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.

Thanks, Scott, and good morning, everyone. In the fourth quarter, we delivered resilient performance in what continues to be a challenging operating environment. Our adjusted earnings per share for the quarter was 53 cents, bringing our full-year adjusted EPS to $1.74. Fourth quarter reported EPS was 43 cents and included a net 10 cents of adjusted items. The items were comprised of 11 cents of realignment and transformation expenses and 9 cents of below-the-line currency impacts, which were partially offset by eliminating 10 cents of a reported benefit primarily related to a discrete tax item from a reduction in foreign tax liabilities. Fourth quarter sales of $985 million were down 7.8% versus the prior year, but increased sequentially by 6.6%, reflecting our normal seasonality. Fourth quarter original equipment sales decreased 7.1%, driven primarily by FCD's 14% decline, while FPD's revenues were relatively flat, reflecting solid execution on a strong OE backlog entering 2020. Aftermarket revenues decreased 8.4%, including FPD and FCD declines of 9% and 5% respectively. For full year 2020, Revenues decreased 5.4% to $3.7 billion, again primarily due to aftermarket, which was down 7.6%, with both segments approximately in that range. OE sales decreased just 3.1% as FPD's strong 10% increase was offset by FCD's 16% decline. Turning now to margins. Fourth quarter adjusted gross margin decreased 250 basis points to 30.7%, including declines of 260 and 280 basis points at SPD and FCD respectively. While we continue to manage and limit COVID-related disruptions to our operations, the decline in margins does reflect the ongoing impact on productivity and the associated costs incurred due to the pandemic. Additionally, we experienced increased underabsorption in certain facilities and were also impacted by FPD's 200 basis point mix shift towards lower margin OE work. For the full year, adjusted gross margins decreased 200 basis points to 31.2%, with both segments down 190 basis points. On a reported basis, both the fourth quarter and full year gross margins decreased 270 basis points to 30%. In addition to COVID disruption, absorption and mix headwinds, the full year and fourth quarter were impacted by increased realignment spending of approximately $30 million and $2 million, respectively, to support our structural cost reduction efforts and to better align the business with current volume levels. Fourth quarter adjusted SG&A decreased $40 million to $193 million versus prior year and was flat sequentially. As a percent of sales, fourth quarter adjusted SG&A declined 220 basis points versus last year and declined 130 basis points sequentially to 19.6%. This solid performance reflected our continued tight cost controls and the cost actions we took in mid-2020. On a reported basis, the fourth quarter's SG&A decreased $45 million, which included a $5 million decline in adjusted items. On a full-year basis, adjusted SG&A declined $82 million or 90 basis points to 21.7% of sales. Reported SG&A expense declined $35 million in 2020 with our timely cost actions more than offsetting the $47 million increase in adjusted items. Our fourth quarter adjusted operating margin decreased a modest 30 basis points versus prior year to 11.3%. as our decisive cost actions limited the impact of the $83 million revenue decline and delivered an adjusted decremental margin of approximately 14%. As we noted on our third quarter call, we expected to see strong sequential improvement from FCD, and they delivered. With improved execution, cost actions, and mixed benefits, SCD drove a 570 basis point sequential improvement in adjusted operating margin to 17.9%. SPD's Q4 adjusted operating margin was 13.1%, a decline of 110 basis points year over year. Reported fourth quarter operating margin decreased 10 points year over year to 9.7%, while for all of 2020, Reported operating margin decreased 310 basis points to 6.7%, primarily driven by increased realignment spend of approximately $74 million. Our adjusted tax rate for 2020 was 23%, slightly below our initial guidance range, primarily due to the realization of certain available tax credits and the geographic mix of earnings across our portfolio. Compared to 2015, when our adjusted tax rate was over 29%, we have worked strategically to reduce the annual tax rate while fully complying with all the relevant laws. Certainly, U.S. tax reform a few years back helped modestly, but with roughly two-thirds of our business in international markets, it isn't the main reason for our progress. We are pleased with the progress of our tax team and business leaders in pursuing tax-efficient strategies and keeping the full income statement in mind when making business decisions. Our work isn't done, and barring any major changes in tax law, we expect to continue our work to lower the effective tax rate over time. Turning to cash and liquidity. Our seasonally strong fourth quarter generated cash flow from operations of $196 million, which included $173 million of cash flow from working capital. This performance drove our full-year free cash flow to over $250 million and produced a cash balance of nearly $1.1 billion. Our full-year free cash flow conversions represented approximately 111% of our adjusted earnings and approximately 200% of our reported earnings. We are pleased with the fourth quarter's 150 basis points sequential improvement in primary working capital as a percent of sales at 28.5%. However, there are still significant opportunities to drive further improvement. With our intense inventory management and strong Q4 shipments, we reduced inventory, including contract assets and liabilities, by over $75 million versus the third quarter. That being said, inventory levels are still elevated as we continue to deliver on strong OE backlog we built in 2019, and by a few of our larger facilities that experienced shipping and manufacturing delays, due primarily to COVID-related disruptions. Looking at our accounts receivable DSO and inventory turns, we are pleased to be able to maintain relatively flat measures to prior year given the COVID-driven disruptions to our and our customers' processes. We will continue our pursuit of driving DSO below 70 days as we further centralize and consolidate our global collections management function and related systems. Inventory reductions and improved terms will be driven by operational execution and increased utilization of our transformation-driven integrated business planning tools and resources. Heading into 2021, we expect to continue the momentum we built in the fourth quarter related to working capital through order to cash, supply chain, and inventory management transformation initiatives. As a result, we currently expect that we will again exceed 100% free cash flow conversion in 2021. Turning to our year-end liquidity position, our combined cash and available credit facility capacity totaled over $1.8 billion, representing a $174 million increase over the 2020 third quarter. Our year-end net debt position of approximately $630 million is down about $75 million year-over-year and almost a quarter of a billion dollars since 2017. In fact, our net debt reached its lowest year-end level since 2012. As you may recall, last fall we issued $500 million of 10-year senior notes in advance of upcoming maturities in 2022 and 2023. At the time of the offering, we also tendered for $191 million of our outstanding Euronotes that mature in 2022. Last week, we announced our plan to call the remaining $410 million of these securities with a completion date before the end of the first quarter. In addition to the Euronotes previously tendered, other significant cash uses in 2020 included the return of $136 million to shareholders, through dividends and share repurchases, $57 million in capital expenditures, and the funding of our structural cost-out actions, as well as in our other realignment and transformation programs. Turning now to our 2021 outlook, the ranges we provided reflect the late-cycle nature of our business, where we are buffered at the start of a downturn by our previously built backlog. But declines in bookings impact us at a later date. Nonetheless, we are managing the business through the cycle with our cash conversion, management of decremental margins, and positioning for through-cycle returns on invested capital. The actions we take today will better position FlowServe as growth returns with stronger incremental margins and enhanced return profile. For 2021, we are targeting full-year adjusted EPS of $1.30 to $1.55. on expected revenue decrease of 4% to 7%, including a modest FX tailwind in the current exchange rate environment. The adjusted EPS target range excludes expected realignment expenses of approximately $25 million, as well as below-the-line foreign currency effects and the impact of other potential discrete items which may occur during the year, such as acquisitions, divestitures, debt retirement premiums, special initiatives, tax reform laws, et cetera. Based on the known realignment spending, our reported EPS range at the midpoint is about 90% of our adjusted EPS range average, as FlowServe remains committed to our focus of improving the quality of our earnings. As such, after three years of our FlowServe 2.0 transformation efforts, we move into 2021 confident that the elements of the program are now embedded in our operations and functional teams. The remaining expenses related to the transformation will be included in both our reported and adjusted EPS going forward. In 2021, the impact of this change in methodology is expected to reduce adjusted EPS by approximately five cents. Both the reported and adjusted EPS target range also assume current foreign currency rates and commodity prices. Our expectations are based on 2020 year-end backlog anticipated bookings level, and largely the continuation of current market conditions. We expect net interest expense in the range of $55 to $60 million and adjusted tax rate between 22% and 24%. In terms of phasing, as many of you know, flow serves results and cash generation are normally second-half weighted, and we expect that to continue in 2021, although somewhat more balanced than in prior years. Finally, major planned cash usages this year include retiring the remaining outstanding Euronotes and expectations to return over $100 million to shareholders through dividends and potential share repurchases. We also intend to invest in our business as we expect to return to the growth aspects of our GlowServe 2.0 program. We expect capital expenditures in the $70 to $80 million range which includes spending for enterprise-wide IT systems to further consolidate our ERP platforms and support our transformation-driven productivity improvement. Let me now return the call over to Scott.

