Flowserve Corporation (FLS) Q4 2007 Earnings Report, Transcript and Summary

Good morning, my name is Amanda and I will be your conference operator today. At this time I would like to welcome everyone to the Flowserve Fourth Quarter and 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]. I would now like to turn the call over to Mr. Zac Nagel, Vice President of Investor Relation. Please go ahead, sir.

Thank you, operator. Hello everyone and thank you for joining us. Welcome to Flowserve's 2007 investor conference call. Today's call is being webcast with our earnings presentation by our website at www.flowserve.com. Just click on the Investor Relations tab to access the webcast and the company in presentation. Before we get started with presentations, 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 our earnings presentation slides by our website. Please click on the click here to listen via phone icon at the bottom of the event details page. I also like to note that our webcast we posted on our website for replay approximately two hours following the end of the call, the replay will stand aside on demand for the next few months. Joining today are Lou Kling, President and CEO of Flowserve; Senior Vice President and Chief Financial Officer in Latin American Operations Mark Blinn; and Vice President and Chief Accounting Officer, Dick Guiltinan. Following our commentary we'll begin the Q&A session. Regarding a forward-looking statements I'll refer you to yesterday's earnings release and 10-K filings and today's earnings presentation slide deck for Flowserve's Safe Harbor statement on this topic. All this information can be found on Flowserve's website under the Investor Relations sections. I encourage you to read these statements carefully with respect to our conference call this morning. Information on this conference call including the initial statements by management, plus their answers to questions related in anyway to projections or other forward-looking statements are subject to Flowserve's Safe Harbor statement. Now I would like to turn over to Lou to begin the formal presentation.

