CIRCOR International, Inc. (CIR) CEO Scott Buckhout on Q3 2018 Results - Earnings Call Transcript

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About: CIRCOR International, Inc. (CIR)
by: SA Transcripts

CIRCOR International, Inc. (NYSE:CIR) Q3 2018 Earnings Conference Call November 6, 2018 9:00 AM ET

Executives

David Mullen - VP, Finance, Corporate Controller & Principal Accounting Officer

Scott Buckhout - President, CEO & Director

Rajeev Bhalla - EVP & CFO

Analysts

Andrew Kaplowitz - Citigroup

Jeffrey Hammond - KeyBanc Capital Markets

John Franzreb - Sidoti & Company

Patrick Wu - SunTrust Robinson Humphrey

Adam Farley - Stifel, Nicolaus & Company

Brett Kearney - G. Research

Operator

Good day, ladies and gentlemen, and welcome to CIRCOR International's Third Quarter Fiscal Year 2018 Financial Results Conference Call. Today's call will be recorded. [Operator Instructions]. I'd like to turn the conference over to David Mullen, Senior Vice President of Finance for CIRCOR for opening remarks and introductions. Thank you, you may begin.

David Mullen

Thank you and good morning, everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; and Rajeev Bhalla, the company's Chief Financial Officer. The slides we'll be referring to today are available on CIRCOR's website at www.circor.com on the Webcasts & Presentation section of the Investors link. Please turn to Slide 2. Today's discussion contains forward-looking statements that identify future expectation. These expectations are subject to known and unknown risks, uncertainties and other factors. For a full discussion of these factors, the company advises you to review CIRCOR's Form 10-K, 10-Qs and other SEC filings. The company's fillings are available on its website at www.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 view as of today, November 6, 2018. While CIRCOR may choose to update these forward-looking statements at a later date, the company's specifically disclaims any duty to do so.

On today's call, management will refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS, free cash flow, organic measures and pro forma amounts.

These non-GAAP metrics exclude certain special charges and recoveries. The reconciliation of CIRCOR's non-GAAP measures to the comparable GAAP measures are available on the financial tables of the earnings press release on CIRCOR's website. I'll now turn the call over to Scott. Please turn to Slide 3.

Scott Buckhout

Thank you, Dave, and good morning, everyone. We had a strong third quarter. On a pro forma organic basis, orders grew to $307 million, up 13%, and revenue grew to $298 million, up 10%. Operating margin improved 80 basis points to 8.2%, and adjusted EPS came in at $0.52, 21% higher than Q3 2017. Operating cash flow came in at $24 million, allowing us to reduce debt by $18 million in the quarter.

Before we get into our segment financial performance and market outlook, I'd like to cover some operating and strategic highlights since our last call. Cash flow remains a top priority. In addition to growth and margin expansion, the cash management office is working with the global team across CIRCOR to drive improved cash flow through better working capital from us. We're leveraging the CIRCOR operating system to methodically and sustainable improve inventory, receivables and payable performance across the company. I'm encouraged by the recent results and the culture change we're starting to see.

The Fluid Handling integration remains on track. Our synergy plan is ahead of schedule, we expect to deliver the $23 million run rate cost synergies by the end of year 3, a year earlier than our original timeline. We expect to exceed the synergy commitment by year 4. Overall, we expect the synergy action plan to deliver $4 million to $5 million of savings in 2018.

In October, we announced the closure of our Distributed Valves manufacturing plant in Oklahoma City. Producing is moving to our Monterrey, Mexico facility as well as to our Houston facility for the welded body product line. We'll continue to maintain a sales, customer support and engineering office in Oklahoma City. At current volumes, we expect this action to deliver run rate operating margin improvement of 100 to 150 basis points for the Energy segment. We expect to exit Oklahoma City production and the first half of 2019. We continue to rationalize our portfolio of businesses. In October, we divested 80% of a low-margin non-core business based in the Netherlands for a nominal amount. The business, SES Rosscor, supplies Fluid Handling skids and systems primarily for the oil and gas end market and has approximately $15 million of annual sales. This business does not strategically fit our product portfolio, and is a low growth business that loses money.

