CIRCOR International, Inc.
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the CIRCOR International's Second Quarter 2015 Financial Results Conference Call. Today’s call will be recoded. At this time, all partcapants have been places in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks [Operator Instructions]. I'll now turn the call over to Ms. David Calusdian from Sharon Merrill for opening remark and introductions. 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'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 2. Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to known and unknown risks, uncertainties and other factors. For a full discussion of these factors, the Company advises you to review CIRCOR's Form 10-K and other SEC filings. The Company's filings are available on its website at circor.com. Actual results could differ materially from those anticipated or implied by today's remarks. Any forward-looking statements only represent the Company's views as of today, April 28, 2015. While CIRCOR may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so. On today's call, management will often refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS and free cash flow. These non-GAAP metrics exclude any pre-tax special charges and recoveries. A reconciliation of CIRCOR's non-GAAP metrics to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website. I’ll now turn the call over to Mr. Buckhout. Please turn to Slide 3.

[Scott Buckhout:]

Thank you David and good morningg everyone. For the second quarter we delivered revenue above our guidance range at $167 million with adjusted EPS of $0.55 a share. We delivered siolid organic growth in our large projects and control valve businesses that partially offset as isgnificant decline in our North American short cycle distributed valves business. As expected aerospace and defense was slightly lower than last year due to the exit of our structural landing gear product line. From an orders perspective in our energy segment we reported soild boolkings in the long cycle international projects business and we expect this positive trend to continue this strength wasmore than offsett by the expected delcine in our upstream North American short cycle bookings. Aerospace and defense orders were lower than expected due to the differal of certain milatry programs, most notably the Joint Strike Fiighter. The integration of our Schroedahl acquistion is procceding well and we're excithed about the growth propsect of this business. As a reminder the Schroedahl acceletates our penertation into the high rgowth power genertaion market and significantly improves our precence in Asia. We are in the process of cross training our global sales force for both Schroedahl CIRCOR products in order to leverage complementatry channels to market. We are making good progress with this effort and our sales people are getting up to be quickly. Operationally we’re focused on reducing material cost by integrating Schroedahl into our strategic sourcing organization to leverage our common material spent. We expect our return on investing capital will exceed our cost to capital in the first year. We continued to expect Schroedahl to be accretive on an adjusted EPS basis in year one. Our simplification in operational excellent priorities remain on track, today we’re announcing another step in our ongoing simplification initiative. We’re closing one of our two Corona California manufacturing facilities. This is an important part of our important ongoing effort to improve the efficiency and margins of the Aerospace and Defense business. We outsourcing the commoditized machining operations performed in this facility in order to focused on higher value-added activities that are core to the business such as product design, assembly and test. This action will expand our margins while maintaining revenues. This is a significant effort even the number parts machine in the facility. As a result we expect to completely exit this facility of the third quarter of 2016. The annualized savings from this project are expected to be approximately $3 million beginning in the second half of 2016. All of the other restructuring actions that we announced this year are complete. In total we now expect to deliver savings of $10 million this year from this auctioned higher than our original estimate of $8 million. Annualized savings are now expected to be $15 million. In our Energy businesses we reduced our headcount by 26% this year. While the restructuring actions taken so far were primarily in response to the market decline in oil and gas were taking advantage of this downturn to reduce our structural cost wherever possible. For example as part of those efforts we consolidated several back office operations in North America and we’re in the process of consolidating one of our test facilities in Europe. In addition we’re making progress on our operational excellent initiative. We are seeing significant improvement in our key operating metrics including customer on time delivery, supplier rationalization and sourcing saving. For example our customer on time delivery has consistently improved from 73% in June of last year to 86% last month. We’re on track to achieve the best in class target of 95% by early next year. In the last 12 months we’ve reduced the number of suppliers by 25% to 38,00 today with the target of 12,00 by 2018. At the same time we’ve increased the amount of direct material spend on long term contracts from 8% to 30% today. With the target of 80% by 2018. Long term contracts typically provide from better year-over-year productivity, delivery and quality performance. Finally from a capital deployment perspective, I would like to note that in the second quarter we continued to repurchase share as part of the $75 million program we initiated to Q1. Today we purchased over $1.2 million shares for about $70 million. We expect to complete the full program this year. Now I’ll turn the call over to Rajeev Bhalla

