Flowserve Corp at Stifel Cross Sector Insight Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Great. Thank you, Scott. So I'm going to start with bear cases first. It's a bear case number one. EBITDA margins have been in decline since the 2014 oil price peak despite multiple rounds of restructuring and the Flowserve 2.0 transformation. The 15% to 17% operating margin targets are not credible, and it's difficult for investors to have confidence in sustainable margin expansion.

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Great. I wanted to just talk a little bit about Flowserve 2.0. I believe it's supposed to be in the optimized phase beginning in 2020. What is the optimized phase and what does it evolve? And was Flowserve 2.0 implementation on track? Or did COVID delay it a little bit?

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. Great. I'm going to move on to the second bear case. Historically, during cyclical CapEx upturns, which Flowserve is starting to see now. There's too much capacity chasing OEM project volume and pricing has been very challenging, leading to lower incremental margins as backlog turns into revenue.

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. That's great to hear. I'm going to finish up on the bear cases, growth in energy transition in other markets won't be enough to offset the secular decline in oil and gas markets, and Flowserve is likely to grow slower than GDP as a result.

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. Great. And now I'm going to turn it over to the bull cases. You just touched on this a little bit, but Flowserve has several positive demand drivers over the short, medium and long term with high commodity prices and underinvestment during COVID. Renewed focus on energy independence, driving investment in oil and gas, LNG and nuclear, decarbonization spending, driving investment in energy efficiency, biogas, REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2022 / 1:45PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference carbon capture, et cetera, et cetera. So is there any -- are there any technologies that need to be developed or acquired maybe to participate in these markets?

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. Thanks. On to bull case number two, touch on this again. Flowserve has updated strategy to focus on diversification, decarbonization and digitization, diversifying away from traditional energy markets provides for better market growth over time with digitization, opening up opportunities for new revenue streams and share gains. So maybe you can just talk about some of your -- a little more detail on your digitization strategy, maybe the RedRaven offering. How does this work in reality? And what other technologies or products are being deployed to try and capitalize on these initiatives? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2022 / 1:45PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Just a follow-up. So you're digitizing products that service. There's a high cost of failure to the products that you put in. Maybe you could talk about the monetization opportunity of some of the digital?

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. Great. In our final bull case, cash generation has improved significantly in recent years with 95% conversion of adjusted net income over the last 4 years, having averaged 66% for the decade prior. Improvements in working capital are structural and sustainable. And Flowserve should be able to maintain this improved free cash flow conversion going forward, enabling capital deployment opportunities that have been absent in the last few years?

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Yes, great. I was going to say, as these processes are institutionalized into the working capital movement, should we expect to see further improvement in cash flow conversion? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2022 / 1:45PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference

Question: Adam Michael Farley - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : All right. Great. Well, we are just about up on time. So Scott and Amy. Thank you.