We retained a minority interest as well as the intellectual property rights. This will allow us to better manage our two screw pump sales for this channel. The accounting for these transaction will take place in the fourth quarter. We expect any gain or loss to be minimal and be treated as a special charge. Finally, I want to comment on the momentum we're building in new product development. We launched 3 new products in Q3. We expect to launch an additional 6 new products in Q4. Product launches in the second half of 2018 span across all 3 segments. We expect to see a similar pace of new product output through next year.

Now let me turn the call over to over to Rajeev to discuss the third quarter results in more detail before I review our end-market outlook.

Rajeev Bhalla

Thanks, Scott. Let's review the segment results starting with Industrial on Slide 6. The Industrial segment had sales of $119 million, up 4% organically compared with Q3 2017 on a pro forma basis. The North American pump business saw a significant increase in deliveries, including large projects. The North American valve business and the European cost and pump businesses were flat to slightly down compared to a pro forma Q3 2017. Industrial segment operating margin of 12.3% is up 330 basis points year-over-year and up 80 basis points sequentially. We are seeing the benefits of our restructuring and synergy projects, partially offset by lower margins on a few large projects. We recorded a contract loss for a large oil and gas projects that we acquired with the Fluid Handling business. This project impacted industrial margins by 50 basis points in the quarter. For the fourth quarter, we expect similar margin levels sequentially as we'll see the continuing benefit of our restructuring and synergy actions, partially offset by an expected lower margin mix of business. Over the longer term, we expect this business to operate with margins in the mid-teens.

Turning to Slide 7. Energy sales of $121 million increased 15% on a pro forma organic basis. Growth was led by refinery valves, up over 50%. We also saw mid to high single-digit organic growth in Distributed Valves, Instrumentation and Sampling and Engineered Valves. Reliability Services sales were down slightly. Energy segment operating margin of 7.6%, down 60 basis points year-over-year. We continued to experience lower margins in Distributed Valves, as we execute our plan to close our Oklahoma manufacturing facility and ramp up of our Mexico the headwind from higher costs in Oklahoma City are expected to continue into Q4, and begin to improve in 2019 as we transition production and complete delivery of the higher costed inventory.

We expect the Energy segment to deliver mid-teen margins over the longer term, assuming a cyclical rebound for the Engineered Valves business.

Turning to Slide 8. Aerospace & Defense had sales of $58 million, up 11% on a pro forma organic basis compared to Q3 2017. We saw growth in commercial sales, including the impact of our pricing actions as well as an increase in the Defense deliveries. Aerospace & Defense operating margins were a strong 15.1%, up 260 basis points from the prior year and up 290 basis points sequentially. This is driven by our pricing and restructuring actions as well as favorable sales mix in the quarter.

We expect margins to continue to improve in the fourth quarter based on price increases, ongoing restructuring actions and operating efficiencies. Over the longer term, we expect Aerospace & Defense margins to reach high teen.

Turn to Slide 9 for selected P&L items. Our adjusted tax rate for the quarter was 13%, reflecting a year-to-date catch up to the 20% rate we now expect for this year. In addition, we recorded a benefit from a discrete tax item related to the settlement of an international audit matter. The settlement amount was lower than the amount previously accrued, which resulted in a benefit to the Q3 tax rate. The adjusted EPS benefit from the lower tax rate was largely offset by higher onetime compensation-related costs in the quarter. Looking at special items and restructuring charges. We recorded a total pretax charge of $16 million. The largest component of this charge continues to be the noncash acquisition related amortization expense totaling $13.4 million. The remainder relates primarily to severance costs for our restructuring programs.

Net interest expense for the quarter was $14.1 billion, up nearly $12 million

compared with the prior year due to higher debt balances because of the Fluid Handling acquisition as well as higher interest rates.

Turn to our debt position on Slide 10. We generated $24 million of operating cash flow in the quarter, due in part due to improved working capital performance. During the quarter, we spent approximately $5 million in capital expenditures. For the full year, we expect CapEx to be approximately $22 million. During the quarter, we paid down debt by $18 million. Clearly cash flow generation, debt pay down and margin expansion remain our top priorities as we target the net leverage ratio calculated under our credit agreement to be approximately 3xb the end of 2019. As we discussed in the Q2 earnings call, we expect to generate free cash flow in the range of $30 million to $50 million in the second half of 2018.

