Flowserve Corporation (FLS) Q1 2008 Earnings Report, Transcript and Summary

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And now I would like to turn the call over to Zac Nagle, VP of Investor Relations. You may begin.

Hello, everyone, and thank you for joining us. Welcome to Flowserve's first quarter 2008 investor conference call. Today's call is also being webcast with our earnings presentation via our website at flowserve.com. Just click on the Investor Relations tab to access the webcast and the accompanying presentation. Before we get started with the presentation, I want to make one brief note. For those of you who have accessed today's call through our dial-in phone number and also wish to follow along with the earnings presentation slides on our website, please click the "Click Here to Listen Via Phone" icon at the bottom of the event details page. I'd also like to note that our webcast will be posted on our website for replay approximately two hours following the end of the call. The replay will stay on the site on-demand for the next few months. Joining today are Lew Kling, President and CEO of Flowserve; Senior Vice President, Chief Financial Officer and Latin America Operations, Mark Blinn, and Vice President and Chief Accounting Officer, Dick Guiltinan. Following our commentary, we'll begin the Q&A session. Regarding any forward-looking statements, I'll refer you to the yesterday's earnings release and 10-Q filing and today's earnings presentation slide deck for Flowserve's Safe Harbor topic... Safe Harbor statement on this topic. All of this information can be found on Flowserve's website under the Investor Relations section. I encourage you to read these statements carefully with respect to our conference call this morning. The information in this conference call including the initial statements by management, plus their answers to questions related in any way to projections or other forward-looking statements are subject to Flowserve's safe harbor. Now I would like to turn over to Lew to begin the formal presentation.

