Flowserve Corporation

Ladies and gentlemen, thank you for standing by. And welcome to the FlowServe Corporation Q4 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference to your speaker today, Jay Ruch, Vice President, Treasurer, and Investor Relations. Please go ahead, sir.

Thank you, Joelle, and good morning, everyone. We appreciate you participating in our conference call today to discuss FlowServe's fourth quarter and full year 2020 financial results. On the call with me this morning are Scott Rowe, FlowServe's President and Chief Executive Officer, and Amy Schwetz, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call for questions. As a reminder, this event is being webcast and an audio replay will be available. Please also note that our earnings materials due in 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 February 24, 2021. 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 accessible 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. Great. Thank you, Jay, and good morning, everyone.

Thank you for joining our fourth quarter earnings call. We had a strong finish to 2020, and I want to start by thanking the FlowServe associates, especially our frontline workers, for their continued dedication and hard work during this unprecedented time. Despite all the challenges throughout the year, we continued to serve our customers and provide the essential flow control equipment and services needed to keep the world running. At FlowServe, safety is a core value, and in today's environment, that means not only keeping people safe operationally, but also protecting them against the spread of COVID-19. I'm proud to highlight that our associates achieved record safety performance in 2020, including in our COVID-related protocols. Additionally, I want to thank our customers. They trusted FlowServe during a very challenging year. I found over my career that working through a crisis alongside our customers, being there for them each step of the way truly solidifies long-term relationships. As we look to the future, we believe our strong customer relationships will position us well to capture significant opportunities when the pace of the industry investment returns. From the beginning of this pandemic-driven environment, our financial priorities centered on improving our free cash flow conversion, managing our through-cycle return on invested capital, and delivering superior decremental margin performance. During the remainder of our prepared comments, I think you'll hear that we successfully controlled what we could during this unprecedented period and are now focused forward. The progress of FlowServe 2.0, a committed leadership team, and the support of our associates has enabled our company to manage the current market environment better than in the past. Our efforts in 2020 allowed us to generate over $250 million of free cash flow. We maximized our margin potential by taking out in excess of $100 million from our cost structure, and we continue to position FlowServe for the future. Turning now to the 2020 fourth quarter. Amy will cover our financials in detail, but let me first say that we are proud of our fourth quarter results and our associates' dedicated effort to finish the year strong. The decisive structural cost actions we took in mid-2020 are evident in our fourth quarter financials, which drove 14% decremental margins. As you'll recall, a key desired outcome of our transformation strategy was to create an operating model that could react quickly to a downturn, and certainly COVID-19 had that impact to our end markets. In the face of the pandemic, we reprioritized the timing of our Closer of 2.0 initiatives to accelerate the cost aspects of the program. We are pleased that in the final three quarters in 2020, each had adjusted SG&A levels below $200 million. As a result of the quick and significant actions, we also delivered meaningful improvements in our decremental margin performance versus prior cycles. Shifting to working capital and cash flow progress. We made strong sequential improvement with an $84 million reduction in primary working capital this quarter, which generated impressive fourth quarter and full year cash flow conversions, both of which exceeded 100% of adjusted net income. We remain confident that our transformation-driven process improvements have us on the right path to further drive working capital out of the business and to improve our overall operating cash flow. quarter bookings of $825 million were not a return to pre-COVID levels, the sequential quarterly growth of 2.4% increases our confidence that there isn't another step down and that we are at or near a foundational level that should represent a starting point for bookings growth into 2021. Fourth quarter consolidated aftermarket activity remained relatively stable sequentially with bookings down 1.1% to $420 million. Fourth and were down 18.7% versus prior year. Original equipment bookings in the quarter were $405 million, down 24.4% versus prior year, and up about 6% sequentially. Looking at bookings in greater detail, as you may recall, the 2019 fourth quarter included strong oil and gas project activity in Asia Pacific, as well as a number of smaller project awards in North America and Europe, which together exceeded $120 million of bookings. Comparatively, the largest award received in the 2020 fourth quarter was $15 million. When this is added to our other small to medium-sized project awards across diverse end markets, this quarter's project awards represented only $15 million, which highlights the challenges of the current market environment. Fourth quarter bookings were further impacted by the absence of normal end-of-year MRO spending increases. with operators and distributors continuing to preserve cash and manage inventory levels rather than spend their remaining budgets. With consistent bookings levels for the last three quarters, we are increasingly confident that we are at a foundational level and are optimistic that we may see a return to bookings growth in 2021. and we would expect it to be led by our aftermarket and MRO markets, as well as by smaller project activity. I would also note that our year-end backlog of $1.9 billion