福斯 (FLS) 2011 Q4 法說會逐字稿

Good morning, my name is Christie, and I will be your conference operator today. At this time I would like to welcome everyone to the quarter four 2011 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). Thank you. Mr. Mike Mullin, you may begin your conference.

Thank you, operator. Good morning, and welcome to Flowserve's fourth quarter 2011 earnings conference call. Today's call is being webcast with our earnings presentation via our website at Flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation. The webcast will be posted at Flowserve.com for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review over the next several months. Joining us today are Mark Blinn, President and CEO of Flowserve, Tom Pajonas, our Chief Operating Officer, Mike Taft, of our Chief Financial Officer and Dick Guiltinan, our Chief Accounting Officer.

Following our commentary today will begin the Q&A session. Regarding any forward-looking statements, I refer you to yesterday's earnings release and 10-Q filing and today's presentation slide deck for Flowserve's Safe Harbor statement on this topic. All of this information can be found at Flowserve's website under the investor relations section. We encourage you to read these statements carefully with respect to our conference call this morning. Now I would like to turn it over to Mark to begin the formal presentation. Mark?

Thank you, Mike, and good morning, everyone. I am pleased with our solid 2011 results, and I am proud of the work our employees have done to position us to take advantage of what we believe are improving end markets. Looking at our 2011 financial results, bookings were $4.7 billion, up 10.2% versus the prior-year. We ended 2011 with our highest fourth quarter backlog since 2008 in spite of geopolitical challenges and considerable currency headwinds. Our aftermarket bookings grew 9% in 2011, demonstrating the success of our end-user strategies which include ongoing investments in our global QRCs, as well as our strategic localization efforts. Earnings per share were $7.64, up 11% versus prior year. Our margins were negatively impacted by lower margin large projects booked in 2010 and early 2011, as well as incremental costs associated with a few delayed shipments. Despite these margin headwinds, we had positive operating income improvement on both a year-over-year and sequential basis as we continued to tightly manage costs.

Our 2011 results demonstrate the execution of our core strategies around global localization near key customers and resource allocations towards higher growth markets. Towards those strategies, we continued our efforts to reposition our people and capabilities in growing regions of the world, and we are seeing the benefits of these efforts in the bookings growth in emerging markets. We expect this trend to continue in 2012 in light of our additional investments in Brazil, China, India and Russia. We also executed on our inorganic growth strategy in 2011 through the acquisition of Lawrence Pumps. In 2012, we will continue to seek out similar bolt-on opportunities where we can purchase well-respected engineered technology that complements our product portfolio, has good brand recognition in an underserved market. We look for opportunities where we can leverage our global sales force and aftermarket platform to grow the business and pull through additional products.

Additionally, we recently set in place a new COO leadership structure which will help us drive our one flow serve initiative. We are seeing that increasingly our customers want to face one supplier. Our shelf frame agreements are a great example of that trend. Our new structure will help us leverage our product offering and aftermarket capabilities for our common customers across common markets and more quickly respond to the global trends we are seeing. We will also drive expense leverage and common processes through our unified organization. Tom will give you more details on his plans around the new structure and where he sees opportunities for leverage and operational improvements. I would just point you to the success we have had in combining our pump and seal groups as well as Tom's success in improving FCD's operational performance in margins over the last few years. We believe our more unified leadership structure will help us drive a strong culture of operational excellence through a common focus across the Company.

Looking forward to 2012, we expect continued momentum in our short cycle and aftermarket businesses, and we expect the long cycle business to remain competitive, but slowly growing. We have seen some increased quoting activity around several large megaprojects that have been announced or expected to be announced relatively soon. Although we are optimistic about these projects on the horizon, given the long cycle nature of this aspect of our business, we will not see an immediate impact on our results as we must still (technical difficulty) local margin large products in our backlog in 2012. We expect the first half of 2012 earnings, particularly the first quarter, will be tough compare to the first half of 2011, primarily due to the impact of the delayed projects in backlog, the strong dollar and the continuing uncertainty in Europe. Mike will go into the guidance in greater detail later in the call. Despite these headwinds, I believe we are well-positioned with our increased backlog to continue to achieve our 5% to 7% revenue growth target for 2012.

The guidance for revenue growth and margin expansion is based on our confidence in our end markets and our proven strategies around targeting growing global regions and markets to capture that growth. With this increased confidence in our future, we recently announced a 12.5% increase in our quarterly dividend on an annualized basis. This action reflects our commitment to our policy of returning cash to shareholders. In addition to focusing on profitability growing the business, we will always look to increase shareholder value and believe that along with our increased visibility and confidence, returning cash to shareholders was an important step in increasing our evaluation. Simply put, while 2011 showed good progress, we believe 2012 is well-positioned to be even stronger.

Before I turn it over to Mike, I'd like to thank Dick Guiltinan for all he has done for our Company. It was a pleasure working with you, and we wish you the best in a well-deserved retirement. So with that, I'll turn it over to Mike.

Thank you, Mark, and good morning, everyone. I am pleased to be here and serve as your new CFO. I'm excited about the opportunity we have to grow the Company and create shareholder value. Before I review our financial performance, I would like to thank Dick for the first class financial team he has put in place and wish him the best in retirement. Mark provided an overview of 2011, I am going to add some comments on the consolidated financials, talk a little bit about 2011 cash flow, and how we have deployed our cash over the last few years and discuss our working capital performance and our plans for improving it.

