Flowserve Corporation

Good day and welcome to the Q2 2022 FlowServe Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jay Roosh, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Christina, and good morning, everyone. We appreciate you participating in our conference call today to discuss FlowServe's second quarter 2022 financial results. On the call with me this morning are Scott Rowe, the Service President and Chief Executive Officer, and Amy Schwetz, the Senior Vice President and Chief Financial Officer. After 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 note that our earnings materials do, in this call, include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations, and other information available to management as of July 28, 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 disclosure, as well as the reconciliation of our non-gauged answers to our reported results, both of which are included in our press release and presentation. and are accessible on our website at float.com in the investor election section. I would now like to turn the call over to Scott Rowe, Float Service President and Chief Executive Officer, for his preparedness. Great.

Thank you, Jay, and good morning, everyone. Thank you for joining our second quarter earnings call. We are pleased with our second quarter performance, which modestly exceeded the outlook we provided on our last call. The 30 cents of the EPS that we delivered in the second quarter keeps us on pace to deliver within our full year adjusted EPS guidance. Closer benefited from top line growth in the quarter as our incremental adjusted operating margin was nearly 60% on a sequential revenue increase of 7%. Our end markets remained supportive and we delivered strong with $1.04 billion, primarily by aftermarket and MRO activity that is now above pre-pandemic levels. The overall operating environment was challenged in the second quarter, but signs of stabilization appeared late in the period, giving us renewed confidence in our second half outlook. During the quarter, bottlenecks remained for certain procured items, such as electronics, soft goods, and motors. Supplier lead times were still extended, but have begun to stabilize, providing us more certainty to incorporate their delivery dates into our production schedules and our customer commitments. China lockdowns continue to be the headwind for most of the second quarter, with lockdowns easing and logistics improving late in the second quarter, allowing our facilities and suppliers to start the process of restoring their production. Additionally, our global suppliers continue to be impacted by labor availability issues and an inflationary environment that existed for most commodities and raw materials. While we are seeing evidence that pricing for some items may have peaked and could be starting to moderate, particularly as it relates to logistics and materials, the two price increases that we have implemented so far in 2022 will support our efforts to maintain price-cost neutrality for the year. The first price increase began to show this quarter, and our most recent increase will benefit the second half of the year. I was fortunate to visit many global manufacturing locations during the second quarter, and saw the impact of these challenges firsthand. To say the least, it is an incredibly difficult environment to operate in, and I want to thank our dedicated and devoted teams for their passion and commitment to serve our customers and drive success for Folkserve. With this operational backdrop, the results we delivered demonstrated the resolve and dedication of our associates around the world. Our teams adapted and found their way around to the challenging environment by placing a high level of focus on mitigating the disruptions, minimizing the costs that we had incurred in recent quarters. We worked hard to qualify new suppliers where needed and aggressively repositioned and expanded our supplier base. Where appropriate, we spent cash to build our inventory with forward purchases and expedited critical components and materials. These efforts helped ease the expanded lead time environment and increased our ability to more accurately predict delivery times. that will continue our operation as we build resiliency in our chain, strengthen our planning capabilities, and staff our operations to the growing environment. The entire organization is focused on our strong backlog into revenue growth and margin expansion. The second quarter continued a trend of solid bookings, and I couldn't be more encouraged by the strength and demand for our products and services that we saw in the quarter. In the quarter, our $1.04 billion in new awards delivered a year-long bookings growth of 10% despite the strengthening dollar. The growth was primarily driven by our aftermarket and run-rate businesses as several of the large projects in our funnel shifted into the second half of the year. The high utilization rates at our customer facilities and the impact of deferrals that took place in 2020 and 2021 drove aftermarket bookings of $526 million, which delivered constant currency year-over-year growth of 4.5%. From an original equipment perspective, bookings increased 21% in the prior year to $518 million. While we did not repeat the amount of large-scale work that was in the first quarter, primarily due to timing, we did receive roughly 15 orders in the $5 to $20 million range across all of our major end markets. Additionally, our MRO-related original equipment bookings remained strong. While we saw several projects progress to funding in the second quarter, a few of the orders that we did expect to book in the quarter shifted into free, and some of these have already been booked by. Our project funnel for large project work over the next 12 months continues to grow in the second quarter, with good visibility into opportunities across LNG, nuclear, oil and gas, water, several desalination projects. Finally, the developing markets and our committed partners in our distribution channel provide strong bookings for the first half, which should continue during the remainder of the year. With both solid OE and market bookings in the quarter, our backlog topped $2.3 billion, reaching the highest level since 2015. This level of work under contract is aligned with our expectations of a supportive demand environment position us well to deliver strong growth and margin improvement as we move forward. As I've mentioned in prior calls, I am increasingly confident that we are at the beginning of a multi-year growth cycle driven by a number of factors, including aging existing infrastructure pressured by hospitalization, which will require ongoing investment to maintain capacity and increase efficiency in reducing use. Energy security and energy independence is a rapidly growing theme driven by the war in Ukraine, and it will require significant investment across our traditional markets, including increased LNG capacity and renewed interest in nuclear power. GDP growth and consumer demand will also continue to drive infrastructure space in our chemical, water, and general industry markets. the global focus to decarbonize and meet CO2 reduction commitments will further support investment opportunities. I would also like to highlight that our diversification, decarbonization, and digitization growth strategy contributed to strong rankings in the second quarter. In particular, we saw strength in areas where we utilized our flow control activities to support customers' decarbonization efforts. Our energy transition alone has been over 60% since the beginning of the year. Looking now at our performance by end market and on a constant currency basis given the strengthening dollar. Chemicals represented the strongest market for year-over-year with bookings up over 20%, including two small project awards totaling $12 million. Oil and gas industry bookings were up over 20%, and it benefited from project work in the $5 to $20 million range. Water bookings were up 37%, with two projects totaling more than $10 million. including a desalination project in the Middle East. Finally, our power bookings grew up roughly 3% on a relatively tough $20,000 compare that included a $12,000 nuclear award. From a regional perspective, our second quarter bookings growth was driven primarily from North America and Asia Pacific, which grew up 19% and 27%, respectively. Europe delivered 9% growth from the Middle East and Asia, Africa was essentially flat. Finally, Latin America bookings were down roughly 10%. Let me now turn the call over to Amy to address our financial results in more detail.