福斯 (FLS) 2008 Q1 法說會逐字稿

Good morning, my name is Cassandra and I will be your conference operator today. At this time I'd like to welcome everyone to the Flowserve first quarter 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). Thank you.

And now I'd like to turn the call over to Zac Nagle, VP of Investor Relations. You may begin.

Hello everyone and thank you for joining us. Welcome to Flowserve's first quarter 2008 investor conference call. Todays call is also being webcast with our earnings presentation via our website at www.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 on our website, please click the " Click here to listen via phone " icon at the bottom of the event details page. I'd also like to note 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 next few months. Joining me today are Lou Kling, President and CEO of Flowserve, Senior Vice President and Chief Financial Officer , and Latin America 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-Q filing, and todays earnings presentation slide deck for Flowserve's Safe Harbor topic or Safe Harbor Statement on this topic, excuse me. All of 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 on 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'd like to turn it over to Lou to begin the

Thanks, Zac and good morning. It's a pleasure to welcome you to our 2008 first quarter conference call. I'm pleased to report that Flowserve had a terrific first quarter with continued strong execution and outstanding financial results. We started off the year stronger than expected and are now on track to exceed the full year 2008 targets we stated in our fourth quarter 2007 conference call.

These record results show the continued strength of our end markets, strong leverage in our income statement and most important, successful execution of our key strategies, which include significant organic growth, successful operational excellence and limitation, SG&A reduction and margin improvements. The financial results along with even better than expected penetration of our key end markets, more favorable currency ratios, lower interest rates, improved traction on our tax planning initiatives, and our increased confidence in our ability to continue to execute and grow in this environment have bolstered our outlook for our full year performance. Therefore, we are significantly raising our full year 2008 earnings per share range to between $5.90 to $6.20.

During the next few slides I will cover some of the quarter's significant highlights as well as the key performance metrics achieved during the quarter. Then I'll touch on just a small subset of the key global project wins we've had over the past year or so, which will highlight more clearly how we're using our global footprint and executing in strategic global locations and key market segments to position the Company well for success over the long term. In the back half of my presentation, I'll spend a considerable amount of time reviewing what we're seeing and expecting to see going forward relative to our primary end Markets. From this discussion, you'll be able to gain a clearer view of of our external market outlook and a stronger sense of the very attractive opportunities we see ahead.

Slide 3 covers the primary highlights for the first quarter of 2008. We delivered record first quarter earnings per share of $1.53, up 159% over the same quarter last year. This significant increase in earnings was primarily due to improvements in operating income, up 350 basis points during the quarter to 11.9% driven by 24% increase in sales, 180 basis point improvement in gross margin, and a reduction of 180 basis points in SG&A expenses as a percentage of sales. The company's fully diluted first quarter earnings per share of $1.53 included currency benefits resulting from our global presence, which Mark will discuss in more detail later in the presentation.

We also delivered our fifth consecutive quarter of bookings in excess of $1 billion, recording bookings of over $1.4 billion, up 31%, and another quarterly record for the Company. This increase was driven primarily by continued strengthen all sectors with notable growth in the power and chemical markets, particularly in the pump and valve divisions. We also saw strong manufacturing throughput in the first quarter, delivering record first quarter sales of of $993 million, up 24%, and recorded strong gross margin improvement, up 180 basis points to 34.8%.

This gross margin increase was primarily due to higher sales volumes positively impacting fixed cost absorption, continued execution on our operational excellence programs, price increases, and success of the company's end-user after market strategy, which resulted in higher levels of after market sales, particularly in the pump and seal divisions. It should be noted that even with our record first quarter sales, our record bookings increased our backlog 27% versus December 2007 to a record $2.9 billion. With respect to our end markets we continue to see broad strengthen the first quarter based on continued global infrastructure investment.

Slide 4 outlines in detail many of the first quarter highlights I discussed on the previous slide. As you can see, the Company delivered tremendous leverage through the P & L during the quarter, delivering operating income growth of more than three times the rate of sales growth and earnings per share growth more than six times the rate of sales growth.

Slide 5 shows our progression of bookings success since the start of 2004 and highlights a tremendous growth in bookings we've driven since the back half of 2005. As I've mentioned earlier, the first quarter of 2008 represents the highest quarterly bookings level ever achieved by the Company, at over $1.4 billion, which was up 31% from the same period a year ago. Slide 6 highlights our sales since beginning of 2004 and the tight correlation between bookings growth and sales growth. Historically, this relationship or conversion cycle between a booking and a sale on average has held to about 12 months or even slightly less, but as projects become more complex and industry supply continues to be tight, customers are ordering earlier and extending the duration of their projects to help ensure their own success. This lengthening of the delivery cycle by a month or so benefits our capacity planning and allows us to take on additional projects while providing increased opportunity for even better on time delivery. While we cannot guarantee the average cycle time from a booking to a sale in 2008, our current expectation is for it to lengthen slightly to between 12 and 13 months.

Slide 7 highlights an important element of our business model that we've talked about for some time. That being the strength of our global footprint and how we leverage it. This chart represents a small sampling of of our large project wins from across the globe over the past year or so in many of our key industries, including oil and gas, power, chemical, and pulp and paper. We've updated the chart with some recent wins that were not shown in our 2007 year-end call. The strength of this snapshot is not just the fact that we're a leader on these projects around the globe. It also represents the continued after market opportunities that projects like this represent for our future. Our growing global manufacturing and support center footprint across multiple key infrastructure growth areas is also a major competitive advantage for the Company.

