CIRCOR International's (CIR) CEO Scott Buckhout on Q4 2015 Results - Earnings Call Transcript

| About: Circor International, (CIR)

Start Time: 09:00

End Time: 09:45

CIRCOR International, Inc. (NYSE:CIR)

Q4 2015 Earnings Conference Call

February 19, 2016, 09:00 AM ET

Executives

Scott A. Buckhout - President and CEO

Rajeev Bhalla - EVP and CFO

David C. Calusdian - EVP and Partner, Sharon Merrill

Analysts

Nathan Jones - Stifel Nicolaus

Shane Rourke - KeyBanc Capital Markets

Kevin Maczka - BB&T Capital Markets

John Franzreb - Sidoti & Company

Ryan Cassil - Seaport Global Securities

Jim Foung - Gabelli & Company

Charley Brady - SunTrust Robinson Humphrey

Operator

Good day, ladies and gentlemen. Welcome to CIRCOR International's Fourth Quarter 2015 Financial Results Conference Call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. [Operator Instructions].

I will now turn the call over to David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

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 referencing today are available on CIRCOR's Web site 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, 10-Q and other SEC filings. The company's filings are available on its Web site 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 19, 2016. While CIRCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so.

On today's call, management will often refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS and free cash flow. These non-GAAP metrics exclude any pre-tax 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 Web site.

I'll now turn the call over to Mr. Buckhout. Please turn to Slide 3.

Scott A. Buckhout

Thank you, David, and good morning, everyone. CIRCOR concluded 2015 with solid fourth quarter performance as we demonstrated continued progress on our margin expansion and simplification strategies. We delivered revenue of $165 million and adjusted earnings per share of $0.63 consistent with our guidance.

We delivered solid year-over-year organic sales growth in our large projects business as well as our control valves business. This growth was more than offset by the continued decline in our short-cycle distributed valves business as well as softness in the upstream portion of our instrumentation and sampling business.

Aerospace & Defense sales were down year-over-year, primarily due to a difficult comparison with prior year when we completed a large UK Navy program. In the fourth quarter, we saw an increase in orders for fluid control products out of our California business primarily on military platforms. We improved our free cash flow to $28 million driven by better working capital performance. Working capital and cash flow continue to be a top priority for us.

Our restructuring and simplification actions delivered the expected $12 million of savings during 2015. This contributed to year-over-year consolidated margin expansion of 50 basis points to 10.2% in the fourth quarter. Our energy team has done an excellent job of aligning our cost structure to the lower energy market, ultimately delivering 13.4% margins in the quarter.

In Aerospace & Defense, our margin expansion initiatives led to double-digit margins of 10.4% in the fourth quarter, up 560 basis points year-over-year. Our efforts to simplify CIRCOR, which began in 2013, are progressing well. As a result of the current economic climate, we’ve been accelerating our simplification initiatives and the rationalization of our operational footprint.

Let me give you an update on the major restructuring actions we announced last year. Production at our manufacturing operation in Brazil has essentially ceased and we’re in the process of winding down the business. This closure permanently removes a high cost negative margin business from the CIRCOR footprint and puts us another step closer to achieving our long-term margin targets.

In July 2015, we announced the closure of one of our two California manufacturing facilities as an important part of our efforts to improve Aerospace & Defense margins. The plan is on track and we expect to exit this facility by the end of the third quarter.

I’d like to provide you with an update on our progress against the targets we set at our Investor Day conference back in September 2014. At the end of 2015, we’ve reduced the number of manufacturing facilities from 24 to 18. The Brazil and California closures will put us at 16 by the end of the third quarter.

We’ve reduced the number of suppliers by 34% to 3,300. We’ve increased the level of sourcing spend on long-term contracts with our suppliers from 8% to over 30%. We’ve also decreased the number of P&Ls from 22 to 16 and reduced the number of ERP systems from 24 to 18.

In addition, we’ve maintained a strong focus on growth. We continue to carefully invest in sales and marketing, new product development and engineering while we improve our operations. Our fourth quarter customer on-time delivery was 90% compared with 73% in 2014. So, overall, we delivered strong results in a difficult market while we significantly improved our operations.

After Rajeev discusses our Q4 financial results, I’ll discuss our outlook for 2016 with a review of our end markets. Now, I’ll turn the call over to Rajeev.