Thanks Zac and good morning. It's certainly a pleasure to welcome you to our 2007 fourth quarter and yearend conference call. I am pleased to report that the fourth quarter was another outstanding wicked quarter for Flowserve. We delivered on our announced targets and executed well against our primary goals and objectives of the company. While we still have plenty of additional internal improvement opportunities as well as significant external growth opportunities ahead, the fourth quarter was a terrific end to a great year. On the next few slides, I will spend a few minutes outlining some of the significant company highlights in the fourth quarter and the full year, as well as listen to few of the key project wins we've had over the past year or so. While I will show just a small subset of these wins, I believe we would demonstrate how we are executing strategically within the geographies as well our segments to position the company for success over the long-term. I will then spend a fair amount of time reviewing our end markets. What we are seeing today and what our outlook is going forward. So you can get a clear sense of the significant opportunities we see ahead. And then I will conclude with a brief wrap up slide summering how was the pairing for the future. For those of you who have followed this company for some time, you maybe familiar with slide 4 which calls out our identity begin that defines what Flowserve is and our key strategies for driving sustainable profitable growth. In 2007 we made significant progress, across each of these strategies. We drove significant organic growth. Made key built-on on strategic acquisitions and dispositions, continue to expand our global foot print, further developed our product portfolio and continue to bring innovative technology to the market. We also made significant strides in improving our process excellence in organizational capability and built it even stronger foundation for the future. Strong execution on these strategies we believe to achieving our goal of sustained profitable growth throughout 2007 and we believe continuing to execute well will enable us to continue to be very successful in future. Looking at the full year 2007, the company delivered tremendous result to gain some very aggressive goals we set out to achieve at the beginning of the year. It seems delivered record annual earnings per share of $4.46 of 121% from 2006 and also delivered record annual bookings of $4.3 billion up 19% and record annual sales of nearly $3.8 billion of 23%. In addition the company delivered very strong annual operating margin improvement of 310 basis points to 10.9% led by strong sales increased manufacturing absorption, successful operation excellence programs and strong improvement in SG&A as a percentage of sales which was reduced 280 basis from the 2006 results. We've also delivered very strong cash flow improvement for the year driving $417 million in cash flow from operations. As I've indicated many times before, this is not a quarter-to-quarter business due to the size and complexity of our projects. Therefore for variety of reasons we have tend to deliver the low end share of our annual cash flow in the fourth quarter, and as you can see this is our trend again. Turning to our end markets, we continue to benefit from strong market conditions throughout the year. The demand for more global infrastructure and our key end markets continue to outstrip supply. Now we don't see this need being satisfied any time soon. I will elaborate more specifically on what we are seeing in each of our key end markets in a few minutes. But surprises to say the requirements for additional global infrastructure continues to be pervasive and we continue to see terrific sales opportunities as a result. Turning to 2008, we've also made a number of significant financial announcements. First we have initiated a periodic open market share repurchase program about the $300 million and second we have announced increase in our first quarter dividend of 67% from $0.15 per share to $0.25 per share. Both of these measures regarding our uses of cash demonstrate our confidence and our ability to deliver strong cash flows in the future and our commitment to solid returns to our shareholders. We believe we can follow this plan while taking... investing in our business and taking advantage of any other strategic opportunities. In addition we are also re-affirming our earnings per share range for 2008 that we outlined earlier this year between $5.10 and $5.40. Turning to slide 6, I am pleased to report to the market that we continue to set a Number of new records during the quarter. The first and probably most important record was the company's fourth quarter earnings per share of $1.67 which represents a 188% growth of the same quarter last year including approximately $0.31 in tax and SG&A benefits, which Mark will discuss in more detail in the presentation. This record earnings per share was primarily driven by good improvement on gross profit and improved efficiencies on our SG&A both of which resulted in significant increases and operating income. We also delivered our fourth consecutive quarter of bookings in excess of $1 billion recording over $1.1 billion of 90% and another record for the company. Now we executed extremely well on manufacturing throughput in the quarter driving record sales of $1.1 billion of 26%. The team continues delivering strong operating margin improvement increasing operating margins 520 basis points in the quarter over the period last year to 12.4%. We continued our strong track record of improving our SG&A as a percentage of sales lowering SG&A 470 basis points versus the same quarter last year. The majority of this improvement was driven by solid cost control and successful execution of productivity initiatives across the company. Additionally in the quarter we continued to see more strength in our key markets, based on continued global infrastructure investment. Slide 7 outlines in detail, many of the fourth quarter and full year P&L highlights I discussed on our previous two slides. The slide layout is pretty straight forward. So I won't cover every number in detail, but I do want to make few a points about the company's performance that I think are not worthy. First, the company's performance has been balanced and consistent throughout the course of the year. We consistently delivered strong top line growth in both bookings and sales each quarter and we consistently and significantly drove operating income and earnings per share growth at a considerably faster rate than sales, illustrating once again significant leverage our business is capable of delivering. A second point that is important to make is that this is a company that drives aggressively the meet or beat expected targets. In 2007 we exceeded each of the targets that we communicated to the market at the beginning of the year. We set an initial sales target of between $3.4 billion to $3.6 billion and we achieved $3.76 billion. We also said that an initial target of consolidated operating income percent improvement of 200 to 300 basis points. Now we've achieved an improvement of 310 basis points. And further we updated our guidance throughout the course of the year as visibility into our performance improved in order to provide the investment community with timely updates. We plan to use the same communication process as we drive to deliver strong financial results in 2008. Slide 8 helps demonstrate the strong position of the company as we entered this year. Well all of these numbers have been announced at this point. The finest graphical representation of booking sales and backlog are useful way to examine 2008 opportunities. As we've discussed on several occasions in the past the conversion cycle between a booking and sale on average is about 12 to 13 months. As projects become larger and more complex, our initial supply continues to be tight. Customers are often ordering earlier and extending the ration of their projects that help ensure success. This situation turns out to be good for Flowserve since complex projects were squarely into our sweet spot due to our extensive engineering capabilities and it also allows us to better plan our capacity requirements. Well we cannot guarantee you the average cycle time from a booking in the sale of 2008. Our current expectation is it to be between 12 and 13 months. With our strong bookings in 2007 the $4.3 billion, in those bookings gives us great prospects for 2008 sales. Additionally you will note that we are entering the year with the highest yearend backlog in the history of the company at over $2.3 billion. This should have been in the backlog also both well for a strong year in sales assuming of course continued solid execution. But sometime I've talked about the strength of our global footprint and how we leveraged that strength. This chart represents a small sampling of our large project wins from across the globe last year and some of our key industries including oil and gas, power, chemical and pulp and paper. The strength of the snapshot is not only the fact that we are the leader in these