CIRCOR's (CIR) CEO Scott Buckhout on Q1 2016 Results - Earnings Call Transcript

| About: Circor International, (CIR)

CIRCOR International, Inc. (NYSE:CIR)

Q1 2016 Earnings Conference Call

April 29, 2016 09:00 ET

Executives

Jamie Bernard - Investor Relations, Sharon Merrill

Scott Buckhout - President and Chief Executive Officer

Rajeev Bhalla - Chief Financial Officer

Analysts

Nathan Jones - Stifel

Kevin Maczka - BB&T Capital Markets

Charlie Brady - SunTrust Robinson Humphrey

Jeff Hammond - KeyBanc Capital Markets

Ryan Cassil - Seaport Global

Operator

Good day, ladies and gentlemen. Welcome to CIRCOR International First Quarter 2016 Financial Results Conference Call. Today’s call will be recorded. [Operator Instructions] I will now turn the call over to Ms. Jamie Bernard from Sharon Merrill for opening remarks and introduction. Please go ahead.

Jamie Bernard

Thank you and good morning everyone. On the call today is Scott Buckhout, CIRCOR’s President and CEO and Rajeev Bhalla, the company’s Chief Financial Officer. The slides we will be referring to today are available on CIRCOR’s website at www.circor.com on the Webcast and 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 10-Q and other SEC filings. The company’s filings are available on its website at circor.com. Actual results could differ materially from those anticipated or implied by today’s remarks. Any forward-looking statements only represent the company’s views as of today, April 29, 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 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 will now turn the call over to Mr. Buckhout. Please turn to Slide 3.

Scott Buckhout

Thank you, Jamie and good morning everyone. CIRCOR delivered solid first quarter financial results with revenue of $151 million and adjusted earnings per share of $0.52. Despite significant headwinds in our energy market, we maintained strong margin performance and delivered year-over-year sales growth in our engineered valve and control valve businesses. As expected, we continue to see a decline in our North American short-cycle distributed valves business due to ongoing market deterioration.

Aerospace & Defense improved its bottom line results expanding margins 130 basis points over last year. Aerospace & Defense sales were flat year-over-year as higher sales from our fluid controls business were offset by lower sales from our Defense program. Our simplification in operational excellence initiatives remain on track. Last year, we announced plans to close our manufacturing operation in Brazil as well as our California machining facility. We stopped production in Brazil in March, which removes a high cost negative margin business from the CIRCOR footprint. Our California facility closure is progressing well and we expect to complete the project in July likely ahead of our original schedule. Combined, these actions will deliver annualized savings of approximately $7 million.

In response to market conditions in our North American upstream oil and gas business and the excess manufacturing capacity it created in China and Oklahoma City, we suspended our manufacturing operations in China and reduced the workforce accordingly. While our Oklahoma City facility has been downsized as well, it can comfortably support our anticipated distributed valve demand. We intend to continue to source from our established Chinese supply base. This action should deliver annualized savings of approximately $2 million. Working capital and cash flow continue to be a priority for us. We reduced working capital in the quarter, which contributed to free cash flow of $4 million, up $22 million over last year. After Rajeev discusses our Q1 financial results, I will provide more context of our expectations with a review of our end market.

Now, I will turn the call over to Rajeev.

Rajeev Bhalla

Thanks, Scott. Let’s start with energy on Slide 4. Energy sales of $113 million decreased 12% from the prior year. As Scott mentioned earlier, we delivered strong year-over-year sales growth in our engineered valves and control valves businesses, but that was more than offset by the year-over-year decline in our North American short-cycle distributed valves business as well as a modest decline in the upstream portion of our instrumentation and sampling business. Distributor valves sales decreased more than 50% from the prior year. However, sequentially, the decline was less than 10%. Declines in rig count and well completions continue to adversely impact our sales. As you may know, rig count was down 40% in the first quarter from year end. Energy’s adjusted operating margin decreased 120 basis points to 12.6%, primarily as a result of lower volume and pricing pressure in our distributed valves business. Productivity actions, restructuring and sourcing saving have helped mitigate the bottom line impact.

