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Flowserve Corporation (FLS)

March 20, 2013 9:00 am ET

Executives

John E. Roueche - Vice President of Investor Relations and Treasurer

Mark A. Blinn - Chief Executive Officer, President and Director

Thomas L. Pajonas - Chief Operating Officer and Senior Vice President

Michael S. Taff - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

R. Scott Graham - Jefferies & Company, Inc., Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Charles D. Brady - BMO Capital Markets U.S.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Brian K. Langenberg - Langenberg & Company, LLC

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

William D. Bremer - Maxim Group LLC, Research Division

John E. Roueche

Thank you for being out here with us today on this first day of spring, particularly considering the late winter weather we're having here in New York City. In addition, we very much appreciate everybody who's participating with us over the Internet through our website today. We welcome all of you.

Looking quickly at our agenda this morning, I am Jay Roueche. You'll hear shortly from our President and Chief Executive Officer, Mark Blinn. Tom Pajonas, Flowserve's Chief Operating Officer, will then come up and review our operations. We'll take a short break thereafter, and then Mike Taff will come up, our Chief Financial Officer, and provide a financial review. Mark will return for his summary remarks, and then we'll open the meeting up to your questions. In addition to those who are presenting, who you'll see shortly, I'd also like to recognize at this time a couple of our other senior leaders, who have been kind enough to join us this morning. First then here on the front row, we have Carey O'Connor. She is our Senior Vice President, General Counsel and Secretary. In addition, we also have Mark Dailey, who's our Chief Administrative Officer. And we very much appreciate them taking time out of their schedules to be with us today. Finally, most of you know him already, Mike Mullin, my colleague in investor relations effort, is here in the audience as well. I very much appreciate his hard work, and that of many others who have made this day possible.

Lastly, as is typical in these type of events, I'd like to highlight our Safe Harbor disclosures regarding the forward-looking statements. Today's presentation will very much contain forward-looking statements, and these are obviously subject to various risks and uncertainties. For more information on these, we encourage you to read this lengthy disclosure, as well as the filings that we've made with the Securities and Exchange Commission.

And with that, I'm very pleased to introduce Mark Blinn, our President and Chief Executive Officer.

Mark A. Blinn

Thanks. Good morning, everybody. I appreciate you taking the time out here to come and hear our story. This is our third year. And I think what I want to do first is -- many of you know the story, but from time to time, we find that people really don't know much about the company. So let me just spend one slide talking about Flowserve.

So first of all, we're a leader in manufacturing and aftermarket services in the flow control industry. And so what's important about that? Scott and I were talking earlier, 8.5, 9 years ago, everybody was like, why just flow control? Why aren't you in purification systems and other kinds of residential applications? Well, the reason is flow control is core to a process. It's been around for a long time. If you look at some of our technology, the base technology, it's 160 years old, and it will be around for a long time. And if you look at some of these major processes, flow control is what drives the process. A lot of those niche applications sit around the processing, can come in and out of favor, but flow control is core, and it's been around.

I think the second thing about our business to understand is these aren't necessarily all commodity products. These are precision, highly engineered pieces of equipment. And the significance of that is that it requires engineering talent, which is one of our most important assets in our business, relationships with the customers, understanding what their needs are in terms of being able to drive this process. Now the one thing that has changed in the last 160 years, definitely, is these processes have gotten much more complex: out in the desert, subsea, freezing temperatures, cryogenic applications. So if -- as you think about what you hear in the markets in terms of alternative fuels, complex recovery, that all drives to more engineering content, which has higher aftermarket attachment as well. So from our standpoint, we have a global presence as well. So we're here to participate in these markets and be close to our customers, which we have long-term relationships with them. So we have to earn their business every day. But many of our customers we work with for many, many years. They know our products, they like our products.

And also, we have this One Flowserve culture that we talked about. We talked about this last year, and that's really to capture all the propensity and all the benefits we have in our business. If you looked a couple of years ago, we really did operate as 3 businesses. Now we're very focused on leveraging across our entire platform. So we're in an area where you've seen a lot of focus in the industry. Now you see a lot of people moving towards flow control, and we're here to try to capture the market opportunities, in the opportunities we have within the 4 walls of our business.

So as I go through these investment highlights, really what we want to cover today, and these are going to be the recurring themes, is really in 5 areas, really around a diversified or stable type business and business profile. Also what you're going to hear a lot about is the margin expansion opportunities that we have and the cash flow resulting from that. That's going to be important. Now we are focused on growth, not only in what the market can offer us, but the products that we can deliver into the market, the capabilities we can deliver into the market, the aftermarket, you'll hear a lot about that as well. Of course, capital allocation, Mike will spend time on that, focusing on the shareholders, focusing on how we grow our business and invest in our business. And finally, what does this all mean? We think we have the opportunity to take that top line and leverage earnings for our shareholders.

So let's talk a little bit about the One Flowserve culture. I know you hear this for a lot of companies. They come out with these taglines about One Flowserve, one whatever it may be, but it really does mean a lot to us. It's about a collaborative management team that starts with this group of people right here. And once we get that, we start to drive it throughout the organization. And you think about what that can mean, is we can leverage across our entire businesses. We have a sales organization across our platforms that have access to all points in the world, all customers in the world, and now we can drive all of our products through it as well. Also, of course, cost leverage. You've started to see that, particularly in our SG&A line, that we're able to leverage costs, but also best practices across the organization. What this does is gives us propensity -- the term we've used -- propensity to drive improvement within our business and then drive shareholder value.

So let me talk a little bit -- highlight the concept of diversified and stability, and also growth as well. If you look at how we participate in the market, we do across 3 segments, and really, we're focused on energy, because we think energy has a good growth profile over the next 20 to 25 years. But we are diversified across power, chemical, water and then general industries, which has mining applications. So we're in various sectors. We're in various geographies as well. As a matter fact, this middle pie at the bottom, if you would have looked maybe 8 years ago, 3/4 of our business was in the OECD countries. Now you've seen we've migrated to where the business is, and that's where there's more opportunity as well. Also, you've seen through the cycle, we have long cycle business, short cycle business and aftermarket, and how that brings stability in terms of our earnings in our business.

So I don't want to dwell too much on the past, but I think it's important to understand the concept of margin expansion. If you look during the last cycle leading up to 2008, we saw a very strong pricing environment. And what you're going to hear is, we saw very strong pricing, particularly in these long cycle projects, because customers out there were competing for capacity. There was a great concern over capacity constraint. And so you were able to get good margin not only on your equipment, but things you've bought from other companies as well. Now that strong pricing environment was in our long cycle business. So it carried our margins through 2009, when a lot of short cycle businesses were starting to see the impact, into 2010 as well. Now the significance of that, just to give you order of magnitude, if you -- we saw probably about peak to trough in terms of the pricing environment, because it went from competing for capacity to capacity competing for the projects as well, probably consolidated about 400 basis points of margin impact. Now you didn't see that in our business, but that's roughly the impact, it may have been a little bit greater, and would be primarily in what you see as the EPD segment, although it has the aftermarket component as well. Now what happened during that period of time, as we repositioned the business and worked on improving the platform, you didn't see that margin decrement. That was the underlying business starting to get the propensity, starting to build momentum on what we had in our business. So you've seen that through the cycle, and we've talked about this before, in 2010 and early part of 2011, that was when the market was most competitive, because capacity had swung the other way in terms of the market capacity chasing the market as well. So the point to that is, that we'll work through in terms of our long cycle, and in fact, you've seen that with some of our legacy backlog. And as we look forward, what we've done relative to 2007, 2008, is improve the underlying operations. That's one aspect of our margin propensity.

So just -- I'm going to go through the 3 segments and just highlight areas of focus for those segments as well. But you can see, we operate in 3 segments, we leverage the aftermarket capabilities, and we all face the same customer. The customer sees one company.

EPD, the Engineered Products Division overview. This is the business that has a lot of the long cycle business, and the aftermarket as well. The seal operations are in this segment. Their focus has been on products, solutions and manufacturing. So one of the things Tom and his team have been doing with not only EPD and IPD, is improving the throughput in our factories. They also want to make sure they're diversified across regions, customers, and driving low-cost manufacturing. So some of the themes around LPO/SPO, that Tom will talk about, you'll hear, apply a lot to this division. And in fact, you can see what I talked about earlier, if you looked at the historical gross margins in the business. You can see the impact from the long cycle business rolling off, but it wasn't as significant as just the impact of price itself, mainly because of the improved operations and the growth in aftermarket.

IPD, this segment is around improving the operations, and you saw good progress last year. If you look at the financial summary, you can see it also benefited from price in '07 and '08, but a lot of that impact and that decline was a need to improve the operations. And you've started to see that gain traction, particularly this last year. They've been very focused on costs, so if you look at the operating margin line, you can see they've been very diligent and disciplined with their costs. So with that intact, what they want to do is drive better throughput in the factories, grow the business, they have added products to their capabilities, and start to get that margin expansion to get to the 14% to 15% that we've been talking about for 2 years.

The Flow Control Division, well, frankly, this has been a high-performing group for a number of years. And in fact, this is the group that Tom led for many years before he took over the COO role. That's what, of course, gives us confidence that we're going to get all of our businesses the way this one is. This has been a very high-performing group. What we're focused on here is around driving top line growth. Now they're doing it not only through market presence, but they're adding products. They're moving vertically, for example, in some of the control valves into actuation. So they're very focused on growing the business and maintaining the discipline and the high throughput that you've seen. And in fact, you can see that in the financial summary. This thing speaks for itself right here.

So the milestones, just to touch on 2012. We had solid earnings and revenue growth. We started to drive our One Flowserve culture. These things take time, we understand that, but we've made good progress. That's with -- and we also put the COO organizational structure in place. We saw operational improvement. We still have work to do. We also drove -- started to drive this expense management culture in the business as well, which we'll get traction on over the next couple years. Good progress in IPD in 2012. Great leadership team, there were a lot of changes, not necessarily everybody new, but new in roles. We did continue to expand our footprint, particularly in the emerging markets, where the opportunities are going to be, Brazil, China and India as well, and really focused on driving shareholder return and optimizing our capital structure.

So let's move beyond 2012 and look forward over the next 5 years. If you look at this symbol on the right, this is really how we make decisions and run our business, things -- how we think about questions that come up and where we want to drive it. And our key strategic objectives, if you look over the next 5 years, is to grow our business. It's one of our primary objectives, but it's going to be disciplined profitable growth. The other thing we're going to do is continue to drive operational improvement. I think what you'll find from Tom's discussion is there's still a lot of opportunity in our business. Solidify the One Flowserve culture, this takes a couple years to do it. We've made good progress, but we definitely have work to do. And focus on continued return for our shareholders. You saw that over the course of last year, and we want to continue to do that with the cash flow generation in the business. Talent, and we're seeing in regions, down in the Gulf Coast region, that they're trying to hire engineers as quickly as they can. These are important assets for our business. So focus on recruiting and retaining our talent. And then also look at bolt-on acquisitions, like we did over the last couple years, where we bring a product, leverage it on our platform, get any improvements that we can in the business, drive it globally. We've had good success with that.

So just focusing on growth, you've seen this slide before, it is still intact. What drives spend? Historically, it was just a matter of the independent oil companies making profit. But more and more, what you're seeing is energy security or security. For example, in Saudi Arabia, they're building a facility, they're in process right now on the West Coast. Why? Because it's away from Iran, and they're concerned on the East Coast that it can be somehow impacted, which would impact their economy. They're also looking to build one in the Southern Coast and bring an economy down there. So there's other reasons they build this capacity out. Also there's a lot of upgrade and renewal requirements. For example, in Kuwait, they have to build this clean fuels facility because they export a lot into Pakistan and Europe, which require less sulfur content in the refined product. So these are the things that are driving spend and infrastructure, beyond what was just historically intact.

Once again, you can see around infrastructure needs, a lot of it is going to be in the emerging parts of the world. So that's why we've repositioned a lot of our assets and our capabilities in the emerging regions of the world. And a lot of it is going to be energy demand. If you think about oil and gas, power, even to a certain degree, some of the things in general industries, a lot of that is tilted towards energy. Over the long term, it's forecasted to remain intact. This is data we got from Exxon. They do expect higher energy demand over the next couple years. If you think about it, you have population growth, you have urbanization of existing population as well, so that's going to demand energy, hydrocarbons, power, other aspects in terms of energy. And when we look at our portfolio, we think it's aligned well with the opportunities that are out there over the next number of years. And what you see -- this is important, what you see in these bubble charts is where we have a kind of hash mark, that represents installed base, and I think this is something we want to make sure you come away with. Installed base is just that, it is permanent. A lot of times when you see some of the products go into an upstream application, for example, good business, frac-ing, the next marginal use for a frac-ing pump is wherever those 4 tires will take it. But if you look at a refinery or a permanent structure, they don't have the option of picking up and moving it. So what they need to do is optimize it in place. That is installed base. That is core to our end-user strategy, because what we do is we offer solutions to make that permanent infrastructure more efficient. So you can see a lot of the infrastructure that they see, in terms of opportunities over the next couple years, have in fact, this installed base, which is core to our end-user strategy.

