Welcome to the Flowserve's 2016 First Quarter Earnings Call. My name is Christine, and I will be the operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Today’s call is being recorded. I will now turn the call over to Mr. Jay Roueche, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you participating today in Flowserve’s 2016 first quarter earnings call. Joining me this morning are Mark Blinn, Flowserve’s President and Chief Executive Officer; Tom Pajonas, Executive Vice President and Chief Operating Officer; and Karyn Ovelmen, Executive Vice President and Chief Financial Officer. Following our prepared comments, we will open the call to your questions. And as a reminder, this event is being webcast and an audio replay will be available. Please be aware our earnings materials do, in this call will, include non-GAAP measures. Please review the reconciliation of our adjusted metrics to our reported results prepared in accordance with Generally Accepted Accounting Principles, which can be found in both our press release and the earnings presentation. Please also note that this call and our associated earnings materials contain forward-looking statements, which are based upon forecasts, expectations, and other information available to management as of April 29, 2016. These statements involve numerous risks and uncertainties, including many that are beyond the company’s control. And except to the extent required by applicable law, Flowserve undertakes no obligation and disclaims any duty to update any of these forward-looking statements. We encourage you to fully review our Safe Harbor disclosures contained in yesterday’s earnings materials as well as our other filings with the Securities and Exchange Commission, all of which are available on our website at Flowserve.com in the Investor Relations section. I would now like to turn the call over to Mark Blinn, Flowserve’s President and Chief Executive Officer, for his prepared comments.

Thank you, Jay, and good morning, everyone. Flowserve's first quarter results were largely as expected and in line with our cautious outlook discussed on last quarter's call. I will cover a few highlights then Karyn will take you to through our financials in detail. Let me begin by stating that despite the current challenging macro environment, we remain on pace for the year with our adjusted EPS of $0.39, which included the increased seasonality impact that we expected as well as approximately $0.07 of distinct expenses in the SG&A line. Our adjusted operating margin fell to below 10% for the first time in a while and included the 140 basis points impact from the distinct SG&A expenses. This margin performance demonstrates that cost efforts lag in a declining revenue environment. And the loss of fixed cost leverage results in increased under absorption in addition to the normal detrimentals. We do, however, expect our margin profile to improve for the full year particularly in the back half, as a result of the expected increase in volume as implied in our full-year revenue guidance, as well as the building cost savings from our realignment in integration efforts. In the current market environment, we are focused on controlling what we can. As we previously discussed, we are taking aggressive action through the acceleration of our planned structural cost initiatives to optimize our global manufacturing presence as well as adjusting to current levels of customer capital spending. Considering the size of our overall investment in this program, let me review some of our efforts. To begin, to simplify the tracking of our realignment programs, we have now combined our 350 million accelerated manufacturing optimization strategy announced last quarter in a nearly complete 50 million SIHI realignment effort into a single initiative. So we will…

Thanks Mark. As we highlighted first quarter results kept us on phase for their full-year expectations outlined in February. We discussed at the time that our 2016 first quarter would be challenged beyond our normal seasonality due to industry headwinds experienced in the 2015 fourth-quarter which continued into the first months of the quarter. First quarter adjusted EPS of $0.39 was driven by a solid level of shipments and continued operational performance. Our adjusted results included approximately $0.07 of distinct SG&A expenses primarily related to accelerated non-cash SG&A accruals in the quarter from modifications to new long-term incentive plan grants. We also saw negative currency translation of approximately $0.03. Following our announced definition, adjusted EPS excluded $0.07 of realignment expense, $0.02 of negative below the line currency effects, and $0.01 of CE purchase price accounting and integration charges. Adjusted SG&A expenses appear elevated during the first quarter, but we do not believe this represents a trend. First we are including the 13.1 million of distinct SG&A expenses, primarily related to the non-cash accruals I mentioned, which will not recur in the remaining quarters this year. We also had some non-realignment severance in the quarter as we look to upgrade certain roles there is also a timing related impact associated with our cost reduction efforts where we've identified current savings but they haven't been fully realized in the quarter. As Mark discussed many of our actions are in high-cost regions and will take longer to achieve. So, as the year progresses, we expect our adjusted SG&A percentage to be below the 24% we saw in the first quarter. Turning to margins, first quarter adjusted gross margins were 33.3%, which excluded realignment charges of 7.2 million. Gross margins were negatively impacted by lower volumes increased under absorption and a beginning backlog that…

Thank you, Karyn. Operator, we've now concluded our prepared remarks, and would like to begin the question-and-answer period at this time.