We are reaffirming that guidance today. Moving to guidance on slide 11. Overall, we expect fourth quarter of 2018 revenue in the range of $295 million to $315 million, and adjusted EPS in the range of $0.53 to $0603 per share.

From a top line perspective, we expect growth in our Energy and Industrial businesses, continuing the momentum from Q3. This guidance range reflects a $5 million impact from the divestiture of SES Rosscor that Scott mentioned earlier. Aerospace should be slightly lower year-over-year, given the difficult comparison with Q4 2017. We recorded a significant onetime retroactive price increase last year.

We expect pro forma year-over-year margin expansion across all groups in Q4 due to the benefits of price, volume and realized synergies.

Regarding special and restructuring charges for the fourth quarter of 2018, we anticipate charges for the following items: acquisition-related amortization expense of $0.54 to $0.56 per share; and restructuring and special charges totaling $0.13 to $0.16 per share, including an estimated loss on the SES Rosscor divestiture. We expect the fourth quarter adjusted tax rate to be approximately 20%.

Before I wrap up, I'd like to give you a quick update on commodity inflation and the impact of tariffs.

To date, we have been able to generate and productivity for direct-material purchases by offsetting commodity inflation with sourcing savings. We expect material productivity trends to continue through the remainder of the year. The main impact of commodity inflation is on our Distributed Valve product line. Regarding tariffs, at this point, the current program in effect has not had a significant impact on the cost of our imports from China. With that, let me turn it back over to Scott.

Scott Buckhout

Thank you, Rajeev. Let me give you an overview of the end markets and the drivers that we believe will give us momentum as we move through the balance of 2018. Please turn to Slide 12. Let's start with Industrial. Q3 was a seasonally low quarter in the Industrial segment. However, both new equipment and aftermarket demand remains healthy. In the third quarter, we saw 2% pro forma organic growth in orders, mainly driven by strength in the valve orders in the U.S. Navy and pump orders in Commercial Marine. This offset the $10 million Industrial project order received in the third quarter of last year. General Industrial and Energy markets within Industrial remain solid with broad-based expectations of continued capital spending.

In Commercial Marine, we continue to see improving activity in the Merchant Marine sector. The implementation of the IMO 2020 regulations is providing incremental orders for scrubber pumps used by large commercial vessels. Offshore supply vessel activity remains very low. Power markets remain soft overall. One bright spot has been stronger-than-expected aftermarket orders in the quarter, driven by our control valve installed base in Europe in nuclear power plants. The increase in U.S. defense spending is driving growth in both our North American pump and valve businesses. For Industrial overall in the fourth quarter, we expect stronger growth sequentially and year-over-year driven by solid order intake across most end markets and regions. We expect decisions on projects that were deferred out of the third quarter as well as significant orders from the U.S. Navy on aircraft carriers applications for our valve business. Pricing remains a focus for the business. Our Q2 price increase, which impacted about half of our Industrial segment revenue, should help lift margins in the second half of the year. For the remainder of the Industrial segment revenue, we continue to evaluate opportunities as long-term contracts and frame agreements come up for renewal.

Now let's shift to our Energy segment. Overall, Energy orders were up 7% on a pro forma organic basis. The North American upstream and midstream markets continue to be strong. International upstream markets are still slow but improving. Global downstream markets remain strong for our products. Our Refinery Valve business had record quarterly orders since we acquired the business. Orders more than doubled compared to last year. With stable oil prices and the impact of the IMO 2020 regulatory change, refiners remain committed to capital spending. We expect this to continue to drive growth for our DeltaValve product line.

Order timing can be difficult to predict, however, given the favorable market conditions and new product development efforts that are underway, the growth outlook for this business remains robust. In Distributed Valves, though the mark-to-market continues to be strong with rig counts, well completions and production remaining at high levels. Orders in Q3 moderated sequentially, especially in the Permian where take-away capacity has become constrained. We expect to see similar order levels sequentially in the fourth quarter.

In Engineered Valves, orders were weak in the third quarter. The Middle East continues to be our most active market. Although quoting activity is up, it has not translated into improved order intake, primarily due to excess capacity in the market and the resulting pricing pressure. Based on current and expected quoting activity, we expect Q4 orders to improve sequentially but to remain relatively low.