Thanks, Zac, and good morning. It's a pleasure to welcome you to our 2008 first quarter conference call. I'm pleased to report that Flowserve had a terrific first quarter with continued strong execution and outstanding financial results. We started up the year stronger than expected and are now on track to exceed the full year 2008 target we stated in our fourth quarter 2007 conference call. These record results show the continued strength of our end markets, strong leverage in our income statement, and most important successful execution of our key strategies, which includes significant organic growth, successful operation excellence implementation, SG&A reduction, and margin improvements. The financial results are lower even better than expected penetration of our key end markets, more favorable currency ratios, lower interest rates improved traction on our tax planning initiatives, in our includes confidence in our ability to continue to execute and grow in this environment have bolstered our outlook for our full-year performance. Therefore, we are significantly raising our full-year 2008 earnings per share range to between $5.90 to $6.20. During the next few slides, I will cover some of the quarter's significant highlights, as well as the key performance metrics achieved during the quarter. Then I'll touch on just a small subset of the key global project wins we’ve had over the past year or so, which will highlight more clearly how we are using our global footprint and executing and strategic global locations and key market segments to position the company well for success over the long term. In the back half of my presentation, I will spend a considerable amount of time reviewing what we are seeing and expecting to see going forward relative to our primary end markets. From this discussion, you will be able to gain a clear view of our external market outlook and a stronger sense of the very attractive opportunities we see ahead. Slide three covers the primarily highlights for the first quarter of 2008. We delivered record first quarter earnings per share of $1.53, up 159% over the same quarter last year. This significant increase in earnings was primarily due to improvements in operating income, up 350 basis points during the quarter to 11.9%, driven by 24% increase in sales, 180 basis point improvement in gross margin, and a reduction of 180 basis points in SG&A expenses as a percentage of sales. The company’s fully diluted first quarter earnings per share of $1.53 included currency benefits resulting from our global presence which Mark will discuss in more detail later in the presentation. We also delivered our fifth consecutive quarter of bookings in excess of $1 billion recording bookings of over $1.4 billion, up 31% and another quarterly record for the company. This increase was driven primarily by continued strength in all sectors with noble growth in the power and chemical markets, particularly in the pump and well divisions. We also saw strong manufacturing throughput in the first quarter delivering record first quarter sales of $993 million, up 24% and recorded strong gross margin improvement up 180 basis points to 34.8%. This gross margin increase was primarily due the higher sales volume positively impacting fixed-cost absorption, continued execution on our operational excellence programs, price increases, and success of the company’s end-user after-market strategy, which resulted in higher levels of after-market sales, particularly in the Pump and Seal divisions. It should be noted, that even with our record first quarter sales, our record bookings increased our backlog 27% versus December 2007 to a record $2.9 billion. With respect to our end markets we continued to see broad strength in the first quarter based on continued global infrastructure investment. Slide four outlines in detail many of the first quarter highlights I discussed on the previous slide. As you can see the company has delivered tremendous leverage to the P&L during the quarter, delivering operating income growth more than three times the rate of sales growth and earnings per share growth more than six times the rate of sales growth. Slide five shows our progression of booking success since the start of 2004 and highlights the tremendous growth in bookings we have driven since the back half of 2005. As I mentioned earlier, the first quarter of 2008 represents the highest quarterly bookings level ever achieved by the company at over $1.4 billion, which was up 31% from the same period a year ago. Slide six highlights our sales since the beginning of 2004 and the tight correlation between bookings growth and sales growth. Historically, this relationship pr conversion cycle between a booking and a sale on average has sell to about 12 months or even slightly less, but as projects become more complex and industry supply continues to be tight, customers are ordering earlier and extending the duration of their projects to help ensure their own success. This strengthening of the delivery cycle by a month or so benefits our capacity planning and it allows us to take on additional projects while providing increased opportunity for even better on-time delivery. While we cannot guarantee the average cycle time from a booking to a sale in 2008, our current expectation is for to lengthen slightly to between 12 and 13 months. Slide seven highlights an important element of our business model that we've talked about for some time, that being the strength of our global footprint and how we leverage it. This chart represents a small sampling of our large project wins from across the globe over the past year or so in many of our key industries, including oil and gas, power, chemical, and pulp and paper. We've updated the chart with some recent wins that were not shown in our 2007 year-end call. The strength of this snapshot is not just a fact that we are a leader on these projects around the globe, it also represents the continued after-market opportunities that projects like this represents for our future. Our growing global manufacturing and supports in our footprint across multiple key infrastructure growth areas is also a major competitive advantage for the company. Slide eight begins our view of our core markets; oil and gas, power, chemical, water, and general industries. In the oil and gas market, we continue to see not only continued strength, but also growth opportunities for Flowserve on a global scale. Several research firms have been analyzing the future of this industry and have created basic models on the growth of daily oil consumption across the globe. These models forecast an average annual increase of approximately 1 million barrels per day worldwide for the next several years. This increased demand is being driven by significant growth from development markets, particularly China and India, as well as many other parts of the globe, which are expecting to have increased demand due to their growth in both domestic industries and populations. This forecasted growth in demand requires continuing increases in upstream and downstream projects. Investments in new plant capacity are forecasted to occur globally with particular focus in Asia, Russia, Brazil, and the Middle East. Refurbishment and upgrading of aging refinery infrastructure is also a key focus for investment to meet these projected demands. On the upstream side, major offshore field discoveries in places like Brazil are helping to fuel significant project activity well into the future. These large offshore finds are in deepwater and are catalysts to driving advanced technology developments for this demanding application. As I had mentioned before, we are actively participating with numerous partners in development of subsea pumping and flow management technologies. We've also benefited recently from the offshore activity driving the increased use of floating platforms and production shifts. These applications require large underwater positioners or thrusters, which are linked to GPS systems to ensure that the floating structure is able to stay in its proper location. We started manufacturing these positions as many years ago and we have recently won several large orders including new opportunities in Russia. Flowserve's product capabilities have also provided some major project wins in Canada for the tar sands production facilities, as technology investments continued to reduce the cost of extracting this oil. The natural gas industry is also seeing measurable growth due to the increasing interest in cleaner burning fuels. This trend is broadcast to drive continued investments and conditioning gas for long-haul transportation. The two methods experienced focus investments are Gas to Liquids know as GTL and Liquefied Natural Gas known as LNG. Flowserve