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Edited Transcript of CIR earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 CIRCOR International Inc Earnings Call

BURLINGTON Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of CIRCOR International Inc earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chadi Chahine

CIRCOR International, Inc. - Senior VP & CFO

* David F. Mullen

CIRCOR International, Inc. - SVP of Finance

* Scott A. Buckhout

CIRCOR International, Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Brett Kearney

Morgan Group Holding Co. - Research Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to CIRCOR International's Third Quarter Fiscal Year 2019 Financial Results Conference Call. Today's call will be recorded. (Operator Instructions)

I'll now turn the call over to Mr. David Mullen from CIRCOR for opening remarks and introductions. Please go ahead.

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David F. Mullen, CIRCOR International, Inc. - SVP of Finance [2]

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Thank you, and good morning, everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; and Chadi Chahine, the company's Chief Financial Officer. The results presented today are considered preliminary as the company has not completed its review procedures related to reporting discontinued operations and related impairments and associated tax effects. As the company completes its review, material adjustments may arise between today and the date the company files with the Securities and Exchange Commission its quarterly report on Form 10-Q for the quarter ended September 29, 2019. The slides we'll be referring to today are available on CIRCOR's website at www.circor.com on the Webcasts & Presentations section of the Investors link.

Please turn to Slide 2. Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to known and unknown risks, uncertainties and other factors. For a full discussion of these factors, the company advises you to review CIRCOR's Form 10-K, 10-Qs 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 view as of today, November 6, 2019. 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 refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS, free cash flow and organic measures. 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 in 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.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [3]

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Thank you, Dave, and good morning, everyone. In June, we communicated our detailed 18-month plan for delivering significant shareholder value. I'm pleased to report that our Q3 results and our outlook for Q4 are right on track to that plan. We'll talk more about the progress we've made delivering our strategic plan, but first, let me recap our results.

As you may recall, following the diversity of our Engineered Valves business in July and the announcement of our intent to divest our Distributed Valves business in October, we started reporting both businesses as discounted operations.

Including the impact of Distributed Valves in the quarter, consistent with our guidance, we delivered a solid Q3 with $252 million of revenue and $0.48 of adjusted EPS. From continuing operations, excluding divestitures, sales in the quarter were $234 million, up 7% organically. Adjusted EPS was $0.63. Adjusted operating margin was 11%, up 160 basis points versus last year. We delivered $218 million of orders in the quarter, down about 13% organically.

In our Aerospace & Defense segment, we had a solid quarter of orders of $64 million. Orders were down 20% organically due to the timing of large orders last year. Year-to-date, orders are up 22% versus prior year. Year-to-date book-to-bill ratio for this segment is over 1.25.

Industrial segment orders were down 3% organically, primarily due to softness in large projects. Consistent with industrial trends, we saw OEM weakness in Europe, partially offset by modest growth in North America and Asia and strong global growth in aftermarket. Energy continuing operations orders were sold with a book-to-bill ratio of approximately 1. Orders were down 21% organically, mainly driven by a difficult compare in Refinery Valves where a number of large project orders drove an exceptionally strong quarter last year. The order pipeline in Refinery Valves remain strong.

So far in 2019, we've made significant progress on CIRCOR's transformation, and we continue to diversify away from commodity businesses and upstream oil and gas. In February, we completed the sale of Reliability Services for approximately $85 million. In July, we completed the sale of our loss-making upstream oil and gas Engineered Valves business. In August, we completed the sale of our Spence and Nicholson product lines for approximately $85 million. In addition, in October, we announced our intent to sell our upstream oil and gas Distributed Valves business further simplifying the company and allowing management to focus on businesses with better growth and earnings potential. In conjunction with this strategic shift away from upstream oil and gas, the Energy Group's overhead will be rationalized by the end of the year, which is expected to generate annual run rate savings of approximately $4 million.

The Fluid Handling integration remains on track with $7 million of incremental savings expected in 2019 and $23 million of run rate savings expected by the end of 2020.

