福斯 (FLS) 2007 Q4 法說會逐字稿

Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve fourth quarter and 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator. Hello, everyone, and thank you for joining us. Welcome to Flowserve's 2007 investor conference call. Today's call is being webcast with our earnings presentation via our website at Flowserve.com. Just click on the Investor Relations tab to access the webcast and the accompanying presentation.

Before we get started with the presentation, I want to make one brief note. For those of you who have accessed today's call through our dial-in phone number and also wish to follow along with the earnings presentation slides via our website, please click on the "click hear to listen via phone" icon at the bottom of the event details page. I would also like to note that our webcast will be posted on our website for replay approximately two hours following the end of the call. The replay will stay on the site on demand for the next few months. Joining today are Lou Kling, President and CEO of Flowserve; Senior Vice President and Financial Officer in Latin American Operations, Mark Blinn; and Vice President and Chief Accounting Officer, Dick Guiltinan. Following our commentary, we'll begin the Q&A session.

Regarding any forward-looking statements, I'll refer you to yesterday's earnings release and 10-K filing and today's earnings presentation flight deck for Flowserve's Safe Harbor statement on this topic. All this information can be found on Flowserve's website under the Investor Relations section. I encourage you to read these statements carefully with respect to our conference call this morning. The information in this conference call, including the initial statements by management, plus their answers to questions related in any way to projections or other forward-looking statements, are subject to Flowserve's Safe Harbor.

Now I would like to turn over to Lou to begin the formal presentation.

Thanks, Zac, and good morning.

It is certainly a pleasure to welcome you to our 2007 fourth quarter and year-end conference call. I'm pleased to report that considering fourth quarter was another outstanding record quarter for Flowserve. We delivered on our targets and executed well against our primary goals and objectives as a company. While we still have plenty of additional internal improvement opportunities, as well as significant external growth opportunities ahead, the fourth quarter was a terrific end to a great year.

On the next few slides, I'll spend a few minutes outlining some of the significant company highlights in the fourth quarter and the full year, as well as listing a few of the key project wins we've had over the past year or so. While I'll show just a small subset of these wins, I believe it will demonstrate how we are executing strategically within the geographies as well as segments, to position the company for success over the long-term. I'll then spend a fair amount of time reviewing our end markets; what we are seeing today and what our outlook is going forward, so you can get a clear sense of the significant opportunities we see ahead. Then I'll conclude with a brief wrap up slide summarizing how we are preparing for the future.

To those of you who have followed this company for some time, you may be familiar with slide 4, which calls out our identity beacon that defines what Flowserve is, and our key strategies for driving sustainable, profitable growth. In 2007 we made significant progress across each of these strategies. We drove significant organic growth, made key both-on strategic acquisitions and dispositions, continued to expand our global footprint, further developed our product portfolio and continued to bring innovative technology to the market. We also made significant strides in improving our process excellence and organizational capability, and built an even stronger foundation for the future. Strong execution on these strategies did lead to achieving our goal of sustained profitable growth throughout 2007, and we believe continuing to execute well will enable us to continue to be very successful in the future.

Looking at the full year 2007, the company delivered tremendous results against some very aggressive goals we set out to achieve at the beginning of the year. The team delivered record annual earnings per share of $4.46, up 121% from 2006, and also delivered record annual bookings of $4.3 billion, up 19%, and record annual sales of nearly $3.8 billion, up 23%. In addition, the company delivered very strong annual operating margin improvement of 310 basis points to 10.9%, led by strong sales, increased manufacturing absorption, successful operational excellence programs, and strong improvement in SG&A as a percentage of sales, which was reduced 280 basis points in the 2006 results. We also delivered very strong cash flow improvement for the year, driving $417 million in cash flow from operations.

As we have indicated many times before, this is not a quarter-to-quarter business due to the size and complexity of our projects. Therefore, for a variety of reasons, we tend to deliver the lion's share of our annual cash flow in the fourth quarter, and as you can see this was our trend again.

Turning to our end markets, we continue to benefit from strong market conditions throughout the year. The demand for more global infrastructure in our key end markets continued to outstrip supply, and we don't see this need being satisfied anytime soon. I'll elaborate more specifically on what we are seeing in each of our key end markets in a few minutes, but suffice it to say the requirements for additional global infrastructure continues to be pervasive, and we continue to see terrific sales opportunities as a result.

Turning to 2008, we have also made a number of significant financial announcements. First, we have initiated a periodic open market share repurchase program of up to $300 million. And second, we have announced an increase in our first quarter dividend of 67%, from $0.15 per share to $0.25 per share. Both of these measures regarding our uses of cash demonstrate our confidence in our ability to deliver strong cash flows in the future,e and our commitment to solid returns for our shareholders. We believe we can follow this plan while taking - investing in our business and taking advantage of any other strategic opportunities. In addition, we are also reaffirming our earnings per share range for 2008 that we outlined earlier this year between $5.10 and $5.40.