Another area of growth, innovation as well. So I talked earlier, we weren't really heavily into the actuation business a number of years ago. We've put a project team in place, and now we're actually manufacturing more actuation. That's an example of innovation and product growth. Also, the ISO chemical pump that we've talked about a number of times on our calls. We've had a leading product in the ANSI standard, which is the American standard, but a lot of the incremental chemical requirements were under the international standard, and we had to adapt our product capabilities to do that. Innovation in many aspects, Tom will talk about some of that. We're really -- I've talked about the core technology being around for a long time, but if you look at metallurgy and other aspects, innovation is so important and also, diagnostic capabilities as well. Also making sure we expand our capabilities, not just -- beyond manufacturing, monitoring, efficiency of the equipment, our capabilities in terms of people around the world, this will also drive growth as well. Strategic localization, one of our core strategies, be where the customer is, be local, that's an increasing requirement. If you look at many of the major countries around the world, Brazil, India, Saudi Arabia, they want local employment, they want local content, they want local supply base, so being local is very, very important. You've seen a lot of that in terms of the way we've spent our money over the last couple years.

And this kind of highlights how we've grown. We've started to tilt towards the emerging markets. By no means does that mean the OECD are gone, but we're well penetrated in those areas, and we're building our capabilities in the emerging parts of the world. We've seen bookings growth there. That's where our increased resources are going into, is the emerging parts of the world.

Also, we'll continue to look at bolt-on acquisitions. What did Valbart do? Valbart gave the valve business a good leg into the oil and gas industry. Also, if you look at the Lawrence Pumps, severe service equipment, we're able to load it on our global sales platform and start to capture aftermarket business that they weren't otherwise getting. So that's the way we think about acquisitions. It's what can -- how can we leverage it very quickly. We don't necessarily want to get something that we need to go and fix, or spend a lot of time integrating. It's how do we bring it on and leverage it very, very quickly.

Of course, we're going to maintain operational focus. We still have a lot of opportunity in the business, and you'll come away from that -- from hearing Tom speak. But we want to do it smart. We want to make sure that we have a sustainable business model, for our customers, for our employees, but most important, for our shareholders as well, to deliver long-term value. So what that means is, back in '10 and '11 in the competitive market, not just taking anything for growth, making sure -- in terms of how you think about your acquisitions, your capital allocation. We want to make sure we do it smart and sustainable. And the results should be to continue this proven track record of creating shareholder value, as you can see we've done over the last couple years. That's our objective.

So before I end my comments, here's the path to our revenue target. When we were here 2 years ago, we gave you an objective over the next 5 years. And if you look at it, either you look at it on a nominal or constant currency, we're able to deliver on that. We saw good growth over the last couple years, and we still see opportunity to grow over the next 5 years. As you've heard from time to time, a lot of these big projects have moved. We saw a move from last year into this year. You'll get a better read on where they are from Tom's discussion. But a lot of the areas you've seen growth is in market penetration, product penetration, growth in our aftermarket business. That's provided solid growth in our business. It's 40% of our business as well. We still have room to grow that. So good growth over the last couple years. We see growth opportunity over the next 5 years, and this is what we're focused on.

So just to sum up, you see that we've got stability in our business. We've got propensity in our business for margin expansion and improvement. We want to make sure we grow it, be disciplined in capital allocation and at the end of the day, leverage earnings growth.

So with that, I'll turn it over to Tom.

Thomas L. Pajonas

Thanks, Mark. Just by way of introduction, by myself, I spent 25 years in the large project execution business on the power side, and then the last 9 years on the product side of the business. And hopefully today, you're going to see the interplay between the project side of the business, as well as the product side, and why those 2 are important to us, overall, in the business.

Mike? So what I'm going to cover today is I'll briefly go over in just a little more detail on the 2012 themes from an operational standpoint. I'll cover what our attributes are from an overall business perspective, in terms of products, in terms of schedules, the customer drivers, hopefully, begin to give you a sense of why we're set up the way we're set up in -- and again, give you a lot of thoughts around the propensity of the business. You're going to hear, and as Mark discussed, propensity in terms of growth, in terms of margin attainment in the business going forward, and margin increase, that, hopefully, you're going to see that, that we have a lot of opportunities, certainly in those 2 areas. We'll talk about the markets. I have some slides in here relative to our view of the -- of what we think is happening with the EPCs at this particular point in time, relative to the FEED and pre-FEED work, and the bidding and the buying activity. And hopefully, that will give you some thoughts as how we see the market, certainly, going forward here. And then lastly, and I think most importantly, I want to talk about the operational initiatives relative to meeting the customer drivers. Very important for us that we understand the customer, and I think we have a good view of things in terms of where the customer is headed over the next several years, and how we're positioned as an organization to meet those drivers.

So 2012, our themes. We've advanced the One Flowserve concept, as Mark has indicated, and what this is about for us, it's about leveraging the global competencies across our installed base. And what I mean by that is leveraging the project management competencies, the low-cost sourcing competencies, the information technology competencies, so that we can get the most out of those global competencies that we drive across the overall business. And it's also about leveraging our aftermarket service capability. You'll see throughout this presentation, and as Mark, again, indicated, the aftermarket business is critical to us. It's critical to our customers over the 40- to 50-year life of our customers.

The next thing that is -- makes up a piece of the One Flowserve initiative is, obviously, the customer focus initiative. In terms of on-time delivery, quality, responsiveness, ownership, all the 4 pillars that are important relative to driving and meeting the overall customer requirements. Leveraging our operational initiatives in terms of on-time delivery, in terms of the cost of poor quality, which I'll talk about later on, the SG&A efficiencies not at the expense of some short-term gain, but making sure that we have the right platform for driving the initiatives with the overall customer. We spent a lot of time in the last year going through our proposal process, setting up how to cost our products, the terms and conditions, cash flow, all the things that are important to working capital early on in the proposal stage, so that when we get the contract, we can basically execute according to that set up that we've already negotiated in the proposal stage. We've hired some very good resources on the project execution side of the business to drive project management, very critical to us in the business and critical to our customers. As Mark indicated, the automation side of the business in terms of product development, we've advanced that going forward, along with material advancements and new product developments in terms of pumps, as well as valves, new seal face systems that increase the life of seals and, hence, meet the overall customer drivers. So we'll continue in our product development efforts over the next several years.

And then lastly, relative to our customers, we have to be local. So we spend a lot of time continuing to adjust our localized drivers in the overall business, and we've added 4 Quick Response Centers. We're working on 3 large main manufacturing units, and I'll talk more about that as we get into some of those slides. So all this leads to, really, the propensity for growth and the propensity for margin improvement.

Just briefly on the industries served, the point of this slide is that each industry requires some unique solutions and services in order to meet the customer drivers, and that's how we approach the business. If I'm in the oil and gas business, I have to provide services and solutions different for the oil and gas business versus the power, versus the chemical business, and we're aligned that way in the organization in order to be able to do that. So a lot of effort has gone in not just recently, but over the past years, in making sure that alignment is all driven by the customers' needs.

Typical schedules across the industry. If you take a look at this, this begins to define who we are and where we play. On the large projects, these may be refinery projects, this could be a nuclear power plant, you see here from project inception to startup, it could be anywhere from 5 to 7 years. It could be 2 to 3 years worth of negotiating with the EPC and the FEED and pre-FEED area, where we're providing to the EPC budgetary prices or helping them with their particular costing. So we have a lot of good visibility, I think, in the long cycle business in these particular areas. And then you see there, different levels of schedule going all the way from the 5 to 7 years, all the way down to the 24-hour period, where we're producing a part or a service on the customer service side in a Quick Response Center, and turning that over within a 24-hour period. We have to service this range of schedules, and I think we do that quite well.

In terms of the characteristics of the industries served, our customers in these large infrastructure businesses have a long-term view. It's not a short-term view. In the oil and gas business, they're looking at 10, 15, 20 years. Similar aspects on the power side. So we have to be looking also in those long-term trends. If you look at the total available market for our products, it's about $127 billion market worldwide for our pump, valve and seal products. And I'll show you that we still have a lot of propensity to grow organically, even within that space, because while we do service that business, we're probably one of the widest product portfolios, we still have a lot of opportunities to grow with all the products organically, as well as inorganically.

And certainly, we -- you'll see this theme over and over again, the 40- to 50-year aftermarket annuity business is critical to us. More importantly, it's critical to our customers. They put these plants in service. They want them to work for 40 to 50 years. On the nuclear side even, they go in with license extensions, so they go beyond even the 40 to 50 years. We're there with them throughout this entire life cycle, providing them with products, services, revamps, upgrades, modernizations, all things that contribute and, again, support the customer.

And then lastly, it's not just about us being localized, it's about the whole supply chain that has to drive and meet the customer drivers, needing to be localized. So when we go into an area to support them with our products and services, we're also localizing the supply base. We're bringing either the supply base with us in that particular area or we're developing the supply base locally to meet those needs. And as Mark showed you one slide in terms of energy security being a driver, we're seeing a consistent perspective, both in China, the Middle East and so on, that everybody wants to have a localized base there in order to supply both the OEM, as well as the aftermarket service components. And you'll see later on, with our almost 60 core manufacturing operations and almost 180 QRCs, that it's something that we've developed over the last several years. Not something in the last couple years, but we've been working on that for the last several years, so we're positioned very well, I think, for where the customers are heading.

Just a few words on the attributes of our products and services in this $127 billion available market. First of all, you have to have a wide portfolio of products. You can't only be a niche player. We have one of the widest portfolio of products, which we believe is a competitive advantage. We don't have all of them, but we certainly have the widest range, I think, in pumps, valves and seals across that -- across what our customers require. The second thing is, and I would say the most important out of everything that we do, is the customers demand quality. Those products that are put into service have to work the first time. When you put a main steam isolation valve in a nuclear power plant, when that has to stroke, that has to stroke the first time, even though it may not stroke for 10 years. So our products have to have a high degree of quality, technical content, reliability. That is, again, what the customer is paying for in our particular process, and that, perhaps, is one thing that distinguishes us between other industries. The criticality of these products going into severe service and the type of plants that they're going into require a high degree of engineering sophistication throughout the entire cycle. So -- and the customers are paying us for that high degree of sophistication and our overall delivery of products. The on-time delivery is also very critical during the EPC phase. Many of those -- many of the EPCs are on tight schedules. They have severe liquidated damages for overall plant guarantees which they are taking, so we have to commit to schedules that we can deliver on and that the EPCs can depend on us, or else it causes a lot of problems throughout the entire system. So we spend a lot of time in our business on being recognized as an organization that can deliver on its commitments, is there. If there's a problem, we have the ability to go in and research it to help not only the clients but to help our EPC and OEM clients meet their needs.

And then lastly, as we mentioned, the localized supply base becomes critical in this mixture of balanced products and services.

In terms of the market now, so we take a look at the market in general, extremely fragmented market. We know that. It's not all the same in pumps, valves and seals, and I'll show you a slide later on, because there are some distinguishing features between the 2. It is a very conservative end-user base. They want those products to work, they want to have experienced products that have been tested in our portfolio. So we have to deliver and make sure that those products work. The failure costs are extremely high, overall. They are mature markets. Even though we have -- the developing market is moving at a very good clip, we have to do a lot of supplier development in the developing market. And again, that's another thing that the customers expect us to do, is to bring that supply base along in a localized emerging market basis.

On the competitor side, the global competitors do have differing competencies. I mean, there are good players out there, but we feel as though we have a very balanced competency across the widest product portfolio out there, to service the overall clients' needs.

The local firms are becoming more sophisticated. When their markets begin to get absorbed, they will be -- where they will start to come out, which they have been for the last couple years, and we need to be ready for that. One of the ways that, I think, that we drive differently, perhaps, is with 177 QRCs and the 65 core manufacturing units, we are localized. So when we talk about supplying products from China, we talk about being in China for the aftermarket business and for the OEM supply. We don’t look at China as just a low-cost source to provide products to our other shops. Granted, there is some of that where it makes sense to do that, but we are in -- we want to plant the flag locally with local assets, resources and so on.

In terms of the customer trend, you saw in the previous slides, the market is moving towards the emerging markets. Here are just some of the percentages, where 95% of the refining activity over the next 5 years will be in emerging markets, 70% in power. So the numbers are quite significant.

That's not to say the developing regions don’t have some great opportunities. If you look at North America alone, in the shale business, great opportunity there for us over the next several years as we tap into that in the North America area.