has already seen major project wins in both of these methodologies, including the pro project in Qatar. The power industry continues to experience significant growth. The global demand for electricity has been forecasted almost double by the year 2030 for the 2007 World Energy outlook report. There are also many other external data points, which supports this growth projection. For example, the press recently reported that China's kilowatt-hour consumption in January and February of 2008 increased by almost 12% compared to the same period in 2007. This forecasted growth in both China and India over the next two decades supports significant increases in demand for electricity. In addition, new electrical capacity has been either constructed or planned worldwide due to the ever-growing demand for power. Along with new construction, there is significant focus on low efficiency, aging power infrastructure presently throughout many mature markets. Some of this old infrastructure may have to be taken out of service due to the high CO2 emissions and high operating cost requiring new plants to come online to replace the demand, but most of them reviewed for upgrades and refits to increase power generation capacity and decrease CO2 emissions to ensure they remain operational well into the future. Near term, coal is still being forecasted as a primarily fuel source worldwide. The new coal fired systems are projected to use super critical or ultra super critical designs to increase demand of power for a unit of fuel as well as lowering CO2 emissions. Flowserve has made significant investments in new product technology, which has done specifically to serve the increased pressure and temperature demands for these new power plants. The drive for [inaudible] is also purely more discussion activity around nuclear and gas fire powered plants. As we have mentioned in the past, we are well positioned with product lines which maintain our instant rating, even through the steep fall-off in U.S. market that occurred during the past several decades, and through our continued nuclear experience in other parts of the world combined with strategic joint ventures, such as the one with the Changsha Pump Company in China, we believe we are well positioned for the growth of this growth market. The desire to control greenhouse gases is also supporting investments in geothermal technology and carbon [inaudible], and we are actively partnering with key customers to investigate and test solutions for these critical applications. In the chemical industry, the increasing global consumption combined with the rising cost of feedstock and labor is requiring new investment in plant capacity either closed to input raw materials such as oil and gas or close to increasing demand and lower cost of labor. This is closing many new chemical processing plants we built in both in the Middle East and Asia, which we plan to support through our new facilities in Dhahran, Saudi Arabia and Suzhou, China. In addition there are numerous coal gasification projects underway to convert feedstock from oil to less expensive coal. These developments support the continued growth in our chemical market as our customers invest to increase capacity, move capacity, and convert capacity. It is also important to note that several of the major national oil companies are beginning or have announced aggressive investment plans to add petrochemical operations adjacent to their refineries to lower the cost of production. These include companies such as Petrobras in Brazil and PetroChina in Asia. Our line of specialty products designed for critical applications in chemical processing plants continue to support strong business growth for major project wins in these growth areas. In the water market, the outlook remains positive due to the increasing demand for cleaner water worldwide. Forecast continues to show sustained growth in this industry with strong growth in developing areas of the global market. Research data shows at almost one fifth of the world's population currently live in areas with an insufficient supply of water. This will require increased infrastructure, which is capable of moving large volumes of water over long distances. Flowserve's project and application expertise along with our line of large water and [inaudible] pumps for movement of large volumes of water, flood control, and irrigation applications supported by our Changsha Pump Company joint venture in China position us well to pursue this market opportunity. A very exciting [inaudible] in this industry is the aggressive increase in desalination demand worldwide. Litter supply around the globe by desalination is expected to double by the year 2015. This is mostly driven by new technology that is significantlly reduced the cost of building desalination plants. Desalination projects are now under consideration in many regions of the world, not just in developing countries with easy access to ocean water. Today we are seeing projects being implemented or under review in more mature markets such as Western Europe, and even in the United States. Slide 12 shows the market grouping referred to as General Industries, this group contains industries such as mining and ore processing, district heating and cooling, agriculture, government, pulp and paper, and food and beverage. And also contains orders of flow through general distribution. It should be noted that much of this distribution serves a broader array of customers, which may include companies in the oil and gas, power, chemical, or water markets. One of our lead businesses in this grouping is mining and ore processing with current forecasts supports strong growth going forward. Our improved ability to handle slurry type materials in severe environments are providing robust systems integrity as self-support our growth in this industry. In Russia and Eastern Europe, the expansive efforts to refurbish aging infrastructure of a district heating is driving significant volume growth in this market. As I have mentioned in previous calls, we are investing in capacity expansion and our welded ball valve manufacturing site specifically to support this expanding market. In addition, many of the same valve products used in our district heating systems combined with our pump products are used to support the growing district cooling market in the Middle East. We have also continued to invest with our strategic customers, partially supported by government funding to develop new solutions for the growing biotechnology market. Investments in production of cellulosic ethanol have also increased recently and our forecast to grow as market manages the need for alternative fuels and its associated impact on the global food supply. We’re also seeing specific projects in pulp and paper such as the recent major project wins in Brazil. We have ample, deal our analysts of both external and internal market forecast supported by our own ongoing discussions with our customers leads us to believe our market outlook continues to remain very positive. In summary, the first quarter was another outstanding quarter for Flowserve and I am extremely proud of the Flowserve team around the globe for their tremendous performance. They not only met, but in many cases far surpassed our expectations with respect for the quality of the operational execution, which as I noted many times is probably the most important factor in our success of the company. Relative to growth, we have continued to demonstrate our ability to deliver strong financial performance across the P&L and bookings, revenue, operating income, and earnings per share. We continue the strong momentum we had when we exited 2007, taking advantage of the ongoing strength of our key end markets, as well as our global footprint and continue to drive strong bottom line earnings to operational excellence and leverage in our P&L. We will also continue to place prime importance on building sustainable long-term relationships with our customers, which is critical to our success. This is a key element of our strategy and is focused on creating a win-win, low cost of ownership model for our customers. As to our focus going forward, we will continue our strategic deployment of assets and resources to provide local support with global expertise to our customers worldwide. And we will continue to focus on executing against the critical customer metrics of on-time delivery, performance, and reliability. Lastly, we will continue to ensure that shareholder goals and Flowserve employee goals are tightly aligned by continuing to lead closure of compensation plans to our performance. At this time, I would like turn the presentation over to Mark to discuss the segment results and our financial performance in more detail. Mark?