Rajeev Bhalla

Thanks, Scott. As a reminder, we’ve excluded the 2014 divestitures in our year-over-year comparisons for both segments. Let’s start with energy on Slide 4. Energy sales of $124.4 million decreased 24% from the prior year. We delivered strong organic sales growth in our engineered valves business as well as the control valves business, especially into the power generation market. But that was more than offset by the continued and significant decline in our short-cycle distributed valves business.

Short-cycle distributed valves sales declined 65% from the prior year and over 20% sequentially as North America rig count and well completions continue to decline. We also saw year-over-year softness in the upstream portion of our instrumentation and sampling business.

Our restructuring and cost-cutting initiatives helped to mitigate the impact of margins from lower volumes. We achieved an operating margin of 13.4%, a 120 basis point year-over-year decrease. Our ability to deliver double-digit margins in the face of a 24% revenue decline highlights the strong actions taken to mitigate the volume-driven margin erosion.

For Aerospace & Defense, please turn to Slide 5. Aerospace & Defense sales of $39.8 million decreased by 6% organically, in part due to a difficult comparison with 2014 when we completed a large UK Navy program. The decline was also due to push-outs of deliveries for certain large military programs, most notably the F-35.

Aerospace & Defense adjusted operating margin of 10.4% increased 560 basis points year-over-year and 130 basis points sequentially achieving our goal of exiting the year with double-digit margins. This was primarily driven by ongoing operational improvements and the benefit of exiting the structural landing gear product lines.

Turn to Slide 6 for selected P&L items. We recorded Q4 special and restructuring charges of $4.5 million. This primarily consisted of $2.2 million of acquisition-related amortization expense and $2.1 million related to the exit of manufacturing operations in Brazil. With the end of production in Brazil, the remaining shutdown costs are expected to be about $1 million in the first quarter and $500,000 for the rest of the year.

Our tax rate for the fourth quarter was 25.6%, much higher than the fourth quarter of last year. You may recall that we recorded a benefit of $0.21 per share in the fourth quarter of 2014 when we utilized our foreign tax credits resulting in a much lower tax rate. For the first quarter of 2016, we expect our tax rate to be in the range of 28% to 29%. Adjusted earnings per diluted share were $0.63, in line with our guidance and lower than the prior year given the impact on our bottom line from the decline in volume.

Turning to our cash flow and debt position on Slide 7. During the fourth quarter, we generated $28.4 million in free cash flow, which brings us to $16.6 million for the full year 2015. The improved cash flow is a result of better working capital management and we expect this trend to continue in 2016. In Q4, we also completed our $75 million share repurchase program.

This brings us to our guidance, please turn to Slide 8. We expect revenue to be in the range of $135 million to $145 million based on the backlog in our large projects business, growth in our control valves business and continued decline in our short-cycle distributed valves business of approximately 60% year-over-year, and slight revenues in our instrumentation and sampling as well as Aerospace & Defense businesses.

We expect adjusted EPS in the range of $0.38 to $0.48 per share reflecting the benefits from cost reductions, restructuring actions and productivity. For Q1, we anticipate special charges to be in the range of $2.5 million to $3 million or $0.10 to $0.15 per share.

With that, let me turn it back over to Scott.

Scott A. Buckhout

Thank you, Rajeev. Let’s start with an overview of current market trends for energy and Aerospace & Defense; first, energy. Energy segment orders were lower overall in the fourth quarter, primarily driven by weakness in our upstream North American short-cycle business where market dynamics have not changed and demand is down significantly year-over-year.

Rig count continues to decline with total U.S. rig count at about 540 or 60% below last year and 35% lower than the end of Q3. Distributed valve orders in Q4 were down approximately 65% versus last year. Distributors continue to reduce inventory or in some cases hold inventory at very low levels while expecting us to carry the inventory instead.

We’ve adapted our operations to this new reality and we believe we are gaining share in this market. We recently signed two new distributors in the U.S. displacing the competition. In addition, we’re quoting a number of North American pipeline projects, a relatively new market for us.

Over the last year, our Milan and Oklahoma City operations have been accepted onto the approved manufacturers’ list for eight pipeline companies. This quotation activity has picked up within this segment, especially for our fully welded ball valves used in natural gas pipeline.