The end-users want to leverage the supply base. So as that supply base certainly, first of all, needs to be localized, they also want to leverage the supply base, if the supply bases have some capacity issues. So that will also weigh in, in determining some of the overall pricing.

The end-users and EPCs are requiring the local content, both on the OE and the aftermarket side. And there was a constant push for more complicated terms and conditions. I mean, we deal with very sophisticated clients in terms of terms. We believe that we're fair with those terms back to the client, but the client, most importantly, wants a product with high-quality and on-time overall in the process. So we are, I believe, able to support our clients globally with the assets that we have.

So just a few minutes now on the markets to give you a perspective, and then we'll talk about where we think the business is headed. Overall, we're looking at $127 billion available market, and you see the splits here. Again, a very large market for pumps, valves and seals. I've broken that available market down into respective products. So pumps, you see $58 billion; valves, $64 billion; and seals, $5 billion. You see the top 7% of competitors only make up a very small portion of that available market. So you have a lot of local players in the other portions of this particular market, and a lot of those local players will stay local, some of those local players who may become more global.

But clearly, going global in these pump, valve and seal products requires a lot of assets and a lot of resources located strategically around the world. We built up those assets and resources and processes and technologies and systems over the last 10 years. So it's not something that you can just switch -- flip a switch, and within a short period of time, 1 to 2 years, set up those assets around the world.

If we take a look at the total available market, we see here for the $99 billion market that we're talking about, the emerging market is growing faster than the developed regions. That's not to say the developed regions do not have a sizable piece of this market, and there are things changing, like the shale gas business will begin to change this landscape slightly going forward into the future. We have to have assets in certainly both places. There's a significant amount of opportunities that still exist in this total available market, and I have that on the next slide.

So what I've done here is I've kind of provided a very rough outline of our -- how we service that available $100 billion market. Shown here in the dark shaded circles are the areas that we serve, both in terms of geography and in terms of products. So the thing to take away from this slide is, when we take a look at growth, there's still a significant amount of opportunity in our core businesses to grow this business with additional products, with additional services, with additional geographical footprint. We have a lot of propensity still, without going into any kind of non-pump, valve and seal opportunities, to grow the overall business.

Just taking a look at the sophistication of our route to market and give you an idea of who our customers are. I've shown here 3 different areas, EPD, IPD and FCD, and again, broken it down between EPCs and generic procurement contractors, OEMs, distribution, as well as the end-user. You can see in our highly engineered business, with a lot of aftermarket, we have quite a bit of percentage of business in the end-user, as well as in the EPC. As you go to the right in the slide, IPD, while that's true, you begin to ferret in a little bit more distribution, and then over to the right with the FCD business, you have a larger percentage on distribution, less on EPC and less on the end-user. But still, it's a different mix, and what it does is, it gives us our balance point, depending on what's necessary to get at the customer. So each one of these businesses has a particular customer perspective, that we go to the market differently, in order to maximize what the customers' needs are in each one of these businesses.

A few words on the market touch points. Previous slide, Mike. If I take a look at all of our efforts on flow control, we're focused on flow control, and you'll see that in some upcoming discussions that I have here relative to our competitors. We're in the pump, valve and seal business, that is the business we're in, we're in flow control, large infrastructure. We don’t do much commercial. We don’t do any residential. We could move into those areas, but we have elected at this particular point in time to stay focused on the large infrastructure business. That focusness provides us, I think, with a competitive advantage.

If you look at our sales force, highly, I would say, technical sales force. Many of them are engineers, 4-year degrees. Almost 1,150 direct sales people located around the world because we have to be local with our clients, both on the OE side, as well as the aftermarket.

We have a base of over 500 distributors around the world. Again, the route to market, I showed you the distribution between the IPD and EPD, as well as FCD. Each one of those divisions has a different distribution relative to going to the market through distributors.

And then obviously, reps in various parts of the world, we have over 500 reps.

And I think most importantly on this slide, we have 450 technical service people that are in peoples' plants on a day-to-day basis. And yes, while they're in there servicing the customers for orders, at the same time, they're also looking for opportunities in bringing those back into the businesses, for looking -- looking at additional ways that we can help support the client. So we believe that this certainly provides us with a competitive advantage.

The competitive landscape. Shown to the left are our major competitors in terms of pumps, valves and seals. What's shown here in the center is that we are the only pure play, we believe, that services all 3: Pumps, valves and seals. We do have very good and strong competitors, but we do think that some of the distinguishing features that we brought up here, along with the fact that we're a pure play in this particular area, does create a different perspective on the focus. And we are very focused on the markets and the products that we go to markets with.

To the right, we've provided a little bit more detail, and this is obviously our perspective on this. So to the left, they are all the competitors. Across the top are the industries that they serve. So the green indicates that this -- we serve and they serve that industry quite well in terms of products and so on. A yellow, moderate; and then a red, they don’t serve that at all. So you can see there that Flowserve does service all the industries, oil and gas, power, chemical, as well as GI and water.

The last 2 charts are just some additional data, which show the pump, valve and seal business itself. So for instance, the way to read this chart, if I pick one, you see there in the middle, $1.2 billion for one of our competitors in terms of pump, valve and seals, however, that's only 1% of what that overall business does. Here, you see Flowserve is 100% in the pump, valve and seal business, very focused. We believe, again, that provides a competitive advantage because we understand our market, we understand the flow control business.

Just a few words now on the overall market itself. If I take a look at these charts, these charts show the forecasted capacity expansion in each one of the areas, and I won't go through the numbers, you can read those at the top of the chart. But just very briefly, you see here in the oil and gas area, an increased pipeline activity, U.S. and Russia. You see China and the Middle East, certainly driving a lot of that over the next several years. LNG production increases based on what we're seeing in terms of the forecast. Middle East, greenfield expansions.

In the chemical business, China will continue to drive chemical expansions. North America, because of the low-priced natural gas, we'll see ethylene projects, and you probably have seen a lot of announcements on those going forward. The China economic system seems to be moving in the right direction, although in 2012 mid-year, there was a little bit of a slowdown. It seems like it's picking up again. Middle East continues with its investment in downstream and diversification, and we've seen a big increase in the growth in the fertilizer projects, certainly on the chemical side of the business.

On the power side, we'll see, again, coal-fired power plants, a lot of them going in, still in China, India, as well as Russia. Regulatory changes, a lot of things happening in the developed areas, so there may be revamps, upgrades, relative to environmental requirements in coal-fired power plants. Obviously, given the price of natural gas, combined cycle power plants are increasing, primarily in the developed regions.

We see modest nuclear activity going forward. There's been some positive developments in various areas. The U.K. has announced plans to go forward with some nuclear projects, as well as the Czech Republic, as well as China most recently. And certainly, the solar projects, we see them going ahead in the Middle East and Africa.

In terms of general industries, the mining business, obviously, tends to be very GDP dependent, and -- but the mining business will have good prospects over the long term. And we are seeing some good efforts going on in de-sal business around the world, particularly in the Middle East.

So just a word here on this chart, and if I could just take a few seconds to set up this chart. The blue on this chart represents pre-FEED activity of EPCs coming to us for pre-FEED work. And that pre-FEED work may be budgetary work, where the EPC is trying to get a handle on putting together the overall project pricing, but very early on in the process. The FEED work represents an escalation of the pre-FEED work, where they're now beginning to get a little bit firmer in their activity. The orange that you see there is where they're coming to us now for fixed firm bids, and the green is where they're actually doing the buying in the overall projects.

So I've given you here a few chunks of segregation of times. Don't be concerned about the times here, but what this shows is 2 things. The first one is, in 2012, you had a buildup of FEED and pre-FEED work. So there's things coming through the pipeline where the EPCs are beginning to bid projects, a lot of upfront work, a lot of FEED work going on. They're collecting bids from various suppliers. They may not have chosen an EPC supplier yet. You may have several EPCs bidding on the same project, but there's been a buildup of activity. What we've seen recently is, we've seen a lot more EPCs now coming to us and asking us to firm up those bids. So what's shown there in the 2013, at least in the period that we see there, is an increase in the level of bidding activity, which is a good sign for us. It means that things are coming through the FEED and pre-FEED stage, getting to the point where the EPCs are firming up their price for the end-user, which then we're speculating is going to lead to a buying phase going forward. We're also getting indications on the EPC side that they're getting -- a lot of engineers are going into the EPC businesses. We've checked that out in several different places. So that, coupled with some of this directional views that we have here, indicate that we have work going from FEED to pre-FEED, which was 2012. We have that work now resulting in more bidding, actual firming up the offers from us on that side, which, speculative-wise, should lead to a higher buying phase going forward in the future.

We've talked, and several of you have asked for this in the past, so we decided this year to put this in here to give you a relative feel for what the value is depending on the project. And these are very rough numbers, and they can vary significantly. But on a large refinery project, 300,000 barrels per day project, you could have anywhere from a $60 million to $100 million scope opportunity for Flowserve, across pump, valve and seals. On a nuclear power plant, that could be $80 million and so on and so forth, that you see here.

I would say, in addition to this OEM work, there's a significant amount of aftermarket opportunities, which aren't listed here. So using one example on the nuclear side, with the OEM being $60 million to $80 million, you could have, over the next 40 years of a nuclear power plant, another $80 million to $100 million of aftermarket opportunity through upgrades and revamps, retrofits. That nuclear power plant could ask for a license extension for another 20 years of operation, in which case, you have to go in and condition all the equipment.

So there is, along with this OE work here, an additional amount of aftermarket work across all these plants. And recognize the one key thing that's there as a given, these plants are in operation for 40 to 50 years.

So what's Flowserve all about in terms of the value chain? Mark talked about large projects and short projects -- short cycle projects in aftermarket. And I've tried to depict here a little bit about the value chain. In the large project execution business, we're doing a lot of upfront engineering work and we're leveraging our engineering resources for the benefit of the customer in the EPC, and helping them begin to craft how that project is going to be set up. So a lot of upfront proposal work and development cycle work in the large project execution business.

In the short cycle, we're leveraging logistics, we're leveraging manufacturing, we're leveraging the local supply base. So again, a different level of value on the short cycle business.

And then on the aftermarket business, we're leveraging localization, not just of assets, but its people, its supply base, its systems, its processes.

If we take a look at this value chain and we think about the One Flowserve concept, we're also trying to take and leverage our IT systems and processes across this base that we have, to leverage our other processes, including supply chain, to leverage our base in terms of legal terms and condition processes that we have overall in the base, as well as our R&D and certainly, the rest of the operations, which I'll talk about now.

So if you take a look at the Flowserve difference, the way we look at things. First of all, it all starts with the customer. You have to have reliable service, on-time, high quality, and you have to be local. But that translates into what we believe are the cornerstones of what we're driving. We believe that we need to understand the customer drivers and that we need to put processes, systems and people and assets around those customer drivers, and the more that we can be linked up there, the better off we're going to be in terms of creating a sustainable business.

We want to be able to solve our customers' highly complex technical issues and problems. We want to be -- spend money in research and technology and develop new products and be on the leading-edge. But we also want to, for the majority of the products, develop a product development roadmap that increases to solve those near-term technical issues for our clients.

In terms of operational excellence, we have a lot of propensity in this business. We think that we're -- we meet many of our customer requirements, but we have a lot of opportunities, and I'll talk through those in a minute. So in terms of margin attainment, I think we've got good growth prospects going forward.

And then lastly, the strategic localization, where we have a significant amount of assets located around the world, where we constantly take a look for where we can put another Quick Response Center, where we can put another sales office, where can we bring a process into a QRC and increase the level of sophistication of that QRC, because the customers require more process orientation. If we can do these things across Flowserve with the customer in mind, we think that, that can create a sustainable business model going forward into the future, as well as good growth and margin opportunities.

Now just a few words on the next slide relative to some of the attributes on customer intimacy. I mentioned previously, the aftermarket and infrastructure business is a 40- to 50-year business, and I've given you some examples here. The first example here is a pump, where we sell the pump for $10 million on the OE side of the business, and that may be a sale to the EPC or to an OEM. Over the life of that pump, I mean, the 40- to 50-year life of the pump, a customer may spend $90 million overall on that $10 million pump. A significant amount of that goes into energy in order to run that pump over the 40 to 50 years; some of that goes into maintenance; some of that goes into the other breakouts that you see here, repairing of the particular products, maybe some revamps or upgrades. So 9x the OE spend is sitting there, relative to the customer spend, on the next 40- to 50-year life. What we try to do, and it's depicted on the chart to the right, is we try to now, over this 40- to 50-year life, be there for the client, relative to what the client needs to do with that $90 million spend. So if he wants to increase the efficiency of that pump and system, and where they're looking at optimizing that overall system for the benefit of trying to get down that energy cost over that particular period. He may want to get more output out of his entire plant, in which case the pump needs to run heavier. We're in there, making a modification of the pump so that the plant can get more output, maybe 10 years down the road. We're also providing parts and service.