We continue to invest in innovation and new products to drive growth. Year-to-date through Q3, we've launched 31 new products. We remain on track to launch at least 35 new products this year and we reiterate our forecast of $70 million of new product revenue.

We reduced our debt by nearly $89 million in the third quarter and $148 million so far in 2019. We continue to evaluate the sale of additional noncore assets to simplify the company, strengthen the portfolio and further deleverage the balance sheet.

Overall, we're optimistic about the remainder of the year and 2020. We have initiatives and process to continue to advance our 18-month plan to optimize the company, new product launches are gaining traction, the Fluid Handling integration is on track, our 2019 price increases are dropping through, simplification initiatives are in process and our low-cost manufacturing facilities continue to ramp up. Looking ahead, we remain confident in our ability to enhance growth and margin potential while deleveraging the company.

Now let me turn the call over to Chadi to discuss the third quarter results in more detail before I review the outlook for our end markets.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [4]

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Thank you, Scott, and good morning, everyone. Let's begin by reviewing our segment results. All figures are from continuing operations and excluding divestitures.

Starting with Industrial on Slide 5. The Industrial segment had sales of $111 million, organically up 2% due to a strong backlog and order execution. It's worth noting that foreign currency headwinds reduced Industrial revenue by 3% in the quarter. The Industrial segment delivered margin of 12.6%, up 60 basis points from Q3 2018. The margin expansion was driven by price increases, integration initiatives and productivity improvements, partially offset by an unfavorable mix and foreign currency headwinds. For the fourth quarter, we expect revenue and margin in line with the third quarter.

Turning to Slide 6. Aerospace & Defense had sales of $68 million, up 19% organically, on strength across both our Defense and Commercial business segments. Aerospace & Defense operating margin was 20%, up 490 basis points versus the third quarter of 2018, reflecting the benefit of higher revenue, low-cost manufacturing and pricing initiatives.

For Q4, we expect to deliver double-digit revenue growth and further margin expansion year-on-year.

Turning to Slide 7. We continue to execute on our plan to reposition the Energy segment. Energy sales of $56 million were up 4% versus prior year, driven by growth in downstream Refinery Valves. Adjusted operating margin in the quarter was 9.4%. The company's operating loss attributable to the Distributed Valves business was approximately $3 million in the quarter and $7 million for the 9 months ended September 29, 2019.

In Q4, we expect Energy sales in line with Q3 and margin in the low teens, largely driven by strength in the Refinery Valves business and the reduction of Energy Group overhead cost during the quarter. Starting in Q1 2020, the remaining Energy businesses will be integrated into the rest of CIRCOR.

Turning to Slide 8 for Q3 P&L selected items. Our adjusted tax rate for the quarter was 13.5% due to a true-up of year-to-date tax expense from continuing operations.

Looking at special items and restructuring charges, we recorded a total pretax charge of $28 million. The largest component of this charge continue to be the noncash acquisition-related amortization expense, totaling $12 million.

The remainder was made up of: a $7 million charge related to other restructuring activities, primarily a rationalization of the Energy Group and Industrial business in Europe; a $5 million loss on the sale of a business; and $4 million of professional fees related to the unsolicited offer to acquire the company.

Net interest expense for the quarter was $11.8 million, down over $2 million compared with prior year as the impact of lower debt balances are partially offset by higher interest rate. Other income, which was $1 million in the quarter, primarily reflects pension income and both realized and unrealized foreign exchange gains. In Q3 2018, other income was also about $1 million.

Turning to our debt position on Slide 10. Our free cash flow was around $9 million in Q3 at similar levels to Q2 2019. We invested around $4 million in CapEx in the quarter and expect to invest a similar amount in Q4. We've reduced net debt by $89 million in Q3 and nearly $148 million year-to-date.

We continue to expect to reduce our leverage by 1 turn by the end of 2019, excluding the divestiture of noncore assets.