Thank you, Lew, and good morning, everyone. As Lew mentioned, we had a terrific quarter highlighted by strong top line growth and significant earnings leverage. Before I review the results, I want to focus on a few factors that impacted the quarter as well as our outlook for the year. First, we saw an increase in sales momentum in our sectors with notable growth in power, chemical, and water. When you couple this with the benefits of operational excellence, we see a positive outlook for the year. We also saw the impact from currency. As we've discussed before, two-thirds of our business is outside the United States, which means two-thirds of our costs are outside the United States as well. So as the revenue benefits from currency, we also see an impact on cost. We did see a benefit in our other income expense line, which reflects the mark-to-market of our hedges on foreign currency. Let me take a moment to explain this. When we enter into an order oftentimes it will be dollar-denominated, but it will be manufactured in Europe in a euro-based cost environment. We believe in hedging future cash flows. So when we take that order in, we will put a hedge in on that dollar-denominated contract anticipating the future cash flows. What you see in the other income expense line is the mark-to-market on these hedges on a sequential quarter basis. Keep in mind that the underlying contract is either sitting in backlog or the receivables is setting in AR. We also saw a tremendous growth in the after-market business, strong growth in after-market order in sales highlighted by a 19% growth in after-market orders in the pump business and a 22% bookings growth in the seal division. Our end user strategies are continuing to gain traction. We saw a continued benefit from our SG&A initiatives with continued expense control, particularly in the valve division and the corporate segment. We're focused on limiting indirect headcount while continuing to invest in selling resources, engineers, and R&D. In fact, over half of our $29.5 million increase in selling expense in SG&A was related to selling resources. Below the operating line, we saw a benefit in interest expense, we see lower interest rates and lower borrowings, which has driven expense down. We also saw a great leverage from the tax rate and increase in our foreign earnings in low tax countries and the benefit for our tax planning has improved our outlook for the tax rate for 2008. These factors that is sales momentum, currency, after-market growth, SG&A improvement, interest rate reduction, and tax rate leverage contributed to a strong first quarter and an improved outlook for the year. Turning to our consolidated results, you can see that operating income improve at three times at the rate of sales growth demonstrating the tremendous leverage we get in this business. Turning to our bookings, bookings increased $340.5 million or 31.3% to a record $1.429 billion with strong organic growth of 22%. Sales increased almost a $190 million or 23.6% to $993.3 million for the quarter with strong organic growth of 15%. Gross profit grew $80.3 million or 30.2% to $345.8 million representing a 180 basis point increase to 34.8% with contribution by all three divisions. SG&A increased $29.5 million or 14.5% to $233.1 million and SG&A improved as a percentage of sales, 180 basis points to 23.5%. Again I'll comment half of this... over half of this was related to selling and also to illustrate my comment earlier about currency, we did see a $12 million negative impact from currency in the SG&A line. So, you can see that currency benefits on the top line but also impacts our cost. Operating income grew a tremendous $51.3 million or 76% to $118.7 million. And operating margin improved 350 basis points to 11.9%, demonstrating the full leverage in our P&L, EPS grew 94% or almost 160, $0.94 or almost a 160% to $1.53. So, we got the benefit of operating leverage, interest expense leverage, and tax leverage. Turning to the Pump Division. The Pump Division had an excellent quarter highlighted by tremendous organic growth as we continue to see them take market share, shows sharp strong strength in project wins, strong after-market growth, and terrific operating leverage. Bookings grew $232 million or 35.2% to $890 million. Sales increased to $142 million or 34% to $561 million and gross profit increased $57.6 million or almost 50% to $174.6 million representing a 320 basis point increase to 31.1% gross margin. This was driven by price, operational excellence, and we did see a shift of 100 basis points to after-market. SG&A increased $19.7 million or 25.7% to $96.5 million, and SG&A as a percent of the sales improved 110 basis points to 17.2%. Again the common theme is over the half of this incremental expenses was selling related. Operating income increased $36.7 million or 88% to $78.4 million representing a tremendous 400 basis point improvement in operating margin. Looking again at the mix for our Pump Division, you can see that we have 44% bookings growth in projects. These are longer-lead time projects, but they do secure the future by increasing our install base. And we saw a very impressive 19% growth in our after-market bookings, showing our end-user strategy is paying off. I will call your attention to the mix for the bookings in the first quarter with 70% OE and 30% after-market which should indicate the going forward the mix should continue to shift to more original equipment. You can see the sales mix, we benefited from a shift to after-market, but more of the gross margin improvement was driven by price, operational excellence, and absorption. Turning to the Flow Control Division, they had another excellent quarter. I highlight the word another, because if you look over the past three years, you see consistent improvement in sales, gross margin, and SG&A. This is the result of systematic program management approach to the initiatives around pricing, product management, capacity optimization, low cost sourcing, cost reductions, continued investment and selling and R&D, just to name a few. Running these programs effect... running these programs effectively and they are more in the queue. If you look at their bookings growth, bookings grew $80.7 million or 26.1% to almost $390 