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CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
Flowserve(FLS)EarningsReport:Q42015ConferenceCallTranscriptThefollowingFlowserveconferencecalltookplaceonFebruary19,2016,11:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JayRoueche;Flowserve;VP,Treasurer,IRMarkBlinn;Flowserve;President&CEOKarynOvelmen;Flowserve;CFOTomPajonas;Flowserve;COO
OtherPart icipants
AndrewKaplowitz;Citigroup;AnalystMikeHalloran;R.W.Baird;AnalystCharleyBrady;BMOCapitalMarkets;AnalystNathanJones;StifelNicolaus;AnalystJosephRitchie;GoldmanSachs;AnalystPhillipeForlorne;Susquehanna;AnalystChaseJacobson;WilliamBlair;AnalystJimFoung;Gabelli;AnalystJonnyWright;Nomura;AnalystBrianKonigsberg;Vertical;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometoFlowserve's2015fourth-quarterearningscall.
(OperatorInstructions)
IwillnowturnthecallovertoJayRoueche,VicePresident,TreasurerandInvestorRelations.Youmaybegin.
JayRoueche (VP,Treasurer,IR):
Thankyou,Operator.Goodmorningeveryone.WeappreciateyouparticipatinginFlowserve'sfourth-quarterandfull-year2015earningscall.
JoiningmethismorningareMarkBlinn,Flowserve'sPresidentandChiefExecutiveOfficer;KarynOvelmen,ExecutiveVicePresidentandChiefFinancialOfficer;andTomPajonas,ExecutiveVicePresidentandChiefOperatingOfficer.Followingourpreparedcommentswewillopenthecalltoyourquestions.Asareminderthiseventisbeingwebcastandanaudioreplaywillbeavailable.
Pleasebeawareourearningsmaterialsdoandthiscallwillincludenon-GAAPmeasures.Pleasereviewthereconciliationofouradjustedmetricstoourreportedresultspreparedinaccordancewithgenerallyacceptedaccountingprincipleswhichcanbefoundinbothourpressreleaseandearningspresentation.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
Pleasealsonotethatthiscallandourassociatedearningsmaterialscontainforward-lookingstatementswhicharebaseduponforecasts,expectationsandotherinformationavailabletomanagementasofFebruary18,2016.ThesestatementsinvolvenumerousrisksanduncertaintiesandmanythatarebeyondtheCompany'scontrol.
Excepttotheextentrequiredbyapplicablelaw,Flowserveundertakesnoobligationanddisclaimsanydutytoupdateanyoftheseforward-lookingstatements.WeencourageyoutofullyreviewourSafeHarbordisclosurescontainedinyesterday'searningsmaterialsaswellasourotherfilingswiththeSecuritiesandExchangeCommissionwhichareallavailableonourwebsiteatFlowserve.comintheinvestorrelationssection.
IwouldnowliketoturnthecallovertoMarkBlinn,Flowserve'sPresidentandChiefExecutiveOfficer,forhispreparedcomments.
MarkBlinn (President&CEO):
Thankyou,Jay,andgoodmorningeveryone.Wewillquicklyrecapourfourth-quarterandfull-year2015resultsthismorning.Additionally,andmoreimportantly,Iwilloutlinetheactionswearetakingtoimproveouroperatingandfinancialperformance.
Letmebeginbysayingthatoverall,Iampleasedwithourfourth-quarterfinancialperformancewhichdeliveredfull-yearresultsinlinewithourexpectationsdiscussedlastquarter.Thedownturninourservedmarketsduring2015wasmoresevere,widespreadandpersistentthanweandtheindustryatlargeoriginallyanticipatedayearago.
Thesharpdeclinethatbeganinupstreamoilandgasspreadacrosstheindustrialcomplexastheyearprogressed.Compoundingthechallengesinourservedindustriesthestrongdollarwasalsoamajorheadwindthroughouttheyear.Andregionallypetroleum-driveneconomiesinmostemergingmarketssuchasLatinAmericaremainmorechallenged.
AgainstthismarketbackdropIampleasedwithhowourorganizationresponded.Ouremployeesremaincommittedtoourcustomersandcontinuetodeliverqualityproductsandservicesthroughourstrongoperatingmodelfocusedonexecution.Importantly,wehavetakendefinitiveproactivemeasurestobettercompetitivelypositionFlowserveforlong-termgrowthandvaluecreation.Whileweanticipateongoingheadwindsinthecomingyear,weareconfidentthattheactionsweimplementedin2015andtheexpandedprogramandgrowthinitiativeswewilldiscusstodayprovideuswithasolidfoundationtodriveprofitablegrowththroughthemarketcycle.
Aswelooktothefuture,globalmacrofundamentalssuggestthatFlowserve'sendmarketswillcontinuetheirlonger-termseculargrowthpatterns,confirmingweservetherightstrategicindustries.Populationgrowthandanemergingmiddleclasswilldriveenergydemandandaginginfrastructureinenergy,power,chemicalandgeneralindustrieswillrequirerefurbishmentorreplacement.Ourendmarketsareinherentlysoundoverthelongrun,althoughtheyarecurrentlycyclicallychallenged.
Whilewecan'tcontrolthenear-termcyclicality,Flowserveiswell-equippedtoweatherperiodsofvolatility.Andourtrackrecorddemonstratesthatwearewell-positionedtocapitalizeonlong-termindustrygrowthdriversevenasweplanforalowerforlongerenvironmentinthenear-term.
Letmediveintosomeoftheactionsandopportunitieswearepursuing.Whileleadershipintechnologyproductsandservicesarefundamentaltenetsofourcompetitivemodelthemarketswecompeteindemandthatwearealsocompetitivewithourcoststructure.
In2015andcontinuinginto2016,theactionswearetakingaretransformationalforFlowserve.In
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
essencewearestructurallyrepositioningFlowserveforthefuture.
First,weareaggressivelytakingactionstoalignourSG&Acoststructuretomarketrealities.Thesedecisionsaredifficultandweconsiderouroptionsthoughtfullybeforeacting.Wearenottakingtheseactionslightlyastheyimpactourmostvaluableasset,namelyFlowserve'sassociates.
Inaddition,webelievethecurrentcyclecreatestherightenvironmenttoacceleratethestructuralchangeswehaveaddressedinpriorcalls.Theseactionsarecriticaltoleveragingourglobaloperatingmodelandestablishingaflexible,responsivemanufacturingnetworkthataddressestheneedsofourmarketsandcustomers.Againstbothoftheseobjectiveswehavemadesignificantprogressagainstourpreviouslyannounced$125millionrealignmentplan.
Inthefourthquarterweexecutedover$50millionofactivities,bringingthefull-year2015yearinvestmenttoapproximately$80million.ThisinvestmentincludestheclosureorrepurposingofsevenmanufacturingfacilitiesandafewredundantQRCswhilereducingover5%ofourworkforcesincethefirstquarterof2015.
BeyondthisannouncedprogramwealsomadesignificantstridesinintegratingSIHIandachievingdissynergiesweexpectedtodateaspartofourtransactioneconomics.Ourabilitytoexecuteonourdiversesetofinitiativesduring2015hasprovidedustheconfidenceandtheabilitytoaccelerateevenmoreofourlonger-termplans.Wedevelopedtheseactionsoveranumberofyearsandinitiallyexpectedanextendedtimelinetoimplement.