I will now hand the call to Scott to discuss our market outlook.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [5]

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Thank you, Chadi. Now I'll provide an overview of our end markets and business group outlook. Please turn to Slide 10. Let's start with Industrial. The Industrial group backlog continues to be strong. Orders in Q3 were down 3% organically, primarily due to projects delayed out of the quarter. We saw OEM weakness in Europe, partially offset by modest growth in North America and Asia, and strong growth in our aftermarket business globally. In addition, we continue to see strength in Commercial Marine and several niche businesses such as cryogenic valves.

For our aftermarket business, we have an extensive installed base that continues to fuel our short-cycle orders. We've increased our dedicated aftermarket sales capacity to improve the capture rate in our installed base. In the third quarter, our global aftermarket business grew 10% versus prior year. In Commercial Marine, with IMO 2020 on the horizon, we continue to see strong demand for our scrubber pumps. This positive momentum is offsetting the ongoing weakness in new vessel orders.

For Industrial overall, we're entering Q4 with a strong backlog. We expect to see continued pressure on our OEM and project businesses in Europe and to a smaller degree in North America. However, we expect to largely offset these headwinds with new product revenue, strong growth in the aftermarket and in Commercial Marine and ongoing strength in Asia and India. Overall, we expect orders in Q4 to be in line with Q3.

Our Aerospace & Defense segment generated another strong quarter of orders of $64 million, down from the previous quarter and last year mainly due to timing of large defense orders. Commercial aerospace orders continued their upward trend in the quarter, driven by the increase in build rates from major platforms like the A350 and 2 significant new program wins. We continue to raise prices in Aerospace & Defense, primarily focusing on OEM spot orders and aftermarket demand.

The backlog for Aerospace & Defense segment continues to be strong driven by ongoing strength in commercial aerospace and large defense orders in prior quarters related to multiple programs including the Joint Strike Fighter, the U.S. Navy Virginia Class submarine, the DDG 51 class destroyer and the CVN-80 aircraft carrier. Overall, we expect Q4 orders to be in line with Q3 due to a limited number of large defense or commercial orders anticipated in the quarter. We expect large program orders to pick up again in the first half of 2020.

Now let's shift to our Energy segment. For continuing operations, the order intake for Energy Group was up 21% versus prior quarter, mainly driven by the strength in Refinery Valves. Refinery Valve orders were up 64% sequentially, but down year-over-year in Q3 mainly due to a difficult compare last year. As we've mentioned in the past, project orders in this business can be lumpy with order timing difficult to predict. The pipeline of project activity remains healthy and the outlook for this business remains strong for Q4 as well as 2020. In Q4, while timing of large orders is uncertain, we expect to be up sequentially and versus prior year driven by a strong order pipeline in Refinery Valves.

Now I'll turn the call back over to Chadi to discuss guidance.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [6]

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Thank you, Scott. Turning to Slide 12 (sic) [Slide 11]. The guidance is for continuing operations. Overall, we expect fourth quarter of 2019 revenue in the range of $235 million to $248 million and our adjusted EPS in the range of $0.76 to $0.88. We expect an unfavorable FX impact of $4 million to $5 million on revenues as compared to Q4 '18. In the quarter, we expect sequential and year-over-year margin expansion driven by volume, pricing, productivity initiatives and restructuring actions. We also expect sequentially improved free cash flow in the fourth quarter, which aligns with our expectation of continued free cash flow improvement in the second half of 2019 compared to the first half.

Regarding special and restructuring charges for the fourth quarter of 2019, we anticipate charges for the following items: acquisition-related amortization expense of $0.49 per share, and restructuring and special charges totaling $0.20 to $0.24 per share. We expect the fourth quarter and full year adjusted tax rate to be approximately 18%.

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

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [7]

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Thank you, Chadi. To summarize, we're building positive momentum. As we look to next year, we expect to realize continued benefits from our business simplification initiatives, new product launches, pricing actions, manufacturing in low-cost facilities and integration synergies.

We've made great progress in our continued portfolio transformation during the quarter and will continue to explore the divestiture of other noncore businesses that would accelerate the deleveraging process.

