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CIRCOR International (NYSE:CIR)

Q1 2013 Earnings Call

May 02, 2013 10:00 am ET

Executives

Dennis J. Walsh - Vice President and Director of Social Media

Scott A. Buckhout - Chief Executive Officer, President and Director

Frederic M. Burditt - Chief Financial Officer and Vice President

Wayne Foster Robbins - Chief Operating Officer and Executive Vice President

Analysts

Kevin R. Maczka - BB&T Capital Markets, Research Division

John Franzreb - Sidoti & Company, LLC

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Charles D. Brady - BMO Capital Markets U.S.

Operator

Good day, ladies and gentlemen. Welcome to CIRCOR International First Quarter 2013 Financial Results Conference Call. Today's call will be recorded. [Operator Instructions] I'll now turn the call over to Dennis Walsh for opening remarks. Thank you. Sir, please go ahead.

Dennis J. Walsh

Thank you, and good morning, everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; Wayne Robbins, CIRCOR's Chief Operating Officer; and Fred Burditt, 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 Webcast and Presentation section of the Investors link.

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 for 2012 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, May 2, 2013. 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 EPS and free cash flow. These metrics exclude any pretax special charges, repositioning inventory reserves, intangible impairments, as well as historical asbestos and bankruptcy charges related to the company's Leslie Controls subsidiary.

The reconciliation of CIRCOR's non-GAAP adjusted operating income, adjusted net income, adjusted EPS and free cash flow 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 A. Buckhout

Thank you, Dennis, and hello, everyone. It's my pleasure to be here today as CIRCOR's President and CEO. I'd like to take this opportunity to briefly introduce myself and to share with you my excitement about joining the CIRCOR team and the opportunities that lie ahead.

Most recently, I served as President of United Technologies' $7 billion Fire & Security division. Fire & Security sold highly engineered products and systems into many of the same markets as CIRCOR, oil & gas and power generation, to name a couple.

Before that, I served in other roles at UTC, including President of the Global Fire Products business and President of the Systems and Firefighting business based in Europe. I also spent 6 years at Honeywell, running their Friction Materials Americas business and the Friction Materials and Consumer Products businesses in Europe.

In my new role as CEO at CIRCOR, I'll be focused on driving earnings per share and cash flow by delivering results in 3 areas: margin expansion; growth, both organic and through acquisitions; and improved working capital.

I'd like to share some of my initial thoughts and impressions after 3 weeks on the ground, but before I do that, let me turn the call over to Fred to discuss our Q1 results.

Frederic M. Burditt

Thanks, Scott, and good morning, everyone. Please go to Slide 3, and I will touch on the consolidated results, then give you more color by segment and markets.

We had a solid start to the year, achieving both revenue and adjusted EPS at the high end of our guidance. Revenue for the first quarter was $205.4 million. As expected, this was 4% down from Q1 of 2012, primarily due to softer short-cycle energy volume, which declined in line with the North American reduction in rig counts and larger national projects, where some shipments shifted to the second quarter.

Backlog of $457.3 million was up 6% year-over-year and 2% sequentially from the fourth quarter. Adjusted operating income was $14.5 million, up 6% in the first quarter of last year, and AOI margins expanded to 7.1% compared with 6.4% in the same quarter of last year.

Net income for the quarter was $7.9 million or $0.45 per diluted share compared to net income of $8.6 million or $0.49 per diluted share in the same quarter last year. Excluding repositioning charges, we achieved adjusted EPS of $0.52 for the quarter, an increase of 6% from the first quarter of 2012.

Now please turn to Slide 4 for our Q1 repositioning-related charges, which are associated with the activities in Brazil, California and India. These actions include consolidating facilities, shifting expenses to low-cost regions and exiting certain nonstrategic product lines.

During the quarter, we incurred $1.6 million in repositioning charges, which was primarily cash. On a year-over-year basis, these projects have already contributed approximately $1 million of savings, primarily from Brazil. We expect to realize annualized savings of approximately $7 million from these actions in the second half of 2013.

Now I'll turn to segment performance beginning with Energy on Slide 5. Energy bookings were down 19% year-over-year as a result of lower North America short-cycle orders and large international projects. North America short-cycle business was negatively impacted by the 10% year-over-year rig count reduction. In addition, last year's first quarter had unusually high bookings.

