Flowserve Corporation

Please stand by. Your conference is about to begin. Good day and welcome to the third quarter 2023 FlowServe Corporation Earnings Conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jay Roosh, Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, Melinda, and good morning, everyone. We appreciate you joining our conference call to discuss FlowServe's third quarter 2023 financial results. On the call with me today 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 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 October 26, 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 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 in the Investor Relations section. I would now like to turn the call over to Scott Rowe, Flow Service President and Chief Executive Officer, for his prepared comments.

Thanks, Jay, and good morning, everyone. It was great to see so many of you in person at our Analyst Day a few weeks ago in New York City. where we outlined our 2027 financial targets and our strategies to achieve them. We discussed our new operating model and how it has enabled the company to improve our speed, accountability, and cost efficiency in our operations. We also highlighted our belief that the intersection of energy security and energy transition has FlowServe well positioned for accelerated growth, driven by the success of our 3D strategy, which we'll provide further updates and progress on today. For anyone who hasn't reviewed the analyst day materials, I'd encourage you to access them on our website in the investor relations section. Let's now turn to the quarter. I'm extremely pleased with the continued strong operating performance that we demonstrated again this quarter. This performance drove admirable financial results, including the adjusted earnings per share of 50 cents, which exceeded our internal expectations. Our execution continued to improve during the quarter. evidenced by our highest quarterly revenues since 2015, with an adjusted gross margin of nearly 30% despite the higher mix of original equipment revenue. Our markets remain healthy and supportive, and we delivered over $1 billion in bookings for the seventh consecutive quarter. With a book-to-bill of nearly one times, we largely maintained our near-record backlog of $2.8 billion. This backlog provides the strong foundation to our 2024 revenue and earnings growth expectations. Our third quarter results, coupled with our improved execution, provided us the confidence to raise our full year 2023 revenue and adjusted EPS targets for the third consecutive quarter this year. While our operating performance was certainly strong in the third quarter, both our reported and adjusted earnings per share were tempered by a discreet $10.7 million non-cash accrual related to the annual assessment of certain long-term liabilities. This expense had a six-cent impact in the quarter for both reported and adjusted earnings per share. Nevertheless, we continued to build on the momentum established late last year. We delivered our fourth consecutive quarter of year-over-year revenue and earnings growth. We also took significant actions during the quarter that largely completed our new operating model intended to drive greater speed and accountability within the organization. We have now exceeded the $50 million annualized cost reduction goal we set out late last year, which will largely be reflected in the 2024 results. More importantly, we are already realizing benefits from the new operating model with a more efficient and effective operating platform. The seven business units within our two segments are driving an improved focus on their targeted markets that enable better product positioning, while the improved functional support provides the framework and processes to ensure greater operational effectiveness. I am confident that the new operating model will help drive our expectations for accelerated growth and strong financial performance. During the third quarter, we generated bookings of nearly $1.1 billion. Compared to last year's third quarter, which included the $210 million referral award, our bookings this year were driven primarily by smaller project awards in the $5 to $10 million range, with strong aftermarket and MRO work across all regions. Over our awards this quarter, only one project exceeded the $20 million level at roughly $40 million in size. As always, predicting project award timing is difficult, and in the third quarter, we saw several promising opportunities move out of the quarter and are now likely to book in the fourth quarter. Our project funnel has grown year over year, and we have line of sight to a number of meaningful, larger projects that we expect to be awarded over the next several quarters. For instance, we see significant larger project opportunities on the horizon in the Middle East, for our traditional oil and gas and petrochemical markets. The improved project outlook, combined with our strong backlog, enable us to remain disciplined in the work that we pursue. Our project pursuit process requires the margin expectations that we deserve given the risk and effort on these large projects. This approach has proven successful for us to date as we continue to increase the gross margin levels of project work in our backlog. And we intend to remain on this trajectory in coming quarters as we aim for continued gross margin progression. In line with our 3D strategy, we continue to capitalize on growing investments in new energy initiatives such as hydrogen and carbon capture, while traditional markets remain healthy. In the third quarter, 3D bookings represented roughly 26% of our total awards, including substantial new energy awards, where we are on track to exceed $200 million for the year. a near 50% increase over 2022. The nuclear and LNG markets are also key to our 3D strategy, given the strong levels of expected growth. While we didn't see any large projects in these categories in the third quarter, we booked a healthy amount of smaller awards, as well as significant ongoing MRO and aftermarket work. Turning to our aftermarket business, Most of our customers' facilities remain highly utilized and are focused on safety, uptime, efficiency, and emissions reductions. Bolster remains well-suited to fill these needs. In the third quarter, we generated over $580 million of aftermarket bookings, marking the eighth consecutive quarter exceeding the $500 million-plus threshold. We see this trend continuing with no signs of this activity receding anytime soon. Our market outlook remains positive. We continue to believe we are in the early years of a multiple year up cycle. We haven't seen any indication of a slowdown in our served markets. We continue to expect a full year book to bill above one, which will maintain our backlog in support 2024 growth. Our project funnel remains above last year's third quarter level and has increased 7% since the beginning of the year. We also expect that both aftermarket and MRO activity levels will remain strong into 2024 and beyond. CloseServe is well-situated to capitalize on energy security and energy transition. These global themes are expected to continue driving significant investments for decades to come, and our 3D strategy has CloseServe well-positioned to drive accelerated growth. Additionally, our exposure to later cycle project investment by industries that have substantially underspent over a three-year period further supports our expectation for multi-year growth. Let me now turn the call over to Amy to address our third quarter financial results in greater detail.