Flowserve Corporation

Good day and welcome to the Q3 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, Investor Relations and Treasury. Please go ahead.

Thank you, Elaine, and good morning, everyone. We appreciate you participating in our conference call today. to discuss FlowServe's third quarter 2022 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 note that our earnings material due And this call will include non-GAAP measures and contain forward-looking statements. And these statements are based upon forecasts, expectations, and other information available to management as of November 1st, 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 third quarter earnings call. Let me start by saying that no one is more disappointed than I am about performance in the third quarter. Our results this period do not reflect what PostServe is capable of delivering, nor are they representation of what we expect going forward. The third quarter was impacted by a number of items, some of which are self-inflicted, some were strategic decisions, and other were one-time events that came to fruition in the quarter. As a result, we delivered third quarter adjusted EPS of only $0.09. In addition to the $0.19 of ERP systems issues, and corporate expense items that was disclosed in our September update. We also incurred other unexpected costs and headwinds in late September that further deteriorated our margins and earnings, such as higher than expected bad debt and under-absorption expenses, as well as project true-up costs coming from inflation-related impacts in our highly engineered businesses. Our results were also impacted by an increase in R&D expense that we believe to be a very positive long-term growth driver for FlowServe. Late in the third quarter, we commenced a formal partnership with Chart Industries related to hydrogen fueling pumps. As part of the agreement, we acquired their in-process research and development technology, and its purchase was immediately expensed in our third quarter SG&A, as noted in our Form 10-Q. Despite the negative impact to the quarter's adjusted EPS, we moved expeditiously to close this agreement, given the benefits derived to both companies, including a five-year agreement to supply Chart with these pumps upon commercialization. We believe having this technology will further increase our capabilities in hydrogen, and we also expect that the opportunities available to FlowServe in the high-growth hydrogen markets extend well beyond this initial agreement. While the impact to our results for the quarter for these items was significant, we believe most of these items will not impact future performance. First, the North American enterprise systems issues that impacted our highly profitable operations during the third quarter was remedied by mid-September. Since then, we've continued to operate at or above pre-conversion levels, and we do not expect this headwind to persist going forward. And the corporate expenses were also distinct to the third quarter and should not recur in the fourth quarter. Likewise, the purchase of the hydrogen technology investment we made is clearly a quarter-specific charge that we do not anticipate repeating. And lastly, the elevated bad debt charges of the third quarter are expected to subside. Those are certainly the easy ones to identify. Additionally, from an operational perspective, I am encouraged that many of the supply chain and personnel challenges that plagued us for the last year and impacted our ability to plan and meet lead times have continued to stabilize and improve. Part of this improvement is a direct result of the targeted actions we have taken to improve our supply chain management and build greater resiliency and redundancy in our facilities to support our customers and meet their expectations more consistently. Our efforts are not complete, and we continue to see opportunities to improve lead times for certain procured items, such as electronics, motors, and some castings. As we continue to make progress with planning and lead times become more predictable, we expect our revenue conversion and margins to improve. Let me assure all of our shareholders that we fully recognize that FlowServe's recent performance has not met our own expectations or those of our shareholders. We have to significantly improve our execution and our ability to work through the challenges of today's complex environment. While we have made a lot of changes and improvements to how we operate, our execution in the third quarter overshadows that progress that we are making. We fully expect to deliver better results going forward. Combining the discrete items that are not expected to recur with our strong backlog and overall healthy in-market environment, we do see a clear pathway to delivering improved results. We know we must execute to get there, and this management team and I are committed to doing just that. Let me now turn to our third quarter bookings. We capitalized on high activity levels and delivered third quarter bookings of $1.2 billion, which is the highest quarterly level since 2014. and it represents a year-over-year increase of 34%. These strong bookings were anchored by two large project awards totaling approximately $250 million. Additionally, our traditional run-rate bookings in aftermarket and MRO, as well as our continued success with diversification, decarbonization, and digitization awards, remained healthy throughout the period. Despite increasing economic uncertainty, we continue to have a strong funnel of project opportunities at levels