Flowserve Corporation

Stand by, we're about to begin. Good day, everyone, and welcome to the Q1 2023 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, sir.

Thank you, Lynette, and good morning, everyone. We appreciate you joining our call today to discuss FlowServe's first quarter 2023 financial results. On the call with me today are Scott Rowe, Float 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 material is due, 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 May 2, 2023, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to review our safe harbor disclosures as well as our reconciliation of 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 in the investor relations section. I would now like to turn the call over to Scott Rowe, Closer's President and Chief Executive Officer, for his prepared comments.

Thanks, Jay, and good morning, everyone. Thank you for joining Closer's first quarter earnings call. I am pleased to report strong results for the first quarter, which provide us with a very solid start to the year. First quarter adjusted EPS came in at $0.40, supported by year-over-year revenue growth of nearly 20%. Thanks to the efforts of our associates across the company, we continue to build on the positive momentum created in the 2022 fourth quarter, driving further operational improvements while performing for our customers. The first quarter has historically been our most seasonally impacted period in any given year, but we have taken action to moderate this trend and drive more consistency in our results. Our first quarter performance was a great start in this effort. In the fall of last year, we challenged the team to not only deliver a strong finish to 2022, but also to ensure that we are maximizing our opportunities to begin the year strong. The team's efforts paid off as both segments delivered outstanding results, exceeding their revenue, margin, and bookings commitments. The first quarter results have us well positioned relative to our previously announced full-year guidance and provide a solid foundation to build upon throughout the year. We remain optimistic about our in-markets, and are encouraged by the growth in value creation opportunities ahead of us. I am increasingly confident that FlowServe is well positioned for 2023 and beyond, and I believe we are differentiated from many others in the industrial landscape. Our end markets remain healthy, and we secured solid bookings above a billion dollars for the fifth consecutive quarter. In fact, our project funnel is now at its highest level since 2019, including projects across all industries, driven primarily by two key catalysts. First, there is an increased focus on energy security around the globe, which is driving heightened levels of activity. For example, we are seeing significant investment in nuclear, LNG, fossil power plants, and regional oil and gas developments as countries look to become less dependent on unreliable foreign suppliers of energy. Today, our nuclear and LNG project funnels are up significantly from where they were a year ago. The second primary driver of our expected growth is decarbonization. We believe spending in this area will continue to expand through 2023 and accelerate beyond this year as our customers look to meet their ESG commitments and comply with regulatory changes. This investment is supported further by various government incentives, including the Inflation Reduction Act in the United States. Our project funnel and decarbonization doubled in 2022 and has risen nearly 25% since the beginning of the year, and now includes activities like hydrogen, carbon capture, sustainable energy like wind and solar, as well as projects to decarbonize existing infrastructure. CloseServe is truly at the intersection of energy security and energy transition. These two major global themes leverage both our traditional in-markets and our 3D strategy of diversification, decarbonization, and digitization. This backdrop, combined with FlowServe's late-cycle exposure and the direction of our customers' capital spending, support our expectations for continued positive order momentum in 2023. Additionally, we have taken significant actions over the last year to drive further operational improvements to better execute in the current environment. We have focused on accountability, streamlined decision-making, and improved processes across our manufacturing platforms and supply chain functions. We believe the combination of the supportive market environment with improved operational execution will enable us to continue to build on the momentum of stronger operating results as seen in these last two quarters. Closer delivered revenues of nearly $1 billion this quarter, our highest first quarter sales level since 2015. We leveraged this top-line growth to deliver adjusted gross margins of over 30%, an important hurdle for flow service progression towards price cost and absorption improvement. Additionally, we produced incremental adjusted operating margins of 34% in the quarter. Notwithstanding our strong revenue performance, our first quarter book to bill was 1.08 and drove a sequential increase in our backlog, which now sits at $2.8 billion. This solid foundation, the strongest since 2014, Positions flow serve for expected revenue growth in the remainder of 2023 and 2024. Finally, we expect margins in our backlog to further increase as we replace lower margin project work that was booked primarily in 2021 with higher margin business we are winning today. We should also benefit from the impact of our January 1st price increase in future periods as it works its way through the system. Let me now provide some additional color on our first quarter orders. Bookings remained strong in the first quarter at $1.06 billion. While last year's bookings benefited from four projects sized between $30 and $50 million, our bookings this year were driven by higher margin MRO and aftermarket awards. Today, MRO and aftermarket bookings are close to record levels, supported by strong growth in FCD and our SEALs business across all geographies. Many of our customers have been running their assets at high utilization rates over the past year, which requires ongoing maintenance spending to ensure their facilities remain operational and productive. We expect to see solid activity in this space, including turnarounds, general maintenance, and efficiency-focused upgrades throughout 2023, and at this point, we see no signs of it slowing down. This quarter's largest project bookings included three midsize awards in the $10 to $20 million range, which were primarily in the oil and gas markets for both pump and valve equipment. We also booked several smaller projects in the $5 million range that represented virtually all of our core end markets and regions and included a record level of energy transition bookings of nearly $50 million. As a result, we delivered 11% constant currency bookings growth in our chemical and general industries markets, while our power and oil and gas markets were down 32% and 4%, respectively, due to the tough compare of last year's first quarter large project bookings, which included a $55 million nuclear award. We are in the second year of what we continue to believe is a multi-year upcycle. We fully anticipate delivering bookings this year at a similar level to 2022 with the potential for additional growth. This comes despite the headwind of the large $220 million deferred project that we booked last year. Later cycle project investment, increased EPC backlogs, and continued MRO and aftermarket growth are expected to drive our full year book-to-bill over 1.0 again this year. resulting in increased backlog that should position FlowServe for further revenue growth in 2024. Again, we are pleased with our first quarter results and we remain confident in the outlook. Our performance over the last two quarters affirms that we are pursuing the right initiatives, including the implementation of our 3D strategy and supporting our traditional customers. Energy security is critical in the near term, and we believe the 3D strategy is well aligned with the expected energy transition and decarbonization investments of tomorrow, creating visibility to long-term growth. With that overview, let me now turn the call over to Amy to address our first quarter financial results and our expectations for the remainder of 2023 in greater detail. Amy?