[Rajeev Bhalla:]

Thanks Scott. Before I get into the Energy results you note that we excluded last divesture in our year-over-year comparisons for both segments. Starting with energy on slide four, energy sales of $127 million decreased 15% over the prior year and 12% organically. This was primarily due to lower sales and our upstream North American short cycle business and our upstream instrumentation and fabling businesses. This is offset in part of our higher sales and our large international projects business. Energy the adjusted operating margin decreased 190 basis points to 13.4% primarily as a result of lower volumes. Restructuring savings and cost reduction actions help to mitigate the bottom line impact keeping the margins above 13%. For aerospace and defense please turn to slide five. Aerospace and defense sales of $39.7 million decreased by 9% over the prior year and 3% organically as expected the main driver was the impact of exiting the structural landing gear product lines as well as lower sales in our defense business. Aerospace and defense adjusted operating margin of 8.8% increased 220 basis points year-over-year driven by ongoing operational improvements and the benefit of exiting structural landing gear product line. As Scott mentioned we announced a closure of one of our two California manufacturing facilities as part of our effort to improve the operation and focus on the core competencies of our aerospace and defense business. Our adjusted operating margins improved sequentially by 80 basis points and we are on track to exit the year with double digit margin. Turn to Slide 6 for selected P&L items. In the quarter, we recorded special charges totaling $7.4 million, our restricting actions, the completion of the exit of the structural landing gear product lines and acquisition related cost. To better reflect the company’s performance, we are treating the amortization associated with the acquired intangible assets from the Schroedahl acquisition as a special charge. This is about $2.1 million in the quarter. Our tax rate for the second quarter was higher than we expected. We had a number of discrete tax items that in the aggregate negatively impacted Q2 adjusted EPS by $0.05 per share. The primary item related to the previously disclosed tax audit in Italy which we settled in the quarter. The adjusted tax rate for the quarter 34.7% compared to U.S. GAAP tax rate of 36.5%. We expect our third quarter tax rate to be about 28%. Adjusted earnings per diluted share was $0.55 compared with $0.88 in the prior year on a pro forma basis. Turning to a cash fluent debt position on Slide 7. During the second quarter, we generated $4.5 million in free cash flow below our expectation. An increase in working capital drove a significant portion of the cash out flow especially on the inventory side. Two primary factors drove the increase in inventory. First availability of product was for smaller token build demand has become the most important factor in taking share in our North America short type of business. We are not seeing a pick up in large stocking orders from distributors. We are adopting to this new reality by strategically holding inventory of parts ready for rapid delivery. And second due to strong orders from long cycle projects in the first half, we increased work in process inventory from project that will shift later this year. We remain focused on improving our working capital position and free cash flow performance. Regarding our share repurchase program, we spent $53 million in the second quarter. This equates to about 953,000 shares. That brings us to our third quarter guidance. Please turn to Slide 8. We expect revenue to be in the range of $155 million to $165 million, reflecting lift from our large project and control vault businesses and lower volumes from our upstream short-cycle businesses in North America. And we expect higher sequential adjusted EPS in the range of $0.55 to $0.65 per share, reflecting the benefit from cost reduction restructuring actions, productivity and the lack of discrete tax items that we had last quarter. For Q3, we anticipate special charges to be in the range of $2.9 million to $3.2 million or $0.12 to $0.13 per share. For comparison purposes, the adjusted business has generated $14.1 million of revenue and $0.06 of EPS in the third quarter of 2014. In addition, our guidance reflects currency headwind of $11 million in revenues and $0.07 per share on adjusted EPS. With that, let me turn it back over to Scott.