million and sales grew $31.7 million or 11.8% to $300 million in the quarter. Gross profit increased $13.2 million or 14.2% to $106.2 million representing an 80 basis point improvement in gross margin. Again this has been a consistent theme in gross margin improvement over the last three years. SG&A increased $8.2 million or 14% to $66.8 million, representing a 40 basis point increase, but all of this increase in SG&A were selling and R&D related, which is an investment for the future. Operating income increased $6.8 million or 18.7% to $43.2 million and operating margin improved 90 basis points to 14.4%, again tremendous leverage for this business as well. Turning to the seal division, they had an excellent quarter as well, highlighted by strong order growth, which has been a focus for this business. We continue to talk about investment, specifically around building out the hub-and-spoke model. Let me explain what this means. This group has focused factories in key regions around the world that are supported by low-cost high-volume factories and a network of QRCs. This structure drives not only after-market growth but pulls through original equipment orders. Across this entire structure, there is a focus on standard processes and systems and 24/7 engineering. The result has been increasing demand for their products and services as evidenced by their strong bookings growth in the quarter, $30.7 million or almost 22% to $171.3 million. Sales increased $21.4 million or 16.6% to $150.6 million and gross profit improved $8.8 million to 15.4% to $66 million with a strong gross margin of 43.8%. SG&A increased $7.5 million or 22% to $41.5 million, representing continued investment in the model I described earlier as well as people. Operating income increased 1.2%... $1.2 million or 4.8% to $26.3 million and operating margin was 17.5% for the quarter. We've looked at this margin from time to time and management is very confident in this business and the margins going forward. Looking at primary working capital, one of the things that we need to talk about is the impact of factoring in our acquisition of Niigata Worthington. If you look at the overall impact, there was a $40 million impact from going off of factoring during the quarter and also a $30 million impact on primary working capital from the acquisition of Niigata Worthington. If you look down at a ratio that we watch carefully and that's the ratio of primary working capital and/or inventory to backlog, you can see it held very stable over the three reported period shown. So we're very confident in our working capital position. Just to highlight a few of the items, receivables did increase $121 million, which was impacted by increased sales. There was a $40 million impact from factoring and a $17 million impact from the Niigata Worthington acquisition. Inventory increased $174 million and this included a $153 million impact from work-in-process primarily in the Pump Division and a $32 million impact from Niigata Worthington. Looking at our first quarter cash flows, as we discussed historically, we are on an annual cash cycle and we intended historically to be a net users of cash in the first half and net generators of cash in the last half. You can see that the first quarter was consistent. Looking at the increase in working capital that was driven by work-in-process and the two items I discussed earlier. Looking at capital expenditures, there was a $14 million spend, we've talked about a spend of $115 million to $125 million for the year and we do expect that to occur as capital expenditures will accelerate as we penetrate additional markets. And look at the borrowings on the line of credit, there were no borrowings at the end of the quarter and also although we announced the program, the last call we did not initiate the program on stock repurchase but we do expect to initiate that going forward. Looking our full-year outlook, the chart around gross margin and SG&A. Let me just highlight a few items to consider as your outlook going forward. First of all, the OE after-market mix, we continued to drive good project work. Over the short time, we are getting good price and good margin on this business. And over the long-term, we are increasing our installed base in securing the future for after-market business. Talking about after-market business, you can see that our end users strategies are paying off and are driving gross margin. With respect to SG&A, there has been good control at the division around SG&A, particularly related in direct head count. And we are scaling corporate overhead. Over these discussions, we talked about our goal of getting corporate overhead 200 basis points to 300 basis points of sales. And in fact we achieved that this quarter. Also look at selling expense, if you see the increase of SG&A over the last year, well over half of it has been driven by selling resources, which has supported our top line growth. Also we see an improved tax-rate that is below the previously stated range. This is driven by foreign earnings, increase, and also our tax planning. That brings us to our outlook going forward. As we mentioned we are very excited to raise our 2008 EPS target to between $5.90 and $6.20 based on Q1 performance, improved visibility, strengthened outlook, particularly as it relates to the factors I discussed earlier. Also we see continued strong investment in global infrastructure. In response, we will maintain focus on globalizing our assets to drive capacity, needed to support growth of developing markets around the world. We look at a continued focus on the customer with key customers focusing on total cost of ownership and lines arrangements to share uptime. And also we’ll drive our end user strategy. While we remain focus on the top line, we will also look below the line around cost containment efforts, gross margin improvement, and tax planning. We think this will deliver strong operating profit and EPS growth. We will also maintain financial flexibility to strong cash flow and a strong balance sheet. The bottom line has been and will remain when you just stay focused on execution. We think the opportunity is out there for us to get and we are confident that we will. With that, I will turn it back over to Jac for Q&A.