Turning to slide 6, I am pleased to report to the market that we continued to set a number of new records during the quarter. The first and probably most important record was the company's fourth quarter earnings per share of $1.67, which represents 188% growth over the same quarter last year, including approximately $0.31 in tax and SG&A benefits, which Mark will discuss in more detail later in the presentation. This record earnings per share was primarily driven by good improvement in our gross profit and improved efficiencies in our SG&A, both of which resulted in significant increases in operating income. We also delivered our fourth consecutive quarter of bookings in excess of $1 billion, recording over $1.1 billion, up 19%, and another record for the company. And we executed extremely well on manufacturing through put in the quarter, driving record sales of $1.1 billion, up 26%.

The team continued delivering strong operating margin improvement, increasing operating margins 520 basis points in the quarter over the period last year to 12.4%, and continued our strong track record of improving our SG&A as a percentage of sales, growing SG&A 470 basis points versus the same quarter last year. The majority of this improvement was driven by solid cost control and successful execution of productivity initiatives across the company. Additionally, in the quarter we continued to see broad strength in our key markets, based on continued global infrastructure investment.

Slide 7 outlines in detail many of the fourth quarter and full year P&L highlights I discussed on the previous two slides. The slide layout is pretty straightforward, so I won't cover every number in detail, but I do want to make a few points about the company's performance that I think are noteworthy. First, the company's performance has been balanced and consistent throughout the course of the year. We consistently delivered strong top line growth in both bookings and sales each quarter, and we consistently and significantly drove operating income and earnings per share growth at a considerably faster rate than sales, demonstrating once again a significant leverage our business is capable of delivering.

The second point that is important to make is that this is a company that drives aggressively to meet or beat its stated targets. In 2007 we exceeded each of the targets that we communicated to the market at the beginning of the year. We set an initial sales target of between 3.4 to $3.6 billion, and we achieved $3.76 billion. We also set an initial target of consolidated operating income percent improvement of 200 to 300 basis points, and achieved an improvement of 310 basis points. And further we updated our guidance throughout the course of the year as visibility into our performance improved, in order to provide the investment community with timely updates. We plan to use the same communication process as we drive to deliver strong financial results in 2008.

Slide 8 helps demonstrate the strong position of the company as we entered this year. While all of these numbers have been announced at this point, we find this graphical representation of booking sales and backlog a useful way to examine 2008 opportunities. As we discussed on several occasions in the past, the conversion cycle between a booking and a sale, on average, is about 12 to 13 months. As projects become larger and more complex, and industry supply continues to be tight, customers are often ordering earlier and extending the duration of their projects to help ensure success.

This situation turns out to be good for Flowserve, since complex projects fall squarely into our sweet spot, due to our extensive engineering capabilities, and it also allows us to better plan our capacity requirements. While we cannot guarantee the average cycle time from booking to a sale in 2008, our current expectation is to be between 12 and 13 months. With our strong bookings in 2007, the $4.3 billion in those bookings gives us great prospects for 2008 sales. Additionally, you will note that we are entering the year with the highest year-end backlog in the history of the company at over $2.3 billion. This significant backlog also bodes well for a strong year in sales, assuming of course continued solid execution.

For some time I have talked about the strength of our global footprint and how we leverage that strength. This chart represents a small sampling of our large project wins from across the globe last year in some of our key industries, including oil and gas, power, chemical and pulp and paper. The strength of the snapshot is not only the fact that we are the leader in these projects around the globe, but it also represents the continued after-market opportunities that these projects like this present for our future.

Slide 10 begins our view of our core markets, oil and gas, power, chemical, water and general industries. In the oil and gas market, we continue to see growth in all global regions. We believe that this is being supported by a number of factors. For one, the aging production infrastructure around the globe is challenging the ability of refineries to keep pace with increasing demand for refined product. With many of these facilities constructed in the 1950s, significant investments have been forecasted in order to refurbish this critical infrastructure. We have continued to see a high level of project activity in both the upstream and the downstream portions of the oil and gas market, and new discoveries leading to significant investment in infrastructure in parts of the world such as Brazil and Russia should continue to drive this growth. The forecasted increase in consumption around the globe will require additional barrels of production on a daily basis, along with more capacity to refine the crude oil into retail-ready products. Complex recovery projects like tar sands, deep water and heavy oil are also seeing major investments as demand increases and technology lowers the cost of recovery. Through our own market research and feedback from our customers, we feel the outlook for investment in the oil and gas industry remains positive.

I should also note at this point that many of our globalization investments, such as our operations in China, India and the Middle East, continue to provide additional growth opportunities as we establish operations closer to our customers. We continue to invest in our quick response centers, or QRCs, in support of our customers' after market needs in a timely and efficient manner. We also continue to expand our global reach with more operations in Canada, Africa and Latin America.

Another recent growth initiative in this market is the increasing use of alternative fuels. Many of the leading oil and gas companies around the world are actively engaging in these developments. So we are also continuing invest in capabilities to serve this new and growing market. As the consumer begins to require more biofuel products, we believe we are well positioned to serve the companies which provide these new resources.

The power industry remains the strength for many of Flowserve's products. For many years, this industry as often relied on our boiler feed water pumps and our main steam isolation valves for quality and reliability and service throughout the life of the power plant. The forecasted growth of demand of electricity is creating project activity around the global market, with significant activity occurring in China and India.