[Operator Instructions] Our first question comes from Mike Halloran from Robert W. Baird. Please go ahead.

Hi, good morning, everyone. So first could you give us some more context around the improvement you saw in the March order rates. Do you think it's a sign that maybe outside the oil and gas space in particular there's a little less fear maybe more willingness to bring CapEx back to the market. Was the trend more than normal seasonality, so just a little more color around that improvement please?

Yes, we always see a little pickup in the month of March. Mike, if you remember, mid February, look what happened in the markets and in the price of oil, there was just a complete lack of visibility at the first part of the year. So you typically see a trend up in March as particularly in some of the emerging parts of the world that get their budgets approved and everything. But for us, we saw a kind of not back to what I’d say normal levels but certainly some improvement particularly on the aftermarket side and I've seen it continue into April as well. So I would say it was stabilization reflecting kind of the current market environment. What we saw towards the end of the year last year and really in the first six weeks of this year, was something more can to what you saw in 2009 in parts. And there was not a lot of visibility. So process operations have to continue to run and as long as things are flowing through and they have to do that, but there are still times when people kind of stop and wait and see and we saw that in 2009 and we saw it really the last month of the end of last year and first six to eight weeks of this year's as well. So we're keeping an eye on it. As I made in my comments, you have seen oil certainly stabilize. Remember at the beginning of the year as they were concerned about oversupply, lack of storage and demand destruction in China. So some of those things have certainly abated. You see the price kind of stabilize. It will still move around. But as this occurs than people can kind of get back to life, so to speak.

So then when you think about growth and the return of growth, aftermarket starting to become a little bit more normalized for you may be even starting to improve sequentially. Some of that deferment starts -- at least dissipating a little bit, the OE site is starting to stabilize. So from here to get growth in 2017 what would you need to see different or just a continuation of the trend, may be just talk about some of those dynamics.

As we kind of think of growth in really the three areas we talk about on the aftermarket, it is going to be the pent-up demand being released and not further demand being pushed out. And we talked about that a little bit, but some of that coming back online and then executing on our aftermarket strategies. Keeping in mind that over the last seven to eight years the growth that we've seen has not been -- it's been market driven to a certain extent, but more so around our strategies. When you look at the run rate business, I think there's a couple of things to that. Executing our industrial strategies we did see some good improvement and some traction in Q1 versus where we were last year. So executing our distribution, focusing on our channels market, our e-commerce to try growth in that business, also some brownfield activity. If you look at it may be some destocking has for the most part occurred. Maybe there's stock levels that come in and a little more activity around brownfield both direct and through our distribution channel. And I think the last piece Mike that what we need to keep an eye on is the larger project activity. While typically the lowest margin business that's something that can move your topline the most, what we've seen is projects -- there are some projects that are still out there, some that we had an opportunity to bid on in Q1. We just didn't like the terms and conditions. But they're out there. It's really keeping an eye on what's going on the drawing board. In terms of next year that may be come to bid. That's where we're still trying to get some visibility. And I wouldn't have expected that to snap back after what we went through in the last six months. But that's what we need to keep an eye on is, are they going to put some of these projects on the drawing board and start to work them up.

Thanks for the time, Mark.

Thank you. Our next question comes from Andrew Kaplowitz from Citigroup. Please go ahead.

