Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual) Transcript

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

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Scott, you've been involved in energy markets for quite some time. I'd like to start just with a few high-level questions on how you view this downturn relative to others you've been through. I understand Flowserve has limited exposure directly to upstream, and what there is, is mostly offshore, but oil money does lubricate a lot of the businesses that you're in. So this one clearly has some different attributes. We already had a supply-side issue with the rise of unconventional oil supplies, particularly U.S. shale. And then we've seen unprecedented demand destruction created by COVID-19. And for a short period, we'd even seen the start of a price war between Russia and the Saudis, which may or may not have been targeting the U.S. shale market to begin with. If you could just talk about your views on the oil market, what are the things we need to have to see prices rise? What are the things that would be nice to have but your business can live without? And what are the things that you would really -- do you think would really get the energy markets moving again?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : It's very helpful. Maybe I'll jump down. You made this comment just there about capital flowing into and maintenance having to get done to keep things keep things rolling. And there was a comment you made on the recent earnings call that I found interesting about customers you've spoken to acknowledging they cut aftermarket spending, and this would be, I guess, primarily downstream chemical kind of area, too deeply in 2015 and 2016. And I remember being surprised back then at how long those deferrals went on. Can you expand a little bit on those discussions and talk about what customers lost in terms of productivity, what trade-offs they're making in terms of protecting their liquidity versus running at an optimal level?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Okay. I guess then if we scratch out 2Q '20 because it has vastly different dynamics because people are closed down and you just can't send people out there to do turnarounds, and we've heard a lot about turnarounds getting pushed out of the fall -- out of the spring and into the fall or even to next year. So if we forget 2Q for a minute, just because of the black swan event that we're being -- have had going on here, it's your contention then that the declines in the aftermarket are not going to last as long. Maybe they'll be as deep in the short term, forgetting 2Q '20, but they won't last as long as they did in '15, '16 and probably evening a little bit into 2017. Do you think customers have learned a lesson from what happened in the last downturn and will be more apt to spend on maintenance and productivity as we go through this downturn?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : So a fair amount of the assets, the downstream and chemical assets, are controlled by IOCs and NOCs, who I think typically will cut spending across their portfolios in oil downturns because they're getting pinched on the upstream side of the business. Do we really need to see a recovery in oil prices even to maintain a decent level of aftermarket spending on those downstream assets, just to have enough funding from those companies in particular rather than just the independents to see that level of maintenance spending maintained?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Fair enough. A few comments from the last earnings call on current trends and expectations, I'd just like to follow-up and see whether those trends have played out the way you expected a month ago, if you've got any updates there. You said bookings in 2Q '20 might decline 15% to 25%. Would you say you're still on trend for that kind of a number?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : With economies opening back up, people going back to work, you being at potentially able to get on to onto different facilities and into customers' buildings, is there any reason for us to think that June won't be better than April and May?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Okay. You said 2Q '20 revenue is similar to 1Q '20. I mean I think it's fair to say that the reopening of the global economy here has been going better than I think pretty much anybody would have hoped for a month ago. Potential for 2Q '20 to be maybe a little bit better than 1Q '20 in light of just how the global economy reopening has progressed?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Only it takes a few cases of COVID to shut down a plant, hey?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : And we need to avoid those. So...

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : So is the takeaway there on the uptime that you're getting out of your facilities is that you've seen some additional challenges in some places, you've seen others do better, but net, you're about where you thought you were going to be?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Okay. The 2018 Analyst Day, you guys set some financial goals, which I'm sure didn't anticipate a global pandemic, the temporary closure of large parts of the global economy and $30 oil. So I'd like to get your views on what might need to happen to get somewhere towards some of those goals, specifically starting on free cash flow, the target there was 100% plus conversion. I went back and looked. In the last 12 years, Flowserve has done that twice: once in '07; and once in 2017 as you guys made a lot of progress on working capital there. The main drag on cash flow over the years has been working capital, and a lot of that was prior to the current team arriving. And it had consumed hundreds of millions of dollars, and primary working capital sat in the mid-30s. You guys have made some really good progress on working capital down into the mid-20s in 2018 and maintaining that in 2019. I don't think you're done with the process and IT rollouts to institutionalize better working capital management. So do you see further upside to working capital to help with cash conversion? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 08, 2020 / 8:00PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual)

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : So you mentioned terms and conditions there, which was the next question that I had. Typically, I've seen -- I've covered you guys for like 11 years now. And typically, in these downturns, the terms and conditions that your customers impose on you and your competitors get tougher and more onerous. How do you plan to deal with that during this downturn? Is it something that you'll just have to suffer through? Are there times where you'll walk away from business if the Ts and Cs are not appropriate for you? Just how are you going to deal with that during this downturn?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Okay. So again, I know some of these targets are outdated, and given the pandemic, they're not likely reasonable anymore. But you had set a goal of 15% to 17% on the operating margin, obviously not set with this outcome in mind. I think you'd set that assumption of no market growth during that time horizon, and any volume leverage was going to be gravy. Typically, energy downturns take some time to roll through Flowserve's P&L, with the OEM business the last to recover, which leads me to believe the level of revenue in 2022 is probably going to be lower than it was in 2018. Under those circumstances, is it reasonable to expect Flowserve to post margins even at the bottom end of that range in 2022?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Fair enough. Maybe I'll just turn to the cost side then. The cost-out actions that you guys announced on the last call to me look to be pretty modest with the majority coming from variable cost reductions and reductions in CapEx. Can you talk about the decision to maybe carry some of the more

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : I would like to follow up on that one. And I think hitting the pause back then was, I mean, clearly, the right thing to do. That whole massive realignment program that was enacted before you got there, I think it's safe to say, didn't go all that smoothly.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Could you talk about what you think the weakness is in the organization that led to that not being executed to the level that you would hope it to be; what you've done to, I guess, embed higher capabilities into those kinds of functions that would be responsible for doing that; and what your level of confidence is that you could execute something like that or something -- those kinds of actions more effectively and more efficiently in the future?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Makes total sense. Maybe over to the balance sheet. The business did end at the downturn with a strong balance sheet, net leverage at 1.5x at the end of the first quarter. My model has you staying under 2x throughout this downturn. I won't ask you to bless that or not. Aside from the fact that we know my model is wrong, that does give you a lot of flexibility to invest internally or to get on the front foot with M&A as we stabilize and recover or to potentially buy back your own stock. Can you talk about how you're thinking about deploying that balance sheet, whether it be in the next few months or the next couple of years? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 08, 2020 / 8:00PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual)

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Maybe a little more philosophically than tactically in the near term. There hasn't been much done on the M&A front over the last few years, and I do understand that, that's prioritizing getting your internal house in order before you want to stack businesses on top of that. Maybe you can talk about maybe when you pivot from defense and internal kinds of investment here to offense and more of an M&A focus.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : That sounds reasonable. Well I see we're -- we've just run slightly overtime and with no questions in the queue. Amy and Scott, I'll thank you very much for your time, and I hope to catch up with you guys soon.