For Energy overall, we expect orders to moderate sequentially and compared to prior year on a pro forma basis. Distributed Valves and Instrumentation & Sampling are expected to deliver orders in line with Q3. We expect sequential growth in engineered valves off a low base and we expect refinery valves to be lower sequentially given the record bookings in Q3.

In our Aerospace & Defense segment, we had another solid quarter of orders of $82 million, up 47% year-over-year on a pro forma organic basis and 37% sequentially. The growth was primarily driven by our large defense orders for the Joint Strike Fighter program, Virginia-class submarines Block V program and Commercial and Defense spares. We continue to see broad-based strength across our Commercial and Defense products. In addition, we're leveraging our core technologies and low-cost manufacturing footprint to win new programs. A couple of the most reasonable recent wins includes a brushless DC motor for an existing high volume missile program, and a severe service electromechanical switch assembly for a new missile program. And finally, we continue to opportunistically raise prices across the group and expect to realize about 2.5% net price increase in 2018.

Overall, orders for Q4 expected to dip sequentially due to the timing of large defense orders, but the market outlook remains robust. We're seeing higher build rates for existing programs in commercial Aerospace & Defense as well as growth in the aftermarket and higher pricing. We're well positioned in a strong market.

To summarize, our end markets remain strong and the positive momentum across most of our business continues. We're realizing the benefits from the actions we started in the first half of the year, new product launches, restructuring programs, integration synergies, manufacturing transitions to low-cost facilities and pricing actions. We're optimistic as we look ahead to Q4 and 2019.

We remain committed to driving long-term growth, generating strong free cash flow and delevering the company by reducing debt and expanding margins. As we announced in August, Rajeev will be transitioning out of the CFO role of CIRCOR. I'd like to take a moment to thank Rajeev to his commitment to the company over the last 5 years. He played an important role in getting us where we are today, and we wish them all the best in his future endeavors. Now Rajeev and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Andrew Kaplowitz from Citi.

Andrew Kaplowitz

So Scott, over to you, you guys talked about aerospace and defense orders, they ramped up significantly, sequentially here in the quarter. You mentioned last quarter that you saw opportunities to replace competitors with newer technology and that your MRO initiatives were gaining traction. And this quarter you talked about the strength on major platforms such as JSF. So is increasing orders more market share or is it just these sort of chunky platforms? And how does it translate toward your visibility for higher revenue growth in 2019?

Rajeev Bhalla

Yes, so let me start and then Scott can chime in here. There are -- there is an element of lumpiness here, Andy. We had actually anticipated getting the joint strike fighter 11 order in the fourth quarter, but we were pleased to book it early here in the third quarter. And that is a significant portion of the year-over-year increase relative to the order intake. So we are seeing some of that lumpiness kick in. With respect to the opportunity to replace, we're making traction there. No large contract received at this point, but we do have a number of irons in the fire. And then with respect to the revenue discussion, yes, it will translate into good organic growth as you progress and as these programs ramp up especially as we go into 2019.

Scott Buckhout

I guess I'd -- let me just add to that a little bit. So certainly the lumpiness played a factor in the quarter with a couple of larger orders that we received on the defense side. But the other 2 big factors are just general rate increases on the platform, so the existing platforms that we're already on; and the -- where we are picking up the market shares in the MRO side with the aftermarket. So we have a concerted effort on MRO and aerospace and defense where we've increased capacity, dramatically reduced turnaround times and put a direct sales force in place. And so that piece of the business is growing quite rapidly, much more than the market. So we know we're taking share in that piece of the business.

Andrew Kaplowitz

That helpful, guys. And I wanted to ask you about Distributed Valves. Obviously people are very focused on the Permian. You guys talked about sequential orders being relatively flat in Q4 versus Q3. Is that what you're seeing so far here in Q4? Have you seen -- maybe talk about your visibility in that business, because I guess flat it's relatively good if you can sort of maintain that going forward.

Scott Buckhout

So yes, we In our Distributed Valves business we did see a drop off in order intake starting Q3. So Q3 was lower than Q2 and so far what we're seeing in Q4 is more or less in line with Q3. So it seems that our customers in the Permian all realized around the same time that there was a change here in takeaway capacity and demand and have lowered their expectations in demand on us. So it seems to be holding at about the same rate as we were seeing the last 2 months of Q3 as we go into Q4 here. So we're comfortable that we're going to see orders more less in line with Q4 as what we saw in Q3.