Good morning, guys. Mark, I wanted to ask you a little bit more about the bookings in the quarter from the standpoint of specifically in power in general industries where's the power stream coming from. I know you cited the line cycle U.S. market is improving, maybe China nuclear is improving, maybe Gulf. But are you trying to signal that those end markets are getting better here and are you also seeing a bit of inflection in the general industry business. I know it's a hodgepodge of businesses that you mention pulp and paper. Are you seeing better sort of environment for general industry as well quick

I think in the power it is the combined cycle some of the other project. I mean you've seen over the last couple of years power has been challenging relatively flat. Now you're seeing investment go forward. And if you look behind all this, we talk about this oftentimes the secular drivers, I mean people need more power there's not a sufficient amount of power. The infrastructure is aged. So you know these things will kind of come back around. It's been kind of soft over the last couple of years, but you've started to see some investment generally combined cycle in the U.S. with the focus on fossil fuels and also in emerging parts of the world. In the general industry there's certainly been some self-help around our focus on our distribution channel. That typically is reported in our general industry segment. Also as you saw a couple of years ago there was investment in the agricultural industry. Pulp and paper is kind of having its moment right now. So these things do tend to cycle through and come around. In general what you'll see the G.I. is going to track the distribution channel and then also certain other markets as well that will tend to see investment from time to time. But the way I look at that is what strategies are we executing around our industrial side and also in our distribution channel. And as for the other parts of our business, the chemical side certainly we see investment opportunities as you saw back in 2010 after a market decline. So you'll see investment. The one we've got to watch as the big projects on the oil and gas side.

I would add maybe a little bit to what Mark said. In addition to combined cycle, you have a little bit more I would say push going on with renewable, solar by a mass, waste or energy, so that we’re starting to see just some turning, turn there slightly, and I also I would tell China Nuclear, there is plans for a defined build up over the China nuclear over the next several years and even though the coal market is going through a transition, that may spur a lot of carbon sequestration projects as they look for clean coal opportunities going forward.

Got it, okay. That's helpful. Can you talk about aggregation of your saving initiatives. I think you reiterated your targets but you recognized only 50 million in savings in the first quarter. Your target is still 125, but I think that for ’16, but I think that includes CG now. So concerned should be savings could be pushed to the right or little more into '17 and given by the reason to get cost down its compete in a more difficult pricing environment, how concerned are you guys that margins could get a little worse before it gets better?

Well if you look at it a lot of these costs are in the high-cost regions and in a particularly in Europe and it does take time to get those cost out. And so you see times when you are ahead of expectations and behind expectation. At this part of the year, sitting in April, we are still confident that we are going to be able to drive a lot of these costs out or get them teed up to drive them out during the course of this year as we talked about. But certainly in the first quarter you saw the lack of fixed cost leverage particularly in the G&A line, and a lot of that is just that it takes time to drive it out of the business. But for the specifics Karyn?

Let me give you a little more granularity around how this will flow through. So 400 cost approximately 80% of that relates to closures or capacity reductions and that will represent about half of those run rate savings. And then the headcount reductions which really are less than one year type paybacks that's about 20% of that overall cost and about half of those savings. So Q1, just to roll through here Q1, 13 million, 50% of that cost of sales, 50% of that SG&A, we expect that ratio to kind of range between 50% to 60% as we go through into cost of sales and 40% to 50% SG&A. So, as we indicated in our comment previously inception to date expenses about 130 million of that remaining 270 million about 55% to 60% and for the remainder of 2016 and the rest will be in 2017. So it will continue and expect that split between cost of sales and SG&A. The year-to-date savings in 2016, about 16 million and we expect that savings to increase over 2016, so definitely waited heavy in the back half of the year. The run rate savings we expected to be around 230 million by the end of 2017 or early 2018 and expect savings of a little bit more than half that amount in 2016, 130 million and that's all growing to about 85% to 90% in 2017.

And so Andy, one other thing to keep in mind the cost of sales oftentimes those savings will take the cost out but they'll be capitalized in the project. So in terms of when hits a P&L. But I think the bottom line on this, this is an absolute priority for us. This is very significant. We think it's going to really position us very well for the future so we have a lot of resources on this. So that we can achieve the commitments that we talked to you about.

Thanks Mark.

Thank you. Our next question comes from Nathan Jones from Stifel. Please go ahead.

Good morning, everyone.

Hi, Nathan, How are you?