On the financial results, we continue to see momentum in bookings with Q4 bookings growth of 11.3% over the prior year, while full-year bookings grew at 10.2%, which I would like to add is the strongest bookings year we have posted since 2008. Our book-to-bill ratio in the fourth quarter was 0.9 on solid bookings and strong sales. Our full-year book-to-bill ratio was over 1.0 for the second year in a row at 1.03. Backlog at the end of 2011 was $2.7 billion, up 3.7% from the prior year. Sales in the fourth quarter were up 11% over the prior-year and up about 12% for 2011, reflecting the continued growth in the oil and gas and chemical industries and the full year impact of Valbart which was acquired in July 2010. Gross margin for 2011 was 33.6% which decreased 140 basis points from 2010, in part due to a few large projects with low margins, along with some incremental charges on certain projects that have not shipped or shipped late. As we turn to SG&A, you can see cost control continues to be a major focus, but not at the cost of limiting our investment in growing emerging regions. We continue to see the benefits of our realignment programs and cost reduction initiatives.

When you look at SG&A as a percentage of sales, the fourth quarter decreased by 130 basis points to 18.4% while the full year of 2011 came in at 20.3%, which decreased 70 basis points from 2010. Operating margin in the fourth quarter was 15.3%, reflecting strong leverage. Operating margin for the full year of 2011 was 13.7%, or 14% when adjusted for realignment costs, which is down about 90 basis points from 2010 with the SG&A improvement partially offsetting the lower gross margin. Foreign currency rates continue to be volatile in 2011. Other income expense net for the fourth quarter included $4.2 million in losses associated with transactions we have entered into in currencies other than our location's functional currency and mark-to-market charges on foreign-currency hedge contracts during the period. For the full year 2011, we recognized a gain of $3.7 million. Our fourth quarter tax expense was negatively impacted by a profit mix shift to higher tax jurisdictions, resulting in a quarterly tax rate of 30.3%. We do not view this shift as permanent and expect our structural rate of 28% to 30% to remain intact going forward.

Turning to cash flows, we finished the year strong, as is typical with the seasonality of our cash flows. We generated $368 million in operating cash in Q4, bringing our full-year cash flow from operations to $218 million. As we have mentioned throughout the year, working capital investment has been higher than expected. We'll take a more in-depth look at working capital in just a few minutes. On investing activities, we had capital expenditures of $108 million for the year as we continue to invest above our rate of depreciation. We also deployed $90 million of cash for the strategic acquisition of Lawrence Pumps.

On financing activities, we returned $220 million to our shareholders in 2011. $70 million in dividends and $150 million in share repurchases. So, on a year-over-year basis, our cash balance decreased $220 million as we finished the year with $337 million in cash with a net debt position of approximately 7% of total capital.

Turning to our use of cash slide, we have a historical look at how we have deployed capital over the last six years. We continue to take a balanced and disciplined approach to evaluating and deploying cash. We will provide some additional guidance around our expected use of cash in 2012 later in the presentation. Turning to working capital, we saw sequential improvement in the fourth quarter; however, there is still work to be done. This is an area of focus for our team over the next several quarters. We made some progress reducing DSO to 75 days at year end. As I mentioned at our analyst day a couple of weeks ago, I believe we can drive DSO into the mid 60s. We also made some progress on inventory, shipping roughly 20% of our past due backlog, representing approximately $60 million. I believe there is another $60 million of opportunity within past-due backlog, which we expect to get out the door in the first half of 2012. Now, I would like to turn it over to Tom as he will talk about the markets in our divisional results. Tom?

Thanks, Mike, and good morning, everyone. Before I review the overall markets and the details of the business segments, I'd like to discuss the new structure. As Mark mentioned, we are transitioning to a One Flowserve approach. We will be focusing on product and service platforms as shown and driving those platforms on a worldwide basis within our operating divisions of the engineer product division, EPD, industrial product division, IPD, and the flow control division, FCD. Each platform will be responsible for product definition, manufacturing loadings, sourcing, lead and secondary product manufacturing strategy, sales and execution. Several process functions like financial systems, project management, supply chain, research, human resources and information technology will provide consistency of processes across the platforms. We are excited about this change as we drive specific focus to each platform on a worldwide basis.

Overall, bookings increased from $4.2 billion to $4.7 billion year-over-year, bookings grew nicely year-over-year by focusing on our aftermarket strategies and strategic growth initiatives in emerging markets. Opportunities continue to be mixed with strong activity in most power markets, the chemical, general industries and upstream oil and gas. Aftermarket opportunities remain strong as we continue to redeploy resources and increase our capabilities through our services and solutions platforms.

Overall, the project business remains competitive. We continue to approach opportunities strategically by balancing pricing discipline, project win rates and marketshare targets, factory loading considerations and long-term business considerations. Large project pricing, however, remains very competitive in the current environment. In the oil and gas area, there is a shift of activity toward upstream production; in particular, natural gas has a growing focus even as shale gas finds in North America have kept domestic prices low. Investments in new refineries continue to be driven by Saudi Arabia, China, Brazil and India. Oil and gas production spend could increase mainly because of the depletion rate of current fields and higher costs of developing new, harder to find oil and gas deposits. While we expect long-term market growth to remain robust, we also see the near-term being moderated due to economic uncertainty in Europe. As a result, we continue to view the immediate future as mixed with opportunities continuing to present themselves in the emerging markets.

In power, activity is focused on China and India and particularly on the super critical side driven by reduced emissions and efficiency. Nuclear power opportunities continue in various countries around the world, including the recently announced Vogtle plants in Georgia. Natural gas reserves have created opportunities for combined cycle power plants, particularly in the developed regions just like the US. The chemical market in general is focused on the Middle East and China for new construction and MRO activity in North America and Europe. With recent finds of the shale of natural gas in the US, the use of natural gas as a feedstock has raised opportunities because of its low cost and available reserves. Refining, petrochemical and chemical plants will continue to vertically integrate. This is due to the proximity of the feedstock and the need of customers to drive more margin in countries like Saudi Arabia, the UAE, Kuwait and Russia.