For Aerospace & Defense, please turn to Slide 5. Aerospace & Defense sales of $38 million were flat year-over-year as higher sales in our fluid controls and actuation businesses were offset by lower sales from our Defense program. Aerospace & Defense adjusted operating margin of 9.3% increased 130 basis points year-over-year due in large part to savings from prior period restructuring, recent pricing action and ongoing operational improvement. Sequentially, Aerospace & Defense margins declined slightly due to lower volume as well as the mix of our products sold in the quarter. We expect full year adjusted operating margin to be approximately 11%, up about 200 basis points from 2015.

Turn to Slide 6 for selected P&L items. We recorded special and restructuring charges of $5.8 million in total. These charges relate primarily to restructuring and facility exit costs of $4.2 million and the non-cash acquisition-related amortization expense of $1.9 million. Our adjusted tax rate for the first quarter was 23%, lower than we expected given the distribution of sales and income between the U.S. and international type. We expect our second quarter tax rate to be back in the range of 28% to 29%. As Scott mentioned, adjusted earnings per diluted share were $0.52 above the outlook we provided earlier this year.

Turning to our cash flow and debt position on Slide 7, during the first quarter, we generated approximately $4 million in free cash flow. I should note that the improved working capital performance in the quarter contributed over $10 million of cash. However, this was offset by the outflow for certain items, such as the cash cost of restructuring as well as expenditures that typically fall into the first quarter, such as customer rebates, annual incentive compensation and insurance premiums.

This brings us to our guidance. Please turn to Slide 8. Overall, we expect the sales trend to be consistent with our experience in the first quarter with the exception of Aerospace & Defense as well as distributed valves, which will be slightly lower. We do expect continuing pricing pressure in most of our energy businesses. As a result, we expect revenue in the range of $135 million to $145 million and adjusted EPS in the range of $0.38 to $0.48 per share. For Q2, we anticipate special charges to be in the range of $4 million to $4.5 million or $0.19 to $0.22 per share.

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 & Defense. First, Energy. Energy segment orders were lower overall in the first quarter versus prior year primarily due to continued weakness in our upstream North American short-cycle business. The large projects business order flow was good, but lower than prior year. Keep in mind, this business is inherently lumpy and we recorded a number of large orders in the first quarter last year.

In our short-cycle business distributed valves business, we saw a small sequential decline in order run rate from Q4 2015 through Q1. Going into Q2, we expect a moderate decline in order intake again due to lower rig count and ongoing destocking at our large distributors. We believe that we are at or very close to the bottom of this market. We are seeing very few upstream project opportunities and volumes largely coming from replacement valves and MRO. The one bright spot in the market is strong activity in the midstream segment.

While we have not historically been a strong player in this part of the market, we are seeing increasing quoting activity for pipeline and some success winning orders against competitors with operational challenges in the market. We continue to see strong market headwinds in our long-cycle engineered valves business. Oil majors are reducing CapEx, resulting in project delays and aggressive competition with increasing pricing pressure. We see very little activity in Europe, Asia and North America. The only region with strong activity is the Middle East. Recent order intake has been good and we have a strong pipeline of outstanding quotes and opportunities for projects in the region. You might remember from last quarter’s call, second half of the year was dependent on order intake in Q1 and Q2. The orders we have booked in the first quarter, combined with our current backlog and order pipeline give us confidence in the back half of this year. As a result, we expect the full year to be flat to prior year with slight moderation in the back half revenue relative to the first half of the year.

In our instrumentation and sampling business, we saw a dip in the order run rate around the middle of last year and that rate had held fairly steady through the first quarter of this year. The project business is generally down, however, the book and bill business, especially for replacement product is holding up well. We expect this business to continue at its current order rate. In our control valves business, the power market continues to show good growth, especially in Asia and North America where we see higher quoting activity. You may recall that with the Schroedahl acquisition, a key growth opportunity was to leverage our North American channel for Schroedahl product. We are seeing early signs of success with a very strong pipeline of quoted project. On the other hand, industrial control valve markets are essentially flat with some pockets of growth.