Good. Thanks. So this is about as bullish as I've heard you in a couple of years Mark. So I guess, even potentially a little bullish here on a large project business. Can you talk about maybe what your customers are telling you in terms of their plans to bring some of those things back to market what you're seeing in terms of behavior from your competitors on pricing. Just your general outlook on that going forward?

Well you tend to be encouraged when you see some stabilization after the last six months that we been through. Or actually the last what 15 months that we been through. I'm certainly not calling the ball that good times are here like they were certainly two, three years ago or more particularly in 2008. But we are encouraged by the stabilization, and I think I'm also encouraged it's always good when you see some of the initiatives that you have start to take hold, particular in our distribution and industrial segment. I think Nathan when we were together we talked about that a little bit. But I do want to make it clear on the project side as I mentioned earlier, there is some activity. These things have been on the drawing board for a while. We expect them to be very competitive, we'll need to be selective because we definitely can compete we want to position ourselves to but we need to be disciplined. I do want to express just my concern is with oil and gas the way its been, we just haven't seen things going on the drawing board that we want to see. They can come back online but that area we’re still definitely cautious about. From a pricing standpoint on the projects, we expect that to be competitive. Look, we've taken that approach for the last nine months to a year plus, as we saw this market. This is why we’re taking the aggressive action in our cost. A big part of our cost reductions are in our custom engineered business which addresses these projects. We want to participate in these projects. That's what creates installed base, that's what gets you in front of your customers. But we know that we need to really drive costs out of our business so we can remain competitive not only in this environment, but we can drive good profitability as pricing improves in the projects. So that's kind of our outlook. Generally, as you've seen with the integrated they’re all focused, they continue to be focused on the dividend and they've gotten a little more I think tailwind to them. But they're focused on price as well so are we. Keep in mind, these projects are competitive, but if you look across the rest of our business we’re turning to our supply base as well. So we're passing through a lot of that on the smaller business down to our supply base.

And I know you mentioned we talked about this earlier in the year. I think it's one of the more interesting initiatives going on at Flowserve and I know you've got a new later in IPD. Can you may be give everybody a little bit more color on that growing distribution for IPD initiative what progress has been made, what kind of opportunity you think that is?

We started to see progress this quarter. So I wouldn't necessarily claim victory on that. What you're seeing in IPD is it is shifting truly to an industrial business. If you thought about my prepared comments, year-over-year we saw a significant decline in projects large projects particularly in the oil and gas. So IPD kind of road the -- for many years the oil and gas coattails as it emerged out of the pump business a number of years ago. But half of that decline was offset by traction in our industrial initiatives and also we’ve been very pleased with what we’ve seen from CE. The top line is held up well and the gross margin has as well. On the SG&A line, we've been very thoughtful in terms of what we do with that we’ve been able to leverage it. Those costs will take time to get out. So as we take a step back, and think about the products that we brought in there over the last couple of years, we were under utilizing our channels to market. Both in a mag also we -- and we learned a lot from the SIHI acquisition. So from our standpoint we're encouraged with what we see, we need to grow that business we talked about that a couple of years ago. And that's what we see in the business.

Is there any way to size the opportunity I mean you've talked about that being an unserved market for Flowserve. Can you size the market, can you size kind of what you're going out, going after in that market at all?

Market like the industrial market?

Yes.

I mean it's -- it addresses the chemical industry. I mean there's multiple applications. I mean much more opportunity certainly in the chemical industry. For example, if you look at the vacuum pumps that SIHI has, they were primarily focused on the European market. So European market is good, but the Chinese market even the U.S. market is strong as well. So the opportunity is big.

And I would add Nathan to what Mark is saying is I mean the opportunity comes through distribution and the industrial side on the range of products. So increase the range of products that go in through the distribution side of the business. It's a regional play. EMA was a very good stable growth on the distribution side, and it was because of the new territories that we started to look at in service to our distribution business, including Russia. And it's also a play on the strategy of matching what the customers need there to the type of distributor that you need in a particular territory. So it's a little sophistication on the distributor strategy in those areas, region, products and customer drivers.