International project quoting remains healthy. However, actual releases of contracts were pushed out. We do anticipate, though, Q2 will be stronger, which has been confirmed so far in the first month of the quarter.

In Brazil, we received our first large oil & gas valve order since entering that market a couple of years ago. Our ending Energy backlog of $217.8 million was up 12% year-over-year, primarily due to higher order levels within our large international projects business, especially in the Middle East.

Energy revenues of $96.7 million for Q1 decreased 11% year-over-year, due to factors I mentioned earlier. In addition, unfavorable foreign currency fluctuations reduced revenues by 1%. The segment's adjusted operating margin was 11.1%, up from 8.2% in the first quarter of 2012. This increase was primarily driven by improved large international project pricing, partially offset by lower volume and associated leverage.

Now let's move to Slide 6 in Flow Technologies. Year-over-year segment bookings were up 2%, primarily driven by sampling and instrumentation orders, partially offset by lower HVAC orders. Revenue came in at $71.4 million, up 7% year-over-year from higher power generation, instrumentation and sampling demand, partially offset by a 1% unfavorable foreign currency fluctuations.

Flow's first quarter adjusted operating margins were strong at 12.7% and up from 11% last year, primarily due to higher volume and associated leverage.

Now Aerospace on Slide 7. Bookings were up 5% year-over-year, due primarily to higher landing gear orders led by A330. Ending backlog of $162.7 million was up 1% year-over-year. Revenues of $37.3 million were up 2% from the prior year, primarily due to a decline in landing gear shipments associated with the exit of the unprofitable overhaul product line as part of the repositioning actions.

Aerospace margins in Q1 were 3.5% compared with 10.8% in Q1 of 2012 and 3.5% in Q4 of 2012. Year-over-year margins were affected by approximately 500 basis points, as a result of development and start-up expenses on new programs including the A350, 330 and BLACK HAWK.

In addition, we had unfavorable mix related to a favorable engineering project from last year. We anticipate margin improvement on BLACK HAWK and A330 during the second half of this year as they reach full production, and we will get full benefit of the repositioning.

The Aerospace business is a major focus of our margin improvement initiatives. We are consolidating 2 of our California landing gear facilities and exiting some small nonstrategic product lines.

Slide 8 includes highlights from our consolidated P&L. Corporate general and administrative expenses for the quarter, first quarter of 2013, were $6.6 million compared with $6.9 million in the same period of 2012. The tax rate was 31.2%, lower than our anticipated 36% rate due to a shift of Brazil repositioning expenses from Q1 to Q2. The adjusted effective tax rate in the quarter without repositioning charges was 30.3%, slightly lower than our anticipated rate of 31%.

Looking ahead, we anticipate our second quarter tax rate to be approximately 31%. Excluding repositioning charges, the rate is anticipated to be 29.5%. For the full year 2013, we expect our tax rate to be approximately 36%. And excluding repositioning charges, it will be 31%.

Now turning to Slide 9. During the first quarter, we generated a positive $1.1 million free cash flow, $8.2 million more than the first quarter of 2012, primarily due to improved working capital.

Now let me take -- give you an update on the markets we serve. So please turn to Slide 10. Let's start with oil & gas markets that impact our Energy segment, as well as more than 25% of our Flow segment. We continue to see rig counts essentially flat for Q2 in North America. However, this is still at good levels. We are cautious but currently believe rig counts may improve in the second half of the year.

To minimize the impact of rig counts, we continue to expand our relationships with international distribution outlet, especially in the oil & gas hotspots of the Middle East, Southeast Asia and Brazil.

At our large international projects business, we're seeing strong offshore project activity. The oil price environment is providing support for a wave of new offshore projects, and quote activity in the Middle East is improving. There are some delay, however, in project finalization but we do expect Q2 to improve.

Our pipeline business, which is primarily driven by capital spending, is up in North America with international markets flat. There's an increased opportunity in pipeline integrity due to aging infrastructure and spills, particularly in North America.