All of this provides a continuum of opportunities and services that we can provide over the length of this. And what does this result in? You see there, we've been able to grow the aftermarket business worldwide, almost 7.6%. Over this particular period, it's almost $1.9 billion overall for Flowserve.

I've talked a lot about where we're located strategically around the world, this chart depicts this. 65 core manufacturing operations, 177 Quick Response Centers, those you don't just put in overnight. It's been several years in the making. We believe it's a competitive advantage for anybody trying to do this level of globalization and localization that we've done here, and we believe that we're well-suited for where the customers are going, because the customers want to -- want us be local. And we believe we have the assets, systems and capabilities, both in terms of manufacturing, people and processes, to be able to do that.

A few words of how we go to market globally, because one of the things we do with those assets on the ground is, we want to make sure that the products that we're manufacturing are the same no matter where they are around the world. So we've set up this lead product operation and secondary product operation concept, where the lead product operation is responsible for setting the standards; setting the design criteria that goes into that pump, valve or seal; and setting up the core manufacturing processes that, that localized second unit is going to have execute. The localized second unit around the world then has to take those standards, and then apply those locally and execute that business on a local basis, to do local manufacturing and local supply base, as well as local market pricing. We believe that this concept has created a competitive advantage for us. It also allows us to load-levelize across our business and certainly gives us a nice balance in the organization, in terms of what we have in developed regions versus emerging regions around the world.

Just a quick picture on the next slide, in terms of what we've been doing just most recently and where we think we're headed in certain areas. Shown to the left are 3 core large manufacturing operations: one in Brazil that has recently opened up in February, 160,000 square-foot facility, so it's a very large facility; another large facility that will be ready to go by the third quarter of this year; and then a third one in China that will be ready to the back-end of this year, first quarter of 2014, to get at the China market and to begin to grow that business there. 3 core large manufacturing.

Now we're also upgrading and revamping several other of our facilities. What I'm depicting here is just some of the bigger issues that I wanted to show you. Over to the right are several things that we're doing on the Quick Response Center side of things, both in terms of extensions of existing Quick Response Centers, as well as new Quick Response Centers around the world. And again, the reason why we open up these centers is because there's some customer driver there that drives us to open up these centers. And maybe a concentration that we haven't serviced before, that we've seen now opportunities, and maybe OEM business that we sold in the last few years that now needs to go into the next stage, which is aftermarket. So there's a lot of different reasons for opening these up, and we feel good about our progressive plan here.

A few words now about the operational excellence, which I think is fundamental to any business and to growing the margins in the business. It all starts with the customer, I've repeated that probably ad nauseam here, but it is true. We're trying to create a customer-centric culture within Flowserve. That means people devoted to on-time delivery, meeting their commitments, quality, relentless quality pursuit throughout all of our units. We have 1,800 black belts and various other quality professionals throughout our network to drive this quality initiative. We want people to be responsive. We want them to take ownership throughout this -- throughout the chain, the lifecycle of our products, to meet the customer drivers. That's the culture that we're trying to drive overall, and I think we've been very successful here, beginning to drive that, but we have a good propensity in this business to grow it further.

A lot of effort on project management. I mentioned in the beginning, there's a big interplay between the product side of the business and project management. We're trying to become excellent in terms of project management, in terms of scope, schedule and budget and delivering on our commitments.

And then lastly, we do measure, ad nauseam in our business, a number of different metrics, both on the operational side and the financial side. You'll see in Mike's presentation here, we're concerned about safety. In every one of our units, we go over that on a regular basis, where we look at every back strain. We look at any other thing that happens. We look at it systemically. We look at why it was caused, try to get at the root cause. We want to make sure our people are safe, and as Mark showed you, that was core to one of our pillars on the One Flowserve.

We spend a lot of time measuring cost of poor quality, and I'll show you a little more detail on that. And certainly, on-time delivery, and we do survey our customers. In terms of when we ship things, we ask them how did we do. How did we do in terms of responsiveness and on-time delivery and did you get what you needed when you needed it overall, then we take that in, assimilate it, and then we change if we need to.

In terms of quality, and again, this is probably -- a propensity slide, is what I would call this. Shown on this iceberg are -- what shows across the tip of the iceberg, which is the more easy to measure quality aspects, so that's scrap, rework, any liquidated damages that you have coming back, warranty items. These tend to be more financially oriented in the systems, in the company. What's below the line are all the things that result in improper execution and on-time delivery and quality issues. What we're after is getting at this entire pot of quality.

So we're relentless on the financial items that you see on the tip of the iceberg, and what we're doing is we're driving very deep into the organization to get at why we have perhaps increased freight. Well, it may have been because, even though we've delivered the product on-time, we had to air freight it there to get it on-time, which costs more money than what we had originally planned. So we get in and we analyze that, as an example, and figure out why that happened and so on and so forth, and then try to systemically fix that in the business.

So if you look at these things as levers and you think about an organization, there's a significant amount of levers that we can pull below this tip in the business over the next several years, and we have these lined up and they're in our sights to be able to pull.

The supply base is critical for us. We need to procure materials around the world on time. So we need to have assets on the ground, and we have a significant supply chain organization. As I mentioned, we need to be local, which means our supply base also needs to be developed locally. So we spend a lot of time and effort in actually educating and developing the supply base, so that they can quote to us, along with what the customers drivers are in the overall business.

We measure our people and processes. So our supply chain organization and units have gone through a process assessment in every one of the units. So we know which units have very strong processes and management teams and which units need to improve, and then we put in place those improvement metrics in order to get them up to certain levels. So here's another lever point that we have, that we have certainly not tapped out. We're certainly good at it, but we have a long lever point here to go.

Shown on the bottom is a lever point called low-cost sourcing. You see here that, certainly the FCD organization has been the highest low-cost sourcing over the last several years. And shown here, again, is a propensity on the EPD and IPD side of the business, which represents, for us, margin and represents localization opportunities.

We do measure on-time delivery and measure supplier quality. And you see there, and as Michael mentioned to you on the working capital side, a lot of efforts going in now to adjusting our turns in the business, and the DSO are going forward through our working capital initiatives.

Technology development and technology leadership. We have set up, certainly, to deploy a pretty robust research and technology process worldwide. We now have a R&D process of ideation for new product development and actually, core technology. We have our systems and processes now set up to execute the R&D project, as a project. So these are treated exactly like core execution projects in the business, when we do a new product development. They have gate reviews, they have sign-offs, so there's a regimentation and process set around this, so we maximize the amount of revenue stream that we're going to get on future business, based on the money that we've put up for our research and technology.

Here in the middle, I just depicted and as I mentioned, we have very conservative customers that want to make sure that we -- that our products work. So most of our development goes into product development as opposed to core research. We probably have a 80-20 split that you see here, and that is because we're trying to meet our customer drivers for product development enhancements, as opposed to necessarily just core technology. But we do about 20% core technology. We feel as though it's balanced across the entities that you see here. And as I've indicated to you in the past, a lot of effort going on core-cost cost reduction as we begin to pull that lever in our business for margin enhancement. You see there in the green, what we're spending on core cost reduction overall in the business.

So our priorities for 2013 to '17. Certainly, growth is one of our core priorities. I think if we can localize our products, deliver a good quality product based on the programs that I've outlined here, continue to excel in on-time delivery and get to the next tier level performance, work on the cost reductions through our R&D efforts and certainly, leverage our aftermarket base, along with technology and innovation and, as Mark mentioned, optimizing our SG&A base, I believe that we have a great recipe here and a balanced recipe here for driving our core business.

So in summary, I would say here and pose a question and answer that question at the same time. So do we have the propensity to grow and improve the business? I would say, a resounding yes on that, based on certainly the way I see the business from where I sit overall in the business. We have opportunities in our products and our regions. Certainly in the aftermarket business, you see how we have grown that 7.6% over the last few years. There's great opportunity there over the 40- to 50-year life. And yet, as Mark mentioned, the bolt-on inorganic opportunities also exist at our business for where we have gaps, both in regions and in product gaps.

And then lastly on the margin side, every once in a while, you see people divert into other things. We've kept a focus on margin attainment. To me, that is critical to our business. We'll continue to drive the gross margin in the business, I believe that, organically, that represents the health of the business.

And you see here, and I've listed just a few and talked about many of these, there's a lot of lever points that we can still pull in this business. And what I see as my major role over the next several years, is to strike a balance to determine which ones to pull and when to pull them, in order to maximize the margin attainment of the business. If we can do this, then we're going to lead to a very sustainable business model going forward into the future.

John E. Roueche

At this point in time, we'll go ahead and take a 15-minute break [indiscernible] and Mike Taff will come back to do the financial overview and [indiscernible].

[Break]

Michael S. Taff

Well, good morning, and we'll get started back here, and I'll wrap up with some financial comments related to our performance. Certainly, a pleasure to be with you here with you today. As you may recall, last year when I met most of you, I'd been here 14 days, so it's a little nicer now that I've been here 14 months. But you may recall last year when I was here, I said there's 3 reasons I came to Flowserve, and I think all those reasons are still very applicable today. One is the management team. We've got a very strong management team with Mark Blinn as our leader, and you've heard from him and seen the other ones today. Second was, I really liked our business diversification and our risk profile. And you've seen that, as Mark and both Tom have indicated that today. It's a core attribute that we have. And third, I thought there was a lot of value to unlock in the organization and in the network and the platform. And certainly, the performance for the year has certainly indicated that. 2012 was certainly a very good year for us from a financial standpoint. We were able to achieve a number of things. I'll cover those from a financial standpoint and all. And so a few of the things you'll be hearing me speak of today, will be, one, we'll be -- we'll talk about our margin expansion and our profile and our cash flow improvement. We'll cover our performance versus the peer group. I'll talk about the number of successful things we did on the capital structure initiatives, and also talk about what we're doing in 2013 and our track record for returning cash to our shareholders. We'll cover our bookings and our backlog, our commitment to improving our working capital. It's been an initiative that I've been working on, and with Tom's group, extensively during 2012 and that carries over into 2013. I'll cover our foreign currency exposure and that impact, briefly touch on where we stand from a balance sheet standpoint, and then end with guidance. So what I'd say is, is bear with me for the next 20 minutes. Don't turn to that last page, and I'll get to the guidance page that you always -- all want to hear.

So starting off, let's cover -- start with sales and operating income. Certainly, 2012 was a record year for us from a top line standpoint. We generated $4.75 billion of sales, growth of 5.3% year-over-year, and that was coming off, as you saw in Mark's slide, an 11.9% increase in sales from 2010 to 2011, and all. And the other thing to point out here is just the solid contribution from both the OE side of the business, as well as the aftermarket. We've built that aftermarket business. It's been growing nicely the last several years. It's up to a $2 billion run rate at 45% gross margins. And then next, I'd like to touch on the operating results. Again, ended the year with a record year, generating $676 million of operating income for the year. Margins ended the year at 14.2%, so 500 -- or 50 basis point improvement over the prior year, as we talked about our long-term goal there, and ended at 33.3% on the gross margin line. Mark talked about that gross margin. I wanted just to spend a little bit of time because it's actually a good -- an interesting story when you look back over this 9-year period on the gross margins, and all. And that long-cycle business tends to sway that gross margin, especially in the EPD side of that business. And so what you saw back in '08 and '09, as Mark mentioned, on that long-cycle business, we were able to generate high gross margins in that range, in probably the 25% to 30% range, and still getting pretty good margins on those procured items, which can be up to 40% of a long-cycle project. And then you saw that capacity shrink, it got very competitive in the pricing, in the 2010, '11 and flowed into 2012. And the margins on our long cycle was probably in that 10% or below. And then prospectively, what we see is, what we're bidding today and the prospects for the future, we'll generally see that margin in that probably 15% to 20% range on that long-cycle business. So as Mark's indicated, it can have up to a 400 basis points delta in our overall gross margin. But what we've been doing is focusing on the operational excellence side of it, as well as the cost side, to combat that.

Let's look at the -- our performance versus a peer group from an EBITDA standpoint. Obviously, very favorable over this period of time, we're showing. If you look over the last 11, 12 years, we've improved our EBITDA margin line 480 basis points, whereas the industry peer group has declined 150 basis points. And then more recently, over a 6, 7 year period, we've improved that line 600 basis points and the peer group has been 10 basis points down, and all. So this is very favorable from that standpoint. And I think that speaks to the strength of our platform, our focus on that operational efficiency, focus on the cost control, very cost control culture here. Not only cost control, as Tom talked about, at the operating line and gross margin, but also touch on what we're doing at the SG&A line and the targets we've set in place for us from an SG&A standpoint.