projects around the globe. But it also represents the continued aftermarket opportunities that these projects like this present for our future. Slide 10 begins our view of our core markets, oil and gas, power, chemical, water and general industries. In the oil and gas market we continue to see growth in all global regions. We believe that this is being supported by a number of factors. The one, the aging production infrastructure around the globe is challenging the ability of refineries to keep pace with increasing demand for refined products. With many of these facilities constructed in the 1950s, significant investments have been forecasted in order to refurbish this critical infrastructure. We'd continued to see a high-level of project activity in both the upstream and the downstream portions of the oil and gas market and new discoveries leading to significant investment in infrastructure in parts of the world such as Brazil and Russia to continue to drive this growth. The forecasted increase in consumption around the globe, require additional barrels of production on the daily basis and with more capacity to refine an crude oil and to a retail ready products. Complex recovery projects like Tisanes [ph], Deep Water and heavy oil are also seeing major investments as domain increases and technology lowers the cost of recovery. Through our own market research and feedback from our customers we feel the outlook for investment, the oil and gas industry remains positive. I should also note at this point that many of our globalization investments such as our operations in China, India and the Middle East continue to provide additional growth opportunities as we establish operations closer to our customers. We continue to invest in our quick response centers or QRCs in support of our customer as the market needs in a timely and efficient manner. We also continue to expand our global rate with more operations in Canada, Africa and Latin America. Another recent growth initiative in this market is the increasing use of alternative fuels. Many of the leading oil and gas companies around the world are actively engaging in these developments. So we are also continuing to invest in capabilities to serve this new and growing market. As the consumer begins to require more bio-fuel products, we believe we are well positioned as to serve the companies which provide these new resources. The power industry remains the same for many of Flowserve's products. For many years this industry has openly relied on our oil and steam water pumps and our main steam isolations valves for quality and reliability and service throughout the life of the power plant. The forecast of growth and demand of electricity is creating project activity around the global market with significant activity occurring in China and India. World energy outlook 2007 predicts a demand for electricity of persist for 2030 and driven by the growth in the developing economies. This forecast of growth and demand compounded by the worlds desire to reduce carbon emissions is providing support for the increase in activity around the nuclear power generation. As we mentioned in the past Flowserve is uniquely positioned with product lines through which we maintained our instance status even through the fall of this market that occurred during the past several decades. This allowed us to continue to support key customers in the past and through this continued experience combined with strategic international joint ventures, we believe we are well positioned for the future in this market. We have also continued to invest in supporting depending on alternative power markets such as binding [ph] products and services related to geothermal technology. I would like to now discuss what we are seeing in both the chemical and water markets. Starting with the chemical markets, several of Flowserve's heavier brands provide products specifically designed to meet the needs of the chemical process operators. In addition due to the rise in cost of oil the major feedstock the chemical development combined with the high cost to labor especially in Europe many chemical companies have started building new plants in both the Middle East and China in order to lower their costs. Our investment and manufacturing service support and our Suzhou facility in China, and our facilities throughout the Middle East, we have grown our business opportunities in the indigenous chemical markets in support of these new customer finance. In addition there are numerous coal gas location projects under way that convert feedstock from oil to a less expensive coal. This has helped of course continued growth in our chemical market as our customer invest to increase capacity, more capacity and convert capacity. In the water market, our forecast remains positive due to the increasing demand for clean water infrastructure. For example in the Middle East investment activity and desalinization as forecast is to continue to increase its development projects to require more water. We are therefore continue to invest in expanding our offerings and serving desalinization applications, and we believe that these investment will buy further growth opportunities in this important market. In 2007 when we announced our joint venture with Changsha pump company in China. This partnership has strengthened our competitive position in pursuing both the water market and nuclear market in China as well as throughout Asia. Our success in helping solve large scale flip controlling irrigation applications such as those in Holland... highland has also demonstrated our product and service capabilities in managing the movement of the large volumes of water. Slide 12 shows a market where we can refer to as general industries. This contains industries such as mining and ore, pulp and paper and food and beverage. It also covers our business in steel systems, [Indiscernible] in cooling agriculture and government. As well as the orders to float from a general distribution. I would like to point out that many of these distributors serve a boarder way of customers which may also include companies in the oil and gas, power, chemical and water markets. One of the most important business is in this group is mining and ore processing. Over the past couple of years we have made a number of small technology driven acquisitions which have increased our capabilities to serve this market. The ability of our slow resale products to endorse severe environment and provide measurable water conservation, is helping our growth in the mining industry. In 2008 we plan to make capital investments to increase our manufacturing capacity for welded bore well for the global district heating market. This is primarily driven by central and eastern European countries making strong investments in the their aging heating infrastructure. These valve products also serve as well when teamed with our pump products to pursue good drilling district cooling market in the Middle East. And finally for collaboration with strategic customers, we've invested with them and solutions for the growing bio-technology market. In summary, I am extremely proud with the Flowserve team around the globe for their tremendous performance in both the fourth quarter and the total year. They are well executed against a very tough set of objectives and strategies gives me great confidence of achieving our targets in 2008. Well its up to growth, we demonstrated our ability to deliver strong program across the P&L and bookings, revenue, operating income and earnings per share. We need to continue to execute well to maintain a momentum and drive strong tough and bottom-line results. With respect to the market, we believe we are in enviable position of gain and establish leader in each of our key markets with infrastructure demands and investments remain strong. And our global foot print provide us the diversified competitive advantage and equally positioning us to capitalize on the many opportunities that lay ahead. Well that's for the... if you step to future focus we will continue to place heavy emphasis on the long term, building sustainable long-term relationships with our customers is paramount to our success. As we previously stated a key element of our strategy is to continue to build and support long-term business alliances with our customers, we can create a win-win, low cost of ownership model. To-date we have nearly 400 of these alliances with customers globally. Additionally we will continue to focus on executing against the clinical customer metrics of on time delivery, performance and reliability. These are absolutely critical elements of success in developing and maintaining winning relationships in our industry. We'll continue to work aggressively to maintain or improve our performance in these areas which we believe is best in class. And lastly we'll continue to insure that shareholder goals and Flowserve employee goals are tightly aligned by continuing to link our employee incentive compensation to our financial results. Now, at this time I'd like to turn the presentation over to Mark to discuss the segment results and financials in more detail.