Now let's move on to the Flow Technologies segment, which also derives a significant amount of revenue from the Energy-related markets. Flow Technologies accounts for about 35% of our business and serves oil & gas, power generation, process and other markets. I'll focus my remarks on the oil & gas and power generation markets. The commentary on smaller markets is on Slide 10.

In the oil & gas market, offshore platforms continue to provide good growth opportunities, especially internationally. We plan to grow share in this market through our ability to deliver products with exotic materials and with short lead times. The long-term outlook for the power generation market is positive as a key target market for us. New construction in emerging markets presents CIRCOR with excellent near-term and long-term growth potential. While the power generation market in India still remains somewhat slow, we expect policy actions in 2013 to drive growth. Although growth in China has also slowed, the region is still investing heavily in large power projects.

In Europe, new power investments are primarily coming from Russia and Eastern Europe. We are also participating on an increasing basis in the MRO business in North America with significant growth opportunities, both efficiency upgrades and for the conversion to natural gas powered plants.

Finally, let's move to our Aerospace segment, which makes up about 17% of our business and primarily serves the commercial and military aerospace end markets. On the commercial side, production from OEMs, such as Boeing and Airbus, continue to be strong and commercial traffic is up. On the flip side, commercial aftermarket orders are soft, due to maintenance deferrals and aircraft cannibalization. The business jet market remains flat.

On the military side, there continues to be uncertainty related to defense budgets. However, our business is well positioned through 2013 as the BLACK HAWK program ramp-up offsets weakness in military spares.

And now for our guidance for the second quarter of '13. We expect revenues to be in the range of $214 million to $220 million. During the second quarter, we expect our -- to incur pretax repositioning-related charges of between $4.2 million and $4.8 million. Excluding those charges, we anticipate adjusted earnings to be in the range of $0.64 to $0.70 per diluted share. This guidance assumes that exchange rates remain at the present level.

I'll now turn the call over to Scott for some final thoughts.

Scott A. Buckhout

Thank you, Fred. I'd like to close out the call by discussing what appealed to me about CIRCOR before I joined the company and what I now see as some of the key opportunities going forward. The principal reason I was attracted to the company is the significant earnings growth potential.

To reach this potential, we're going to capitalize on several key strengths. First, we have a broad range of premier brands in the energy and aerospace markets around the world. Second, we have a diverse product line of highly engineered products. Many of our product lines have leading positions in their respective niche markets. Third, we sell into strong end markets with good, long-term growth potential, energy, both oil & gas and power generation and aerospace. In addition, we have an early presence in several important emerging markets, including India, China and Brazil. Finally, we have a strong, continuous improvement culture, particularly in our factories. Those key strengths attracted me to CIRCOR.

Now that I've been here a few weeks, let me share my initial impressions of the company. Looking first at our top line opportunities. We plan to place a higher priority on organic growth. As I mentioned, our products are a key strength of the company, and there's certainly pockets of excellence in our new product development efforts across the company. Having said that, I see an opportunity to improve the rigor and discipline around new product development to become a more innovative, customer-focused company.

In addition, we also have an opportunity to enhance CIRCOR's marketing function and expand our presence in higher growth parts of our industry. Accelerating our organic growth through thoughtful go-to-market initiatives will be a high priority for us. Acquisitions will remain an important component of our growth strategy. Going forward, we'll be refocusing the organization on end-market acquisitions, businesses we already understand very well, where we can generate a double-digit return on invested capital. We have a strong balance sheet and serve excellent end markets with many opportunities for consolidation.

Finally, one of the most striking observations after arriving at CIRCOR is the complexity of our business. As everyone knows, complexity drives costs. We have more than our share of complexity. We have a lot of P&Ls, factories, SKUs, suppliers and ERP systems to name some of the more apparent opportunities. We also have an opportunity to streamline our sourcing and supply-chain organization, which is somewhat fragmented and managed locally in most parts of our business.

Simplifying CIRCOR and aligning the business with our customers and channels will be a top priority for us. All of this won't be accomplished overnight, but we look forward to reporting our progress to you in the quarters ahead. I'm excited about the strong foundation that's in place at CIRCOR, and even more so by the opportunities in front of us.