Great. Thank you, Amy. Let me wrap up with some additional color on our FlowServe 2.0 transformation progress, our long-term targets, and comments on our outlook for 2021. Despite the disruption to our end markets in 2020, we made significant progress institutionalizing the transformations playbook and processes deep into our organization and functions. We are striving to make this a part of our everyday business processes. Our 2020 results reflected our progress toward building a business model to better weather the cycles in our end markets. Our goal is to substantially complete the original transformation program by the end of 2021, but ensure that the process and the discipline remain embedded in how we run the business. In 2021, we'll return our focus to the growth and optimization phases of the transformation, where we complete the operational excellence and productivity improvement initiatives. We intend to drive growth with an increased focus on our customer experience and development of innovative products and services, and in-market diversification, including increased participation in energy transition initiatives that are gaining investment dollars. A key component to our transformation growth initiatives involves staying market-led and generating consistent innovation. Our marketing and technology team made significant progress in 2020, developing new and innovative products and services. During the year, we had 21 commercial launches, including three new products, six products that completed our design-to-value process, and the remaining launches were product extensions, feature updates, or portfolio upgrades. I am excited about our product pipeline and the opportunities that technology and innovation can bring to FlowServe. Our efforts will improve our geographic and in-market diversification. accelerate digitization through IoT and e-commerce, and support decarbonization with better efficiency and technology to capture and repurpose carbon emissions. FlowServe has been solving technical flow control challenges for over 200 years. Our customers expect us to help improve their performance, reduce their costs, improve efficiency, and help them prevent unplanned interruptions. We are committed to continuing to support our existing customers and our installed base, as well as ensuring that we will participate in a meaningful way as new end markets emerge for flow control products, services, and solutions. I am confident that our people, our products, and our technology will continue to evolve and be value-added for decades to come. As an example, this year alone, FlowSort provided equipment and services to Carbon Caption Technology, hydrogen processing, concentrated solar power, water desalination, flood control, and most importantly in 2020, we provided our full suite of pumps, valves, and seals for COVID-19 vaccine development and production, helping to accelerate the distribution of a COVID vaccine. Our ultimate objective is to continue to be the trusted partner that FlowServe has been historically for all flow control customers long into the future. We're off to a great start in 2021. Following years of development, testing, and pilot projects, we are excited to launch and commercialize Red Raven, FlowServe's global IoT offering. Red Raven will provide a solution for customers to optimize their flow control processes. We are uniquely positioned to provide this offering considering our extensive expertise with pumps, valves, and seals, combined with our proprietary analytics and embedded diagnostics. Red Raven simply and easily provides our customers the ability to improve productivity, avoid unplanned downtime, and ultimately reduce overall cost of operations. The offering follows nearly five years of development, including extensive testing, great feedback from our partners, and the knowledge gained from our pilot sites. We are still in the early stages of the rollout, and while the current financial contribution from Red Raven is small, we expect that Red Raven will expand into a more meaningful revenue stream and pull through our complete suite of aftermarket services in the years ahead as customer adoption grows. I spoke last quarter about FOSRF's commitment to environmental, social, and government issues, or ESG. These subjects remain a vital component to our mission and values. I am very proud of the progress we made in 2020, including committing to reduce our carbon emissions while also continuing to develop innovative solutions to help our customers do the same. We also achieved record safety performance and continue to refresh and diversify our board of directors. As we focus forward, FullServe will endeavor to continue being on the forefront of ESG initiatives and progress. I'd now like to spend some time on our long-term financial targets that we identified in 2018 with the launch of our transformation program. Last year at this time, we were very much on pace to meet or exceed the original objectives and timeline. Unfortunately, the pandemic-driven downturn and associated business interruptions have stalled this progress. As you might recall, the identified targets were centered around growth, free cash flow, operating margins, and RLIC improvement. The assumptions underlying these targets outlined a consistent business environment. As everyone can relate, the COVID-driven challenges of 2020 were anything but a consistent business environment. Nevertheless, I am extremely pleased with the progress that we have made over the last three years of the program, including achieving our long-term target of more than 100% free cash flow to adjusted net income early in 2020. We have made systemic changes to inventory and receivables management, and I am confident that you will continue to see improvements in working capital in the future. Additionally, we were able to manage the balance sheet and margin decrementals in such a way to keep our ROIC well above our cost of capital and minimize the market impact on our return profile. When we find a way to go to reach our mid to upper teens target, we expect the actions taken in 2020 will serve as a catalyst to delivering much stronger returns as we move to our growth environment. To summarize, our long-term aspirations and goals remain the same as those previously outlined. I remain confident that each of these targets is achievable with our continued transformation progress and as the world returns to within the range of our original assumptions. With the continued uncertainty that exists due to COVID and the associated impact it has had on our end markets, we cannot credibly commit at this time to a new date on achievement. Once economic and market conditions permit, we will share our timeline, our plans, and the actions necessary to achieve these targets. Let me close with our 2021 outlook. Amy provided this year's official guidance in her comments. The 2021 target ranges were derived using essentially current market conditions with only modest low single digit bookings growth expected from aftermarket in our MRO short cycle business later in 2021. Given the uncertainty in the marketplace, many of our customers were unwilling to predict the timing of projects or an inflection point in their business. It is clear that as COVID subsides, our customers will be spending more money to keep their operations running and advance their critical projects. For Chauvet, it has traditionally been a late-cycle business, given the lead time of some of our large pump and valve projects. The pandemic didn't impact our 2020 financial results as much as others, considering the strong backlog we had entering the year. However, the double-digit declines in our bookings over the last three quarters, in addition to the 14% reduction in our year-over-year starting backlog, will have a more pronounced impact in 2021. While our guidance assumes mostly a continuation of the current environment, there are potential opportunities in the marketplace that could improve our expectations for the year. Containing the virus is truly the key catalyst for flow serve in most of our end markets. As that occurs, we would expect to see increased activity levels. We are encouraged that fourth quarter bookings were up sequentially, and activity levels could be gaining traction. Project discussions are more active than any time in the last three quarters, and we see the potential for some projects in Asia, the Middle East, and Latin America to move forward as conditions permit. Additionally, I expect to see improvement in our aftermarket business and MRO business as the year progresses. At this time, assuming the continuation of these trends and further progress containing the virus, I fully expect our financial results to return to growth in 2022. In closing, 2020 was an extremely challenging year for our company and our industry. Through the commitment and dedication of our associates, combined with the positive impact of our transformation efforts, we are able to deliver strong results for our customers and implement the actions that best serve our shareholders. I am confident that as operational progress continues in 2021, we will remain focused on cash conversion, financial returns, and managing decremental margins. More importantly, Full Serve will be well positioned to win in the recovery and create long-term value for our shareholders and other stakeholders. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Andy Kaplowitz with Citigroup. Your line is now open.

