Question-and-Answer Session
Operator
Thank you. (Operator instructions) We will go first to Charlie Brady with BMO Capital Markets.
Charlie Brady – BMO Capital Markets
Hey, thanks. Good afternoon guys. Couple of questions on the Energy segment margins as we go into Q2 and the rest of the year. Give that we should probably have a pickup in the distribution business given the backlog build, could you talk about what that mix shift does to margins as compared to the large project business. Then also, should we expect then Q2 to see a sequential, but not year-over-year, but a sequential decline in margin because you are not going to have that large valve project hitting in Q2, as it did in Q1?
Bill Higgins
Let me start with the first point around the mix shift. We do expect to see a mix shift because the order backlog has filled in although we have been steadily building project orders, so I don't know if it's that significant overall. The project order backlog has been filling in nicely. The (inaudible) large scale project order to go out in sort of out into next year, but we have domestic fabricated project business that we are filling in for this year. It will be somewhat of a mix shift as we go forward. We believe we can leverage volume on the short-cycle business, as I've talked about before, as we ramp up the volume there and leverage fixed costs. But we are also very cautious of the increase in material costs coming out of China and our supply chain that comes out of China. So we are watching those cost increases as well. Your Q2 question was, would we see a decline because of the very nice project we shipped in Q1? We will probably see a margin decline as we go into Q2 relative to that.
Fred Burditt
Assuming that we don't have that order, obviously, in the second quarter, as we said, it impacted the quarter by 120 basis points. So, assuming we have no replacement for that, it will have some depressing effect on the quarter. And the other question, if you look at mix of businesses, the project business tends to have all the issue with mix of sales or orders, tends to have better margins overall than the other part of our segment. I think both of those, it will have a little bit of a depressing impact, all things being equal.
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