Our long-cycle engineered valves business saw an increase in orders year-over-year and sequentially, largely driven by strength in the Middle East. We’re seeing good activity in the U.S. and Canada for LNG, elsewhere in the market we’re seeing increasing market headwinds as we enter 2016.

We see very little activity in Asia, Europe and Latin America. We expect modest growth in the first half based on our backlog with the second half of the year to be determined by current order intake.

Overall, we’re quoting more projects but the average value of the projects is lower and the sales cycle is longer. Pricing pressure continues to be strong but this is partially mitigated by lower cost for raw materials that we buy.

In our instrumentation and sampling business, we’re seeing decent quoting activity in downstream oil and gas and in LNG. There’s also good activity in the Middle East. Most of the business is coming from ongoing MRO and safety upgrades as opposed to large capital projects.

Order intake seems to have bottomed out in the middle of last year but has remained relatively stable since then. We expect orders in this business to be flat to slightly down in 2016 with some potential upside driven by a number of large projects in the pipeline.

In our control valves business, we’re seeing a healthy pipeline of power projects and good quotation activity in Asia and North America. In addition, the Schroedahl acquisition is opening up new opportunities for sales growth of Schroedahl products and legacy CIRCOR products as we expected.

Aerospace & Defense bookings were slightly lower than prior year. As we enter 2016, we expect to see growth from most of the commercial OEM platforms, especially the A350 program and the expansion of our MRO business. Overall, we expect Aerospace & Defense orders to be about flat in Q1 with order growth increasing to low-single digits as the year unfolds.

Going forward, we’re focused on supporting higher OEM production rates, driving new product development for both commercial and military platforms and growing our MRO business.

Let me sum up by leaving you with three important points. First, we’re reaping the benefits of our margin expansion initiatives across CIRCOR. We’ve been taking advantage of low volumes in our energy business to drive simplification at a much faster pace than we initially anticipated. We’ll continue to be aggressive with cost takeout at CIRCOR. We’re in the planning phase on a number of structural initiatives that we expect to announce later this year.

Second, we continue to invest in growth, geographic expansions, sales and marketing and new products. For example, we’re investing in the Middle East where we’re expanding our presence to be closer to our customers. We’re investing in new products for power generation in LNG as well as certain Aerospace & Defense markets. And we’re taking advantage of our competitors’ instability to hire their best sales leaders and engineers.

Third, we have an active M&A pipeline and we’re currently exploring a number of proprietary opportunities for our energy group. We’re still in the early phases of building a pipeline on the Aerospace & Defense side.

So in summary, we’re focused on what we control. We’re effectively managing our business through the market downturn in energy while we build the foundation for long-term value creation. We’re investing in growth, expanding margins, generating strong free cash flow and being disciplined with capital deployments.

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

Question-and-Answer Session

Operator

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

Nathan Jones

Good morning, guys.

Scott A. Buckhout

Good morning, Nathan.

Rajeev Bhalla

Good morning, Nathan.

Nathan Jones

I’m going to start on Aerospace & Defense for a change because nobody wants to talk about oil and gas anymore. You have obviously some more visibility into what demand is on that side of the business than you do, I guess, especially on the distributed valve side of the business in energy. You’re talking about orders flat in the first quarter, increasing to low-single digits in the second quarter and as the year progresses, you’ve got a facility closure to finish later on this year. You’ve got to the double-digit margin levels that you were talking about last year by the end of 2015. How do you progress from there to that mid-teen level that you’ve been targeting that I think you laid out on the Analyst Day in 2014?

Scott A. Buckhout

Okay. So I’ll start and Rajeev, you can jump in.

Rajeev Bhalla

Sure.

Scott A. Buckhout

So, there’s still a lot of opportunity in our Aerospace & Defense business. If you were to segment and look at it by business unit, you’d see some very profitable businesses and you’d see some businesses that continue to struggle. The struggling businesses are getting a lot of attention right now, so we’re continuing to work on, I’d say, two paths here. One is the ongoing structural problems we have with cost, so you referenced the factory closure that we’re in the middle of doing right now. There will probably be more structural cost takeout in Aerospace & Defense over time. The second piece is we have some unprofitable programs that we’re still dealing with. So it comes down to renegotiating prices and/or exiting business if we have to. So it’s really digging into the portfolio and addressing the portfolio. So, overall, we’re still confident that this is a mid-teens business and that we can get there. We have a path that we feel pretty confident with, it’s just a matter of time and execution.