Good morning, guys. Good morning, Andy. Hey, Andy. Scott or Amy, I just want to focus on cash first because you said you were going to generate $100 million plus in Q4, and you obviously generated almost double that. You mentioned the 150 base points of sequential improvement, primary working capital as a percent of sales. Obviously, the 21 guidance of 100% free cash flow conversion is encouraging, but So it seems like you're getting your arms around the cash situation, but I guess the question is working capital as a percent of sales is in the high 20% range. So can you talk about where you think you can get that metric to and how you get there now as it seems like you have more confidence on the cash side than I've heard before?

Sure. Thanks for the question, Andy. I think starting with what we think is possible, Scott and I are aligned around that mid-20s as really being the spot where we think that we need to get to from a primary working capital as a percentage of sales perspective. And we think we've made tremendous progress over the last couple of years in a number of ways. One, DSO has come down and we've been able to hold it to a level that we think is around where we want to be at or where we think we should be at at around 70 days. We think there's marginal improvement in that area that can happen, but we're probably working around the edges there. Where we really see a significant amount of improvement coming in 2021 is is around inventory. And foundationally, I think we've got the tools and the talent in place now to manage inventory in the right way within the company. And now 2021 is about delivery on the working capital improvements in inventory. So that's where the majority of our focus is going to be in 2021.