Our third quarter performance and outlook for the remainder of 2019 are right in line with the targets we laid out in our 18-month plan. We remain committed to driving long-term growth, expanding margins, generating strong free cash flow and deleveraging the company.

Now Chadi and I will be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nathan Jones, Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

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Can you hear me now?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [3]

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Yes, we can hear you now, Nathan.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [4]

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Just a clarification, first, on the preliminary results here. I would think that based on the things that you're looking at there, they might affect GAAP results, but probably not affect your adjusted results. Is that reasonable? Or if not, what could be under consideration here or evaluation that would change the adjusted results?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [5]

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Nathan, this is Chadi. Yes, you're right. It's -- primarily, it's going to affect the GAAP results as we mentioned due to our procedure review of our discontinued operations. So we don't expect our adjusted result to be affected.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [6]

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Okay. And then on the Aerospace margins, I think that's probably a quarterly record for the company at 20% there. Can you talk about the things that have driven those margins up, whether or not they are sustainable here in the short to medium term? I think they're above what your targets have been? Any more color you can give us around the strong performance there?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [7]

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Sure, Nathan. So you're absolutely right, we're having great momentum in Aerospace & Defense and primarily driven by our volume as well pricing, aftermarket growth and this is driving our margin sequentially and year-over-year.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [8]

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I would add that we continue to ramp up the low-cost manufacturing in Aerospace & Defense as well, which is contributing.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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I mean, all of that commentary there, doesn't sound like there's anything one-time in nature in those. Can you sustain 20% high teens, that kind of area going forward here?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [10]

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That's what we expect, Nathan. So we're guiding similar margins in Q4 and we don't expect to -- a material change in margins as we go into next year.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Okay. And last one on leverage. I think you're down to about, I mean, my margin shows just over 4 at the end of 2019 potentially under 3 by the end of 2020. Can you talk about any other actions that you could take aside from more divestitures here that could positively impact that leverage ratio over the next 15 months? And then I'll pass it on.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [12]

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Sure, Nathan. So definitely our growth in EBITDA as we look at the run rate of 2019 and 2020 will contribute to an acceleration of deleveraging as well, as we mentioned, we're looking at noncore assets divestiture that would reduce our debt year-on-year. And of course, as we announced our intention to sell our noncore assets in upstream oil and gas that are loss-making, that also will contribute to increasing EBITDA and delevering fast.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [13]

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Increasing EBITDA, increasing cash flow as well to eliminate the negative cash flow. I'd say there's a little -- there's still some opportunity in working capital, Nathan, as well, particularly on the inventory side, but I think Chadi captured the bulk of it.

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Operator [14]

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

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [15]

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So it sounds like '19 is very much on track. I'm just -- just given all the moving pieces, the sales, Spence and Nicholson, getting out of some of these money-losing businesses, just, kind of, talk about how we should maybe be thinking about the 2020 $165 million target? What's changed within that, if anything?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [16]

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Sure. I'll start, Chadi, and then why don't you jump in. So we -- you're right, 2019, we're very confident of delivering the commitments for '19 as well as the run rate as we exit '19. We feel very good about being where we expected to be as we entered the year. We'll report out on that in our February earnings call as we close out the year.

Going into next year with the $165 million, I'd say with one exception, virtually all of what we expected to do, certainly everything we control is on track going into 2020. I'd say the one change in the bridges that we communicated in June is that we're seeing, I'd say, weaker market industrial in Industrial than what we had assumed in June. Having said that, we're ahead of that already and responding to compensate in other areas of the business.

So if you look at a very high level at the weaker markets in Industrial going into 2020, we're seeing better growth in Aerospace & Defense going into 2020 than what we expected back in June, so that's partially offsetting the expectation and then we're being more aggressive than previously thought on both the cost out with respect to both group and corporate cost and G&A, but also pricing should be better as well as we go into next year.