Thanks Lou and Good morning everyone. As Lou indicated we are very pleased with our strong results and strong execution across the company. This morning I'll focus on a few key financial themes for the quarter and for the year which demonstrate the strong earnings leverage and strong cash flow leverage of the company. These around margin improvement, improving tax rate and strong cash flow. Within this margin improvement we had tremendous margin improvement in 2007. In our gross margin we saw 30 basis point increase for the year and 50 basis point increase for the quarter. This includes the impact of better pricing across all of our businesses, improved absorption, improved lien and CIP, supply management and low cost sourcing. There is a whole set of initiatives we are driving and they are all in progress. Now, this increase in gross margin was despite at 300 basis points shift in 08 in the pump business for the quarter and the year. We also saw tremendous leverage in SG&A as a percentage of sales which decreased 280 basis point for the year and 470 basis points for the quarter. As you'll recall in the first quarter we put programs in place and we saw great progress during the year but we still have work to do in 08 and beyond. Also in the third quarter if you remember we discussed the impact of oil for food. In the fourth quarter we did see $15 million benefit from the sale of our TKL asset and also the resolution of certain various legal matters. Basically for the year these things balanced out but we did see a benefit in the fourth quarter. SG&A did increase in 2007 in total of $74 million. This increase reflects over half of that in selling. $10 million increased spend in R&D investment in our ERPs as we took them down to 37 platforms and a build out of our QRCs. It's also important to note that for the year and particularly for the quarter we saw an increase in our broad based employee bonus expense. Now while we consider this a recurring expense it's important to note that our plans are designed to require improved performance to achieve a target payout in the next year. The result strong operating margin improvement for the year of 310 basis points with increasing incremental margins during the year. With respect to the tax rate we did see a benefit from our investments in tax planning during the year and taking advantage of our global footprint. The 29% tax rate for the year did include $15 million of discrete benefits, $8 million of which occurred in the fourth quarter. Basically as we look out into 2008 as we've indicated a 30% to 35% range and we see it at the low end of that range. With respect to cash flow we've often discussed that the cash is generated in the back half of the year and this year proved no difference. We are very excited to see that our free cash flow exceeded net earnings for the year. This improvement in cash flow was driven by strong systemic earnings growth and we saw a significant improvement in working capital. Turning to slide 15 to review our financial results, bookings of 1.116 billion for the quarter and 4.319 billion for the year represented respectively 19% increases. As we continue to show strong growth in all of our key markets. Sales for the fourth quarter increased $225.9 million or 25.6% to $1.1094 billion a record for any quarter. Gross profit increased 79.3 million or 27.6% to $366.2 million representing a 50 basis point increase to 33% gross margin. Again this includes the impact during the quarter of the 300 basis point shift in our pump business to more original equipment. Bottom line as we are seeing better margins in these products. SG&A increased for the quarter $5.9 million or 2.6% to $233.2 million representing a reduction of 470 basis points to 21% as a percent of sales. Again I'll remind you we did have a $15 million discrete impact or benefit during the quarter. This was offset in part by the incremental incentive accrual which again we deal with current charge and also when you compare to the prior year we had the realignment charges at the end of 2006. Operating income for the quarter increased $74.1 million or 117% to $137.3 million representing of 520 basis point increase in operating margin. And EPS increased to $1.09 or a 188% to $1.67 again this does include $0.31 impact from discrete items, but if you exclude that there are still year-over-year 135% growth or 5 times that the rate of the sales growth. If you look for the year, sales increased $701.6 million or almost 23% to $3.7627 billion. Gross profit improved $240 million or 24% to $1.247 billion representing a 30 basis point year-over-year increase to 33.2%. And again as we mentioned earlier this included the 300 basis point shift in our pump OE business. SG&A increased 74 million or less than 10% to $856.5 million. As I mentioned earlier half of this increase was selling and in addition to that we had a $10 million increase in R&D, investments in ERP and QRC. So we are spending our SG&A dollars for the future of the company. Operating income increased $170.3 million or 71.2% to $410 million. This was an increase at the rate of 3 times that of sales. An operating margin improved 310 basis points to 10.9%. Earnings for the year increased $2.44 or 121%, $4.46. A tremendous year for the company. Turning to the pump division, the pump division had an excellent year highlighted by market leadership and proved execution and tremendous progress on our aftermarket strategies. Bookings for the quarter in the year increased 21%. Sales for the quarter increased $153.6 million for almost 31% to $655.1 million. Gross profit improved $43.1 million or almost 30% to $187.7 million. And gross margin did decrease in the quarter 10 basis point but that wasn't the face of the 300 basis points shift. SG&A increased only $4 million quarter year-over-year or 4.6% to $90.7 million this does include the benefit of the TKL asset which was approximately $6 million. And SG&A of percent of sales improved 340 basis points to 13.9%. Operating income increased $39.7 million almost 68% to $98.3 million and reported margins were 15% if you exclude the impact TKL assets we saw substantial growth to 14.1 from 11.7% in the prior year during the quarter. Sales increased $477.6 million almost 30% to $2 billion, $95 million. And gross profit increased $139.2 million or 30.4% to $596.6 million and gross margin 20 basis points for the year to 28.5%. SG&A increased $40.5 million or 14% to $327.8 million if you look at the SG&A growth relative to gross margin, you can see this business got great leverage on their SG&A expense. And to point out over half of their SG&A was related to increased selling costs in investment in ERP systems. Operating income improved over $100 million to 58.7% to $274.2 million, representing a 240 basis point increase in operating margin. If you look at the details around the bookings and sales in the pump business and important thing to note is that the pricing in the ending '07 backlog was better than the pricing into 2006 as we saw pricing power during the year. Another thing to point out is that bookings for the quarter, fourth quarter and after market increased 10% and increased 14 % for the year which is well ahead of the market growth and after market. For the year sales in the after market business grew 23% for the quarter and 20% for the year. This is tremendous growth and tremendous execution on our after market strategies. Looking