[Scott Buckhout:]

Thank you, Rajeev. Let’s start with an overview of our current market trends for energy and aerospace and defense. First energy. As a reminder, about one-third of our consolidated revenue last year was in the upstream oil and gas segment. This includes most of our distributed valve and international projects businesses, as well as part of our instrumentation and sampling business. In our short-cycle distributed valve business, we expect lower volumes year-over-year due to the lack of activity in North American while rig counts seem to affirm the bottom activity is down significantly versus last year. Distributor destocking is expected to continue and will have an impact on our bookings in the third quarter. We’re expecting orders and sales to be down approximately 50% consistent with our discussion during last quarter’s earnings call. We are not currently seeing signification pricing pressure in the distributor valves business. The market dynamic now is more about lower demand, smaller orders, and product availability. Within our long cycle project business, we continue to see positive activity and we’re achieving good win rate. We continue to see strength in the Middle-East especially for gas projects. Engineering projects in North America from mid-stream L&G and down stream oil and gas are running at similar levels to last year. In contrast to the short-cycle business, we are seeing pricing pressure in this market. Our competition is more aggressive than we’ve seen historically. In power, the combined cycle segment in North America is doing reasonably well and we’re seeing good activity in the emerging markets in South East Asia and China. We’re also experiencing good quoting and order activities for our recently launched aeroflow turbine bypass valve. We expect instrumentation and sampling orders to be down year-over-year as a result of a difficult compare with Q3 2014 when we reported strong orders. This business is inherently lumpy and we see fluctuations from time to time. Sequentially, Q3 orders should be about flat although we expect demand to improve towards the end of this year as we start receiving orders for the Johan Sverdrup project in the North Sea. In Brazil, we are seeing substantially lower orders and sales as a result of the ongoing issues to Petrobras and the economy in general. We are not optimistic about the outlook in this market but we’re working to realign our business and cost structure to adapt to the new outlook in Brazil. In Aerospace and Defense, as Rajeev mentioned earlier, orders for certain programs were deferred from Q2 until later this year and into 2016. We do expect a sequential increase in orders in Q3 largely driven by a number of defense programs globally. Let me sum up by leaving you with three important points, first with the exception of our Upstream North America business, our primary businesses are showing positive momentum going into the back half of the year. In the Upstream market, our large project business is expected to continue to see good order activity and higher revenue as we deliver projects from orders won earlier in the year. In addition, we are seeing improved activity in mid and downstream businesses especially in control valves and power generation, second we are starting to see the effect of the restructuring that we completed so far this year and savings will improve our results from the second half of the year. In addition, we believe we are turning to corner operationally in Aerospace and Defense. All the work we’ve done recently to improve our operations is starting to show in the results. We still plan to exit the year with double-digit operating margins in Aerespace and Defense. Third we continue to invest in growth through the cycle, we are increasing the size, capability, and scope of our commercial team and introducing more effective marketing and product management talent and prospects. New product development continues to be a priority across the company, we expect exit the energy downturn a much strong company than when we entered. In short, we remain focused on creating long-term shareholder value by investing in growth, expanding margins, generating strong free cash flow and being disciplined for capital deployment. 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 is coming from the line of Nathan Jones with Stifel. Please proceed with your question.

[Nathan Jones:]

Good morning guys.

[Rajeev Bhalla:]

Good morning, Nathan.

[Nathan Jones:]

So very, very strong results for the second quarter there, you had revenue 9.5% above the mid-point of guidance and earnings 50% above the mid-point of guidance, can you just talk about what drove the delta to what you are thinking three months ago?

[Rajeev Bhalla:]

Sure. Thanks Nathan. We did have some good numbers here, I appreciate the comments, two key factors here clearly we’ve done a lot on the margin expansion side with respect to cost reduction and taking appropriate actions there and you see the fact that we had actually bumped up expected savings on those actions that we are going to see for the rest of this year. On the top line, no surprises distributed balance now being down substantially as you had expected but we did see some left out of Milan in our large project business as well as some of the other smaller businesses there. So those are the two main factors that helped us drive to the better numbers.

[Scott Buckhout:]

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

[Nathan Jones:]

So I think it sounds like the top line strength was primarily out of Milan was that shipping projects early, was that hitting milestones that are largely to recognize revenue just anymore color you can give there?

