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 : There you go. It's probably the only thing I'll do right today. We're going to begin here with the bear cases. And the first 1 I have here is 40% of the business is directly tied to oil and gas spending, with another 10% from mostly fossil fuel power generation. These markets are going to grow slower than GDP and could see outright declines in investments over the long term. Growing faster than GDP for Flowserve is going to be challenging.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Thanks for that. I'll jump on to the next 1 in the interest of time. There is too much capacity in the flow control industry, chasing too little volume currently, particularly on OEM projects which is going to make pricing challenging as the market recovers and lead to disappointing incremental margins as backlog turns into revenue.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : We've seen a little bit of I guess inconsistency over the years in this MRO aftermarket work returning as we come back into a cycle. I know you weren't around then, but I covered Flowserve back in 2009, 2010, 2011 when the aftermarket did rebound pretty well. And then in '15 and 16, where it didn't. Maybe you could just talk about the differences between what you're seeing in the market now versus at least what Flowserve saw in '15 and '16, where customers really did continue to defer that pent-up market wise.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : I'll vouch for that in saying as I cover the yard to U.S. distributors. On to the third 1 now. Technology, sensors, IoT, predictive analytics, might not be revenue accretive for Flowserve. The addition of all these technologies has the potential for customers to extend asset life and time between services, which could reduce aftermarket and replacement revenue for Flowserve? 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 08, 2021 / 2:00PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual)

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Thanks for entertaining the bear questions. At the halfway point, we'll switch to the good one.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : We're doing the good ones now. The heavy lifting of the Flowserve 2.0 transformation is nearing completion and should have laid a solid foundation for Flowserve to drive better than historical incremental margins as revenue growth returns in 2022. Depending on the strength of the recovery, the targeted 15% to 17% operating margins are in play for 2024 and 2025.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : I'll definitely not do this. 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 08, 2021 / 2:00PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual)

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : I definitely understand the avoiding the timeline kind of thing there because it definitely depends on how the volume returns and what that mix looks like at any given time. Maybe if I can...

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Maybe I could frame a follow-up question like this. In 2018, you guys set that 15% to 17% operating margin target. Obviously, we've had a small disturbance in the global economy on the way to that time frame. Is there anything structurally within the company that you guys have found as you have rolled these initiatives out that would have struck you from getting to that 15% to 17% other than all the volume disruptions that we've seen? 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 08, 2021 / 2:00PM, FLS.N - Flowserve Corp at Stifel Cross Sector Insight Conference (Virtual)

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : If it was easy, everybody to be able to do it. On to...

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : The balance sheet is in good shape with net debt of 1.3x trailing 12 months EBITDA, improved cash flows and increasing EBITDA likely to come in the recovery here is going to add to that deleveraging and lower leverage. This gives Flowserve the ability to diversify its end market exposure away from fossil fuel markets and into areas with better long-term growth potential?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Maybe I could ask 1 follow-up there on your appetite for M&A, Flowserve hasn't done much M&A over the last few years. Is the company looking to get back into M&A markets for inorganic growth? Is there going to be some other outlet, share repurchase for capital deployment? And now that you've got the balance sheet in pretty good shape here, and certainly improve the cash flows, how is the company thinking about capital deployment?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : On to the last one. Speaking of cash generation, it has improved significantly in recent years with 96% conversion of adjusted net income over the last 4 years. And that having averaged 66% for the prior decade. Improvements in working capital, structural and sustainable and Flowserve should generate solid cash flow going forward?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Your predecessor described their working capital improvement is more brute forced than anything else in the initial improvement. I know you guys were looking to invest in IT systems and to codify those improvements, so they would be more sustainable. Can you talk about what's been done more than just calling customers and we're asking them to pay their bills, to actually have that structurally built into the way the company operates?

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Great. Well, I see we're up on time. So Amy, thank you very much for your time today. We appreciate it. And thanks for everybody for joining us on the line.

Question: Nathan Hardie Jones - Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst : Thanks, Amy.