Slide 8 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 not only continued strength, but also growth opportunities for Flowserve on a global scale. Several research firms have been analyzing the future of this industry and have created basic models on the growth of daily oil consumption across the globe. These models forecast an average annual increase of approximately 1 million barrels per day worldwide for the next several years. This increased demand is being driven by significant growth in development Markets particularly China and India, as well as many other parts of the globe which are expecting to have increasing demand due to their growth in both domestic industries and populations. This forecasted growth in demand requires continuing increases in upstream and downstream projects.

Investments in new plan capacity are forecasted to occur globally with particular focus in Asia, Russia, Brazil, and the Middle East. Refurbishment and upgrading of aging refinery infrastructure is also a key focus for investment to meet these projected demands. On the upstream side, major offshore fuel discoveries in places like Brazil are helping fuel significant project activity well into the future. These large offshore finds are in deepwater and are a catalyst for driving advanced technology developments for this demanding application. As I've mentioned before, we are actively participating with numerous partners in development of subsea pumping and flow Management technologies.

We have also benefited recently from the offshore activity driving the increased use of floating platforms and production ships. These applications require large underwater positioners or thrusters which are linked to GPS systems to insure that the floating structure is able to stay in its proper location. We started manufacturing these positioners many years ago and have recently won several large orders, including new opportunities in Russia. Flowserve's product capabilities have also provided some major product wins in Canada for the tar sands production facilities as technology investments continue to reduce the cost of extracting this oil.

The natural gas industry is also seeing measurable growth due to the increasing interest in cleaner burning fuels. This trend is forecasted to drive continuing investments in conditioning gas for long haul transportation. The two methods experienced focused investments are gas to liquids known as GTL and liquefied natural gas known as LNG. Flowserve has already seen major product wins in both of these methodologies including the Pearl project in Qatar.

The power industry continues to experience significant growth. The global demand for electricity have been forecasted almost double by the year 2030 for the 2007 World Energy Outlook Report. There are also many other external data points which support this growth projection. For example, the press recently reported that China's kilowatt hour consumption in January and February of 2008 increased by almost 12%, compared to the same period in 2007. This forecasted growth in both China and India over the next two decades supports significant increases in demand for electricity.

In addition, new electrical capacity is being either constructed or planned worldwide due to the ever growing demand for power. Along with new construction, there is significant focus on low efficiency, aging power infrastructure presently throughout many mature markets. Some of this old infrastructure may have to be taken out of service due to the high CO2 emissions and high operating costs requiring new plants to come on line to replace the demand, but most will be reviewed for upgrades and refits to increase power generation capacity and decreased CO2 emissions to insure they remain operational well into the future. Near term, coal is still being forecasted as a primary fuel source worldwide. The new coal fired systems are projected to use super critical or ultra super critical designs to increase the amount of power per unit of fuel as well as lowering CO2 emissions.

Flowserve has made significant investments in new product technology which is designed specifically to serve the increased pressure and temperature demands for these new power plants. The drive for cleaner electricity is also fueling more discussion and activity around nuclear and gas fire power plants as we have mentioned in the past, we are well positioned with product lines which maintain our N-stamp rating even through the steep fall off in U.S. market that occurred during the past several decades. And through our continued nuclear experience in other parts of the world combined with strategic joint ventures such as the one with the Changsha Pump Company in China, we believe we are well positioned for the growth of this growth market. The design and control greenhouse gasses is also supporting investments in geothermal technology, in carbon sequestration and we're actively partnering with key customers to investigate in test solutions for these critical applications.

In the chemical industry the increase in global consumption combined with a rising cost of feedstock and labor is requiring new investment and plan capacity either close to input raw materials such as oil and gas or close to increasing demand and lower cost of labor. This is causing many new chemical processing plants to be built in both the Middle East and Asia which we plan to support through our new facilities in Dharan, Saudi Arabia, and Shuzo, China. In addition there are numerous coal gasification projects under way to convert feedstock from oil to less expensive coal. These developments support the continued growth in our chemical market as our customers invest to increase capacity , move capacity and convert capacity. It is also important to note that several of the major national oil companies are beginning or have announced aggressive investment plans to add petro chemical operations adjacent to their refineries to lower the cost of production. These include companies such as Petrobras in Brazil and PetroChina in Asia.

Our line of specialty products designed for critical applications in chemical processing plants continue to support strong business growth for major project wins in these growth areas. In the water market, the outlook remains positive due to the increasing demand for cleaner water worldwide. Forecasts continue to show sustained growth in this industry with strong growth in developing areas of the Global Market. Research data shows that almost one fifth of the world's population currently live in areas with an insufficient supply of water. This will require increased infrastructure which is capable of moving large volumes of water over long distances. Flowserve's project and application expertise along with our line of large water and volume pumps for movement of large volumes of water, flood control and irrigation applications supported by our Changsha Pump Company joint venture in China, position us well to pursue this market opportunity.

A very exciting part of this industry is the aggressive increase in desalination demand worldwide. Water supply around the world by desalination is expected to double by the year 2015. This was mostly driven by new technology that is significantly reduced the cost of building desalination plants. Desalination projects are now under consideration in many regions of the world, not just in developing countries with easy access to ocean water. Today we're seeing projects being implemented or under review in more mature markets such as Western Europe and even the United States.