General industries, including pulp and paper, mining and distribution, has seen a general increase over the last year and have rebounded somewhat from the 2010 levels. Bookings in 2011 were dominated by the oil and gas industry at roughly 40%, with chemical and 18%, and general industries at 22%. Sales for 2011 remained roughly at the 2010 splits by region with North America at 32%, followed by Europe at 23% and emerging markets at 45%. The Middle East continues with the refinery and petrochemical investments, even though there continues to be general unrest in some areas. Asia-Pacific continues to drive forward with investments in power, driven by the coal-based economies of China and India. Original equipment and aftermarket, bookings and sales saw good growth on a yearly basis. Original equipment bookings and sales grew 11.1% and 8.2% respectively year-over-year. Aftermarket bookings in sales grew 9% and 17.6% respectively on a year-over-year basis comparison. The workforce of skilled engineers with our customers continues to retire at an accelerated rate. This should result in an increased reliance on suppliers like Flowserve and drive the demand for offerings like our integrated services and solutions.

Over the past five years, Flowserve has continued to make strategic investments in our most important resource, our people. Specifically in engineering and leadership capability. Flowserve has added nearly 1,000 engineers over this period, representing a compounded annual resource growth rate of over 9%. In addition, Flowserve has trained over 1,200 managers since 2008 in management and leadership foundation courses with nearly 50% occurring in 2011 as we build our leadership bench for the future growth. Flowserve has grown our employee resource base in emerging markets by over 50% in 2006 with 23% of all employees now located in emerging markets. Overall, we are excited about the infrastructure developments we see across the industries we serve.

Now let's review the various business segments in detail. The engineered product division grew bookings 12.3% in Q4 versus prior year. Sales grew 13.8% over the same period. Bookings growth in Q4 came from the chemical, oil and gas power and general industry businesses. Regionally, much of the bookings and sales growth in Q4 came from North America, Asia-Pacific and Latin America. Gross margin was 34.5% in Q4, down from prior year. Operating margins, however, were 18.7%, based on operating and income growth of 12.2% from prior year Q4. On a full-year basis, bookings grew 4.1% with solid growth in chemical, power and general industries. Sales grew 7.8% with regional growth in North America, the Middle East and Asia-Pacific, followed to a lesser extent by Latin America. Operating margin was 17% for the full year in a mixed market environment. Aftermarket bookings in sales increased both in Q4 and the full year. Q4 bookings of sales increased 7% and 14% respectively, and full-year bookings and sales increased 9% and 16% respectively.

Our aftermarket business continues to strengthen. Services and solution opportunities also continues to grow, gaining interest from our customers by focusing on energy efficiency and operating cost reduction. Overall, Flowserve has 450 global customer alliances, of which approximately 112 are fee based. The power market in general saw good growth on a yearly basis, in spite of the continuing effects of the Fukushima incident. Projects in fossil, gas, solar, geothermal wind and biofuels are proceeding and present opportunities for bookings growth. The chemical market again saw good growth, especially with the opportunities that gas presents itself as a feedstock versus liquids. Oil and gas opportunities continue to present themselves, particularly in the Middle East. Proposal activity has been robust in this area, even though the oil and gas business was down about 2.5% from prior year. Overall growth in general industries, including mining and paper, provide for good diversification of our product base. In the face of competitive pricing environment, we continue to focus on lower cost sourcing, cost management and productivity improvement using our well-established continuous improvement programs.

We also positioned ourselves for growth by taking advantage of emerging markets. We invested in more strategic localization efforts in Brazil India, China, and Russia, and we continue to differentiate our integrated solution offerings through expanded asset management contract offerings. We completed our acquisition of Lawrence Pumps and integrated it into the business in Q4. Lawrence is a premium brand name in the oil and gas and chemical sectors. Their products are well known for their reliability in harsh critical service applications. This acquisition is consistent with our strategy to grow and deliver value through bolt-on additions. Lawrence Pumps is now part of the EPD portfolio. The industrial product division, IPD, is improving, with increased bookings and sales in Q4 versus prior year. Orders were up 5.3% in Q4 versus prior year, thanks to the increases in chemical, power and water business. Regionally, that growth came from North America, Europe and Asia. Sales were up 14.3% in the quarter based on North America and Asia-Pacific projects. Operating margin was 9.1% for the quarter as we continue to work off lower margins in the backlog from prior periods.

We are also continuing to work on increasing the performance and efficiency levels of our IPD plants. On a yearly basis, bookings grew by 9.4% on the strength of the chemical and general industry business. Regionally, the growth came from a strong Asia-Pacific and Europe and to a lesser extent, North America. Sales grew 9.7% on a year-over-year basis with strong growth coming from North America, Asia-Pacific and Latin America. Operating margins for the year were 7.2%. We continue to optimize certain structural parts of our business, including increased emphasis on on-time delivery and overall unit efficiencies.

Both bookings and sales grew in the aftermarket business for the quarter and full year. Aftermarket bookings in the quarter and the full year grew 18% and 9% respectively while sales grew 14% and 17% respectively. IPD will continue to stay focused on improving our operational efficiencies, on-time delivery and overall contract execution. IPD remains committed to reaching its operating margin target of 14% to 15% by 2015. The full control division had a solid quarter of performance. Bookings were up 15.2% versus Q4, with strong growth across all sectors, including chemical, oil and gas, power and general industries. Regional booking growth was strong in North America, Europe, Asia-Pacific and Latin America. Q4 revenues were up 5.6% versus prior period with strong growth coming from the Middle East, Asia-Pacific and Latin America. Gross margins in Q4 were up 180 basis points versus prior period based on stronger showings in the oil and gas businesses.