Its early days on that, Nathan. There's other companies out there that have very good products, very good channels and do quite well and have high margins in their business. That's what we aspire too.

Thank you. Our next question comes from Charlie Brady from SunTrust Robinson Humphrey. Please go ahead.

Hi, thanks. Good morning, guys. Just on IPD, can you just talk about – we’re not getting I guess too specific, because you won't, the margin improvement to that business. I mean it took a pretty big hit on the margin Q1 relative to where that business has been and I guess a lot the absorption is hitting that. But as you go through this year, do you get it back to a double-digit margin and it was again in the 2017, further improvement on that or is it – structurally it's going to be kind of a slower crawl back up to that.

Well, no, this isn’t reflective structurally of that business. What you have in the IPD segment this quarter is a good portion of those discrete expenses were in that segment. And also you have the SG&A burden from SIHI which will drive those costs out in the back half of the year. So it's not really reflective. Also, if you look year-over-year, the revenue decline, we need to get those SG&A costs out, part of those are in high cost. So there's a lot of things working. The revenue decline, the impact of the discrete SG&A items in the Q1 and as Karyn talked about those don't occur in the other quarters, and also the impact of SIHI. All of those things in a sense impacted margins during the quarter. But if you look underneath in the business, the gross margins held in there fairly well. The underlying SIHI business was strong we were able to offset some of the significant oil and gas project declines, so that's really representative of how that business looks. We expected it to improve.

Okay. And can you talk on a more macro sense in terms of competitors given the downdraft in some of – in oil and gas market in particular, are you seeing any different reactions from competitors, either positive or negative to Flowserve's business?

No. I mean, it's – where we see them mostly is going to be on the big project side and that is each competitors making decision for their own reasons as to how they're going to approach a project. It could be absorption; it could be a desire to get the installed base. If you look particularly in some of our run rate business, it's – they’re fairly large markets and the real issue there is making sure you’re responsive to your customer, that you can give them the product that they want. What we do like is we have a broad array of products in our portfolio. And you've got to execute well on the channels. What we found that we've struggled, particularly in our ITD segment, going back to 5, 6 years ago it's when we haven't really taken good care of the customer. So that's really the opportunity that we and our competitors look for and that's why we're so focused on these initiatives.

Great. Thank you.

Thank you. Our next question comes from Scott Graham from BMO Capital Markets. Please go ahead.

Hi, good morning, all. Mark, one comment. I really wish Karyn had a better handle on the numbers. I'm going to have to go back to the transcript to see what she said. I couldn't keep up. I put my pen down. So, very well done Karen. I wanted to ask you a question about some of the dynamics of the bookings. In both flow control and particularly in EPD, there were some pretty rough and tumble organic booking numbers in the last four quarters and maybe if we start with EPD. Despite that, we've had organic sales growth in each of the last two quarters and not organic sales growth in the last two quarters in flow control obviously down, but the degree of the bookings decline even there would suggest that really the next couple of quarters, we could see a pretty significant reversion in sales there. Is that the right way to look at it there? I mean it would seem that the booking -- that the shipments are going to have to catch up to the weak bookings at some point in both businesses.

In EPD what you've primarily seen is the big project activity. So, as we talked -- that's been the bulk of the decline. So, the underlying aftermarket business year-over-year and sequentially the sales were relatively stable but you saw the project activity that we booked in 2014, those compares across it. On the FCD, it tends to be shorter cycle businesses and so you feel the impact of the bookings quicker, much quicker in terms of book-to-ship. So, I think if that's answering your question, I just want to make sure it is, that's typically what's driving it.

Yes. It is in part, but it suggests to me that -- I mean if your sales guidance for the full year is down, seven to 14 and this quarter you were only down seven, it would suggest you guys are bracing for weak, slower year-over-year sales or weaker year-over-year sales declines in at least the next couple of quarters. That's when trying to understand.

Go ahead, Karyn.

Thanks. So, I think as you go through the year, you have to look at first quarter and you have to look at it from the percent of revenues that we have in the first quarter. And so going forward, you have to kind of wait that a bit. But expectation as we move through the year, we will have increased revenues in the latter part of the year. Seasonally that's what we've experienced in the past as well. The key for us as we go forward, as you drive down through revenues, is looking at margins and looking how the realignment activities and under-absorption starts to improving the latter part of the year.

