CIRCOR International, Inc. (CIR) Q2 2022 Earnings Call Transcript

Sep. 30, 2022 12:28 PM ETCIRCOR International, Inc. (CIR)
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CIRCOR International, Inc. (NYSE:CIR) Q2 2022 Earnings Conference Call September 30, 2022 9:00 AM ET

Company Participants

Scott Solomon - Senior Vice President, Sharon Merrill Associates, Inc.

Tony Najjar - President and Chief Executive Officer

AJ Sharma - Chief Financial Officer and Senior Vice President of Business Development

Conference Call Participants

Mitchell Moore - KeyBanc Capital Markets

Nathan Jones - Stifel

Piyush Avasthy - Citigroup Inc.

Brett Kearney - Gabelli Funds


Greetings, and welcome to CIRCOR International's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the conference over to Scott Solomon, Senior Vice President of the company's Investor Relations firm, Sharon Merrill Associates. Thank you, sir. You may begin.

Scott Solomon

Thank you, and good morning, everyone. Before we begin, let me remind you that our earnings release and presentation are available on CIRCOR's website at If you'd like to receive copies of these materials, please e-mail and our IR team will provide them for you.

Turning to Slide 2. Today's discussion will contain forward-looking statements that represent the company's views only as of today, September 30, 2022. These expectations are subject to known and unknown risks, uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks. While CIRCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so. You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website.

As referenced in Slide 3, on today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of the non-GAAP measures to the comparable GAAP measures are available in our earnings press release.

Please turn to Slide 4. Joining me on today's call are Tony Najjar, CIRCOR's President and Chief Executive Officer; and AJ Sharma, Chief Financial Officer and Senior Vice President of Business Development. Tony will begin with a strategic overview and the highlights of our second quarter performance. AJ will review the financials and discuss our guidance for full year 2022. Tony will provide our market outlook and then management will be happy to take your questions.

Now, please turn to Slide 5 as I hand the call over to Tony.

Tony Najjar

Thank you, Scott. Good morning, everyone, and thank you for joining us to discuss our second quarter 2022 financial results.

A lot has happened since we last spoke with you in this forum, including the completion of our financial restatement, the Board's initiation of a review of strategic alternatives, the exit from our loss-making Pipeline Engineering business and the appointment of a new executive leadership team.

As President and CEO of CIRCOR, I am committed to ensuring we maintain a culture of value creation across the company. This starts with our most important assets, our people. We are investing in the development and providing a diverse, inclusive and engaged workplace that allows them to leverage their unique backgrounds and experiences. During the past several months, I have had the opportunity to visit 12 of our 14 manufacturing sites in Europe and the U.S. and to interact with our teams at all levels. Additionally, I have had the opportunity to interact with our teams across the globe through virtual all-hands meetings. As you can see from our first half 2022 results, our team remained resilient and executed well in the face of macroeconomic headwinds and a challenging geopolitical environment.

In addition to meeting with our teams, I continue to spend a significant portion of my time engaging with current and potential customers. Over the past several months, I have had the opportunity to meet with over 20 of our top customers. These interactions have only reinforced the value of our products and services and the strength of CIRCOR's brands across our A&D and Industrial businesses.

Before we get into the specifics of and our full year outlook, let me take a few minutes to acquaint you with our company and discuss the progress we are making on our strategic priorities. We supply flow control solutions that support civil service and mission-critical applications in two large and growing segments: Industrial, which in 2021 accounted for about 2/3 of our roughly $759 million in revenue; and A&D, which made up the balance. The CIRCOR family of brands, including Aerodyne Controls, a leading supplier of critical products to the defense market; Allweiler, a market-leading German pump supplier; Warren Pumps, a critical supplier to the U.S. Navy, as well as others shown here on Slide 5 are leaders in their respective markets.

Our Industrial products serve a range of critical applications in various end markets, including commercial marine, power generation, various general industrial markets, including chemical processing, machine tools and automotive and midstream and downstream oil and gas.

Our Aerospace & Defense segment is relied on by commercial and military customers across the globe, and we have strong positions on key platforms in both categories. Our products are used for mission-critical applications on commercial aircraft, submarines, aircraft carriers, fighter jets and various missile programs.