at the flow control division, they had an excellent year highlighted by strong market penetration, tremendous execution in areas of product development, lean CIP, low cost sourcing as well a strong focus on cost control. Bookings for the control division grew in the quarter and the year 17% over the prior year. Sales for the fourth quarter increased $47.7 million or 18% to $314.5 million. Gross profit improved $21.9 million for almost 25% to $110.2 million representing a 190 basis point increase over the prior year. SG&A increased 3.8 million or less than 6% to $67 million and almost all of that cost increased year-over-year was selling in R&D so they are investing for the future. Operating income for the quarter increased $18.8 million or 72 % to $45.1 million representing a 450 basis point increase over the prior year, tremendous leverage during the quarter. For the year in the valve division, sales increased a $168.3 million or 17% to 1 billion, $163 million and gross profit increased $67.5 million or 20 % to $405.8 million representing a 90 basis point increase in gross margin and it's important to note this is on the heels of in the two prior years each a 200 basis point increase in gross margin. They are driving improvement in their margins all the way through their P&L. SG&A increased $21.7 million or less than 10% to $248.9 million and again over half of this increase is selling cost, investment in engineers and investment in R&D. And SG&A as a percent of sales improved 140 basis points. Operating income increased $47.8 million or 41.2% to $163.7 million, and operating margins improved 250 basis point. A common theme your hearing with all other divisions in the corporate is that we are getting tremendous leverage. Their operating income grew at a rough rate over 2 times the rate of sales. Turning to the flow solutions divisions, they also had an excellent year as we've discussed a number of times they are high margin business and they were are able to sustain these high margins while aggressively going to business, investing and selling resources and engineering resources, investing in QRC's and investing in ERP systems. Bookings for the quarter increased $25.3 million or almost 20% to $154 million. Sales in the fourth quarter increased almost $30 million, a 22.6 % to $160 million and gross profit increased $14.8 million or 27% to $69.7 million representing a 160 basis point increase to 43.6 gross margins. They continue to drive the margin up. SG&A increased $6.7 million or 19.3% in the quarter to $41.2 million and well over half of this was increased investment in selling resources and engineering resources. Operating income grew $7.9 million to almost 36% to $30 million representing a 180 basis point increase in operating margin. For the year they had strong bookings growth, bookings grew $87.5 million or 17.3% to $592.5 million and sales grew almost $68 million or less than 14% to $564.5 million. Gross profit increased $33.6 million or 15% representing a 70 basis point improvement in gross margin. They ended up at $252.6 million in gross profit. SG&A increased $20.3 million or 16% to $148.2 million and again well over half of this cost were selling engineering resources investment in QRC's and ERP's. Operating income grew $13 million or 13% and operating margin remained at a very strong 19.8% for the year. As Will mentioned we had very strong cash flow and turning to primary working capital on slide 20 you can see that receivables for year end grew approximately $115 million and inventory grew a $133 million. This is in connection with our sales growth and the inventory increase was primarily driven by work in process primarily in pump division. If you look at advance cash, advance cash for the year increase $132 million which was able... allowed us to offset the growth in inventory and also shows the confidence our customers have and our ability to delivery that they are willing to provide cash upfront. You can see that we got tremendous working capital leverage. In primary, working capital grew a $150 million for the year while bookings and backlogs grew $700 million we got leverage in our working capital. Looking our year-to-date cash flows you can see the growth year-over-year and cash flow from operating activities was primarily driven by net income growth. We also saw that working capital management which drove incremental cash flow. Capital expenditures of $89 million included investments in India, China, the Middle-East. Our ERP systems in test facilities while maintenance CapEx remained in range of $22 million to $25 million for the year. We also returned $471 million to shareholders in the year in the form the dividends and repurchase of common shares. If you look on slide 22, for our net debt to cap, while we continued to return cash our shareholders in 2007 and continued to invest our business to support future growth in expansion in the new markets. We also had the ability during 2007 to continue to strengthen our balance sheet. If you look at our reported net debt to cap for the year it was 13%. So as we look at our uses of cash in 2008 and we talked about this, we have authorize the share repurchase about the $300 million, we believe this is an efficient and effective way to return value to our shareholders. We increased the dividend 67% from $0.15 share a quarter to 25%. This reflects management's long term confidence in our cash flow generation. Capital expenditures for 2008 we've seen investment in the range of $115 million $125 million because we see a lot of opportunity out in the markets. Strategic growth initiatives that we talked about in Russian district heating Middle-East investment product development continued QRC expansion. Investment automated machinery to reduce labor costs, additional ERP implementation and strategic capacity expansion. Also in 2008 we do intend to eliminate our factoring arrangements which will be use of cash to approximately $64 million. All of these things we planned to do along with other strategic opportunities the point we want to make is that none of these are mutually exclusive. Looking 2008, drivers of EPS growth, you can see on the gross margin, if you look at the bookings mix for pump business in 2007, that we still that there will be an OE aftermarket mix but we will continue to drive aftermarket growth in 2008 as we did in 2007. We have the ability to execute on strong organic sales growth during the year and we also as I mentioned earlier are see improved pricing in our back log at the end of '07 versus 2006. With respect to SG&A we still have work to do. We see an opportunity to significantly reduce compliance cost, drive head county management at divisions and incorporate. And also we will still be investing in 2008 in ERP's. 2007 and 2008 are heavy investment years. As we've also indicated we expect the tax rate to be at the low end of the 30% to 35% range, I will remind you on a quarter-to-quarter business, basis we cant see volatility as we have during this year, under FIN 48. The result is a 2008 EPS target of 510 to 540 for the year. We put this range out and we will be reviewing performance across these metrics during the course of the year and revise any of these metrics or guidance as appropriate. Bottom-line, our focus remained on execution. And we see a good opportunity in 2008 and beyond. With that I will turn it over question and answers. Question And Answer

