Flowserve Corporation

Good day, and thank you for standing by, and welcome to the Q3 2021 FlowServe Corporation Earnings Conference Call. At this time, all participants are on a listen-only mode. Please be advised that today's call is being recorded. If you require any further assistance, please press. I'd like to hand the conference over to Jay Roosh, VP Treasurer and Investor Relations. You may begin.

Thank you, Justin, and good morning, everyone. We appreciate you participating in our conference call today to discuss FlowServe's third quarter 2021 financial results. On the call with me this morning are Scott Rowe, FlowServe's President and Chief Executive Officer, and Amy Schweppes, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call for your questions. 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 October 28, 2021, and may 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 floatserv.com in the investor relations section. I would now like to turn the call over to Scott Rowe, Floatserv's President and Chief Executive Officer, for his prepared comments. Great. Thanks, Jay, and good morning, everyone.

Thank you for joining our third quarter earnings call. There are two key messages that we want to cover today. First, we are confident that FlowServer is on the path to growth after a dramatic pandemic-driven downturn. We are optimistic about the future, the positive inflection we are seeing in the cycle, and our opportunities through energy transition. Second, we experienced a number of challenges in the third quarter with our supply chain, logistics, and labor availability. These problems had an impact on our revenue and profitability in the quarter, but we believe that we will work through the issues and restore our revenue to a more normal conversion rate in the quarters to come. Let me now move into my prepared remarks. As I just indicated, the third quarter presented a number of challenges which we continue to navigate, including supply chain, logistics, and labor availabilities. These issues were truly global in nature and have had an impact on FlowServe and other global industrials in the quarter. FlowServe had been largely successful in mitigating these issues in the first half of the year, but the confluence of events and the combined impact of the challenges had an adverse effect on our third quarter results. I will specifically address the disruption and inflation challenges with the supply chain later in my prepared remarks. It is important to note that we remain encouraged by the healthy underlying demand that we see across many of our end markets and by the fact that many of the headwinds we experienced in the third quarter are primarily timing related. We expect that our business will return to growth and that the FlowServe team will work diligently to resolve the issues that we faced in the quarter. Let me now turn to our results. Third quarter reported and adjusted EPS were 38 and 29 cents respectively. The combination of supply chain logistics and labor availability shifted approximately $60 million of expected revenue out of the quarter. Our backlog remains secure, and we are confident in our ability to recognize the backlog at a more normal revenue conversion rate in the coming quarters. Our third quarter bookings of $912 million represented a 13% increase over prior year, continuing this year's trend of strong year-over-year quarterly growth. Aftermarket and MRO bookings during the quarter were consistent with first half levels, while larger award activity continues to remain below pre-pandemic levels. Aftermarket orders of $495 million increased 16% and are at pre-COVID levels. The aftermarket business is benefiting from the increased utilization rates of our customers' assets being driven by improved mobility, and increasing GDP levels around the globe. Original equipment bookings increased 9% year-over-year to $417 million. Our project or original equipment business continues to lag in the recovery with less than a handful of larger projects awarded in the quarter, with only two project orders in the $10 to $20 million range. Some of the same macro issues around logistics and supply chain are also impacting the progress of these global projects moving toward award. We remain confident in our pipeline of opportunities, and we expect project work to increase from this point forward. Each of our core end markets delivered year-over-year growth in the third quarter, with oil and gas up 33%, while chemical and power were both up 17%. Water bookings were also particularly strong, up 46%, and included a $10 million desalination award. From a regional perspective, bookings growth was driven primarily from North America and the Middle East and Africa, where these markets were up over 30%. COVID continues to negatively impact flow serves and our customers' operations in Asia Pacific, which was the only region not returning to growth thus far in 2021. We do expect our overall bookings to recover more towards our first half 2021 quarterly run rate of approximately $950 million in the fourth quarter. We saw bookings growth in each of the three months during the third quarter, and we believe that September's exit rate can restore our bookings levels to those of the first half of the year. Project timing will be the key variable for fourth quarter bookings levels. We believe full-year bookings will grow year-over-year in the 10% range. This level of bookings growth positions FullServe well for revenue growth and solid financial performance in 2022. I would now like to return to the operational challenges that we faced in the third quarter. Approximately $60 million of revenue and $20 million in gross profit that we had previously expected to recognize in the period was deferred from the third quarter due to supply chain issues, global logistics, and labor availability. We were largely successful in mitigating these types of items during the first half of the year, but as the quarter progressed, we faced significant issues on all three fronts. Historically, challenges like these might affect a few locations in any given period, but in the third quarter, we saw a very large number of our global manufacturing facilities and QRCs impacted by the logistics supply chain labor issues. On the supply chain front, we are facing disruption and inflation across the entire value chain. We have done a good job managing our critical vendors for procured items such as castings, forgings, machining, and large motors. And we are seeing the benefits from the supplier consolidation and the quality work that was completed in the FlowSurf 2.0 transformation. However, the broad issues and extension of lead times across essential components like base materials, coatings, small motors, consumables, and electronics have impacted our ability to deliver product to our customers. We have now identified and are mitigating these extended lead times, but there is no immediate fix, and we expect further disruption in the coming quarters. To address the accelerating inflation that we saw during third quarter, we have now announced our fourth price increase of the year, which will go into effect at the end of this year. To continue our efforts to offset the increased costs on purchase items and logistics in the marketplace. We are in a difficult environment with inflation and cost pressure, but I feel that we have done a nice job balancing enhanced pricing and our pursuit of growth. With logistics, we are getting impacted in three different ways. First, our supply chain is predominantly out of Asia, and the ability to ship product from that region to Europe and the Americas is now more costly and less predictable than ever before. Second, it is also difficult to reliably coordinate and schedule product shipments from our factories to our customers. And third, in some cases, our customers are unwilling or unable to schedule pickup or delivery of our products, which impacts the timing of revenue recognition. While we believe the situation with our customers is getting better, we are the most impacted in the latter weeks of the third quarter. Finally, it is hard to maintain staffing and productivity levels in certain parts of the world in the current environment. For example, in China, we're having to hire a significant number of new associates to keep up with demand and to satisfy the emerging local laws. In Europe, labor is especially tight in certain areas, While in the Americas, we saw a large COVID quarantine rate during Delta's rise, and it is also a very tight labor market. We are pleased that the heightened COVID cases and related quarantines we saw in the third quarter across our business have consistently declined through October, and we are encouraged by this continuing downward trend. We will, of course, continue to focus on the safety of our associates, as we have been since the start of the pandemic. We are actively working through each of these disruptions, and we expect it will take a few quarters for us to adjust to the extended supplier lead times, the disruption in logistics, and the issues with labor availability before we return to the more normal operating model. Additionally, we have not seen, nor do we expect, an increase in cancellations from our backlog, so our revenues are there for us to deliver in the coming quarters. Following our third quarter results and with the assumption that these issues will impact closed serve in the fourth quarter and likely into 2022, we adjusted our 2021 full-year guidance metrics yesterday. As we indicated in yesterday's press release, our revised adjusted EPS range is now $1.40 to $1.45. I will now turn the call over to Amy to cover our financial results in greater detail.