Flowserve Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the FlowServe Corporation Q2 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to end the conference to your speaker today, Jay Roosh, Vice President and Best of Relations Treasurer. Please go ahead, sir.

Thank you, Joelle, and good afternoon, everyone. We appreciate you participating in our conference call today to discuss LOSERV's 2020 second quarter financial results. We also regret the technical issues that the previous third-party call provider had during our previous scheduled time slot this morning. But we do very much appreciate you modifying your schedules to join us now. On the call with me today are Scott Rowe, Float Service President and Chief Executive Officer, and Amy Schwetz, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call up 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 July 31, 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 afternoon, everyone. Thank you for joining today's call. Before discussing our quarter, I first want to acknowledge and thank the flow service associates for their dedication and productivity during this difficult time. The COVID pandemic has required all of us to adapt our daily routines and change our approach to better manage the associated distractions of the virus. While each of our employees has been impacted in some way by the virus, I am especially appreciative of our essential frontline workers who have been physically present in our manufacturing facilities and QRCs each day supporting our customers. Their commitment and hard work was a key driver to delivering our second quarter performance. Amy will cover our financials in detail, but at a high level, ClosedServe delivered adjusted earnings per share of 53 cents, which was 152% sequential improvement in flat year over year. Our second quarter results demonstrate our ability to persevere through the COVID crisis, take swift and material cost reduction actions, and leveraged the great work from the FullServe 2.0 transformation. Our strong earnings were delivered despite a year-over-year revenue decline of 6.6% at $925 million. 2020 has been an unprecedented year thus far with the combination of energy price volatility and the global shutdown due to the COVID pandemic. Throughout March and April, most of our end markets had declined significantly as demand for global liquids plummeted with the worldwide quarantines. Our customers subsequently announced significant cuts in their spending for both new capital projects and ongoing maintenance spending. FlowServe's second quarter bookings reflect this environment. Despite the severe correction, we saw stabilization and growth in certain key demand metrics. For instance, Asia returned to a more normal demand profile, and some end markets like water and specialty chemicals remained reasonably strong throughout the quarter. Additionally, crude oil prices returned to $40 per barrel, as operators, including OPEC Plus, took measures to curb production. Nevertheless, we are preparing for a prolonged downturn and are prepared to take the actions necessary for the long-term health of our business. In terms of COVID-19, we expect the challenges from this pandemic to persist for some time. We have learned a lot in a relatively short period of time that it's helped us adapt to this new normal. Our top priority in our actions has and will be maintaining the health and safety of our people. We continue to follow the safety guidelines from the World Health Organization and Center for Disease Control. Given our global footprint, we continue to experience temporary site closures as COVID cases ebb and flow in various geographies. We have undertaken significant steps to protect our safety of our essential associates as they can continue to advance our business. While many of our associates continue to work from home, we are constantly reviewing and updating our prevention and response procedures as well as our return to work plans in anticipation of their arrival back into the office. At the site level, our ongoing proactive measures have enabled improved productivity despite the pandemic disruptions and work stoppages. Implementation of temperature screening, social distancing measures, staggered shifts, improved testing, and persistent cleaning has helped us to make consistent operational progress throughout the second quarter. As a result, we were able to recoup some of the deferred profit we experienced in the first quarter and reduce the level of these deferrals that occurred in the second quarter. As of today, all of our facilities are open and operational and running close to normal productivity. In response to the challenges in the energy markets and recognizing the ongoing COVID-related uncertainties, we have taken quick and decisive action to reduce our overall cost structure at closed serves. As discussed on our first quarter conference call, we have implemented the steps necessary to drive an expected $100 million from our cost structure this year compared to 2019. This amount is comprised of roughly a half year's benefit from structural cost actions, with the remainder coming from temporary cost avoidance measures. Next year, some of the temporary costs will return, but will be more than offset by a full year's worth of the structural changes we have taken. The actions that we took in the second quarter has us tracking ahead of our $100 million commitment level that we communicated in early May. I am pleased with the way we are executing our phased approach to this crisis. We are successfully operating in the new COVID world and providing support and business continuity for our customers. Additionally, we are taking the necessary steps to manage through the downturn. I am confident we are taking timely actions to successfully manage FlowServe through this period of uncertainty, And with continued transformation progress, our company will emerge as a stronger and more flexible enterprise. FlowServe will be well positioned for the future. Turning now to our markets, we highlighted on our last call that we were preparing for a significant decline in bookings during the second quarter as a result of our customers' delayed infrastructure investment as the current uncertainty has driven a decline in capital commitments, utilization rates, and operating budgets. On a constant currency basis, our second quarter bookings declined 25% year over year, which was at the upper end of our expectations, driven primarily by lower project spending compounded by a difficult comparison given the strong bookings we delivered in the 2019 second quarter. As you might recall, last year's second quarter was our highest quarterly level of bookings since 2015 and included large LNG, pipeline, and concentrated solar power awards totaling over $80 million, in addition to a number of smaller $5 to $10 million oil and gas awards. By contrast, the largest award we received in the second quarter of 2020 was a $7 million nuclear power award. The combination of COVID and energy volatility has clearly impacted our customers' willingness to move forward with projects currently in the feed stage. And we saw a number of projects that we expected to be awarded