Let me wrap up my energy market summary with a comment on pricing. We are experiencing price pressure in all markets, especially in engineered and distributed valves. We continue to exercise strict pricing discipline in our bidding process. We are seeing the competition price projects 10 percentage points to 15 percentage points below our best project. With the business we do win, we are able to partially offset the pricing pressure with productivity, cost reduction action and the benefit from lower commodity costs.

Aerospace & Defense bookings were down in the quarter, primarily due to the timing of certain defense programs. The commercial market remained strong with high levels of OEM backlogs, although the general aviation market is showing some weakness. While orders in the Aerospace & Defense business can be lumpy, we do expect that increase in bookings this quarter, especially for our major defense platform. This increase in orders will lead to revenue growth in the back half of this year.

Let me sum up by leaving you with three thoughts. First, looking at our market, we believe that we are at or near the bottom for both distributed valves and instrumentation and sampling, where we see relatively stable order run rate. We expect revenue growth as we proceed through the year in control valves and Aerospace & Defense. With the benefit of bookings from the Middle East, we expect our engineered valves business to be essentially flat with the prior year. Second, we are taking advantage of volumes being down to drive simplification at a much faster pace than we initially anticipated. We are controlling what we can control and aggressively driving our margin expansion initiatives across the company. And finally, despite the difficult market environment, we continue to carefully invest for long-term growth, with our focus on new products and geographic expansion. We have an active acquisition pipeline and we are currently looking at opportunities in both the energy and the Aerospace & Defense market. So in summary, we are focused on what we can control. We are investing in growth, exercising discipline with capital deployment and driving for better margins and free cash flow.

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 everyone.

Scott Buckhout

Good morning Nathan.

Rajeev Bhalla

Good morning Nathan.

Nathan Jones

I know you mentioned, Scott in your prepared remarks, rig count in the U.S. down another 40% sequentially, what was that business down in the quarter?

Scott Buckhout

So sequentially, on revenue we were down mid single-digits from the previous quarter. Year-over-year, Rajeev do you have the number year-over-year in terms of revenue?

Rajeev Bhalla

Yes. The year-over-year was close to 50%. But sequentially, we are down mid to high single-digits Nathan, on the revenue front. We were down slightly on the low single-digits on the orders front sequentially.

Nathan Jones

I think sequentially is a much more constructive way to look at it at this point. So that implies then that probably certainly sequentially the rest of the business was actually up, I doubt that your markets were up, which to me says that you re taking share there, can you talk about if you agree with that and then how you are going about doing that?

Rajeev Bhalla

Well, let me add then Scott can jump in. Sequentially, we were down relative to the distributed valves on the short-cycle side of the business here. We did see some lift with respect to our instrumentation and sampling business, a little better than frankly what we had anticipated coming into the first quarter relative to how we guided. And then, we were actually down a notch with respect to engineered valves, a large project long-cycle business sequentially there as well. We had a very good order as you recall in the fourth quarter, so.

Nathan Jones

And then in terms of taking share or not taking share?

Scott Buckhout

So I think the two areas, where we are doing pretty well Nathan, is the engineered valves, I think we are clearly taking share in that market. The macro on CapEx spend and spend overall would suggest the market is down somewhere between 20% and 30% in upstream oil and gas and that’s the big place that we are stalling right now. And we intend to be flat this year in engineered valves. So we are having good success in the Middle East broadly speaking. And that’s really what’s helping to drive our top line in engineered valves. The other area where things are going pretty well for us is in control valves. It’s largely driven by power, power generation and it’s both the U.S. market as well as Asia broadly, but more specifically China.

Rajeev Bhalla

Just to add a comment to that as well, Scott talked about the engineered valves and control valves, on the distributed valves side, relative to market share, one thing I would point out, we have been able to benefit from some of our competition operational challenges as they have gone through certain areas there. So that helped us, whether it’s picking up a distributor here and there or helping service a customer that may be having difficulties with their existing supplier.

