Jay Roueche - Vice President, Investor Relations and Treasurer Mark Blinn - President and CEO Tom Pajonas - Executive Vice President and COO Karyn Ovelmen - Executive Vice President and CFO.

Scott Graham - Jefferies Kevin Maczka - BB&T Capital Markets Deane Dray - RBC Capital Markets Robert Barry - Susquehanna Joe Ritchie - Goldman Sachs Nathan Jones - Stifel William Bremer - the Maxim Group Brian Konigsberg - Vertical David Rose - Wedbush Securities Joe Giordano - Cowen.

Welcome to the Flowserve's 2015 Second Quarter Earnings Call. My name is Paulette, and I will be your 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. I will now turn the call over to Jay Roueche, Vice President, Investor Relations and Treasurer. Mr.

Roueche, you may begin..

Thank you, Operator, and good morning, everyone. We appreciate you joining us today to discuss Flowserve Corporation's financial results for the second quarter of 2015.

Joining me on the call 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 instructions will be given at that time. As a reminder, this event is being webcast and an audio replay will be available later today.

Before turning the call over to Mark, I will note that we filed our Form 10-Q, issued a press release and prepared an earnings presentation for our second quarter 2015 results, which are all available on our website at flowserve.com in the Investor Relations section.

Additionally, please also be aware, our earnings material do and this call will include non-GAAP measures. Among the non-GAAP figures cited include our adjusted earnings per share metric.

We have reconciled our adjusted EPS, as well as other adjusted metrics to our reported results prepared in accordance with Generally Accepted Accounting Principles which can be found in both our press release and earnings presentation.

Please also be aware 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 July 30, 2015.

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 second quarter materials, as well as our other filings with the Securities and Exchange Commission for additional detail.

We encourage you to fully review our Safe Harbor disclosures contained in yesterday's second quarter materials, as well as our other filings with the Securities and Exchange Commission for additional information. 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 delivered solid operating results in the 2015 second quarter, in light of the current business climate. As you know, the challenging markets we experienced earlier in the year extended into the second quarter, with broad-based capital spending declines, a strong U.S.

dollar, low oil prices and heightened pricing pressure on new orders. Headwinds in many of our emerging markets also increased last quarter, adding to the tough business environment. Although, there were some signs of reduced volatility in the quarter, with oil prices and currency trading in a tight range, overall market uncertainty continued.

Our outlook for the rest of 2015 has moderated with the assumption that current market conditions will persist. With this updated view in combination with our first half results, we've adjusted our revenue and earnings guidance. Despite these challenges, Flowserve is performing well operationally and is navigating the current business environment.

Although, customers remained deliberate and measured in the release of new orders and acceptance of finished goods, Flowserve's adjusted sequential bookings and sales increased by double digits, reflecting our normal seasonal increase. On a year-over-year basis, our bookings, excluding SIHI were down roughly 15% on a constant currency basis.

This was a tough compare period, since as you may recall, our bookings a year ago included a few mid and larger size projects, including our largest award in 2014, which together made last year’s second quarter, our strongest booking period since 2008.

Our aftermarket franchise performed well despite continued maintenance deferrals in some of our markets, and lower parts and spares activity tied to new project orders. Many refining and chemical customers delayed upgrade projects and maintenance to take advantage of current strong profit periods.

Even with these deferrals, our aftermarket bookings declined only 5% on a constant currency basis, demonstrating the resiliency of the MRO business.

While our adjusted gross and operating margins declined in the second quarter, as compared to the prior year, primarily as result of lower levels of activity and the currency impact, our operating platform remained solid.

The operating improvement we've implemented over the last few years in product quality, on-time delivery, customer responsiveness and manufacturing efficiency have taken hold, which allows us to focus on Flowserve's next evolution, permanent reductions in our cost structure.

As we announced on last quarter's call, we've accelerated our strategic manufacturing optimization and cost efficiency plans. These type of changes take careful planning and execution to ensure customers are not impacted and to comply with local requirements, but we are aggressively proceeding.

These structural changes will provide us increase flexibility to compete in the current market environment. It will further improve the efficiency of our operating platform and enhance our competitive position when conditions improve.

We are also meeting increased customer expectations through our ongoing efforts to improve our low cost sourcing and increasing our emerging region capabilities, which is where new capacity investment will be concentrated.

This greater geographic flexibility, when combined with our attractive and diverse end market exposures increases our ability to capture opportunity when it occurs. We've invested substantial capital in recent years, increasing our capabilities in emerging markets, including China, India and Brazil.

These facilities have now built a track record of performance and are prepared to permanently take work from some of our higher cost facilities in developed geographies. Turning now to our second quarter activity by regional market, excluding SIHI and currency, bookings were down in all regions, with the exception of the Middle East and Africa.

In North America, our largest end-market, bookings held up reasonably well considering the macro environment and we are down less than 1%, while sales were up modestly.

Many of the headwinds I discussed earlier applied to North America, but with all of the infrastructure projects that are underway or in the planning stages opportunities do remain in the region. Europe was a story of two extremes this quarter, bookings were down over 35%, but sales were up over 20%, as we work through that regions backlog.

In last year second quarter, Europe had its largest booking quarter since 2008. So, this year's decline was against a tough compare, that included some of the mid and larger size projects, which we discussed a year ago. Bookings in the Middle East and Africa region were up over 4% in the second quarter.

Even as this region tends to be an oil and gas driven economy, the national oil companies operating there continue to demonstrate a somewhat consistent long-term approach to investment.

Asia-Pacific was down double-digit percentages in both bookings and sales, reflecting slower growth in some major countries and increased price competition from local market participants.

Latin America remains a very challenge region, with political and financial headwinds in a few of the larger countries, which means it could get worse in the near-term. As a result, bookings and sales were both down in the region this quarter.

We remain encouraged by future opportunities in Mexico as a result of the anticipated foreign investment in the oil and gas sector, and we believe that in the long-term this region will return to growth. While we are responding to current market conditions it is important to also keep a long-term view.

