Q2 2022 Circor International Inc Earnings Call
Greetings and welcome to circle, our internationals second quarter 2022 earnings Conference call.
If anyone should require operator assistance during todays call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I will now turn the conference over to Scott Solomon Senior Vice President of the Companys Investor Relations firm Sharon Merrill Associates. Thank you Sir you may begin.
Thank you and good morning, everyone. Before we begin let me remind you that our earnings release and presentation are available on <unk> website at investors Dot circle Dot com.
If you'd like to receive copies of these materials. Please email C. I R Investor Relations Dot com and our IR team will provide them for your.
Turning to slide two today's discussion will contain forward looking statements that represent the company's views only as of today September 30th 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 circle 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 <unk> Form 10-K, 10, Qs and other SEC filings also located on our website.
As referenced in slide three 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 four.
Joining me on today's call are Tony in a jar surplus 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 of the highlights of our second quarter performance.
Hey, Jay will review the financials and discuss our guidance for full year 2020 to Tony who will provide a market outlook and then management will be happy to take your question now please turn to slide five as I hand, the call over to Tony.
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 our review of strategic alternatives to exit from our Lossmaking pipeline engineering business and the appointment of a new executive leadership team as.
As president and CEO of Evercore I am committed to ensuring we maintain a culture of value creation across the company. This starts with our most important assets our people.
And investing in their 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 U S and to interact with our teams at all levels. Additionally, I've 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.
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 significant portion of my time, engaging with current and potential customers or.
Over the past several months I've had the opportunity to meet with over 20 of our top customers eastern interactions have only reinforced the value of our products and services and the strength of sort of course brands across our A&D and industrial businesses.
Before we get into the specifics of Q2, and our full year outlook. Let me take few minutes to Reacquaint, you with our company and discuss the progress we are making on our strategic priorities.
We supply flow control solutions that support the severe service and mission critical applications and to a large and growing segments industrial which in 2021 accounted for about two thirds of our roughly $759 million in revenue and A&D, which made up the balance of.
The third core family of brands, including Aerodyne controls, a leading supplier of critical products for the defense market, all while our market, leading German pumps supplier watering pumps, a critical supplier to the U S Navy as well as other shown here on slide five are leaders in their respective markets.
Our industrial products serve a range of critical applications in various end markets, including commercial marine and power generation, various general industrial markets, including chemical processing machine tools, and automotive and midstream and downstream oil and gas.
Our aerospace and defense segment has relied on by commercial and military customers across the globe and we have strong positions on key platforms. In both categories are products are used for mission critical applications on commercial aircrafts submarines aircraft carriers fighter jets and various missile programs.
Turning to slide six 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 and.
In addition, we are continuing to drive sourcing activities from best cost countries as well as increase in capacity, our manufacturing sites in Morocco and China.
Moreover, we are making selective capital investments in our factories focus 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 and to growing markets like hydrogen.
Batteries production medical equipment and space, while continuing to drive growth in our core markets.
The key growth engine across our businesses as 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%.
<unk> 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 a jay will provide more details on the sale leaseback initiatives handle.
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 it.
Appropriate or required.
Turning to our second quarter highlights on slide seven 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 <unk>.
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 three points of organic growth.
The demand environment for our products continued to be positive and we feel good about our business as we move through the second half of the year and into 2023.
Yeah.
Moving to slide eight I'll provide some additional color on two growth opportunities, where we are leveraging our core technologies and manufacturing capabilities and new and adjacent markets first is the fast growing hydrogen market. We introduced two critical products late last year, our balanced isolation valve and dome regulator for application on hydro.
And 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 capture another $3 million in hydrogen related applications, but we have been pursuing.
We expect to continue to see growth in this developing market as we move into 2023 and beyond and medical we are leveraging our design and manufacturing capabilities to supply critical products used in blood collection devices and cardiac assist equipment, the leading medical equipment Oems.
The medical product client 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 nine you can see the effect, we expect value pressure to generate in 2022.
In A&D. This includes the 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 foreign market.
Now, let me turn the call over to a J to cover the financial results in more detail.
Thank you Tony and good morning, everyone. It's my pleasure to share <unk> 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 Knowhow and strong customer intimacy.
Order strength was broad based we saw robust growth in aerospace and defense market as well as in industrial after market and downstream.
We were particularly pleased to see continued momentum in industrial after market.
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 experience supply constraints in logistics and supply of certain commodities, such as motors and castings.