With that, Fred, Wayne and I are available to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Kevin Maczka of BB&T Capital Markets.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Fred, can we go back to your comment about seeing a little bit better trends into Q2 in Energy on the large projects side? I know we've been talking for some time about good quotation activity there, and it seems like pushouts have kind of become the norm. Can you just say a little bit more about what you're seeing there specifically that's better?

Wayne Foster Robbins

This is Wayne. Yes, we're seeing some delays in the project activity. But as Fred mentioned, April was a very strong order entry for us and May looks like it's also shaping up. So we are seeing some more releases than what we've had in the past 2 quarters, actually.

Kevin R. Maczka - BB&T Capital Markets, Research Division

And kind of as the name implies are these longer-term projects that would not ship in 2013? Or are these things that would show up on the revenue line in the back half?

Frederic M. Burditt

Most of these would be shipped into 2014 at this point.

Kevin R. Maczka - BB&T Capital Markets, Research Division

'14. Okay, okay. And then a question on aero Margin. Again, Fred, you said that's one of the key focuses here in terms of the margin expansion initiatives. We had the same 3.5% margin in Q1 that we had in Q4. And back in Q4, you'd called out a couple of big buckets that were really pressuring it, the new program spending, which is mostly still there and all the repositioning and culling and other things. So as we get out to the second half, should we think that, that 500 or so basis points from the repositioning and the culling goes away and much of the new program spending does as well because 2 of the 3 new programs are starting to ship? I'm just wondering how we should think about back half margins in aero.

Frederic M. Burditt

In the back half, there's really 2 ways, I think, you should look at it. One is the repositioning project will be in the -- again, we've got the full run rate of $3.5 million of savings. And that will take care of most of the issues we've had with the Sylmar facility after we've closed those -- put those 2 together, the California sites together. So that will address that piece that I talked about last year. Cost is maybe 300 basis points last year for a -- on a full year basis. And then on the new product side, yes, we will see -- it's been a significant drag on us. We talked about it was 400 or so basis points in Q4. And it was similar, actually a little bit higher in Q1. But -- and some of that will go down. We still have the A350, which is the biggest program, but we will have some improvement in the second half on those 2 as we get the full run rate. And obviously we'll let you know more as we close out Q2.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. So we ought to see those margins just from the things that are already in place and the programs that are already starting to ship, we ought to see them substantially better in the back half. But still there's the pressure from the A350, so maybe we're not all the way back to double digits like we were in the first quarter of last year.

Frederic M. Burditt

At this point, correct. And just one -- not for you Kevin. But I just want -- I think I misspoke in my comments a few minutes ago, the full year tax rate is 31%. I think I might have said 36%. I just want to make sure that's clear. My mistake, I apologize.

Operator

Our next question is coming from John Franzreb of Sidoti & Company.

John Franzreb - Sidoti & Company, LLC

I actually want to talk a little bit about the short-cycle energy. It seems to me that you're saying that the business is starting to stabilize and you have expectations of a turnaround. Is that based on what you're hearing from customer inventory levels? Or is that more of a macro view from the benefits of getting more international distributors involved in the mix?

Frederic M. Burditt

Yes. John, I don't know, let's make sure we characterize it correctly. We think right now that the short-cycle environment, the rig count is going to stay relatively stable to where it is today. We did mention that we have -- we are cautious that there may be some uptick in the second half, but we're, I would say, we're not planning on that. That was more things we've been hearing but that we don't have that factually. So I think if you're thinking about us for the rest of the year right now, basically we think the market will be relatively stable where it was in Q1.

John Franzreb - Sidoti & Company, LLC

Okay, that's fine. And are you thinking about that on just North America or are you thinking about that globally?

Frederic M. Burditt

Well, that was a North American comment.

John Franzreb - Sidoti & Company, LLC

Okay, fine. So you've talked about adding international distributors to the short-cycle business. How big of an opportunity is this for you?

Wayne Foster Robbins

This is Wayne. I think long term, this is an opportunity. But obviously, we're still developing some of those relationships. So the impact on, say, Q2, we don't anticipate anything that you'd see significant over the next couple of quarters on that effort. That's a longer-term process.

John Franzreb - Sidoti & Company, LLC

Okay, fair enough. And on the power side of the business, you've called out some opportunities mostly in Russia and in China. What's it like domestically for you in power gen?