Slight 12 shows the market grouping we refer to as General Industries. This group contains industries such as mining and ore processing, heating and cooling, agriculture, government, pulp and paper and food and beverage and it also contains orders of flow through general distribution. It should be noted that much of this distribution serves a broad array of customers which may include companies in the oil and gas, power, chemical, or water markets. One of our lead businesses in this group is mining and ore processing where current forecast supports strong growth going forward.

Our improved ability to handle slurry tight materials in severe environments while providing robust systems integrity has helped support our growth in this industry, and Russia and Eastern Europe, the expansive efforts to refurbish aging infrastructure, the district heating is driving significant volume growth in this market. As I have mentioned in previous calls, we are investing in capacity expansion, in our welded ball valve manufacturing site specifically to support this expanding market. In addition, many of the same valve products used in our district heating systems combined with our pump protects are used to support the growing district cooling market in the Middle East.

We have also continued to invest with our strategic customers, largely supported by government funding to develop new solutions for the growing biotechnology market. Investments in the production of cellulosic ethanol have also increased recently and are forecast to grow as market manages the need for alternative fuels and its associated impact on the global food supply. We also seen specific projects in pulp and paper such as the recent major project wins in Brazil. We therefore feel our analysts of both external and internal market forecasts supported by our own ongoing discussions with our customers leads us to believe our market outlook continues to remain very positive.

In summary, the first quarter was another outstanding quarter for Flowserve and I'm extremely proud of the Flowserve team around the globe for their tremendous performance. They not only met but in many cases far surpassed our expectations with respect to the quality of their operational execution which as I've noted many times is probably the most important factor in our success of the Company. Relative to growth, we have continued to demonstrate our ability to deliver strong financial performance across the P & L and bookings, revenue, operating income, and earnings per share. We continued the strong momentum we had when we exited 2007, taking advantage of the ongoing strength of our key end markets as well as our global footprint and continue to drive strong bottom line earnings to operational excellence and leverage in our P & L. We will also continue to place paramount importance on building sustainable, long term relationships with our customers which is critical to our success. This is a key element of our strategy and is focused on creating a win-win low cost of ownership model for our customers. As for our focus going forward, we will continue our strategic deployment of assets and resources to provide local support with global expertise to our customers worldwide.

We will continue to forecast focus on executing against the critical customer metrics of on time delivery, performance, and reliability. Lastly, we will continue to insure that shareholder goals and Flowserve employee goals are tightly aligned by continuing to link Flowserve compensation plans to our performance. At this time I'd like to turn the presentation over to Mark to discuss the segment results and our financial performance in more

Thank you, Lou, and good morning, everyone. As Lou mentioned, we had a terrific quarter highlighted by strong top line growth and significant earnings leverage. Before I review the results I want to focus on a few factors that impacted the quarter as well as our outlook for the year. First, we saw an increase in sales momentum in our sectors, with notable growth in power, chemical and water. When you couple this with the benefits of operational excellence, we see a positive outlook for the year. We also saw the impact from currency, as we've discussed before, two-thirds of our business is outside the United States, which means two-thirds of our costs are outside of the United States as well. So as the revenue benefits from currency, we also see an impact on costs.

We did see a benefit in our other income and expense line which reflects the mark-to-market of our hedges on foreign currency. Let me take a moment to explain this. When we enter into an order oftentimes it will be dollar denominated, but it will be manufactured in Europe In a Euro based cost environment. We believe in hedging future cash flows, so when we take that order in, we will put a hedge in on that dollar de nominated contract anticipating the future cash flows. What you see in the other income expense line is the mark-to-market on these hedges on a sequential quarter basis. Keep in mind the underlying contract is either sitting in backlog or the receivable is sitting in AR.

We also saw tremendous growth in the after market business. Strong growth in after market ordering sales highlighted by a 19% growth in after market orders in the pump business and a 22% bookings growth in the seal division. Our end-user strategies are continuing to gain traction. We saw continued benefit from our SG&A initiatives with continued expense control, particularly in the valve division and corporate segment. We're focused on limiting indirect headcount while continuing to invest in selling resources, engineers and R & D. In fact, over half of our $29.5 million increase in selling expense in SG&A was related to selling resources.

Below the operating line we saw a benefit in interest expense. We see lower interest rates and lower borrowings which has driven expense down. We also saw great leverage from the tax rate. An increase in our foreign earnings and low tax countries and the benefit of our tax planning has improved our outlook for the tax rate for 2008. These factors that is sales momentum, currency, after market growth, SG&A improvement, interest rate reduction, and tax rate leverage contributed to a strong first quarter and an improved outlook for the year.

Turning to our consolidated results you can see that operating income grew at three times the rate of sales growth demonstrating the tremendous leverage we get in this business. Turning to our bookings, bookings increased $340.5 million or 31.3% to a record $1.429 billion with strong organic growth of 22%. Sales increased almost $190 million or 23.6% to 993.3 million for the quarter with strong organic growth of 15%. Gross profit grew $80.3 million or 30.2% to 345.8 million representing a 180 basis point increase to 34.8% with contribution by all three divisions. SG&A increased 29.5 million or 14.5% to 233.1 million and SG&A improved as a percentage of sales 180 basis points to 23.5%. Again I'll comment over half of this was related to selling and also to illustrate my point earlier about currency, we can see a $12 million negative impact from currency in the SG&A line so you can see currency benefits on the top line but also impacts our cost. Operating income grew a tremendous 51.3 million or 76% to 118.7 million and operating margin improved 350 basis points to 11.9%, demonstrating the full leverage in our P & L, EPS grew $0.94 or almost 160% to $1.53, so we got the benefit of operating leverage, interest expense leverage, and tax leverage.

