Flowserve Corporation

Welcome to the first quarter 2020 earnings call. My name is Sylvia, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Jay Rouge, Vice President, Treasurer and Investor Relations. Sir, you may begin.

Thank you, Sylvia, and good morning, everyone. We appreciate you participating in our conference call today to discuss FloatServe's first quarter 2020 financial results. Joining me this morning are Scott Rowe, FloatServe's President and Chief Executive Officer, and Amy Schwetz, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open up the call for questions. And as a reminder, this event is being webcast and an audio replay will be available. Please also note that our earnings materials do, and this call will, include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations, and other information available to management as of May 8, 2020, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully review our safe harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results, both of which are included in our press release and earnings presentation and are available on our website at flowserv.com in the investor relations section. I would now like to turn the call over to Scott Rowe, Flowserv's president and chief executive officer, for his prepared comments.

Thanks, Jay, and good morning, everyone. Thank you for joining today's call. First, I hope that everyone is healthy and taking the necessary precautions to to stay safe and well. The world has dramatically changed in the two and a half months since our last call. In February, we talked about the virus impacting our China and Asian operations. Since then, the coronavirus has spread through the globe, altering the way hundreds of millions of people around the world work, interact with each other, and live their day-to-day lives. This has upended the global economy, and with very few people now driving or flying, the demand for oil, natural gas, and related transportation fuels has plummeted to historic lows. The magnitude of this unprecedented crisis creates a challenging backdrop for FlowServe. However, we enter this period with a strong backlog, over a billion dollars of liquidity, no debt maturities until 2022, a trusted brand, great products and services, and most of all, outstanding people. Over our 230-year history, FlowServe has managed through multiple market downturns. While every crisis brings renewed challenges, I have absolute confidence that by leveraging the collective experience of our team and the progress we have made in the FlowServe 2.0 transformation program, we will come out of this situation a better and stronger company. We're using a four-phased approach to position FlowServe for success throughout the COVID-19 crisis and the market downturn. COVID-19 crisis management includes focusing on the safety of our people, delivering customer support in the continuity of our business, which is about restoring our capabilities, planning and executing for the downturn, and finally, positioning FlowServe to differentiate in the future. FlowServe has remained open for business throughout most of this pandemic, as the vast majority of our sites and facilities are considered essential to support the global energy, chemical, power, and water infrastructure complex. This is a responsibility that we don't take lightly, and we have done so by prioritizing the health and safety of our employees, customers, and suppliers. I want to express my sincere appreciation to our associates for their extraordinary efforts during these challenging and unprecedented times, and particularly to those employees who are on the front lines and have enabled FlowServe to continue supporting our customers. Additionally, I could not be more pleased with the efforts of our company to support our local communities. FlowServe is providing equipment to improve sanitation within hospitals, collaborating to accelerate the development and manufacturing of low-cost ventilators, and providing support to hospitals and caregivers around the world. We are doing everything we can to provide assistance during this critical time. We have been closely monitoring the COVID-19 situation since the middle of January to best position FlowServe to respond to the pandemic. We stood up crisis teams in Asia, Europe, and the Americas and leveraged our global experience as the virus spread around the world. Our leadership team is met daily on the topic to coordinate how best to protect our associates and continue to support our customers. Our emergency response teams have been operating in compliance with and on the advice from local governments as well as following CDC and World Health Organization recommendations. Furthermore, we implemented processes around personal protective equipment, appropriate social distancing through staggering of shifts, and temperature checks for all on-site associates. Where there has been a risk of infection, we have immediately begun contact tracing, quarantine procedures, and temporary site closures for cleaning. Despite all of these efforts, we have faced a significant level of disruption as COVID-19 spread around the world, causing temporary facility closures and impacting our employees at those sites. We have associates that are directly impacted by the virus, and we operate in several of the hot spots around the world, like Milan, Madrid, and India. In terms of numbers, over 90 of our facilities and offices have experienced periods of temporary closure through May 6, impacting the work routine of over 8,000 associates. In most cases, the closures were limited to one to two days, although in some cases, like Italy, Spain, China, Argentina, and India, we have experienced long periods of closure. Nevertheless, virus-related challenges delayed roughly $74 million of revenue in the first quarter. Amy will get into more of the financial impact, but clearly, idle facilities materially impacted our results. As of today, we are open for business, but we still have three significant manufacturing facilities in India that that have only partial staffing to comply with local regulations. We have made significant progress over the last three weeks and we now have approximately 95% of our operating capacity open and are operating around 80% productivity. We still expect to deliver roughly 88% of our $2.2 billion backlog that we began 2020 with during the year. Assuming the impact from the pandemic doesn't worsen and our suppliers remain stable. In the face of this challenge and disruption, we expanded our efforts to best serve our customers, working closely with them to ensure business continuity and prioritizing critical shipments. I'm extremely proud of our teams and the positive feedback received from our customers as we supported their operations. There are too many instances to share, but examples include expedited delivery of a critical nuclear valve to prevent power disruption and accelerating vacuum pump shipments for sterilization applications