So we're still -- the bridge look similar, a few changes, but we're still confident in delivering the $165 million net of acquisitions next year.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [17]

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And Jeff, just to add to what Scott said. As we highlighted, the $165 million have been reset to exclude Spence divestiture of $8 million. So we're targeting $157 million excluding future divestitures.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [18]

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Okay, that's very helpful. And then can you give us, I guess, the pro -- just -- I know Nathan asked the question on leverage, but what's pro forma leverage look like given your 4Q guidance and kind of excluding these money-losing businesses kind of? So where does pro forma leverage end 2019 at?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [19]

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So we're still looking at around 4%, 4.3% at this point from a leverage point of view, our pro forma.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [20]

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And that would take out the Engineered and Distributed Valves?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [21]

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Correct. Again, as reported as of Q3. So I'm not -- look, it will be fast, it will be lower if we take out completely from continued operations for Q1 and Q2, then it will be less than 4%.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [22]

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Okay, helpful. And then I just want to -- the order commentary always helpful, but just given all the moving pieces, I want to make sure I understand it. So Industrial, I think you said would be in line with the Q3. What does that contemplate for an organic decline? Because I just don't have the prior year apples-to-apples number.

And then maybe while you're looking at that, the Energy -- I don't have -- I don't know what the apples-to-apples prior year orders numbers, so maybe you can just talk about what you think the magnitude of increase in orders would be versus 3Q, which I think you had at $53 million.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [23]

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Sure. John (sic) [Jeff]. I'll take your questions on the Industrial. So when we look at Q4, we're looking at year-on-year flat order -- flat order year-on-year. And for Energy, we're looking at an increase in order primarily driven by the RV order that we expect in Q4.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [24]

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But what's the 4Q '18 adjusted order number excluding whatever you've gotten rid of?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [25]

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Yes, it's $57 million for Energy.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [26]

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Okay, great. And then just the last one. Refinery Valves, it sounds like you still feel very good about that business just despite some of the lumpiness in the order rates. Just talk maybe more qualitatively about what your customers are saying in terms of spend into 2020 and what that business might look like?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [27]

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So we are -- we have a pretty strong pipeline of projects that we're working on right now. And as you know, when they turn into orders, it's hard to predict in any given quarter even within a 6-month window. But there's a number of reasons that we feel good. One is that we have been -- we've needed to increase the number of engineers in this business to keep up with the project work that we're doing ahead of receiving orders. That -- they're working with process licensors who are, we'll say, a leading indicator of order activity in this business so the process licensors are very busy right now. And so we have as strong a pipeline of new orders kind of teed up to fall into place here over the next 9 months, that's pretty big. So we're feeling good going into next year.

I think that when you look at year-over-year, when we go back to the 18-month plan that we communicated, we expected flat earnings year-over-year in this business. So we're delivering a decent year here in 2019, and we're expecting the same in 2020.

I wouldn't say at this point that we are going to forecast a different number for next year, it still feels more or less in line 2020 versus 2019 from an AOI and EBITDA standpoint.

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Operator [28]

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

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [29]

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Just kind of to sum it up, if I remember in June, you put out the original 18-month plan, the total organic revenue profile was to be just north of 3%. Given the better-than-expected Aerospace & Defense and lower-than-expected Industrial, are you still netting out above that kind of organic growth profile in order to hit those targets or not?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [30]

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That's correct. Yes, that's how we're looking at it right now.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [31]

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That's exactly right. So a weaker Industrial and a stronger Aerospace and basically, Energy is playing out as expected.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [32]

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Got it. Okay. And on the Aerospace & Defense side, on the Commercial side of that business, can you talk a little bit about what the booking profile looks like in 2020? It seems to sounds like it's accelerating maybe a little bit more than I would've expected. What programs are driving that?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [33]

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So this is primarily driven by the A350 ramp-up that we are seeing.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [34]

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I'd say add the A320 as well.