Rajeev Bhalla

Let me just add to that, Nathan. So, Scott talked about the operation side and the unprofitable program’s piece. The demand on the top line is also going to help us get those margins up both in the commercial and the MRO side as we push hard on capturing more of that MRO base that’s frankly our installed base. So it’s the top line operations and the exit of some unprofitable programs.

Nathan Jones

So if I can just talk about the unprofitable programs, I know this is something you’ve got out of before. Are these things that have long life spans? Are these things that will go away sometime in the near term by themselves? What kind of recourse do you have on those kind of contracts? How do you get out of them if you need to?

Scott A. Buckhout

Broadly speaking, there’s two types of businesses that we’re in, in Aerospace & Defense. We have build-to-spec, which is products that we design; we own the design and we’re the only ones that can manufacture it. And then there is build-to-print product that we have. And as a general rule, the build-to-print is a lot lower margin than the design-to-spec. And so if you look at what we’ve been doing over the last few years, we’ve been shifting the mix of this business more towards design-to-spec and away from build-to-print. And so we expect to continue doing that. So if it came down to exiting, we’re usually talking about a small build-to-print program that’s either generating losses or very low margin. In most cases, we can reason with the customer and negotiate a better price because it’s usually a situation where they’re not going to get a better price somewhere else. So that’s the exercise that we’re going through and really getting down to the SKU level and SKU profitability and addressing it at that level.

Rajeev Bhalla

And along those lines, as our operational performance improves, Nathan, you can expect that obviously what we can ask for and get from the customer improves and those go hand-in-hand.

Nathan Jones

Yes, that makes sense. Scott, you mentioned, and I know you’re probably not going to give me too much information on this, further restructuring programs that you’re looking at that could come on in the year. Any kind of magnitude that you could frame for us there?

Scott A. Buckhout

Sure. If you go back over the last couple of years, you’d see a bit of a bias towards Aerospace & Defense side and relatively smaller projects, let’s say maybe low hanging fruit might be one way to look at it. As we’re entering 2016 here, we’re spending a lot more time on the energy side where the projects will be significantly bigger, also take longer but have a bigger impact on the company as a whole. So what we’re working on right now is both. We have some projects on the Aerospace side but we’re also spending more time on some larger, we’ll say more impactful projects on the energy side and we’ll be giving a lot more detail on that later this year.

Nathan Jones

All right. Thanks very much guys.

Scott A. Buckhout

Nathan, one more thing on that. Just in general, the strategy here on fewer moving parts, fewer facilities, so consolidation of facilities will continue to be a theme here but also you’ll see us start to shift the center of gravity for our manufacturing away from higher cost locations and leveraging more of the low cost facilities that we have today.

Nathan Jones

Great, that’s helpful. Thank you.

Rajeev Bhalla

Thanks, Nathan.

Operator

Your next question comes from the line of Joe Radigan with KeyBanc. Please proceed with your question.

Shane Rourke

Hi. This is Shane Rourke on for Joe. Good morning.

Scott A. Buckhout

Hi, Shane.

Rajeev Bhalla

Hi, Shane.

Shane Rourke

So when it comes to the large projects, I guess on the last call you had some of that activity kind of moving to the right and I’m curious in 4Q, was that still the case where some of those projects coming to fruition and are you still not seeing any cancellations, just sort of what’s going on there?

Scott A. Buckhout

Yes, on the large projects I think maybe the way to break it into two pieces. So in terms of our backlog, we are not seeing any shifts in the current backlog in terms of delivery dates. We’re not being asked to renegotiate prices in the backlog, so we feel pretty good about the backlog that we’re entering the year with. And that really takes us really through the summer in terms of volume and revenue in that business. In terms of the orders that we’re quoting now, probably the right way to think about this is we are quoting more opportunities than we have historically but they’re smaller. And so if you look at the aggregated quoted revenue that we’re sitting on right now, it’s lower than what you would have seen six months ago. We’re also seeing that the amount of time between when we quote and when a decision is made is getting longer. So we’re definitely seeing a change in the market, as I mentioned earlier in the call, the pricing pressure is still there. But we had a decent quarter in orders in Q4. And how our orders come in here in Q1 and early Q2 will determine how well we do in the second half of the year.