However,currentmarketconditionsprovidetheopportunitytoactnow.Assuch,wearenowexpandingtheprevious$125millionrealignmentinitiativewhichweexpecttoexecuteoveratwo-yearperiod.Wenowenvisionatotalinvestmentofaround$350million,includingabout$50millionofexpensethatisbelowtheoperatingincomelinewithexpectedannualizedsavingsofapproximately$215milliononcecompleted.
Withapproximately$80millionofrealignmentexpenserealizedin2015,excludingSIHIinitiatives,thisleavesus$270millionremainingtoexecuteoverthenexttwoyears.
Whilesomeofourinitiativesareinresponsetovolumereductionsinthecurrentmarket,amajorityoftheactionswearetakingarestructuralinnature,focusedoncapacityoptimization,productrationalization,supplychainoptimizationanddevelopingalow-costmanufacturingbaseforcompetitivepositioning.Together,thiswillfundamentallychangeourengineeredbusiness.Wehavedemonstratedprovensuccessinourabilitytotransfermanufacturingcapacityandpermanentlyreducecosts.
During2016weplantoacceleratetheclosureorrepurposingofeightfacilitiesthatwerepartofourlonger-termplans.Additionally,wewillfurtherdelayertheorganizationwhichisintendedtoincreaseaccountabilityandperformance.
Insummary,whenourexpandedprogramiscompleteweexpecttoreduceourmanufacturingfootprintbyapproximately30%,improveplantandmachineutilizationandsignificantlyincreaseourmanufacturingcapabilitiesandlaborhoursinlow-costregions.Weexpecttorealizesavingsofapproximately$125millionin2016and$185millionnextyear.Wehaveaprovenrecordofreducingcostsandareconfidentthatwecandeliveronthisplan.
InadditiontoourabilitytodrivefurthercostsoutofthesystemIamequallyencouragedbygrowthopportunitiesthatareavailabletoFlowserve.Forinstance,weseesignificantupsideforgrowthinaftermarketandMRO.WehaveaQRCnetworkthatiswell-positionedglobally.
Ourcoreaftermarketactivitiesofparts,repairsandservicehaveshowntheresiliencyweexpectevenin
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
2015.Andwhilewewon'tpredictthetimingwedorealizethereisabuildingaftermarkettailwindcomingfromlastyear'sdeferredmaintenanceactivities.Aswehaveseeninthepast,thelongerfacilitiescontinuouslyrunthegreatertheworkloadisavailabletouswhencustomersdocatchup.
AndwhilemuchofourMROsalesareclassifiedasrunrateOEthisactivitydemonstratessubstantialaftermarketattributes.Inshort,asignificantmajorityofourannualrevenueisbrownfieldinnature,servingexistinginfrastructurethatispermanentandneedsregularattentionwhichwebelieveprovidesopportunitiestoimproveourshareofthecustomer'soperationalspending.ForFlowserveandourshareholdersthisworkformsanattractiverecurringrevenuestreamcreatedfromdecadesofourinstalledbaseandweintendtoincreaseourfocusonthisaspectofourbusinesswithanumberofinitiatives.
Wearealsocommittedtoremainingasignificantcompetitivesupplierintonewlargeprojectopportunitiesthatmakesenseforourbusiness.Thelogicissimple-projectworkabsorbscostinourmanufacturingfacilitiesandkeepsFlowserveasatechnologicalleaderandinnovatorinourindustry.Additionally,customandhighlyengineeredproductsinherentinourEPDsegmentcreateanewinstalledbaseandprovideacompetitiveadvantageforfutureaftermarketandMROopportunities.
WebelievewiththemanufacturingandproductoptimizationstrategiesweareimplementingthatFlowservewillremainastrongcompetitorinthemarketplacewhilethequalityofourproducts,brandsandoperationalexcellenceremainkeysellingpoints.Wealsoseesizableopportunitiesinourindustrialbusiness.IPDhasdoneanadmirablejobofloweringcosttodrivemarginperformanceinrecentyearsbutthepriorityaheadisgrowth.
WehaverecentlynamedanewleaderforthissegmentthatbringsaproventrackrecordofsuccesstodriveIPDforward.Oneoftheuniqueopportunitiesavailabletousistodriveincreasedsalesthroughthedistributionchannel.Ourvalvesbusinessrecognizesabout40%ofitsrevenuethroughdistributors.
IPDhasanumberofproductsthatareapplicabletothisavenueandwearepursuingitaggressively.Additionally,ouracquisitionofSIHIhasenabledalternativego-to-marketmethodswithagreaterfocusonrunratebusinesswhichwecanincorporatewithexistingIPDproducts.
Additionally,wenowhaveamoreextensiveportfoliothatwecanbetterleverageasaresultoftheInnomagandSIHIacquisitions,bothofwhichprimarilyservethechemicalindustry.EveninthechallengedmarketwebelieveIPDispositionedforstrongergrowthlongterm.Infact,weseeopportunitiestogainshareinthemarketplaceacrossourstrategicproductlines.
WiththedepthandbreadthofourunparalleledflowcontrolproductandserviceofferingsFlowserveiswell-positionedtocontinueaddingvalueforourcustomers.Likewise,asframeagreements,multiyearperformancecontractsandpreferredsupplierarrangementsgaintractionintheindustryFlowservecompetesveryeffectivelyaswecurrentlyhaveover400suchprogramspredominantlywithsubstantialcustomersandwebelievethereisstillopportunityinourcustomerfocusedinitiativesandend-userstrategies.
Lastly,Flowservecontinuestodemonstrateoperationalexcellenceinacontinuousimprovementculturethatdrivesresults.Wecontinuetolookatthecostofpoorquality,pursueoutsourcingopportunitiesandleverageoursupplychainandlogisticsallinanefforttodriveoutcosts.Atthesametime,we'recommittedtoproducinginnovativeproductsandenhancementsfortheindustryandwe'llcontinuetodemonstratedisciplineinourpursuitofnewwork.
BeforeturningitovertoKaryn,whowillcoverourrecentfinancialsindetail,letmefinishbysayingthatwhileourendmarketsremainchallengedandmaybeforsometimeweareontopofit.Flowserveisandwillremainastrongcompetitorwiththeabilityandculturetodriveperformance.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
LetmenowturnitovertoKaryn.AndIwillreturnafterwardsformyfinalcomments.
KarynOvelmen (CFO):
Thanks,Mark.Asweindicatedinourpreliminaryreleaseseveralweeksago,2015fourth-quarteradjustedearningswereinlinewiththeexpectationsweconveyedduringthethird-quartercall.
Ourstrongerperformancethisquarterleveragedstrongshipmentlevelsconsistentwithourtraditionalseasonality.Ouradjustedfourth-quarterEPSof$0.89excludesrealignmentexpensesof$0.31,negativebelowthelinecurrencyimpactof$0.06,$0.02forthenon-cashvaluationallowanceontheLatinAmericandeferredtaxassetandSIHIimpactof$0.01.Partiallyoffsettingtheseitemsisa$0.05benefitfromthereductionofcontingentconsiderationrelatedtoa2013acquisition.AllinreportedEPSwas$0.54.
Inourpreliminaryreleaseearlierthismonthweindicatedourfourth-quarteradjustedEPSwouldexcludethereservesestablishedforanat-riskcustomer.Aswe'veshowntoday,wedidnotaddbackthe$0.06incurredsinceweviewthisaspartofourbusinessandwantittobeconsistentwithpriorquarters.
Buttocompareonanapples-to-applesbasiswithourpreliminaryreleaseourresultswereatthehigh-endofourexpectations.Thereserveinquestionisrelatedtoanat-riskcustomerandincludesthewrite-downofinventory,workinprocessandreceivablesfromaEuropeancompanythathasformallyindicateditneedstoreworkitsliabilitiesandifunsuccessfulisatriskforinsolvency.