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [35]

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And the A320.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [36]

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We may have some upside as we go into next year depending on what Boeing does. So as you know, they pulled the [3-7] down to 42 a year. We don't have a lot of content on that, but if they ramp that back up, we may have a little bit of upside on that. But there's not a lot of change in expectations on Aerospace. As you know, these production rates don't change that quickly. So we still are more or less in line with what we expected on the Commercial side. Where we're seeing stronger growth than expected is more on Defense.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [37]

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Okay, that helps. All right, and lastly I think, Chadi, you said something about better-than-expected results in the coming quarter in Asia. Can you just talk a little bit about those comments and where you're seeing that?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [38]

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So this is primarily in India and in China, where we're focusing some of the activities, albeit we're still small, so the growth is -- on a like-for-like basis is bigger from a percentage point of view than a dollar point of view. But our investments in China, for China as well as ramping up India are benefiting us primarily in the Industrial segment.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [39]

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A lot of our Commercial Marine business goes into Asia as well and we're seeing strong growth in Commercial Marine right now as well.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [40]

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So it's Commercial Marine, Asia is where you're seeing the strength? Or is it some other business also that's benefiting?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [41]

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Both. It's Asia, both China, non-Commercial Marine, India, which is non-Commercial Marine and then Commercial Marine in Asia. All 3, we're seeing good growth in Q3 and expecting that to continue through Q4.

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Operator [42]

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Our next question is from Andrew Kaplowitz, Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [43]

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Scott or Chadi, to get to your 2020 plan, you mentioned Aero's better, it's going to offset Industrial, but you also mentioned cost out and pricing that you can sort of hit more on those initiatives. How much more flexibility do you have to, sort of, press on those initiatives considering you're already being relatively aggressive with those initiatives over the next 18 months?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [44]

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Right. So I'll start, Chadi, and then you can jump in. I think on the -- as we go into next year, the majority of the compensation that we're making here for the Industrial expected weakness is going to be on the cost side. So we're being more aggressive on the G&A. We're getting a lot of cost out of Energy as we consolidate that into the rest of CIRCOR. And so the numbers are bigger than what we expected back in June. And that's giving us some room here for additional weakness on the Industrial side.

With respect to pricing, we're going to be careful with pricing in Industrial given the weak market. So that's probably going to play out as expected in the plan that we put out in June. We won't be more aggressive Industrial, but on the Aerospace & Defense side, we are being more aggressive, and we're really focusing on OEM spot orders and aftermarket where we have significant leverage with price. So we're getting more now and expect to continue to get more price into next year that will contribute to offsetting the weakness in Industrial.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [45]

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And then, Scott, just maybe update us on how the sale process of Distributed Valves will go, timing, potential interest, anything more you could give us in terms of color there?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [46]

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So it's real -- as you know, it's really difficult to predict the timing, Andy. So we are -- it's in process. We are working through that. We're out contacting potential buyers and we're working through the process here. I don't know -- I'm afraid to give you an exact time of when we're going to sell it. I'm not sure how long it's going to take. We're doing -- we're looking across the board at both strategics and private equity buyers and we expect to just run the process here. So it's not going to be imminent. We don't intend to sell this in the next 3, 4, 5 months, but it's -- but we're actively working it.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [47]

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Okay. And then related to that, Scott or Chadi, like, obviously, draining a bit of cash from the business itself. I think, Chadi, you had given guidance earlier this year of about $30 million of free cash. You're negative through 3 quarters, it's not so unusual as the fourth quarter is usually quite good. So how would you update that guidance at this point for the year?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [48]

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So you're absolutely right, Andy. So we're looking -- as I mentioned in my prepared notes, we're looking at a similar Q4 than a Q3. And overall, we'll be closer to $20 million than $30 million.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [49]

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Okay. And how much of that, Chadi, is the weaker Energy markets versus just working capital build? Any more color you'd give us there?

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Chadi Chahine, CIRCOR International, Inc. - Senior VP & CFO [50]

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Sure. This is -- it's absolutely all of it and more is coming from upstream oil and gas. And in fact, our -- with our working capital at 26%, 12 months turn is right where we want it to be even if there is more to do on the inventory. But definitely, the upstream oil and gas have been a drain on cash for the first 9 months.