Turning to Slide 6. We are focusing on three strategic priorities to drive growth and profitability across our businesses, margin expansion, organic growth and delevering the balance sheet.

Starting with margin expansion. We are driving actions in four key areas: value-based pricing, simplification, best-cost country manufacturing and factory modernization.

For the past few years, we have successfully used value-based pricing in our A&D segment to drive growth and margin expansion. We are now implementing the same philosophy and 80/20 principles in our Industrial segment with positive results. I'll cover our near-term expectation regarding value-based pricing in just a minute, but we expect to see a significant price/cost benefit in our Industrial segment in 2022.

Looking at simplification. We continue to evaluate our cost structure across the company and identify opportunities to simplify operations while aligning our teams closer to our customers. These initiatives have already resulted in structural cost out in the first half of 2022 of about $12 million on an annualized basis, and we have identified additional opportunities for future implementation.

In addition, we are continuing to drive sourcing activities from best cost countries as well as increasing capacity, our manufacturing sites in Morocco, India and China. Moreover, we are making selective capital investments in our factories, focused on improving productivity and supporting growth, and we expect these investments to generate significant savings when fully implemented.

Moving to organic growth. Our strategy to increase connectivity with our customers is critical to our ability to drive organic growth. Our engineering, product management and sales teams are working closely with current and potential customers to leverage our products and technologies into growing markets like hydrogen, lithium batteries production, medical equipment and space while continuing to drive growth in our core markets.

The key growth engine across our businesses is our aftermarket, which accounts for an increasing share of our revenues and profitability. Our revenues from the aftermarket represent about 40% to 45% for our Industrial segment and about 25% to 30% for our A&D segment. Leveraging our aftermarket position has been one of the key drivers and the solid margin expansion that we have achieved in our A&D business over the past few years. We are leveraging the playbook from A&D along with the 80/20 principles into our industrial segment to drive growth and margin expansion.

Our third strategic priority is delevering the balance sheet. In addition to the continued focus on improving cash flow from operations, we have leveraged selective sale-leaseback opportunities to pay down debt and are continuing to evaluate additional options. AJ will provide more details on the sale-leaseback initiatives and leverage in his prepared remarks.

I also want to touch on our strategic alternatives review, which our Board announced back in March. The process is ongoing, and the Board and management team are committed to pursuing all possible options to maximize shareholder value. We don't intend to comment further on the process unless and until the Board has determined that such disclosure is appropriate or required.

Turning to our second quarter highlights on Slide 7. Our team executed well, navigating ongoing supply chain challenges, the inflationary environment and labor shortages. Organic orders were up 5% for the quarter, and our backlog heading into the second half of the year was a robust $477 million, up 9% from prior year. Our revenues in the quarter were up 2% reported and 8% organically. Adjusted operating margin was up 280 basis points as a result of our margin expansion actions. Additionally, we estimate that global supply chain disruptions delayed approximately $6 million of revenue in the quarter, which translates into about 3 points of organic growth. The demand environment for our products continue to be positive, and we feel good about our business as we move through the second half of the year and into 2023.

Moving to Slide 8, I'll provide some additional color on two growth opportunities where we are leveraging our core technologies and manufacturing capabilities in new and adjacent markets. First is the fast-growing hydrogen market. We introduced two critical products late last year, a balanced isolation of valve and dome regulator for application on hydrogen tube trailers. These products were subjected to rigorous testing for certification to European transport directives. Since we launched these products in late 2021, we have captured over $8 million in orders that we are currently executing. Additionally, we captured another $3 million in hydrogen-related applications that we have been pursuing. We expect to continue to see growth in this developing market as we move into 2023 and beyond.

In medical, we are leveraging our design and manufacturing capabilities to supply critical products used in blood collection devices and cardiac assist equipment to leading medical equipment OEMs. The medical product line has contributed about $24 million of orders year-to-date with potential for further growth.

Before I turn the call over to AJ, I would like to discuss our value-based pricing initiative since it has and we expect that will continue to have a significant and positive effect on our margin expansion priority.