Nathan Jones

Okay, that’s helpful. Balance sheet, strong, I know Scott you were talking about the M&A pipeline there, can you give us any color on, I guess how mature that pipeline is and what we should be expecting maybe for the remainder of the year?

Scott Buckhout

Yes. It’s really hard to answer that, Nathan. We have several opportunities that could realistically happen in this year. But as you know, it’s very hard to predict it, either it’s binary, either we get it done or we don’t and there is lot of factors that play into that. We have had one recently that didn’t work and we were pretty mature with this. And at the end of the day, came down on to a disagreement on price. So I am reluctant to tell you what to expect, but to say that we are pretty active. We were finding there, there are a lot of opportunities on both the Aerospace side as well as the Energy side. And we are being disciplined with price, which can be a little bit difficult in the oil and gas market right now.

Nathan Jones

Okay. I will jump back in the queue.

Rajeev Bhalla

Yes. Nathan, while you jump back in the queue, let me just touch on the valuation which I assume would be a question that’s going to come up if not now, a little later. The sellers here are looking for less absolute value than what we were seeing back in 2014. But frankly, the multiples are still quite elevated. So the sense is that we are seeing here that the buyers are really – the sellers are expecting the buyers to take the risk of the timing of a recovery. So just be prepared in mind as well.

Nathan Jones

Yes, that’s fair. Okay. Thank you.

Scott Buckhout

Thank you.

Operator

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

Kevin Maczka

Thanks. Good morning.

Scott Buckhout

Good morning Kevin. How are you?

Rajeev Bhalla

Good morning.

Kevin Maczka

Great. So just to be clear on some of the terminology here, which sometimes gets confused, when you are talking about engineered valves, you are talking about the projects, correct?

Scott Buckhout

Correct. Typically, large valves projects long cycle.

Kevin Maczka

Got it. And so it still sounds to me like kind of mix messages on the project front, you said the orders were good, there were higher volumes this quarter, but you still got the big CapEx challenges in the industry and pricing is under pressure, so can you just revisit that and what the outlook is for this year on how you get the flat this year in the large project side?

Scott Buckhout

So, let me clear up that confusion there Kevin. When we do talk about the projects, there are different types of projects here. So, when we talk about engineered valves and the large projects internationally, that’s the discussion that Scott had in the prepared remarks relative to year-over-year being especially flat. So, we have been able to fill the order book here plus the backlog, plus what we have in the pipeline to help shore up the back half. There are also projects that come about with respect to what is overall a short-cycle business like distributed valves, where there maybe an order – a stocking order or a large order for many valves that take a little longer and that could be considered a project as well. Including the instrumentation and sampling business, where we could have projects that we deliver on as well. So, the latter – those two is where we are not seeing a lot of activity. That makes sense?

Kevin Maczka

Okay. Yes. Okay. So, engineered valves is a subset of projects overall, but that engineered valve piece that you expect to be flat. Can you roughly scale that for us, what the size of that component of your Energy segment?

Scott Buckhout

It’s – yes. So, if you think about – let me put it in the context of what’s upstream. So overall all of CIRCOR about one-third is upstream, of that two-thirds is engineered valves. Does that help you?

Kevin Maczka

Yes, okay. And then can I just jump over with a question on aero, so I think I heard you say you expect the bookings to be better in the second quarter margin coming in around 11 or so for the year. With moving parts on production rates from Boeing and others, are you still expecting the year to show some top line growth for that segment as well?

Rajeev Bhalla

Yes, we are. So, it’s a little bit difficult sometimes, where we sit in the supply chain to predict exactly quarter-by-quarter how the orders are going to play out and how the revenue is going to play out. But we are confident that we are going to have strong orders intake here in the second quarter and we will see revenue growth in the back half that should lead to growth for the full year in Aerospace & Defense.

Scott Buckhout

And let me give you a couple of drivers to that, Kevin. So, the point about bookings in the second quarter is an important one. We are pretty confident of bringing in some of the Defense programs and finding those up and that’s going to help with the growth profile in the second half of this year.