Andrew Kaplowitz

Just one more for me. Cash generation obviously picked up nicely in Q3, as you said it would. Maybe can talk about your new cash management office in terms of the progress it's making on working capital, especially in the inventory. We know your ultimate goal is to get working capital to 20% to 25% of sales. So if you could update us on the progress toward that goal. You did say you still expect to get to 3x levered by the end of next year. Has your confidence level improved here as cash has started to pick up?

Scott Buckhout

Sure. Thank you. So we have a core team that we've named the cash management office here at corporate with director-level of leaders on the team. So we have 1 running the office and we have 1 director for each component of working capital, receivables, payables and inventory. And then we have an extended team of people accountable for driving this component of working capital in each of the business units. As part of that, using the CIRCOR operating system, driving best practices, driving the playbook on how to optimize and minimize the working capital that CIRCOR need to run the business. So we're driving that methodically through the business. The business has now forecast cash flow every week. They're tracking receivables and they're tracking receipts and disbursement every week. And we fundamentally changing the culture around cash at CIRCOR. So I'm pleased with the results that we're seeing -- we saw here in Q3. We feel good about what we've done here going into Q4.

And I think you can expect to see significantly better working capital performance out of CIRCOR as we go into 2019. The second piece to mention around cash management at CIRCOR is -- it's important to note that everybody who gets bonus, everybody who's in the short-term incentive program at CIRCOR has 35% of the bonus directly related to cash flow. So that in combination with the initiatives that we're running in parallel and the increased focus on literally daily receipt and disbursements, we're expecting is going to continue to deliver good results. With respect to hitting our target at the end of 2019, it's important to note that the 3x target is how our banks calculate the leverage, which is a generous calculation. The way many of the analysts would calculate it, that translates into more like 3.7x or 3.8x EBITDA, and we still feel good about hitting 3.7 or 3.8 at the end of 2019.

Rajeev Bhalla

Andy, let just me add there a couple of quick comments on that. With respect to the working capital, you'd asked about that. Keep in mind there are 2 pieces to the puzzle here. One is, we are generating cash from better working capital performance and a reduction in the quarter of inventory to the tune of about $19 million and receivables to the tune of about $9 million, so that's all positive. But it's done in the context of the fact that we are growing the business and so the velocity is just as important with respect to the throughput in the shop inventory. And so we are making sure that we're not constraining the business as we try to grow as well.

Operator

Our next question is from Jeff Hammond from KeyBanc Capital Markets.

Jeffrey Hammond

So just want to hit on this facility closure, and I think you said 100 to 150 basis points of improvement. I just wanted to be clear if that's kind of the structural underlying improvement or, because I know there's been a lot of added costs, et cetera, this year.

Rajeev Bhalla

Yes, it's the -- it's actually a combination of -- it's kind of a holistic view of what we expect to get out of the business, recognizing first and foremost that the biggest benefit we get in the transition is the labor arbitrage and the lower cost with respect to labor. The direct material and how we source continues to be the same there. So it is that piece. And there is also some structural cost reduction with just the closure of the facility, but that is really a smaller portion relative to the aggregate benefit of the transition and the move.

Scott Buckhout

So I think just to jump in, I think a part of your question we have higher than expected cost now and are we guiding relative to the current situation with higher costs or are we relative to -- are we guiding relative to the run rate. And I think the answer to that is relative to the run rate. So we do have higher cost now associated with the transition. We've mentioned the labor issues that we have in Oklahoma City in terms of getting qualified labor and keeping labor and some of the inefficiencies associated with the transition. So that's over and above with you would expect in our normal run rate. So when we talked about the savings in the prepared remarks, that's relative to a run rate and there would be upside versus what you're seeing today because of the extraordinary costs we're feeling.

Jeffrey Hammond

Okay. And then what does the margin look like into 4Q for energy? I mean it looks like it stepped back a little bit in the 3Q, and kind of how to think about that 4Q run rate as a jumping off point into '19?