Part of what could help you if -- I'm sorry I'm struggling with your questions because I don't think I understand it, but if you look at the book-to-bill, often that can give you an indicator in a shorter cycle that will help you with the trend on subsequent quarters. But clearly what you've seen is the book-to-bill in the OE and EPD segment has been impacted by the lack of projects. So, you see that reflect through in the revenue side. That formed a lot of the basis of our revenue guidance this year. Because last year's revenue had a lot of project activity that was booked in 2014.

Okay. I guess what I'm trying to get at here is that it seems like there has been an improvement in that sort of great middle. Not the project, not the aftermarket, but in fact the book and ship business. That trend line seems to have improved and if it hasn't, then it would seem that the sales declines in at least engineered products, are going – you'll start to see sales declines in next three quarters in that business for sure. That's what I'm trying to get a handle on.

Yes. In the project side, we do expect that and as I said that forms the basis. But even if you look in the first quarter, the book-to-bill in the flow control division was slightly over one. Let's say roughly flat. That's a good sign of things how things are stabilizing can improve over the period, same thing in the industrial segment as it tends to be shorter cycle. But if I'm answering your question right, a lot of the decline in our reflected in our guidance, is the project environment in 2014, the bidding activity in 2014 versus the bidding activity in 2015 and to a certain agreed the bidding activity we expect in 2016, because some of that goes through percentage of completion.

Understood. Okay. Thank you. Second question is about the capital allocation policy. Last year you were pretty comfortably over what you've mandated yourselves at. I'm just kind of wondering does that kind of normalizing 2016 or can you stay above that 40% to 45% return.

Well, right now we haven't changed our guidance in terms of the 40% to 50%. As we talked about in terms of our capital allocation priorities, we always look internally and organic first. One of the things that we are very focused on is this restructuring. And that's where a lot of our cash will go to this year in terms of driving that. So the priority is going to be our restructuring activities, our capital expenditures, which are anticipated to be more modest than last year, but still important growth capital expenditures and then we’re still sticking to our 40% to 50%. No change there.

That's what it meant 40 to 50. You're so far above that last year and now it will have to probably be tempered little bit more, because of some of the capital that has to go toward the restructuring is that what you're saying?

Yes. In the past couple of years, what we do is when we fund our internal initiatives and our priorities, we've over the last couple of years have returned the access to our shareholders, which is very import. So to the extent where those are going to be more cash utilization on the important internal initiatives, the likelihood is that we’ll stick to our guidance.

That's very good. Thanks. Nice quarter.

Thank you. Our next question comes from Chase Jacobson from William Blair. Please go ahead.

Hi, good morning. Mark, I think you touched on it a little bit; I just want to make sure I understand this. But, understood the gross margin was a little bit lower this quarter because of the bookings in 2014 and clearly the pricing deteriorated throughout last year. So, I guess the question is really how long do those longer cycle projects take to flow through the income statement and is 60% decremental gross margin what we should be expecting as we go throughout the year maybe into 2017 may be given how tough the pricing is been in the level of the OE bookings.

Well, let's say all other things being equal and they aren't because of the restructuring, but let's just start generally with the way to think about it. First you look at the volumes. The volumes in 2015 in terms of project activity were lower than in 2014. The pricing environment in 2015 was more competitive than it was in 2014. Not to the extent of what we saw in 2008 and 2009 because the pricing didn't get near those levels. So those things flowed through -- started flowing through the P&L and -- last year and are reflective in our compares. So you'll have absorption which you address with some of your restructuring activities and also the pricing environment which you also address with your restructuring activities. But that's working its way through. So the marginal impact or the incremental impact starts to abate because you don't have as much project activity sitting in backlog. As we look forward in terms of the profile there. We do need to get at the absorption issue. So the cost savings will focus on addressing the pricing environment, and also the volume environment that we're in. And we're designing it to be very, very long-term. The other thing that is you start looking at mix. If we start driving growth in the aftermarket business, start getting traction in the run rate business, then that can certainly support margins. Those are the levers and those are really the dynamics around our margin profile. But we've seen quite a bit of our project activity certainly from 2014 go through the P&L and we're posting 2015 now go through the P&L. There wasn’t lot of project activity at the end of last year by the way.