On Slide 9, you can see the effect we expect value pricing to generate in 2022. In A&D, this includes a 100 basis point improvement in price as a percentage of sales from our well-established pricing process, leveraging the aftermarket and price escalations on long-term contracts. In Industrial, this includes an expected 330 basis point improvement as a percentage of sales, leveraging our strong position in the aftermarket and selected pricing actions in the core market.

Now let me turn the call over to AJ to cover the financial results in more detail.

AJ Sharma

Thank you, Tony, and good morning, everyone. It's my pleasure to share 2Q results and discuss expectations for the year.

Let's start with our second quarter financial highlights on Slide 10. Orders were $208 million, up 5% organically. Our customers have continued to reward us with their business as a result of our superior technology, application know-how and strong customer intimacy. All this strength was broad-based. We saw robust growth in Aerospace & Defense markets as well as in Industrial aftermarket and downstream. We were particularly pleased to see continued momentum in Industrial aftermarket. We are laser-focused on leveraging pricing, growing volume and winning share in this highly attractive part of our Industrial platform.

Revenue of $191 million was up 8% organically on broad-based strength across our end markets. Our operations and business teams worked diligently to address supply chain disruptions and labor constraints to deliver high single-digit revenue growth. We experienced supply constraints in logistics and supply of certain commodities such as motors and castings. The supply chain disruptions impacted revenue in the quarter by approximately 3 percentage points and the exit of Pipeline Engineering impacted revenue by another 2 points.

We successfully executed value pricing, exited Pipeline Engineering, maintained cost controls and reduced corporate overhead. These efforts, combined with revenue growth, delivered 50% year-over-year increase in adjusted operating income and our margins expanded by 280 basis points over prior year.

On the bottom line, we delivered $0.32 of adjusted earnings per share for the second quarter, a 60% increase over prior year. Adjusted EBITDA grew by 33% to $22 million. FX headwinds impacted AOI by $1.6 million and EPS by $0.06 in the quarter. Adjusted free cash flow for the quarter was negative $9.1 million. Cash flow was adversely affected by cash draw associated with the Russia project that was impacted by U.S. sanctions, FX headwinds, expenses related to the restatement and selective investments in working capital.

Turning to Slide 11 and our A&D segment results. Starting with orders. We delivered organic orders growth of 32%. Defense orders grew by 37%, driven by our content on Columbia submarine, CVN aircraft carrier and fighter jets. Commercial aerospace grew by 50%, driven by Airbus A220 and Boeing 737 platforms. Organic revenue grew 14%. The growth was broad-based across our business and end markets. Except for a slight decline in our U.S. Navy platform due to ongoing supply chain constraints, all other sites reported revenue growth.

We delivered adjusted operating income growth of 16% and expanded AOI margins by 80 basis points to report 20.2% AOI margin performance in the quarter. We are bullish on continuing AOI growth and margin expansion through the rest of the year.

Moving to our Industrial segment results on Slide 12. Organic orders were down 4% due to approximately 10 points of headwinds from timing of a large Navy order booked in prior year and 3 points of headwind from exiting the Pipeline Engineering business. This was partly offset by organic growth across Industrial end markets, including 25% growth in Industrial aftermarket and 17% growth in downstream. This was the second consecutive quarter of mid-20s growth in our Industrial aftermarket business.

Organic revenue grew 5% from broad-based strength across the platform that more than offset headwinds from supply chain constraints and the exit of the Pipeline Engineering business. Industrial delivered AOI growth of 17% and expanded margins by 110 basis points. The losses from Pipeline Engineering impacted AOI margins by 90 basis points.

Turning to Slide 13. Managing leverage is a top priority. In the second quarter, we kicked off sale leaseback transactions to monetize our real estate portfolio. Sale leasebacks are attractive when cap rates are below our cost of debt, and in some cases, we are able to pass on the cost of lease expense to our customers. In 2Q, we closed $26 million of sales and sale leaseback transactions. In August, we closed another transaction generating $28 million of cash at a cap rate of approximately 5.5%. This compares favorably to our cost of debt that is approaching 9%.

Net leverage and compliance leverage improved sequentially in 2Q. As we look at the rest of the year, we expect net leverage and compliance leverage to improve sequentially and we expect to exit the year at a net leverage of around 5x.