Let's talk just briefly about that, and as it relates to both SG&A and margin standpoint. We've got a very disciplined cost management mentality at Flowserve, focused not only on driving operations, but also on the cost control. We've set a target from an SG&A standpoint, by the end of 2015 to hit 18%. We made good progress in 2012. We lowered that rate to 19.2%, I think a 90 basis point improvement over that, or I think it's 19.4% -- excuse me, but it was 90 basis point improvement, year-over-year. And so we're targeting that 18% mark by the end of 2015, and all. So this is something that we're very focused on from that standpoint.

Now let's just turn and talk about our returns versus our peer group. Two metrics here on this slide. One is a metric related to our return on invested capital, as well as return on equity. You can see over this last 6 year period, in both of these criteria, we've exceeded the peer group, and all. So these -- look quickly like, for example, at 2012, our return on invested capital was 13% versus the peer group with 6%. And then our return on equity for 2012 was 24% versus the peer group of 16%. So very good marks from that standpoint.

And next, you look at return on net assets. This is a criteria that we use internally for not only compensation purposes, but also, when we look at investment purposes, and all. And over this period of time, you'll see, we've been very successful over the last number of years, over this 5-year period, of beating not only the industry peer group, but also the high-performance peer group in this. And you'll see in the footnotes, the various companies that make up both of these criteria and all. One of the things that we focus on, is not just the short term, but it's the long term as it relates to return on net assets. So there can be certain criteria where an investment may not give you the best return in a short period of time, over a 6- or 12-month period, but it gives you a good return over a 3- to 5-year period, and that's typically how we look at our investment, both, whether it's returning share -- returning funds to our shareholders, or investing organically or inorganically. We look over a long period of time, over a 3- to 5-year period, what's the best return for the shareholder.

Now let's turn to cash flow. This is an organizational platform, that you've seen and heard from both Mark and Tom, that generates a lot of free cash flow. 2012 was great example of that. Top line on operating cash flow, we generated over $500 million of cash flow. And from a free cash flow standpoint, we generated $381 million and all. And you'll see, significant investment continues to occur in our -- from a capital expenditure standpoint. We're investing organically in the business, well north of our rate of depreciation. This last year, we invested $136 million. And things that Tom mentioned earlier in his -- things like the manufacturing facilities in Brazil and India and in China, investing in the foreign QRCs, and all, and I've got another slide that's going to follow in a couple of slides that will depict just exactly where that capital has been, and all. But is it an organization that will -- that should be able to have a proxy to generate free cash flow close to our net income. And that will allow us then to make strategic decisions on where to invest that, that we either return that capital to shareholders, we invest organically or inorganically. So it's certainly a good opportunity for us down the road.

One of our key focus, and we've talked about this a lot on our conference calls, and I've talked about it over the last 14 months when I've been on the road, meeting with a number of you guys, is what we're doing with working capital. We've got work to do here. We've set internal targets. We've started a process to look at our procedures and our processes and the culture around that. And certainly, we still have work to do. On the inventory side, we set internal goals of increasing our inventory turns to 4x to 4.5x per year. On the accounts receivable side, we set a goal of reducing DSO down to the mid-60 level, say 65 days or so. Every day of DSO is worth about $17 million. So there's still a lot of value within working capital that we can harvest there, and all. So what I'd tell you is, again, that we've brought in some outside resources in the last year. We've identified the process and procedure improvements we want to make, now we're deploying our black belts and green belts around the world, working with Tom's organization to make those improvements. It's not easy. I think the easy part was identifying what the process and procedures changes need to be. Now the hard part is that implementation phase. We think it's going to take 12 to 18 months to implement of that, both on the inventory side and accounts receivable side. It won't be a straight line. It's going to be lumpy. It won't be easy. But we do think so, we'll be able to harvest some of that working capital and turn that into cash for investment purposes.

So how have we deployed capital over the last 6 years? This slide is a good depiction of that. Again, one of the first things we look at is long-term returns. What is the best for the shareholder, from an investment standpoint? Over this period of time, we've returned $1.6 billion to the shareholder, in the form of share repurchases and dividends, over -- about close to $750 million in capital investments organically in the business. And so the way to think about that CapEx is about 2/3 of that goes to growth capital, and about 1/3 is what I'd call maintenance capital and all. So you could see, of that $750 million, a lot of that has gone into the growth of the business and all, around the factories and QRCs and all. We've made strategic investments of about $280 million, and then I'd say that the other 2 items to speak of here are the debt repurchasing and the pension. Going forward, those are pretty minimal going forward, and you'll see that, for example, our pension requirements for the current year are in the $25 million to $30 million range.

So how have we spent that capital that I mentioned, that's roughly $750 million over this period of time? I'd say about 50% to 60% of it has been on expansion and all, mainly in those emerging markets and our aftermarkets in our QRCs. And then we continue, as Tom mentioned, to upgrade our facilities and to invest, from an infrastructure standpoint, such as in IT and other investments.

This is really a good chart that shows you what we've done over this 7-year period and all, including 2013 and our plans, from both a dividend standpoint and a share repurchase standpoint. We have consistently returned cash to our shareholders since 2006, in the form of share repurchases and dividends, starting in 2007. So you can see our dividends and we've, over that period of time, have increased 180%, including this year, up to what was just recently approved by our board, $1.68 per share, from $0.60 per share in 2007. And then we've repurchased about $1.3 billion worth of stock from 2006 into early 2013, and reduced our diluted share count by 15% during that time period.

As Mark mentioned, reviewing our capital structure policy was really one of the first things that we embarked on when I joined the company 14 months ago. I'd say 2012 was really a very good year for us from a capital structure standpoint, as you'll see on this slide and the other slide, of some things we were able to accomplish and all. But it kind of dates back to a month prior to me joining the company, where we announced in December of '11, our policy of returning 40% to 50% of our net earnings to our shareholders in the form of share repurchases and dividends. And then in May 2012, we came out and refined that policy. We basically said 2 or 3 things. One, we wanted to optimize our balance sheet and have a stated debt-to-EBITDA ratio of 1x to 2x from a gross debt standpoint. We also announced at that point, we were going to enter into $1 billion share repurchase program and we kickstarted that with a $300 million ASR. And then we also mentioned about the 2 or 3 things we did not want people to be confused with. One, we are committed to growth, and two, we're committed to maintaining flexibility on our balance sheet, to always be opportunistic for future investments. With that, shortly thereafter, we got -- we received investment grade status from all 3 of the rating agencies.

So what are the some of the things that we completed last year from a capital structure standpoint? We entered into a new credit facility for $1.25 billion, a 5-year facility. We issued $500 million worth of bonds, 10-year bonds at 3.5% interest. We returned nearly $850 million to our shareholders in the form of both share repurchases and dividends. We ended the year at 1.2x leverage, and so we're at the low end of our range, but we did get within that range during the year. And then most recently, last month, our board continued to support us on our capital structure plans. We have a replenished program of $750 million share repurchase program. The board, as I mentioned, approved the $0.16-plus increase in our dividend and also, we have plans to have a 3 for 1 stock split, subject to our shareholder approval. As it relates to that existing -- the $1 billion share repurchase program we talked about last year, we plan to basically complete that by the -- as part of this new $750 million program. But we'll complete that initial phase of that $1 billion by the end of June of this year.

Let's talk briefly about our backlog. I think the story here gets to the -- is really the improvement of the quality of our backlog. We talk a lot about discipline and selectivity. And you've heard me talk about that a lot, you heard Tom talk about that a lot, of the projects we're pursuing and all. So a couple of things to focus on here. You see a nice mix between the long cycle, the short cycle and the aftermarket. But one thing I wanted to clarify here, you'll see in the blue bar towards the bottom, is that the long cycle represents about 30% to 35% of our backlog. But as you'll hear us talk about, it only represents about 20% of our revenues. The reason being is, we have a lot of aftermarket and short-cycle business, that we call book-and-burns, within a given quarter, so it never shows up in the backlog, part of that $2 billion aftermarket franchise that we have. The other thing you see, from a quality standpoint is, is basically we were able to ship a lot of this old legacy, low-margin backlog. We've talked about that the last 3 quarters on our conference calls. It's down to less than 5% of our total backlog today, and we think it'll be out the door by the end of the year. So from that standpoint, the quality of our backlog for future revenues, as we go into 2013, but even more importantly, 2014 and beyond, is very important. And the thing I'll talk about, the backlog and improving the quality, it's not something -- it's not a 1 or 2 quarter system. That's really something where we have to continue to gain momentum. I think we've got 3 or 4 good quarters in us today, where we really focused on that in 2012. And then the key is maintaining that discipline, that selectivity over 8, 12, 16 quarter period, and then you'll see that in the out years, the quality and that margin enhancement occur as a result of our backlog.

Let's just talk briefly about foreign currency. As you saw last year, currency can significantly impact our results. About 2/3 of our revenues is translated back into U.S. dollars for financial reporting purposes and all. And a stronger dollar, versus the prior year results, can impact that significantly, as you've seen in the past. What we do, is basically, we enter into foreign currency hedges on our large contracts to lock in the cash flow margin at the project award date. And then basically, those hedges are then mark-to-marketed each quarter, and that result flows through other income. Now the opposite effect then would occur in revenues once that occurs. So if we're basically hurt at the -- on the other income expense line, when that turns into revenue, then we'll see the reverse impact of that, assuming you kind of have constant foreign currency rates going forward.

Next I'd just like to talk about the balance sheet a little bit. The balance sheet is something that's, from my standpoint, is near and dear to my heart. I think my -- one of my chief jobs as CFO of this company, or any company, is to maintain the integrity of that balance sheet and strength of that balance sheet. You can see where we are today. It continues to be our cornerstone, our foundation at Flowserve, in order to serve us [ph] or do things going forward, from a positive standpoint in the future. As I mentioned earlier, we ended the year at a very modest debt-to-EBITDA ratio of 1.2x, 0.8x on a net basis. And the key for us is maintaining that flexibility, to be opportunistic in the future and all. So it's something we'll always focus on. From that standpoint, is just to do that. We've got very good relationships with our key banks, and that will allow us to have ample access to capital if strategic opportunities come about in the future.

This is a good slide. I'll -- this slide is Slide #80 in the deck, and with this slide I'm going to grow to through it, so if you just turn -- bear with me, and go to Slide 80 in your deck, I don't know if it printed or not, but it basically talks about our EPS seasonality and all, and from that standpoint. And what I wanted to share with you on our seasonality, on -- from the EPS standpoint, is that the first quarter is generally our weakest quarter, and the fourth quarter is generally our best quarter and all. So that's not unusual for our business. Typically, in the fourth quarter, being our strongest quarter, our customers are really pushing to get projects out the door, both from an OE standpoint and an aftermarket standpoint. Whereas, first quarter is generally a quarter where there's a lot of regrouping going on, budgets are getting approved and things of that nature. A couple of things to point out for Q1 of this year, we've got a few headwinds facing us. One is, we've got the devaluation of the Venezuelan currency. It's going to cost us about $0.07 to $0.09. We mentioned that on the quarter, on our earnings call last month. We've also got a -- we had a gain in the prior year that was worth about $0.13, that will not recur in the current year. So just something to focus on there. Last, I'd like to close with 2 slides, on the guidance slides. So let's just review our guidance for the year. Our EPS guidance remains at $9.60 to $10.60 for the year. We're forecasting earnings growth from 4% to 6%. And I'd say the range there, to get to that top end of that range will require some of those long cycle projects that Tom talked about, going from that pre-FEED and FEED in bidding phase into award phase, and us getting some of that revenue flow in the second half of the year and all. I mentioned the Venezuela currency devaluation, as well as our tax rate. You're going to see an uptick in our tax rate, as we mentioned on our fourth quarter call, up to around 30% for the year. Our capital expenditure forecast for the year is $120 million to $130 million, so pretty consistent with what you saw last year, still spending north of our depreciation run rate, still about 65% of that related to growth capital. Pension contribution of $25 million to $30 million, and we're going to return to our shareholders $425 million to $475 million in the form of share repurchases and dividends for the year.

Looking at our longer-term guidance, we talked about this last year and introduced this to you. We talked last year about our margin improvement target of 150 to 250 basis points over a 3-year period. Well, we achieved 1/3 of that this year, and so we've got 2 years left and our goal remains similar to that, 100 to 200 basis points over that 2-year period, and then, with a targeted SG&A ratio of 18% by the end of 2015, so over the next 3 years, to get us to that 18% mark.

So let me close, and then I'll turn it back over to Mark for his final comments and then Q&A. This is a slide that I showed you last year, and I think it shows you a lot about how we think about the business, and what we feel drives shareholder value. It's our disciplined commitment to growth of the top line, and over this 5-year period, we're forecasting an 8% to 10% growth, both organically and inorganic, focusing on margin expansion and operational excellence, that turns into driving earnings growth. That earnings growth turns into free cash flow that then, we can deploy back to our shareholders, or organically or inorganically in the business, and we feel, if we do those things, it drives value for the shareholder. So with that, Mark, I'll turn it over to you for your final comments.