World energy outlook 2007 predicts a demand for electricity will persist through 2030, being driven by the growth in the developing economies. This forecasted growth and demand compounded by the world's desire for reduced carbon emissions is providing support for the increase in activity around a nuclear power generation. As we mentioned in the past, Flowserve is uniquely positioned with product lines through which we maintain our [in-stand] status, even through the fall off of this market that occurred through the past several decades. This allowed us to continue to support key customers in the past, and through this continued experience, combined with strategic international joint ventures, we believe we are well-positioned for the future in this market. We have also continued to invest in support impending alternative power markets such as providing products and services related to geothermal technology.

I would like to now discuss what we are seeing in both the chemical and water markets. Starting with the chemical market, several of Flowserve's [heritage] brands provide products specifically designed to meet the needs of the chemical process operators. In addition, due to the rising cost of oil, the major food stock, the chemical development, combined with the high cost of labor, especially in Europe, many chemical companies have started building new plants in both the Middle East and China in order to lower their costs. Our investment in manufacturing service support at our Suzhou facility in China, and our facilities throughout the Middle East, we have grown our business opportunities in the indigenous chemical markets in support of these new customers [plans].

In addition, there are numerous coal gasification projects underway to convert feed stock from oil to less expensive coal. This has helped cause continued growth in our chemical market, as our customer invests to increase capacity, more capacity, and convert capacity. In the water market, our forecast remains positive due to the increase in demand for clean water infrastructure. For example, in the Middle East investment activity and desalinization is forecasted to continue to increase as development projects require more water. We have therefore continued to invest in expanding our offerings in serving desalinization applications, and we believe that these investment provide further growth opportunities in this important market.

In 2007 we announced our joint venture with the Changsha pump company in China. This partnership has strengthened our competitive position in pursuing both the water market and nuclear market in China, as well as throughout Asia. Our success in helping solve large-scale flood control and irrigation applications, such as those in Holland and Thailand, has also demonstrated our product and service capabilities in managing the movement of large volumes of water.

Slide 12 shows a market grouping referred to as general industries. This contains industries such as mining and ore, pulp and paper, and food and beverage. It also covers our business in steam systems, [district] heating and cooling, agriculture and government, as well as the orders that flow through general distribution. I would like to point out that many of these distributors serve a broad array of customers, which may also include companies in the oil and gas, power, chemical and water markets.

One of the most important business in this grouping is mining and ore processing. Or over the past couple of years we have made a number of small, technology-driven acquisitions, which have increased our capabilities to serve this market. The ability of our slow reseal to endure severe environments and provide measurable water conservation is helping our growth in the mining industry.

In 2008, we plan to make capital investments to increase our manufacturing capacity for welded bowl valves for the global district heating market. This is primarily driven by Central and Eastern European countries making strong investments in their aging heating infrastructure. These valve products also serve us well when teamed with our pump products to [pursue] the growing district cooling market in the Middle East. Finally, through collaboration with strategic customers, we have invested with them for the growing biotechnology market [audio difficulties].

In summary, I'm extremely proud of the Flowserve team around the globe for their tremendous performance in both the fourth quarter and the total year. Their ability to execute against a very tough set of objectives and strategies gives me great confidence about achieving our targets in 2008. Relative to growth, we have demonstrated our ability to deliver strong performance across to P&L in bookings, revenue, operating income and earnings per share. We need to continue to execute well to maintain our momentum and drive strong top and bottom line results.

With respect to the market, we believe we are in an enviable position of being an established leader in each of our key markets, where infrastructure demands and investments remain strong, and our global footprint provides us with a diversified competitive advantage, uniquely positioning us to capitalize on the many opportunities that lay ahead. Lastly, with respect to future focus, we will continue to place heavy emphasis on the long-term; building sustainable, long-term relationships with our customers is paramount to our success. As we have previously stated, the key element of our strategy is to continue to build and support long-term business alliances with our customers, so we can create a win/win low cost of ownership model. To date we have nearly 400 of these alliances with customers globally. Additionally, we'll continue to focus on executing against the critical customer metrics of on-time delivery, performance and liability. These are absolutely critical elements of success in developing and maintaining winning relationships in our industry, and we'll continue to work aggressively to maintain or improvement our performance in these these areas, which we believe was best-in-class. Lastly, we'll continue to ensure that shareholder goals and Flowserve employee goals are tightly aligned, by continuing to link our employee incentive compensation to our financial results.

Now at this time I would like to turn the presentation over to Mark to discuss the segment results and financial results in more detail.

Thanks, Lou. Good morning, everyone.

As Lou indicated, we are very please with our strong results and strong execution across the company. This morning, I'll focus on a few key financial themes for the quarter and for the year which demonstrate the strong earnings leverage and strong cash flow leverage of the company. These are around margin improvement, improving tax rate and strong cash flow. Looking at margin improvement, we had tremendous margin improvement in 2007. Under gross margin, we saw a 30-basis point increase for the year and 50-basis point increase for the quarter. This includes the impact of better pricing across all of our businesses, improved absorption, improved lien and CIP, supply management, and low-cost sourcing. There is a whole set of initiatives we're driving and they're all in progress.

Now, this increase in gross margin was despite a 300 basis point shift in OE in the pump business for the quarter and year. We also saw a tremendous leverage of SG&A as a percent of sales, which decreased 280 basis points for the year and 470 basis points for the quarter. As you will recall, in the first quarter we put programs in place and we saw great progress during the year, but we still have work to do in '08 and beyond.