Turning to the the Pump Division. The Pump Division had an excellent quarter highlighted by tremendous organic growth as we continue to see them take market share, show strong strengthen project wins, strong after market growth, and terrific operating leverage. Bookings grew $232 million or 35.2% to$ 890 million. Sales increased $142 million or 34% to $561 million, and gross profit increased$ 57.6 million or almost 50% to 174.6 million representing a 320 basis point increase to 31.1% gross margin. This was driven by price, operational excellence, and we did see a shift of 100 basis points to after market. SG&A increased 19.7 million or 25.7% to 96.5 million and SG&A as a percent of sales improved 110 basis points to 17.2%. Again a common theme is over half of this incremental expense was selling related. Operating income increased 36.7 million or 88% to 78.4 million representing a tremendous 400 basis point improvement in operating margin.

Looking again at the mix for our Pump Division, you can see that we had 44% bookings growth in projects. These are longer lead time projects but they do secure the future by increasing our installed base, and we saw very impressive 19% growth in our after market bookings showing our end-user strategy is paying off. I'll call your attention to the mix for the bookings in the first quarter was 70% OE and 30% after market which should indicate that going forward the mix should continue to shift to more ridge mall equipment. You can see the sales mix. We benefited from a shift to after market but more of the gross margin improvement was driven by price, operational excellence and absorption.

Turning to the Flow Control Division, they had another excellent quarter. I highlight the word another because if you look over the past three years you see consistent improvement in sales, gross margin, and SG&A. This is a result of systematic program management approach to initiatives around pricing, product management, capacity optimization, low cost sourcing, cost reductions, and continued investment in selling and R & D, just to name a few. They are running these programs effectively and there are more in the queue. If you look at their bookings growth, bookings grew $80.7 million or 26.1% to almost $390 million, and sales grew$ 31.7 million or 11.8% to $300 million in the quarter. Gross profit increased $13.2 million or 14.2% to $106.2 million representing an 80 basis point improvement in gross margin. Again this has been a consistent theme in gross margin improvement over the last three years. SG&A increased $8.2 million or 14% to 66.8 million representing a 40 basis point increase but all of this increase in SG&A was selling and R & D related which is an investment for the future. Operating income increased 6.8 million or 18.7% to $43.2 million and operating margin improved 90 basis points to 14. 4%. Again, tremendous leverage for this business as well.

Turning to the seal division, they had an excellent quarter as well, highlighted by strong order growth which has been a focus for this business. We've continued to talk about investment specifically around building out their hub-and-spoke model. Let me explain what this means. This group has focused factories in key regions around the world that are supported by low cost, high volume factories and a network of QRCs. This structure drives not only after market growth but pulls through original equipment orders. Across the entire structure there's a focus on standard processes and systems and 24/7 engineering.

The result has been increasing demand for their products and services, as evidenced by their strong bookings growth in the quarter, $30.7 million or almost 22% to $171.3 million. Sales increased $21.4 million or 16.6% to $150.6 million and gross profit improved $8.8 million or 15.4% to $66 million with a strong gross margin of 43.8%. SG&A increased $7.5 million or 22% to $41.5 million, representing continued investment in the model I described earlier as well as people. Operating income increased 1.2%, 1.2 million or 4.8% to 26.3 million and operating margin was 17.5% for the quarter. We looked at this margin from time to time and Management is very confident in this business and the margins going forward.

Looking at primary working capital, one of the things that we need to talk about is the impact of factoring in our acquisition of Niigata Worthington. If you look at the overall impact, there was a $40 million impact from going off of factoring during the quarter and also a $30 million impact on primary working capital from the acquisition of Niigata Worthington. If you look down at a ratio that we watch carefully, and that's the ratio of primary working capital and/or inventory to backlog, you can see it's held very table over the three reported periods shown so we're very confident in our working capital position. Just to highlight a few of the items, receivables did increase 121 million which is is impacted by increased sales, there was a there 40 million impact from factoring and a $17 million impact from the Niigata Worthington acquisition. Inventory increased $174 million and this included $153 million impact from work in process primarily in the Pump Division and a $32 million impact from Niigata Worthington.

Looking at our first quarter cash flows, as we discussed historically, that we are on an annual cash cycle and we tended historically to be net users of cash in the first half and net generators of cash in the last half ,you can see the first quarter was consistent. Looking at the increase in working capital that was driven by work in process and the two items I discussed earlier. Looking at Capital Expenditures, there was a $14 million expense, we talked about a spend of 115 to $125 million for the year and we do expect that to occur as Capital Expenditures will accelerate as we penetrate additional markets. You look at borrowings on the line of credit there were no borrowings at the end of the quarter, and also although we announced a program, the last call, we did not initiate the program on stock repurchase but we do expect to initiate that going forward.

Looking at our full year outlook, the chart around gross margin and SG&A, let me just highlight a few items to consider as you outlook going forward. First of all, the OE after market mix. We continue to drive good project growth. Over the short-term we're getting good price and good margin on this business, and over the long term, we are increasing our installed base and securing the future for after market business. Talking about after market business, you can see that our end-user strategies are paying off and are driving gross margin.

