Good morning. My name is Terry and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowserve Corporation Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I'd now like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Hello everyone and thank you for joining us. Welcome to Flowserve's second quarter 2008 investor conference call. Today's call is also being webcast with our earnings presentation on 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 our earnings presentation slides on our website, please click on 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 stand aside 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 will begin the Q&A session. Regarding any forward-looking statements, I’ll refer you to yesterday's earnings release and 10-Q filing and today's earnings presentation slides deck for Flowserve's Safe Harbor on this topic. All of this information could be found on Flowserve's website under the Investor Relation's section. I also encourage you to read these statements very carefully with respect to our conference call this morning. The information in this conference call including the initial statement from management plus their answers-and-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 it over to Lew to begin the formal presentation.

Thanks, Zac and good morning. It's a pleasure to welcome you to our 2008 second quarter conference call. I'm pleased to report that the second quarter was another terrific quarter for Flowserve with continued strong execution and outstanding financial results. These results met or exceeded all our internal expectations which is why we're now significantly raising our full-year earnings per share guidance to between $7.20 and $7.50 per share from our previously announced $5.90 to $ 6.20 per share. These record second quarter results show the continuous strength in our end-markets, strong leverage in our income statement, and most important, successful execution of our key strategies, including significant organic growth, success in our aftermarket initiatives, additional process excellence improvements, further SG&A reduction, and strong margin improvement. When looking at the full year, these financial results along with the continued penetration of our key end markets, further operational excellence improvements within our manufacturing facilities, continued margin enhancements, improved traction in our tax-planning initiatives, and the increased confidence we have in our ability to continue to execute and grow in this environment caused us to raise our outlook again for 2008. During the next few slides, I will cover some of the significant company highlights for both this quarter and the first half of 2008 as well as the key performance metrics achieved during the quarter. Next, as I have done in the past couple of conference calls, I'll touch on a few of the key global project wins we've had over the past year or so. I'll highlight just a very few subset of these project wins which should show more clearly how we're using our global footprint in executing in strategic global operations and key market segments to position the company well for success over the long term. In the…

Thank you, Lew. And good morning, everyone. As Lew mentioned, we are very pleased with our second quarter results, and more important, we're pleased with the progress towards our long-term objectives and we're confident we will achieve them. During the second quarter, we saw continued strength in orders, highlighted by our strong aftermarket growth as we continued to execute on our aftermarket strategies. In fact, if you look at our growth in the aftermarket business over the last year, you can see that we are quickly becoming a $2 billion aftermarket business, which is profitable, high-margin, sustainable business. We also continue to see strong global sales growth. As we have discussed many times, over two-thirds of our revenues are international and two-thirds of our operations are international. We are truly a global company with a diversified operating and sales platform. Looking at gross margins, last year at this time, we saw a good improvement in gross margins despite mix shift to original equipment in the Pump division which showed that we were driving improvement through pricing, operational excellence, and absorption. This year, we've seen a slight shift to more aftermarket in the Pump division and margins have expanded significantly, which demonstrates that independent of mix, we're continuously and systematically improving our margins in all three divisions. In fact, in the Seal division, this quarter, we saw a 10% shift to more original equipment and their margins expanded. Looking at SG&A, we remained focused on driving SG&A as a percent of sales down to 20%. During the quarter, SG&A increased $41 million and once again, approximately half of that was selling related. We also invested in R&D. Also in this number, we've included the Niigata SG&A which was not consolidated last year and we saw a $14 million increase from currency.…

Thanks, Mark. Operator, I think we are ready to take questions. Question and Answer

[Operator Instructions]. Your first question comes from the line of Amit Daryanani with RBC Capital.

Good morning, guys. Just a quick…

Amit, did we lose you?

We will move to the next question. Your next question comes from Charlie Brady with BMO Capital Markets.

Hey, thanks. Good morning, guys

Hi, Charlie.

Hey, just a quick clarification on the tax rate just so I understand I'm clear. Structural rate of 29% but then reported rate, 200 basis points to 400 basis points below that?