Whenmarketconditionsgetchallengingwerecognizewewillseetheseoccurrencesperiodically.WhileFlowservegenerallydoesnothavecustomerconcentrationissueswedostrivetotakeallthestepswecantoprotectFlowserve'sassets.
Turningtoourbookings,onaconstantcurrencybasistheydeclined24.8%inthequarterexcludingSIHI'scontributionof$54million.Asareminder,boththe2014fourthquarterandfullyearhadrecordlevelsofbookingswhichcreatedtoughcomparisons.
Lookingfurtheratourbookingsprofile,originalequipmentordersweredown32.4%whileorganicaftermarketbookingsdeclined13.6%constantcurrency.AsMarkmentioned,ourcoreparts,servicesandrepairsaftermarketbusinesshaslargelyshowntheresiliencyweexpectduring2015.WhilewehadexperiencedsomemaintenancedelaysthelargerheadwindswefacecomefromreducedlevelsofCapEx-drivenaftermarketprojectssuchasefficiencyupgradesaswellasfewerpartstiedtonewunits.
Similartoallof2015ourendmarketsduringthefourthquartercontinuedtobeimpactedbylooklowandvolatileoilandgasprices,astrongUSdollarandemergingmarketweakness.Certainendmarketsevendeterioratedfurtherinthequarterasoildriftedloweranduncertaintyincreased.Forinstance,duringthefirstthreequartersof2015ourbookingsinpower,chemicalandgeneralindustriesheldupbetterthanweexperiencedinouroilandgasmarkets.
Thetrendchangedabitinthefourthquarteraswesawthesemarketstakeanadditionalstepdownascustomersdeferredcapitalinvestmentandpulledintheirmaintenancebudgetsconservingcash.Likewise,onaregionalbasistheMiddleEastandNorthAmericawerebetterperformersthroughmuchof2015butthistrenddidnotcontinueinthefourthquarter.However,Europeproducedsomerelativeimprovementinactivitylevelsversusthefirstthreequartersoftheyear.
LatinAmerica,ourmostchallengedregionthroughout2015,remainsextremelysoftwithdelaysoccurringinnearlyallprojectswithourimportantcustomersinBrazil,VenezuelaandArgentina.Consideringthequarterlyvolatilityinourservedendmarketsandregionsweexperiencedthisyearourvisibilityheadinginto2016remainslimited.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
Fromasalesperspectivewegenerated$1.3billioninthe2015fourthquarter,anincreaseof1.2%onaconstantcurrencybasisincluding$76millionfromSIHI.Thiswasalsoa17.4%increasesequentially,againreflectingFlowserve'snormalseasonality.
ExcludingSIHI'scontribution,salesdeclined4.3%constantcurrencycomparedtolastyear.Againouraftermarketbusinessheldupbetterassalesincreased2.2%onanorganicconstantcurrencybasis.Forthefull-year2015Flowserve'sconstantcurrencyrevenuesincreased2.4%including$294millionfromSIHI.
Lookingatourmargins,evenwithQ4revenuedeclinesofover12%inatoughpricingenvironmentadjustedgrossandoperatingmarginsdeclinedonlymodestly,demonstratingFlowserve'sstrongoperatingperformance,ourshareholderalignmentandfocusoncosts.Additionally,theincreasedmixofaftermarketsalesandsomesavingsfromourrealignmentactionsalsocontributed.
Consideringwe'reatachallengingpartofthecyclewearefocusedoneffectivelymanagingourSG&Aexpenses.Ourfourth-quarterSG&Adeclined$23millionyearoveryearor9.1%excludingtheimpactofSIHIrealignmentandthebenefitassociatedwiththereductioninacquisition-relatedcontingentconsideration.Thedeclineisprimarilyduetolowervariablecompensationandmodestrealignmentbenefits.
Ourfourth-quarterandfull-yearadjustedtaxratesofapproximately29.3%and29.1%wereinlinewithourfull-yearguidancerateof30%to31%.Onareportedbasisthefourth-quarterandfull-yeartaxrateiselevatedasaresultofaccruedexittaxesforsiteclosuresandanon-cashvaluationallowancewetookoncertaindeferredtaxassetsinLatinAmerica.
Turningtocashflow,Flowservegeneratedtotaloperatingcashflowof$286millioninthe2015fourthquarterorapproximately$2.18pershare.Capitalexpenditureswere$43millioninthequarteraswecontinuetomakedisciplinedinvestmentsinourbusinesstosupportlong-termgrowth.
Wealsorepurchasedapproximately1.2millionFlowservesharesduringthequarterandforfull-year2015wereturnedalmost$400milliontoshareholdersthroughdividendsandrepurchases.Approximately$160millionremainedavailableunderourcurrentsharerepurchaseprogramatyear-end.
Turningtoour2016outlookandEPSguidancewearereaffirmingourfull-yearadjustedEPSguidanceof$2.40to$2.75asharewhichincludesapproximately$0.10ofabovethelinecurrencyheadwinds.2016adjustedEPStargetrangeexpectstotalrevenuestodecline7%to14%includinga2%currencyheadwind.Additionally,itreflectsyear-end2015foreigncurrencyrates,currentcommoditypricesandmarketconditions.
Guidancefurtherassumesnetinterestexpenseinthe$63millionto$66millionrangeandataxrateof30%to31%.Wealsoexpectthequarterlyphasingofourguidancetofollowourtypicalseasonaltrends.AlthoughthefirstquarterislikelytobeslightlymorepronouncedafterchallengedQ4bookingsanimprovementshouldfollow.
Our2016adjustedEPSguidanceincludestheoperationalperformanceofSIHIwhileitexcludesrealignmentexpenses,SIHIpurchasepriceaccountingandintegrationcosts,belowthelineforeigncurrencyeffectsandtheimpactofpotentialotherdiscreteitems.Wealsoexpectthat2016capitalexpenditureswillbereducedversusanelevated2015levelwhereweincreasedmanufacturingcapacityinAsia-Pacificandpurchasedalicenseenablingincreasedaftermarketopportunities.WealsoplantocontinuecontributingtoourpensionplanstocoverservicecostsevenastheUSplanislargelyfullyfundedcurrently.
WiththatreviewletmeturnthecallbacktoMarkforhisremainingcomments.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
MarkBlinn (President&CEO):
Thanks,Karyn.Inclosing,Flowserveexpectsnear-termmarketvisibilitytoremainlimitedascustomerscalibratearoundthepersistentmacrouncertainties.
Weexpectthiswillresultincontinueddelaysininvestmentdecisions.However,asyouhaveheardthenear-termmarketchallengesprovideustheopportunitytofocusoncosttake-out,ouroperationalperformanceandgrowthopportunitieswhileremainingdisciplinedinourbidding.
WebelieveFlowserveiswell-positionedwithitsextensiveportfolioandconsistentoperationalexcellence.Wehavedemonstratedsuccessthroughpriorcycles,controllingwhatwecanbyleveragingourOneFlowserveinitiativeperformancecultureandcomprehensiveproductportfoliotodriveprofitwillgrow.
Aswehavearticulatedtoday,weareaggressivelypursuingthesizableopportunitiesavailabletoustooptimizeourmanufacturingportfolioandfootprint.AndwewillpullthenecessaryleverstonotonlymanagethroughthecurrentmarketsbuttopositionFlowservetocontinuetodeliverlong-termvalueforourcustomersandshareholders.