Mark A. Blinn

Thanks, Mike. I appreciate our presenters here today, and I think, if you saw nothing else, the excitement and the energy around the presentations, frankly, when we kind of timed these out, we would've been done, probably about 20 minutes ago. The fact is we weren't, because we like talking about what we're doing, and we've got a lot of opportunity in the business. So let me just summarize, and I'll go through these slides quick because I think I want to get your questions. We talked about growth. We want to grow this business. So we're driving the culture, the One Flowserve culture, we're focused on disciplined top line growth, cost control, right, driving margin opportunities in our business. These are the themes I talked about the beginning, the stability, the margin, the cash flow generation, growth in our business, capital allocation and leveraged earnings.

On the revenue growth side, we continue to look for bolt-on opportunities out there, the type that you've seen over the last couple of years, where we could really leverage our platform. Increase margin opportunity, we want to leave you with that thought, amongst others. We have the opportunity. There's propensity in our business to drive substantial margin improvement by execution, aftermarket growth, improving IPD, all the things that we've been talking about, and focusing on the cost as well.

At the end of the day, what we want to do is take that revenue line that we've seen, which has an organic component and an inorganic component, and driving leverage earnings for our shareholders. And we'll remain committed to returning capital to our shareholders. So stability, margin improvement, cash flow generation, growth, capital allocation, leveraged earnings, value for our shareholders. I'll get back to the investment highlights. Last year proved this thing out. We think we've got opportunity. We're going to continue to push forward. So with that, let's get to your questions.

Question-and-Answer Session

Mark A. Blinn

Scott?

R. Scott Graham - Jefferies & Company, Inc., Research Division

Okay. Just want to make sure I have the math [indiscernible].

Mark A. Blinn

Yes, it did. Yes, it did. We give you what we'd call the EIF data, and then we showed market share gain. Last year, we said about 70% of it, roughly, was going to be organic in our estimates. And about 30% was going to be inorganic. That's been fairly consistent.

R. Scott Graham - Jefferies & Company, Inc., Research Division

So even though your [indiscernible].

Mark A. Blinn

That's right. We are. In terms of the share gain, yes. Well, if you remember, 2 years ago, Scott, we had 9 to 11, and then we looked at some of the EIF data and ratcheted down last year. But part of what we're doing is looking forward and, I think our commentary last year is, we expected some of the pushouts, we'd originally seen them in 2012, and then they pushed out. But the fact is, we got a lot of our revenue growth, particularly x currency, through share gain, aftermarket growth, market penetration. So it exceeded our original expectations, basically, when we were looking 1.5 years ago. But that's -- it's -- there still is an inorganic component to it as well. And as you look in the out years, we're also looking at some of these longer projects as well to come online. So that's going to be component.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Just 2 other.

Mark A. Blinn

Sure.

R. Scott Graham - Jefferies & Company, Inc., Research Division

[indiscernible] .

Mark A. Blinn

I mean, that's a good question. I think, for the benefit of those of the web, who's not hearing what he's saying, look, in the bidding process, what we're seeing in the opportunities is that higher margin relative to legacy. The answer is yes. Legacy reflects the environment we saw in 2010 and 2011, where basically capacity -- the capacity was different. It was available, it was in different hands at that point in time. Some of it was stand-alone capacity. Now it's in other folks' hands. Very competitive environment, pretty much limited to opportunities, they were primarily in the Middle East, where you saw a lot of Korean contractors. Now it's definitely more broad-based. But add to that the discipline, the discipline that we've been able to bring, the fact, we've been -- how we've been focused on that. So it is improved. Now that's not to say that we've seen a return to what I'd call a normal pricing environment. The thing with normal pricing environment is, you stay there, but not forever. You will tend to move above, like we did in 2008, and move below, like we did in 2010 and 2011. But it is, and we believe it will continue to start to normalize. So it is improved. That's part of the quality of the backlog. So it's not only the run-off of the legacy, but it's the discipline, and the opportunities on the horizon are going to be the pricing opportunity, market penetration, complex products that we're offering out in the environment. We are not counting on an OE-type pricing level to get to where we need to be.

R. Scott Graham - Jefferies & Company, Inc., Research Division

So that's what is different [indiscernible] Have you seen, over the last several years [indiscernible] that your [indiscernible] versus competitors [indiscernible] .

Mark A. Blinn

Yes. The question is, have we seen, basically, as -- over the last couple of years, the markets, our portfolio, have we been able to leverage it. Yes. Clearly integrating the rotating equipment side, pumps and seals, has given us substantial leverage in the business, mainly because we've got one rotating equipment specialist, and they're selling and offering -- you think about it, it's a package, increasingly now in the valve side, you're seeing that as well. And I'll tell you, part of it is cultural. When you have 3 business, they kind of compete with each other. You've got Type A leaders and so on and so forth. Bringing that in, we're certainly seeing the leverage, particularly on the oil and gas side. We are very strong in the rotating equipment side in oil and gas, and valves has really been able to capitalize on that as well, to a certain degree, our aftermarket capabilities. Mike?

Unknown Attendee

So I have 2 questions. First on the aftermarket side, can you talk about [indiscernible].

Mark A. Blinn

So the question is, how much opportunity really is on the aftermarket side. We have the attachment rate to our equipment, and as it becomes increasingly complex, that attachment rate, it goes up. Because if you think about it, our real competition is primarily the customer, and second tends to be the local machine shops. The customer prefers the OEMs to support their equipment. And that goes for our competitors as well, in fairness. So a lot of the opportunity for us is going to be in continuing to drive complex equipment into the environment, and that has an attachment rate, and an attachment rate that'll tend to generate more revenue. But the other thing as well is, our customers. Turning that over to us, the Dow Benelux, great example. That basically was an opportunity where they said, "We don't want to do this anymore, we're going to provide it to you." So if we look -- and then, you look just geographically. I think I've talked about this on the calls before, if any of you spent time -- and maybe we'll do one of these down in the Gulf Coast region, if you look down to the Gulf Coast region, we have a well-developed aftermarket infrastructure down there, in terms of the QRCs, service, field techs, experience, it's very deep. I wish we had that in Brazil. We're starting there. I wish we had that in parts of Malaysia as well. In Russia, where we're on just the beginning phases of that. So there's still a lot of opportunity to bring what we know how to do to other regions of the world. Now Tom -- as Tom pointed out, it doesn't happen overnight. You got to get the right leadership in place, you got to build the structure, we've done it in the Middle East. So there is a lot of opportunity on the aftermarket side. And if you think about it, globally, the way we've grown our aftermarket business over the last 10 years, I can assure you, on a net basis, global infrastructure hasn't increased that much. I don't know what the order of magnitude is, but it's been higher than the net infrastructure that's gone in around the world. So we have been penetrating that market further. We still have opportunity. Yes?

David L. Rose - Wedbush Securities Inc., Research Division

David Rose with Wedbush Securities. A couple of questions, Mark. The first, is the comment [indiscernible]

Mark A. Blinn

Okay. Well, one way you get comfortable with our opportunities this year is looking at 2012. That's why we spent time on it. You look, we grew the business, x currency, 5.3%, without -- with just one significant large project in there. So let's start from that standpoint. But I think if your question is taking what Tom talked about, what I'd call pre-backlog activity, as far as we're concerned, and what does that mean? There is some opportunity, because, keep in mind, these are long -- typically long cycle projects and have a percentage of completion, there is an aspect of that. So when you see, in that range there, that Mike put out, if you think about it, some of that at the higher end, does include starting to recognize some of these projects in the back half of the year, in terms of percentage of completion. But also keep in mind, the contribution margin of a large project is not at the level of a contribution margin of the aftermarket side. So as you look across that revenue guidance spectrum, it's not necessarily linear. So there is -- it tends to center towards the middle, in terms of the margin profile. But I think what you need to do is follow our comments on these projects as well. But again, go back and look at 2012, to give you comfort that we're going to be able to grow within that range.

David L. Rose - Wedbush Securities Inc., Research Division

[indiscernible] .

Mark A. Blinn

Okay. So the question for everybody is, in approaching aftermarket, are we willing to take less to drive more revenue growth in everything. Those are the things you always look at in terms of the pricing in the environment, but the point is -- because we're talking about 45% plus gross margins. So it's not like we're looking at our margin point, our gross margin point and making decisions below and above it. These are incremental margins in terms of how we grow it. But it's -- they've been fairly stable, and they -- and I think that the thing to point to is, look at our commentary around 2009 and 2010, where aftermarket margins remained stable. Now, if you look at margins and commission spares, we've talked about that before, different from parts, quick turn. Some of the best -- if you think about it, if you're operating a facility and you're worried about downtime, or you need a seal real quick, you're not worried about if we command 3 or 4 percentage more, in terms of the gross margin. You want to that piece of equipment. So it's about, the really -- the margin's about being able to be responsive, reliable. Some of the things that ISG is doing in terms of delivering improved quality, right? On the margin -- on the margin, that's less of a concern, in terms of growing your business. So it's been -- they've been very stable in terms of the margins and we want to grow the business. And they're -- they contribute to our gross margins. Jim? I'll get over here.

Unknown Attendee

Mark, if you look at [indiscernible] technology of products [indiscernible] are you comfortable with just having [indiscernible]

Mark A. Blinn

I think we are ahead of other folks in terms of the broad product portfolio and the focus on flow control. Yes, I think I made the comment earlier, 8, 9 years ago, it was like, why just flow control, why not something else? Look at what the industry is doing, it's focusing on flow control. So I think our challenge is really making sure we stay in that leadership position. Question is, in terms of when we look at products, is there anything we need to see to keep our leg up? We always look at that. But these aren't game-changers. Keep in mind what we talked about. Our technology, the basic technology's been around for 160 years. So this isn't where you've got the killer app that comes in and displaces anything. But we do continue to look at the markets, the customers' needs, and think about what products do we need to either produce ourselves, innovate ourselves or acquire, to take advantage of what we think is our economic motive [ph] . Broad product portfolio, good penetration in the aftermarket side. So, we're always keeping our eyes on the markets going forward, in terms of what the product needs are. And your question around adjacencies, if we can leverage our end-user strategy and not introduce significant risk to the business, we'll consider it. Charlie? And I'll come forward.

Charles D. Brady - BMO Capital Markets U.S.

Mark, [indiscernible] on the aftermarket growth rate of 7.5%. [indiscernible].

Mark A. Blinn

Yes, so the question is on attachment rate. We talked about this for a number of years, and it's always been very high in the seal business, because the mean time between failures are shorter in the seal business. And also, we really led our end-user strategy with our seal business. So we've moved on. I -- and this is going to be more anecdotal than anything. I think we've probably moved up, maybe from the mid-30s number years ago, to the low 40s in terms of the attachment rate. There's still opportunity, but that opportunity really comes from the customer taking their rotating equipment specialists, which believe it or not, some of them are starting to retire around the world, and bringing that business over to us. Now but it -- that does go back to what Tom talked about, all right? the reason they have that service maintenance capability is downtime is critical. A refinery goes down, it's $1 million a day. So they want to make sure that you have the capabilities and the commitment to deliver to them. So I think, really, the attachment rate opportunity for us, not only on our equipment but existing installed base out there, is going to be working with the customers through, not only how do we improve the existing equipment, how do we take care of it better, how we give you more reliability, and we should -- that should drive the attachment rate up. I don't want to suggest that, like in our seal business, which is over 90%, that the other rotating equipment or valve business can get there. I think there's always going to be an aspect, especially on some more of the commodity products, where we don't participate as much, where you're going to have the local machine shop that can compete on price, and especially if it's not critical equipment, that's always going to be there. A seal face is just that, it's highly engineered. It is very, very critical, and we can respond very quickly if -- these highly engineered pumps you typically pull them in and service them. But some of the more commodity pieces of equipment, you can just go in and get, what I'd call, reasonable efficiency. If you think about it -- I'll go way into this, but if you look around the hydraulics, if it's just pushing water at basic low RPMs, if you get it reasonably right, that's going to be okay. If it's high RPM, or caustic or flammable, you don't want to mess with hydraulics, in terms of the shaft or the impeller or anything like that. So that tends to be where the aftermarket attaches. Yes, sir?

Chase Jacobson - William Blair & Company L.L.C., Research Division

[indiscernible] being the key driver of your ability to outpace the market growth, where are the [indiscernible] come from, if there's anything you'd like give on that? And how concerned are you [indiscernible] than any of your competitors? Your competitors are putting a lot more focus on aftermarket, so how concerned or how comfortable are you that you can beat that [indiscernible].