Operator, we’ll open it up for Q&A now, please. Question and Answer

[Operator Instructions]. Your first question comes from Amit Daryanani.

First on the Pump segment, it looks like gross margins were up 320 basis points. I think, Mark, you said 100 basis points was due to a better mix, the remainder 220, how much was that pricing versus operational initiatives and was commodities at all issue over there?

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

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

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

And then just finally I want to hop off after that, work-in-progress, it sounds like you jumped up quite a bit, was there anything specific that drilled out in terms of something that got pushed out from Q1 to Q2, was that just a normal course of business?

I think I answered your question around pumps margin, no, there was no unusual items to talk about. I'm sorry, those… in investment.

Actually... Mark, the question was more… the work-in progress inventory?

Something... I had difficulty, yes, you saw that during the course of last year. This is, as we build these large projects for shipment and we talked about this in a second and third quarter last year work-in process thus can be build in anticipation of getting these projects out. So, there is nothing unusual here.

All right, thanks.

Your next question comes from Mike Schneider from Robert W. Baird. Michael Schneider - Robert W. Baird & Co., Inc.: Good morning, guys.

Good morning, Mike. Michael Schneider - Robert W. Baird & Co., Inc.: Congratulations. Truly a speculator quarter. And on that line, I am trying to understand the sustainability of what's going on this quarter in Pump margins. I guess so, the couple part question leading to the ultimate question, which is it, the pump after-market margins, are those rising as well, due to price operation excellence, etcetera?

Yes, pricing doesn't change a lot, we talked about over the cycles in the after-market business, but certainly is operational excellence is going to help all of our manufacturing activities, all of our service activities. So we do see some benefit, but it's not as a market is what you're you seeing in the original equipment side. Michael Schneider - Robert W. Baird & Co., Inc.: Okay, then on the original equipment side, so we take a educated guess as to what the margins are between these and it looks like OEM or project margins in Q1 were only slightly down from Q4, despite a significantly seasonal... seasonally weaker quarter. I guess what that bags is this ramp year-over-year in project margin sustainable over there anything unique in the shipments this quarter that would suggest we shouldn't look for the year-over-year increases in the project-related margins?

Yeah, I mean you look at the year-over-year quarter and you can see that margins were up and we do think that is sustainable in your original equipment, and a lot of that is, my comments around pricing in the backlog at the end of 2007, reassure on the traction on the operational excellent is we commented before, we try to get folks focused on the operating margin line in this business. This is good business and you get tremendous leverage on incremental price, but you do want absorption and operational excellence as well. And we are continuing to drive that, and also keep in mind because you look down in the operating margin line, the incremental SG&A dollar with the project is not as burdensome as after-market, because typically at selling related and customer support and a few other items. So and most of the other costs are capitalized in the cost of sales. So, if you are looking at the margins, we have seen improved margin in our project business we started calling it in the third quarter last year for all the reasons we described. Michael Schneider - Robert W. Baird & Co., Inc.: So, to conclude this then incremental margin for the total company this quarter was 27% on the operating line and the guidance seems to imply that incremental margins from here are 20% or less. So, I guess really bifurcating question, if 27% is sustainable, it looks like the real earnings power this year is $7 or more, if it is less than 20%, what factor should we think about just weighing on the incremental margin for the balance of the three quarters because that seems to be what’s implied in the guidance?