Also in the third quarter if you remember we discussed the impact of oil for food. In the fourth quarter we did see a $[50] million benefit from the sale of our TKL assets and also the resolution of certain various legal matters. Basically for the year these things balanced out, but we did see a benefit in the fourth quarter. SG&A did increase in 2007 a total of $74 million. This increase reflects over half of that in selling, a $10 million increase spend in R&D, investment in our ERPs as we took them down to 37 platforms, and a buildout of our QRCs.

It is important to note that for the year, particularly for the quarter, we saw an increase in our broad-based employee bonus expense. While we consider this a recurring expense, it is important to note that our plans are designed to require improved performance to achieve a target payout in the next year. The result, strong operating margin improvement for the year of 310 basis points, with increasing incremental margins during the year. With respect to the tax rate, we did see a benefit from our investments in tax planning during the year in taking advantage of our global footprint. Our 29% tax rate for the year did include $15 million of discrete benefits, $8 million of which occurred in the fourth quarter. Basically as we look out in 2008, as we have indicated, a 30 to 35% range, and we see it at the low end of that range.

With respect to cash flow, we have often discussed that cash is generated in the back half of the year, and this year proved no different. We are very excited to see that our free cash flow exceeded net earnings for the year. This improvement in cash flow was driven by strong systemic earnings growth, and we saw a significant improvement in working capital.

Turning to slide 15 to review our financial results, bookings of $1.116 billion for the quarter and $4.319 billion for the year represented, respectively, 19% increases, as we continue to show strong growth in all of our key markets. Sales for the fourth quarter increased $225.9 million or 25.6% to $1,109,400,000, a record for any quarter. Gross profit increased $79.3 million or 27.6% to $366.2 million, representing a 50-basis point increase to 33% gross margin. Again, this includes the impact during the quarter of a 300-basis point shift in our pump business to more original equipment. The bottom line is we are seeing better margins in these projects.

SG&A increased for the quarter $5.9 million or 2.6% to $233.2 million, representing a reduction of 470 basis points to 21% as a percent of sales. Again, I'll remind you we did have a $15 million discrete impact or benefit during the quarter. This was offset in part by the incremental incentive accrual, which again we deem a recurring charge, and also when you compare to the prior year, we had the realignment charges at the end of 2006. Operating income for the quarter increased $74.1 million or 117% to $137.3 million, representing a 520 basis point increase in operating margin, and EPS increased $1.09 or 188% to $1.67. Again, this does include a $0.31 impact from discrete items, but if you exclude that there is still year-over-year 135% growth or five times that - the rate of the sales growth.

If you look for the year, sales increased $701.6 million or almost 23% to $3,762,700,000. Gross profit increased $240 million or 24% to $1,247,000,000, representing a 30 basis point year-over-year increase to 33.2%. Again as we mentioned earlier this included the impact of a 300 basis point shift in our pump OE business. SG&A increased $74 million or less than 10% to $856.5 million. As I mentioned earlier, half of this increase was selling, and in addition to that we had a $10 million increase in R&D, investments in ERP and QRC. So we are spending our SG&A dollars for the future of the company. Operating income increased $170.3 million or 71.2% to $410 million. This was an increase at the rate of three times that of sales. And operating margin improved 310 basis points to 10.9%. Earnings for the year increased $2.44 or 121% to $4.46, a tremendous year for the company.

Turning to the pump division, the pump division had an excellent year, highlighted by market leadership, improved execution and tremendous progress on their after market strategies. Bookings for the quarter and the year increased 21%. Sales for the quarter increased $153.6 million, or almost 31%, to $655.1 million. Gross profit improved $43.1 million or almost 30% to $187.7 million, and gross margin did decrease in the quarter 10 basis points, but that was in the face of a 300-basis point shift. SG&A increased only $4 million year-over-year or 4.6% to $90.7 million. This does include the benefit of the TKL assets, which was approximately $6 million. SG&A as a percent of sales improved 340 basis points to 13.9%. Operating income increased $39.7 million or almost 68% to $98.3 million, and reported margins were 15%. If you exclude the impact of the TKL assets, we saw substantial growth to 14.1% from 11.7% in the prior year during the quarter.

Sales increased $477.6 million or almost 30% to $2,095,000,000, and gross profit increased $139.2 million or 30.4% to $596.6 million, and gross margin improved 20 basis points for the year to 28.5%. SG&A increased $40.5 million or 14% to $327.8 million. If you look at the SG&A growth relative to the gross margin, you can see this business got great leverage on their SG&A expense. To point out, over half of their SG&A was related to increased selling costs and investment in ERP systems. Operating income improved over $100 million or 58.7% to $274.2 million, representing a 240-basis point increase in operating margin.

If you look at the details around the bookings and sales in the pump business, an important thing to note is that the pricing in the ending '07 backlog was better than the pricing in 2006, as we saw pricing power during the year. Another thing to point out is that bookings for the quarter - fourth quarter in after market increased 10%, and increased 14% for the year, which is well ahead of the market growth in after market. For the year, sales in the after market grew 23% for the quarter and 20% for the year. This is tremendous growth and tremendous execution on our after market strategies.