Wayne Foster Robbins

This is Wayne again. The North America power is especially focused on the MRO business. We see an opportunity for upgrades, as well as replacing and some environmental improvements. So -- and that's where we're focusing our efforts. There is some project business, but it's not -- that's not the main focus for us in North America.

John Franzreb - Sidoti & Company, LLC

Okay. And one last question for Scott, maybe. Scott, when you look at the product portfolio, it's pretty diversified, an awful lot of end markets. You mentioned that M&A activity is something you're going to refocus on. Any markets you find most appealing? And do you think there's any opportunities maybe for consolidation of some of the product lines that you have?

Scott A. Buckhout

So as far as the strategy goes, I like the end markets. I like energy broadly where we play. I like aerospace where we play. I think we'll see better than GDP growth over the long term here with these markets. So I wouldn't anticipate any changes from those broad markets. We do have, I'd say, mixed profitability among the different product lines in CIRCOR, and that's something that we're certainly going to look at. I couldn't tell you exactly where that's going to end up with or its internal cost initiatives or pricing or maybe there's businesses that we perhaps don't want to be in. But we're still looking at that. We're in early days on assessing at this stage.

John Franzreb - Sidoti & Company, LLC

Actually, one more question. You mentioned different ERP systems. Are you actually thinking about putting the firm on one common system?

Scott A. Buckhout

It's an option. We have a tremendous number of ERP systems. We're certainly be reducing the number of ERP systems. But as with anything, there's a return on capital here that we have to watch, and we have to make sure we're spending wisely. So it'll definitely be simpler. It'll definitely be fewer systems. Going to one system, I don't know if the payback for that is going to make sense. But it's certainly where we'd like to look at -- directionally, it's where we'd go.

Operator

Our next question is coming from Nathan Jones of Stifel.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Scott, I know you've only been there a few weeks. So I'm not going to ask you what your kind of long-term margin targets and that kind of thing are. But is there a time frame where you think you might be able to share with us some longer-term margin goals and revenue growth goals for the next 2 or 3 years?

Scott A. Buckhout

I would think by -- around the end of this year, we ought to be able to shed a little bit more clarity and light on what our targets are and what our goals are. So I think in the 6- to 8-month time frame, we should have a better feel for what we think we can do there.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay, fair enough. Question on Energy. There's a mention of destock in the channel. Can you talk about where you think distributors are in terms of that, whether the destocking is finished and whether -- when we might see a pickup in demand just from the absence of destocking?

Scott A. Buckhout

We saw a lot of destocking in Q4 and it continued in Q1. We feel it's relatively stable now going into Q2.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Energy orders down 19% year-over-year. Can you split the decline in orders out between the short-cycle business, the pipeline business and the international business?

Frederic M. Burditt

Well, we don't break it out that clearly, obviously, to you, Nathan. But it's pretty well balanced between the short cycle and the projects business, that decline.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Not in the pipeline business then?

Frederic M. Burditt

No, there's some. I included that in the pipeline piece. So it was broad, but...

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's fine. In Aerospace, can you talk about what opportunities there are out there for new platform wins or increased content on current platforms, opportunities out there to win new business?

Frederic M. Burditt

Well, as you know, there's no -- this is Fred. There's no big program out there, big new program. I mean, I guess, the NEO, there are some. But there's nothing that, again, like A350 that we're working at today. But we do think that there's opportunities to replace other companies as we've done with the BLACK HAWK. We think there's certainly, in some -- we've gotten some new wins on some of the business jets that are coming in the future. So there's -- I would say there's -- we're working on a lot of smaller programs that should help us with growth, but there's nothing -- there's no major program, as you know.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And on the Military spare side of it, that business has been depressed for a while now. Have we lapped the decline? Or is that business still declining?

Frederic M. Burditt

This is Fred again. I think generally speaking, Nathan, it has declined. We don't have any -- in the spares area, we don't have any major leg to drop it from here.

Operator

Our next question is coming from Joe Radigan of KeyBanc Capital Markets.

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Can you quantify the project shipments in Energy that pushed into Q2 -- from 1Q into Q2?

Frederic M. Burditt

It was in the range of $5 million or $6 million.