Yes. I mean if you look going forward, there is a number of factors, they could impact the margins and things going forward. One is mix and we talked about that. You saw a tremendous lift in the Pump margins from a mix shift as they drove significant 400-basis point operating margin improvement. And there is a number of other factors that we talked about. What happens to the currency going forward in a number of things as you outlook, is we mentioned, this is our outlook for the year at this point. We are certainly confident in our business and there is a number of factors that could impact that, but we don't ... we are not suggesting as there was anything in the first quarter that was unique either way, but you have also seen historically our first quarter... you’ve kind of modeled it over a period of time was our lowest absorption quarter in historical times, we saw good business go through. So, if you look relative to prior periods, the hockey stick that you've seen in companies are just certainly been moderated because we are getting good flow through our factors. Michael Schneider - Robert W. Baird & Co., Inc.: Okay. Congratulations again, guys.

Thank you.

Thank you.

Your next question comes from Scott Graham from Bear Stearns.

Hi, good morning.

Good morning, Scott.

Hi, Scott.

Nice quarter, but I hopefully got to say that more... was more enthusiasm than I think has already been expressed. A couple of questions I have for you guys. First of all, was there any little minor revenue impact from the consolidation of the joint venture?

Yes, there was. It was very small because the acquisition was consummated in the middle of March and so we had roughly a $10 million revenue impact, but it was insignificant to earnings. I think going forward the way you need to look at it is our half of the net income was taken in the income from the affiliates line in the Pump division and therefore on consolidation and so, going forward it will be fully consolidated. In the historical revenues, we are approximately $80 million, so, that ought to help you kind of model it going forward, but it will be fully consolidated, no, wasn’t an impact of working capital because we could even know we took just a partial month of their earnings in consolidation, we had to take their full balance sheet on at the end of the period.

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

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

Right, right, and I was talking about the stuff above the operating income line.

Yes.

So, you are aware that the dollar going the other way could impact us and you have strategies in place to kind of keep within a band?

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

All right. Okay. Last question is there’s some cooperate expenses as you know has been something that's difficult through, I guess the sell side, and perhaps even the buy side to forecast and so, is there any type of color you can give us here, Mark, on, you had a nice decline in cooperate expenses this quarter, is that a trend we should see continue? Do you think corporate expenses may be flat… it's a big number and it moves the needle. So any kind of visibility you can give on this would be helpful.

Yes, I can't Scott, I think we've talked about, let me talk about what our goal and our initiatives are, they are around 200 to 300 basis points as a percent of sales, and I guess this is the first time and our discussions got over the last two years where I can say we are there. We are at the high end, but we are going to continue to drive it. I think another thing to consider is if you look '07, '06, '05, '04 we've been certainly impacted by let me just call it generally finance related, compliance related cost. You certainly see in the financial related cost taper off during the course of last year and as we talked about at the end of the year, we do expect our other compliance related cost to go down. Now, you never can anticipate an unforeseen event, but absent those we expect the way we are managing the corporate departments up here, we expect to continue to get scale on that. But it can change from quarter-to-quarter, but we certainly seen an improvement and we're within the range and we are going to continue to drive it.

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

Well, again, things can pop up from one quarter the next, sure.

Sure.

But we were continued to drive it at this rate and lower in absence of might that popping up, we are going to continue to do that.

That's very helpful. Thank you and congratulations.

You’re welcome. Thank you.

Thank you, Scott.

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

Good morning, guys.

Good morning, Charlie.

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

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

Can you give us a sense sort of what the build-out of the QRC looks like today and where that's headed in the next 12 months or so?

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

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

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

Your next question comes from Ned Armstrong from FBR.

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

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

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

Sure. As we talked about last year, we had to build out in India and in China, there is still continued investment there. We are building out our facilities in the Middle East. We are also building our facilities to support the Russian district heating opportunity, which we think is tremendous. We will be spending money in South America, see the theme there is either we have existing facilities that we can add products to and capabilities to or we make greenfield some facilities and locations where they market opportunities are. One thing will suggest is, we don't feel like we are in every place, that we ultimately need to be. So, there is still some build-out opportunity to capture additional market share. I think another thing, another general theme if you look at it is, we will continue to spend as we did last year. Your P Systems, that's critical to our business and we have seen very good progress in that. So, we will continue to invest in that going forward. I think another thing that we talked about is our certainly some of our automated machinery. In these high-volume factories, what we are doing is putting computerized machinery, if you think about the machine, the machine is these days often times it's a different person. He is a computer operator, very sophisticated and very capable. And so what that does allow very high volumes of manufacturing to occur 24/7 and then finally a common theme we talked about is in our QRCs. That's where we are going to be investing our money going forward. So, as we talked about on the year-end call, the fact that we had the balance sheet and the opportunity to put this type of capital to work is very exciting for us.

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

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

Your next question comes from Karen Finerman from Metropolitan Capital.

Karen?