Turning to Slide 14 to discuss our expectations for the full year. We delivered strong performance in the first half, with AOI growth of 52% and AOI margin expansion of 230 basis points. We expect the momentum to continue in the second half. The demand environment is largely stable at this point in time. We are seeing organic growth in Industrial aftermarket, recovery in commercial aerospace and benefiting from our position on defense platforms. We are starting to see decelerating growth in industrial core market and expect downstream to be meaningfully down year-over-year.

We exited 2Q with record backlog and teams across the company are working to navigate supply chain constraints. As a result, we expect organic revenue growth in the range of 6% to 8% for the year. We expect pricing to further improve in the second half based on pricing actions already executed, and we expect inflation, except for energy costs in Europe, to moderate. We have reduced corporate overhead and taken out costs from our downstream business. These actions account for approximately $12 million of cost benefits annualized. We expect around $5 million of carryover benefit in 2023.

Overall, as a result of pricing, improving mix and overhead reduction, and accounting for continuation of supply chain constraints, we expect AOI growth of 36% at the midpoint of our range. Interest expense is expected to be approximately $45 million for the full year, up $12 million compared to prior year. We expect full year adjusted EPS to be in the range of $1.07 to $1.34. FX headwinds are expected to impact AOI by approximately $6 million and adjusted EPS by approximately $0.20.

As a note, our guide does not account for potential risk of unwinding a downstream Russia project booked in prior years in the event sanctions were to tighten further. This would be a noncash charge with estimated exposure of $4 million.

Now, I'll hand the call back to Tony to discuss our market outlook for orders on Slide 15.

Tony Najjar

Thank you, AJ. Starting with Industrial and our general industrial business, we expect 6% to 8% organic growth driven by power generation, midstream oil and gas as well as new business activities in China for lithium batteries manufacturing and pricing activities in the aftermarket. In Commercial Marine, we expect about 10% to 12% organic growth, driven mostly by the aftermarket supported by increased utilization and pricing. Industrial oil and gas, we expect about 25% to 30% decline due to non-repeat of large capital projects that we booked in India last year. However, we do have a strong pipeline of projects that our team is driving in North America, India and the Middle East.

Elsewhere in the segment, we expect about 20% to 25% orders decline due to non-repeat multiyear large defense order for the U.S. Navy. In total, we expect organic orders decline of about 2% to 3% in this segment, with our core industrial orders growing about 4% offset by the decline in downstream oil and gas and the exit from our loss-making Pipeline Engineering business.

Turning to Aerospace & Defense. In our Defense business, we expect 10% to 12% organic growth driven by increased activities in aftermarket, new products for missile fusing devices and space applications and pricing with some offset from the timing of large defense orders. In commercial aerospace, we expect about 13% to 15% organic growth, primarily driven by the market recovery for the single-aisle platforms at Airbus and Boeing and our position on the growth platform, the Airbus A220, as well as the increased activity in the aftermarket supported by pricing and the rebound in air travel.

Elsewhere in the segment, we expect about 15% to 18% organic growth driven by new products for the hydrogen market and increased activity in our medical business. In total, we expect organic orders growth of about 16% in the segment.

Turning to Slide 16. In summary, we are very pleased with our results through the first half of 2022. For the full year, we expect organic orders growth in the range of 2% to 4% led by A&D and our core Industrial products, offset by downstream oil and gas. We expect organic revenue growth in the range of 6% to 8%, with contributions from both segments. We expect to continue to leverage our strong aftermarket position in our industrial segment and deploy our value-based pricing and 80/20 principles across the organization, generating margin expansion and staying ahead of inflation despite the challenging macroeconomic climate.

We continue to benefit from the rebound of the commercial aerospace market and look for further momentum in our defense business driven by our positions on key platforms and the strength in the aftermarket. We strive to maximize value creation for our shareholders, pursuing organic revenue and margin growth through new product development, value-based pricing, simplification and cost out actions while at the same time, pursuing the parallel path of a potential strategic transaction. We will continue to focus on what we can control as we navigate the challenging macroeconomic environment and its potential impact on our businesses.

Now, AJ and I would be happy to take your questions. Operator, please open the line for Q&A.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Jeffrey Hammond with KeyBanc.