in healthcare and pharmaceutical industries. Our supply chain team is doing a great job managing potential delays, navigating logistics risks, and shifting to alternative vendors to maintain continuity of supply. We've established a number of hit teams and workflow processes to minimize lead times and provide assurance of materials. Presently, India is the most challenged location for our supply chain. We're resourced to roughly $150 million a year. primarily for local Indian operations and North American valve facilities. Our Indian suppliers are facing the same manpower restrictions that we are facing. Our team is assessing local viable options, but critical POs are being moved to alternative regions and secondary suppliers. We expect the supply chain disruption to continue to improve through the second quarter. Shifting to our first quarter financial results, the COVID-19 disruption in the quarter had a significant impact to our financials. As a result of some discrete non-cash charges, our reported EPS was breakeven. On an adjusted basis, our earnings were 21 cents per share. Both results included approximately 19 cents impact from the COVID-19 disruption related to delayed shipments and the cost associated with closed facilities. Constant currency revenue grew modestly while bookings declined 6.6% on a constant currency basis as our customers reacted to the crisis and access to their facilities became more limited for our service technicians. Our free cash flow improved 8% compared to a year ago on strong working capital performance. Turning to our segments, FCD's constant currency bookings and sales were both down approximately 6% and continued to be impacted by slower MRO activity in North America and Europe. The quarter's bookings included several $3 to $7 million awards across power, chemical, and defense markets. Adjusted operating margins declined 590 basis points to 10.1%, reflecting the revenue mix shift towards lower margin project work away from shorter cycle MRO, as well as the impact of COVID-19 disruptions to operations. FPD's constant currency bookings decreased 6.7%, Oil and gas project activity continued in the first quarter, including seven awards totaling over $90 million across Asia, the Middle East, and North America. Aftermarket orders of $426 million increased 1% on a constant currency basis as the seal aftermarket business performed well despite the COVID-19 challenges. Revenue increased 6.2% constant currency, driven by original equipment growth of 25%. Adjusted operating margins declined 300 basis points, which was driven by a combination of pandemic-related impacts in the 600 basis point mixed shift towards original equipment from aftermarket. FPD entered 2020 with a strong project backlog following 2019's original equipment order growth of over 20%. Turning to our consolidated bookings and served in markets, First quarter bookings were $977 million, producing a book-to-bill of 1.09. However, this amount was down 6.6% year-over-year on a constant currency basis. In March, we did have the highest level of monthly bookings for the quarter, as is typically the case, but the amount was muted by global crisis. The backlog of $2.2 billion grew sequentially 3.8% on a constant currency basis. To date, we have had one small cancellation within our backlog, which was a North American chemical project that has been delayed and descoped. We have not had any material cancellations from our backlog at this time. We have had a few discussions with mainly upstream oil and gas customers in the Americas about potentially placing certain orders on hold or canceling them, although the amounts involved would not represent a material portion of our backlog. Original equipment bookings in the quarter were $475 million, down at 14.6% compared to last year's first quarter. Aftermarket bookings in the first quarter were $502 million, flat to last year's bookings. While aftermarket bookings were generally good, customer site access limitations as well as delays in scheduled turnarounds impacted our aftermarket bookings this quarter, as a significant amount of work has been delayed until the third and fourth quarters when operators can plan and execute on-site projects and services. I would also note that while our bookings discussions with the financial community tend to lean toward big projects, traditionally 85% to 95% of our annual bookings are tied to existing operating facilities, are installed based in our customers' aftermarket and MRO budgets, where we expect to see more stability. Turning to our served-in markets and starting with oil and gas, First quarter bookings decreased 13% year-over-year on a constant currency basis, driven by FPD's 14% and FCD's 8% declines. The quarter included eight awards in the $5 to $40 million range, totaling $90 million. The first quarter bookings included multiple pump package awards to support cleaner fuel production, where we continue to benefit from emission regulation changes. On a constant currency basis, chemical bookings were down roughly 13% in the quarter, primarily driven to FCD's 21% decline. The quarter included two smaller awards totaling $10 million in Europe and Asia Pacific. In 2019, the oil and gas and chemical markets accounted for roughly 60% of our bookings. Our large customers in these markets are integrated majors, national oil companies, and the big global chemical producers. Our exposure with them is heavily weighted towards the downstream markets and their fixed infrastructure. While we expect this business to be impacted by the current situation, we believe these companies will continue to invest to keep their operations safe and productive, and we have no doubt this group of companies will be there for the long run. Only a small portion, about 5%, of our oil and gas exposure serves the upstream markets where the most severe cuts and concerns are expected. Moving now to power, our power markets saw constant currency bookings down 1%, where FPD's 3% increase, including concentrated solar power and nuclear awards, was offset by FPD's 4% decrease. While gender industries, and specifically distribution, continue to face headwinds from the MRO slowdown in North America, first quarter bookings increased 7% year over year, driven by FPD's 10% increase, including growth in mining and pulp and paper markets. Finally, representing our smallest market, water bookings decreased 9% in the quarter with no significant awards. Regionally, we saw growth in Europe and Latin America of 10% and 11% respectively, more than offsetting this growth were declines in North America, the Middle East, and Africa and Asia Pacific of 15%, 20%, and 4% respectively. I'll return shortly to discuss our path forward in Outlook, but let me now turn the call over to Amy to cover our financial results in greater detail. Amy has been with us for almost three months, and I'm pleased to have her on the team and appreciate her early contributions during this critical time. Amy?