That's right, Charlie, and let me make sure I'm really clear on this. What we talked about around FIN 48, there is the aspect to the structural rate and then there can be fluctuations around that for a resolution of certain matters, but also from certain tax-planning items. So what we are saying is, we see our structural rate going forward to be 29% or below. We do see additional benefits of 2% to 4% through the back half of the years and those could be resolution of tax matters and/or the benefit of tax-planning initiatives. But you are right, 29% or below is our structural rate and additional 200 basis points to 400 basis points in '08.

Okay. Thanks for that clarification. As we look at the bookings, particularly on the Pump business, as we had that 200 basis point shift and Q1, we had another 100 basis point shift. Are you seeing a shift towards the aftermarket business happening sooner than you might have envisioned? Or given the fact that for Q3, for instance, we're going against a 42% aftermarket mix, do you expect that the swing back towards more OE in the back half of '08?

Yeah, I don't want to call mix going forward because if I would have done it last year, I would have been wrong. And that's primarily driven by our tremendous success in executing on our aftermarket strategies. But Charlie, you can't ignore that the mix in orders over the last year has really been more biased toward original equipment. What we've seen is just tremendous success on our aftermarket strategies. And the other thing I'll always remind you is we are not a quarter-to-quarter business. You can't call a trend from either one but if you look at our full-year trend so far, I think that's indicative of where we are going; strong aftermarket growth, but we still see a lot of project work and you've seen the bias to more original equipment. So I would say that is a leading indicator of what you should see in shift going forward. But we just don't want to call it because we're really lighting it up on this aftermarket strategy.

Okay. One more question, I will get back into queue. Just in terms of the bookings mix by end-market, it looks as though this half of the year, the oil and gas business has been trending down as part of the overall mix and you were ticking it up on the chemical and the power again [ph]. So your mix of business is a bit more balanced out. Is that what you expect going forward? I would assume that that's more of a positive in that you're seeing a pickup from some other markets that have been maybe not a great [ph] contributor in the past?

Well, I mean, I certainly don't want in any way to infer that we are calling the oil and gas markets to be going down because that's just not the case. They've remained strong but what you've seen, and we’ve often talked about our process, is selectivity. And we certainly have been very selective and I think that’s reflective in our margins and also it’s reflective in our aftermarket growth. But, yes, we have seen growth in the other sectors, chemical and power, but oil and gas remained very, very strong and very, very profitable for us. So I think what you should see going forward is that we will continue to drive selectivity through our processes and we will continue to see opportunities to take advantage of aftermarket and we are going to capitalize on the chemical and the power markets, but it is balanced. It is balanced for a number of reasons, that's the way the markets are, but also it's balanced around selectivity.

Right. Thanks very much. Great quarter, guys.

Thank you.

Thank you.

Your next question comes from the line of Amit Daryanani.

Hi, good morning, guys.

Good morning.

Hopefully, the line works this time. I think a great quarter by the way. Just a couple of quick questions. On the Pump segment, the bookings, it looks like it slowed down a bit at 7.5% growth this quarter. Could you just have what drove that? And I know, Lew, you mentioned that we should see the back-half bookings being stronger than the back half of '07, are you talking dollar amount or are we talking the growth rates?

Yes, we're talking dollar amounts. And look, that's the way we run our business as we look at the dollar amount and the orders because from quarter-to-quarter, you're looking at different comparers. But, the other thing we'll remind you is, Amit, you may have seen the organic rates in the 7% range for the second quarter if you look at the organic growth rates for the year. And again, we are not a quarter-to-quarter business. Orders can move from one quarter to the other and that's why we found it was important to talk about the back half of the year because we do have very good visibility into our markets, we go grow through a detailed process and we wanted to make sure that we understood that our markets are good and we're executing well in tune [ph].

All right. And then if I just look at the overall bookings numbers on a sequential basis in Q2, it dropped 8% sequentially. It seems a little bit severe, at least compared to last year when the drop was about 4%. Could you just talk about why the sequential drop there?

Well, I mean, it's... again, they are still at very high levels and they did drop last year. And there is some that you can see if you look over the last couple of years seasonality as to how orders occur, last year is a good example and it's the way people set their budgets and so on and so forth, but again if we start looking it sequential from one quarter to another and try to call that a trend, I think we're going to be missing a lot of the messages that Lew talked about in his comments and it could be very simple that one was pulled up... came up into the first quarter that we thought would be in the second or slipped out of the second quarter into the third. So I would just caution you not to look too hard at necessarily the sequential bookings unless you're sustained over a period of time.