Operating income increased 18.3% versus prior year Q4. The overall book-to-bill ratio was 1.0 for the quarter while the book-to-bill ratio on a yearly basis was 1.09. On-time delivery to our customers was 91%. For the full-year, bookings increased 22.7% over prior year based on the growth in the oil and gas, chemical and general industries. Sales increased 23% versus prior year. Latin America and the Middle East led the increase, coupled with strong percentage increases in Europe, Asia-Pacific and North America. Operating income increased almost 29.3% versus prior year. Aftermarket bookings and sales for the full year versus the prior-year increased 7% and 23% respectively. In addition, all customer channels to the market, original equipment manufacturers, engineering and procurement and construction, end users and distribution, grew in bookings year-over-year. Overall bookings growth reflected our investments in emerging markets, particularly in the Middle East and Asia-Pacific, along with the strength at our core developed markets.

In our industrial markets, the chemical industry continued to see strong Q4 growth driven by smaller capacity increases and MRO activity. Renewed interest in chemical plants is beginning to form in the Middle East based on their drive to be recognized as a petrochemical hub. This is also the case in the US based on the abundance of relatively low-priced shale gas. Germany and key markets in Asia reported strong MRO activity. We also secured new orders for the silicone chip production for the solar business.

In the oil and gas business, we have seen continued interest in the LNG market. Particularly in Australia and some interest in the US Gulf Coast region, again, based on the abundance of shale gas. Proposal activity remains strong with the gas projects, LNG projects, pipeline initiatives and Middle East activity. Shifts from gas to liquid in the US have been a continued topic in the North American market. The power market has not yet stabilized. This is due to nuclear reports due out of China, the continued discussion of the fossil coal EPA requirements in the US and the overall increase in interest on combined cycle plants.

Solar projects continue being discussed, along with renewed interest in biomass projects, albeit on a smaller scale. In general industries, pulp and paper in South America continue to drive forward, as well as the overall distributor business. The distributor business increased over 22% year-over-year, as this route to market continued to gain strength. Some project orders were also realized in the steel industry for air separation plants and in other industrial gas applications in China. FCD's key initiatives will continue to drive our aftermarket and original equipment penetration into the emerging markets, particularly in China, Latin America, the Middle East and Russia. Our focus on on-time delivery and quality will provide FCD with customer growth platforms for the future. And now I'd like to turn this back to Mike Taft

Thanks, Tom. So, let's take a look at 2012. We will continue to be disciplined in our approach to capital deployment as we work to balance and align our growth initiatives with our desire to return capital to shareholders. Yesterday, we announced a 12.5% increase in our quarterly dividend to $0.36 a share, which is the fifth year in a row we have increased our dividend. We expect CapEx to be between $120 million and $130 million in 2012 as we continue to grow the business and support our customers. We expect pension contributions of $20 million to $25 million and have required debt principal payment of $25 million. We outlined our revenue targets a few weeks ago and expect to see a 5% to 7% growth in 2012, excluding the impact of potential acquisitions.

Moving to our 2012 (technical difficulty) geographic (technical difficulty) quarter of 2012 is expected to be impacted by some low margin late projects shipments booked in 2010 and early 2011 and a reduced level of aftermarket shipments compared to the fourth quarter of 2011. Earnings will be further impacted my the effects of the stronger dollar. We expect negative translation effects giving the average euro rate of roughly 1.4 in the first half of 2011 versus the 1.3 we have seen so far this year. In addition to the translation effects last year we saw from a weaker dollar, we also expect the $0.11 gain from a transaction standpoint we saw in the first quarter of 2011 not to recur. Finally we are reaffirming our 2012 full-year guidance of $8.00 to $8.80 per share, including $0.50 of negative foreign currency impact. And now I'll turn the call back over to Mike.

Thanks, Mike.

(Operator Instructions) Our first question comes from the line of Hamzah Mazari.

Good morning, can you hear me okay?

We can hear you, Hamzah.

Great, the first question is just around working capital. Maybe if you could just comment on what levers you are focused on? I know your targets out there on working capital, Mike, you mentioned them, but maybe if you could just talk about what structural challenges you may face in improving that working capital, given some of the factors inherent in your business?

Okay, well, why don't I turn it over to Tom and then to Mike to kind of walk you through it, one from an operational and the other one from a financial targeting.

Yes, so Hamzah, what I would say on the working capital from an operational perspective, what we are going to concentrate on is on-time delivery. Obviously, documentation and the closure of that documentation toward the back half of the contracts. We're going to look at lead times because obviously that can help also on the working capital as we now deploy more lean into the businesses. And then basically getting through the units in a high efficiency, the throughput overall in the businesses. Those would be the three or four operational things that I would concentrate on. Mike?

Yes, Hamzah, good morning, I agree with exactly what Tom said. And also, we will obviously address it on the front end, too, as we go through the bidding process of looking at certain things. So, it is really a two phased approach. One is addressing on the front end as we go into new orders, and then second is putting some procedures in, as Tom mentioned, operationally, in what is in place today. As far as metrics to look for, I think we ended the quarter at 75 days DSO. We are going to drive that down into the 60s, that is our goal. It is about $13 million to $14 million for every day we reduce that. So, I think there is a good $100 million out there of monetization on the AR side. On the past-due backlog we've mentioned, we reduced that by 20%. We think we've got at least another 20% to go, and that would be a monetization of another $60 million to $70 million. So, we've got work to do, but it is in our sights. And we've done it before, and we just got to get busy and focus on that over the next several quarters.

And, Hamzah, I would just add structurally, you asked, if you look at his industry back '07 and '08, very strong pricing environments. And we use the term that people were basically putting cash forward for manufacturing slots, so you are able to come in more cash at that period of time. And that -- so one dynamic, as you have seen, is it's gotten more competitive and the capacity we've talked about, the ability just to come in, that market in general us and our competitors has decreased. I think the other thing is when we talked about this is wanted to move more towards emerging markets, high-quality customers on the end, but they do tend to pay slower. So, I think those are some of the structural issues that we've seen overall in our industry, but I think the message for you is we talk through these concepts of working through the cycle as we talked about. And that working through this past-due backlog and some of the opportunities Tom has around operations, that all fits, and the output of all of that is working capital.