Operator,wewouldnowliketoopenthecallforquestions.Thankyou.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
AndrewKaplowitz.
AndrewKaplowitz (Analyst-Citigroup):
Goodmorning,guys.Mark,soasyouknowFlowserve'soverallbusinesstendstoberelativelylatecycle.SohowdoyouguysgetareadonenergyCapExcutswhichIknowyouknowhaveacceleratedoverthelastcouplemonthswhenyouaresettingguidance?
Morespecifically,howmuchconcerndoyouhaveforadditionalpressureonyourmidstreamanddownstreamoilandgasbusinesses?Reallyendmarketslikepipeline,LNG,evenrefininggivenrelativelyrecentCapExcuts.
MarkBlinn (President&CEO):
Yes,thanks,Andy.Soalotofthecutsthatyou'vetalkedabouthavetypicallybeenwiththemultinationals.Wedostillseeprojectactivitieswithsomeofthestate-ownedcompaniesaroundtheworld,particularlyintheMiddleEast.
Buttoyourpointaportionofourbusiness,primarilyinEPD,iswhatyoucalllatecycle.Andaswe'vetalkedaboutbefore,andyoustartedtoseethishappeninthemiddlepartof2014,theystarttocurtailtheirCapExexpenditures.You'veseenthiswiththemultinationalstryingtoprotecttheirdividend.
Andthefactisthosethingscangooffthedrawingboard,getpushedalittlebitandtheydon'tcomebackrealquickfromprimarilyfromthemultinationals.Sotheydon'tdecidenecessarilyovernighttobringitbackonline.Buttypicallytheseareintheirlong-termplans.
Sothisispartofthereasonifyoutakeastepbackandlookwhyweprimarilyfocusedonourengineeredbusinesswithsomeoftheserealignmentactivitieswe'vebeenlookingattheseforyears.Ifyoulookat
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
whathasoccurredovertime,andit'simportantthatpeopleunderstandthis,wecamethroughastrongcyclein2008andin2009weadjustedtomarkets.Andtheypickeduprelativelyquickly.
TherewasstillquiteabitofactivityintheMiddleEast.ButmoreimportantlywhatwedidiswestartedsettingupalotofourSPOfacilitiesinIndia,China,enhancedtheonewehadinMexico,builtoutmorecapabilities.AndourLPO/SPOstrategyisdesignedtostarttoqualifythesesothatultimatelywecanmovetheproductandworktothoselocations.
Sowe'vehadthesethingsonthedrawingboardforawhile.Whatthislatecyclecomponentdoesisgivesustimetogoaheadandexecutethebacklogthatwe'vehadforthelastyear,yearandahalfandwestillhavebacklog,andthereareprojectsthatwillstillcomeintobacklog,butforthemostpartweexecutethatandthenstartmovingthosecapabilitiestotheselow-costregionsoftheworld.
Ifyoulookataroundsomeofthepipelineandotheractivities,someofthoseareonsomeofourrunratebusinessandthat'snotaslatecycle.Alotofthatiswetalkedaboutearliersomebrownfieldactivity.Sotherestillissomegoodbrownfieldactivitybecausewhathappensisalotofthesefacilitiescontinuetorunandtheystillneedrepairandupgrade.
Sokindofwalkingthroughit,whatthemarketenvironmentdoesallowustodo,andthisiswhywe'redoingit,isitallowsustoplanandexecuteandacceleratesomeofourwhatwe'dcalltransformationalactivitiesaroundrestructuringprimarilyinourengineeredsegment.
AndrewKaplowitz (Analyst-Citigroup):
Gotit,that'shelpful,Mark.Okay,soletmeaskyouabouttheaftermarketinthecontextofyoumentionedlastcycle,obviouslythelastcyclewasaverydifferentcyclebuttheaftermarketwasflatinadifficultmarket.
Aftermarketbookingsin4Qweredown11%,sothequestionishowdowethinkaboutyouraftermarketbusinessinthecontextofsomeofthesebigcustomersseeminglycontinuingtopullbackonmaintenancespend?Doyouthinkyoucanmaintainorincreasethelevelofaftermarketbookingsfromthemid-$400millionrangethatyouhadthisquarterorcoulditgolowerstillinthecurrentenvironment?
MarkBlinn (President&CEO):
Well,ifyoulookbacktothepriorcyclewesawsomethingsimilarinthattherewastheydefertheirspendaslongastheycould.Butitcamebackwithintheyearbacktowardstheendof2009someofthespendactivity.
Firstofall,youtalkedaboutQ4.Intheyear-over-yearcomparewehadabout$550millionofbookingsinQ42014.Thatwasavery,verystrongquarter.
Thathadalotofpartstiedtonewunits.Italsohadalotofupgradeprojects,sothosearesmallprojectswithintheaftermarketportfolio.Ifyoustripthatdownandyoulookandyouseethatourrunratebasemaintenancewasdownonlyslightlyyearoveryearbothonaquarterbasisandonayear-over-yearbasisconsistentwithwhatwesawbackin2009.
Sowe'dexpectthattostabilizeunlessthere'sanykindofdisruptiveeventthatoccursoutthere.ImeanwhatourindustrysawacrosstheboardwasverylittleactivityinQ4,particularlyontheprojectandevenontherunrateside,thatwasreflectedinourbookings.Butwehaveseensomestabilityintheaftermarketbusiness.
Mycommentsearlierissomeofthedeferredmaintenancewillneedtocomebackandcomebackonline.Whatwe'relookingforistoseewheretheefficiencyupgradescomebackinandwhiletheyare
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
rationalizingCapExthatmaytakesometime.Sothatismarketdriven.
Fromourstandpointwhatweneedtodoiscontinuetoexecuteonsomeofourend-userstrategies.I'vetalkedaboutthisbeforebutfranklywedon'tknowwhereallofourinstalledbaseis.We'reworkingwithsomeofourteamstoincreaseaninventorywherethatissowecancallonthosecustomers.
Theywantustohelpthem,wejustneedtoknowtheyarethereandcallonthem.Sowearegoingtocontinuetoexecuteend-userstrategieslikethatinanattempttogrowtheaftermarketbusinessinanyenvironment.Andinfact,ifyoulookoverthelastsevento10yearsyou'veseenafairlyconsistentstronggrowththroughcycles.
Mostofthatisnotthenetincrementalinstalledbase.Therewasabaseamountofnetinstalledbasethatwentinbutthefactisthegrowthrateswerehigherthanthatandthatwasprimarilyfromexecutingtheseend-userstrategies.Butwhenyoulookatourbusiness,whenyouhavevolatilemovesinoilittakeseverythingwithit.
Everythingtendstomoveintandem.WhenthingstendtostabilizeandnormalizeoutevenatlowerlevelsthenyoucangetwhatI'dsayisdifferentiationinyourend-userstrategiesandanyotherstrategyyouwanttoexecute.
AndrewKaplowitz (Analyst-Citigroup):
SoifI'mhearingyoucorrectly,assoonasoilstabilizesifithasstabilizedyoushouldseemorenormalaftermarketbehavior.Isthatfair?
MarkBlinn (President&CEO):
That'sfair.Ifyouthinkaboutourcustomers,theyaretryingtofigureoutwhatthenumberisandtheymakeinvestmentdecisions,capitaldecisionsallaroundthat.SoIthinkthat'spartofwhatyouseeintheindustryisthatvolatilemoves,andwesawitwhenoilmovedupbythewaybackin2007sorapidly,volatilemovestendtoincreasethecorrelationofbookingsandallotheractivitytothatmovementinthatunderlyingresource.