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [51]

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It's, again, negative contribution on cash this year and continued through the third quarter as a negative contribution.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [52]

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That's helpful, guys. And then just back to Industrial. Scott, you mentioned the strong aftermarket business and the new products. I mean aftermarket growing, I think you said, 10%. How much could that offset the weaker OE, if weaker OE continues into 2020?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [53]

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It's significant that's why I highlighted it. Roughly 30% of our Industrial business is aftermarket. So that still leaves 70% that's not and that is seeing a -- and as you know, we have a pretty significant business in Europe, where we're seeing the biggest headwinds. So order of magnitude, we're seeing about 30% of the business in global aftermarket that's growing. And we're seeing modest growth in the Americas and Asia. And then Commercial Marine is growing quite nicely.

So you net it all together and we ended up with around a 3% decline in organic orders in the third quarter. And we're expecting more or less flat orders in the fourth quarter. We may do a little bit better than that, but it's probably will be around flat orders organically in the fourth quarter.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [54]

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And Scott, one more bigger picture question. I think you mentioned last quarter that you were evaluating a broad range of operational and financial strategic options that could deliver value in excess of your strategic plan. Any update on the thought process around this evaluation? Do you just kind of do what you've been doing, which is these divestitures? Or are there any bigger changes that we might anticipate?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [55]

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So we're still evaluating and I believe the way that -- the right way for this to play out is as we -- if and when we choose to take that a different path, we'll announce it when we can. As you can imagine, we can't announce certain things well ahead of time. But I will tell you the process is still in process. If we reach the end of the process and everything we've evaluated comes back to executing the 18-month plan the way we communicated back in June, then we will close out our process and communicate that. But we haven't reached the point where we're closing it out. We still are evaluating certain alternatives, but we don't have anything that we can really report on publicly right now.

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Operator [56]

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

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Brett Kearney, Morgan Group Holding Co. - Research Analyst [57]

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Just want to ask, I guess, across a few of the businesses how you're thinking about personnel resources. It sounds like on Refinery Valves, you feel pretty good about the engineering function where it's at to support continued positive momentum in that business. But then on the Industrial side, could you talk a little bit more about the incremental restructuring action you're taking in Europe?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [58]

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Sure. It's a good question. So we have -- still have opportunity that could be categorized as synergy. But we're not really looking at it that way. We're focused on -- and what we have done in the third quarter and going forward, you'll see more of this, is the tactical G&A back-office kinds of resources and getting -- driving more efficiency into the business there. So the restructuring that we did in Industrial was largely in Europe, largely focused on back-office. There were some leadership roles that we changed with some organization change but largely focused on back-office G&A types of resources.

So we continue to invest in engineering. We continue to invest in product management as well as in sales. So if you look at broadly across the company, the head count in those categories is going up slightly, whereas the back-office, the G&A, the overhead types of roles, you should expect to see those -- the head count continue to come down. And as you know, the group's structure in Energy, there's a significant amount of overhead that we're going to be removing here as we consolidate the Energy Group.

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Brett Kearney, Morgan Group Holding Co. - Research Analyst [59]

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Great. And I guess, one quick follow-up on that, and you mentioned in your prepared remarks integrating, I guess, the remaining energy assets into the rest of CIRCOR. I know it's early days, but any thoughts on time line there and kind of how you're thinking through the way that will play out?

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Scott A. Buckhout, CIRCOR International, Inc. - President, CEO & Director [60]

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Sure. We're going to continue to run CIRCOR with a separate Energy Group through the remainder of this year. And when we close out the year and report our earnings, we'll talk about Energy in Q4. Once we get into next year, the remaining businesses in Energy will be consolidated into the rest of CIRCOR. There will be some savings associated with that. But going forward, we will not be talking about nor we will be running the company with a separate Energy Group. So we'll have an Industrial business, a broad-based Industrial business and an Aerospace & Defense business.

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Operator [61]

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We have reached the end of the question-and-answer session, and with that, the conclusion of today's call. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.