That's very helpful, and just a follow-up question. As you look at your current product portfolio, are there any product gaps right now that you need to address either organically or acquisitively? And maybe if you could also comment on your thinking around whether -- what your views are on the frac pump market. I know you are not in that market right now, but is -- do you find any other markets attractive right now that you are not in? And maybe also just on the product gap side, if you have any going forward?

Well, a lot of questions, and this is really the subject of a lot of our strategic discussions, and I'll try to encapsulate it shortly here. I think when you look at our product gaps, we addressed one opportunistically with Lawrence Pumps, we've developed the first phase of our chemical pump in the IPD business which was introduced. We need to bring the next generations to market because on the NC standard, which is the American Standard, we have the leading product equipment we need to develop more for the ISO standard. So, I think there are opportunities.

Now, I don't think there is a product that we look at that we said is going to fundamentally negatively impact our business if we don't have. It is more around opportunity. Now, when you look at the mining industry or the frac pumps, those are strong markets right now, and you can't be all things to all people. You've got to look how you get selectively into those market, consider that they do go through to cycles. They are in strong cycles right now, and penetrate it as you can. Think about it, though. When something is really hot, to get it inorganically, you're going to pay quite a bit for it. I mean, the market is not going to give it away for free. So, I think that is how we think about these opportunities.

We had the opportunity to develop some incremental capabilities internally in the mining business. We have a good competitor in that area, they are very good at what they do. But we always feel the market likes competition, and so we seek opportunities to get in there as appropriate. But again, you take a step back. When you look at inorganic what we want to do is be able to leverage our existing sales and aftermarket platform and be able to realize that return for our Company and our shareholders over a reasonable period of time in terms of internal rates of return. So, that's how were going to think about it, and we will keep approaching our product offering. We're very detailed in terms of how we look at it. But I think one of the things, with all the products that we have, we have a lot of technology, a lot of capabilities that we can adapt to different markets. A good example is, some of the equipment that we've adapted for the tar sands would not have been thought of 10 years ago, 10 or 15 years ago, but that has good penetration up in Canada at this point in time.

That is very helpful, I appreciate it. Thank you.

Sure.

Our next question comes from the line of Robert Barry.

Hi, guys, good morning.

Good morning, Robert.

A couple of things. One is on IPD, and I was wondering if Tom could just comment on what he is thinking about for that business, and maybe it is still kind of early days, but that path of 14% to 15% is that going to be back end loaded? Is there some low hanging fruit that we could see progress in the next 12 months and then move gradually there? How should we think about that target because it seems like there is still some pretty significant operational challenges in that business?

Yes, I mean, I would say there are some operational things that we have to take a look at, but the 14% to 15% is achievable over the next two to three years. If you look at the -- coming out of the gate here in terms of 2011, we had good orders, good sales, so I would say the front end of the businesses is beginning to work well, again. We have opportunities on on-time delivery, we have opportunities on the quality side of the business. Certainly, the working capital I mentioned before, in terms of the low-cost sourcing, this business is shorter-term, similar to the flow control division where there is significantly more low-cost sourcing around the world in FCD that there is an IPD, so that is an area we could begin to get some additional margin out of. Certainly, some of the things like lean and manufacturing optimization we'll begin to target, and I would also say the supply chain in general will be an area that we'll provide a lot of focus on, certainly in 2012.

And then you made a comment in the prepared remarks about Europe, I was wondering if you could talk about whether since you gave the outlook back in December, is Europe tracking weak as expected, or is it weaker or stronger?

It's pretty much along the lines as expected, Robert. We saw that -- if you look at our bookings, EMEA was that one that really -- that was negatively impacted last year, and we have seen a similar approach this year. The real question is, as you take a step back is I think there is consensus that they are going to go into recession, the question is how long and how deep. And I think a lot of that hinges on how quickly they can take action to basically firewall their credit related issues and to get in accord amongst the countries as how they're going to proceed going forward. We've seen some improvement there, but really until there is a firm understanding of how they are going to move forward, you wouldn't see necessarily the impact overall in our business.

And I would add, I mean, Europe on a year-over-year basis was only about 2% off and on a quarter to quarter basis, it was essentially neutral. So.

Yes, the other thing I would add there, Robert, is obviously we talk a lot about our exposure to the euro and the quantum of the dollars, but that is not just strictly business that stays in Europe, that's business were doing with customers that our contracts are valued in the euro, but actually, the product go outside of the country to other places.

Yes, and then just finally on EPD, I look at the backlog there exiting the year into '12, it is about the same as what it was going into 2011. I know the bookings started to accelerate in this quarter, but it is probably more of a 2013 impact on the P&L. Do you think the revenue will grow in EPD this year?

Robert, I don't wonder to give guidance be on what we have given you but the 5% to 7% range kind of helps you understand how it will grow across a couple of them. What you saw in EPD was, coming into the year, it was still, as we talked about choppy and competitive. So, you focus in these engineered areas on loading your factory's absorption also around price, but what we talked about in the middle part of the year was we saw some stabilization and increased selectivity. It was that selectivity in effect that kept it flat, if not to slightly down, on the OE side year-over-year, but we continue to drive the aftermarket business. This is how you manage these big, long cycle engineered facilities and opportunities as you move out of a cycle.

So, as we look forward, what we do have to do, and it is in EPD and IPD and a little bit in FCD, is clear that past due backlog that has been around for a period of time, and that is for a number reasons. It's -- it could be supply base, some of the issues that we have or really, some of these projects just haven't come online as originally scheduled and customers weren't anxious to take the equipment. But that will start to clear the first half of this year, we will work through that. A lot of that is in EPD, and we move forward. But I think as you look at revenue this year, we will remain selective and drive the aftermarket business in overall. And as I mentioned in my comments, we do see some of these project opportunities coming back over the horizon. And with that, we think pricing will ultimately follow.