Whenthingstendtostabilize,thenend-userscanstartmakinginvestmentdecisionsthataremorelongerterm.Butwhentheshorttermissovolatileit'sjusttoughtomakeadecision.That'sthewayeverybodyis.
Operator :
MikeHalloran,RobertBaird.
MikeHalloran (Analyst-R.W.Baird):
Goodmorningeveryone.Sofirst,justkindoffinishing,roundingoutthatlastitdoesn'tsoundlikeyouthinkthatthere'sashiftgoingoninthecustomerbaseintheaftermarketsidebetweeninsourcingthattypeofworkoroutsourcingittoproviderslikeyourself.Somaybeyoucouldjusttouchonthatalittlebitandifthere'sanychangeintrendlinethereifit'sprettynormalrelativetowhatyouwouldhaveseeninpreviouscycles.
MarkBlinn (President&CEO):
Yes,Idon'tthinkthere'sanysignificantshift.Ifyouthinkaboutit,Mike,youlookatthecomplexityoftheequipmentthatgoesin,thattendstoleadtomoreoutsourcingbecausethecapabilitiesinternallyforthecomplexworktheyarealwaysgoingtolooktoabsorbtheirfixedcostsingoodtimesandinbad.Thetrendsthatareoccurringistheequipmentisbecomingmorecomplex,thatiscertainlyone.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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Alsoalotoftheresourcesinternallytoourcustomersareagingandretiringandtheywouldprefertooutsourcethatwork.Thenyouaddtothatsomeofthecapabilitieswehavearoundtheend-userandthisisgoingtobeanopportunity,it'snotjustmaintainingrepairandservicingbutit'showdowegetmoreefficiencyoutofthoseproducts.Wehaven'tseenalotofthatrecentlybutthattrendwillcontinue.
Butshortterm,Mike,infairnesseverybodylookstocoveranyoftheirfixedcosts.SoIcan'tsaythatdidn'thappenonthemarginbutthat'snotalong-termstrategyforarefineryoranykindofprocessingplantistotrytobringthatininternally.Shorttermmaybesomeofthethingsthey'lldobutonthecomplexequipmenttheywilltendtolettheexpertsdoit.
MikeHalloran (Analyst-R.W.Baird):
Yes,thatmakesalotofsense.AndthenontheIPDplantomovetowardsthatdistributionmarket,Iguessaquestiononbalance,howdoyoubalancemovingnewproductsintothatmarketversusanabilitytomaintainamarginprofile,speakingmoreontheideaofthelevelofengineeringandaftermarketthat'sgoingtogothroughthedistributionchannelsalittlelower.Sojusttalkabouthowyoucanprotectthemarginprofileifnotevendobetterthanthatasyoumoveintonewchannelsthere.
MarkBlinn (President&CEO):
ThesimpleanswerisIwillpointtoFCD.Imeanthey'vedonethething,thesamething.Youcanmakemoneythroughyourdistributionchannel.
IthinkifyoutakeastepbackandlookatIPD,ourfocuswasonimprovingtheoperationsandthemarginswhichwe'vedone.Ifyoulookatalltheadjustmentsandtakeouttheat-riskcustomerwewereover16%inthefourthquarter.Sofromourstandpointmissionaccomplishedintermsofthemarginimprovement.
Butsomeofmycommentsearlierwerethisgroupbrokeoutoftheengineeredbusinessandwehavearealopportunitytoimprovehowtheygotomarket.Variouschannels,configuretoorderonelectronicallyintermsofbeingabletorespond,someofthesepiecesofequipmentareacouplehundreddollars,$500,$600,$1,000,$1,500,thecustomersaren'tasprice-sensitive,theyjustwantitandtheywantitnow.
Soifwecanexecutethroughouronlinecapabilitiesandimprovethoseorthroughadistributionchanneltypicallyyoucancommandmarginbecausetheyneedthesefortheirbrownfieldactivity.SoIthinkpartofwhatwe'reliningoutforyouisthisisasegmentofourbusiness,andfranklywe'velearnedalotfromtheSIHIacquisition,thisisasegmentofourbusinesswhichhassomegreatopportunity.
Wejustneedtoimproveit.Weneedtoimprovethewaywegotomarketandhowweexecuteintothechannels.
AndMikeyou'vealwaysknownme.I'llsayifthingsaren'toperatingthewaytheyshouldbeI'lltellyouthisisonethathasrealopportunityforimprovementonthetopline.
MikeHalloran (Analyst-R.W.Baird):
Great,Iappreciatethetime,Mark.Takecare.
Operator :
CharleyBrady,SunTrustRobinsonHumphrey.
CharleyBrady(Analyst-BMOCapitalMarkets):
Thanks,andgoodmorning.ThecommentaryonEPD,onthebookingsinthequarterobviouslyreallyheavyaftermarketweighting72%orsowhichisIthinkprobablyunusuallyhighforthatbusiness.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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Youkindofunderstandwhygiventhatthat'salargeprojectbusiness.ButI'mwonderingcanyoumaybetalkaboutthemarginimpactonthatsignificantmixshiftandaftermarketversusOE,whenyoutiethatinwithobviouslyyou'vedonesomeabsorptionbecauseOEisjustdroppingoffIguessmyquestionattheendofthedayiswhatlevelcanyoumaintainthemarginswithaftermarkettooffsettheabsorptionissuesyou'rehittingonEPD?
MarkBlinn (President&CEO):
You'retryingtofindthemathofwhat'stheinflectionpoint.Butyou'reright,withlow-levelbookingsintheprojectbusinessyouwillhaveanabsorptionissuewhichcangetprettyexpensive.
Andpartofthereason,notnecessarilyjusttheQ4bookings,butpartofthereasonwe'readdressingthatinthatsegment,Charley,wehadlookingbackto2014,andfolkswouldhaveconsideredthatadecentmarketandagoodyearforus,wehadabout$150millionofunderabsorptioninourbusiness.Andalotofthatwasinthatengineeredsegment.That'swhatputusonthepathtowardswhatweatthattimewasgoingtobeaboutafive-orsix-yeartransformationofthatbusiness.
Nowyounevergetyourunderabsorptiondowntozerobutyoucertainlycangetitto$50millionto$70millioninyourbusiness.SoIjustwanttomakethatpointaroundthatengineeredsegmentbecausethat'salotofthereasonwe'retakingthoseactionsistohelpitvariablizeandbemuchmorecompetitiveandnothavetodealwithunderabsorption.
Ithadanoverhangcomingintothisdownturnandsopartofthatisweneedtoattackthat.OnceweattackthatIthinkyou'regoingtoneedtoseehigherlevelsofprojectbookings.InQ4therewerealotofprojectsthatwererightthereinfrontofusandtheygotpushed.
Andthat'snotatypicalbecausethecustomercanwaitacoupleofquartersandseewheremarketssettleoutandit'svery,verycompetitive.Andit'stotheiradvantagetowaitoverashortperiodoftime.
SoIthinkwhatyou'regoingtoseeisaswestarttoaddressthatwewilldealwiththeunderabsorption.Theaftermarketmixwillhelpbutthere'salotoflargeexpensivefacilitiesinthisdivision.Soit'sgoingtoneedprojectworkwewilloffsetthatbystartingtotakecostout.
That'salsosomeofthefacilitieswetookoutlastyear.SoIdon'thavetheexactmathbecausepartofitishowwegetatthecostsbothintermsofthegrossmarginlineunderabsorption,inthefixedcostsaswell,aswementionedearlierwe'retakingactioninsomeofthoseareasaswellandthenwheretheaftermarketbusinesscomesin.