When we look at the big picture, we expect that our served industries will return to growth in the long-term. In fact, end-user demand for electricity, refine products and chemicals is increasing, while existing infrastructure continues to age.

Therefore, even as we take permanent actions to improve our cost structure and operating platform, which will further our competitiveness, we remain very focused on growth and future opportunities within our markets.

Last quarter, I mentioned some of our initiatives, including expansion in targeted end-market, such as Asia Power and chemical, as well as our strategies to better align our selling practices with our customers buying preferences, through key accounts, expanded distribution sales and product bundling.

Together, these efforts should enhance our opportunities in any market condition. Driving greater value through our aftermarket platform remains a growth priority. As our products become increasingly complex and in-house maintenance crews near retirement, we believe the value proposition from our aftermarket services will only increase.

As in prior cycles, we continue to make disciplined investments to expand our local presence and target a greater capture of our global installed base.

These investments include new QRCs but primarily encompass initiatives to increase capabilities within the existing footprint to leverage our full installed base and to increase synergies by combining facilities where it makes sense. We are encouraged by the opportunities created from the SIHI acquisition.

And we will continue to evaluate other growth initiatives as well as pursue opportunities to optimize within our existing portfolio to drive long-term profitable growth and shareholder value.

Inorganic investments that meet our standards, provide opportunities to leverage our global scale and improve the utilization of our manufacturing and QRC footprint. And private sellers appear to be slowly adjusting their valuation expectations.

All of our activities around our portfolio are evaluated using disciplined return requirements with a focus on shareholders, including our commitment to an efficient capital allocation and structure. Turning to our outlook for the remainder of the year, there are mixed signs.

The second quarter stability in currency levels in oil prices was a positive start although volatility returned to the commodity in July. The continued high level of utilization of our customer’s facilities combined with the recent deferrals support higher levels of maintenance and repair work in future periods.

This type of activity cannot be delayed indefinitely. But the timing is difficult to predict. Additionally, the current level of asset utilization will also tend to support our run rate OE work as customers focus on the efficiency of their facilities and associated upgrades.

The challenges to our outlook are primarily fewer expected project opportunities in the near-term with increased price competition in headwinds in emerging regions. We believe our experience in similar market conditions combined with the aggressive proactive measures we’re taking will position Flowserve for success.

Although we have moderated our outlook for this year and have taken a cautious outlook regarding any near-term market recovery, I remain confident in our business model, our strategy and most importantly our people taken together, we're focused on delivering value for both our customers and shareholders as we position Flowserve for the future.

Lastly, I would like to welcome Karyn Ovelmen, our new CFO, to this firm. You will be hearing from her shortly. But I will note that she has hit the ground running during her first two months. And I look forward to Karen's leadership and contributions as we go forward to drive long-term shareholder value while navigating near-term market challenges.

But first, let me turn the call over to Tom..

Thanks Mark and good morning everyone. As Mark highlighted, market conditions remain challenging. We’re reasonably pleased in this type of an environment that our book to bill this quarter was close to one, excluding SIHI at 0.97.

This helped ensure that our organic backlog remained intact and was even up modestly year-over-year on a constant currency basis, which provide support to our revised 2015 outlook.

Longer term, we continue to believe in the growth opportunities within our industry as the fundamental drivers for the infrastructure business has not fundamentally changed.

To respond to the current market, however, and to position Flowserve for the future, we announced last quarter that we're accelerating our planned long-term manufacturing optimization strategies.

These actions are permanent structural changes that will close capacity or reposition activity in many of our existing higher cost developed region facilities while leveraging our significant investments made and our enhanced capabilities in lower-cost emerging markets.

As part of this initiative, we will also make greater use of third-party suppliers to reduce our fixed cost structure. Since that announcement, we have made notable progress towards our goals. This effort will not be a quick or easy transformation but we are moving forward with a sense of urgency.

We also implemented a cost efficiency initiative to reduce our headcount expense structure to align with the current business environment. Together we are targeting roughly $100 million of investment which we expect would generate at least $70 million in annualized savings, once we implement all of our actions in mid -to-later 2016.

In the second quarter, we recognized $24.7 million of realignment charges for these initiatives and expect to execute on most of the remaining actions by year end. Despite these significant changes, our employees have remained focused during this busy period, continuing to deliver on our commitments to our customers.

Our on-time delivery metrics, past-due backlog of 4%, and second quarter’s solid margin performance together demonstrated continued efforts and culture of execution.

Looking at the booking environment, the lower-level project opportunities we saw in the first half of 2015 has increased competitive pressure on the business that is available in the market. Customers are seeking greater value from their investment dollar.

This conversation typically initiates as our pricing discussion and our initiatives to drive our cost will help respond to this request. However, we are also demonstrating how Flowserve can support their goals with our unique value proposition beyond price alone.

By leveraging our global reach and comprehensive flow control portfolio, we can deliver value to our customers through product bundling, certifying lower cost facilities and collaborating earlier and project design work.

We believe this approach is consistent with our focus on leveraging the underlying strength of our platform in driving profitable growth. From an aftermarket standpoint, we delivered constant currency bookings that were down only 5%, excluding SIHI, which showed signs of resiliency we generally expect.

The first quarter labor strikes that affected many U.S. refining and chemical customers have largely ended, which is a positive development. However, in addition to managing their capital budgets tightly, strong margins of some of these customers are currently producing resulted in continued deferrals of maintenance work to later periods.

So that they can capitalize on current period of profitability. Given the combination of these takedown deferrals, lower upgrade opportunities and fewer parts and spares tied to new units, we do expect continued headwinds in our aftermarket business for the remainder of the year. The good news is this delayed work was not lost.

It just represents a future opportunity. Even with the expected near-term challenges to our aftermarket business, we view this franchise as a solid resilient foundation. We continue to invest in and execute on our strategies to increase our aftermarket capture.

