Flowserve Corporation

Good day and welcome to the FlowServe fourth quarter 2021 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jay Rouge, VP Treasurer and Investor Relations. Please go ahead, sir.

Thank you, Anita, and good morning, everyone. We appreciate you participating in our conference call today to discuss FlowServe's fourth quarter and full year 2021 financial results. On the call with me this morning are Scott Roe, Close Service President and Chief Executive Officer, and Amy Schwetz, our 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 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 February 23, 2022, 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. Thanks, Jay, and good morning, everyone.

Thank you for joining our fourth quarter earnings call. Before we discuss our results today, I want to acknowledge the severity of the situation in Ukraine. While Flowserv has no associates in the country, our thoughts and prayers are with their citizens, and we are hoping for the most peaceful outcome possible. The Russia attack on the sovereign country will have significant humanitarian and geopolitical consequences for years to come that are difficult to put into perspective today. We at Closerv sincerely wish for peace in the Ukraine and hope that Eastern Europe returns to something more normal in the near future. I'll now begin my prepared remarks. Closerv made progress across several fronts as we closed out 2021, including delivering strong bookings capitalizing on the ongoing recovery in our aftermarket business and supporting a growing range of customers on their energy transition journey. Nevertheless, the overall environment in the fourth quarter remained challenging, with continuing COVID-related impacts to our people, our operations, and our customers. I want to start by expressing my sincere appreciation to our associates for their commitment to PloServe, our customers, and the pursuit of excellence during this challenging time of disruption and transition. Our people are truly FlowServe's greatest asset, and they have worked tirelessly to serve our customers throughout the pandemic. From a financial standpoint, COVID had a larger impact on our 2021 financial results than it did in the prior year, due primarily to the lower starting backlog position we had entering last year. Our productivity in the fourth quarter was further impacted by the Omicron variant, first in Europe and then later in the U.S. With cases appearing to have peaked in January, we believe the majority of the impact to our operations from COVID-related absenteeism is now behind us, as our associates have largely returned to work. I am proud of the work we have done to keep our associates safe around the globe, and despite many of the personal challenges they faced, our talented team has remained committed to serving our customers' critical infrastructure and needs throughout these pandemic years. In addition to direct COVID-related impacts, we faced increasing macroeconomic headwinds beginning in the middle of the 2021 third quarter, which continued and modestly worsened into the fourth quarter, including heightened inflation, supply chain and logistics disruptions, and labor availability issues in many of our locations. We have addressed these issues directly with mitigating actions, but the net impact has delayed our ability to ship product and increased our overall cost to serve our customers. Despite these challenges, we are seeing promising fundamentals across our traditional end markets and are encouraged with our outlook for 2022. With the foundation we have in place, we believe FlowServe is well positioned to deliver solid growth this year, and we plan to further build on that foundation through the execution of our new strategic framework, which I will discuss in greater detail later in the call. Let me first provide more color on our fourth quarter results. As I noted earlier, one of the highlights in the quarter was our bookings of $969 million, which were up 17.5% over the prior year. Aftermarket bookings of $500 million remained strong and increased 19% year-over-year, while OE bookings were up 15.9%, despite our two largest project awards being in the $10 million to $15 million range. Improving global mobility and higher asset utilization rates drove this favorable mix in our bookings growth, including aftermarket awards, distribution, and shorter cycle wins, which positioned FlowServe well to deliver on this higher margin backlog. Project activity, particularly in oil and gas, remained muted and delayed in the fourth quarter. In total, fourth quarter bookings were the highest quarterly level we have generated since the first quarter of 2020, prior to the impact of the pandemic. The year-over-year and sequential growth occurred across most of our core in markets and regions. From a strategic standpoint, we're especially encouraged by the fact our fourth quarter awards included roughly $45 million of energy transition bookings, including orders from a large Gulf Coast customer totaling over $15 million for flare gas recovery equipment to support their decarbonization efforts. We remain excited