With respect to SG&A, there's been good control at the divisions around SG&A particularly related to indirect headcount and we are scaling corporate overhead. Over these discussions we've talked about our goal of getting corporate overhead to 2-300 basis points of sales and in fact we achieved that this quarter. Also, look at selling expense. If you see the increase of SG&A over the last year, well over half of it has been driven by selling resources which is supported our top line growth. Also, we see an improved tax rate hat is below the previously stated range. This is driven by foreign earnings increase and also our tax planning. That brings us to our outlook going forward. As we mentioned we're very excited to raise our 2008 EPS target to between $5.90 and $6.20 based on improved visibility , strength EBIT outlook particularly as it relates to the factors I discussed earlier. Also we see continued strong investment in global infrastructure. In response we will maintain focus on globalizing our assets to drive capacity, needed to support growth of developing Markets around the world. We will have a continued focus on the customer with key customers focusing on total cost of ownership and alliance arrangements to assure uptime, and also will drive our end-user strategy. While our main focus on the top line will also look below the line around cost containment efforts, gross margin improvement and tax planning. We think this will deliver strong operating profit and EPS growth. We will also maintain financial flexibility through strong cash flow and a strong balance sheet. The bottom line has been and will remain we need to stay focused on execution. We think the opportunity is out there for us to get and we're confident that we will. With that I'll turn it back over to Zac for Q

Operator? We're ready for Q & A now, please?

(OPERATOR INSTRUCTIONS). Your first question comes from Amit Daryanani.

Question on the pump segment. Looks like gross margins were up 320 basis points and I think margin is at 100 basis points is due to better mix, the remainder 220. How much is that pricing versus operational initiatives and was commodities at all issue there?

Right, what I said was that we saw 100 basis point shift. The general rule of thumb is 100 basis points of shift mix approximately equates to about 30 basis points margin improvement so out of the 320 that would explain 30. The other 290, if you look at the implied margins in our projects you can see that we saw very good strong improvement there and that's being driven by price, absorption, operational excellence, all of the things. We have seen pricing and we've commented earlier that the pricing in our backlog in '07 was better than the pricing in the backlog in '06, but a lot of this is being driven by volume and operational excellence.

Got it. And then just as a follow-up on the bookings side, looks like the numbers up about 21 or 22% year-over-year. That's kind of a material acceleration in my head. Was there any one-time large contracts that could have potentially helped you guys out and also when you look at the sales activity, the bidding activity that you see, is there a reason why you would think that number would slow down materially from here throughout 2008?

Yeah. We don't comment on bookings going forward but looking back at the first quarter, it was consistent with the prior quarters and then we did as usual see large projects. There's a lot of projects that are being bid out there and if going to lose comments, the market looks still fairly strong, but going forward, we really won't comment on bookings but I think a point I want to make and we consistently made, we're very pleased with this growth but if you look at our business, we -- 10 to 15% organic order growth is tremendous for our business if you see the kind of operating earnings and EPS leverage we can get through our business so I think an important message is to achieve the objectives we talked about in 2010, we don't need real high levels of growth but what you've seen. Now, we're pleased with them and we'll continue to drive to them but I want to make sure that point is very clear, and also always keep in mind we're not a quarter to quarter business so things can fluctuate from quarter to quarter but over the cycle, we see good business coming our way.

And then just finally I want to hop off after that. Work in progress sounds like it jumped up quite a bit. Was there anything specific that drove that in terms of something that pushed out from Q1 to Q2 or is that just normal course of business?

I think I understood your question around pumps margin. It was, no. There's no unusual items to talk about.

Actually, yeah, the question was more work in progress inventory.

Oh, I'm sorry. I had difficulty, yeah, you saw that during the course of of last year. This is as we build these large projects for shipment and we talked about this in the second and third quarter last year, work in process does tend to build in anticipation of getting these projects out, so there's nothing unusual here.

All right, thanks.

Your next question comes from Mike Schneider from Robert W. Baird.

Good morning, guys.

Good morning, Mike.

Congratulations, truly a spectacular quarter. And on that line, I'm trying to understand the sustainability of what's going on this quarter in pump margins. I guess a couple part question leading to the ultimate question which is the pump after market margins, are those rising as well due to price operational excellence, etc?

Yes, you know, pricing doesn't change a lot. We've talked about over the cycles in the after market business but certainly as operational excellence is going to help all of our manufacturing activities, all of our service activities so we do see some benefit but it's not as marked as what you're seeing in the original equipment side.

Then on the original equipment side so we take an educated guess as to what the margins are between these and it looks like OEM or project margins in Q1 were only slightly down from Q4 despite a significantly seasonally weaker quarter. I guess what that begs is, is this ramp year-over-year in project margin sustainable or was there anything unique in the shipments this quarter that would suggest we shouldn't look for these year-over-year increases in the project related margins?

Yeah I mean, you look at the year-over-year quarter and you can see that margins were up and we do think that is sustainable in the original equipment. A lot of that is my comments around pricing in the backlog at the end of 2007. The issue around traction on the operational excellence and as we commented before, we try to get folks focused on the operating margin line in this business. This is good business, and you get tremendous leverage on incremental price but you do on absorption and operational excellence as well and we're continuing to drive that, and also keep in mind as you look down in the operating margin line, the incremental SG&A dollar with a project is not as burdensome as after market because typically, it's selling related and customer support and a few other items, so most of the other costs were capitalized in the cost of sale, so if you're looking at the margins, we have seen improved margin in our project business we started calling it in the third quarter last year for all of the reasons we've described.