Key to this effort is increasing our ability to support clients possessing our installed base as well as assisting in their broader reliability and maintenance opportunities.

At the same time, with further identifying pockets of installed base, increasing our localization efforts, including new QRCs, enhancing the capabilities of some of our existing facilities and consolidating all those where appropriate. Growing our aftermarket franchise remains a top priority and opportunity for Flowserve.

Looking at the end markets during the second quarter on a constant currency basis and excluding SIHI for a clean comparison, we have long gas bookings declined roughly 24%. This industry is experiencing both highs and lows. Offstream customers are suffering from low oil prices.

However, the mid and downstream assets remain highly utilized as the demand for the finished product remains strong. Both service predominately mid and downstream supplier of these customer’s efforts to maximize current period profits and delay new work where possible certainly affected us.

Looking at a couple of oil and gas regions, Latin America remain challenged as Mark mentioned. Latin America as a whole got worse as Petrobras works through their issues and resets budgets. And Venezuela’s financial crisis constrains Petrovesa's activity.

In Middle East and Africa, proposal activity has remained solid, which supports the thesis that this region would take a longer-term view towards continued investment. With strong end-user demand from the mid and downstream markets, we believe investment activity as well as maintenance and repair opportunity is building.

We will remain on the horizon near-term as we do not forecast a meaningful pickup in the second half of 2015 beyond our normal seasonal patterns. In the chemical market, second quarter bookings decreased by almost 17% versus a strong compare in 2014.

We continue to expect ethylene expansion in North America with derivative plants related to the new capacity expected to come online over the next two years as well as a number of new projects in various preconstruction stages. Similar to our refining customers, chemical margins are also currently solid for our customers.

And while the economic support continued investment, timing is always difficult to forecast. Regionally Middle East and North American chemical expansion remains a solid opportunity ahead. Early in 2015, we increased our chemical presence substantially with the acquisition of SIHI.

The integration of SIHI is going well and we remained pleased with the opportunities created from this acquisition. In the power market, our bookings increased 11.6% versus prior year's quarter. In the U.S. coal retirements and low-cost natural gas are careless for combined cycle plants since expected electricity demand is increasing.

Asia continues to invest in fossil based plants and our local capabilities in the region improves our competitiveness for this work. China's new nuclear plans were the first since 2011, creating an opportunity for incremental work.

Flowserve has provided nuclear products for reactors worldwide and our capabilities and end stamp certifications are differentiating factors in a market where safety is critical. In addition to China, Russia and South Korea see continued development in nuclear power and Europe is discussing new capacity in some regions as well.

If India approves limits to nuclear supplier liability, that region could also potentially be a meaningful catalyst for Flowserve’s nuclear work. Following the new safety standards, Japan is getting closer to restarting a portion of its nuclear capacity, which has been idle since 2011.

Bookings in our general industry markets were down a combined 12.8% in the second quarter as increased agricultural bookings and flattish food-to-beverage awards were more than offset by declines in our other markets in this segment. For the distribution channel, de-stocking continued and these customers were slow to restock.

Like deferred maintenance, these orders will return in the future. But in the interim, our customers maintain a cautious approach. We have increased our focus on this channel with the new leader, additional resources and a fresh strategic direction.

Wrapping up my prepared comments, while near-term uncertainty continues to impact many of our customers in end markets, Flowserve will remain focused on what we can control, including increased aftermarket capture, operational excellence, targeted growth initiatives, product development and realignment of our global manufacturing base.

We continue to believe in the long-term drivers of growth in our key energy markets and are confident that the actions we are taking will better position Flowserve when our customers resume their growth investments. With that overview, let me now turn it over it to Karyn..

Thank you, Tom and good morning, everyone. I'm very pleased to joining the call today. My first as Flowserve’s CFO.

From my time, thus far with the company, I am excited about the opportunities ahead and I believe we are well-positioned to continue to progress the company’s made over recent years to further drive value for our customers and shareholders. Following Mark and Tom's reviews let me now focus on the financial highlights.

Following our challenging first quarter, we were pleased with some stability in the second quarter, which enabled sequential constant currency increases in bookings and revenues of 11.3% and 15.6% respectively, excluding SIHI. Q2 2015 sales of almost $1.2 billion increased 4.8% on a constant currency basis and included $77 million from SIHI.

Excluding SIHI, sales were down 1.5% compared to last year on a constant currency basis. Turning to margins. Excluding the $14.3 million charges related to our strategic realignment initiatives and impact of SIHI, adjusted gross margins were 34.5%, down approximately 60 basis points from a year ago.

Our focus on tight cost control was again demonstrated this quarter. Excluding the effect of SIHI and realignment, SG&A dollars decreased year-over-year by over $30 million, reflecting our alignment with shareholders and the ability to flex to current market conditions. Turning to our adjusted operating margins.

The year-over-year decline is largely volume related. Adjusted operating margins were approximately 40 basis points lower than a year ago, but still solid at 15.5%. Our second quarter tax rate of approximately 29% is in line with our guidance of 30% to 31%.

Second quarter adjusted EPS of $0.80 includes $0.06 per share of negative currency translations and excludes $0.24 per share of adjusted items comprised of $0.13 of realignment, $0.10 of net SIHI dilution and a penny of below the line currency impact. Reported EPS for the quarter was $0.56. Turning to cash flows.

Operating cash flow improved about 52%, compared to the 2014 second quarter. Free cash flow also improved despite an increased level of CapEx spending and represented approximately $0.60 per share. As I mentioned, our capital expenditures for the quarter were up versus prior year, as we continue to invest organically to grow our business.

In total, we invested almost $30 million in capital expenditures during the period, as we made disciplined investments in our business, including increasing our aftermarket strategies and emerging market capabilities to support long-term growth.

Similar to prior periods of slower end market activity, we will continue to pursue organic growth initiatives within our business. Returning capital to shareholders also remains a key priority for Flowserve and in the first half of the year, we returned over $185 million to shareholders through dividends and share repurchase.