Supply chain disruptions impacted revenue in the quarter by approximately three percentage points.
And the exit of five by engineering and packet revenue by another two points.
We successfully executed value pricing exited pipe by 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 pay to fence off 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.
By one 6 million and EPS by six cents 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 that Rochelle 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 order growth of 32%.
Defense orders grew by 37% driven by our content on Columbia submarine C V an aircraft carrier and fighter Jets.
Commercial aerospace grew by 50% driven by Airbus <unk> hundred 20, 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 margins by 80 basis points to report 25, 2% NOI margin performance in the quarter.
We are bullish on continuing NOI growth and margin expansion to 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 three points of headwind from exiting the pipe things knowing business.
This was partly offset by organic growth across industrial end markets, including 25% growth in industrial after market and 17% growth in downstream.
This was the second consecutive quarter of mid Twenty's growth and 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 NOI growth of 17% and expanded margins by 110 basis points the losses from pipeline engineering impacted NOI margins by 90 basis points.
Turning to slide 13, managing leverage is a top priority.
In the second quarter, we kicked off fairly spec transactions to monetize our real estate portfolio.
Fair lease back to attractive when cap rates are below our cost of debt and in some cases, they were able to pass on the cost of lease expense to our customers.
Until Q, we closed 26 million of sale and sale leaseback transactions in August we closed the transaction to.
Generating $28 million of cash at a cap rate of approximately five 5%.
Compares favorably to our cost of debt is approaching 9%.
Net leverage and compliance leverage improved sequentially into Q.
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 five times.
Turning to slide 14 to discuss our expectations for the full year.
We delivered strong performance in the first half.
But <unk> got a 52% and Oi 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.
Seeing organic growth in industrial after market recovery in commercial aerospace and benefiting from our position on defense platforms.
We are starting to see decelerating growth in industrial for market and expect downstream to be meaningfully down year over year.
We exited two Q 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.
And we expect inflation, except for energy costs in Europe to moderate.
We have reduced corporate overhead and taken out cost from a downstream business.
These actions accounted for approximately $12 million of cost benefits annualized.
We expect around $5 million of carryover benefit and 2023.
Overall, as a result of pricing improving mix and overhead reduction and accounting for a continuation of supply chain constraints.
We expect <unk> 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 $7 34.
FX headwinds are expected to impact ally by approximately $6 million and adjusted EPS by approximately 20.
As a note.
Our guidance does not account for potential risk of unwinding, a downstream lashup project booked in prior years and the event sanctions were to tighten further.
This would be a noncash charge, but estimated exposure of $4 million.
Now I'll hand, the call back to Tony to discuss our market outlook for orders on slide 15.
Thank you a J, 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 aftermarket and commercial marine we.
Expect about 10% to 12% organic growth driven mostly by the aftermarket supported by increased utilization and pricing and downstream oil and gas, we expect about 25% to 30% decline due to non repeat of large capital projects that we booked in NGL last year. However, we do have a strong pipeline of.
<unk> 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 not repeat multiyear large defense order for the U S Navy.
In total we expect organic orders decline of about two 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 and defense and our defense business, we expect 10% to 12% organic growth driven by increased activities in the 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 <unk> hundred 20, as well as the increased activity in the aftermarket supported by pricing and the rebound in there.
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% that ban 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 continued 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 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 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 a J and I would be happy to take your questions. Operator. Please open the line for Q&A.
Thank you we will now be conducting a question and answer session.
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Please while we poll for questions.
Thank you. Our first question comes from the line of Jeffrey Hammond with Keybanc. Please proceed with your question.
Hey, guys. Good morning. This is much more on for Jeff.
Good morning.
Good morning, I was just wondering if you could give us a bit more granular detail on how the how the business is trending regionally, particularly in Europe with all the headlines we're seeing come out coming out of there.
Yes.
Okay I'll I'll take that 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 all acute include Q3 here in my commentary, we expect that region to be about.
10% to 12% up overall as far as the orders activity.
Yes.
Yes.
You have a small color there.
One of our key priorities. This year has been leveraging pricing and growing aftermarket and Lauder designs in our European businesses, and we are seeing pretty good.
Sequential growth year over year growth from an order intake in.
Our European businesses.
Great that's helpful and.
And then just kind of.
Kind of on the restatement process.
How is the restatement process and not having clean financials.
Is that holding back the strategic review process at all and does that kind of being in the rearview does that allow you to focus a bit more on the strategic review process.