So just so to conclude this then, incremental margin for the total Company this quarter was 27% on the operating line and the guidance seems to imply that incremental margins from here are 20 or less, so I guess really bifurcated question, if 27 is sustainable, it looks like the real earnings power this year is $7 or more. If it's less than 20, what factors should we think about just weighing on that incremental margin for the balance of the three quarters because that the seems to be what's implied in the guidance.

Yeah. I mean, if you look going forward, there's a number of factor s that could impact the margins and things going forward. One is mix and we talked about that. You saw a tremendous lift in the pump margins from a mix shift that drove significant 400 basis point operating margin improvement. And there's a number of other factors that we talked about. What happens to the currency going forward in a number of things as you outlook as mentioned, this is our outlook for the year at this point. We're certainly confident in our business, and there's a number of factors that could impact that but we don't, what we're not suggesting is there was anything in the first quarter that was unique either way, but you have also seen historically our first quarter, if you kind of modeled it over a period of time was our lowest absorption quarter in historical times. We saw good business go through, so if you look relative to prior periods, the hockey stick that you've seen in companies, ours has certainly been moderated because we're getting good flow through our factories.

Congratulations then, guys.

Thank you.

Your next question comes from Scott Graham from Bear Stearns.

Hi, good morning.

Good morning, Scott.

Nice quarter, but, you know, I don't think I could say that more with more enthusiasm than I think has already been expressed. The couple questions I have for you guys, first of all was there any little minor revenue impact from the consolidation of the joint venture?

Yes, there was. It was very small, because the acquisition was consummated in the middle of March and so we had roughly a $10 million revenue impact but it was insignificant to earnings. I think going forward the way you need to look at it is our half of the net income was taken in the income from affiliates line in the Pump Division and therefore in consolidation so going forward it will be fully consolidated. The historical revenues were approximately $80 million so that should help you kind of model it going forward but it will be fully consolidated and there was an impact to working capital because even though we took just a partial month of their earnings in consolidation, we had to take their full balance sheet on at the end of the period.

Understood, okay. Now, it looks like you you had some benefits from currency in the operating income line that were a little bit higher than what I was thinking about. Is that something that you guys are contemplating, some type of hedging to avoid it going the other way, with the dollar potentially strengthening over the next 12 to 18 months, not that it will but obviously recently it has been. How do we kind of stop that or blunt that from going the other way?

Well, that's a good point and let me explain this. We do not speculate on hedges, so we will not put a hedge on making a call just absent an underlying on the currency. What you see in this, let's just think above the operating line and below the operating line. And I'll start below the operating line. That's where the mark-to-market on our hedges are, so from one quarter to the next and you you saw the Euro go from $1.46 to $1.58, that's the mark on our notional amount of hedges. Above the line, what that is hedging is a dollar denominated contract with Euro costs, so we really do have hedge when you get down to the pre-tax line. Now, there may be some timing issues around it but those are not put in place based on necessarily our call from quarter to quarter where the dollar is going to go, they're really designed to hedge the cash flows of the business, because we've got a lot of things to work on and we don't want to necessarily just take on a necessary currency risk, so I think that's an important message, so these hedges that are sitting down below the line, what they're hedging are going to be orders in backlog or receivables that are sitting on our balance sheet. Right, right, and I was talking about the stuff above the operating income line. Yeah.

So okay, so you're aware that the dollar going the other way could impact this and you have strategies in place to kind of keep it within a band?

Absolutely. That's what it's designed. You could actually say that some of the margins in our receivables are going to backlog are compressed at this point because they're dollar denominated revenues with Euro costs and if the dollar strengthens you'll see a benefit from it and the offset again is going to be the mark-to-market on our hedge.

Right. Okay, last question is this. The corporate expenses as you know has been something that's difficult for like I guess the sell-side and perhaps even the buy side to forecast so is there any type of color you can give us here, Mark, on you had a nice decline in corporate expenses this quarter. Is that a trend we should see continue? Do you think corporate expenses may be flat? It's a big number and it moves the needle, so any kind of visibility you can give on this would be helpful.

Yeah. I think, let me talk about what our goal and our initiatives are, they're around 200 to 300 basis points as a percent of sales and I guess this is the first time in our discussion, Scott over the last two years where I can say we're there. We're at the high end but we'll continue to drive it. I think another thing to consider is if you look '07, '06, '05 , '04, we've been certainly impacted by let me just call it generally finance related compliance related costs. You certainly seen the finance related costs taper off during the course of last year and as we talked about at the end of the year, we do expect our other compliance related costs to go down. Now, you never can anticipate an unforeseen event but absent those, we expect the way we're managing the corporate departments up here, we expect to continue to get scale on that. But it can change from quarter to quarter but we certainly have seen an improvement and we're within the range and we're going to continue to

So you would say that last year's number should be a peak, at least for maybe the next 18 months if we kind of look at that on a quarterly basis?

Well again, things can pop-up from one quarter to the next, sure. But we're continuing to drive it at this rate and lower and absent something like that popping up we're going to continue to do that.

That's very helpful, thank you and congratulations.

Thank you.

You're welcome. Thanks, Scott.