Approximately, $325 million remained available under our current share repurchase plan authorization at quarter end. And we remain committed to our financial policies with regards to returning capital to shareholders.

Primary working capital as a percentage of our trailing 12-months sales improved modestly to 26.5% versus 29.6% a year ago excluding SIHI.

With regards to 2015 outlook and EPS guidance, as the company evaluated its prior guidance, we balance the current market conditions against the second quarter’s relative stability in currencies, the price of oil and in our challenging market.

We took into account our first half results, with an expectation for further delays and deferrals in the second half, which resulted in Flowserve revising its 2015 full year adjusted EPS guidance. We now expect 2015 adjusted EPS between $3.10 and $3.40, on revenues that are down between 10% and 15%.

Currency changes are a major year-over-year factor in our guidance. And as we indicated previously, a roughly 10% FX headwind on revenues impacts EPS by around $0.40. Consistent with our previous approach, our guidance excludes both SIHI’s revenues and its expected $0.25 per share net dilution for the year.

Our adjusted EPS range also excludes the expense of our $100 million realignment plan below the line currency impacts, as well as other specific one-time events, such as the first quarter's Venezuelan remeasurement.

Our guidance also suggests that 2015 will reflect our traditional seasonality with earnings more weighted to the second half of the year. SIHI has been performing in line with our expectations and is expected to follow a similar seasonal trend. Finally, we still expect capital expenditures in the $170 million to $180 million range for 2015.

At this level, we will continue to position our business to grow organically and profitably by improving our capabilities around the world. Before turning the call back to Jay, I would like to mention that I am very much looking forward to meeting with many of you over the coming months. Although in the near-term, Flowserve faces challenging markets.

Over the longer term, the fundamentals remain very strong. Our diversified end markets, comprehensive product portfolio and geographic exposures, coupled with our growth initiatives and cost reductions, positions us very well today and into the future.

I look forward to discussing with all of our stakeholders Flowserve's competitive positioning and our continued focus on creating meaningful shareholder value.

Jay?.

Thanks, Karyn. Operator, we have concluded our prepared remarks. We would now like to begin the question-and-answer period..

[Operator Instructions] And our first question comes from Scott Graham from Jefferies. Please go ahead..

Hey. Good morning..

Good morning, Scott..

And welcome, Karen. I really only have two questions for you. Tom, it sounds to me like you are pulling forward the benefits of the restructuring tag to be about $70 million.

Is that a fair way to read your comments?.

I mean, I would say if you look at the $100 million of the cost and the $70 million of benefit, we are trying to execute that as soon as possible. A lot of is going to -- like we said in the mid to later part of 2016. We will, however, try to maximize that as much as possible.

But it’s going to take a direction because some of these initiatives are pretty complicated..

Understood. Second question is really I think equally as simple and maybe more for you, Mark. The push outs of the deferrals affecting the aftermarket and your services and what have you, obviously those things do have to happen at some point.

But you are saying I think you are saying implied in your guidance is that you are not expecting them in the second half of the year.

Is there some type of catalyst? Is there a trigger that you guys are watching here that is okay at time? Is it oil at may be a little bit higher level to hurt those refining margins and to take them off line, because obviously oil at a higher level helps you in one way, potentially down the line but certainly hurts you on a more near-term basis in the other way.

Is it the price of oil? Is it the price of ethylene? What are some of the triggers, Mark?.

Well, it’s primarily going to be the spread between what they can retail and what they can acquire the crude product and that’s gapped out quite a bit. If you’ve been to the pump recently, it hasn’t fully reflected what you’ve seen occur at the price per barrel of oil. So, that'll tend to -- refiners kind of like a bond.

They are going to generate as much cash as they can for long as they can. But in no instance will they put the refinery in harms way. So, I'm not -- didn't push it out. And typically these are scheduled take downs, regular scheduled maintenance. So they can push them out for a period time. I think the best thing to do is -- they make some commentary.

I think some of the refiners were talking about turnarounds and expense in the beginning of next year. So, both typically talk about that because they communicate this as a positive. They said, look, we are making a lot of money. We are going to run these things flat out for a period of time.

But it depends on a customer-by-customer basis, but typically these are scheduled take downs. So, I’m not suggesting -- they are putting these things in harms way, but they do need to eventually, efficiencies will start to get impacted and they do have increased risk if they run them for too long.

We saw this back in 2009, but if you remember, we will move back up fairly quickly in that block, that deferred maintenance back in. Oil has been down for a fairly sustained period of time compared to six years ago..

That is exactly what I was alluding to. Thank you..

The next question comes from Kevin Maczka from BB&T Capital Markets. Please go ahead..

Thanks, good morning..

Good morning, Kevin..

Mark, a question on the OEM side as we look out to the back half of the year and into 2016, and I know you are guiding 2016 yet. But I'm just wondering how concerned we should be about that because as I have understood it, Flowserve demand comes somewhat in the middle of in cases of a multi-year construction project.

So things that have been underway maybe are continuing on, but at some point we are going to start to burn backlog and maybe new projects just won't be there because we are reading about the additional $200 billion in oil and gas CapEx cuts coming.

So can you just talk about your view and how we should be thinking about the OEM side out into ‘16?.

Yeah. As we typically talk about, let’s talk about these large projects versus run rate because large projects have been a smaller portion of our overall business. Here’s probably the way to think about it. There will always be projects out there, almost at any price of the underlying commodity because of aging infrastructure.

There is a whole set of needs around energy independence, trying to capture more of the verticals, which is what they are doing in the Middle East. A whole host of things that will drive investment and a lot of that is, some of the long-term drivers in our business. Really there is going to be more demand as you look over the horizon.

So that’s a general backdrop in terms of the way you think about global capacity. The fact that the multinationals have been rationalizing CapEx now, I think we’re into the seventh quarter.

So on more shorter-term what the industry needs to do is see for example an oil and gas, a price of a barrel of oil that they can start making investment decisions around. And what I mean by that is, certain investments will occur obviously at a 100 and certain investments will occur at 50.