[Scott Buckhout:]

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

[Rajeev Bhalla:]

And - any other - reduce from the bottom line, we did go a little deeper then we had expected early in the quarter and you see that because we’re raising the number for the year end and the aggregate restructuring saving so that played a role as well.

[Nathan Jones:]

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

[Scott Buckhout:]

I think it’s the later but we’re seeing - all of our peers and competitors are seeing with aggregate CapEx being down, what you’re seeing in our business is that we’re having some success with the few key customers notably in Saudi - in the Middle East but few others as well we’re able to above the trend little bit as we progress through the year.

[Nathan Jones:]

And just one last there is it necessary for you to be bidding these things, I guess significantly lower margins in order to take this business is that something that you’re doing strategically, how the margins looking in the stuff that going into backlog..

[Scott Buckhout:]

The margins that are going into backlog here are little lower than what we’ve seen historically but this is still very good, recognize the fact that as we reduce cost we’ve been able to that is the pricing piece of that as well, so we’re driving a lot of productivity out of our sourcing business for example and aggregating that spent. And so some of that does translate into lower price with the customer but at the end of the day they’re still good margins.

[Nathan Jones:]

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

[Scott Buckhout:]

Thanks Nathan.

[Operator:]

Thank you. The next question is coming from the line of Joe Radigan with KeyBanc Capital Markets. Please proceed with your question.

[Joe Radigan:]

Hi, good morning this is Sean [indiscernible] on the call for Joe. Thanks for taking this call. Good morning. If you could talk a little bit about in the aerospace, what you’re seeing with the H350, I think there has been a few concerns that there might be some sort of hiccups there. Have you seen anything’s going on with that model?

[Scott Buckhout:]

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

[Rajeev Bhalla:]

That the other thing just to add to that I mean the we’ve not anticipated any significant ramp up in that program for part of while so the Airbus2 there are not going to get to full right production for couple of years at least, that you have some normal entry into service type of issues that get manage but there are, it is not having a significant impact on us.

[Joe Radigan:]

Okay, that’s helpful and then on the energy upstream business, I think in the prepared remarks you mentioned that, you not really anticipating take backup from the destocking that was going on in 1Q, is that –do you have any more color on what might? What you expect there sort over the rest of the year?

[Scott Buckhout:]

Sure, the as far as what we’re expecting or anticipating is more less the volume that we just articulated in the prepared remarks. So we think sales and orders will be down year-over-year around 50% in Q3 and we’re expecting that to continue through the rest of the year. So I’ve met with a number of our largest distributors over the last three weeks. And they are not optimistic about the remainder of this year from a volume perspective and all of them are saying that they’re continuing to destock to the third quarter so we’re not seeing the end of that. I know some of our peers are saying that they believe that it stock certainly for our largest customers or largest distributors. We expect to continued to see the destocking through the third quarter.

[Joe Radigan:]

Okay, that’s really helpful. Thank you and good quarter.

[Scott Buckhout:]

Thanks a lot.

[Rajeev Bhalla:]

Thank you.

[Operator:]

Thank you. The next question is coming from the line of Kevin Maczka with BB&T Capital Markets. Please proceed with your questions.

[Kevin Maczka:]

Thanks, good morning.

[Rajeev Bhalla:]

Hey, good morning Kevin..

[Scott Buckhout:]

Good morning.

[Kevin Maczka:]

So on short-cycle distributed valves you are not seeing price pressure, even though volumes are down in about 40% to 50% range that you expected there. Are you expecting 2 speed price pressure, I guess, its good that you’re not but I’m just wondering why not because that was the experience in the last down turn.

[Scott Buckhout:]

So I think what’s happening, anyway there is a couple dynamics here the first is that, where we would probably start seeing the price pressure is when the large stocking orders start to pick-up that’s when you get into the negotiations on price. Right now, we’re not seeing large stocking orders. We’re seeing relatively small actually very small orders and a lot of them. So it’s much more availability about return time, and about for our distributors moving inventory into the right place to cover the right areas of the country. So we’re just not getting the price pressure, their small orders I suppose they don’t see the value and spending a lot of time negotiating the price they are trying to manage their inventory down and if you have the product, they are going to buy it if we don’t, they are going to move somewhere else. As volume starts to pickup, I can imagine that and they start putting more stocking orders in place, I imagine you will get into a price negotiation at that point. But as of now, that’s not the big dynamic, the margin pressure that we have is all related to the severe drop in volume.