But Robert, as we said in our prepared comments, we do feel good about the revenue projection and trajectory own in the 5% to 7% growth on a consolidated basis.

Okay, thanks very much.

Our next question comes from the line of Charley Brady.

Hey, thanks. Good morning, guys.

Good morning, Charlie.

Just a couple of quick ones, clarifications. On the tax rate first half, you're expecting -- would you expect the tax rate in Q1, Q2 to be above that 28% to 30% range?

Yes, you said 28% to 30%, I think overall, Charlie, I think what you would say is that we feel good on an annual basis that are structural rate will remain in that 28% to 30% range. Quarter to quarter it's going to bounce around, there is a lot of things that drive that, whether it is revenue mix, profit mix and things like that. But on an annual basis, we still feel comfortable that our structure rate being in that 28% to 30% range.

Okay, it's not fair then to say that the first half might be a little heavily weighted toward the higher tax rate just because of the mix of shipments going out the door?

Yes, it certainly -- it could be, it just -- a lot of it just depends on where that is coming from and all that, so it is hard to project quarter to quarter. I think we really look at our tax rate more on an annualized basis versus a quarterly basis.

Okay, and did you quantify a realignment cost for IPD in 2012?

No, we did not specifically. I mean, we are -- it's relatively small. We are pretty much through all that. We will have some residual realignment cost, a couple million dollars.

Yes, I think most of it is going to be more of larger -- just paying some bills and cash flows versus P&L hit at this point.

Okay and then one more. I want to look at the US nuclear market maybe a little more closely and the opportunity there because you had Southern Company come out and get approval for the first two to build the first two reactors in over 30 years. You've had the NRC come out the past two days purposing the safety regs in the US, you've got the Nuclear Energy Institute out there saying that new companies are buying a lot of equipment. Can you maybe give us a sense of what you view the opportunity in the US is over the next two or three years on the nuke side?

Let me just respond with a high-level theme, and I'll turn it over to Tom. I think this is what we have been talking about for a while. Nuclear power represents 20% of the power supply globally, and if anybody thinks are going to diversify away from it over a short period of time, that is just not the case. You can see it in certain isolated areas where they have moved from away from it in countries, but in general, this is a viable, long-term, well-established supply of power globally. And that is what we've tried to say is we -- you can see the short-term impacts of some of these things, but the US is a great example. It's key source of power, they don't have alternative ready supplies, alternative power and emerging powers, those aren't going to replace these base standards of power over the short term. So, it is a high level theme to think globally as it relates to our business.

And I would add to that, though, Charlie, that if you look at the US, there is 104 reactors in the US, a lot of them are coming up for relicensing, so that is going to present opportunities for us over the next several years. The aftermarket parts and services has continued to be robust over this time period because many of these plants are plants that were built in the 70s. And like you mentioned, Vogtle, Vogtle got its construction and operating license just a few days ago, and we participated in that particular project, and that commercial operation is coming up in 2016, 2017 for those plants. And then you also have SCANA, which has not gotten it COL yet, but that supposedly is coming up for review here shortly, and that is a plant that's similar to the Vogtle plant in South Carolina. Two plants for that, and those also have a 2016, 2019 commercial operation date. So, I think we're going to see a mixture of some new plant constructions, aftermarket and relicensing going on as we go forward here over the next several years.

When you guys get orders for nuke work, is it come out of EPD or are flow controllers rather evenly split?

Well, we have -- if you were to look at the Votgle and SCANA without getting into the actual details, it was pretty equally split. [Vels] participates on both of those plants also, the EPD group participates on those plants on the pump side, obviously on the seal side they go along with that. So, we have both opportunities, and I think I mentioned before on a typical plant, could be anywhere from $60 million to $80 million on a typical nuclear plant, not including the aftermarket over the next 30 years.

Great, thanks a lot.

Our next question comes from the line of Scott Graham.

Hey, good morning, approaching afternoon here. Two questions for you, one is more housekeeping. The $0.50 a share FX within the guidance that they hit, is that inclusive of the $0.11 a share swing in the first quarter?

Yes.

Second question is, and this is more directed for Tom, as you get to work on these operations here, it is pretty clear you've got a lot of things on your mind that you want to get moving. Should we expect you to hit the pumps businesses first because what you've done personally on the valve side is good to go for a while? Or are your efforts going to be across all the businesses, because that would seem to be a lot to tackle in your first year?

Yes, what I would say is this, is it was certainly -- I mean, the FCD business has performed well over the last several years, but we have a very capable person in there that has been part of the succession planning for the last four years. And I hope and expect, based on the objectives that he's been given, that he's going to take that business to the next level as it goes after emerging markets and gross margin and those type of things. A lot of my emphasis, because I have -- there is a, I would say a different base in FCD right now. A lot of my emphasis will be on the pump side of the business.

We talked about IPD in the past, and we have a road to go to get that up to 14% to 15%, but I think the road largely is in our internal responsibility to get there. I think the market is there for those products. We need to get better on the on-time delivery, pretty basic. We need to get excellent on the quality, which is what our customers expect, that those products get out there and are tested and passed testing the first time and get out the field and work with no subsequent revisions. So, we -- I feel pretty good that we got a view of what needs to be done. Now it is the amount of backlog that has to come through, and it is the length of the projects that will determine ultimately how that margin begins to develop over the next several months.

Let me add a couple of things to both of those, one is Tom has a -- in all of them, has a, really a good group of people in there. So, one important message is as we look at this opportunity, and yes, Tom is busy, he is always busy, but he's got some really good folks to help him out, and I think that is important to understand as well. And of course, and I made this point in the investor day, we all have a tremendous amount of confidence in Tom and his team. And so I think -- I just want to make sure that is very clear here as we look forward.