Rajeev Bhalla

Yes, we do expect to see sequential expansion in margins, driven in large part by what we're going to deliver on the top line to the Refinery Valves business as well as some of the Instrumentation & Sampling businesses as well. What -- we are going to still experience headwinds with respect to engineered valves. We've talked about the fact that we expect a significant improvement relative to the profitability of that. At this stage, we are forecasting to continue to have a loss, albeit smaller than what we saw in Q2, and then the Distributed Valves is going to still experience some of the headwinds that Scott talked about with respect to the transition here. But the aggregate Energy margins sequentially should improve.

Scott Buckhout

Just to clarify, on the EV loss, so we had a loss in Q2, we had a smaller loss in Q3 and we'll have an even a smaller loss in Q4. We were hoping to get to breakeven or slightly profitable in EV in Q4. But based on the current backlog and margins and backlog, we expect to have a small loss in Q4 in EV.

Jeffrey Hammond

Okay, great. And then just you mentioned the divestiture of Rosscor. Can you just talk about as you look across the portfolio, what else you've identified is potential divestiture candidates that might be non-core and a use of -- or source of cash?

Scott Buckhout

So we are -- obviously we can't talk any -- about any specific that we might be looking at for further divestiture, but we're continually looking at options for selling or divesting in nonstrategic assets, especially as a potential tool to accelerate the delevering process here at CIRCOR. So we're not ready to announce anything specific today, but there are opportunities at CIRCOR that we're evaluating and that we are likely to move forward with. But we're just not ready to talk about the details yet.

Rajeev Bhalla

Yes, Jeff, the Rosscor divestiture was important relative to the strategy and the fact that it was a low growth, money losing piece of the business here as well. So it was more pruning and adjusting the portfolio.

Jeffrey Hammond

Okay. Then just last one. Fluid Handling, I think you said $4 million to $5 million of savings and you're going to get the to $23 million by year 3. Can you give us a sense of what the '19 incremental savings would be at this point?

Rajeev Bhalla

Yes, I don't actually have that specific number here, but we do ramp up significantly in '19. And I think we would expect at least double, maybe little bit less than double what the run rate was coming out of -- or what we experienced coming out of 2018.

Scott Buckhout

It should be just under $10 million of incremental savings in 2019. So say around $8 million to $9 million.

Operator

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

John Franzreb

Yes, can you talk a little bit about the Industrial segment? If I heard you correctly, it sounded like the revenue profile and everything was slightly positive, but the op margin, I think you said was going to be sequentially flat despite the absence of 50 basis points of that one-time project. What's going on with the mix there? Why wouldn't you have better margin profile in Q4 versus Q3?

Rajeev Bhalla

Yes, John, this is Rajeev. There is mix piece to the equation here. The product that we had here in the third quarter, there's going to be an expectation of additional dilutive impact in Q4 for a handful of those projects. But the -- there are pieces to the mix here with respect to the North American pumps business versus some of the European pumps businesses as well. But we do see growth out of the valves businesses both in Europe and North America.

Scott Buckhout

I think you should expect sequential margins to be more or less in line on Q3 to Q4 given the mix changes that we've seen. There is a -- as of today, a fairly significant margins difference across the regions in our Industrial group.

John Franzreb

Okay, Scott, that helps. And can you talk a little bit about the Aerospace and Defense business? With the new program wins, can you talk about how that revenue profile kind of plays out? And also seems, Scott, with the new actuary to win in the missile business, you're more positive about what's going on in the missile profile. Can you talk a little bit about Aerospace & Defense and how that looks in the coming 2, 3 quarters?

Rajeev Bhalla

Yes, I'll start and then Scott can jump in here. Recognize that the orders that we're booking like the Joint Strike Fighter LRIP 11, there were a number of, obviously, lots that have being awarded historically here. So you're not going to see a significant increase absent -- an increase in the number of aircraft being built and therefore the amount of product that we have. And we're still at the low rate initial production, so we are seeing that grow. But you should expect kind of mid-single digit type of growth as those programs ramp up year-over-year, John.

John Franzreb

Okay. And a couple other quick questions. Commodity costs across the company, you talked about sourcing has kind of been helping you offset. Has commodity costs been a net negative or is it neutral for the firm in total? And by how much, if you can quantify?