[Kevin Maczka:]

Got it. And then on the project side, it sounds like you are doing very well there, your win rates are higher, your blocking the trend but there again you are seeing a bit of pressure, it seems like the concern for most now in that business is more around 16 and 15, that may be some volume, but especially some price in way around things next year. But it sounds like you are so far off setting with your own internal cost cut. So, is that something we should be concerned about as we think about 2016 that may be there is more revenue and margin pressure than or you are not seeing that.

[Scott Buckhout:]

It would be hard for us to really tell you what’s going to happen in 2016. But we’re not necessarily saying we’re not seeing the pressure in the market overall. We’ve managed to react, if you look at what was the mix of our revenue in 2013 and 2014, you would see a much higher percentage of our revenue was offshore. Now going into 2015 and 2016, it’s more land, it’s more gas as opposed to oil, we’re actually doing more power as well. So the mix of our product has changed, now going into 2016, the pricing pressure, we expect will continue. We’ll continue working on the cost but not to say we’ll - we won’t avoid some level of deterioration from price. I think we’re all seeing that. The margins are still good, it’s a still profitable business that we are winning but the margin is in our backlog are slightly lower than what you would have seen a year or two ago.

[Rajeev Bhalla:]

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

[Kevin Maczka:]

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

[Scott Buckhout:]

Yes. Well, absolutely. We had anticipated that coming into the year, the biggest driver was a Joint Strike Fighter program we had expected to get I think it was out right the low rate initial production not lot nine into the second quarter here. And lot 10 towards the back end of this year. 9 has moved to the back end of this calendar year and hence moved into the next year’s but that was one of the big drivers. The other thing is don’t forget we have been on a journey here starting early last year to get out of some of the low margin built to print business especially out of our French locations. And so obviously there has been some pressure on orders from that perspective but that’s intentional and a good thing. It’s really that business and then the second piece of it is our UK defense business, we’d also seen lower orders there as we completed out some of the UK navy programs last year. But those are the two or three key elements to the change.

[Kevin Maczka:]

Okay. Thank you.

[Scott Buckhout:]

Thanks, Kevin.

[Operator:]

Thank you. The next question is coming from the line of John Franzreb with Sidoti & Company. Please proceed with your question.

[John Franzreb:]

Good morning guys.

[Scott Buckhout:]

Good morning, John.

[John Franzreb:]

Let’s just stick with Aerospace & Defense, you guide - had some low margin business, structural landing business had some deferrals, could you just talk about the opportunity pipeline in regards to filling some of the businesses that you exited, when you expect to finally catch up in that front?

[Scott Buckhout:]

Yes sure. We have - we just spent a lot of time on this, so we are working on probably the strongest pipeline, new products that we have in CIRCOR is on the Aerospace & Defense side, we are trying to change that on the energy side with us taking some time. So we are working on new products largely switches and actuation for defense to we’re increasing our penetration on missiles as well as the [UAVs] we see both of those as strong growth opportunity, the other piece that I would say in addition to some of the basic fluid control products and on the commercial side is really MRO, so we have historically not played a big role in MRO and Aerospace & Defense and as you can imagine we have a pretty large installed base, we’re changing that, we’re spending a significant amount of time and resources in becoming a bigger player in the markets that we participate in. So we’re seeing pretty good growth off of a small base in that market, it’s focused on the commercial side of the business. And we would expect that to be a pretty significant driver for our growth going forward and as you can imagine the margins in MRO are quite good.

[Rajeev Bhalla:]

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

[John Franzreb:]

Perfect. Thank you. And we so I just want to make sure I understood your comments, you set down 50% year-over-year was that comments on sales - was that comment limited to the short cycle business?