And then Scott, just again on your currency issue, it was against the full year. If you look at the currency benefit we got, it was rather small for the full-year. But a good way to look at it is there is above the line and below the line impact. And look, if $1 strengthens 10% against all of our foreign currencies, we have a disclosure in our K, and if you think about 70% of our businesses in those foreign currencies, that is a 7% hit right there on -- as a kind of flows through. So, what is important, a lot of people get focused on our below the line, but the currency hits us above and below like. It is part of being predominantly an international business.

No, I understand that completely, it is definitely operational, I was just trying to make sure that that $0.11 swing was in that $0.50 for modeling the first half.

Okay.

That is really all I had, guys. Thanks a lot.

Thanks, Scott.

Our next question comes from the line of Mike Halloran.

Morning, guys.

Morning, Mike.

So, could talk a little bit about the price competition you're seeing on the engineered pumps versus the IPD segment? Are you seeing more competition on a pricing side in the more standardized IPD products versus the engineered products at this point, or is it pretty broad-based?

Well the big -- we've talked about this before, the big large projects that you see out there are still competitive. Because if you look at our industry and the capacity which is getting incrementally utilized, but that is one of the best and most efficient ways, efficient in terms of you can get it to that capacity, getting that capacity utilized overall in the industry. It's the heritage of our industry. It's the old iron concept of our business overall, it is these big, big projects. And so they are fairly -- they are competitive at this point in time. When you look at FCD and IPD, those can -- it is probably not as broad-based. You may have pricing competition in certain areas, but you tend to have more pricing power quicker because of the short cycle nature of the business.

Great, at this time, I'll leave it there.

Yes, okay, thanks, Mike.

Our next question comes from the line of Kevin Maczka.

Hi, good morning.

Good morning, Kevin.

I wanted to ask a question about these lower margin shipments coming out of backlog. That has been a kind of a key theme for a number of quarters now, and a few quarters ago we were talking about lower margin business in backlog that was booked at less favorable pricing during the downturn. And now we are talking about past-due backlog which is more related to either a customer delay or an execution issue or what have you. So, I guess the question is, are we done with the low margin business that was booked during the downturn, and are we not just focused on cleaning up our own execution or customer delays and working on past due current backlog?

We're -- they're still both, and some of them are both. And what I mean is, some of the ones that were booked years ago that they haven't taken delivery on or late in delivery, those were projects that were competitively priced and haven't gotten any better in terms of their margin profile. And then you have the projects that were booked in '10 or '11 that are -- had not due to be shipped yet that are still coming through in the more price competitive environment. And then you have some projects that were booked early part of last year which have run delayed, more shorter cycle, mainly in IPD which have been delayed. And cost -- the general theme is the longer -- and E&Cs know this, customers know this, this is why lead time is so important. The longer a project days stays in the plant, the more costs attach to it.

So, it is really a combination of the things, but in general, the market driven impact, what you heard from us in the summer was selectivity and stabilization in these bigger projects. That will take whatever the lead time is, but typically a year plus. So, the market driven aspect, you can start to see clear towards the later half of this year. The past-due typically comes at the end of the cycle, those are the ones that are late. We are going to -- we talked about -- we really started talking about those on the third quarter call. We expect to get those out over the next couple of quarters, fourth quarter, first and second quarter is primarily where we'll get most of that moved out. So, those are the two forces that are driving it.

Right, and you said you moved out $60 million in Q4 and you are planning to do another $60 million in the first half, but I thought I heard a 20% number on the call today, can you explain what the 20% is? Is $60 million only 20% -- or is that 20% of this past-due backlog?

Yes, that is correct. We are always going to have some past-due backlog, and we measure that as a term of our efficiency and on-time delivery and all. And when you have a multitude of projects and the size of the business we have, we're going to have some of that. What has happened over the last several quarters is that has gone up, probably about up to about $120 million, $130 million. So, what we mentioned is that we shipped about $60 million of that in Q4, we've got about $60 million additional to get down to kind of our normalized past-due backlog, which we measure as a percent of backlog. And generally, best in class is in that 5% to 7% range.

So, we've, historically there is always an element of past-due backlog, but a couple of things about it. It is not necessarily all low margin past-due backlog. If you look back in '08, '09, that was not the case. We had past-due backlog, you will always have it for certain reasons. Because what we do is we are very rigorous to measuring to the contractual date. Even though the customer may have asked you to extend it for a period of time, it becomes past-due backlog. So, we want to keep the metric very, very pure. So, what Mike was talking about -- but the keep in mind, stuff moved in and out of past-due backlog in the fourth quarter.

But in quantum, that balance reduced 20%, and again, we think we have got another 20% to go to kind of get it below that $200 million mark.

Okay, got it. Thank you.

Our next question comes from the line of Jamie Sullivan.

Hi, good morning.

Good morning.

Just a follow-up to the last question on the past-due backlog. Is the right way to think about that the past-due backlog that shipped in the fourth quarter and scheduled for the first half, that's the most material impact, for instance on margin, and once you get that, you're sort of back to a normalized level of where the past-due usually runs?

Well, that is what we anticipate. What Mike talked about is as we move into the back half of the year, we will get to more normalized levels. And our expectation is Tom, over time, will drive those normalized levels to new lower levels. So, we're not satisfied, we're just going back to where we were before. But I think just a couple of things to think about. Past-due backlog that is late, that comes from a competitive pricing environment is low or no margin type of backlog that goes through. So, I think that's a distinction I want to make is we could have -- we have past-due backlog coming out of the last strong cycle, and it still a good margin in it. So, I don't ever want to associate past-due backlog across the board is zero or small margin business, but in this instance what we have is backlog that came out of a competitive environment that has been delayed, and those two things will compound to low margin backlog. That is probably the best way to think about it.