Shane Rourke

Okay, that’s helpful. And then switching gears just a little bit to defense. So the budget is out. I’m kind of curious, the numbers there change your outlook at all just as far as the programs that you’re on specifically.

Rajeev Bhalla

I’ll take that, Shane. The budget is actually favorable overall relative to our programs. There are puts and takes within a particular set of programs but overall we do see the larger programs that we are on getting funded, and that obviously helps us. The question that always comes into play is timing and what’s proposed in a budget versus what actually gets appropriated and then executed on can often vary; but overall, is favorable.

Shane Rourke

All right.

Scott A. Buckhout

We feel pretty good about – certainly as the year unfolds, the organic growth in this business should pick up. The challenge that we have occasionally here in the short term that we’re dealing with is inventory levels at our customer base. So we are on good programs but we’re pretty far down the supply chain here. So there are times when our customers’ inventory will affect our near-term demand. But overall, we feel good about the organic growth in this business both on the military side but also on the commercial side.

Shane Rourke

Okay, that’s great. Thank you for the time.

Rajeev Bhalla

Thanks, Shane.

Operator

Our next question comes from the line of Kevin Maczka with BB&T. Please proceed with your question.

Kevin Maczka

Thanks. Good morning.

Scott A. Buckhout

Good morning, Kevin.

Kevin Maczka

I guess back to energy, so can we start just by looking at the big buckets within your energy segment, the distributed valves, the projects, the instrumentation/sampling and the power gen and as we exited 2015, resized each of those for us and you gave some color on the Q1 outlook. I’d like to just make sure I revisit that and talk about the outlook for those for the year. I think maybe the power gen is growing but the others have some obvious headwinds.

Rajeev Bhalla

Sure, Kevin. I think you’re right. The power is growing. Overall, if you were to just look at a smaller pie in the aggregate, the relative proportion aren’t dramatically different. Obviously, the sizes and the slices are smaller here. In terms of the upstream project as well as short-cycle business being a significant portion, I think it approximates closely to a third still. And then as we get into power, it’s up between 5% and 10% of the total slice. Aerospace, as you know, is a little over 20%. And then you’ve got the rest, the mid, down – midstream, downstream and industrial pieces there. So it’s not a huge shift dramatically as we look at '14 versus '15.

Scott A. Buckhout

I think if you were to break the business into the four pieces that we talk about; engineered valves, distributed valves, control valves and instrumentation and sampling, historically distributed valves was significantly bigger than the other three segments. That’s not the case anymore. So when you look at distributed valves, it’s smaller than the other three segments today. And in general, the other three segments are more or less similar in size.

Kevin Maczka

Okay. And distributed valves I think you said in the first quarter that that one still has a harder comp, you’re down about 60%. That’s about $100 million or so business in '15 and I guess we’re looking at double digit decline there for '16 as well if current levels hold.

Rajeev Bhalla

Correct.

Scott A. Buckhout

Yes, exactly. So where we exited the year – the run rate we exited the year out in 2015 was much lower than how we entered '15. So we saw a decline through the year, so you’re right. The year-over-year comparing Q1 is pretty significant, 60%.

Rajeev Bhalla

Yes, but if you take that run rate, as you suggested Kevin, you would see a significant decline year-over-year in that business.

Kevin Maczka

Yes. Now maybe I missed it but did you give an outlook for the first quarter on the project side as well; and if not, can you do that?

Rajeev Bhalla

We did and we have good firm backlog in the projects business and so we are going to deliver that and that should give us some lift year-over-year.

Scott A. Buckhout

And sequentially --

Rajeev Bhalla

And sequentially, yes.

Kevin Maczka

All right. So the project side up year-over-year sequentially and sequentially in the first quarter, but then after that we start facing some declines and some of this pricing pressure starts to roll through eventually.

Rajeev Bhalla

Yes, we will anticipate some pricing pressure there. The top line is going to be driven by what we book in the near term here and that’s a key focus for us is getting those orders in, to help sure-up the back half.