Yeah, just to add to what Amy said, we're really pleased with the progress that we're making. I'd say, you know, Q2 and Q3 were not ideal for us. I'd just say the COVID disruption and all the things going on, we kind of took a step backwards on the inventory management. We're back on track. We made good progress in Q4. And, Amy, what I would expect is just continued progress as we go forward. And it's not going to be – there won't be these giant gains, but I'd say relatively steady progress. And as Amy said, you know, mid-20s is certainly what I'll call a near-term goal, but we're not going to stop there. We'll continue to work this. You know, the best companies in the space are right at kind of 20%. I don't want to commit to that because we're so far away from it. But I really do think we'll make progress. And as Amy said, the focus right now is inventory. The receivable side, we've gotten cleaned up and we're in a pretty good spot. There might be a little more improvement, but not a whole lot. for us is inventory management. Our teams know it. We've got the tools, the visibility, and the process in place. We just need to execute now.

Thanks for that. Scott, you mentioned oil price, refinery utilization, stable or improving, MRO activity you talked about, expect to increase. You also mentioned you haven't seen improvement yet in aftermarket bookings, at least sequentially. What do you think your customers need to see to ratchet up MRO demand? How much do you think higher oil prices help Could the Texas weather-related issues be a catalyst? And have you seen any discernible incremental improvement in bookings, you know, for the first couple months of this year? Andy, that's like six questions. You've got to be efficient with your time. I see that.

market and MRO, and I'll hit kind of two of the key points there. You know, I was pretty clear in the last, in the Q3 earnings call, talking about, you know, that we would see return to growth on MRO and aftermarket at some point in 2021. We're still confident in that, and, you know, I think it's more of a timing issue. I want to hold the Texas weather event and the Gulf Coast weather because that's a whole different issue, but I'm going to come back to that. But if we say pre-weather event and kind of where the where we were going, I think our customers, as long as they're getting more confident that things return to normal, right, stability on oil prices, mobility goes up, then they're going to have confidence to invest in their facilities. And, you know, I would say we feel very good MRO and aftermarket spending returns in 2021. The question is, you know, are we going to see it in Q1, Q2, or Q3? But I would say certainly by mid-year, we start to see that inflection up. And we've got lots of customer discussions and data support that. There's a lot of pent-up demand and cost avoidance that at some point catches up to them. I'm going to hit the Texas weather event, and what I would say is obviously that was last week, and we're still trying to get to the bottom of it. But in the Gulf Coast region, we're tracking over 30-plus installations that have some emergency type request in the flow serve on parts or services. And so, you know, we see it as a net positive for us. The downside is, you know, we were offline for three to four days in most of our facilities, so we've got to overcome that. But, you know, I think there's a lot of damage out there from the freezing weather, and we're seeing, you know, already orders for pumps, valves, and seals. And so, you know, I don't think this is a material number, but it's upside that we didn't plan for and we didn't necessarily have in the guidance. And I think probably most importantly, it's an opportunity for Fullserve to demonstrate support of our customers in these situations. And we can come and help them, you know, restore their operation. We solidify kind of our presence on site, and they know they can trust us. And so, you know, it's an unfortunate situation because a lot of people were incredibly uncomfortable from hitty days. but the closer this will be an opportunity. And if there is some sort of regulation that comes out of this that, you know, Texas will require, you know, something more substantial with these installations, then any time there's upgrades or new standards, we'll capitalize that as well as we put in more beefy equipment that can stand through, you know, any temperature range, both high and low. Appreciate that, Scott.

Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.

Hey, good morning, everyone. Good morning, Mike. So let's follow up on Andy's first question there. Obviously, really nice cash flow this year. Good to see the guidance for next year. You're kind of at the point where you can start playing some offense, given the liquidity, given the more consistent cash generation. How are you thinking about that internally? Has the radar shifted towards M&A at all? And if so, what does the opportunity set look like there?

Yeah, so as Scott pointed out, we were pleased in 2020 that was a tough year that we were able to deliver ROIC well above our cost of capital. And we frankly think that delivering those type of returns with line of sight into the future to returns above 15% does allow us to think about reinvesting in the business. We think about that in terms of both organic and inorganic growth. Obviously, any type of project that we look at or any type of acquisition that we would look at would need to fit within our criteria. It's all towards achieving those financial objectives that we've set out, meaning accretive to ROIC, accretive to margins over time as well. So we think about it through that lens. That being said, we do have commitments embedded into our cash usage for 2021 as well. So as I pointed out, we are going to retire those Euronotes in the first quarter of the year. We are committed to maintaining our capital spend for maintenance and for those ERP projects over the course of the year. And, of course, we want to return money to our shareholders as well via our dividends. And we do have about over $100 million left on our share repurchase program. So to the extent that it makes sense at points during the year to deploy any of that capacity, we'll look at that as an option as well.

Just to add to that, Amy and the team have put us in a nice position with the balance sheet, and so we're definitely more open to moving to the offense than in years past. One of the things that was holding us back was we really wanted to get the 2.0 in the process improvements embedded in the organization and really wanted to have that done to give us confidence in our ability to integrate any deal that we do. And so I'm feeling better than ever before that we've got good business process and we're executing at a higher level, and it gives us a stronger appetite to start looking at things on the offense. And so I would expect we don't have anything imminent. We're not going to do anything crazy, but we are interested in starting to add to the portfolio in the right places that we you know, help diversify our in markets a little bit and helps to bolster what we're trying to do in the long run.

Thanks for that. And then on the margin side, just make sure I understand here, solid documentals in the fourth quarter there. Puts and takes when we think about 2021, how we think about discretionary costs coming back versus structural savings, what price cost mechanisms look like for you and any other important large bucket items that would impact how you're thinking about it.