And what they are looking for at this point in time is to see where it’s going to settle out and start making those investment decisions as you look in terms of really new project opportunities. So, that’s probably way to think about it. And there is always -- there is a typically a trade-off as oil has gone down.

As the feedstock, as natural gas has become more readily available, it does bring other investment in another area, in the chemical industry and in the combined cycle power industry. So it isn’t again once size fits all. But what they need to see and this is why we talk about volatility.

They need to see certainly per barrel of oil, particularly on the upstream side.

They are going to need to see some level of stability that they can start making investment decisions around, keeping in mind that even if you look at the US upstream production on the fracking, which we are not involved in, technology has brought a lot of that cost to production down. So it’s not like the industry stands still.

A long answer to question. Now on the other OEM as we talked about more of our run rate business, that tends to be more stable.

And as Tom mentioned in his comments, those are some of the areas, particularly in the industrial segment where we think we have a lot of opportunity to grow our business through some of the initiatives that we are driving and that SIHI is a good example of that.

Those are good products that are fairly stable on almost any market and we need to start leveraging those on our platforms and also some of the internal development opportunities. So that segment for us really represents a good opportunity going forward..

Got it. That’s helpful. And then if I can just ask a follow-up on price.

I am just wondering if you can compare and contrast what you saw in the last downturn to what you are seeing now or what you think you will see over the next few quarters, because last downturn price was an issue and we were for many quarters, shipping low price, low margin backlog.

How do you compare and contrast this one?.

Well, in short, we’re a completely different company than during the last downturn. But let me try to lay some things out for you. Headwinds we are facing relative to the last downturn is the pricing environment and the projects and there were more of them was significantly better in '08.

You can actually take a step back and say there is probably 300 to 400 basis points of margin that doesn’t exist in this cycle that existed in the last cycle, as we wound through that backlog because the pricing environment was so strong on these projects if you look at it.

The other thing that represents a headwind and we overcome a lot of those two things is if you look at the currency, the dollar in effect relative to where we’re in the last downturn is about 30% stronger, which impacts our financials and we have more international business.

For those two things, I think relative to the last downturn are representing headwind when you’re looking at compares. You saw though that we have lived through that lower cost backlog during the period of end of 2010 and 2011. What’s different is simply put I talked about being the better company.

One example is, we’ve reduced our cost of core quality by well over 300 basis points. Those are permanent changes in our business. Our aftermarket backlog and capabilities were significantly better. We have more run rate product, more run rate penetration in our business. We are less relying on this big project.

We also if you look forward relative to last period, we have the more opportunity to make some structural cost changes in our business. Keep in mind when we came out of the last cycle, we didn’t have significant amount of low cost manufacturing capacity in this market.

These things are up and running and qualified and represent now an opportunity to migrate long-term some of the capabilities over to these facilities. So that’s a high level compare. Honestly, this is a very long discussion in terms of what’s different, but we are much better positioned..

Got it. That’s helpful. Thank you..

Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead..

Thank you. Good morning, everyone..

Good morning, Deane..

I was hoping to get some more color on two of the initiatives that you called out that sound particularly interesting. The first is on product bundling. You all are in a unique position within the flow sector of having important positions both in pumps and valves and seals.

But what we haven't seen a lot in the way of bundling initiatives in the market so what might be new there? And then I've got a follow-up question regarding the capabilities to the QRCs..

Well, just one example to allude to without naming specifics is the lot of the multinationals have started seven quarters ago thinking about their cost structure and then doing so turn to suppliers and said help us drive efficiency through the entire supply chain.

And one of the ways that we can do that is to bring all of our product opportunities to the customer, work with them ahead of time, design specs, enter into frame agreements which we have done and in doing that bring our full capabilities to their capacity needs going forward.

So doing that, what does is that gives us scale in terms of the relationship, scale in terms of our supply base. It also gives them a benefit as well because they know the products that they are going to get, what the expectations are in terms of quality and delivery. That’s one example that you can do it.

Another one is more traditional is, if you look at a project opportunities or whatever maybe, typically you had some of our engineered product, but we would also bring some of our industrial product for balance of plan. So that’s typically occurred as well..

And on the QRC, what types of capabilities are you looking to add and are there QRCs today that have the enhanced capabilities you are trying to model after, or is this new territory?.

Well, I think I have made this point before. If you look at, part of it is your aftermarket capabilities, the QRCs being just one of them. And we are fairly developed in the Gulf Coast region. What I mean by that is we have QRCs that can support bumps, valves and seals in the QRC itself, some that support -- may support one or more of those products.

We have field tax, service tax, a lot of boots on the ground there. The opportunities we look for other concentrations, a processing capacity around the world is to create the same thing in regions in Brazil, certain in Malaysia and China as well.

So the QRCs, the significance of that is it does provide the ability to respond very quickly relatively to the piece of the equipment and that’s going to correlate to size.

As you can imagine one of these large pumps were not going to have QRCs deployed around the world to handle those because you need cranage and it’s going to take time to move it anyway. But some of the smaller pieces of equipment, you can pull and move fairly quickly to some of these facilities. So we look at the QRCs relative to what the needs are.

Some of them are sealed QRCs and they are right close to the customer..

Thank you. And just last question for me would be for Karyn. And I was hoping she could -- you could share some of your initial thoughts on where you are focusing for starters and then maybe address some opportunities in working capital and cash conversion..

Sure. So I have been here two months and this is a very successful company that is running extremely well. There is an existing leadership team that’s seasoned in-depth industry expertise and has weathered these cycles before and then of course Mark brought in a lot of new talent in a lot of different areas.

So it’s a company that I think is very, very well positioned. My focus will be on adding to all the capabilities that are here, looking at the efficiencies, cost reductions, where can we push that in other areas as well as on the growth side of the equation in terms of what markets we want to look at both organically and inorganically.