CharleyBrady(Analyst-BMOCapitalMarkets):
Okay,thanks.Myfollow-uphereisonM&Ajustquickly,IguessdoesthecurrentmarketenvironmentaslousyasitisinoilandgaschangeyourthinkingdirectionallyonwhereyouwanttolooktowardsM&Aasyoulookouttoyourpipelineandmaybedoesitmoveyoutowardareasthatmaybeayearandahalf,twoyearsagoyoumightnothavebeenthinkingastronglyabout?
MarkBlinn (President&CEO):
Right.We'llletmetellyou,oneofourbiggestcashM&Aopportunitiesisthisrestructuring.It'sgotagreatreturn.
ButCharley,no.We'vehadourlineofsightoncertainindustrieswhichwefindattractive.Andtherealquestionisatwhattimedotheymakesense?
Ithinkwhatyoudon'twantisforustodecideallofasuddentogoinaleft-handturndirectionintosome
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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areathat'snotcoretousjustbecauseitmaybeviewedasrelativelycheap.Soit'sfairtosaythatwe'restillfocusedontheareaswherewethinkwemakemoney.
Thechemicalindustry,we'vetalkedforyearsaroundtheopportunityaroundupstream,additionaldownstreamservicecapabilities.Wemadeasmallserviceacquisitionlastyear.Sowe'regoingtostayfocusedonwherewethinkwemakemoneylongterm.
There'sacoupleofthingsweneedtothinkabout.Oneiswedon'twantanythingtoconflictwiththeserestructuringactivitiesbecausethisisahighreturnonourinvestmentandweneedtoexecutethemverywellbecauseourcustomersarerelyingonthat.
Theotherthingtothinkaboutisjustweneedtomakesurewe'reverythoughtfulwithourcashbothintermsoftherestructuringandourshareholdersaswell.Thereisalwaysopportunitytouseyourstockascurrencybutwe'dhavetolookatthatrelativetotheassetthatwe'relookingat.
Soweareclearlyopportunitiesmaycomeinthistypeofenvironment,especiallyforaCompanylikeoursthathasaverystrongoperatingplatform,butweneedtoalwaysbalancethatagainstotherpriorities.AndwhatIwilltellyouiswhenwecanreturn$215millionalotofitisgoingtobepermanentinourbusiness.With$350millionofspend,that'sprettycompelling.
CharleyBrady(Analyst-BMOCapitalMarkets):
Yes,thanksverymuch.
Operator :
NathanJones,Stifel.
NathanJones (Analyst-StifelNicolaus):
Goodmorning,everyone.I'dliketojustaskacoupleofquestionsaboutworkingcapitalandperhapsgetKaryn'stakeonthisnowthatshe'sbeenthereforawhile.
Youendedtheyearwithcoreworkingcapitalabout35%of2015saleswhichhasgoneupconsiderablyoverthelastfewyears.Whattacticsareyouguysusingtogetthatdown?What'salong-termtargetlooklikeandhowlongdoesittaketogetthere?
KarynOvelmen (CFO):
Thereareseveralthingsgoingon.Firstontheaccountsreceivableside,weareseeingslowerpayments,inparticularSouthernEuropeandLatinAmericancustomers.Theyarecontinuingtopaybutalbeitjustslower.
Accountspayableisdownwithinventoryup.Themajorityofthoseincreasesininventoryareinworkingcapital.Soaddingcostbutnotnecessarilyinpurchasedpartsit'smorelaborandlesspayablesassociatedwiththatinventory.
Alsointermsofaccountspayablenegotiatingthetermswithsupplierswewillpayaccordingtotermsandallthrough2015there'sanemphasisdirectionallypayingontime.Wehavealotoflocalsuppliers,sopayingontimehelpswithtimingandon-timedeliveryaswellasdirectionallypricing.
Wehavebeenfocusedlocallyatthesitesintermsofimprovingworkingcapital.AsImentionedonthethird-quarterearningsreleasecallwearesteppingbackandlookingatthisnowgoingforwardonamoreglobalperspectiveandreallylookingtoimplementaglobalstandardizedproceduresaroundbuildingsandcashandcollectionaswellasanorderandpurchasing.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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Sothosearethetypesofthingswe'regoingtolookat.Thosetypesofprogramstaketime.
Ithinkinadditionwiththerealignmentgoingonwewillseeimprovementsultimatelywhenwegetthroughthisprocess.Itwilltakeacoupleofyearsbutasweconsolidateandstreamlineoursitesweshouldseeimprovementinworkingcapital.Butinthenear-termwedon'texpectanysignificantswings.
NathanJones (Analyst-StifelNicolaus):
Understandthat.IfyouthinklongertermisthereanumberthatyouthinkFlowserve'sstructureshouldoperateintermsofapercentageofsalesinworkingcapitalorworkingcapitalturnsorhoweveryouwouldliketoframeit?Becauseitdoesseemlikethere'sprobablyseveralhundredmilliondollarsinworkingcapitalthatyoucouldfreeuptoputtobetteruse.
KarynOvelmen (CFO):
Wedobelievethere'ssomevaluethere.Wedon'thavespecifictargetsatthispoint.LikeIsaidwe'regoingtolookatthisinamorestandardizedglobalperspectivesoversusreallyatthelocalsites.But,yes,wedobelievethere'ssomeimprovementtherebutwedon'thavespecifictargetsatthispoint.
NathanJones (Analyst-StifelNicolaus):
AndMark,Ithinkyoumentionedinresponsetooneofthelastquestionsthattherewereafewprojectsrightthereinfrontofyouinthefourthquarterthatgotpushed.Arethosethingsthatgotpushedsignificantlyoraretheyimminent?Couldthoseorderscomethroughinthefirsthalfoftheyearorhavetheybeenpushedfurtheroutatthispoint?
MarkBlinn (President&CEO):
Thesewerefairlywelldowntheroadandtheyseemedtomovebuttheycanmovefromquartertoquarter.We'veseenthishappenbeforebutwedidseetheymoved.
AndNathan,theycanmovestillanotherquarterortwoeasily.Westillhaveconfidencetheyaregoingtocomeonlinebutremembertheyareverycompetitive.Wewillrespondbutonlytoapointbecauseifyourememberbackin2009,2010and2011,wehadalotofbacklogthatdidn'thavevaluetoitandthatdoesn'taccomplishanythingforus.
Soitisacompetitiveenvironment.Thesethingstendtopush.Wehaveconfidencesomeofthem,particularlyintheMiddleEast,aregoingtogoforwardbutjustrememberourenvironmentisverycompetitive.
NathanJones (Analyst-StifelNicolaus):
Okay,thanksverymuch.Iwilljumpbackinthequeue.
Operator :
JosephRitchie.
JosephRitchie (Analyst-GoldmanSachs):
Thanks,goodmorningeveryone.SoIguessmyfirstquestionisontherestructuringplans,Mark.
Maybeyoucantalkalittlebitaboutthemagnitudeandthecadenceoftherestructuringin2016?Andthenspecifically,isitfairtoassumethatalotoftheactionsoradisproportionateamountoftheactionsareoccurringinEPD?
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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MarkBlinn (President&CEO):
SomeofthelargetransformationalonesinthelargeplantsareinEPD,yes,Joe.AndalotoftheseaswetalkedaboutareinOECDcountriesandquiteafewinEuropeandtheytaketime.