[Operator Instructions]. Your first question comes from Charlie Brady with BMO Capital Markets.

Hi, thanks. Good morning guys. Outstanding quarter, guys you look pretty happy with over the results there. Just a question on pricing and raw material cost. How much of the gross margin improvement is coming out of pricing, sort of what kind of price increases are kind of embedded in to expectations in '08 and along with that how are you mitigating expected increases in raw material, optically steel in 2008.

Yes, Charlie thanks for your comments first of all on pricing, we don't provide specifics and our pricings as you can imagine, relative to increases but we did mention that pricing has been improving over the last couple of years. A lot of the growth and the gross margin came from many of the aspects. Pricing was included but we did see better absorption and also the impact of supply chain. So it really was across all of those fronts. But as we have indicated for 2008 we did see better pricing in our back log in 2007. With respect to raw materials we had certainly seen fluctuations over the last couple of years, Nickel for example rose at the early part of 2007 and went down and our comments have been the same on both sides. We do have e exposure to raw materials but those are more typically in some of our quick term products for example the seal face [ph], where we buy the raw material and it's turned in product and delivered. So that does provide us with a natural hedge but reduces the risk of raw material increases but also does not give the benefit that you see in other companies when raw materials go down. A lot of our long lead time projects, we typically source the components contemporaneous with winning the bid. So in those instances we pass on the raw material cost to our sub suppliers. An example on that is motors. If you look at copper a motor is basically wound copper and so in the early part of '06 there was a lot exposure to increasing copper prices. So motor price is typically good for five days, when we win the bid these days what we will do is we will go out and secure that motor and past that risk on. So the point is, is that it can put certainly can put pressure we are not saying that it doesn't have any impact but a lot of that we lay of to sub supplier or we have a benefit from the fact that those raw materials go into quick term products but the same applies when raw materials are going down that's usually not a big opportunity necessarily for this company.