Yeah, so we do have a number of moving parts as we look at 2021 margins, and we do think there's some pressure on margins entering into 2021. I mean, starting with the challenges, obviously the lower beginning backlog and lower volume generally, as we've highlighted in our sales report, sales guidance is a headwind. And included in that is absorption pressure at our locations. And we do have some inflationary pressure that's built into that as well. There are some opportunities as we think about that or some things that are helping to offset that. So thinking about the mix shift, the mix in 2020 was very heavy on We see that transitioning to a more normal level in 2021. And we do have productivity improvements that are embedded into the 2021 plan as a result of transformation efforts. So as we think about those and we think about the ongoing savings from SG&A, which in 2021 will be much closer to our third and fourth quarter run rate than it has been to historical levels, what we're excited about is as we return to growth, as Scott has highlighted, we think will be the case with our books. in 2020 and 2021, we see many of these cost-saving initiatives as sustainable and building momentum as we return in that direction.

Thank you for that, Amy. Thanks, Scott.

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

Thanks. Good morning, everybody. Hi, Joe. Hey, Scott, as you kind of think about the longer-term operating margin targets and kind of like where you sit today, what kind of like revenue top line do you think we need to achieve those margin targets? And I know that it's really difficult at this point to get some kind of timeframe, but I'm just curious kind of like what the base case scenario is to try to get there.

Yeah. So when we first put these targets out, you know, back in early, well, into 17, early 18, we said we should be able to achieve the targets under any revenue. So basically, you know, at the status quo, we're in a growth environment. And I think that still holds true. And so even if we work to grow, I still think we've got the opportunity to get the margin up. We've got the opportunity to get the return. Now, what I would add is that any growth only helps the situation dramatically, right? And so if we can start growing at a reasonable clip, a 3% to 5%, then I start to feel really good about getting into that margin range that we've laid out.

Got it. And then maybe my follow-on question, and look, really nice to see the progress that you're making on cash flow. I guess, How should we think about kind of CapEx longer term? I know obviously 2020 was a little bit of a down year, but what's the right way to think about CapEx and normalize CapEx for the business?

Yeah, so, you know, we put our guidance out for 2021, which just as a reminder is $70 to $80 million. You know, I think, you know, there might be a couple years where we come up to that, you know, maybe touching the $100 million level if we're doing something major. But I think this is a reasonably good range for us. And so kind of, you know, that $80 to $90 million for sure as we go forward. You know, a lot of that investment, in fact, almost half of it is going to our IT systems, right? And so as we continue to make progress to get on, you know, more efficient and more simplification on our system architecture, then that spending starts to subside, and then we start to look more into kind of the automation and technology around manufacturing. But I think this is a reasonably good run rate for us. I don't see it going, you know, significantly above 100 ever. It'll just depend on some of the projects that we line up year over year.

Great. Thank you very much.

Thank you. Our next question comes from Nathan Jones. Your line is now open.

Good morning, everyone. Hello, Nathan.

Just a follow-up here first on the guidance. It looks to me like the lower starting backlog is really responsible for all of the guided revenue decline in 2021, which then implies that kind of your book and term business in 2021 is flat with 2020. We've seen there are a few tailwinds that you should have on the book and turn business relative to, you know, 2Q20 COVID. Maybe it's a headwind in the first quarter, but improving oil prices and all those kinds of things. Is there some conservatism built in that 4% to 7% kind of, you know, more likely to see upside than downside?

Yeah, Nathan, I don't want to call it conservatism, given all of the craziness that we've been dealing with for the last four quarters. Yeah, and if you just go back a few short weeks ago, we had our highest COVID case counts and the most disruptive impact to our operations was in the month of January. I mean, literally four weeks ago, we were shutting facilities down because we couldn't get enough people to come in. And so I would say, you know, things have improved, right? And every week seems to be getting slightly better. But, you know, we really struggled on whether or not to give guidance or not, just given, you know, how crazy the situation is that we're dealing with. And so, you know, I just add that, you know, as things continue to improve, right, stability at oil pricing, COVID cases going down, mobility data improving, then I'm confident that operators will spend more money. Like, it's going to happen. And if that happens, then our book to bill has the opportunity to come up from what we had before. But to say that it's conservative right now would be really – I don't want to use that word because I don't think it's the case, but I really do think there's upside if things continue to progress like we've seen, quite frankly, in the last two to three weeks.

Okay, I think that's fair. My follow-up question is on the bigger focus put back on the growth side of FLOSA 2.0 going into 2021. Is there an increase in the investments that are running through the P&L that's potentially a headwind to margins in 2021? And if there is, what kind of ramp up are you looking at? And should we see that continue to increase as we go into 2022?

Yeah, we ultimately want to spend a lot more money on new product development and technology. And getting into 2021 is what I would say is a reasonably consistent rate. I think it's up slightly, but it's not anything material. You know, and really what we're trying to do, and I made this comment in the third quarter earnings call, but we've been really focused on the process of innovation and the process of new product development. And we've got that. what I'll call dialed in pretty well now. And so as we start to run more through that, we do want to add projects, we want to add resources, and we ultimately want to start to bring that up. But the net spending in 2021 isn't going to be substantially different than what you saw in 2020 or 2019.

So not only do you plan on increasing that spending in 2022 and beyond, but you also think you've got better processes in order to be more efficient with that spending.

Yeah, absolutely. And, again, that has been the focus, has really been on our innovation process, our new product development process. And I felt really good with the team and what we're doing on that. And so we're getting more things through. We're getting more meaningful innovation to the end markets that are going to convert to revenue and EBITDA. And, you know, we're spending less time and less dollars on getting those products through the system. Okay, thanks for taking my questions.

Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is now open.

Hello. Good morning, everyone. Good morning, John. I guess there's one final guidance item to touch on. I guess, you know, just thinking about the tax rate and the ability to maintain it going forward, is this kind of the right zip code, this 22 to 23, as we look forward?