Yes, that's correct.
The finance organization capacity was consumed by the restatement process.
As you would expect we do need the restatements and the <unk>.
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 possible value creation, including exploring sale of Holdco aten parts, and especially there in parts piece requires a robust sales type quality filings exercise and that needs to sequence.
Although these statements being completed so.
You also have somebody there that the reshaping process did put some sort of.
A speed bump in the strategic review process is absolutely correct and that's behind Us now.
Okay, Great that's helpful.
If I could sneak one more in.
Look for commercial Aero seems pretty healthy for the balance of the year.
Supply chain in that end market seems.
It seems not great could you just talk about your order patterns, you're seeing and how do you expect that recovery to play out over the next couple of years, particularly.
Particularly on the commercial side.
So on the commercial aerospace side, yes, we are seeing a strong recovery driven by the single largest platforms. Yeah. We are on an <unk> hundred 2700, 37, and as mentioned on an 8% to 20, which is a growth platform. So the recovery continues our discussions with our customers say that.
We continue to expect to increase rates.
However, the risk is how fast kind of supply chain ramp up we've done our own analysis internally, 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.
Boeing and Airbus are talking about so assuming the whole supply chain can support the growth we expect to continue to benefit from that.
Okay, Great I'll hop back in queue. Thanks, guys.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Good morning Nathan.
Going back to.
The industrial business.
Yeah, I think you just said.
Said that the revenue growth in Europe through three quarters is about 10% to 12%, which is you know it's going to be that's probably going to be about double what the overall industrial segment that is growing 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 you know what.
Your assumption is for Europe moving forward.
Just given all the macro headwinds that that area Stacey.
So just to clarify the.
14% orders growth in the region revenues are growing but at a slower pace and thats.
Mostly impacted by the supply chain restrictions that we discussed which most of it is coming from that region.
$6 million of supply chain impact about $4 million coming from our European businesses.
Okay.
So Nathan if you look at the first half performance of our industrial business and you normalize for the one time large order that we booked last year about $15 million.
Adjusted for FX in the first half the industrial business, excluding the downstream part has grown north of 5%.
And adjusting for that one time order.
By 11% in the first half the piece that is not doing well from an orders perspective as downstream downstream is down 24% in the first half.
Okay.
Maybe you can talk about the outlook that downstream business and 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.
Yeah, so specific to downstream, we do expect our revenue growth this year.
We also expect fairly robust improvement in <unk> dollar than margins coming from that business.
Given the effort that we've put in in the first half of this year to take out costs as well as focus that business on the more profitable parts of the market itself.
On an orders perspective, you're going to be down you know, what we expect to be down.
Probably closer to 30% Europe , 25%.
Year over year.
And we expect hospitalized.
Looking ahead into 2023.
Okay, if I could just switch over to margins in industrial.
You've got a slide there that had I think 330 basis points of price in it.
The Lossmaking pipeline engineering business has been taken out.
Had some organic growth and margins are up a little bit that you're not really that much can you talk about you know what the headwind to that margin profile chuckle was talking about getting back to large and mid teens industrial margins.
Probably 12 months ago, as we came out in each of the recovery.
Just talk about the things that need to be done to Congress keep that target how.
How much help unique volume are there restructuring actions you can take.
Any color you can give us on the outlook for margins there.
So the key drivers that were working are the value pricing and looking into <unk>, which is basically ending in a couple of days, we do expect to see a significant improvement in the industrial margins based on actions that we discussed which is the pricing under simplification and as we look ahead into Q.
Four 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 about value pricing is the biggest driver there and in our industrial business, we expect pricing.
To be about.
$24 million in total lenders with some offset from inflation.
Which we're dealing with but in total the <unk>.
<unk> contributing significantly to the margin expansion that business will continue to do that in the second half of the year.
Just to clarify you're not talking about low teens in <unk> 'twenty, two you're talking about that over a longer period of time.
No.
What I mentioned is in looking at <unk> and <unk>.
This year okay.
Thanks for the clarification and I'll pass it on.
Yeah, and just to kind of give you a bit more granularity on filling out the downstream piece from our industrial business.
So if you normalize for the pipelines knowing that exists on the first half of this year the industrial margins, excluding downstream at about nine three percentage points and we expect that to sequentially improve through the balance of the year.
Okay.
Yeah.
Yeah.
Our next question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.