Can you hear me? Can you hear me?

Yes.

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

Let me start with the second one. I mean I think you do need to look at the bookings as an indicator of where mix may go. Now one other things that we commented, we got this term here called booking ship. And that primarily relates to the after-market. Those are quick turn products and that's what you saw tremendous growth than in the first quarter. So, that's on the heels of our end user strategy. But, a general theme is at least over the short and intermediate term, we would expect to see more of a bias towards original equipment as our bookings mix for the third… first quarter was 70/30 and if you look over the course of last year, it was 65/35. Commenting out into 2010, there is a number of factors and I won’t call a specific amount going forward. But we will continue to drive our end user strategies, which we think we will drive the after-market growth. And as Lew commented, there seems to be a lot of projects still coming online. So I really can't call exactly where that mix is going forward. But we saw a fairly significant shift to last year and you can look over this year and see where the shift may go. So going forward over the short term that we do see more original equipment again which is good for our business, high margin business, good price. Commenting on the tax rate, a couple of factors here. If you look at the tax profile of countries around the world, it’s… increasingly the United States have become the highest tax jurisdiction. So what we've seen is tremendous earnings growth in our foreign facilities, a lot of them that support the Middle East that are typically in lower tax jurisdictions. That's one thing that's driven our rate down. Also tax planning. We talked about this over the period of time and we've been spending a lot in tax planning and there were some things as we look over the horizon that we may see... we anticipate seeing a benefit in our tax rate this year. That's what caused us to take our tax rate down below the 30% to 35% range. Always keep in mind that with the disclosure rules in FIN-48, it does create volatility in our tax rate, but on a systemic basis, we do see our tax rate going down. It may be volatile in and around that rate, but it is improving. And we'll continue to guide on that and provide information updates on the quarter- to-quarter basis as we get more visibility into our annual tax rate.

All right. Fantastic job, guys.

Thanks, Karen.

You have a follow-up question from Mike Schneider from Robert W. Baird. Michael Schneider - Robert W. Baird & Co., Inc.: Mark, just sticking with this idea of pricing within the Pump division to understand where margins are going. Are you able to determine what you believe the embedded margin is in the projects you booked or you have booked in backlog? And if you are, do you sense that that number is actually… will sequentially improve as you work through deeper layers of the backlog?

Let me answer your first question first. Yes we absolutely have line of sight into the margins, both gross and operating margins in our backlog. We have a very disciplined sales and operation process that we go through and look at every project, build up the cost, look at where we're going to manufacture across the factory, and we create what's called an in-multiplier. We don't talk publicly about that because obviously that's precious information out in the marketplace, but also we monitor the out-multiplier as well to determine what we can do better or what we did right. So there is a very disciplined process of looking at orders, not only in the Pump business, but in the valve and seal business as to orders are going to our backlog. Commenting on the margins going forward, I don't want to comment specifically on project margins. You've seen them steadily improve over the last four or five quarters, which does indicate a couple of things. One, that we have seen improved price and if you look at the way, Lewis, described the markets out there, it's strong environment for price right now. But also, volume, operational excellence, absorption, all those factors, I would say played a significant factor in our gross margin improvement. Michael Schneider - Robert W. Baird & Co., Inc.: Okay. And I guess, in terms of revenue guidance, I don't believe we saw an update on that, can you give us a sense of what your revised number is for the year?

We didn't guide on revenue this year. We just went right to EPS. Michael Schneider - Robert W. Baird & Co., Inc.: Okay.

So, we haven't provided, I think the only things in my comments to factor into your thought process and Lew’s comment is one, we do see longer-lead times on projects, like in other factories, there is going to be a impact from Niigata Worthington acquisition, which will see more fully baked in as they are fully consolidated for the rest of the year for that matter and also we saw good sales momentum in the first quarter. Michael Schneider - Robert W. Baird & Co., Inc.: And then, Mark, just on modeling the balance of the year, so the OEM, after-market mix of orders, this quarter, it’s 70/30, as I think a kind of a peak ratio or peak mix for projects that I can recall. But, when modeling the balance of the year and even in '09, it is unlikely the actual mix of revenue in Pumps ever reaches that extreme for it, because after-market does have a huge element of booking ship, it might right in... in that project?

Well, yes, I mean I think if we continued to execute on our end user strategies you are exactly right, because the booking ship inter-period which will occur, we will get booked and shipped. Before you and I talk next time we will be in those numbers going forward. So, I think that's certainly a fair comment, but I don't want you to ignore the fact that we have seen consistently a strong bias towards original equipment relative to the mix this quarter and that's going to impact at it as well.

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

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

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