very similar to a year ago, driven by energy transition activities and the global need for energy security. Some of the larger projects we were awarded in this quarter included a roughly $220 million award to supply highly engineered and industrial pumps to support the Jafura gas development project in Saudi Arabia. We have a well thought out execution plan with strong project management in place, and we are excited to be part of this significant development. Additionally, in our water markets, we booked over $30 million of engineered pumps for a pipeline that facilitates the use of desalinated seawater for copper mining activities in Chile. With a continued focus on energy security and independence, we have participated in the resurgence in the nuclear power markets and booked a handful of pump and valve orders in North America and Korea, primarily for nuclear maintenance, upgrades, and life extension activities. Finally, we were awarded numerous oil and gas orders in the $5 to $10 million range, primarily in emerging regions to improve energy security and efficiency. Given the size and duration of the Jafura Award, I'd like to provide some additional color on the project in our partnership with Aramco. This massive natural gas processing facility is expected to produce 2 billion cubic feet of gas per day by 2030, as well as provide feedstock for hydrogen and ammonia production. Our longstanding pump frame agreement with Aramco helped secure a significant amount of this work. We have improved our project quoting process and enhanced our project management capabilities to ensure that we deliver the margins that we are entitled to for this large project. With our success on Jafura, as well as a number of other large projects, both of original equipment bookings increased over 60% versus prior year to $680 million. which represents our highest OE bookings level since 2014. Despite the strong dollar, we generated $544 million in aftermarket bookings, which represents a year-over-year increase of almost 10% and over 16% on a constant currency basis. Our aftermarket MRO bookings have remained strong all year as we help operators maintain higher productivity and output levels of their existing assets. Turning briefly to our bookings performance by in-market and on a constant currency basis, given the continued strengthening of the U.S. dollar, our oil and gas bookings were up nearly 80%, reflecting the large project awards and continued strength in the upgrade and revamp environment. Power bookings increased over 19%, supported by nuclear maintenance and life extensions and a nice hydropower award. Both chemical and general industries were up 15%, while our water bookings roughly doubled on the large water pipeline award I highlighted earlier. From a regional perspective, our third quarter bookings growth included all regions. The Middle East and Africa was up over 160%, again driven by the large award in Saudi Arabia. North America, Europe, and Latin America delivered healthy growth of 20%, 31%, and 41%, respectively. Finally, Asia Pacific bookings increased a modest 7%. I am encouraged by the activity levels we've seen thus far in 2022 in both our traditional end markets as well as with the success we've delivered through our 3D strategy. We believe that the outlook going forward remains promising. We will continue to support longstanding customers while at the same time targeting energy transition opportunities and previously underserved markets where we expect higher growth. Near-term visibility supports our view of continued year-over-year bookings growth in the fourth quarter, in both MRO and project work, and we expect to secure another quarter over $1 billion in orders. The combination of this improved global demand environment and the disruption of energy supplies in Europe has driven significant activity around energy security, particularly in our traditional oil and gas, nuclear, and LNG markets. Additionally, the ongoing focus on decarbonization of existing assets as well as clean energy solutions continue to provide incremental opportunities targeted by our 3D growth strategy. The concerns and uncertainty around a prolonged inflationary environment and the increased probability of recession risk somewhat soften our outlook for growth. These conditions are most prevalent in Europe, driven by the significant increase in energy costs and energy security risks, as well as a weakened currency. We expect the impact of a potential recessionary environment would primarily impact our GDP-driven markets, including chemicals and general industries, where we have seen solid year-to-date constant currency bookings growth of 12% and 7% respectively. However, based on our visibility into continued strong booking opportunities in other markets, including increased investment in energy security and decarbonization activity, we feel reasonably well-positioned for growth in 2023. Looking forward, the strong OE and aftermarket bookings we delivered in the quarter produced a backlog that exceeds $2.6 billion, reaching the highest backlog level since 2015. This level of work under contract, combined with our expectations of a continued supportive demand environment, provide us with the opportunity to deliver strong top line growth and margin improvement as we move forward. With that, let me now turn the call over to Amy to address our third quarter in more detail and our expectations for the fourth quarter. I will conclude the call with remarks on our 3D strategy and comments on positioning FlowServe for success in 2023. Amy?