about our ability to support our customers through their energy transition journey and are confident that our broad offering and new strategic initiatives can deliver increased energy efficiency, cost savings, and carbon reduction. With our strong finish to the year, we delivered full-year bookings of $3.8 billion, an increase of 10.6% versus the prior year. Throughout 2021 and in the fourth quarter, our year-over-year growth was consistently driven by strong MRO and aftermarket bookings, with only minimal contributions from larger project work. Our year-end backlog of $2 billion is up 8% compared to the prior year, which sets a solid foundation for growth in 2022. In 2021, our aftermarket business largely returned to pre-COVID levels with bookings of approximately $2 billion, including strong demand for and market share gains in our seals business. From an in-market perspective, our chemical and general industry bookings were up 14.9% year-over-year and were at or above 2019 levels. Water bookings also increased significantly in 2021, up about 25% year-over-year, while power bookings remained essentially flat. In our largest served market, oil and gas, full-year bookings grew nearly 13% versus 2020. While we are encouraged by this growth, we are still off nearly 25% or over $400 million from our pre-pandemic 2019 bookings level due to the tremendous impact of the COVID-induced downturn on the oil and gas complex. From a regional perspective, full-year bookings growth was driven primarily from North America and the Middle East. which were up 20% and 30% year over year, with Europe and Latin America also contributing growth of 8% and 17% respectively. Asia Pacific bookings were down 12% due in part to a tougher compare period as bookings were less impacted in 2020, declining only 7%. Turning now to the income statement, fourth quarter revenues of roughly $920 million were up approximately 6% sequentially, which was below our expectations entering the quarter. While we expected supply chain and logistics delays and labor availability headwinds to continue during the fourth quarter, those issues increased beyond what we had anticipated going into the quarter. The good news is this work and the associated profit remains in our backlog. Cancellation rates remain at normal low levels, and as a result, we believe this is mainly a timing issue. We expect this environment to improve as we progress throughout the year with the potential to return to more normal operating conditions in the second half of 2022. Shifting to our operating performance, margins continue to be negatively impacted by lower year-over-year revenues, the associated under-absorption, and the frictional costs associated with the supply chain and logistics disruptions. With that said, we are pleased that the increase in sequential sales produced a nearly 50% incremental adjusted operating margin, which drove a 230 basis point sequential improvement in adjusting operating margins to 9.3%. Turning to our market outlook for this year, we expect our end markets are positioned for continued growth and view our 2021 results as the base year leading to a multi-year cyclical recovery. In addition to our belief that we will maintain the momentum and growth in our aftermarket in MRO businesses, we are increasingly confident in the return of infrastructure investment in 2022, driven in part by the significant underinvestment of the last two years across our end markets, and particularly in oil and gas. The project discussions with our customers are more constructive than in the past two years, as many of these projects are at or nearing funding approvals. sustained demand growth, elevated commodity prices, infrastructure stimulus spending, and underinvestment during the pandemic provide a constructive macro backdrop for improved project spending in 2022. Our overall project funnel is currently up nearly 10% over this time last year, and we are confident that we are well positioned to take advantage of the macro trends of the cyclical recovery in our traditional end markets. Additionally, we continue to see growth opportunities in energy transition spending. Even at this early stage in the year, we are now tracking over $400 million of energy transition related opportunities in 2022. This increased visibility into energy transition spending is driven by a number of factors, including government stated climate change targets, corporations commitment to ESG initiatives, and emerging technologies driving greater energy efficiencies, and emissions reductions. We further estimate our opportunity set in energy transition has nearly doubled versus this time last year, where our product and service offerings are uniquely positioned for success. In total, we expect to deliver year-over-year bookings growth this year in the upper single-digit percentage range. With this level of expected activity during the year, our starting backlog position that is 8% higher than last year's We believe FlowServe is well positioned to deliver revenue growth and stronger financial performance in 2022. I'll now turn the call over to Amy to cover our financial results in greater detail.