So I'll take a stab at that. I think, you know, for the foreseeable future, we feel pretty good about that effective tax rate. I will tell you that when Scott and I in my tax department sit down, he continues to challenge us to look for appropriate ways to bring that effective tax rate down. So we're pleased with where we've come from. You know, we started out at near 29%, so to bring it down to the 23% level, in 2020 and look for improvements beyond that in 2021 that we have line of sight to, we think is a good place to be. But we'll continue to challenge that as we move forward and look for opportunities to improve on it.

Great. And then maybe a question here on Red Raven. You know, there's actually some really great YouTube material out there on what you guys are doing. But I wanted to ask you, are there going to be kind of public, I don't know, metrics or goalposts you're going to be providing so that we can see kind of the adoption rate and the traction you're making with that initiative? Yeah.

Yeah, I don't know. We haven't gotten that far, John. We just launched it two weeks ago. But certainly as this becomes a more meaningful part of our business, we'll come out and talk about it more, and we'll provide color on some of the metrics that we're looking at. I can provide a little bit more than what I shared in the prepared remarks. We've been working on this for about five years. We have a really good list of partners, both on the customer side and other third parties that are helping us you know, with this offering and making sure that, you know, we've got a solution that's, you know, truly differentiated and something that our customers want. But we're on over 25 different installations. We've got a long list of new opportunities that we're tracking. And so we think we can, you know, certainly double that in the next 12 months. And we've deployed now almost 6,000 different sensors, and we're collecting unbelievable amounts of data program is monitoring, and our customers are, you know, they're asking for that, and that's important. But we've also really pushed the predictive side. And so we've already been able to prevent and predict failures on site. And so as we get more case history and case examples, you know, we'll share those externally, but that becomes, you know, what's going to help us drive this. While the platform itself will generate revenue and we're excited about it, what we're really excited about is being closer to our customers and really making sure that we can provide that full suite of expertise and full control history and knowledge to help our customers with their operations. That pulls through our aftermarket businesses. It pulls through our services. It's parks. and all of that. And so when we think about it, it's really more of a holistic offering from our aftermarket services and solution than just the system itself.

Great. Thanks for taking the questions.

Thank you. Our next question comes from John with Morgan Stanley. Your line is now open.

Hey, good morning, folks. I think that's me. Hey, John. Hey, John. Yep. So, two questions. We covered a lot of ground already. I guess, first one, Scott, on the customer projects that sort of went on the shelf with COVID and oil prices retrenching or other commodity prices as well, for that matter, what's the conversation like today? I mean, obviously, orders haven't really rebounded yet, but is it your suspicion or is it customers' intention to place orders with a similar type project or, you know, re-scoped version of it, or is it kind of back to the drawing board across, you know, across all those things that were planned, you know, maybe this time a year ago?

Sure. Yeah, I got to be a little bit careful because all of our customers are facing different situations and different challenges. And so, you know, a Middle Eastern production project will be different than a petrochemical project in the Gulf Coast or a specialty chemical project in Europe. Just in general, right, everybody put the brakes on big time, you know, in kind of February, March, April timeframe last year as COVID's, you know, impacting, you know, the entire world from a consumption and demand standpoint. And so throughout last year, they've been relooking, you know, did the projects make sense that they originally had on the drawing board? And now they've got kind of six to nine months of working through that, you know, potentially making changes or modifications to their programs and their designs, you know, unfortunately asking us for more price reduction to support the economics. And what we're now seeing is most of those projects were delayed in 2020, and now they're starting to move back through the system, right? So they're now back into kind of the FID or the financial decision for approval and And, you know, we do expect those to be released at some point, you know, perhaps, you know, sometime in mid-2021 or late 2021, and then certainly into 2022. You know, many of the, you know, some of the projects were canceled, but the vast majority majority of them are at least at this point delayed. And I just think as they get more confidence that COVID subsides, as you get more confidence in demand numbers, more confidence in mobility, then they feel confident to pull the trigger on this. And we're having better discussions than we ever had in the last three quarters. And we're starting to see some movement with these projects. And so again, I feel reasonably good that the aftermarket and MRO picks up kind of mid-2021. And I think we start to see some movement on smaller projects, you know, hopefully earlier in the year, but certainly kind of mid to late year. And then I think you start to see some real activity in 2022.

Got it. That's helpful. And then on the stocking comment that you mentioned, anything that you can put around that on percentage of the business you think that would apply to that, went through distributors that had destocked over the last few years and what you think that costs you, like how much you undersold the market in the last couple of years. It might be a little hard to precisely know, but best guess is good enough.

Yeah, so the stocking distributors, I mean, while it does impact our pump business, it really impacts the valve business more than any. And, you know, our percentage of business running through distribution in valves is, you know, kind of 40% plus or minus 5%. And, you know, what we saw certainly in North America was this was already starting to come down in 2019. And then, you know, with the COVID impact in 2020, it's come down dramatically. And there's two public companies out there that, you know, disclosed their inventory levels. And, you know, when they produced their fourth quarter numbers, I was actually shocked at how low it was. And in our discussions with them, you know, we know that they can't maintain this, and even at the existing level of market activity. And so I feel pretty good that we're going to get some tailwinds in the valve business, even if we stayed at this rate. because they can't take stuff off the shelf from there. If they keep doing that, they're essentially not fulfilling their obligation and their purpose, and the OEMs like us just start going to our end customers ourselves. And so I actually think we get a little bit of a tailwind here. And then with the recent activity and kind of just confidence that things are improving, they're going to start putting more inventory on the shelves. They've got to do that. And so I think this gives us some uplift. And, again, it's primarily in our valve business. We'll get a little bit of – there's some stocking distributors in the pump world, but primarily this impacts valves.

Got it. Very helpful. Thanks for the call, guys.

Thank you. Our next question comes from Brett Lindsey with Vertical. Your line is now open.