You'vegottohavealongplanningprocessintermsofjustdealingwithyourconstituencies.Butgenerallywhatmycommentswereisweexpecttoseeabout$125millionofbenefitthisyear,$185millionnextyear.Soallotherthingsbeingequalwewillgetanearningsliftnextyearfromjusttheserestructuringactivitiesandthenwe'llseetherunratein2018whichwilltakeusupto$215million.
JosephRitchie (Analyst-GoldmanSachs):
Okayandthenfromacostperspectiveyou'reincurringabout$150millionthisyear,isthatkindofballpark-ishtherightnumber?
MarkBlinn (President&CEO):
Ithinkthat'sthenumberthatwetalkedaboutearlier.
JosephRitchie (Analyst-GoldmanSachs):
Okay.Andthenmaybemyonefollow-upisreallyaroundpricing.Itlookedlikeyourgrossmarginsinthefourthquarterdeceleratedalittlebitversustherestoftheyear.
Justcurioustohearwhatyou'reseeingonthepricingenvironment.Havethingshavegottenworse?AndgiventhatyouhaveseensignificantCapExcutstostarttheyearfromsomeofyourcustomers,I'mjustcurioustohearwhatyou'rehearingfromyourcustomerstoday.
MarkBlinn (President&CEO):
Well,someofthosemarginsinthefourthquarterhadthesetwocustomerissuesthatwetalkedaboutit.Soalotofthemwereupinthegrossmarginline.Butingeneralwewereactuallypleasedthatourmarginshelduprelativelywell.
Butwhatyouwillseeinthegrossmarginlineisthepricingenvironmentandtotheextentwecanoffsetitbysomeoftherestructuringactivities.Becausealotofthosesitinthegrossmarginlinestotheextenttheyimpactmanufacturingfacilities.Itisjustgoingtobethetimingintermsofwhenwecanexecutethem,someofthatisoutsideofourcontrol.
Whatweareseeingfromcustomers,andjustrememberwedidn'thaveareallystrongpricingenvironmentin2013and2014.Itwasokay,versusthelastcyclewehadatremendouspricingenvironmentin2007and2008.Butwe'recertainlyseeingitdowngetcompetitiveatthatpointintime.
Theotherthingthatwe'llhavetodealwithasthetoplinegoesdownisunderabsorptionandhowquicklywecanoffsetthatwithsomeoftherestructuringaswell.Butthepricingenvironmentiscompetitive.Wesawthisbackin2010primarilybecausealotoftheprojectactivityin2010wasintheMiddleEastandthatisalwayscompetitiveinjustaboutanyenvironment.
TypicallyyouhaveKoreanengineeringandcontractingfirmsthere.Theytendtobeverycompetitiveonpriceanddemandoutoftheirsuppliers.Sowe'restartingtoseeaverycompetitiveenvironment.
Therealquestion,Joe,ishowlongthisisgoingtolast.Becausethelatecyclepartofourbusiness,whichistheprojectswhichaswe'vetalkedabouthasbeenwelllessthan20%ofourbusiness,ittendstotheopportunitiestendtomoveoutquickandmovebackslowly.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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JosephRitchie (Analyst-GoldmanSachs):
Thanks,Mark.
Operator :
RobertBarry,Susquehanna.
Unidentif iedPart icipant :
Goodmorning,guysthisis[PhillipeForlorne]onthecallforRobtoday.Sofirstquestion,goingbacktotherestructuring,Imeanthebenefitofcourselooksupnicelyversustheprevioustargetbutthereturnontheinvestmentlookslower.Isthatthemessagethatincrementalsavingsarebecominghardertofindandisthereanypotentialupsidetothesenumbersiftheenvironmentweretogetworse?
MarkBlinn (President&CEO):
No,thenumbersarereallyreflectiveofthetypeofrestructuringthatyouhave.$125millionfor$125millionisprettymuchaone-for-onepaybackoraone-yearpayback.Youdon'ttypicallyseethatinEurope.
Itcostsmorebutthefactisthosesavingsarepermanent.AndalsowhatyousawwasalotoftheinitialpartwaswhatI'dcallvolume-relatedheadcountreductionasopposedtopermanentclosuresoffacilities.Butwhenyouclosethefacilityanywhere,butparticularlyinanyOECDpartoftheworldandparticularlyinEurope,itcostsmorethanthesavingsbutthesavingsarepermanent.
Ithinktheimportantthingtothinkaboutwhenyoutakeastepbackisifyoulookatourbusinessalotofourheritagecapacitygoingback10yearswasinveryexpensivepartsoftheworld.Andwe'rechangingthat.SowhatthatwillmeanisevensomeofourOECDfacilitiesaregoingtobehavehigherloadlevelsandhigherengineeredequipmentinthemandwe'regoingtotakemoreadvantageofsomeofourlow-costmanufacturingaroundtheworld.
Sothat'swhywe'retryingtoemphasizethisispermanent.Thisisthekindofthingthatwould'veaddressedthat$150millionofunderabsorptionbackin2014andnotonlythatwouldhavesignificantlyimprovedmarginsonceexecuted.
Soasyouthinkaboutusmovingthroughthecycleandwheremarginshavebeenthisissomethingthatwillallotherthingsbeingequalrelativetolastandwethinkthingsaregoingtosomethingsaregoingtochange.Butthefactisifwehadthistypeofmanufacturingprofilefourorfiveyearsagoourmarginswouldhavebeenalothigher.
Unidentif iedPart icipant :
Okay,thatmakesalotofsense.Andthenonyour2016outlookdoesthatimplyanyrecoveryinrefiningMROspending?Andwhat'sthelatestoutlooktheregivenyourdiscussionwithcustomers?
MarkBlinn (President&CEO):
Wellthereisanassumptionthattherewillbesomestabilizationandsomeinvestmentinsomerepairandmaintenanceinthebusiness.Butwe'renotreallyexpectingtheaftermarketupgradeandcertainlynotthetiedtounitstocomebackduringthatperiodoftime.Butitdoeshavesomeofourinitiativesaroundimprovingthego-to-marketstrategyandIPDthat'sinthat.
Soit'snotamatterofusjustsittingbackandlettingthemarketsdealwhattheyaregoingtodeal.Wehavetogoandexecutesomeofourstrategicinitiativestoachieveourguidance.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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Unidentif iedPart icipant :
Okay,thanksguys.
Operator :
ChaseJacobson,WilliamBlair.
ChaseJacobson (Analyst-WilliamBlair):
Hi,howareyou?SoMark,youtalkedaboutincreasingtheaftermarketsalesanddoingabetterjobtrackingwhereyourequipmentisgoing.ButyoualsotalkedaboutmoresalesgoingthroughdistributionwhichIthoughtwouldmaybemakeithardertotracktheproductsandcapturetheaftermarket.
SoIguessone,canyouaddressthat?Andtwo,asyoudotrytotracktheproductsbetterandcapturetheaftermarketareyouputtingmorepeopleonthegroundorareyoudoingsomethingwhereyou'readdingmoretechnologytoyourproducts?
MarkBlinn (President&CEO):
Yestoboth.Technologytotheproducts,somemonitoringcapabilities,bootsonthegroundbutalsotechnologysystemstotrackourinstalledbase.Goingbacktoyourearlierquestionthedistributionchannels,thoseareoutandpresent.
We'rejustnottakingfulladvantageoftheminourindustrialproductsegment.Andthesearedistributorsthatcancarrymultipleproductslinesandareresponsiveonaoneortwoproductbasistoacustomerthatneedsitfairlyquickly.