So that’s where my focus will be. I worked in many of Flowserve’s end markets from oil refining, chemicals, plastics. This is a very customer focused company, on-time delivery, quality, performance culture. So that the company is doing very well within that regard and my hope is to continue that and add to that.

In terms of working capital, I do believe that remains an opportunity for the company. There is a lot of effort and time and some success in those areas. Clearly the quarter showed some good progress on adjusted working capital as a percentage of sales.

However with only two months, I do need to dig deeper and fully understand the puts and takes related to DSOs and turns and personally conclude where our targets should be going forward and where we can look at that from both receivables, inventories and payable perspective.

So that will be an area that we continue to focus on and I will be looking at that in depth..

And our next question comes from Robert Barry from Susquehanna. Please go ahead..

Hey, guys. Good morning..

Hi, Robert..

I was wondering if you could give a little bit more color on how broadly the pricing pressure is impacting the business.

Is it focused on oil and gas or elsewhere and is it impacting the aftermarket?.

Not an impact on the aftermarket. Those tend to be smaller activities, fairly stable in terms of the margin profile. Where you see the most competition is going to be in the oil and gas from some of the larger projects.

And as expected in the Middle East, we saw this before and it’s typical in our industry that oil and gas in the Middle East is very, very competitive..

Got you, okay. So it’s mostly oil and gas, not in some of the other end markets? Got you.

And then could you comment on the performance of the OE book and turn business in the quarter?.

You mean the book, the shorter time to OE. I mean, it was little less than expected so that was part of the reason that we kind of trended that out during the remainder of the year.

We saw quite a bit of a pause for lack of a better term in the first quarter and saw some of that abate during the second quarter, but still I think people are looking at the budgets in terms of some of the smaller and upgrade projects. So we had certainly our share, but it was less than we expected going into the year.

Coming out of the first quarter, we just needed to start seeing some stability there. But clearly, what I can tell you is what we did see stability within kind of our base aftermarket business, the traditional repair work.

What we haven’t seen come back in the aftermarket and even some of the OE upgrades are going to be those upgrades and certainly what we call spares tied to new projects because there isn’t a lot of new project activity. So those are being in the sense kind of the puts or takes, where we also see an opportunity, and I mentioned this earlier.

Remember, our focus in our industrial segment really for four years has been getting the operating performance to where we needed to be, it’s there. And now what we need to do is grow that business.

So a lot of our initiatives around distribution, around e-commerce, around how we organize our sales force, around the products that we offer and bring into the portfolio like SIHI are driven around that industrial product segment.

We think that really represent a good opportunity for us, because if you think across our portfolio, the engineered businesses in general, the big OE projects are very, very subject to market conditions. But the industrial products, you really can with our broad product portfolio penetrate many markets in many type of environments..

I would just add to that. Well, the market wasn’t substantially changed towards the back and the Q1 going into Q2. I mean, we were able to both on the OE and on the aftermarket side sequentially increase those bookings.

And even though some of that maybe seasonal, it still was at least a good sign that we did have an increase from Q1 to Q2 in both of those areas..

Got you. Thank you..

Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead..

Thank you. And good morning, everyone..

Good morning, Joe..

So, Mark, I wanted to touch on those comments that you gave earlier fully recognizing you guys are a different company this cycle than last cycle. But on the OE side of things, things were pretty good last cycle and pricing was good as well.

Just curious on just your OE bookings, what kind of magnitude are you looking at in terms of potential pricing declines in that business today?.

Well, relative to the last period when we came to the last cycle, is that your question?.

I think more generally, just when I think about this cycle versus last cycle, it seems like capacity isn't as tight leading into this downturn. And so I'm just curious on the pricing concessions that you are having to give on the OE side.

I am just curious how those conversations are going and what kind of magnitude are we looking at?.

It’s definitely become more competitive, but I can tell you the pricing change is not nearly as drastic as it was during the last cycle. So we’ve never really said it’s been a strong pricing environment over the last couple of years. So the peak to trough type, we’re not through necessarily the cycle, so I don’t want to call it trough.

But the movement in the pricing is not nearly as dramatic. And I’ve talked about this before, but in the last cycle keep in mind on some of these big projects we’ll buy up to 50% from other suppliers. You really can’t command much margin in most environments.

Back then you could get 20%, 25% margin on those and 40%, 50% margins on the equipment that you manufacture. It was a really, really good environment.

So as you look this versus last, the backlog that we -- in the last year with is very good, executable, it doesn’t have the price and we start to realize that, I mean that's why we’re pleased with our margins that we've seen over the first part of this year.

It certainly doesn't have the margin in the big projects that we saw last time, but the movement in price from peak to trough is not even close to what it was last time..

Okay. So, that’s helpful. And you brought up the margin point, good execution on the quarter and it’s nice to see the restructuring actions are coming through. I guess I'm just trying to understand just a little bit more clarity on the payback on that restructuring.

I know that you talked about $70 million in benefits, but it’s unclear to me at this point how much of the $70 million do you expect to come through this year as opposed to the actions really kind of benefiting you guys in '16?.

Well, I mean, if you look at the way we even started to accrue, we had 25. I mean, these are structural changes in mature markets, particularly in Europe to take time to execute, setting up the accrual one is one thing, realizing the benefit does take time. And a lot of companies avoid doing this, because it takes so much time in terms of the payback.

We think this is a great time to do it. So really very little of the benefits we expect to come through this year. I mean, we’ll try to pull as many as we came forward, but I think this isn’t an important point. This is real structural strategic change in our business.

So we do have some component of it that is responsive to the market, but most of this is permanent. And we’re continuing to look for opportunities. We want these things to be sustainable. And if you think about it moving work, moving capabilities to low-cost is really the way to play for the future.

But I would expect very little of these benefits to come through in this year. We’ll try to drive in as much as we can, but most of it is going to be next year, these things take time..

Okay.

So there is very little in that guidance number that you gave for this year?.

Yeah. Yeah..

Okay. Great. Thanks, guys..

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

Good morning, everyone..