remains solid, and we saw only modest cancellations in 2020 of less than $50 million in total. Let me now turn to our segment-level performance in the fourth quarter. FPD's bookings decreased 25% year-over-year, while sales decreased only 6% as we continued to execute on its strong backlog. The bookings decline was primarily driven by original equipment, which was down 29%, while aftermarket bookings were modestly better at a decline of 23%. Fourth quarter general industries and oil and gas bookings were down 53% and 39% respectively year over year. Water and gas project awards declined roughly $60 million versus prior year. Chemical and power markets contributed growth of roughly 10%, while water bookings grew over 40%, including two project awards totaling $8 million. FCD bookings and sales were down 13.5% and 12% respectfully. Oil and gas and power markets were the primary drivers, down 22% and 27% respectively, while chemical bookings grew a modest 3%. General industry bookings were down 9% as challenges continue across its distribution channel. From an adjusted operating margin perspective, aggressive cost actions by both segments significantly mitigated adjusted growth margin declines of 260 and 200 basis points for FPD and FCD, respectively. FPD reduced its adjusted SG&A as a percentage of sales by 140 basis points, resulting in 110 basis point decline and adjusted operating margin to 13.1%. FPD reduced its adjusted SG&A as a percentage of sales by 200 basis points, resulting in an 80 basis point decline and adjusted operating margin to 17.9%. Turning now to our served-in markets. Oil and gas markets, our largest exposure, continue to be most impacted by COVID-related declines in energy demand. Fourth quarter bookings declined 35% year-over-year, but showed encouraging sequential improvement of 20%. Again, the 2019 fourth quarter presented a challenging compare figure due to FPD's strong project environment at the time, which included several larger awards related to clean fuels upgrade activity, primarily in Asia, contributing over $100 million of projects awards. This quarter, our largest oil and gas project award was $15 million, and when combined with smaller project awards, it totaled less than $50 million. For the full year, oil and gas bookings were down 33%. Despite the significant volatility in commodity pricing in 2020 and the related impact it had on customer spending patterns, today's crude oil price is actually above where it was a year ago. Assuming it remains at these levels, it should help to build industry confidence that the worst may be behind us. Strong fourth quarter chemical bookings growth of 8% did not include any material project awards, but benefited from a favorable compare as prior year Q4 bookings were the lowest level of 2019. Sequentially, chemical bookings increased over 30% driven by specialty chemical customers and increased MRO spend. We remain optimistic going forward with regard to our chemical markets, as pent-up demand continues to grow with petrochemical project delays and the specialty chemical markets are looking reasonably strong. Moving to power. While this market remains challenged, similar to prior cycles, it has demonstrated more stability than oil and gas in chemical markets. Fourth quarter and year-to-date bookings are down 4% and 8% respectfully. The quarter includes a few small nuclear awards in Asia, totaling $11 million, and while 2019's fourth quarter included one project of $12 million for a concentrated solar power plant in the Middle East. As the energy transition progresses and electricity increases as a percentage of total global energy source, there will be a need for more power supply. While the fuel of choice varies significantly between countries and regions, we believe the end market will need to increase capacity and add gigawatts to the grid, presenting good opportunities for closed-serve globally. The general industries market, which includes a significant amount offered through distributors, has been severely impacted since early 2019, including the decline in North American MRO activity. While 2020 Q4 bookings were down 39%, the full year has shown some signs of resiliency, with bookings down just 5%. The quarter included one mining project of $6 million, while there were no material project awards in Q4 2019. The upside to the distributor destocking phenomenon that we've seen for the past two years is that it should not continue for much longer. Inventories at distributors are at extremely low levels. We expect distributors to return to a just-in-time ordering process first, and then we could begin to see moderate to large stocking orders. We believe this is only a matter of when and not if. Finally, representing our smallest market, water bookings increased $10 million, or 38%. Two fourth-quarter project awards totaled $8 million and included a Middle East desalination project and a North American municipal award. Both are areas where we expect continued investment opportunities. While it's the smallest of our identified end markets, we are fairly bullish on water going forward. We believe we have the products, knowledge, and experience to increase our presence in water. and it will be a focus area of ours moving forward. Turning to our bookings from a regional perspective, our best performing markets on a relative basis were Asia Pacific and Latin America, with Q4 bookings down 6% and 15% respectively, and both down just mid-single digits for the full year. North America, our largest market, and perhaps the one most impacted by COVID, was down roughly 25% for both the quarter and the full year. The Middle East, our strongest performing region in 2019, saw its bookings decline 37% for the full year 2020 as the year's volatile crude oil prices limited and delayed customer spending. Finally, Q4 and full-year bookings in Europe were down 21% and 13% respectively. We continue to expect growth to return to infrastructure investment as all regions begin to experience increased energy demand similar to Asia's recovery, as the vaccine rollout progresses and transportation and mobility levels move closer to pre-pandemic levels. 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 2021 and beyond.