Mitchell Moore

This is Mitch Moore on for Jeff. I was just wondering if you could give us a bit more granular detail on how the business is trending regionally, particularly in Europe with all the headlines we're seeing coming out of there?

Tony Najjar

Okay. I'll take that on. This is Tony. So overall, in Europe, we are seeing growth, primarily driven by the aftermarket activities, as we mentioned in our commentary. For the first three quarters, and I'll include Q3 here in my commentary, we expect that region to be about 10% to 12% up overall as far as the orders activity.

AJ Sharma

Yes, a little bit more color there. One of our key priorities this year has been leveraging pricing and growing aftermarket and a lot of that resides in our European businesses. And we're seeing pretty good sequential growth, year-over-year growth from an order intake in our European businesses.

Mitchell Moore

Great. That's helpful. And then just kind of on the restatement process. How is the restatement process and not having clean financials? Was that holding back the strategic review process at all? And does that kind of being in the rear view, does that allow you to focus a bit more on the strategic review process?

AJ Sharma

Yes, Mitch, that's correct. The finance organization capacity was consumed by the restatement process. As you would expect, we do need the restatements and the financials to be current to engage in meaningful dialogue on the strategic review process. We have said -- the Board has said the company is evaluating all paths to value creation, including exploring sale of holdco or in parts and especially the in-parts, this requires a robust sell-side quality of earnings exercise and that needs to sequence the restatement being completed. So your sort of summary there that the restatement process did put some sort of speed bump in the strategic review process is absolutely correct, and that's behind us now.

Mitchell Moore

Okay. Great. That's helpful. And if I could just sneak one more in. Your outlook for commercial aero seems pretty healthy for the balance of the year, but the supply chain net end market seems not great. Could you just talk about your order patterns as you're seeing and how you expect that recovery to play out over the next couple of years, particularly on the commercial side?

Tony Najjar

So on the commercial aerospace side, yes, we are seeing a strong recovery, driven by the single-aisle platforms. We are on A320, 737, and as mentioned on the A220, which is a growth platform. So the recovery continues. Our discussions with our customers say that they continue to expect to increase rates. However, the risk is, how fast can the supply chain ramp up? We've done our own analysis internally, and we've worked with our suppliers to analyze their capacity to the extent possible. And we don't see any restrictions from our end to be able to support the ramp rates that Boeing and Airbus are talking about. So assuming the whole supply chain can support the growth, we expect to continue to benefit from that.


Our next question comes from the line of Nathan Jones with Stifel.

Nathan Jones

Going back to the Industrial business. I think you just said that the revenue growth in Europe through three quarters is about 10% to 12%, which is -- it's going to be -- that's probably going to be about double what the overall Industrial segment has grown through the first three quarters. So can you talk about the areas around the world that are perhaps not doing as well as Europe? And what your assumption is for Europe moving forward just given all the macro headwinds that, that area is facing?

Tony Najjar

So just to clarify, the 14% is orders growth in the region. Revenues are growing but at a slower pace, and that's mostly impacted by the supply chain restrictions that we discussed, which most of it is coming from that region. About $6 million of supply chain impact, about $4 million is coming from our European businesses.

AJ Sharma

So Nathan, if you look at the first half performance of our Industrial business and you normalize for the onetime large order that we booked last year about $15 million, in adjusted for FX in the first half, the Industrial business, excluding the downstream part, has grown north of 5%. And adjusting for that onetime order, it's about 11% in the first half. The piece that is not doing well from an orders perspective is downstream. Downstream is down 24% in the first half.

Nathan Jones

Maybe you can talk about the outlook for that downstream business. I know it's always pretty lumpy. Are you expecting to see improvement in orders? Or is there -- I mean, downstream business in general is doing pretty well for people.

AJ Sharma

Yes. So specific to downstream, we do expect revenue growth this year. We also expect fairly robust improvement in AOI dollars and margins coming from that business given the effort that we put in, in the first half of this year to take out cost as well as focus that business on the more profitable parts of the market they serve. From an orders perspective, it's going to be down. We expect to be down probably close to 30% year-over-year.

Tony Najjar

About 25%, yes, year-over-year. And we expect that to capitalize looking ahead into 2020.