Mark A. Blinn

Well, I mean, our competitors have been focused on aftermarket for a long time. That -- this is not new. Yes, I mean, you've -- they call it service, whatever it is for -- this isn't new that they're jumping in to it. With what you've seen accomplished, they're probably talking about it more, but it's certainly not new. I think what Tom talked about, it doesn't happen overnight. It's not that you show up and you say, "Here, I'm ready to take care of your equipment." And I think the other thing is, keep in mind that the biggest opportunity for share gain for us is going to be around the customer turning that over to us. I think the other thing to keep in mind is, a broad product portfolio is important, because if you have a niche piece of equipment, think about from the customer standpoint, do I want a niche rotating field tech in from Company A and then a seal one from Company B? And you go on -- and even on the valve side potentially, or can we come in and leverage our capabilities? That's where that existing broad footprint comes into place. It is not that easy to replicate overnight. Look at the human capital side, what we call the boots on the ground that Tom talked about, 1,150 sales engineers, 450 service field techs. You don't just hire them and put them on the ground the next day. It takes a period of time to do that. Now does that mean we need to remain -- I'm not suggesting that we don't keep an eye out on our competitors. We absolutely do. We need to remain vigilant. But we think one of the best opportunities there is to continue to take good care of our customers. But it's, again, I view these things from the standpoint of people getting focused on flow control, focused on the aftermarket, as an endorsement of what we're doing. Our competitors have been out there, they've been out there for a long time. This is not new news. They have been focusing on the aftermarket side. We'll just need to continue to drive it.

Chase Jacobson - William Blair & Company L.L.C., Research Division

The end market, you've talked about your strength, [indiscernible] pipeline. It sounds like a lot of your optimism comes from emerging markets. I think some are -- you can see that they're a bit more optimistic out in North America right now than -- I didn't hear -- notably a lot of commentary [indiscernible], but do you think about what you're seeing here in the states that [indiscernible]?

Mark A. Blinn

When we talked about emerging markets, we talked about some of the long-term drivers. And really, that's the basis for why we started to position our assets there. Tom's commentary was around the shale gas opportunity, which is what you're hearing about. So for us, what does that mean? On the -- of gas, in the gas format, I mean, we don't have gas compressors. So the energy, moving it in gas form, really, where we participate is on the valve side, where you have a line. But when you turn it into liquid format or the liquids, that's where the transportation side, we can really capitalize on. So if you think about our opportunities, it's going to be on the transportation, a lot of talk about transportation. Where is it going to? Then what do you do when you get it there and it's transported? If they do build these terminals, then we have the applications that will -- the cryogenic applications that will help with the liquefaction of that and the ultimate transportation of it. So didn't want to suggest we don't see opportunities in North America, particularly on the -- they've been running refineries and there's MRO opportunity. And my comment earlier around what we're seeing in the Gulf Coast region is engineers are hard to come by. We certainly see there's opportunity there. If you look at -- I mean, we can talk specifically, even in the EMA region, you haven't -- we've seen the impact from that. But a lot of those facilities, be them power or oil and gas or even some of the chemical, are due for a rerate or an upgrade. One thing, time works for us because time means these things need to be either repaired, upgraded or made more efficient. Where -- that's the concept of installed base. And unless -- for us, unless that installed base is shut down, it's an opportunity, continued opportunity. Yes, sir?

Brian K. Langenberg - Langenberg & Company, LLC

Brian Langenberg. Just [indiscernible] that the market is [indiscernible] could you [indiscernible] dollars of market opportunity? [indiscernible] Just kind of bringing that -- is that really [indiscernible] in terms of that funnel and [indiscernible] despite your growth plan. How do you [indiscernible] What is the real bucket of pump, valve and seal opportunity [indiscernible] quite a bit, but I'm just trying to get a sense of what are you really competing for and is that purely incremental to what we're seeing over the last [indiscernible] or does some of the large project work actually crowd out spending [indiscernible] projects we've seen [indiscernible] .

Mark A. Blinn

Wow, lot of questions there. The market opportunity is broad-based, right, Tom? Okay. So it's really broad-based. Those aren't necessarily new projects in there. Our industry couldn't handle that. You saw what happened in 2008. And basically, it looked like -- it certainly was a good thing from a pricing standpoint, but not a good thing necessarily across the board. You saw some EMCs having to split orders because they were worried about supplier capacity. You saw them having to go back and re-budget things. I mean, our industry cannot respond that quickly with capacity. Now one of the things that's important, nobody has asked us about capacity, is part of that LPO/SPO is not only designed to bring standards across the entire organization, it's to basically give us more capacity within the existing 4 walls of our business. And that is so we can move work. The other thing is that we can drive to lower-cost manufacturing. So going back to the visibility of these projects, we see them early on. If you heard our discussion in early 2009, we said, some of these things are going to continue to go forward. And they did in 2009 in our order book. But that's the addressable market. I think the real question is, we know from the long-term drivers, these projects have to go, because there is a need there. It's -- in many instances, it's not optional. You don't hear them canceling, necessarily, a lot of the major refineries. Some of the marginal things they may cancel, especially when you get into some of the niche applications. But I think the issue is, if you saw how the large competitors participate in the market, and that market is getting more complex, that's one of the big opportunities for us. Large competitors, I think, on the EPD side was maybe 7%. So there's opportunity for share gain within that 7%, taking it to something higher. Oftentimes, you see industries, as they start to defragment, for lack of a better term, start to settle in at maybe a 15% rate amongst the large competitors. I saw that in the homebuilding industry, which is very fragmented and very low cost, low barriers to entry. There are high barriers to entry in our business. So I think it's grabbing more of that pie, both the large competitors to do that. There's room for us, right? There's market opportunity, certainly long term. We get visibility into these large projects. And that doesn't crowd out spend necessarily, because keep in mind, some of that short cycle business does attach to some of these large projects as well. And the short cycle also, is going to be -- as capacity rolls and needs to be rerated and upgraded and so on and so forth. That help? Long answer to your question but we got...

Brian K. Langenberg - Langenberg & Company, LLC

[indiscernible] free cash flow conversion is hardly [ph] close to net income, with everything you're doing would be towards [indiscernible].

Michael S. Taff

Good question. I think it's certainly possible that it could happen. I just think, long term, that's more of a proxy for that. And I think it's just how quick we can turn those initiatives that we're working on into kind of harvesting that, that cash flow. It's going to be lumpy. It's not a straight line and all, but I think Q4 was a good example of what the organization can do and all. But I think long term, I think when we look out over a 3- to 5-year period, I like net income as that proxy.

Mark A. Blinn

Yes, sir?

Hi, Tom.

Unknown Attendee

[indiscernible] power generation market [indiscernible] can you just talk about what that [indiscernible] are gas fired [indiscernible]

Mark A. Blinn

Yes, I had this discussion earlier. It's not that the power industry itself is weak. Actually, there's opportunity there. It's just real competitive. And so, we've been selective in terms of how we participate in that power industry. That's the way these things typically go when these sectors start to come back. You saw it in oil and gas. It's very competitive for a period of time, capacity starts to fill up, capacity starts to rationalize, capacity changes hands or whatever it may do, all right? And then, pricing comes back to the levels where you're willing to participate in it. So from our standpoint, it's been more around the disciplined approach we have taken. Underlying that though, some of the things you've talked about. You've seen, particularly in the OECD countries, really broad based around the nuclear, the effect of Fukushima a couple of years ago. The fact is, we believe there's still growth opportunities there because it represents 20% of the world's power supply, and you cannot diversify away from that over a 5-, 10-, 15-year period. And they're still all plants that are going on. What they did though is, they did take a pause. And then everybody's going, we don't want this to happen here. So they went and reviewed all their standards. I can tell you, across the board, they've been doing that to make sure that they have even further refined processes. So that was probably a -- for lack of a better term, relative in the long term scheme of things. And then you have other things that have impacted power, particularly in OECD, around some of the fossil fuels, around the clean air. But the fact is, we've seen activity in the power industry. It's just very competitive. But that will change. That will -- it will work its way through the system. Jamie?

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Question on the margin improvement on your [indiscernible] it sounds like there's [indiscernible].

Mark A. Blinn

Yes. I think in the original, what we talked about 2 years ago, that was predominantly what we think we could do. And if you go back to -- like I didn't want to spend a lot of time on the past, but if you go back to the impact you saw from pricing, peak to trough, and how we've offset that, right? Just normalizing gives us even more leverage. But the fact is, a lot of what we're focused on in terms of margin improvement is the SG&A. And now does getting into 18% require some revenue leverage? It does. So there is an aspect of volume. But most of what we're focused on -- and this is why you saw us so encouraged today, is really what we call within the 4 walls of our business overall. Go ahead.

Unknown Attendee

Maybe on the cash flow measure [indiscernible] can you talk [indiscernible] of visibility is on getting those [indiscernible] potential cash to be [indiscernible].

Mark A. Blinn

Well, I mean, part of it is when these folks set their mind to something, I'm highly confident they're going to get it done. So from my visibility standpoint, I have a lot of confidence in them. I think the other thing to keep in mind is, cash flow is part of the process. It's just at the back end. So when we talked last year about front-end discipline, that's the start of the process, and you work all the way through. Cash flow is going to be probably the lagging indicator, in terms of what Tom and his team and Mike, and really the whole management team, they all participate in this, have been able to accomplish. So we've seen the first stages of that work through. I think the other thing is that there were learnings. I mean, part of this was certainly cultural. I can tell you the other thing that impacted cash flow is, certainly not a bad thing, is the more LCS [ph] you have, that will tend to -- just the lead times on your inventory and things like that. So we've looked at what drives it and found that a lot of the things -- the opportunity for improvement, are within our control, constant theme you've heard. We're building momentum. We've got a lot of opportunity in the 4 walls. But cash is going to tend to be lagging. Although, we really were happy with what we accomplished in 2012. Yes, sir?

Unknown Attendee

[indiscernible] the pricing environment [indiscernible] normalized, healthy now [indiscernible] than normal out there or...

Mark A. Blinn

It's been stable. It's been stable for 1 year, 1-plus years, but it hasn't -- hadn't necessarily started to ramp up. The market pricing hadn't started to ramp up. You need -- these projects need to be released. And once they start to get released, then pricing will tend to move up as related to these overall projects. However, it's been fairly competitive because capacity hasn't been claimed yet. So it's been -- I'd describe it as stable.

Unknown Attendee

[Question Inaudible]

Mark A. Blinn

We don't.

Unknown Attendee

[Question Inaudible]

Mark A. Blinn

Well, I mean, we fundamentally -- you can't save your way to prosperity on the cost line. You have to drive improvement in your business and leverage top line growth. What you saw relative to last year though, keep in mind, is the lagging impact of 2010 and 2011 in our business. So if you were following our business in 2009, 2010, you'd say on the gross margin side, particularly in EPD, "These guys are defying gravity, what's going on?" It wasn't the case. It was just that price backlog that came through in the business. Good news is, that provides us stability overall in our business. But in terms of looking at the gross margins going forward, I mean, part of our margin profile is absolutely that, you heard Tom talk about it. And it's going to be, let's talk about what we can control in our business. Better throughput, better on-time delivery, reducing cost of poor quality, all that sits in the gross margin line. Think about it on the product side, driving more aftermarket, more highly engineered pieces of equipment, where you can command more margin overall in the business. So absolutely, we're focused on improving that margin profile. That's part of the propensity. That's really part -- what we think is going to be the main driver in our margin opportunities looking forward. Yes?

Unknown Attendee

[indiscernible] First, how much is the drive [indiscernible].

Mark A. Blinn

Yes. It is. I mean, that's a great question. I mean do we -- on seals, do we want to make sure we have more in stock in some of our products so we can respond quickly? Absolutely. Because the cost of putting that seal on the shelf, in terms of our balance sheet, relative to the margin we can command on that is, it's a great return. Go back in the way management thinks about our business, is what's our rate of return on every decision we make in our business. But yes, that's certainly an opportunity. But I don't want to sit here and cop out on you and suggest that it's all -- this is all intentional in terms of our working capital. The fact is, we do have work to do. And we're at the beginning phases of it, not only in terms of our process, but in terms of analyzing and working through it. So I don't want to use that as an excuse, but I will tell you, using low-cost sources, our LPO/SPO strategy, making sure that we have the product where it needs to be for quick replacement, quick turn, having the right raw materials so that we can manufacture quickly, yes, that will tend to burden working capital, for the lack of a better term, but it allows us to be responsive to our customers and that will drive share gain, margin improvement, everything else that we're all looking for.

Unknown Attendee

[indiscernible] How much of that is [indiscernible].