Hey, guys. This is <unk> on behalf of Andy Good morning.
Good morning, Josh.
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 price pricing offsetting inflation.
Your comment on.
Your ability to hold on to these pricing if it's inflation worked with them over time.
Okay.
Okay.
And.
First half of the year, our net price is about $11 million.
Coming from both the aerospace and defense and the industrial segment and Thats, primarily from what we have been doing and 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 and tax 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 to next year and beyond.
Got it just to add to what you guys are.
Go ahead David.
There's not even a little bit more color. There. So one of the areas, where you're finding a lot of success with our value pricing initiatives in the after market 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 he feels very confident we'll be able to and these prices will stick and ASP.
The inflation environment moderates in the second half that's an incremental pick up on the net pricing drop through from the pricing efforts already executed.
There'll be some softness tied to increasing utility costs in our European businesses, but net net the second half is it's going to show a much more robust net pricing dropped. So then in the first half.
Got it and then you guys mentioned you talked about supply chain labor shortages inflation impacting two to now it's almost the end of <unk>. So would you say that these issues have improved to still the same Washington for your company and you talked about I think 3% impact from supply chain and this quarter is that more like a timing issue.
Kind of you can recover back into <unk> is that a fair assessment.
So on the labor side, we are seeing improvements in the labor challenges have been mostly in our.
Sites in New York, and California, we are seeing starting to see improvements there.
Supply chain challenges, mostly in Europe , and it's driven by suppliers longer lead times as well as some of the 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.
Yeah.
Got it.
And I know, it's a little early to talk about 'twenty, three but given the market will largely be in the consumed up a macro slowdown how should we be thinking about the positioning of both of those businesses and the ability to take additional structural cost actions, if things got worse, especially across our industrial segment.
Yes.
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.
New product developments that we're working on for missile various missile programs.
In 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 Undergrad programs in the UK on the industrial side, we expect low single digit growth now obviously, there is a lot of uncertainty in the industrial markets, but what's the value pricing activities were driving the aftermarket position.
We have we believe assuming relatively stable conditions that we will be able to achieve low single digit orders growth in that space.
And.
T R.
Cost question.
We are incredibly focused and simplifying the company and taking structural costs out of the businesses. So if you look at the cost structure of SOCAR, Yeah, It's about $30 million corporate cost was about $15 million of cost sitting at the group.
Group HQ lay up about 45 million in total.
This year.
<unk> talked at about $8 million of that cost annualize already and they're incremental actions underway, which would make that number a big or as we exit this year. So.
The first layer of cost staying power between the group and the carpet is well underway and 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.
If the market conditions worsen and we also see opportunity to simplify the cost structure of our pumps businesses. You know, there's a lot of actions and activities are happening on that front as well.
Very helpful. Thanks, Tony AJ.
Thank you.
Yeah.
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Our next question comes from the line of Brett Kearney with Gabelli. Please proceed with your question.
Hi, guys. Good morning, Thanks for the call.
Good morning retro.
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.
Our circle or I guess, given your position on submarines to August Alliance.
On mis.
Missile programs are with the situation in Europe , what's your.
Seeing opportunity wise from the shifts in some of the dynamics taking place recently.
So Brett on the missile side, we are definitely seeing increased activities.
Got it.
Most double in some of the programs that we're on.
Primarily with the switch devices that we provide for these programs.
And it enables side there is various activities going on as far as new programs. These are typically longer term, while we do have.
Our quoting activities in Europe that we are working actively on some of the surface ship programs and then continue to support obviously the naval.
Submarine programs.
Overall on enabled side you mentioned the Orca program, we are well positioned on both the Virginia class.
Understood 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 undergrad, not but our expectation it will be some version.
A version of the Virginia and or their students and we feel good about the potential from that program, but as you know thats a little bit longer term.
Yes true.
Terrific and then last one probably also on the aerospace and 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.
Adjacent areas medical and kind of new energy and hydrogen areas.
So on.
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.
There are four different hypersonic missile programs.
The U S and we expect to start see some orders some level of orders and revenue next year, we've already recognized revenue on orders on the development side.
We expect to start to see some of the limb.
Limited rate initial production activities in 2023.
In space, we have won various programs for our cryogenic type valves that our team in long island is developing.
And 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.
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 and related markets and our business in California and that team is taking those products and driving driving in the North America market.
Terrific. Thanks, so much.
Okay.
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. John <unk> for closing comments.
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.
Yeah.