Nathan Jones

Okay. If I could just switch over to margins in Industrial. You got a slide there that had, I think, 330 basis points of price in it. The loss-making Pipeline Engineering business has been taken out. You got some organic growth and margins are up a little bit, but not really that much. Can you talk about what the headwind does to that margin profile? The CIRCOR was talking about getting back to low to mid-teens industrial margins probably 12 months ago as we came out into the recovery. So just talk about the things that need to be done to kind of hit that target, how much help you need for volume? Are there restructuring actions you can take? Any color you can give us on the outlook for margins there?

Tony Najjar

So the key drivers that we're working are the value pricing and looking into 3Q, which is basically ending in a couple of days, we do expect to see significant improvement in the Industrial margins based on actions that we discussed, which is the pricing and the simplification. And as we look ahead into Q4, we also expect to see continued improvement in their margins getting into the low teens, as you mentioned, Nathan.

So that progress is being made. Simplification is definitely part of the discussion but value pricing is the biggest driver there. And in our Industrial business, we expect pricing to be about $24 million in total. And there's some offset from inflation, which we're dealing with. But in total, the pricing is contributing significantly to the margin expansion. That business continued to do that in the second half of the year.

Nathan Jones

Just to clarify, you're not talking about low teens in 3Q '22? You're talking about that over a longer period of time.

Tony Najjar

No. Yes, what I mentioned is looking at 3Q and 4Q of this year.

Nathan Jones

Okay. Thank you for clarification. I'll pass it on.

AJ Sharma

Yes. And just to kind of give you a bit more granularity and feeling out the downstream piece from our Industrial business. So if you normalize for the Pipeline Engineering exit, in the first half of this year the industrial margins excluding downstream is about 9.3 percentage points, and we expect that to sequentially improve through the balance of the year.


Our next question comes from the line of Andy Kaplowitz with Citi.

Piyush Avasthy

This is Piyush on behalf of Andy. Just following on the last comment, can you talk about how much pricing is embedded in your revenue growth for this quarter across both segments? And you mentioned pricing offsetting inflation. Can you comment on your ability to hold on to these pricing if inflation were to ebb over time?

Tony Najjar

Okay. So in first half of the year, our net price is about $11 million coming from both the Aerospace & Defense and the Industrial segment. And that's primarily from what we have been doing in aftermarket, driving value pricing initiatives there. In the second half of the year, we expect that to accelerate further. In the second half, we expect to have about $19 million of net price. Again, this accounts for impact from inflation, including some of the energy cost impacts as well. And yes, we do expect the pricing to hold, and we believe the value pricing initiatives that we're driving are sustainable as we look ahead into next year and beyond.

Piyush Avasthy

Got it -- go ahead, AJ.

AJ Sharma

I just want to give a little bit more color there. So one of the areas where we're finding a lot of success with our value pricing initiatives in the aftermarket part of our business, and that's also the part of the business where we're seeing, I would say, above expectations growth. So that's why we feel very confident we'll be able to -- and these prices will stick. And as the inflation environment moderates in the second half, that's an incremental pickup on the net pricing drop-through from the pricing efforts already executed. There will be some softness tied to increasing utility costs in our European businesses, but net-net, the second half is going to show a much more robust net pricing drop-through than the first half.

Piyush Avasthy

Got it. And you guys mentioned -- you talked about supply chain, labor shortages, inflation impacting 2Q. Now it's almost the end of 3Q. So would you say that these issues have improved, still the same, worsened for your company? And you talked about, I think, 3% impact from supply chain in this quarter. Is that more like a timing issue with that kind of you can recover back in 3Q? Is that a fair assessment?

Tony Najjar

So on the labor side, we are seeing improvements, and the labor challenges have been mostly in our sites in New York and California. We are starting to see improvements there. The supply chain challenges, mostly in Europe, and it's driven by suppliers' longer lead times as well as some logistics impact we expect to continue at about the same level as based on what we're seeing in Q3, again, which is about to end here in a couple of days. And we've made the same assumptions looking ahead for the rest of the year.

Piyush Avasthy

Got it. And I know it's a little early to talk about '23, but given the market volatility and the concerns of a macro slowdown, how should we be thinking about the positioning of both your businesses and the ability to take additional structural cost actions if things get worse, especially across your Industrial segment?