Kevin Maczka

Got it. And then just anything you can say and you mentioned the two new distributor wins and quoting some new pipeline projects that are newer to you, anything you can say about how needle moving those maybe?

Rajeev Bhalla

Sure. Obviously, in this kind of tough demand environment picking up any new distributors, even if they’re small, that incremental demand is helpful. The midstream pipeline part of the market has not been one that we have historically spent a lot of time and focus on. There is growth there, as you know. A lot of pipelines are being built. And so getting – kind of laying the foundation over this past year of driving into that market is going to really help grow the demand there. So, it may not move the needle today but it clearly will help us definitely this year.

Kevin Maczka

Got it, okay. Thank you.

Scott A. Buckhout

Kevin, I misspoke earlier. I want to just correct something. When we were talking about sequential revenue in engineered valves, it’s actually going to be down from Q4 to Q1 not up. Orders will be up but not revenue. So I said the opposite earlier, just wanted to correct that.

Kevin Maczka

Okay. Thank you.

Operator

Our next question comes from the line of John Franzreb with Sidoti. Please proceed with your question.

John Franzreb

Hi, Scott. It seems to me that you’re kind of hoping that energy orders are stabilizing at the current $95 million to $100 million level. Can you just talk a little bit to that and why you have that kind of confidence, or is that not the case?

Scott A. Buckhout

So, I’m not sure that I would say it that way. Maybe I can break it into pieces so that it’s easier for me to answer your question. In distributed valves, we’re expecting we’ll say a slower decline as we come into the first half of this year. We’re not expecting a meaningful recovery at all in distributed valves this year. And if you look at Q3, Q4 and then Q1 of this year, we’re expecting some level of ongoing deterioration but not nearly as dramatic as what we saw last year. In engineered valves, we’re expecting more or less some moderation, if you will. So if you look year-over-year in our engineered business, we’re expecting to be flat to slightly up in 2016 versus 2015; instrumentation and sampling, flat to slight down. We have an upstream portion of that business that is very likely to be down and it started coming down in the middle of last year and it seems to have flattened out. We’re not expecting a big change. Most of the business we’re getting in upstream out of that business now is MRO, safety upgrades, smaller book and shift type of business. So we’re not counting on large projects in that business in 2016, so we’re expecting flat to slightly down there. And then control valves, we’re expecting growth. Control valves, we sell largely into general industry and power gen and we’re seeing – particularly on the power gen side, we’re seeing pretty good trends, good order activity and good quote activity particularly in Asia and North America.

John Franzreb

Okay. And last quarter, if I remember correctly, you said that the pricing pressure was most acute in the engineered product side and projects that were bid to on distribution, but the real book and turn business wasn’t feeling significant pricing pressure. Is that still the case or no?

Scott A. Buckhout

Yes, that’s still the case.

John Franzreb

Okay. And could you give me a sense of the commodity closed benefit that you achieved in 2015 or baked into your expectations in 2016?

Rajeev Bhalla

Sure. John, this is Rajeev. The commodity side clearly is a tailwind and helps but it is not huge in the sense that what we buy and the types of materials we buy and where we buy from relative to those long-term agreements, but it’s clearly a tailwind that helps mitigate some of the margin pressure we see when the top line declines as much as it does here. So we do see it a little more on some of our castings and forgings as you would expect. And many of those we’ve actually entered into long-term agreements as well. So there is some tailwind but it’s not of a magnitude that I would highlight.

John Franzreb

Okay, fair enough. And I guess one last question. The timing of the realization of incremental restructuring benefits, how is that progressing as the year goes forward?

Rajeev Bhalla

Yes, the 2015 actions that we announced last year excluding the closure of the California facility are more frontend loaded in the first half. And then obviously the California facility closes by the end of the third quarter so that you’ll get a little bit this year and then it will flop into the subsequent year. So you do see a little more year-over-year benefit on those restructuring actions of first half. And then with respect to Brazil, as you recall, we did about $5 million of operating losses. When we talked about the closure, we did not anticipate the $1 million of loss I spoke about in the opening remarks for the first quarter, so just keep that in mind. We should still get the full 13 million that we announced in November for 2016.

John Franzreb

Got it. Thanks, Rajeev.

Rajeev Bhalla

Maybe a little different but we’ll get the full amount.