Thank you.

Your next question comes from Andrea Wirth with Robert Baird.

Good morning Guys.

Good morning Andrea.

I wanted to get a start [ph] just on the corporate expense that was probably the most off from our model I guess first upon the charges front I guess the benefit the remainder of that $15 million of that from CKL that actual is an corporate expense is that correct?

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

Fair, sure and then I guess just how should we look at, corporate expense going forward in the past, you sort of tried to target percentage sales by about 2% to 3 % its kind of a your long term goal. Is that the way we should still be looking at corporate expense or you know with, obviously how successful it's been and you know the recurring bonuses should be the may be increasing that amount as we go forward?

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

Thanks.

Your next question comes from Amit Daryanani with RBC Capital Markets.

Thanks a lot guys just I had a quick question on the advanced cash which I guess is the money you get from your customers to procure raw material. As numbers are almost up by a 100% I think year-over-year, is there a change in strategy or do you give people a shot at lead time or how does that dynamic work?

Well I mean its dynamic that's in the market place and one of the things I didn't comment on is we often provided advanced cash to some of our suppliers as well. To secure delivery on time. You can look at it a number of ways, some of it look at this is kind of securing manufacturing slots, which has an aspect to it as well it's a fairly tight market out there but we also look at it is a really a word of confidence from our customer as well as they are willing to put cash up front to for you to execute on it so I think some of it is to offset reviews that certainly offset the inventory, the change in strategy internally is yes we have, we created an organization that really focuses on contracts and contract terms, in terms of risk mitigation and one of the areas was to go in widen any contract to secure this opportunity, so I think its our focused on it its and indication of the market itself which also applies to our suppliers but more importantly I think its an indication of the quality, product we provide and our ability to execute because I can tell, that wouldn't give this cash, if they didn't you can deliver.

That's makes a whole lot of sense and then just looking at the valve, the flow control division, the margin improved pretty nicely at 14.3% in the quarter. I think the last few quarters and I look at, it looks like Q4 has actually been the softer quarter for margins at least in that our business. Was this a one time favorable driver that impacted that or this business just started hit its stride and we should see sustained margin expansion going forward?

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

This is my final question I am going to hop off after that the 300 million buyback that we just announced, no accretion from that is built into the EPS guidance's at this point, is that fair?

Yes we... I mean on the guidance that we said we will revise it I mean we got this program not here, I don't want to comment on when we are going to execute on it because we haven't put specific time frame out there but we didn't necessarily coupled those two things.

Fair enough, congratulation on a good quarter guys.

Thank You.

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

Thank You, Good morning.

Good morning Ned.

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

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

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

No, no you know one of the things we mention in these comments around Brazil and Russia, we are seeing tremendous opportunity really all across South America even following the discoveries that Pet roll process has it is basically taking them into the top ten oil companies around the world you are also in the process of vertically integrating that as a country it is rich in waste and natural resources. You know we clearly see South America coming online very, very strong particular Petro Boss [ph] you know their spend anticipated expense before these two incremental signs over the next five years was anticipated to be around a $120 billion, around half of which was upstream and quarter of which was downstream. So they forecast very strong growth and as you know they had two significant finds in oil and also one significant find in natural gas as well. And just to point out a little bit further in that oil a lot of those the sub C platforms. So we see great opportunity there in other parts of South Americas as well and also the nuclear side which is obviously more long term is looking very-very positive depending on who you talk to 80 to 120, 130 different plants, throughout again they are in China, India, U.S. of course so that's a market that's looking extremely strong.