Right, okay. And then Karyn can use clarify the accelerated SG&A expense at $13 million. Can you just talk about that again quickly and how much of that was in the guidance for the year?

Mainly it's LTI. The acceleration its in non-cash accrual. Its really related to a change in our retirement plan. So accounting convention within a change in employee retirement you have to actually pull that cost forward. So really it's essentially taking three years of cost and pulling it forward. So you'll see a modest decline in our amortization of that over the next 36 months. The majority of that sits in our corporate expense and then a portion of that is allocated down to the segments. In terms of guidance, probably about -- I would say 50% of that was considered in our guidance and then real accounting adjustments were made in first quarter.

Okay and this becomes a tailwind to next your correct?

Slight. It's modest over the next three years in terms of reduction in amortization.

It takes -- what it does is it reduces its subsequent quarters it takes three years to kind of get the full cycle of this. So we will see this impact in Q1, but it will be less significant. But as Karyn talked about it is non-cash.

Okay. Thank you.

Thank you. Our next question comes from Robert Barry from Susquehanna. Please go ahead.

Hey, everyone, good morning. I wanted to circle back to IPD for a second, you had mentioned being particularly significant price pressure there. Is that just really reflective of the segments historically higher EPC exposure at the projects? Or is there some other dynamic going on there and is that accelerating recently or has that been kind of the state of affairs there for a few quarters now?

So, Robert, I think you said IPD and we haven't seen – okay, no, we haven’t seen the big price pressure in IPD, what we did see was the reduction in oil and gas project activity. So IPD has some project that can actually be repurposed for other processes as well. But they were able to line it to kind of the balance of the plant for some of these oil and gas larger products. What we saw was a decline in the bookings activity and these were -- these aren’t huge but there could be $250,000 and above. We saw a significant decline in that year-over-year. Offset by more penetration in some of our other industrial chemical applications and distribution. Where we seen the pricing competitiveness now for really about nine months to year, is in the EPD segment, a lot of it is in the OE portion of that where we seen the pricing impact. Those are the big large projects, millions of dollar projects that are competitively bid.

Yes. That's what I was thinking actually and so when I saw in the release yesterday this mention that the project booking opportunities were challenged competitively priced particularly in IPD, it’s down for me, but maybe it's competitively priced until you are walking away from it, the net result for you is just lower bookings.

Right. I think the comment about project opportunities competitively priced will apply to everything. But the fact is, it was more volume than anything else in IPD. Good questions on IPD, the point there is, we have an opportunity to take the products that we have, we've got a good product portfolio, and much better penetrate the market. Is what happens when you get these large project activities is it all tend to tilt the entire organization to focus on those. We've made some changes not only in the leadership of IPD, but in our channel to market approach in terms of our sales organization, our distribution leadership to focus on this and we’ve seen some traction.

Got you.

So think of those as, we need to address markets better than we have before and that's what we intend on doing.

As market is indicated previously on the EPD side, in the IPD side, we also have had some projects that we could have taken but for some of the terms and conditions which were extremely onerous.

Got you. Yes, just - thank you, that’s helpful. One kind of big picture question, lots of discussion about moving capacity to low-cost countries. Not just that Flowserve but elsewhere too, so I was curious as you look at the company and across the industry, I mean to what extent do you think through this downturn and the restructuring and reaction to it, we are actually seeing a lot of capacity being, I guess, simply moved versus actually removed, or cut.

Now, that's a good question. This one is much more removed than moved than we’ve seen in the past. Because what we're doing is closing facilities and consolidating that into some of our higher performing facilities even in the OECD countries. So there's a lot of closures relative to what we seen before, but then, again, what we'll do is we may move the product into a lead product facility into a mature market and a lot of the work goes into a lower-cost facility in some of the emerging parts of the world. But this is really designed to position the company long-term. In the industry, things we've been really had on the drawing board now for 2.5 years. We just accelerated it.