Hi. Good morning. Hi. Hey, I wanted to come back to supply chain and price cost. Obviously, you know, a lot going on out there and not just an impact on flow serve. But thinking about price cost, what are you assuming for price this year? And then in terms of just the profit weighting, are you thinking that, you know, maybe weights a little more towards, you know, H2 versus H1, just given some of the price cost dynamics early in the year in supply chain? Sure.

So, you know, unfortunately, the price-cost situation is not great right now, right? And so our customers are really challenged and struggling, or most of them, right? Certainly the oil and gas, some of the petrochemical and other ones. And so we've had a lot of pricing pressure. I'd say the pressure is coming more on the project side as these big projects are going back through kind of, you know, what it takes for that project to be financially viable. That's impacting our OE pump business more than anywhere else in the system. But we're also seeing pricing pressure on the valve side. And then we're seeing some pricing issues on the seal side as well. And then on the cost side, we're very much in an inflationary environment when it comes to materials. And so if you look at any of the metal indices, they're all moving up, and they're moving up reasonably quickly. However, with FlowServe 2.0 and the supply chain initiatives that we're doing, we think we can offset all of that through further supply chain rationalization and some of the good work that's going through the transformation process. And so we think anything on the inflation side we can offset with just the self-help and the initiatives. But the pricing is significant. And, you know, my hope is as things start to tighten up and move forward, then we'll start to get into a little better pricing scenario. And then from a timing standpoint, right, this started, you know, back in March, April timeframe. And so, you know, this happened pretty early. We're seeing that start to come through the system even in the fourth quarter, but certainly Q1, Q2. And so we're going to be dealing with this for a couple quarters until things tighten. And I just say that this isn't any different than our competitors. They're all seeing the same situation, and then we've just got to keep doing a really good job on the internal opportunities of maintaining good manufacturing productivity and working those supply chain savings to offset this.

Okay. And I guess just to follow on that, you know, clearly you've mentioned the competitiveness for, like you said, a couple months now. Should we think of backlog margins being negative in the OE business year over year as those get delivered maybe in the second half?

Negative, no, but I would say we are seeing our margin in backlog today is definitely lower than what it was six months ago, no question. And, again, that's more OE pump is the biggest impact, but we're definitely not taking negative OE margins. I didn't mean negative, I guess, down year over year, but okay.

And then just last one on ERP and IT. You know, obviously a big investment there if it's, you know, half of the CapEx. How far along are we in that rollout? And, you know, in terms of, you know, the progression there as we work towards more of the deployment phase, does some of that start to work through the P&Ls and expense versus CapEx? Just trying to think about the phasing there.

Yeah, sure. So I'll talk about the progress. I'll let Amy hit kind of the catbacks and where it's shown on the P&L. We've made tremendous progress. And for those that have followed us for a long time, our systems architect and landscape was incredibly fragmented. We've reduced our ERP systems by over 25% since I've been here. We still have have a long way to go, but we're confident with our approach and solution. And so we've now got a full-serve standard that's embedded in parts of our operation, and we'll continue to make progress as we clean that up. We're not going to kind of a one single instance ERP system, big bang. We're systematically doing this. We'll end up with a handful of systems, but we've got one system that will sit on top of this in the cloud, and we're confident that we can get the visibility and the productivity out of the design and architecture that we have. And I'll just let Amy talk about how much capital and capital versus expense.

Sure. So I guess, you know, as Scott pointed out, nearly half of our capital guidance range this year is going towards IT enterprise-related projects. That's not just all about the ERP system, but about systems that we'll be using to standardize processes across FlowServe generally. As we think about costs going forward, certainly there are costs associated with running ERP systems. However, And there's also benefits that we're going to see run through our SG&A expense over time as well. So I actually see this as this journey as being a tailwind towards our SG&A expense rather than something that's going to be additive to it over time.

Got it. Appreciate the color and best of luck. Thank you.

Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.

Yes, guys. I guess good afternoon my time, still good morning your time. How are you doing, Adrian? I'm doing well. Just a question on FCD. You guys have done a great job sort of pushing the business. Can you just talk a little bit about what were the specific operational changes that drove it, looking at the numbers after market changes? It seemed to have been really good also both in sales and bookings. But if you could just provide more granularity as to what exactly you were able to do and how replicable it is across the company.

Yeah, so STD had a nice quarter. We had a good revenue uplift in the fourth quarter, and, yeah, the margins followed. There was definitely some, you know, cost actions that we took that, you know, came through the system in Q4, and then just a lot of focus on doing the right things. Some of that is some mix where we got more MRO and we got some higher margin projects that did come through the system. You know, we're very focused on the SCD margins. And what I'd say, one of the things that we're working with the team is to be more consistent throughout the year. And so we really want to kind of... level world a little bit more on the revenue side. We want to be more consistent on the operating income. But, you know, we're striving to get that, you know, year-end result on average moving up and getting us back into kind of that mid-to-high teens where this business has been historically. And we still think we have a lot of opportunities with FullServe 2.0 and the other stuff we're doing to move that in the right direction.

Gotcha. And just another question, just sort of thinking about your exposure on the refining side, and I've been asking this question from a lot of companies, but how has thinking from your clients, and I'm not sort of talking about over the next 6 to 12 months, but longer-term thinking about spending in the refining sector is changing, and I'm sort of thinking about Upgrades versus efficiency versus capacity expansion. What kind of conversations are you having with the customer base about the mix of their CapEx going forward, and how does it impact your business model with them? Thank you.