Rajeev Bhalla

And essentially what you saw in the first quarter was some relatively large orders that we expected on these Defense programs were deferred until the second quarter. So, we are a lot more confident now in the second quarter that they are going to come in and we will see that turn into revenue in the back half.

Kevin Maczka

Okay. But there has been nothing in terms of slowing production forecast at Boeing or Airbus or anywhere else that has changed that outlook for some of the new programs that you are on?

Scott Buckhout

No, it has not. In fact, what we are seeing is opportunities for second source on some of those platforms that we are bidding on. So, you are right that there can be a lot of discussion relative to production rates with the large airframes here, but with respect to our business, you find that commercial market quite strong.

Kevin Maczka

Yes. Okay, great. Thank you.

Scott Buckhout

You’re welcome.

Operator

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

Charlie Brady

Hey, thanks. Good morning, guys.

Scott Buckhout

Good morning, Charlie.

Charlie Brady

I was going to go back to on the Energy margins expectation for the year. And so I understand it. I think previously you thought about flat margins ‘16 over ‘15? Is that still your expectation?

Scott Buckhout

Sure, it is. Clearly, when we talked about at the end of the year if you recall, we talked about the fact that top line is going to matter here, but we are clearly focused on that objective, Charlie, that to drive flat margin for the full year year-over-year.

Rajeev Bhalla

So, you are probably asking the question because we came in a little over 12% here in the first quarter, which implies higher than 14% later in the year. So, there is several things going on here. Essentially, that you are going to see a lot of the cost actions that we took middle to late last year. And earlier this year, we are going to start cutting in and you will see an expansion in margin as a result of that. There is still some unknowns on the top line. We see further deterioration than we expect from here. It’s going to be hard for us to get to the 14%, but we still have 14% as a target for the year.

Charlie Brady

What is your expectation on a full year basis for? And broadly speaking on the distributed valves business, do you expect any second half recovery? Do you see it continued to kind of be down straight to the year, because rig counts continue to drop every week?

Rajeev Bhalla

Yes. We watch that as well. So, we saw a little bit of deterioration sequentially coming into Q1. We are expecting a little bit more deterioration as we go into Q2. But these numbers are much lower in terms of deterioration from where we were last year. So, we think we are very close to the bottom, if not at the bottom. So, if you were to look at our forecast for our distributed valve business for the remainder of the year, you see it bouncing around the numbers we are at right now. So, in the 5% down from where we were this year is about what we are expecting for the rest of the year.

Charlie Brady

Okay. And on Brazil, so that – is it shutdown now and I noticed the cost – the closure costs in Q1 were $2.8 million, I think the expectation had been about a $1 million for Q1 and $0.5 million for the rest of the year. So, can you just speak to what the extra $1.8 million was and are you still looking for $0.5 million expense for the rest of the year?

Scott Buckhout

Sure, Charlie. Let me take that. Yes, so it is shutdown. It’s closed. There are no manufacturing operations, no manufacturing personnel there. We are left with a couple of folks to wind up the rest of the business there. With respect to the quarter, we did have an incremental charge of about $1.9 million associated with the inventory that when we walked into the year, I thought we could tell and we had to write that down to salvage value. So, that’s really the big delta between what we talked about earlier on and today. And with respect to the rest of the year, that assumption is still current.

Charlie Brady

Okay. And then one more from me, I will get back in the queue here. Just on the Aerospace orders, I think you have talked a lot about this, down 6% in the quarter versus flat expectation. It sounds like is that all attributable to those Defense orders that you thought we are going to hit in Q1 or was there any other weakness in Aerospace orders that just stuffed and materialized like you thought it was going to?

Scott Buckhout

That’s a big piece of it. We did have a little bit with respect to some industrial related type of orders out of our business in the Europe that was a little softer. We do sell some valves on to skids that go into some of the industrial applications. So, that was a little softer, but really the Defense program was the bigger driver.

Charlie Brady

Can you give us what the Defense programs you expect to book in the quarter? Can tell us what the platforms those were on?