Looking at the flow control division, they had an excellent year highlighted by strong market penetration, tremendous execution in areas of product development, lien, CIP, low-cost sourcing, as well as a strong focus on cost control. Bookings for the control division grew in the quarter and the year 17% over the prior year. Sales for the fourth quarter increased $47.7 million or 18% to $314.5 million. Gross profit improved $21.9 million or almost 25% to $110.2 million, representing 190-basis point increase over the prior year. SG&A increased $3.8 million or less than 6% to $67 million, and almost all of that cost increase year-over-year was selling and R&D, so they are investing for their future. Operating income for the quarter increased $18.8 million or 72% to $45.1 million, representing a 450 basis point increase over the prior year, tremendous leverage during the quarter.

For the year in the valve division, sales increased $168.3 million or 17% to $1,163,000,000, and gross profit increased $67.5 million or 20% to $405.8 million, representing a 90-basis point increase in gross margin. And it's important to note, this is on the heels of in the two prior years each a 200-basis point increase in gross margin. They are driving improvement in their margins all the way through their P&L. SG&A increased $21.7 million, or less than 10%, to $248.9 million, and again over half of this increase is selling costs, investment in engineers and investment in R&D. SG&A as a percent of sales improved 140 basis points. Operating income increased $47.8 million or 41.2% to $163.7 million, and operating margins improved 250 basis points. A common theme you are hearing with all of the divisions in the corporate is that we are getting tremendous leverage. Their operating income grew at over 2 times the rate of sales.

Turning to the flow solutions division, they also had an excellent year. As we have discussed a number of times, they are a high-margin business. They were able to sustain these high margins while aggressively growing the business, investing in selling resources and engineering resources, investing in QRCs and investing in ERP systems. Bookings for the quarter increased $25.3 million or almost 20% to $154 million. Sales in the fourth quarter increased to almost $30 million or 22.6% to $160 million, and gross profit increased $14.8 million or 27% to $69.7 million, representing a 160-basis point increase to 43.6% gross margin. They continue to drive their margins up.

SG&A increased $6.7 million or 19.3% in the quarter to $41.2 million, and well over half of this was increased investment in selling resources and engineering resources. Operating income grew $7.9 million or almost 36% to $30 million, representing 180 basis point increase in operating margin. For the year, they had strong bookings growth. Bookings grew $87.5 million or 17.3% to $592.5 million, and sales grew almost $68 million or less than 14% to $564.5 million. Gross profit increased $33.6 million or 15%, representing a 70-basis point improvement in gross margin. They ended up at $252.6 million in gross profit. SG&A increased $20.3 million or 16% to $148.2 million, and again, well over half of these costs were selling, engineering, resources, investment in QRCs and ERPs. Operating income grew $13 million or 13%, and operating margin remained at a very strong 19.8% for the year.

As Lou mentioned earlier, we had very strong cash flow, and turning to primary working capital on slide 20, you can see that receivables from year-end grew approximately $150 million, and inventory grew $133 million. This is in connection with our strong sales growth, and the inventory increase was primarily driven by work in process primarily in the pump division. If you look at advanced cash, advanced cash for the year increased $132 million, which allowed us to offset the growth in inventory and also shows the confidence our customers have in our ability to deliver, that they're willing to provide cash upfront. You can see that we have tremendous working capital leverage, and primary working capital grew $150 million for the year, while bookings and backlog grew $700 million. We got leverage in our working capital.

Looking at our year to date cash flows, you can see the growth year-over-year in cash flow from operating activities was primarily driven by net income growth. We also saw better working capital management, which drove incremental cash flow. Capital expenditures of $89 million included investments in India, China, the Middle East, our ERP systems and test facilities, while maintenance CapEx remained in the range of 20 to $25 million for the year. We also returned $71 million to shareholders in the year in the form of dividends and repurchase of common shares.

If you look on slide 22 for our net debt to cap, while we have continued to return cash to our shareholders in 2007, and continued to invest in our business to support future growth and expansion in the new markets, we also had the ability during 2007 to continue to strengthen our balance sheet. If you look at our reported net debt to cap for the year, it was 13%.

As we look at our uses of cash in 2008, and Lou talked about these, we have authorized a share repurchase program of up to $300 million. We believe that this is an efficient and effective way to return value to our shareholders. We increased the dividend 67%, from $0.15 a share a quarter to $0.25. This reflects management's long-term confidence in our cash flow generation. For capital expenditures for 2008, we see investment in the range of $115 million to $125 million, as we see a lot of opportunity out in the markets; strategic growth initiatives that we talked about in Russian district heating, Middle East investment, product development, continued QRC expansion, investment, and automated machinery to reduce labor costs. Additionally [RP] implementation and strategic capacity expansion. Also in 2008 we do intend to eliminate our factoring arrangements, which will be a use of cash of approximately $64 million. All of these things we plan to do, along with other strategic opportunities, the point we want to make is none of these are mutually exclusive.