in the second quarter get pushed out to a later date, and some could potentially get canceled. Original equipment bookings in the quarter were $366 million, down 37.3% constant currency compared to last year's strong second quarter. Aftermarket bookings were $443 million, down 10.7% constant currency. Aftermarket opportunities held up better than original equipment but continued to be challenged as customers limited access to their facilities and delayed scheduled turnarounds and spending. As expected, our oil and gas markets have been the most affected in the current environment. We saw continued delays, scope reductions, and some cancellations of potential projects during the quarter. In total, bookings in the end market were down 41% constant currency year over year, which was also impacted by the challenging compare period. Last year's second quarter bookings had increased by over 20% to $454 million. This quarter, our largest project award in oil and gas was just $5 million. Based on discussions with major customers, we expect that any of the large greenfield and brownfield projects that do progress will most likely be delayed as operators reevaluate their project financial viability in this environment and pursue ways to decrease the project's costs. Any awards that do progress will attract significant competitive attention. On a constant currency basis, chemical bookings were down roughly 18% in the quarter, primarily driven by FPD's 30% decline, while FCD bookings were flat. The quarter included one small award of $3 million in Asia Pacific. Specially chemical demand remains reasonably strong and partially offset the declines we saw in the petrochemical markets. Moving now to power. Our power market saw constant currency bookings down 16%, where FPD's 41% increase, including three nuclear awards totaling $16 million, was more than offset by FPD's 35% decline. General industry bookings were flat in the quarter, where FPD's 11% increase was offset by FPD's 21% decline. FPD's distribution business continued to be impacted by headwinds from the MRO slowdown in North America. Mining was the only market with growth where bookings were up 18%. Finally, representing our smallest market, water bookings decreased 35% in the quarter with no significant awards. However, we do expect continued investment in demand in water markets from desalinization to municipal water. Regionally, declines of 30% in North America and the Middle East and Africa and Europe's 21% decrease more than offset our growth in the Asia Pacific and Latin American markets of 6% and 9% respectively. We expect to see Asia and the Middle East to hold up better than North America and Europe for the remainder of the year. With the general decline that we've seen in our customers' large project capital spending, our sales team have shifted their priority toward higher margin aftermarket and replacement equipment opportunities. Our aftermarket and shorter cycle original equipment markets held up reasonably well in the second quarter. Aftermarket bookings declined 10.7% on a constant currency basis in the second quarter, in line with our internal forecasts, which included reduced spending by our customers and continued headwinds from site access issues at our customer locations. We believe that our CloseServe 2.0 transformation-related commercial intensity program will better position us to support our customers while protecting and defending our global installed base of pumps, valves, and seals. The large project original equipment side of our business has been the most impacted as our customers modify their investment plans. Our commercial team is focused on selectively winning the work that is available to win. We will remain disciplined in our pursuit, and we plan to balance the desire for install-based growth with driving aftermarket opportunities and loading of our manufacturing capacity. Our focus remains on building a quality backlog despite the competitive pricing environment. I am confident in our ability to leverage our distinguished brands our quality products, and superior services to win our share of the available orders. FlowServe's competitive position continues to improve through transformation-led efforts to drive manufacturing excellence and lower production costs. Our lean journey progress has significantly increased throughput and reduced waste in a number of key facilities. We continue to pursue our lean journey, and we expect further results throughout 2020. In addition to lean, we continue to deliver reductions in our product costs through design to value and supply chain initiatives. Finally, as we implement these programs in all of our manufacturing locations, our overall manufacturer strategy, we are freeing up capacity and identifying opportunities to further simplify and consolidate our manufacturing presence. While this will not happen quickly, we do expect to make progress in 2020 on rationalizing our overall roofline. Our transformation program, designed to create a more efficient and flexible operating model, was roughly half complete entering 2020. As a result, we believe we are in a much better position to react to the current market situation. Turning to our margin performance, both adjusted gross and operating margins improved substantially versus Q1, up 130 and 570 basis points, respectively, to 32.1 and 11.6%. versus prior year, adjusted gross margin was down 40 basis points, while adjusted operating margin increased 30 basis points, and reflected the benefit of the cost actions we took in the 2020 second quarter. Looking at our business by segment, FCD's constant currency bookings and sales were both down approximately 19%, where the combination of the pandemic impact and volatile commodity prices was exacerbated by slower MRO activity in North America and further distributor destocking. The quarter's bookings included $16 million of small project nuclear awards, several $3 to $5 million oil and gas awards, primarily in Asia Pacific, and a $3 million chemical award in North America. Strong cost management drove flat adjusted gross margins and limited the adjusted operating margin decrease to 130 basis points, despite the 20% revenue decline. FPD's constant currency bookings decreased 28% with the impact of the pandemic and commodity environment. In 2019, the second quarter represented FPD's highest booking quarter since the segment was created and included significant LNG, oil and gas, and power project bookings totaling over $100 million. Aftermarket orders of $373 million in the 2020 second quarter decreased 12.3% on a constant currency basis. However, our seal aftermarket business performed well despite the COVID challenges. FPD's revenue was flat with prior year, driven by original equipment growth of 11.4%. Adjusted operating margins increased 180 basis points, where absorption benefits offset a 400 basis point shift towards original equipment and aggressive cost actions drove a $17 million decrease in adjusted SG&A. As a percentage of sales, FPD's adjusted SG&A decreased 250 basis points to 19.5%. Let me now turn the call over to Amy to cover our financial results in greater detail before I return to provide our outlook for the second half.