Scott Buckhout

Sure, happy to do so. There is three big ones. The first one is the SM3 Missile with Honeywell. The second one is the Joint Strike Fighter and I will give some color on that. We had anticipated signing up the long – the low rate initial production lot number 9 at the end of 2015 that actually shifted into 2016. And the long-range initial production, the LRIP 10 that we expected to sign up here in 2016 has shifted into 2017. And so overall, it’s falling into this quarter here. So, the Joint Strike Fighter is a nice big one and we love that program. And the third one is the multi-machine Maritime aircraft. We have quite a bit of content on that as well. And both the JSF and the MMA, our customer is Harris. And so those are that the three big ones that we expect to sign up here in the quarter.

Charlie Brady

Great, thank you.

Scott Buckhout

No problem.

Operator

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Jeff Hammond

Hey, guys. Good morning.

Scott Buckhout

Hi, Jeff.

Rajeev Bhalla

Good morning, Jeff.

Jeff Hammond

I just wanted to go back to the whole commentary around price discounting in market share and kind of how you are winning in the marketplace relative to your competitors kind of discounting kind of what it sounds like is well below where you guys are pricing?

Rajeev Bhalla

So, why are we winning? So, we are – so it is competitive. We are exercising a lot of discipline on price. When we lose, it is almost always because we run out of room on the margin that we are willing to give up. We have been pretty good about offsetting and planning for offsets with lower commodity prices and other productivity initiatives associated with these projects. So, the margin deterioration that you see now, we don’t expect to be incremental going forward for the rest of the year. We are expecting if we look at the margins on our backlog right now with the order that we have won, they are more or less in line with the margins we delivered in Q1. So, there wasn’t deterioration in Q1 that we aren’t able to fully offset the pressure on price that we are seeing, but it’s not – there is not a lot of drama here. The margins are still pretty good.

Jeff Hammond

Okay. And then you mentioned, some of your competitors having some operational issues, which is kind of enabling you to win, do you see those – is that business sticky, do you see those – are you hearing that those operational issues are continuing, how does that play out going forward?

Scott Buckhout

So that’s mostly where we are benefiting from our competitors issues right now as in North America. As you are well aware one of our big competitors is in the process of being acquired and integrated. And so we are benefiting from that. There are some operational issues that they are dealing with right now. I would guess a lot of the team there is distracted with the integration as well. We are not exactly sure, but we do know that they are having delivery issues and lead time issues. And we have been able to take some customers and some projects that we might not have otherwise won, if we weren’t able to deliver quickly.

Rajeev Bhalla

Just to add to that. I think once you sign up a distributor, it does get a bit stickier. So I think clearly, obviously, distributors can change who they buy from as often as they want. But it is – there is an element of switching costs, an effort there. So there is an element of stickiness to that as well, Jeff.

Jeff Hammond

Okay, great. And then just finally, you mentioned de-stocking in the distributed valve business, as you talk to distributors, where do you think you add in that process in terms of that de-stocking starting to abate?

Scott Buckhout

Yes. We are eagerly waiting for the day that this is going to stop like everyone else. What I can tell you is that, you really have to break our distributors into two buckets. The largest distributors that [indiscernible] have many different sites around the country. Those distributors continue to de-stock. The smaller single site or maybe a few sties, the regional distributors, they are for the most part at the bottom. We think we are getting demand from them that is more or less in line with the demand that they see. So it’s really driven by our larger distributors right now. I hope we are in the bottom, we have been asking about that, but we are not seeing that at all with the large distributors. They are all certainly de-stocking. They are still expecting us to hold inventory on their behalf and have very short lead times.

Jeff Hammond

Okay. Thanks guys.

Scott Buckhout

By the way, Jeff, welcome aboard. I appreciate having you.

Jeff Hammond

Thanks a lot.

Operator

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Jones

Hi guys.

Rajeev Bhalla

Hi Nathan.

Scott Buckhout

Welcome back.

Nathan Jones

I want if we could just talk a bit more about Schroedahl, I know you guys have been pretty bullish on that and suddenly discovering more top line synergies than maybe you had expected when you bought it, so just some more color on how that’s going, what the upside is there?