Looking at 2008, drivers of EPS growth, you can see on the gross margin, if you look at the bookings mix for the pump business in 2007, that we still see that there will be an OE after market mix, but we will continue to drive after market growth in 2008 as we did in 2007. We have the ability to execute on strong organic sales growth during the year, and we also as I mentioned earlier see improved pricing in our backlog at the end of '07 versus 2006. With respect to SG&A, we still have work to do. We see an opportunity to significantly reduce compliance costs, drive head count management at the divisions and at corporate, and also we will still be investing in 2008 in ERPs. 2007 and 2008 are heavy investment years. As we have also indicated, we expect the tax rate to be at the low end of the 30 to 35% range.

I will remind you on a quarter-to-quarter basis we can see volatility, as we have during this year, under FIN 48. The result is a 2008 EPS target of 510 to 540 for the year. We put this range out, and we will be reviewing performance across these metrics during the course of the year, and will revise any of these metrics for guidance as appropriate. Bottom line, our focus remains on execution. We see a good opportunity in 2008 and beyond.

With that, I'll turn it over to questions and answers.

(OPERATOR INSTRUCTIONS)

Your first question comes from Charlie Brady with BMO Capital Markets.

Thanks, good morning, guys. Outstanding quarter, with the results there. Just a question on pricing and raw material costs. How much of the gross margin improvement is coming out of pricing? What kind of price increases are kind of embedded into expectations in 08? And then along with that, how are you mitigating expected increases in raw material? Particularly steel in 2008?

Yes, Charlie, thank you for your comments, first of all. On pricing we don't provide specifics on our pricing, as you can imagine, relative to increases, but we did mention pricing has been improving over the last couple of years. A lot of the growth in the gross margin came from many of the aspects. Pricing was included but we did see better absorption and also the impact of supply chain. So it really was across all those fronts. But as we've indicated for 2008, we did see better pricing in our backlog in 2007.

With respect to raw materials, we certainly have seen fluctuations over the last couple of years. Nickel, for example, rose at the early part of 2007 and went down, and our comments have been the same on both sides. We do have exposure to raw materials. But those are more typically in some of our quick term products. For example, the seal face, where we buy the raw material and it is turned into product and delivered. So that does provide us with a natural hedge, reduces the risk of raw material increases but also doesn't give the benefit that you see in other companies when raw materials go down. A lot of our long lead-time projects we typically source the components contemporaneous with winning the bid. So in those instances we pass on the raw material costs to our sub-suppliers. An example in that is motors. If you look at copper, a motor is basically wound copper. So in the early part of '06, there was a lot of exposure to increasing copper prices. So motor price is typically good for five days. So when we'd win the bid these days, what what we'll do is secure that motor and pass that risk on.

So the point is, that it can put certainly can put pressure, we are not saying it done have any impact, but a lot of that we layoff to sub-suppliers, or we have a benefit from the fact that those raw materials go into quick-term products. But the same applies when raw materials are going down. That is usually not a big opportunity, necessarily, for this company.

Thank you.

Next question comes from Andrea Worth with with Robert Baird.

Great quarter. I wonder if we could just start on the corporate expense, that was probably the most off from our model. I guess first just on the charges front, or I guess the benefits, the remainder of that $15 million aside from TKL, that actually is in corporate expense, is that correct?

Yes, the remainder of those are primarily in corporate expense. Those are really across all of our divisions. But it's primarily in corporate expense. So as you are trying to look at corporate expense, let me line out a couple of things. That segment includes of course our corporate expense, inner-company profit elimination, as we have talked about, and then the P&L for our foundry. But a bulk of it is the corporate expense. If you want to look at the trends year-over-year, as we have talked about in the third quarter, the impact of oil for food was completely within that segment, that [fourth] segment. And then the benefits aside from TKL that we saw in the fourth quarter this year were primarily in that segment as well. And the other thing impacting the year-over-year trend, as I mentioned earlier, which again we view as a recurring charge, would be the incremental broad-based employee incentive expense. So those are going to be the drivers in the year-over-year comparisons.

Sure. How should we look at you know, corporate expense going forward? In the past you have sort of tried to target, you know, percent of sales about 2 to 3%, is kind of like your long-term goal. Is that the way we should still be looking at corporate expense? Or you know, with I guess, you know, obviously how successful you have been in, you know, the recurring bonuses, should we be you know maybe increasing that amount as we go forward?

No. I mean, I think the way you ought to look at it is we intend to get that to 2 do 300 basis points, and the point on the incremental incentive that I wanted to make is, to get what you got last year, you have got to do better next year. So that certainly provides some leverage and opportunity. But no, we are still sticking to the 200 to 300 basis points. If you heard my comments on our opportunities around SG&A, what we see in opportunity in 2008 are certainly reduced compliance costs, a lot of those which were in that corporate segment.

Thanks.

Your next question from comes from [Ahmed Surianani] with RBC Capital Markets.

Thanks a lot, guys. Just a quick question on the advanced cash, which I guess is the money you get from your customers to procure raw material. That number is almost up 100% at the - year-over-year. Is there a change in strategy or do you give people a shot at lead time if they give you more advance cash. How does that dynamic work?