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Okay. And then what percentage of your backlog in Energy is shippable in 2013? And as you look at the project mix in that backlog in terms of what's scheduled to ship for the balance of the year, how does that look kind of in comparison to maybe what has been flowing through the last couple of quarters?

Frederic M. Burditt

Well, most of the backlog in the Energy is in the projects business as usual, obviously by definition. We should have quite a strong second quarter, very strong actually, probably maybe the highest shipping quarter based on the project backlog we have for the rest of the year.

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Okay. And then in terms of what you're quoting now is how competitive is the pricing environment? If you -- maybe to frame it up, are the project margins you're seeing today, are they accretive to where segment margins are currently? I know it's a long-cycle business and it takes a while for that to flow through. But what's the quoting activity look like margin-wise today versus kind of what's in the backlog?

Wayne Foster Robbins

This is Wayne. I'd say that the pricing is stable. If you look at, say, what we experienced in last year, which was a significant increase over 2011, and we are managing price very carefully and selectively going after projects that best match our margins.

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Okay. And then maybe just sticking with pricing on the short-cycle side. This might be my last question. Has it gotten more competitive as you've seen volumes come down in that business? I think you've got a 3% to 5% price increase at the end of the first quarter last year. What does pricing look like in that business? And are there any plans in place for any future pricing action this year?

Wayne Foster Robbins

Well, right now we see price still stable. And of course, we're always looking at opportunities to improve that pricing going forward.

Operator

[Operator Instructions] Our next question is coming from Charlie Brady of BMO Capital Markets.

Charles D. Brady - BMO Capital Markets U.S.

I got on the call late. Did you guys say how much commercial aftermarket was down?

Frederic M. Burditt

We didn't. It's not a big part of our Aerospace segment, so it was not a significant material change for us. But we're just talking about the market itself is still depressed.

Charles D. Brady - BMO Capital Markets U.S.

Okay. And Scott, I just want to go back to your kind of your closing comments on your sort of big picture look at CIRCOR. I guess, I was a little surprised by the complexity commentary. CIRCOR in my mind has always been a company that had been embracing lean for a good number of years. And I guess, as you look at that, is that -- are you not seeing that embedded in the company to a great an extent as it should be? And I guess, can you look -- when you talk about new product development, can you give us a sense of -- does that sound like more spending on R&D is going up? And kind of where is R&D today? Where do you see that going? I know it's a little early days for you to maybe get into that. But I'm just trying to get a sense of strategically, as you're moving towards the new product development, that sounds to me like maybe higher cost. If you're trying to reduce complexity by ramping up lean, maybe that incurs more cost. I'm just trying to get a sense of what we can expect kind of going forward until things get a little bit better.

Scott A. Buckhout

Sure, sure. Good question. So as far as the embracing of lean, where you see that very clearly displayed in CIRCOR is in the factories. So I haven't been to all the factories. I've got a lot of places to visit, as you can imagine. But I've been to 4 or 5 already, and you will see a lot of the lean principles either already firmly in place with well-run factories or they're somewhere in the evolution of what you would expect from a lean perspective. The complexity I'm referring to is the structure of CIRCOR. So many P&Ls, 20-plus P&Ls. Many ERP systems, 20-plus ERP systems. So we do have a lean culture, particularly in the factories. But the structure with respect to suppliers and SKUs and business groups is complex. And of course, that drives some of the cost of how we run the business. With respect to R&D, the specific numbers, Fred maybe you can jump in and comment on that. R&D is up particularly in Aerospace, as you would guess. And I would -- yes, you could expect that we're going to spend more in R&D going forward, to answer your question very directly. But Fred, do you want to comment on that?

Frederic M. Burditt

Yes, I can just to elaborate a little bit. R&D is up, Charlie. I mean, in the power group, we have a brand new product line. We redesigned and are producing in India and are shipping around the world and that's beginning to get traction. As Scott said, the aero programs are getting traction. And in the Energy group, they've moved some of their new product development to India in our Center for Excellence there, and they're getting some -- they're working on some new programs also.

Operator

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

Scott A. Buckhout

Thank you for joining us this morning. I've enjoyed speaking with many of you already, and I look forward to meeting many more of you in the coming weeks and months. Thank you.

Operator

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

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