Hi, Nathan..

So, Mark, just following up on some of the comments, you talked about 300 to 400 basis points of margin higher in 2008 than you’re starting from now in terms of price, less relying on large projects, where the pricing pressure is the most intense? You’ve got more structural opportunities to take cost out.

It sounds like -- and correct me if I'm wrong that it’s a reasonable expectation for investors to think that you are not going to see the same margin compression in this cycle that you did in the last cycle, is that reasonable?.

Well, you leave me right in the margin guidance, which we don't give. But, I think, it's tough to -- what I was trying to do is illustrate that there are things you can compare to the last cycle and it's important to do. But underlying this is a fundamentally different company.

So, what I don’t want folks to do is just try to take the math from last period and roll it forward, there too many things that are different as you look over on our business. A lot of that margin profile as we look forward, are going to be the things we talked about, Nathan.

Obviously, topline from a currency impact standpoint and just an activity standpoint, even on projects is going to have a detrimental impact on margins.

To the flipside is cost optimization over a period of time is going to drive all of things being equal margin improvement, also as we start to scale the acquisition that we made that should drive that as well. So there are mix in terms of aftermarkets.

So, it's better as opposed to just try to do a linear math from last period of time to just step back and say, on a relative basis, what are they doing to drive margins and what are the headwinds. And I think I’ve tried to align those out for you.

But the timing of that and the duration of those things are going to -- they are going to impact margins and that's why we don't want to necessarily start guiding to margins, but it is a better company..

Okay. I also understand that a lot of the structural realignment that you're doing is in Europe, which takes more time.

Is there anyway you can give us any idea of what of the $70 million you expect to recognize next year and what if it will be incremental in ’17?.

I think by the time we get to the back half of next year, we should be pretty close on a run rate to those savings, Nathan.

And so, what I don’t want to do is give you a full year number calendar, January 1 to December 31, because the timing of that can impact the amount, it’s really when we’re going to start seeing the run rate on it, it will be in the back half of next year..

Okay. That’s helpful. On the inorganic side, you talk there about private sellers starting to adjust some of their expectation. It sounds like maybe there is a few more opportunities out there that meet your criteria.

And I know previously you’ve talked about not being interested in large multiyear integrations and you seem to be more willing to do those now.

How many kind of SIHI sized deals would you be willing to be integrating at one time?.

It, well, I mean, that’s a good question. We did like a lot of the SIHI type of opportunities and then we’ll find a way to integrate them to be honest with you. But the fact is they come when they come. I think as we look at our -- as our priorities, the platform is much better.

And you can -- as the opportunity come, you can evaluate it against what your options are. You can do an integration like, right. If it represents a really good opportunity, you can maybe time the integration over a longer period of time and just make sure your returns from a shareholder perspective justify that. So there are things we can look at.

But I think we’re going to look at each of these opportunistically in terms of returns to the shareholder and position this long-term. And again, going back to earlier, things like SIHI are very valuable to us, because they're in an area where we think we have some of the greatest opportunity, our industrial segment.

These tend to be less volatile and market upturns and down. It leverages our sales platform, sales organization, our aftermarket capabilities as well and ultimately, we can also start to leverage some of our low cost manufacturing capacity. So, we hope to see a lot of these.

The fact is Nathan, when you look at these opportunities, you have to take a step back and say, what are my competing priorities in terms of integration? What’s the pricing environment out there? What is this opportunity represent to us long-term and then you just make trade-offs.

Obviously, if a compelling asset came that we could get at a good price, we may differ integration for period of time and just take it on our platform..

And our next question comers from William Bremer from the Maxim Group. Please go ahead..

Good morning, Mark, Tom, and welcome, Karen..

Good morning..

Good morning..

Karen, look forward to seeing your initiatives on the DSO, that’s first and foremost, I would like to start seeing that come through. I guess my first question is really based on SIHI and we touched upon it, it is on track.

Can you give us a sense of what type of restructuring possibly is needed there? And then secondly, with the QRCs, I believe, SIHI pretty much added about ‘15, we are up to about 190 but yet the Q sort of articulated that an earlier some possible combining based upon certain regions, just want you to get a little more granular on those if you can?.

Well, I mean, example around combining them is, if you look in the North Sea region, we had a couple QRCs that were supporting the North Sea activity. And some of these facilities we've been in a long period of time and actually they were -- we acquired them and they were designed for completely different use.

I think one of them actually use to manufacture telescopes. So what we did is we took a couple of these and built a more of a state-of-the-art facility right there on the coast in Aberdeen to support it.

So those are the things that we’re thinking about where we can take some of these facilities, combine them, also combined them for pump valve and seal capabilities to respond to the customers. The idea is and I always try to tell folks, don't think of these as retail locations like a fast food location that you -- the more you add the more you grow.

It's really -- these things are going to be designed to whatever our customers need in the business..

Great. Good point. That’s all I have got..

And our next question comes from Brian Konigsberg from Vertical. Please go ahead..

Hi, good afternoon..

Good afternoon..

Most of my questions have been asked, maybe just one more on SIHI. So you are saying the integration is going as you expected.

Can you just talk about the topline performance, is that in line with how you anticipated it, it would grow or generate this year and what’s the outlook?.

Yeah. I mean coming into the year it is as expected, I mean when we looked at this asset over last year, I mean, the markets were different. Hasn’t moved too much from the original expectations, but certainly as we gave guidance this year, it's pretty much in line with expectations.

Matter of fact, I think in the first quarter we're little ahead and this quarter we're a little behind..

Got it. And just secondly, just with receivables, so you have been talking in the Qs about just having trouble collecting down in Latin America, it has been a while now.

I mean, at what point do you have to consider start taking reserves against that?.

I mean we always evaluate that we've seen some progress in the region in this quarter and in third quarter, but that is something we always evaluate in communication with our customers and the like so. But that is something front of mind we always evaluate in terms when we look at..

I will leave it there. Thanks..

And our next question comes from David Rose from Wedbush Securities. Please go ahead..