Okay good thank you.

Welcome.

Your next question comes from Will Boland [ph] with Wachovia.

Good morning.

Hi Will.

Hi Will.

I just wanted to ask would you help us understand the bidding and negotiation process for project and please if you could tell us about the margin the back log it looks like relative to sales that you know I guess you want to know about the margin in the backlog right now relative to existing sales and I guess what it looks like the back log declined sequentially while booking improved. Are you seeing project cancellation as well?

No let me got to your last question first, if rolled there is little impact from currency but if you roll booking sales you can see our sales were in line with bookings which would indicate that backlog is relatively flat the other thing to think about is you know a lot of shipments go out in the fourth quarter. So you know does it surprise that our backlog at the end of third quarter and backlog at the end of the third quarter and back log at the end of the fourth quarter was flat, not at all. Because what you have seen now we talked about this last year as bookings were out stripping sales as you were ramping up and starting to develop these project, back log continue to grow. But you know overtime of back log grows there can be one or two things, your bookings very strong which we were but also could be that you are not executing on your sales and we did. So that's I think that's an important message. On the bidding process, on these large major projects from inception to finish it could range from 5,3, 5 to 7 years as these things go into drawing board. We are typically involved in a lot of the engineering and a lot if the analysis around it before its even bid out to the general contractor and then period of time depending on the complexity of projects we'll come on line and bid one that project itself. So that's the process on these large projects and we are talking about you said margin and the back log, the only comment I made about that, I didn't talk specifically about margins in the backlog but I did say that we saw better pricing and the way we look at prices is basically the multiplier we put on projects particularly in the pump business, so those multipliers go up, we saw better pricing at our back log at the end of 07 than we did in ''06. Also if you just take an analysis, of our after market and original equipment mix and doing attribution analysis, you can see that the original equipment margins, gross margins did improved during the year, which reflect the benefit of pricing that we saw in ''05 and '06 and also our execution of that back log.

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

Yes we are not seeing cancellations.

Okay, thank you and then just next question it looks like beyond cash use for share backs and the dividend which includes the increase that you announced. Has there been any thought towards acquisition I mean rather than investing in infrastructure on your own, maybe leveraging some of the works that other have done and possibly increasing your footprint and distribution that way, I know its something that you have done historically but it was pretty light in 2007?

Yes, it is something that we are looking at in all three businesses to see what we want to do with acquisitions. When we looked an acquisition be it small or large sometimes it is make versus buy its better sometimes to buy sometimes it is better to make, so the answer to your question directly is yes we are looking and we have the what we call the dry powder to make it happen.

Well that was on the cash flow, that was a message, the repurchase we can score that dividend certainly the organic growth and the structure that we can build out and also strategic acquisitions as well, we've got a very strong balance sheet, we can do all those things.

We do have a follow up question from Charlie Brady with BMO Capital market.

Hey thanks. Can you just talk about the Sinopec agreement you guys reached in, are you guys still forced on that now or few little more detail on really what that mean kind of longer term for you guys something a pretty positive event?

The Sinopec is obviously one of the largest oil companies in China. These an agreement going forward that we will be working closely with them developing products, developing needs and obviously knowing which way they are going so it's a very positive agreement for us and Sinopec.

Thank you.

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

Can you dig little bit into the seal margins obviously you guys have done a lot on the investment funds, the operating margins, the operating margins have slowly year-over-year been you know expanding more and more, so I was just curious to have you pulled back the investments a little bit as far as dollar amounts go or how should we look at it as far show much you actual year are spending now and then going forward really on the investment front deal?

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

And then just searching over the pump side and the aftermarket side, obviously seeing a, saw a good acceleration and the revenue but, looks like that orders are up only 10%, is there some worry we should have there just kind of given the deceleration in the growth rates and especially as it relates to probably seeing this aftermarket shift coming up as lot of this install base just put in place after coming off warranty?

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

And then just as a follow up to that quickly. Just, could you maybe comment as to where you believe you are right now as far as, lot of the projects you've already a lot of pump you plant placed already this is last cycle. Are they starting to come up warranty, you are starting to see a benefit from that yet or is that still you have to come?

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

Thanks guys.

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

So I want to thank everyone for joining us and who have involved today here in this conference call. [Indiscernible].

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