Right, that is helpful. And then maybe just on IPD, the -- one of the trends this year, there was price pressure like in some of the other businesses as well as some higher material costs. Just wondering how that feels now on the pricing side, whether some of that pressure is relieving and how you feel you are price cost on the material side is balanced as we go into 2012.

Yes, I do think if you look at '11, there was some pricing pressure due to the competitiveness that lingered around there. We did have some, maybe some slightly negative or neutral material. I think we are probably going to see the material maybe take a slight upswing, but that is some of the forecast that have been out there. I would say on the short cycle business, we have been indicating that that seems to be have been rebounding through 2011, and I would consider the short cycle business to continue maybe with that trend going forward. A little bit different than the longer cycle business where we mentioned that we still have some of that price competitiveness.

As I look at Tom's opportunities, the market driven price we talked about, but I also see that Tom's going to be able to get more pricing power as he continues to improve the execution. Because that is one of the primary determinants of price in the short cycle business. You've seen it in FCD. This is why we talked about look at FCD to see what the opportunity can be in IPD as he drives cycle times down. In matters of that, he's going to get pricing power.

All right, thanks, everyone, I'll leave it at that.

Thanks, Jamie.

Our next question comes from the line of William Bremer.

Good morning, gentlemen.

Good morning, Bill.

Let's stay what the FCD for a minute, very nice growth year-over-year. I'm looking pretty much at the sales for the fourth quarter was up less than 6% and the bookings, especially on the aftermarket there, were down 10% in the fourth quarter. Is this just sort of like a timing issue that you called out in your release, or is there something more here that needs to be focused on?

Taking a step back, looking at the year, a big contributor to what you saw the bookings and sales was the acquisition. So, I think this is why we are excited about the Valbart acquisition. They grew the business, they were able to grow the operating earnings, and it was right along our strategy. It was a product that we needed that we had the platform to deliver, and FCD did it and did it very well. When you typically look at -- and you can look over a couple of years, you've seen often times Q3 can be stronger than Q4. I think the most important point on this I can say is we said we are not a quarter to quarter business. Don't look for a trend overall in FCD or in anything else unless we call it out on a quarter over quarter basis. They had a great year.

Yes, okay. Okay, gentlemen, thank you.

Your next question comes from the line of David Rose.

Good afternoon, two follow-up questions. One is, if you could comment a little bit about some of the operating initiatives on Lawrence Pumps and anything that you've seen on the upside or negative in terms of surprises. And then lastly, if you can comment on Section 316 B of the Clean Water Act, if you have seen any product activity relating to that? Thank you.

Well, I'm going to differ on the 316 B to somebody else in the room, because I don't know what it is. But I can comment generally on Lawrence Pumps. As you take a step back, it was a good operation, functioning very well, great product, we have been very pleased with the acquisition so far. So, we haven't broken it out specifically or anything because we really integrated it into our business overall, but we're thrilled with that acquisition.

How have you started to leverage the sales force? I guess that's what I wanted to get a better handle of this, where you're getting the leverage or where you expect to see the leverage?

Well, if you think about it, if you look at us versus a lot of our competitors, we have a very broad product offering, and that is important for -- you think a concept around balance of plant. You look at some of these big facilities, and Lawrence Pumps is a critical service piece of equipment. So, now our sales force, after we train them, and they've known about the product, many of them have coveted it for many years, is they take a step back. Now they have another arrow in their quiver when they go in and talk about an opportunity, be it an original equipment greenfield opportunity, a brownfield upgrade and repair or more important, on the aftermarket side, now they have another product that they can take care of, another product to bring into their portfolio.

So, what we do with that is it went from a Massachusetts-based with some sales agents around the world to all of a sudden it had over -- close to 1,000 people that were immediately trained in the product and were capable about selling -- capable in selling it, understood it, and they understood it before. They were well aware of the product. So, that's what the opportunity is on the sales side, and now, if you've been to one of our QRCs, it is capable of servicing, repairing, upgrading one of these Lawrence Pumps. So, now all of a sudden, as opposed to the piece of equipment being served by a local agent, which is oftentimes the case, our salesperson there say, look, we will take this and that and this other piece of equipment to our QRC and take care of it.

Okay, that's helpful. Thank you.

Our next question comes from the line of Jeff Beach.

Yes, good morning, Mark and Mike.

Good morning.

Or good afternoon. I have a question about aftermarket. Are there any new drivers to sustain this, I'll say give or take double-digit, low double-digit growth that you see emerging here in 2012 into 2013? For example, outsourcing, is it showing some accelerating trends, and is there anything else that would drive and sustain this good growth?

Well, I think it is more around market positioning and opportunity. As we talked about in the investor day, the external market growth was certainly moderated for this year and stronger in subsequent years, but I think it is really riding on some of the momentum that we have been talking about up to this point. I can go through a couple of them. FCD's further penetration in the oil gas industry, a couple of years ago they were heavily concentrated towards the chemical side, they have now a strong and increasingly stronger position on the oil and gas side as well. It's pushing technologies out, it's getting in front of more customers on the aftermarket side. So, it is really more of the same in light of some of the challenges that you see out there around Europe and other regions.

And I would add to what Mark indicated that our coverage in all areas around the world currently isn't the same. So, for instance, great opportunities in China and Latin America right now for aftermarket coverage, same thing in Russia. So, as we start developing those areas along with the Middle East, that will give us opportunities. We see a lot of clients continuing to move towards, I would say total cost of ownership in their overall strategic plans as they look at managing their assets, which get us into now more fee-based LCA arrangements with them. So, that is also a good opportunity. And I would also say as you see the oil and gas business, the power business go to more critical applications, higher pressures, higher temperatures, that also brings that aspect into it requiring more maintenance or more governance on the overall plants.

All right, thanks.

There are no further questions at this time.

Thank you, operator, and thank you all for joining.

This concludes today's conference call, you may now disconnect.