some pretty bad feedback in the market from their customers. So, that's helping us for sure. But we're expecting the trend to continue and we're expecting to continue to make progress in this market.

[James V. Foung:]

Where do you think that business can go in a couple of years if it's roughly 5% of revenues today?

[Rajeev Bhalla:]

I think, Jim, we would at least want to double it, right?

[James V. Foung:]

Okay.

[Rajeev Bhalla:]

We'd at least want to double it within the next couple or two, three years here. The key piece to the equation here is ensuring that we have the full product portfolio of the classes and sizes of valves, the fully welded ball valve being a key component here. Because as you would expect, these valves get buried and you don't want to have to pull them out of the ground. So the key here is ensuring that you have a full product portfolio. Doubling this over the next couple of years should be doable.

[James V. Foung:]

Okay. Great.

[Scott A. Buckhout:]

And I should note, Jim, that we have dramatically expanded our product line of fully welded ball valves here, and that's been instrumental in increasing the level of orders we've been getting. So we feel pretty good about what we're doing here.

[James V. Foung:]

Right. And then also I guess in the – I mean I hear what you're saying about the Engineered Valve still being down, but your Distributed Valves business tends to come back first and it's very encouraging what you saw in Q3. And I was just wondering, what's the lag between the pickup – when we may see the pickup in the Engineered Valves when Distributed Valves starts to turn for you? I mean, I'm looking at oil prices being in the mid-$50. That sentiment towards major projects can turn very quickly.

[Scott A. Buckhout:]

So, yeah, I mean – here's what our customers are telling us, Jim, is that in the mid-50s we're not going to see a meaningful improvement in large projects internationally. And what they're saying is that when oil prices stabilize for two or three quarters, over $60 preferably, closer to $70, we'll start to see the large projects start coming back online. So the reason we're guiding this full year here on revenue is because when we take those comments and we look at where we are, we've probably got two to three months that oil has to stabilize at a higher price than it is today. And then when orders start coming in, and we're quoting 25 weeks, I mean we're looking at no meaningful revenue improvement here from this business on large projects really until 2018, given the timeline and the nature of this business. Now we're still pushing very hard on MRO and we're having some success there. We've got a couple of large orders already this year on the MRO side, which tends to be a little bit shorter-cycle, and those projects are still happening. But we don't think the MRO orders are going to fundamentally change the outlook for the year. So we're still looking at a pretty significant drop in revenue this year in this business.

[James V. Foung:]

All right.

[Rajeev Bhalla:]

And, Jim, let me just add some color to that as well. You mentioned the Distributed Valves as well as Engineered valves. So we are seeing better and more robust activity on our Distributed Valves in North America and, hopefully, that trend will continue this year. But we wouldn't expect that, as Scott mentioned, the Engineered Valves to reverse course and provide additional lift here in 2017.

[James V. Foung:]

Yeah. I was just thinking what can change the customers' sentiment. I mean, it seems like a lot of things could be fluid with the current administration and a couple of pro-business legislation could just change this around very quickly.

[Scott A. Buckhout:]

Well, certainly, I guess maybe we should make it explicit here. Any kind of geopolitical event that takes supply out of the market could change things very quickly for this market. And there's some of our customers out there who are saying that's what it's going to take and that they're expecting that that's ultimately going to be the trigger. Obviously, we can't predict that, but that certainly could happen, Jim, and that would certainly change the outlook for this business pretty quickly.

[James V. Foung:]

Okay. Great. And look forward to seeing you at the conference in a couple of weeks then.

[Scott A. Buckhout:]

Me as well. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions in queue at this time, and this does conclude our presentation for today. Thank you for your participation, your time, and have a wonderful day.