Your next question comes from Charlie Brady from BMO Capital Markets.

Good morning, guys.

Good morning, Charlie.

With respect to flow solutions margin there, and I know you've been sort of building out some of the QRCs and it's probably impacting some of the margins there, but they kind of trended down a little bit, we have a temporary trend or has something within that business or maybe a different level of investment caused that margin to kind of stay around this level or do you expect to get back up to sort of prior low 20s, mid 20s level?

Yeah. Again, I won't comment on forward-looking margins but nothing structurally has changed in that business but one thing that we've talked about regularly is we're very aggressive on continuing to take market share. If you'll recall they have the number two position in the business and they're focused on taking the number one position and you have to do that with with buildout, with people and infrastructure and systems as well. They've had very strong investment in their IT systems because as you think about it, response time is critical, so if they can move engineering around the world 24/7 if they can move manufacturing around the world 24/7, if they can build out QRCs to be proximate to the customer, that's what the customer wants and if you look at all of our products, a seal just by nature tends to fail more often than any other products. That's just the nature of a seal and oftentimes they're protecting the environment, so that ability to respond is critical. Now, we're very confident in this business, very excited about its top line growth because keep in mind this is a service business and the after market service does not grow, it grows far less than the rates you're seeing this business grow. So nothing structural has changed.

And can you give a sense of what the buildout of the QRC looks like today, and where that's headed in the next 12 months or so?

We could always say we need to build more but a lot of that will depend on the customer. We're in the process of opening up one in Vietnam in response to a major facility there, so we continue to drive that. We need to make sure we have the right people in place, the right organization and the structure to support it. You can't really look at it like a retail shop in terms of the incremental stores that we put in because it doesn't necessarily mean that we need to have a QRC to support a major facility. We may have another QRC or an arrangement where we can run it through either one of our focused factories or one of our LCS plants so I don't want to look at it in terms of incremental QRCs but we are putting a handful into the ground every year and we'll continue to.

That's helpful, thanks. Just with respect to the other expense line to the mark-to-market on the FX, given what you have in place today, with your current backlog, should we be building in for the next couple of quarters some mark-to-market I guess income on that line?

Well, on that line, remember the mark, there are other things in that line item, but one of the biggest drivers in the quarter was the mark-to-market on our foreign currency hedges. That all depends on your outlook on the dollar Euro primarily but you also have the dollar sterling and some others as well. Basically on a sequential basis that's going to mark, you have the mark and the prior period end and whatever the change is is going to be your income expense in the subsequent period, so it's much your call on where you think the currency is going to go. I mean we are now four months into the year with a relatively weak dollar and a strong Euro. There's commentary around where it may go going forward. I think the point we want to make is we don't, we're not in the business of unnecessarily taking on that risk. So what we'll do is we'll put hedges on to make sure that we are hedging the cash flow and the business going forward. It can mark from time to time but keep in mind that there's an underlying asset that's sitting in backlog or in accounts receivable.

Your next question comes from Ned Armstrong from FBR.

With regard to your gross margin, you clearly had an outstanding quarter there. Has that made you rethink the degree to which you could take those gross margins over the long haul or is that more just a case of things working out really well for the quarter?

Well, I like that question. I'll tell you, Ned, if I in any way gave you any indication we didn't think we had substantial gross margin improvement I apologize because I think we do and we always have. So no, we're not rethinking anything at this point in time. If you peel back behind the mix, you can see that historically, we've had very good strong gross margin improvement over the last couple of years and it comes in different ways. A lot of it is certainly in pricing but if you look across the three divisions, it's in the Pump Division, it's good pricing, good project penetration, strong after market growth, and just great execution, and if you look in the valve business, it's just a whole number of initiatives they 're doing to drive gross margin and I could spend all afternoon listing those initiatives, some of them which are still yet to come, and in the seal business the way I look at it is we're just focused on top line growth. The gross margin goes from 45 to 44 or 44 to 45 or 43.5, we're not as concerned. We're concerned about continued top line growth in that business and that's how we're going to invest to grow it. So I think the theme we have here is we still think we have runway and really all of our P & L line items.

Okay and then moving to capital spending. You suggested that spending would be between 115 and $125 million for this year. Can you remind us how that spending is being allocated? As far as to what type of projects it's being put towards?

Sure. As we talked about last year we had the buildout in India and in China, There's still continued investment there. We're building out our facilities in the Middle East. We're also building out facilities to support the Russian district heating opportunity which we think is tremendous. We'll be spending money in South America. You see the theme there is we either have existing facilities that we can add products to and capabilities to or we may Greenfield some facilities in locations where they market opportunities are. One thing we'll suggest is we don't feel like we're in every place that we ultimately need to be, so there's still some buildout opportunity to capture additional market share. I think another general theme if you look at it is we will continue to spend as we did last year in our ERP systems and that's critical to our business, and we've seen very good progress in that. So we'll continue to invest in that going forward.

I think another thing that we talked about is our certainly some of our automated machinery in these high volume factories what we're doing is putting computerized machinery. The machinists these days oftentimes, it's a different person. He's a computer operator very sophisticated and very capable and so what that does is allow very high volumes of manufacturing to occur 24/7 and then finally a common theme we've talked about is in our QRCs. That's where we'll be investing our money going forward so as we talked about on the year-end call the fact that we have the Balance Sheet and the opportunity to put this type of capital to work is very exciting for us.