Scott Buckhout

So let me answer that, and it may be a longer answer than you want, but I'll answer your question directly first. It's -- for CIRCOR overall, we generated a net productivity. So the savings have exceeded the inflation for CIRCOR overall. When you look into individual businesses that's not always the case. So we mentioned Distributed Valves was where we've absorbed quite a bit of inflation. So in Distributed Valves we're upside down, so our inflation that we've observed in 2018 is higher than the sourcing savings in Distributed Valves. But if you go up to CIRCOR overall, we've generated fairly significant net productivity for CIRCOR.

Rajeev Bhalla

And usually we try and get anywhere from 100 to 200 basis points. It's probably close to the low end at this stage versus the high end historically.

John Franzreb

Okay. And just a couple quick other points. I know in other quarters, you kind of included some consulting costs and whatnot in this part of continuing ops. Are any of those costs still being absorbed? Because it looks like sequentially corporate expense went up by about $1 million in the quarter. So I was kind of surprised by that. So is there anything we should be cognizant of there?

Rajeev Bhalla

Yes, John, you're absolutely right. Thanks for pointing that out. There's 2 factors here. One is the kind of integration-related costs that we've talked about in prior quarters. The second piece to it is that we are seeing some higher recruiting and compensating-related cost. I think I mentioned that in my prepared remarks. So there's about 100 basis points of headwind year-over-year on our consolidated CIRCOR margins with respect to these types of corporate expenses. So the integration related cost, we do expect a little more here in the fourth quarter. But it will continue to tail down.

Scott Buckhout

Much of -- the vast majority of the consulting and recruiting and compensation related costs are associated with the integration and the new Fluid Handling business in CIRCOR. So we might not officially call it integration, but in essence, it is.

John Franzreb

Got it. And I guess just to clarify on the Oklahoma City move, the 100 to 150 basis point improvement, is that based on the current revenue profile? I just want to make sure I understand that properly.

Rajeev Bhalla

Yes, correct.

Scott Buckhout

Based on the current revenue profile, just to clarify, it's based on the current revenue profile. It's a good question because of the savings are variable cost savings with labor. But it's not based on the current margin profile. Current margin profile is lower than normal because of the excluding our cost would be...

Operator

Our next question is from Charles Brady with SunTrust.

Patrick Wu

This is actually Patrick Wu standing in for Charley. On the call, you mentioned that tariffs thus far have not really have a significant impact on the imports that are from China. Have you guys done the calculation for the potential impact in the step up in early 2019? And can you just maybe talk a little bit more about the absorption with the pricing that you guys implemented back in August?

Rajeev Bhalla

Yes, I'll have Scott talk pricing and I'll talk tariffs. We've done some sensitivity analysis and simulation with respect to what would happen if we were to get on the list with respect to a number of products that we import from China. And at the high end, that would be the tune of $4 million to $5 million of incremental costs at the high end. But we've been fortunate today that what's in place, we're not on that list in terms of what we're buying, which is why the impact is much, much lower. But it could be significantly higher if we end up having the products that we import on the list.

Scott Buckhout

So to answer your question on the pricing we discussed in August was, I believe you're referring to the price increase that we did in our Industrial group on half of the revenue. We are seeing that start to cut in around now as we've burned through inventory and the existing order book and backlog. So we're seeing price increase and should expect to see that flow through in the fourth quarter in our Industrial business. We are still raising prices in a more, we'll say methodical way on the rest of the revenue. As the frame agreements and long-term agreements expire, we go in and we renegotiated those agreements are as well. So that covers the other half of the revenue. So we're working that, and we'll continue to do that probably through around the middle of 2019.

Rajeev Bhalla

The impact in the quarter that gave us some lift of about 100 basis points in Industrial. And in fact all pricing across the enterprise in the quarter about 50 basis points, Patrick.

Patrick Wu

Okay, that's very helpful. And then on your slides you call -- on the Industrial side, you called out weakness -- seasonal weakness in EMEA and Europe. Are you -- is the weakness purely seasonal, or I guess sequential at this point? Or are you seeing some moderation in that region as some companies, I think this quarter have called out?