Tony Najjar

Well, I'll address the markets. On the A&D side, based on the work that we've done, we expect about high single-digit growth on the order side. And that's driven again by the continued recovery in the commercial aerospace, many new product developments that we're working on for missile -- various missile programs and then the aftermarket strength that we see as well as expected orders on the naval programs that we're on, like the Virginia Class submarine the Columbia and the programs in the UK.

On the industrial side, we expect low single-digit growth. Now obviously, there's a lot of uncertainty in the industrial markets. But with the value pricing activities we're driving the aftermarket position that we have, we believe, assuming relatively stable conditions that we will be able to achieve low single-digit orders growth in that space.

AJ Sharma

And coming to your -- the cost question, we are incredibly focused in simplifying the company and taking structural costs out of the businesses. So if you look at the cost structure of CIRCOR, there's about $30 million of corporate costs and there's about $15 million of cost sitting at the group HQ layer, about $45 million in total. This year, we've impacted about $8 million of that cost annualized already. And there are incremental actions underway, which would make that number bigger as we exit this year.

So the first layer of cost takeout between the group and the quarter is well underway. In the first half, we've also taken structural cost out of our downstream business. We also see opportunity to go deeper in the downstream business if the market conditions worsen. And we also see opportunity to simplify the cost structure in our pumps businesses. It has a lot of actions and activities that are happening on that front as well.


[Operator Instructions] Our next question comes from the line of Brett Kearney with Gabelli.

Brett Kearney

I had a question on the Defense side. Given all the changes we've seen externally in the environment this year, anything you guys have on your radar opportunities that could open up for CIRCOR, I guess, given your position on submarines with the AUKUS Alliance or your positions on missile programs with the situation in Europe, what you're seeing opportunity wise from the ships and some of the dynamics taking place recently?

Tony Najjar

So Brett, on the missile side, we are definitely seeing increased activities, almost double in some of the programs that we're on primarily with the switch devices that we provide for these programs. On the naval side, there is various activities going on as far as new programs. These are typically longer term. But we do have a lot of quoting activities in Europe that we are working actively on some of the surface ship programs. And then continue to support, obviously, the naval or the submarine programs.

Overall, on the naval side, you mentioned the AUKUS program. We are well positioned on both the Virginia Class and Astute Class out of the UK. We have more content on the Virginia Class. So we're biased to that program being selected. But either way, we have strong positions on both programs. And obviously, we have very strong positions on the Columbia and the Dreadnought. But our expectation, it will be some version of the Virginia and/or the Astute, and we feel good about the potential from that program. But as you know, that's a little bit longer term.

Brett Kearney

Yes. Terrific. And then last one, probably also on the Aerospace & Defense side, it sounds like a lot going on new product development-wise. Can you provide some more color on what you're bringing to market in the space arena and then some of these new products and kind of adjacent areas, medical and kind of new energy and hydrogen areas?

Tony Najjar

So on the Defense side, with the missile programs, we are actively working on the hypersonic programs. And we've already developed products. I can't give a lot more details because we don't have that approval from our customers. But we are involved with three or four different hypersonic missile programs in the U.S., and we expect to start to see some orders -- some level of orders and revenue next year.

We've already recognized revenue and orders on the development side. We expect to start to see some of the limited rate initial production activities in 2023. In space, we have won various programs for cryogenic-type valves that our team in Long Island is developing. And we -- there's a lot of activities, both on the Commercial and Defense side of the space activities that we're involved in.

And then hydrogen, I mentioned the two key products that we developed, which have already generated orders around $8 million that we're executing. We expect to continue to see growth in that area. We're also taking those products, which were developed in our UK business and basically trying to leverage them in the North America market with our business in California. So we do have some activities in related markets in our business in California. And that team has taken those products and driving them in the North American market.


Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Najjar for closing comments.

Tony Najjar

Thank you. As we head into the weekend, our thoughts and prayers are with not only our colleagues in the Tampa area, but the millions of people across Florida whose lives have been significantly affected by the hurricane. Thank you for joining us this morning. We look forward to speaking with you on our Q3 earnings call.


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

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