[Rajeev Bhalla:]

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

[John Franzreb:]

I understood it. In regards to the second quarter, what was the contribution show down in the quarter on the sales and margin line?

[Rajeev Bhalla:]

What we had guided, if you recall we had guided about $6 million revenue about $0.08 per share came in consistent with that.

[John Franzreb:]

Okay. That is fine. And one last question…

[Rajeev Bhalla:]

You do the math there, John you can do the math.

[John Franzreb:]

You talked about the Mid-stream market actually being a positive going forward, could you just provide some color are you seeing in Mid-stream?

[Rajeev Bhalla:]

Yes so the Mid-stream market is an opportunity really for two businesses, the biggest opportunity is more on the engineering product side, so out of Milan, we are actually just proportionate share of the product that we are coding right now is going into Mid-stream primarily LNG. So you would get North America and Australia we are coding quite few projects for LNG right now for large engineered projects. We are trying to make some headway on distributed valves in Mid-stream not as much success as we are having on engineering valves.

[Scott Buckhout:]

There is also the instrumentation and sampling side that could help in that piece of it as well.

[John Franzreb:]

And just back to the short cycle business [indiscernible] working capital suffering it sounds like your increasing inventory because the short cycle has gotten actually shorter, so to address book in term process you are carrying more inventory, [indiscernible].

[Scott Buckhout:]

That’s correct.

[John Franzreb:]

Okay. Thank you very much guys.

[Scott Buckhout:]

No problem, thanks John.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from the line of Ryan Cassil with Global Hunter Securities. Please proceed with your questions.

[Ryan Cassil:]

Hi guys, nice quarter.

[Scott Buckhout:]

Thanks, good morning Ryan.

[Ryan Cassil:]

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

[Scott Buckhout:]

So, yeah I mean let me step back here so lot of the restructuring that we’ve done in the Energy business I’ve mentioned the reduction in headcount had about 26% energy this year. A lot of that this disproportion of that share that is gone into our short cycle business in North America. Not all of that is volume related we are working hard to get structural cost out of this business so if you look at our SG&A. Our overhead, we’re going after all of that as part of this cost reduction effort so of course this volume comes back that cost does not come back. We also spent a lot of time on strategic sourcing in supply chain and simplifying the product line in rationalizing SKUs and suppliers and again that’s cost that goes out and doesn’t come back. So it’s kind of a long answer to your question as the volume starts to come back in certainly we would anticipate some pricing pressure on the stocking were as but we think we’re talking a whole lot of cost down right now that won’t come back in. it’s hard for me to tell you are they going to perfectly offset or we’re going to have bigger margins or higher margins or lower margins is hard to say but I can’t tell you we’re taking a lot of structural cost out of the business right now.

[Rajeev Bhalla:]

[indiscernible] we working the all sides of this including the volume related actions to mitigate what we’re seeing now but we - need volume to come back and we’re going to be very judicious and how we are cost back, even what - volumes come back even what’s a volume back.

[Ryan Cassil:]

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

[Rajeev Bhalla:]

So I’m personally spending a lot of time on M&A right now with the potential partners and targets. I will tell that its hard to say - to say that multiples are changed. The certainly the results has have changed overtime so if you’re looking at oil and gas in North America everybody’s results are down and multiple expectations I don’t think if necessarily changed but, aggregate the prices come down with the results. We are spending at less of my time on North American oil and gas opportunities and more on international opportunities in power, LNG, other opportunities that are not necessarily still in the middle of the cycle right. So we’ll see how it plays out it, its hard to as you know to predict exactly if and when in any of these opportunities are going to actually happened but I can tell you we’re spending a decent amount of time on this right now and hopefully will make something happened. Here - there is a lot of really interesting strategic opportunities out there for us.

[Ryan Cassil:]

Okay and is it the margin that tracking you or just the, the right timing an opportunity for some of these opportunities?

[Scott Buckhout:]

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

[Ryan Cassil:]

Okay, alright great. Thanks guys.

[Scott Buckhout:]

Thanks Ryan. End of Q&A

[Operator:]

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

[Scott Buckhout:]

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

[Operator:]

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