It is a dynamic that is in the marketplace, and one of the things I didn't comment on we often provided advance cash to some of our suppliers as well, to secure delivery on time. You can look at it a number of ways. Some of it - look at this as kind of securing manufacturing slots, which has an aspect to it as well. It is a fairly tight market out there. But we also look at it as really vote of confidence from our customers as well, as they are willing to put cash up front for you to execute on it. So I think some of it is to offset - we have used it certainly to offset the inventory. The change in strategy internally is, yes, we created an organization that really focuses on contracts and contract terms in terms of risk mitigation, and one of the areas was to go and write in the contracts to secure this opportunity. So I think it's our focus on it. It's an indication of the market itself, which also applies to our suppliers. But more importantly, I think, it's an indication of the quality of product we provide and our ability to execute. Because I can tell you, they wouldn't give you this cash if they didn't think you could deliver.

That makes a whole lot of sense. Then just looking at the valves, the flow control division, the margin improved pretty nicely at 14.3% in the quarter. I think the last few quarters, when I look at it, looks like Q4 has actually been the softer quarter, for margins at least, in that business. Was this a one-time favorable driver that impacted that? Or is this business just starting to hit its stride, and we should see some sustained margin expansion going forward?

Well, I mean the first thing to say is, they are getting tremendous leverage and improvement, so - and that is not one time. If you heard in my general comments, overall when you did the compares last year, we did have some realignment costs last year. Some of those were in the valve division. So if you review the information from last year, you will see them in the valve and the pump. Even if you exclude the impact of that, what you are seeing really across all of our business, particularly this year and theirs, was very good cost control and very good leverage in their business. So, the way I would look at it is this is not a one-time trend for them. They will continue to drive SG&A efficiency, and gross margin improvement.

This is my final question. I'll hop off after that. The $300 million buy back just was just announced, no accretion from that is built into the EPS guidance at this point, is that fair?

Yes, we, I mean, you know, on the guidance I said we'll revise it. We have got this program out here, I don't want to comment on when we are going to execute on it, because we haven't put a specific timeframe out there. But we didn't necessarily couple those two things.

Fair enough. Congratulations on a good quarter, guys.

Thank you.

Your next question comes from the Ned Armstrong with FBR Capital Markets.

Thank you. Good morning.

Good morning.

Just a couple of questions. First, your outlook was very positive overall. And I was just wondering if we turn that around a little bit maybe and ask how you are thinking about areas that while they are good now, there could be challenges going forward, what particular areas might you highlight from that perspective?

Well in the short run ,as I said in the presentation, you know all the markets that we are looking at are looking extremely, extremely positive. From chemical, oil and gas, power. So you know, I would say looking in the short run, I don't see any right now that we are really concerned about.

Okay. And then with regard to the power generation business, you had mentioned that India and China were very strong. I have heard other companies talk about solid projects in places like South Africa and some actually in the Americas. Are you seeing similar strength there, and it is just that China and India are particularly strong? Or are you just focusing your efforts on China and India, given the size of those markets?

No, no. You know, one of the things Lou mentioned in his comments around Brazil and Russia, we are seeing tremendous opportunity really all across South America. You have been following the discoveries that Petrobras has had that has basically taken them into the top 10 oil companies around the world. They are also, you know, in the process of vertically integrating. That is a country that is rich in natural resources. You know, we clearly see South America coming online very, very strong, particularly Petrobras. You know, their spend, anticipated spend before these two incremental finds over the next five years, was anticipated to be around $120 billion, around half of which was upstream and a quarter of which was downstream. So they, you know, forecast very strong growth and as you know, they had two significant finds in oil, and also one significant find in natural gas as well. Just to point out a little bit further, in that oil, a lot of those are the [sub-C] platforms. So we see great opportunity there, and other parts of South America as well.

Also the nuclear side, which is obviously more long-term, is looking very, very positive. Depending on who you talk to, 80 to 120, 130 different plants, you know, throughout - again they're in China, India, the U.S. of course,l so that is a market looking extremely strong.

Okay. Good. Thank you.

Next question comes from Will [Boland] with Wachovia.

Good morning. I just wanted to ask, would you help us understand the bidding and negotiation process for projects, and please if you could tell us about the margin in the backlog. It looks like relative to sales that, you know, I guess we want to know about the margin in the backlog right now relative to existing sales. I guess - well, it looks like the backlog declined sequentially while bookings improved. Are you seeing project cancellations as well?

No. Let me go to your last question first. You know, if you rolled - there is a little impact from currency. But if you roll bookings, sales, you can see our sales were in line with bookings, which would indicate that backlog is relatively flat. The other thing to think about is a lot of shipments go out in the fourth quarter. So does it surprise us that our backlog at the end of the third quarter and the backlog at the end of the fourth quarter was flat? Not at all. Because what you've seen now - we talked about this last year, as bookings were out stripping sales, as you were ramping up and starting to develop these projects, backlog continued to grow. But, you know, over time as backlog grows it can be of two things. You're booking very strong, which we were, but also it could be that you are not executing on your sales, and we did. So I think that is an important message.

I think on the bidding process, you know, on these large major projects from inception to finish, it could range from three, five to seven years, as these things go on the drawing board. We are typically involved in a lot of the engineering and a lot of the analysis around it before it is even bid out to the general contractor. And then in a period of time, depending on the complexity of the project, we'll come on line and bid on that project itself. So that's the process on these large projects.