Do you think the return on capital spending in terms of sales generated for every X dollars of capital investment you make or does it make sense to think about it that way in your mind?

Yeah, that's part of the equation. The way we look at it net-net is internal rate of return. Return on investment, and I can tell you one thing, we're targeting and driving towards 15% consolidated margins so you could assume that anything, there aren't many things if any that come across our desk that are less than that amount in terms of an IRR. Now, one thing we will always invest in is certainly safety, because we think that has a very high pay off in our business, so we will, that's the way we look at our business. It kind of takes a step back, we really look at it through the eyes of our shareholders. We're focused on cash flow, that's why we hedge our cash flow and we want an internal rate of return to provide to the shareholder.

Your next question comes from Karen Finerman from Metropolitan Capital.

Karen?

Can you hear me?

Yeah.

Can you hear me?

Yes.

Congratulations on a fantastic quarter. Two questions. Can you give a little more clarity on the tax rate and also on the OEM after market mix, in 2010, do you have any sense of where you think that mix will be some I was sort of thinking it was starting to head back towards more toward after market business but maybe not with these bookings, maybe that's not the case.

Let me start with the second one. I think you do need to look at the bookings as an indicator of where mix may go. One of the things we commented we got this term called bookings shipped and that primarily relates to the after market. Those are quick turn products and that's what you saw tremendous growth in in the first quarter so that's on the heals of our end-user strategy but a general theme is at least over the short and intermediate term, we would expect to see more of a bias towards original equipment as our bookings mix for the first quarter was 70/30 and if you look over the course of last year it was 65/35. Coming out into 2010, there's a number of factors and I won't call a specific amount going forward but we'll continue to drive our end-user strategies which we think will drive the after market growth and as Lou commented there seems to be a lot of projects still coming online so I really can't call exactly where that mix is going forward but we saw a fairly significant shift last year and you can look over this year and see where the shift may go. So going forward over the short-term though we do see more original equipment. Again, which is good for our business.

Right.

High margin business, good price. Commenting on the tax rate, a couple of factors here. If you look at the tax profile of countries around the world , it's increasingly United States is becoming the highest tax jurisdiction, so what we've seen is tremendous earnings growth in our foreign facilities a lot of them that support the Middle East that are typically in lower tax jurisdictions. That's one thing that's driven our rate down and also tax planning. We've talked about this over the period of time and we've been spending a lot in tax planning and there's some things as we look over the horizon we anticipate seeing a benefit in in our tax rate this year. That's what caused us to take our tax rate down below the 30 to 35% range. Always keep in mind that with the disclosure rules and planning and there's some things as we look over the horizon we anticipate seeing a benefit in in our tax rate this year. It may be volatile around that rate but it is improving and we'll continue to guide on that and provide information updates on a quarter to quarter basis as we get more visibility into our annual

Fantastic job, guys.

Thanks, Karen.

You have a follow-up question from Mike Schneider from Robert W. Baird.

Mark, just sticking with this idea of pricing within the Pump Division to understand where margins are going, are you able to determine what you believe the embedded margin is in the projects you have booked in backlog and if you are, do you sense that that number is actually will sequentially improve as you work through deeper layers of the backlog?

Let me answer your first question first. Yes, we absolutely have line of sight into the margins both gross and operating margins in our backlog. We have a very disciplined sales and operation process that we go through and look at every project, build up the cost, look at where we'll manufacture it across a factory and we create what's called an in multiplier. We don't talk publicly about that because obviously that's precious information out in the marketplace but also we monitor the out multiplier as well to determine what we can do better or what we did right so there's a very disciplined process of looking at orders not only in the pump business but in the valve and the seal business as to orders that go into our backlog. Commenting on the margins going forward, I don't want to comment specifically on project margins. You've seen them steadily improve over really the last four or five quarters, which does indicate a couple of things. One that we've seen improved price, and if you look at the way Lou described the markets out there it's a strong environment for price right now but also volume, operational excellence, absorption, all of those factors I would say have played a significant factor in our gross margin improvement.

Okay, and I guess in terms of revenue guidance, I don't believe we saw an update on that. Can you give us a sense of what your revised number is for the year?

We didn't guide on revenue this year. We just went right to EPS.

Okay.

So we haven't provided, I think the only things in my comments to factor into your thought process and Lou's comments is we do see longer lead times on projects and another factor is there is going to be impact from Niigata Worthington acquisition which you'll satisfy more fully baked in as they're fully consolidated for the rest of the year for that matter and also we saw good sales momentum in the first quarter.

And then Mark, just on modeling the balance of the year, so the OEM after market mix of orders this quarter is 70/30, and that's I think kind of a peak ratio or peak mix for projects that I can recall, but when modeling the balance of the year and even into 09 it is unlikely the actual mix of revenue in pumps ever reaches that extreme; correct? Because after market does have a huge element of book and ship? Am I right in that logic?

Well, yeah. I mean I think if we continue to execute on your end-user strategies, you're exactly right because the booking ship intraperiod which will occur, will get booked and shipped before you and I talk next time will be in those numbers going forward so I think that's certainly a fair comment, but I don't want you to ignore the fact that we've seen consistently a strong bias towards original equipment relative to the mix this quarter and that's going to impact it as well.

There are no further questions. Mr. Nagle, do you have any closing remarks?

Yes, I'd like to thank everyone for joining today and we look forward to speaking with everyone soon.

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