Flowserve Corporation

Good day and welcome to the Q4 2022 FlowServe Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jay Roosh, VP of IT and Treasurer. Please go ahead, sir.

Thank you, Anna, and good morning, everyone. We appreciate you joining our conference call today to discuss FlowServe's fourth quarter and full year 2022 financial results. On the call with me this morning are Scott Rowe, Flo Service 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 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 22nd, 2023, 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 both 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, Solicitor's President and Chief Executive Officer, for his prepared comments.

Thanks, Jay, and good morning, everyone. I'd like to start by thanking our associates around the world for their resilience and dedication to our customers and our company. In the fourth quarter, we executed well and delivered significant performance improvement across all aspects of our business, which led to our adjusted EPS of 63 cents. In short, we finished the year strong. These results were achieved despite the continuation of some supply chain and labor availability headwinds. Additionally, we delivered solid bookings of $1.1 billion, representing constant currency year-over-year bookings growth of nearly 20%, with continued support from our traditional in-markets and enhanced 3D booking activity. With four consecutive quarters now exceeding $1 billion in bookings, we ended the year with a near-record backlog of $2.7 billion, despite the impact of a much stronger dollar compared to the last time we were at these levels in 2014. We recently announced an agreement to acquire Valon, a Canadian valve manufacturer. This acquisition will be incredibly complimentary to our existing FCD business and enhances our 3D strategy with growth in nuclear and severe service markets. We're looking forward to welcoming the Valon Associates into the post-serve family toward the end of the second quarter. In the fourth quarter, we delivered modest improvement in our shipping cadence, which drove year-over-year constant currency revenue growth of roughly 19% and total revenues over $1 billion, which was our highest quarterly sales level since the fourth quarter of 2019. I would also note that our North American seal business is back on track, as daily shipments exceeded pre-system conversion levels, and we have significantly closed the gap that resulted from the third quarter's ERP system disruption. SG&A containment remains a priority, and we again delivered a quarterly adjusted SG&A below $200 million, which included the impact of a favorable settlement, but more importantly, it reflects focused efforts around cost management and improved productivity within our overhead structure. With this strong finish to the year, I am confident we'll serve as well-positioned for a successful 2023 as we build on the fourth quarter momentum and deliver our robust backlog. Let me now provide some additional color on our fourth quarter bookings. Bookings continue to be strong in the fourth quarter at $1.1 billion. This is slightly below our third quarter bookings level of $1.2 billion, which benefited from the $225 million deferred contract. While we didn't have a similar size contract this quarter, we did secure a number of awards in the $10 to $35 million range, totaling over $100 million, primarily in oil and gas and chemical markets, as well as many smaller projects in the $5 million range across our end markets. Importantly, our higher margin aftermarket and MRO markets continued to provide solid growth in all regions, further supporting our expectations for 2023 margin expansion. Full-year 2022 bookings of $4.4 billion increased roughly 18% or nearly 23% on an FX-neutral basis. as the overall market rebounded nicely from prior years. We achieved this strong result despite our exit from the Russian market, which typically had provided bookings in the $50 to $70 million range. As we highlighted throughout the year, larger project activity returned in 2022 after several years of delays and was complemented by the second consecutive year of steady growth in our run rate businesses, which together drove a 36.5% increase in backlog for the full year. While we had expected healthy bookings growth as we entered 2022, given the pandemic-driven lack of investment in new infrastructure and maintenance, we performed better than expected, driven by our customers' intention to ensure global energy security in their increased energy transition spending. We expect these trends will continue in 2023, and we believe FlowServe is well-positioned in both new project and aftermarket work. To provide support of these themes, our oil and gas bookings were up 35% in the quarter and up over 40% for the year. And our power bookings also remained strong on energy security concerns, with fourth quarter awards up 17% and up 27% for the year. Shifting to our market outlook for 2023. We believe the current environment supports another solid year of bookings growth for FlowServe, despite the potential for some macro headwinds. While we don't currently expect another project the size of last year's deferral award, we do have visibility to a robust pipeline of smaller-sized projects in 2023. In fact, our project funnel is roughly at the same level as it was this time last year. Additionally, we expect our aftermarket and MRO business to maintain its recent momentum through 2023, as we believe customers will continue to invest in maintenance, efficiency, and decarbonization. Our 3D strategy is working and we expect continued growth in 2023 from our specific efforts to diversify and capitalize on decarbonization efforts around the world. We expect energy security priorities and new energy spending will continue to be key growth catalysts for us in 2023 and beyond. The disruption of energy supplies in Europe has driven heightened levels of activity to secure reliable energy in all regions of the world. These conditions have already driven a significant investment increase in nuclear, LNG, fossil power plants, as well as regional oil and gas infrastructure. We believe this trend will continue to drive capital investment in oil and gas, as well as other energy infrastructure. Additionally, while 2022 decarbonization spending far exceeded our initial expectations by delivering bookings growth of 75%, we anticipate further growth to occur in 2023. Our energy transition funnel is up more than 60% versus this time last year. This growth is supported by government regulations, corporate ESG commitments, and public pressure, creating planned investments in an effort to make the world a better place. The moderating factors incorporated in our outlook include uncertainty around a prolonged inflationary environment, and the increased probability of recession risk, primarily in Europe, driven by the significant increase in energy costs and the energy access issues, as well as the region's weakened currencies. A potential recessionary environment would likely only impact our GDP-driven markets, including chemicals and general industries, where both markets delivered 10% growth in 2022. However, we believe continued strong bookings opportunities in other markets will overcome any softness we experience from our GDP-based businesses. With that overview, let me now turn the call over to Amy to address our fourth quarter financial results and our expectations for 2023 in greater detail. I will conclude the call with remarks on our 3D strategy and comments on positioning FlowServe for success in 2023. Amy?