Mark A. Blinn

Well, the visibility on the cost side in terms of the SG&A target we've set is based on everything that we've talked to you up at this point. So I mean, a lot of that is, when you bring -- I mean, we're an aggregation of many, many businesses over many, many years. And if you think about that, that creates -- that will create a great entrepreneurial spirit, but it will tend to burden your cost structure a little bit as well. So part of what we see in the cost structure is really driving this culture overall in our business. We do have specific things that we're looking at in terms of doing that. But for the most part, it's -- our visibility on the SG&A target -- now it is a percent of revenue so, as I said, it does depend on some of the growth opportunities, is to really be smart with how we deploy it, evaluate some of the things we're spending on now and the like. On the margin opportunity, a lot of that is going to be on the operational improvement, the pricing. And there's a whole slew of things that we're doing. As Tom talked about, we don't of the time to go all -- through all the things we're looking at in terms of driving our gross margin improvement. But there's quite a few. Charlie?

Charles D. Brady - BMO Capital Markets U.S.

[indiscernible] expansion in your global footprint was quite a highlight [indiscernible] expectation working to [indiscernible] in 3 years. [indiscernible] probably on [ph] a case on where you are on utilization where you felt that need for that.

Mark A. Blinn

The front part of your question, you were referring to Tom's slide?

Charles D. Brady - BMO Capital Markets U.S.

Yes. I guess [indiscernible] .

Mark A. Blinn

No, no.

Thomas L. Pajonas

QRC.

Mark A. Blinn

Yes, those are QRCs. Look, I mean, the Gulf Coast region needs more. If you look up in the tar sands, you saw some activity up there. These are typically, oftentimes, customer-led or market-led opportunities. When we put a QRC in, we don't want to build it and then try to go and recruit work, much like a retail site. On the manufacturing side, when we build those capabilities, typically, we want to make sure we have market support. So -- and the way we do that is, if you think about it in China, our industry is sold into China. But now they want more and more localization, so you got the business there. I think the key for us to remember is, make sure you get the right -- you get the leadership team in place. I'll tell you where we've come up short in terms of adding capacity is where we didn't have the right leadership team, we felt, in those locations. So we've learned and we can do a better job on that. Yes, Bill?

William D. Bremer - Maxim Group LLC, Research Division

Mark, can you touch upon -- let's first go into Europe right now, what you're seeing there in terms of projects. The ones that are going and ones that are sort of being deferred out because of the unrest there. And then touch upon Venezuela, we have a first quarter impact here, we've had it in the past. What are you seeing potentially in the future, given what occurred down there?

Mark A. Blinn

For our business -- the question is about what are we seeing in Europe in terms of projects. Generally, for our business, you haven't seen a lot of greenfield projects in Europe since, I think, 2008. That's mostly a lot of run rate business upgrade, a lot of aftermarket business on existing capacity that they're continuing to run. We've seen -- have we seen a lot of greenfield opportunities in Europe, Tom?

Thomas L. Pajonas

Obviously, you have to segregate out Middle East obviously.

Mark A. Blinn

Yes, go ahead.

Thomas L. Pajonas

I think you have to segregate out the Middle East because obviously, there's opportunities in the Middle East. We are still seeing some good, I would say, aftermarket opportunities in Europe, and especially if you include Russia in there. That was one of the QRCs that we have lined up, because we're starting to see activity now, starting to take place on the Russian side, particularly on the coal-fired power plant side of the business. But as you know, I mean, Europe has been in somewhat of a downturn over the last several months. And we saw the effects on that in our order book, certainly in 2012.

Mark A. Blinn

So in Europe, I think my comment on the last call was we've seen, relative to how we are participating, somewhat stable but at low levels. We'll see what happens. I mean, what -- Cyprus now is the big issue in terms of potential run on the banks, and we'll see, that goes from day to day. Although, that's not going to impact an existing power plant or refinery that's in operation at that point in time, and we're not anticipating a lot of greenfield projects necessarily in Europe. The question on Venezuela, we've been in Venezuela a long time. And it's a good place to do business. We always have to make sure our people are safe, but a lot of them are local, that's there. And also understand that our customer there is fairly sophisticated. I mean, they've got a lot of U.S.-based operations and the like. But from time to time, you see these currency devaluations around the world. But it's good business. If we didn't think we could keep our people safe, if we didn't think we had good reliable customers there, if we didn't think it was good business, we wouldn't participate there. But with opportunities come some of the risks sometimes. Yes, sir?

Unknown Attendee

[Question Inaudible]

Mark A. Blinn

I'm going to be consistent with what I've said. I wish we had more mining -- a bigger mining presence. And so I'll say it in the good times when it's really hot, and I'll say it in times where it's perceived not to be at the levels before. But keep in mind, we're talking relative levels. It's -- we still have the opportunity to grow our business, mainly with our product offering and our presence, and we've got some opportunities to do that. A lot of what we have in the mining side is going to be on the aftermarket, slurry seals and the like, that have a lot to do with ongoing operation. But we, for us, it's a relatively small portion overall in our business. That's an opportunity to be more strategic around how we penetrate that market as opposed to less around marginal market swings of what you're seeing in the mining industry. So you might want to look at it differently. We still think there's opportunity for us in terms of offering the products, because there's some very good competitors, and we feel customers want to see a broader competition base. So I think -- what I want to do is, I just don't want to jump on a bandwagon here, when something's hot, go, "Yes, wish we had more of it." And then when you ask me that question, go, "Well, it's down, I'm glad we're not big in it." That's just not the case. We want to drive growth overall in that industry. We don't have the presence that we would like to have. But you know what, the good news is we've got work to do. That's opportunity. Yes, Jamie?

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Sure. A couple of questions. [indiscernible].

Mark A. Blinn

Well, it depends on upstream. I mean, keep in mind a -- traditionally, upstream has been a land-based well, and so we have the opportunity on the water injection side. But we don't have piping and tubing and the rigs that go in there. So when people talk about upstream, a lot of that necessarily doesn't relate to what we do on the flow control side. Now increasingly -- and the other thing I'll tell you about, oftentimes on upstream is, in terms of installed base, that installed base can move, right? You can move a rig, can move an offshore rig. But we definitely have opportunity because increasingly you're seeing what I'd call flow control processing on the upstream side. So there are some product opportunities that we have, some that we've captured over this period of time. The subsea is an idea, where basically you have a small refinery on the subsea floor that does some preprocessing. Those are going to be -- those are opportunities on the upstream side. Why? Because it is installed base. It's highly engineered. But that's certainly an area of opportunity. It's just how we want to participate overall in that, what our capabilities are going to be and really, what's going to be the long term installed base attribute to that. Increasingly, you're seeing -- if you want to call the tar sands upstream, you're seeing more of our equipment that goes in there. So going back a long time ago, upstream didn't necessarily have a big opportunity for, what I'd call, a flow control company because the well was energized by the reservoir underneath. Basically, you drill it and you pump it up. Now after that, you'd start to move it and produce it. That's certainly the opportunity. I also see, let's break out a term within midstream, the opportunity to move further up the midstream chain, because what you're seeing is they bring in complex flow control processes more to the site, like they've done in the tar sands. So that's an area of focus opportunity that you can see out there. But...

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

[Question Inaudible]

Mark A. Blinn

They didn't have Tom running it. They didn't have Tom running it. I don't mean to be -- it's quite that simple. There is -- I mean, look what Tom's did with the valve business over a period of time. I mean, that's a high-performing business. That should be in, what I would say, is even more a fragmented market. It doesn't have the aftermarket business historically that you had as good MRO, and is very competitive, and you look at our competitors, they're big competitors. Look at how that's performed. That should be your gauge as to when we say, yes, we can get there, we got the guy running it, running the whole business, that got them there and has sustained them through a cycle. It's -- believe me, it's more than that, but it's really kind of that simple.

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Is that like a 10-year [indiscernible].

Mark A. Blinn

Again, it's not -- when you look at supply chain and look, we paid some tuition in this over the last couple of years on the castings and the motor side. It's not a matter of just going to some remote part of the world and go, "You know what? I want to hire you to supply the motors." You really, you have to qualify them. You have to make sure you've got the resources on the ground. That's really what takes time, is you've got to build momentum with that supply base. Some of our suppliers will take 1 year to qualify. And because that casting or that motor is so core to the process, if that casting fails, you got a problem. And frankly, when we talk about the past due backlog that we've talked about for a period of time, a lot of that was -- is we moved to some of the low-cost suppliers, they struggled. They took capacity out in 2010 and 2011. They lost some talent, and they struggled getting back up on their feet, and we are wholly dependent on them. Without their casting, we can't make a pump. Yes, sir?

Unknown Attendee

[indiscernible] It seems like it does provide [indiscernible] market there as well. Do you think that your -- that North America [indiscernible] are you as advantaged [indiscernible].

Mark A. Blinn

Well, I think what our strategic localization and everything like that is, I mean, we've driven into those emerging parts of the world. So not -- but we have the ability to do it easier. I mean, with our broad product portfolio, you think about entering a new market, we feel like we have a leg up. We have a broad product portfolio. We have resources there. We have manufacturing capabilities there. And so we think that certainly gives us an edge when we go into those markets as well. But I think you're point is fair. Yes, a lot of our competitors do have service capabilities in the Gulf Coast region. We are all participating in it. So it's not -- keep in mind, the biggest opportunity, Dow Benelux, you want to talk about EMA? Everybody's, "EMA's dead." Well, we just got a great opportunity in the Dow Benelux. The real opportunity is from our customers. We see that, and our competitors see that as well. And I think the other thing is, if you're sitting there running a facility, and you've got a resource on the ground that can look at the efficiency and the opportunity in your pumps, valves and seals, as opposed to having one for seals, one for pumps, one for valves, what are going to do? Hey, Jim.

Unknown Attendee

[indiscernible] you talk about how [indiscernible].

Mark A. Blinn

I'll let Tom comment on the nuclear, but on the de-sal side, remember, that's -- with the financial crisis, that's actually struggled over the last couple of years. I mean, we've got the CALDER technology because really that's around driving the process. We do start -- we see that start to pick up a little bit. And again, this goes back to, that is going to be one of the primary drivers for fresh potable water around the world. And the technology is there to do it efficiently. It's increasing in terms of its efficiency. You just saw some of these projects pulled back during the crisis on the nuclear side.

Thomas L. Pajonas

I would say the de-sal market is obviously very opportunistic going forward into the future. In the last 12 months, it has been very fairly slow. It tends to react more to the GDP than some of the other markets. But I would say the long-term growth prospects look good, and we've also seen, in the last, I would say, 3 months, an uptick in the proposal activity on the de-sal. Relative to the nuclear, I mean, as Mark mentioned, the accident that happened in Japan put a hold on a lot of the nuclear business until the Chinese came through with the standards. The Chinese have now released one of the plants to go into -- to become a project. So that was good news. We're also seeing some indication in the U.K., increased activities in the nuclear market there. There's been several announcements in the paper recently. The Czech Republic is also looking at nuclear plants. India is now starting to really drive forward there, because the amount of coal-fired capacity they can bring online is probably not going to be enough to service those demands, so now they're looking at nuclear and how to standardize those products there. And the other hotbed, obviously, is Russia also, both on the coal-fired and the nuclear side. So I would say, we're coming back on the nuclear side of the business. It's a slower come back, but I think we have now seen some activity in the last -- even in the last 3 to 4 months.

Mark A. Blinn

We've got time for one more. And sir, you haven't had a chance to ask a question. Go ahead.

Unknown Attendee

Just to follow-up [indiscernible]

Mark A. Blinn

Well, I mean, Keystone's a set of one. That just tends -- one that's in the political limelight right now. The fact is, you go across any of these MLP providers and they're building out infrastructure. If you think about the way MLP works, it has to continue to build to grow, especially on the midstream application. You grow or you die. So they're growing their infrastructure to bring the natural gas to different areas, where people can start to utilize it. So Keystone is just a good example, and that's more around the country making a decision, do we want to ultimately export? How do we think about investment in our infrastructure? But I can tell you, that's probably small in comparison to all the other companies out there that are investing in midstream.

Thanks, guys. We -- you've been with us for a number of years. You've asked a lot of good questions. Hopefully, you got a sense of where we're taking this business. A lot of opportunity, what we call within the 4 walls. From my perspective, it happens with these folks right here. This is a very good team. We're very aligned. It's very efficient. And I can tell you, there's real value in that. So you want to talk about propensity. You can go out and look at our manufacturing facilities and our terrific people around the world and our customers and everything like that, but it starts with these folks here. And we really are driving a culture and we're encouraged. If you took nothing else from this, we are definitely balanced in terms of risk and opportunities around the world, but we think we have a lot of potential, and that we're scratching the surface on some issues, we're well down the road on some. So hopefully, you came away with that. We will look forward to talking to you again here in a month or so. And we'll see you again next year. Thanks.

John E. Roueche

One final comment, as you probably noticed, there was one slide that was missing or didn't print out in the deck in the financial section. I believe they've printed copies of that individual slide for you, that you can grab on your way out. And if for whatever reason, they don't have enough or they don't have them ready, feel free to call Mike Mullin or myself and we'll be happy to send it to you. And again, thank you all for coming out today. We appreciate it.

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