Fair enough. And then just finally, my final question would really be... if I look at incremental margins this quarter at around 33%, the full [ph] stat has been around 30%. Could you just remind us how should we think about the long-term incremental margins? I know you’ve talked about 25% historically, but it seems like we may have a step up over here, should be something at 30% is a longer-term sustainable rate?

Well, I mean, the incremental margins are going to be driven by comparers and so there is a couple of things to consider. Look at the SG&A initiatives that we put in place really in the first quarter of last year. Look also at some compliance costs we added last year... during the course of last year and that impacts incremental margins. I think the way you ought to look at it going forward is really around what our commitment is and that is that we want to drive this to 15% consolidated margins. The incremental margins can fluctuate from one quarter to another. They have been very, very strong. As you’ve seen, we've been able to grow operating earnings at three times the rate of sales, which really does drive through that. But at the end of the day, that is a metric we use for efficiency, but it's not necessarily the way we're driving our business. We're going to invest; we’re going to create a sustainable business. But I think if you look over the horizon, you see that we still have a number of initiatives that can drive incremental margin flow through.

Thanks a lot, guys.

The next question comes from the line of Scott Graham with Ladenburg Thalmann.

Hey, good morning guys.

Good morning, Scott.

I think you guys are going to have a good problem to have. It looks to me like the pace of cash flow is going to support a near-zero net debt a little out from a... a little bit more than a year from now. What's the plan there, Lew? What are you thinking in terms of capital deployment?

Well, we're not going to broadcast exactly what we're going to do. But as we’ve discussed many times, right now, we're not paying off debt. We're looking at other things like acquisitions and ways to return money back to the shareholders. We are in the middle of a buyback program and we increased our dividend last quarter by about 66%. So I don't think you'll see us go to a net debt of zero. We will probably continue to be where we are or maybe a little bit above.

Yes. And Scott, the terms [ph] we usually use is... when we go through our cash planning as we talk about at the beginning of the year and we talked about the uses of our cash and if you remember, still in the back half, we’ve got some significant capital expenditures that are coming on and those... you ought to view those as not only automating capacity but those were new market opportunities and so we will be deploying cash to new market opportunities and that's in Brazil and Russia and other areas of the world, continued investment in China and India. So you can look at that as an acquisition or your capital expenditure, it’s a buy versus build decision. As we mentioned, we also have plenty of capacity under our share purchase program and we want to keep flexibility around some strategic acquisitions. So we don't intend to let the cash sit idle, but we also don't see any benefit in paying out our debt at this point. It's termed out, it's very low-cost debt and we are happy with it.

Okay.

And one of the things we continue to do is we've mentioned is increase our number of QRCs around the world and that's basically following our customers, where our customers need us and that's where we are going to be.

Okay. If I just might follow up on that. If in fact you guys are contemplating additional acquisitions, I guess my question would be, where do you see holes in the portfolio? Is it an end market like desal or is it a region or is it a product line that you might want to get more involved in? Any color on that would be helpful.

We are constantly looking at all those things. As an example, in product line that we've mentioned this before in our valve line, we don't have a safety valve. I would like to have it but I don't need it because I have relationships with people that do have that. But it’s a possibility that if we had a chance to get it, we would. We are also looking at areas, as an example, we created a QRC in the Czech Republic. So there, we are looking at a place we wanted to be in. We are building a QRC. We decided to build versus buy in Vietnam because it was obviously nothing there to get. So it's a combination of all of it, really.

Yeah, I mean it's a great example that Lew highlighted, Scott, as if you think about our acquisition in Tulsa of basically sealing systems, which are auxiliary systems, it may have seemed like a small acquisition at the time but we’ve put substantial amount of capital in there and then we are leveraging that platform worldwide. So holes is a tough word to use in terms of our overall portfolio. But I would think of it in terms of opportunity and it can come in the form of capital or acquisitions as well, but we'll see them as they come along. The important message, I think is that we are not in any defensive position where we have to make an acquisition.

Understood, thank you.

You’re welcome.

I think we have reached the allotted time for today's call. Do you have any closing remarks?

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

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