No, it's a good question, and refining is our largest in-market. We call it oil and gas, and the majority of our oil and gas is truly the downstream side. So this is something that's incredibly important to us, and we watch it and we talk to customers all the time. Again, some of my previous comments talked about a refining company is different around the world, and so refining If we think about where things are growing, certainly in Asia, in India, China, India, and the Middle East are going to continue to invest in a very meaningful way over the next decade or two. And so we're going to see increased investment there. Our opportunities on new build or major expansions are almost exclusively in those regions. And then what we saw in 2020 in Europe and North America was some pretty significant, you know, permanent shutdowns in the system. And when we talk to those customers, it really is about helping them with productivity, helping them with cost down, and helping them, you know, with the unplanned downtime. And so a lot of the things that we're doing with Red Raven, a lot of the things that we're doing with our aftermarket services is still really important. But as long as those different facilities are up and running, then we continue to get the seals business, we continue to get the parts for pumps and parts for our valves, replacement valves. And so really, it's in our best interest that we help them continue to drive productivity and movement. And then the other thing I'd just add is that any time there's a regulation change, whether it's to a clean fuel or a temperature standard or whatever, then those regulation changes are opportunities for us because they'll need to re-plumb or add a different pump or a different valve or do something around an emissions control that could potentially lead to new seals or a change out there. Regulation actually helps us in anything where they're changing a process in refining. So, you know, while I know energy transition is a major topic and it's something that we're watching and we're going to make sure we've got a portfolio that works for the long run, we're not going to abandon our refining customers. We've got a massive installed base. We're with them every step of the way. They've got their own plans for energy transitions around reduced emissions, moving some to biofuels and things like that, and we're going to support that transition with them. And so we feel good about having the right products and the right equipment to help them, you know, one on the productivity side, two on cost reduction, and also helping them through the transition. And then we're going to make sure that we participate in these growing markets for the years to come.

Scott, thank you for an extensive answer. Appreciate it.

Thank you. Our next question comes from Joe Giordano with Cowen. Your line is now open.

Hey, guys. I'll just keep it quick. On the IoT platform, I just – a more existential question, I'm like, whose domain is this? Because right now the equipment providers are coming out with technologies like this, like yourselves, the – The automation providers have it themselves. There's third-party companies that come in with sensors that can go on anyone's equipment, and they can pull data, too. So, like, what do customers want? Who do they want to actually do this? And, like, what are you hearing in terms of feedback on that? Like, who should be the one that actually does this thing?

Right. No, it's a really good question, and what I'll say is it's an incredibly dynamic market right now. And so what we've done is we've tried to go down a path that keeps us kind of, you know, really, the best way to describe it would be open source or agnostic to the system that's there. And so what we want to do is we want to instrument our pumps, valves, and our seal systems, and we also want to be able to instrument other pumps, valves, and seal systems, even if it's a competitor. Where we have the differentiated technology or the proprietary knowledge is we do this all over the world in different customers, different applications, and we feel like we can provide information around how does a pump work, how can a pump be more efficient, when does a pump fail, how does a valve work, and when is it toward end of life, and then how do you really protect the environment with the sealing systems. And so that's kind of where we bring in the know-how. And then as long as our Red Raven platform will work with any end user and any automation provider, then we can bring in and kind of tuck our solution in on the assets that we understand incredibly well and have 200-plus years of history with. That's been our approach is really being kind of open source. We've got a lot of collaboration partners. Some of those are automation providers. While we do that, it's working incredibly well. Our sales to our customers is going in saying, hey, we don't care what overall system you're using. What we want to be able to do is provide you the information and the insights to make good decisions on your operations. And whether you use our platform, we'll provide the right information, whether it's in the Red Raven diagnostic system or if it's in an automation provider or if we push it back into yours. And also that is where we're seeing the most success is using our Red Raven platform, and we're giving them some really slick kind of handheld devices and screens that allow them to see the information that they want very clearly and allows them to make decisions with that information and that data in a real-time fashion. Great. Thanks.

Thank you. Our next question comes from Dean Dre with RBC Capital Markets. Your line is now open.

Hi, thanks. This is Andrew Krill on for Dean, and thanks for squeezing us in. I just wanted to ask real quickly on the cost savings actions. I just want to clarify, for 2021, are you expecting any net headwind when you're lapping, like a more temporary COVID-related cost savings, or do you think you have enough other actions underway to, like, balance those? Thanks.

Sure. I guess a couple of things. One, from an SG&A perspective, where a significant component of our savings came in 2020, we're anticipating working at around the run rate that you saw in the third and fourth quarter as we move into 2021. Now, there are some headwinds associated with that, from inflation to at some point the restart of travel, but the fact is that the full-year benefit of the savings or the actions that we took midway through 2020 sort of offset that. So we're now at a level that we see as being much more sustainable. From a cost of sales perspective, I think a couple of things. One, there are actions that we took in 2020 that carry through into 2021, but also additional actions are planned as we make our way through the year and bring that forward. and bring that backlog down, we're continuing to try and adjust the cost structure to manage those decrementals through the course of 2021. And that's why we are forecasting, included in the guidance range, some spend on realignment as we move into 2021. Okay, great.

And then a quick follow-up just on the closer 2.0 cost now being included. Like, we'd like to see that from a quality of earnings standpoint, just to give any other color on what the deciding factor was, you know, that tips you over the edge there. Thanks.

Sure. A couple of things. One, culturally, we do now feel like the transformation process is embedded into the DNA of who we are as flow serves. So from an operational level, from a functional level, we understand that pursuit of continuous improvement and process improvement is part of our day jobs, and this reflects that from a cultural standpoint. But what I would say is also we've reached much more of a run rate from a – from a spend perspective. So in 2020, transformation costs were around 13 cents per share. This year, we think we'll be closer to 5 cents per share, and it reflects more of the run rate of what the embedded cost of those efforts are in our business. And so we felt from a quality of earnings perspective that as we've gotten to that run rate, it makes sense to include that. in our adjusted EPS. Okay, thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.