Scott Buckhout

Well, I think in Europe, what you're seeing is a difficult compare with Q3. So when you look at the raw organic growth numbers for EMEA, we offset -- it's a relatively low number, but we offset, it's a $10 million project order that didn't repeat in Q3 of this year. So going as we look at the orders overall, we're happy with the order intake. It was seasonal when we look at it sequentially and as we look into Q4, we feel good about having sequential growth going into Q4 and very nice year-over-year growth in orders in Q4 for Industrial overall.

Rajeev Bhalla

Yes, just to give you some color around that. The sequential improvement that we expect in orders for Q4 is going to be pretty good and substantial. Part of that is due to the fact that there were a number of decent sized orders where decisions were just deferred out of the third quarter and in fact we've been booking some of those here in the month of October already. So you'll have some lift sequentially from that factor as well.

Operator

[Operator Instructions]. Our next question is from Nathan Jones from Stifel.

Adam Farley

This is Adam Farley on for Nathan. There's been some anecdotal commentary this quarter around some improvement in upstream offshore. I was wondering if you have guys have any type of color on that?

Scott Buckhout

We have not seen a meaningful increase in upstream offshore quoting from our -- the business that would normally be involved in that is our Engineered Valves business in Milan. So we are present and do have existing orders in the North Sea. We got those orders back in Q2, in Q1 and Q2 but as we have gone into Q3 and looking into Q4, we're not seeing that as a meaningful trend that's affecting our business yet.

Rajeev Bhalla

But I think what you're referring to, Adam, is that there has been some discussion and press around the fact that a number of the national companies, oil majors are starting to kind of turn on the CapEx figure, off of obviously a low base here, significantly increase number of projects going to FID, the final investment decision. And so that all bears well, but to Scott's point, there's still a bit of runway here before it translates into an improving outlook for our business.

Scott Buckhout

And typically we're going to be later in the cycle. We wouldn't necessarily see orders yet if the projects are being kicked off now.

Adam Farley

That's helpful. And then just shifting to refinery valves. Orders up nicely, and I guess called out IMO 2020. I was wondering in the Gulf Coast, just the amount of oil, the light sweet crude oil coming out of the Permian, are you guys seeing like any CapEx impacts from that? Just like the change in the type of oil that's going into the Gulf?

Rajeev Bhalla

We're not seeing a significant impact to our business around that. I think what you're referring to is that you take the heavier oils through the delayed coking process and that supply is not blend linked. So but you're right, there is some higher sweeter crude out there as well. I don't know, Scott, if you had anything else to add. But it hasn't impacted our business yet, Adam.

Operator

Our next question is from Brett Kearney from Gabelli & Company.

Brett Kearney

Just wanted to ask, on the Industrial segment, sounds like you expect a sequential improvement in Q4. I guess, even looking further out to the extent have visibility, can you talk at all about some of the products you're tracking, maybe the project funnel? And then kind of runway in terms of more short-cycle business, what you're hearing, seeing from customers at this point?

Scott Buckhout

Sure. I would -- I guess I can answer a simple way is that the main part of the Industrial business where we sell projects is actually oil and gas inside of Industrial. And we are seeing an uptick in projects for that business in North America. And that has been one of the bigger drivers for growth for our North American pump business. The other place where we see projects is in Commercial Marine. We're not seeing -- we talked about the trends in Commercial Marine. We're seeing a slight uptick on the Merchant Marine side. But the rest of the Commercial Marine is not really moving yet. So I think that when you look at this business, the majority is not necessarily driven by projects, it's mostly driven by, what we say smaller orders or short-cycle orders. And trends remain good. One of the metrics that we've tracked with this business globally is PMI. And if you're looking at the manufacturing PMI globally outside of China, it's pointing to expansion around the world. China is the only place where it's relatively flat, and we're certainly seeing the results of that in our order intake around the world in our Industrial business. We want to add anything, Rajeev?

Rajeev Bhalla

Yes. No, I would agree, Scott, the Commercial Marine piece of it, Merchant Marine looks much more positive than the offshore vessels, which again is tied to oil and gas. And to your point, on the PMI, the most recent Eurozone PMI was well above 50, I think it was around 52 or so. It is a little lower than what we've seen in the past, so there is a little bit of reduced rate of growth. But still a healthy number for our business.

Operator

This concludes the question-and-answer session as well as today's teleconference. Thank you for participation. You may disconnect your lines at this time.