Rajeev Bhalla

So yes, I am glad you asked. So things overall are going very well with the integration. So we are 1 year in, we have done a lot on the operational side to improve their operations to improve their working capital performance, their delivery, so we feel pretty good about all of that. We have also spent a lot of time on growth angle as well as what the business with this kind of margins the real way to turn this into home run acquisition is to drive the growth. We have spent a lot of time on both sides, so on the Schroedahl commercial team as well as the CIRCOR commercial team and cross-training and making sure that we are representing the full breadth of the product line that we have control valves including Schroedahl on both sides. So Schroedahl has been helping us sell Leslie product in China. They had a better presence there than we did. And we are having a good success, but early success in North America. So one of the opportunities we had with the acquisition was to bring Schroedahl into North America where they essentially had no presence. And we have a very large pipeline of quoted projects in – for Schroedahl in North America. In fact, North America has more open quotes than any other region for Schroedahl right now. So we are not at a point, where we are seeing that turn into revenue yet, but we feel like we were seeing early signs of momentum here and we will hope to see the revenue piece of that in the back half.

Nathan Jones

So whatever Schroedahl does in the back half in the North America is all incremental, because it’s coming off zero?

Rajeev Bhalla

Well, it’s coming off very close to zero. It was small. There was a little bit, but it’s very close to zero, that’s true.

Nathan Jones

Okay. And then, just on the China facility for the distributed valves, is that closed permanently or is that sitting there waiting for volume to come back one day or how you are approaching that?

Rajeev Bhalla

So right now the manufacturing piece of our China business is shutdown. We still have a procurement team that is managing the supply base there. So they still receive material there. They still check it for quality and then shipping on from there. So we still have some logistics supporting in China. We could spin China back up. We are evaluating China and its role in the CIRCOR footprint right now is probably the best way to say it.

Nathan Jones

Okay, that’s fair. Alright, thank you.

Scott Buckhout

Thanks Nathan.

Operator

Thank you. Our next question comes from the line of Ryan Cassil with Seaport Global. Please proceed with your question.

Ryan Cassil

Hi, guys. Good morning.

Scott Buckhout

Good morning Ryan.

Ryan Cassil

Yes. Just like to touch on the Energy side, you talked about midstream is being one of the areas that’s good for you, could you just update us on how big that business is for you guys now?

Scott Buckhout

Sure, Ryan. If you recall when we talk about the overall revenue pie for CIRCOR the mid down – the midstream, downstream at power is probably about – between 20% and 25% of the total revenue. And then, within that power is still small at this stage, but it’s really more biased towards the downstream. So you could probably break that in half if you make it down.

Ryan Cassil

Okay, great. And then it sounds like you guys have said a couple of times, but it feels like we are at the bottom here or close to it for spending in the upstream, but it seems like you are still expecting de-stocking, perhaps as guys start to think about restocking, do you think pricing pressure gets worse in that environment or how do you think about prices as the volume start to come back?

Rajeev Bhalla

I would – we are seeing pricing pressure now as we mentioned in distributed valves and it’s really wasn’t so intense last year. So that’s relatively recent development here while we are floating around what we believe is the bottom of the market. I would speculate that when the stocking orders start to come and the market starts to come back that we will see ongoing pricing pressure. I don’t know that there will be anymore intense than what we are seeing right now. The ASCII is very big right now for the orders that we do get right now. But I think when those large stocking orders start to come out we are going to see a lot of pressure.

Scott Buckhout

Just to add to that Ryan, because of that’s the way we look at it, it’s imperative for us to take the structural cost out of the business and so that’s why you see us spending a lot of time and effort doing just that. So we are not going to sit here and anticipate that an increase in stocking orders gives us price leverage. We want to take the structural costs out and be ready for that and drive good margins as well.

Ryan Cassil

Okay, great. Thanks guys.

Scott Buckhout

Thanks Ryan.

Operator

Thank you. Thank you, ladies and gentlemen. That marks the end of our questions. And this concludes our conference call. Thank you for joining us today. You may now disconnect your lines.

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