John Franzreb

Great, that’s helpful. Thank you.

Scott A. Buckhout

Thank you.

Operator

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

Ryan Cassil

Hi. Good morning, guys.

Scott A. Buckhout

Good morning, Ryan.

Rajeev Bhalla

Good morning.

Ryan Cassil

Just related to that last question and I know you haven’t given the incremental restructuring actions you’re talking about, but based on when you give those, are those going to be more of a '16 benefit or more of a 2017 benefit, based on when you can implement those actions?

Rajeev Bhalla

They would probably be bias to 2017. We hope to get some benefit into '16, but if it is – the big structural type of actions will probably fall more into the '17 forward timeframe.

Ryan Cassil

Okay. And then just going back to the bookings, particularly on the project side, if you guys were able to kind of sustain this bookings run rate on the project business through the first half, what is that – what would growth look like in the second half in the project side?

Rajeev Bhalla

If we were to sustain what we saw in Q4, Ryan, or are you suggesting what we think we should get in Q1?

Ryan Cassil

Yes, in Q4.

Rajeev Bhalla

If we got the Q4 run rate for the rest of the year, we’d be flattish.

Ryan Cassil

Okay, sounds good. And just looking at the – last one from me, looking at the decremental margins, kind of mid-teens last year in the energy business. It seems like they are getting a little bit stronger in Q1. How should we think about the decrementals as we move through the year and as you guys apply some of these cost actions? Should they be improving I guess if you could give a little color on the cadence? Thanks.

Rajeev Bhalla

Yes, so 13.4% energy margins I think you were referring to just energy in Q4, pretty strong relative to the top line as we noted. As we look at 2016 here, the goal is obviously to keep driving some margin improvement here but the top line is going to matter. Because at the end of the day, the decrementals are running close to about – between 33% to 35%. So you’d have to do absent the top line, it’s really not sustainable from a cost reduction standpoint. But with that said, Scott outlined kind of the various sectors that we’re in and the puts and takes there where we are seeing some growth and where we are seeing some pressure. So a key here is to keep driving those margins.

Ryan Cassil

Okay. I think in prior calls or in conversations, you guys had expected to keep margins in energy flat to slightly higher in '16. In the current environment, do you think that’s still a possibility?

Rajeev Bhalla

At this point it is.

Ryan Cassil

Okay, all right. Thanks, guys.

Scott A. Buckhout

Thanks.

Operator

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

Jim Foung

Hi. Good morning, Scott and Rajeev.

Scott A. Buckhout

Good morning, Jim.

Rajeev Bhalla

Good morning, Jim.

Jim Foung

I was pretty impressed with the corporate expense as a percent of sales, like 2.5%. Is that kind of a real structure change here that we can see the expense at this level going forward?

Rajeev Bhalla

Yes, so a couple of points here, so I appreciate the comments there, Jim. As you look at the fourth quarter, we actually were able to get a little bit of favorability relating to stock compensation and some other aspects that we adjusted for in the fourth quarter. So as you look ahead, our run rate is probably a little higher than what you saw in the fourth quarter but it is also an area that we focus on for cost reduction and cost control. And so you’re seeing the benefit of cost reduction and cost control combined with the fact that we had a little bit of favorability. I wouldn’t expect what you saw in the fourth quarter to be what you would see each of the subsequent 2016 quarters.

Jim Foung

Okay, but it won’t be margin high because you’re really kind of simplifying your organization from what Scott said earlier about all those metrics. And so could see just a kind of a – inflation plus growth going into 2016 more?

Rajeev Bhalla

That’s probably a fair assumption, Jim.

Scott A. Buckhout

Yes, I think that’s right.

Jim Foung

And then I guess there’s a lot of talk about Russia and Iran coming together with some Navy pricing agreement or production agreement on oil. And oil is kind of – prices are starting to firm up. And I was just wondering, if we see oil prices continue to move up from current levels, how quickly would your distributed valve business improve? And how quickly would you see the impact in your bottom line?