Got you. Okay. I'm in is clearly important because as we think about pricing tightening through the next cycle its obviously better if its being removed than just being moved in the cost lower, okay. Good. Would you say that the 15% to 20% reduction in workforce is kind of a good proxy for how much capacity you're taking out or do you have an estimate for that?

I think we've talked about a 30% of our physical capacity is getting taken out. So actually there's, there's more square footage in a sense then there is resources. And a lot of that is because we're, we're building engineering and engineering centers in India to handle higher volumes. What we're doing with the 30% takeout, what we don't want to do is not be able to address the markets when they become more robust. So I think the way to think of it is even though we're taking the physical capacity out, I believe we'll be able to handle at/or higher level of volumes then we been able to handle before. That's important we want to make sure that we can address our markets because we still believe in the underlying secular drivers in the business.

Thank you. Our next question comes from Joe Giordano from Cowen and Company. Please go ahead.

Hey guys, this is Tristan for Joe today. Most of my questions have been answered. But I was wondering referred some of operators wanting to out for standardization instead of going cast installations in their designs. How would that affect your EPD segment?

You're talking about going for standardization? Actually we welcome that. We work very closely with some of our large customers to drive that because what it helps us do, is to streamline our manufacturing process, our ability to support it from an aftermarket standpoint but more importantly turn to our supply chain and drive value through there. Keep in mind, standardization does not mean commoditization, standardization means we develop a common and expected set of process conditions under which the equipment will operate. That actually helps us be more efficient. It also helps us get more of a share of the customer wallet as well because when you develop and can deliver the standard, it works well. I don't - - we don't look at that is favorably all we actually encourage it with our customers.

I would add, we've even gone as far as to put engineering talent in EPC facilities in order to drive that overall standardization strategy that they've been embarking on over the last couple of years.

Nice this is helpful guys. That's all for me. Thank you.

Thank you. Our next question comes from Bhupender Bohra of Jeffrey. Please go ahead.

Good morning guys. Question for Mark, you know Mark talked about the FCD bookings especially mentioned about the talking about the distribution channels and kind of mentioned the word restock here. Can you give us a sense of in your FCD I believe 40% of that business goes through distribution channel and just wanted to get a sense of what you're seeing there on the restock? Thank you.

We aren't seeing necessarily the restocking yet. What we talked about is we feel the destocking is abated and they're running just in time inventory. Now that’s important, because for that channel to be able to be successful, you've got to be able to deliver in a timely and efficient manner. And if you look at FCD's performance over the past couple years the fact that it has the margin profile that it does is reflective of their ability to respond to all customers needs particularly our distribution channel. Now what I did make the comments is when we see some restocking occur that should be a tailwind for us but we have not seen that yet.

Okay. Got it. And just a follow on, on the aftermarket activity can you just go through geographically like how that will look in terms of project versus aftermarket?

Well, what we’ve talked about is that the base aftermarket business has shown some stabilization. What we haven't seen that we saw in prior years what we call the small aftermarket projects some of the efficiency initiatives that some of our customers do. They are still holding onto that spend at this point in time but we're confident they'll do it because it actually improves the return on their operations but it's been pretty much stable what we seen across the board in terms of all the operations globally.

Many of these projects that went in 2014 and in the beginning of 2015 are now going into a period where they need spares during the first two years worth of operation. So we are seeing some good activity relative to that in North America, Europe and Asia. Obviously, Latin America is down given the whole political situation there. So that looks, I would say that looks promising. And we're also seeing in North America because of the deferrals of the maintenance we are seeing some emergency repairs start to kick in. Customers are coming in with very quick turnarounds, so that business is now seeing a little bit different, I would say driver in that business. And our EMA maintenance business in terms of upgrades on flood control, we mentioned desalinization and even the refineries are seeing some positive signs there.

Okay. Got it. Thank you.

Thank you. And thank you, ladies and gentlemen. We have reached the allotted time. Thank you for participating. This concludes today's conference. You may now disconnect.