Good morning. Thank you for taking my call..

Welcome..

First, nice job on executing in the quarter. I think most of us were pretty pleased given the environment. So I had two questions if you may. On the outlook for next year, I know you don't want to go into it but I think as we start to look into next year and given where the bookings are in nominal terms, you got a pretty big step down.

So what do you need to do in terms of cost takeout or conversely at least on the top line in order for you to get to operating numbers that are essentially flat year-over-year? I mean, you have got a lot to make up for so help us kind of think about things that would help you..

Well, we talked about the unknowns. And the unknowns are going to be the large project activity what happened with the underlying commodities and certainly currency going into that period of time. We can control those, but let's spend little time on what we can control.

What we talked about are some of our structural restructuring activities and we can continue to look at some of those well to drive value. These things will take time. We actually have a multiyear plan. We started to accelerate it. We can accelerate more.

I mean, the other things that we talked about are looking within our portfolio or capabilities and what can we do to improve topline capabilities. I’ve alluded to one a number times on the call, around our industrial product segment.

It’s not only integrating the acquisition that we've made but there is other opportunities in terms of how we optimize our channels to market taking advantage of that. Obviously, growing our aftermarket business something we talked about last time.

So what we are going to do in R&D product development, these are all things that we are turning increase focus to not that it wasn’t important before. Just keep in mind, our priority over the last three years has been around improving execution. And you've seen that in our results.

In terms of the margins looking forward over time and effort and investments is going to be in relative market share capturing that as well. So the big thing around next year is just the unknown is what’s going to happen to our industry during the back half of the year..

Do you think all else being equal if you can maintain the bookings where they are today and again, I don't want to get into guidance -- I do but I know you won't go there? But you've got a $400 million deficit in bookings. Do you think you can pull it off? Do you have enough levers at your disposal? You've got SG&A.

The restructuring is really back end waited for next year so?.

You are going into calendar year versus beyond. As I said, I think we have -- we've already started to execute. We have substantial opportunity on the structural changes. So there's a quite a bit there for us and there are other levers we can pull. But again, we still do depend on project activity in our business.

It’s been less of our business over the last couple years and it’s just tough to call. But the things within our control, we can surely add value. And I don't want to give guidance in the next year but what I don't want to say is, look if you take a step back and if we were operating completely efficiently as we could, which we’re not.

And we were fully penetrated in our markets. We wouldn't have any levers to pull at all and I would be saying to you is we’re subject to whatever the market tells us we can do. The fact is we probably have as much or more on things that we can do versus what the market can do to us.

The question is, we need to get after them and we are, and those things take time. And a lot of that is, as Karyn alluded to is some of the leadership that we brought on to help us drive through that. So it's timing dependent but long-term, the way we look at our business is we do think there's going to be demand in our industries long-term.

I view what’s occurring in oil and gas right now is more on the supply side. You’ve got Iran with 40 million barrel sitting in storage, ready to go to the market, the increased production there, Iraq is coming up to speed.

There is a lot of things that are occurring, but you also have depleting rates increasing in the parts of the United States to offset some of that. So that will work itself out over the period of time. Investment will find the right opportunity and the right price to bring it back on line.

Also keep in mind whereas, we were having this discussion a year ago and everybody’s saying why aren’t you more upstream, the fact is midstream and downstream does not go away in tough markets. They may rationalize some of the new project activities but it is still operating and there is still need for this type of infrastructure.

So, I’d just ask, we take a step back. Let’s take a long-term view because some of the things we're doing to fundamentally change our manufacturing capabilities around the world will take time, but they have very good paybacks to them..

And the next question comes from Joe Giordano from Cowen. Please go ahead..

Hi, everyone. Thanks for running a little bit long to fit everyone in here, appreciate it.

Just had a question on -- in the downturn here is there an opportunity maybe to look at the entire portfolio of products and streamline some of the lower margin, lower margin products to lever up on a recovery here?.

In an upturn or in a downturn, we should be doing that. You’ve seen some of the actions we’ve taken over the last couple years and we do. As we take a step back, we will get our products and really primarily look for strategic fit.

Can we scale cross our sales organization, is our aftermarket capabilities? And if they don't make the fit then we assume, as you’ve seen with some of the divestitures that we made, that they are more valuable in another people's hands and so we want to monetize that.

Flipside on the M&A and we haven’t talked a lot about that, but one other things versus where we were four years ago is we do have a better platform to integrate M&A.

So, we are going to look both on -- primarily on the acquisition side but we always look on the divestiture side and say is there something we have to stop doing or sell to somebody else?.

Great. And then just lastly, I wanted to touch on valves quickly and all things considered that was a very impressive performance in that segment.

And based on what we are seeing in other people reporting, it looks like potentially gaining some share so can you talk about how you are executing there and what specifically if anything you can call out there?.

They’ve been executing at the high level for quite a period of time. And I think one of the advantages that they have relative to our internal portfolio is that well developed channel of the market both in terms of distribution and some of the other channels as well.

So, they are further along and that's why I talk about the opportunity in the industrial segment because there is a tremendous amount of similarities. But I think what you’ve seen is a whole host of things.

We talk about lead product, secondary product, and if you remember that strategy is to have confident capabilities often times in some of our mature markets but start to lever some of the work in low cost manufacturing parts around the world. They probably have one of the more successful examples of that.

It is five years into it, so these things do take time that drives great margins in their control valve business. So there is a good playbook there that we’re using for other businesses, particularly we are going to start using it on the industrial product side and that’s the example that you’ve seen.

And you’ve seen good growth in the oil & gas business. Five years ago it was predominantly chemical. We made a strategic move through Valbart into the oil & gas products. They’ve been able to scale that and lever that into the other products that they manufacture.

And then one question that came earlier, this concept around bringing our full portfolio to customers. They’ve certainly benefited from some of the rotating equipment relationships that we’ve had..

Great. Thanks so much for the color..

And we are showing no further question. Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..