Scott A. Buckhout

It’s really hard to know exactly, Jim, but I think that it would happen pretty fast. And the reason I say that is that there’s a lot of wells have been drilled and capped and not completed. And where we really benefit is when they complete the well. The complete the well and connect it to the gathering station. That’s really our sweet spot. That’s where we sell a lot of product. So, all these wells that haven’t been completed or sitting out there waiting to go, once the oil price crosses a certain threshold, obviously these guys are going to move into action pretty quickly and that would benefit us. So what we’ve seen in the past and what we’re seeing in the market now, we would expect that our distributed valves business would come back very quickly.

Rajeev Bhalla

Just remember also we just experienced painful destocking over the last year, year and a half or so, Jim. So the distributors are keeping an awfully low level of inventory and often having us hold it. So if demand comes back and production goes up, I would expect there to be stocking orders that come in and really give us a lot more lift and tailwind as well.

Jim Foung

That’s terrific. So I guess in the aggregate if you look back 12 months, how much business have you kind of lost, so to speak, from the distributed valve group?

Scott A. Buckhout

So if you look at our revenue in 2014 and you compare it to our current run rate, we’re down over 60%.

Rajeev Bhalla

That’s correct.

Jim Foung

Okay. And so that’s a potential that can come back with the restocking and strengthening demand as oil prices firm up?

Scott A. Buckhout

Correct.

Jim Foung

Okay, that’s all I have. Thanks so much and look forward to seeing you guys next week.

Scott A. Buckhout

Thanks, Jim. Yes, looking forward to seeing you too.

Operator

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

Charley Brady

Thanks. Good morning, guys.

Scott A. Buckhout

Good morning, Charley.

Charley Brady

On the Aerospace, your comment about the build-to-spec versus build-to-price in the mix there, that’s interesting. Can you tell us what that mix looks like today and kind of where you think you’re trying to move that to over some period of time, maybe two years, three years?

Scott A. Buckhout

Yes, so we’re – this is an estimate. We really look at it by product line but I’d say in total if you looked at all of Aerospace & Defense, about 70% of it is going to be design-to-spec and about 30% would be built-to-print. And in general, as I mentioned, the build-to-print margins are much lower than the design-to-spec margins. And we’ve been moving that over time, transitioning that over time, so a lot of the business that we’ve talked about, the bigger nuts that we’ve exited over the last couple of years, like the structural landing gear, in general this has all been build-to-print type of business where we don’t own the design. We’re basically a contract manufacturer and the margins, in some cases – they’re always lower but in some cases they have been negative in the past. So the transition, we were probably closer to 50-50, maybe 55-45 two years ago and we’ve been slowly moving that, changing that mix.

Charley Brady

Okay. Thanks. And just on energy, just to clarify and make sure I heard correctly. You say you expect '16 operating margin in energy to be flat with '15, despite a revenue decline and that’s I’m guessing a function of Brazil going away?

Rajeev Bhalla

Yes, in response to that question that Kevin asked, that would be the expectation there, all else being equal relative to the top line. Clearly, if demand drops on the large project business for us or further on the engineered valves and on the distributed valves that can change the equation. But we are driving for at least keeping the margins level.

Scott A. Buckhout

The biggest challenge we have on the margins year-over-year really is distributed valves. So if you look at the decline from last year to this year, the difficult compare from Q1 to Q1, that’s really the issue we have. It’s not so much pricing, it’s really the DV volume coming out of the business that’s giving us a headwind.

Charley Brady

Okay. And just on the – how much of the inventory are your distributors making you carry now versus kind of historically? Can you put some framework around that today to give an order of magnitude? And the second part to that, when we get this pickup in energy at some point in the future here, do you think distributors end up carrying the same level of inventory we had before we entered a downturn? I would guess probably not. And do you have any sense of kind of how much below previous normalized distributor levels they might end up winding – I guess what I’m trying to get to is, you’re down 60% at distributor level. You probably don’t get the full 60% back. How much of that do you think you end up getting back when the market kind of normalizes?

Rajeev Bhalla

It’s a good question and as you suspected, it’s a hard answer given the variables that go into that equation. But I would estimate that we are probably carrying 20% to 30% more inventory relative to what we might have done historically in an up market. And you’re right, if we are down 60%, it’s not all going to bounce back immediately here. But I think that’s a rough order of magnitude that I would estimate at this point, Charley.

Charley Brady

Okay. Thanks, guys.

Operator

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

Scott A. Buckhout

Okay. Thank you for joining us this morning.

Rajeev Bhalla

Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

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