And if we are talking about you said margin in the backlog, the only comment I made about that, I didn't talk specifically about margins in the backlog, but I did say that we saw better pricing. And the way we look at pricing is basically the multiplier we put on projects, particularly in the pump business, we saw the multipliers go up. We saw better pricing in our backlog at the end of '07 than we did in '06. Also if you just take an analysis of our after market and original equipment mix and do an at probation analysis, you can see that the original equipment margins and gross margins did improve during the year, which reflect the benefit of pricing that we saw in '05 and '06, and also our execution of that backlog.

Okay. So in the way of cancellations, you are not really seeing much of that at this point?

No, we are not seeing cancellations.

Thank you. Then just the next question. It looks like beyond cash use for share backs and the dividend, particularly the increase that, you know, has there been any thought toward acquisitions? I mean, rather than investing in infrastructure on your own, maybe leveraging some of the work that others have done and possibly increasing your footprint and distribution that way? I mean, I know it's something you have done historically, but it was pretty light in 2007, for instance.

Yes. Is it something that we are looking at in all three businesses, to see what we want to do with acquisitions. When we look at an acquisition, be it small or large, sometimes it is a make versus buy. It is better sometimes to buy it. Sometimes it's better to make it. So the answer to your question directly is yes, we are looking, and we have what we call the dry powder to make it happen. Well, that was on the cash flow, that was a message, you know, the repurchase we can support that, the dividend, certainly the organic growth and the structure that we can build out and also strategic acquisitions as well. We have got a very, very strong balance sheet, we can do all those things.

You do have a follow-up question from Charlie Brady with BMO Capital Markets.

Can you talk about the SinoPac agreement you guys reached. Are you guys sole sourced on that now, or maybe a little more detail on really what that means kind of longer term for you guys. Sounds like a pretty positive event.

SinoPac is obviously one of the largest oil companies in China. This is an agreement going forward that we will be working closely with them developing projects, developing needs and obviously knowing which way they are going. It is a very positive agreement for us and SinoPac.

Thank you.

You do have a follow-up question from Andrea Worth with Robert Baird.

I wanted to dig a little bit into the seal margins. Obviously you guys have done a lot on the investment front. The operating margins have slowly year-over-year been expanding more and more. I'm just curious, have you pulled back the investments a little bit as far as dollar amounts go? How should we look at it, as far as how much you actually are spending now? And then going forward really on the investment front in seal?

I think probably a good way to look at is the - you know, we are going to continue to drive and focus on top line growth. As I mentioned, this is a high-margin business, a high-performing business, and we want to grow the top line. You should expect continued investment in sales and engineers. One of the things that I would say is probably more event-driven, for lack of a better term, is they are spending quite a bit on their ERP platform, because they operate on a hub and spoke model, and one of the backbones is a very efficient ERP system, so that we can move work literally electronically around the world to be very responsive to our customers. So in '07 they had heavy investment, and there will be some in '08, but they continue to drive absorption and improve their businesses they - you know, over time. Also the QRCs, they will continue to invest in those. There is typically a little bit of a lag time before - as you build the infrastructure, before you get it up and running, but those QRCs have very high IRR. So I would say that he trends you have seen over the last couple of years are really systemic, and one of things at this point may be kind of suppressing those trends, but I think giving us future benefit, is going to be our investment in the systems and in the platform.

Then just switching over to the pump side and the after market side, obviously saw a good acceleration in the revenue. But looks like the orders are up only 10%. Is there some worry we should see - have there, just kind of given the deceleration in the growth rate, you know, and especially as it relates to hopefully seeing this after market shift coming up, a lot of this installed basis put into place start coming off warranty?

No, there is nothing you need to read into that. I mean first of all, again this is a market that grows mid, maybe slightly higher single digits. Anything over that over a sustained period of time indicates that we are exceeding the market growth. Again, this is not a quarter-to-quarter business. There is a lot of focus in the fourth quarter on projects and getting projects out, as you can imagine. But this is a trend on after market that we really look at over the year and anything, any growth rate for us in high single digits, low double digits, is tremendous for our business, because of the kind of after market margins it drives through, and it can also - the important thing to remember also about this after market business is it pulls through our original equipment products. So you can't think of it as just projects and then after market. What we are finding is in these alliance arrangements, our ability to deliver after market actually pulls through, you know, our pumps, our seals, our auxiliary systems, and even our valves to a certain degree, into these new projects into these major refinery expansions. So nothing to read into that. We are very excited with the growth and how they are executing on their strategy, and there is still more work to do.

As a follow-up to that, quickly, could you maybe comment as to where you believe you are right now as far as, you know, a lot of projects you have already - a lot of the pumps you put in place already just this last cycle? Are they starting to come off warranty and are you starting to see a benefit form that yet or is that still yet to come?

You know, when we look over the horizon we still think a good portion that have benefit is yet to come. In terms of, you know, the projects we put in and the after market that comes from that. But we are not waiting for that to come, as you know. We are going to go out and get after market business that the customers are actually performing on their own equipment, that replicators are performing, or that maybe our competitors are

Thanks, guys.

We have now reached the allotted time for questions. I would now like to turn the call over to Mr. Zac Nagle for any closing remarks.

I want to thank everyone for joining us on the call today, and we've got [audio difficulties] scheduled in this year, so hopefully we'll [audio difficulties] seeing you all very soon. Thank you very much.

This concludes today's conference. You may now disconnect.