Theend-userstrategiesarereallydesignedaroundwherethere'ssubstantialinstalledbase.Ifyoulookatsomeoftherefineriesaroundtheworldthereishundredsofpumpsthatareoutthere.Andinalloftheworldifyoulookatourheritagebrandsgoingbackmanyyearsthereareliterallysomepumpsthatwereinstalledinthe1970sthatwe'restillsupplyingpartstoinremotepartsoftheworld.
Soit'sreallyrungettingourhandsaroundthat,inventoryingit,makingsurewe'recallingonthecustomers.Sooneofthethingsthatwe'vedonethisyear,andyoualludedtoitalittlebit,isreallyincreasedourfocusonoursalesorganizationandhowwegetouttocustomersonanaccountbasisandgetmoreshareoftheirwallet.Partofitisknowingwhatcustomertocallonandwhatproducttheyhaveintheirfacilities.
Sowewillbethefirsttotellyouwecandoabetterjobonthatandthatisoneofourkeystrategicend-userinitiativesthisyear.Soifyouthinkabouthowwe'verolleditoutoverthelastcoupleofyears,we'veincreasedourQRCnetworkandwe'llcontinuetodothat.We'veworkedwithsystemsandsomeend-userstrategiestohelpthemdevelopandunderstandhowtheycanbringmoreefficiencyoutofanexistingfacilitybecauseevenrightnowtheyarelookingforhigheryieldsoutoftheirprocessingfacilities.
TheotherelementnowismakingsurethatwehavetherightpeoplecallingontherightcustomersnotjustoutofaQRCbutoursalespeople.Andthat'saseparateanddistinctstrategyfromusingthedistributionchannel.Thedistributionchannelhasbeenverypowerfulforourvalvebusiness,wejusthaven'tlevereditontheIPDside.
Butyourpointisfair.AlotofthisisOEthatgoesthroughdistributionasopposedtoserviceandrepairwork.Butadistributortheywanttogetcertainlymarginaswellbutwhatwefound,andyou'veseeninourvalvesegment,iswecanstillgetgoodmarginonproductthatgoesthroughdistribution.
Keepinmindwhatthecustomerislookingforistheyarelookingforthatproducttherevery,veryquickly.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
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Thesearen'tmultimilliondollarpiecesofequipment.Thesecanbeinthehundredsoreveninthelowthousands,sotimeisoftheessence.
ChaseJacobson (Analyst-WilliamBlair):
Okay,that'shelpful.Andthenwhenyoudoyourduediligenceonsomeofthelargerprospects,Imeanitseemslikealwaysandespeciallyinthisenvironmentthecustomerstell,whetherit'stheE&Ccompanyortheequipmentsupplierstheytellyouthattheprojectsaregoingforwarduntiltheyarenot.SoIguesswhatisFlowservedoingdifferentlynowtomakesurethatyou'reputtingmoreresourcesaftertheprojectsthatareactuallygoingtogoforwardversustheonesthatarejustalwaysoutthereandalwaysgettingpushed?
MarkBlinn (President&CEO):
Well,ifyouthinkaboutitwhenweinteractwiththesecustomerswe'redoingalotofthedesignworkfortheseproductsforthesefacilitiesworkingonstandardizednation.Someofourlargecustomerswehavequarterlymeetingswiththemtogothroughexactlywhattheyareplanning.
It'sinnobody'sinterestthatbothsidesdon'tunderstandwhat'sgoingtohappen.AndwhatImeanbythatisacustomeriftheyaregoingtogoforwardwiththeprojecttheyhavereasons,long-termreasonstodothat.Theymaypushitacoupleofquarters,sooncetheprojectstartsmovingdowntheroad,wehaveaprettygoodsenseit'sgoingtogoforward.
Sometimestheygetcanceled.Wesawthatlastyearsomeprojectsthatwethoughtreallyweregoingtogoforwarddidgetcanceled.Itwasbyamultinationalthatwasveryfocusedonshort-termcapital.
Butwhereweseeprojectsdrop-offaretheonesthatareintheideationphasethataregoingonthedrawingboard.Aspeoplelookforvisibilityaroundtheunderlyingvalueoftheresourcetheymayputthemoffatthatpointintime.ButIthinkwhatIwanttoexplaintoyouisthere'salotofworkthat'sdonebeforethesethingsarebid,soindoingthatwegetprettygoodvisibility.
T omPajonas (COO):
AndIwouldaddtothatwedotakealookatthefinancinginplacefortheproject,doestheprojecthaveofftakeagreementsinplaceforthecommoditythattheyareproducing.Wealsohavedifferentlevelsofactivity.Sosomethingthatisintheearlystageswewoulddeployabudgetlevelofresources.
IfallthesethingsthatI'vementionedandMarkmentionedareinplacethenwewilldeploymoreelaborateresourcesinordertogoafterthatpotentialproposal.Sowehaveaprettygoodsystemforweedingoutthosethatareinearlystagesversusthosethataremorefirmingupandgettingreadyforrealproposalactivity.
Operator :
JimFoung,Gabelli&Co.
JimFoung (Analyst-Gabelli):
Hi,goodmorningeveryone.SoIjustwantedtomaybeyoucouldsizeuptheopportunityintermsofsellingtheindustrialpumpsthroughdistribution.
Howlargeisthatopportunityforyou?Ipresumeitwouldbeincrementaltowhatyou'redoingnow.
MarkBlinn (President&CEO):
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
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Itis,itisincremental.Ifyoulookatourvalvebusinessapproximately35%to40%oftheirbusinessgoesthroughdistribution.Andwe'resittingprobablylessthan10%ontheindustrialside.
InfairnessIwouldn'tsaythat30%differentialisallincrementalbecausepartofwhatweneedtodoishavedisciplinearoundwhatproductsgothroughoursalesforceandwhatgoesthroughdistribution.Becausefranklyasalesorganizationwouldwanttohavealltheirproductsattheirdisposaltosellbutthefactistheywillonlyreallyfocusonsellingafewandwe'veseenthat.Butalotofthatisgoingtobeincrementalinthebusinessifwegetituptotheratethatourvalvebusinessisoperatingat.
JimFoung (Analyst-Gabelli):
Sonetyou'reinthedistributive--you'reinalowermarginthroughthedistributors,net-netyourbottomlinewouldimprovefromjustthehighervolume.
MarkBlinn (President&CEO):
Well,youdogethighervolumebutasImentionedearlier,timeisoftheessence.Andsowhiledistributorscanmakegoodmarginswemakedecentmarginsonproductsthatgothroughdistribution.Iftherewasasignificantmargindifferentialcompanieslikeourswouldgodirecttomarketbutthefactisthere'salotofvalueinourdistributionchannel.
AndJim,we'renottalkingaboutbig,bigprojectsgoingthroughdistribution.Againthesecouldbe$1,500piecesofequipmentandwherethedistributoraddsvalueistheycarryanarrayofproductsthattheycanservethecustomerfairlyquickly,oftentimestheyareapproximatetothem.AndsoI'mnotsayingacustomeriseverpriceinsensitivebuttheyarereallyfocusedongettinghavingthatproductavailablealongwithsomeotherproductsthatwemaynotserveintothatcustomerandgettingresponsequicklyandgettingtheirfacilityupandrunning.
T omPajonas (COO):
AndJim,ifyoulookatdistributorstherearemanydifferenttypesofdistributorsthataddvalue.Somearejustbuyandresell,somewilladdcontenttoit,somewilladdanengineeringvalueaddtothat.Sothatdistributorisreallyaroutetomarketthatwechoosebasedonthevalueaddedthatthatdistributorcanbringtothatproductintheterritoryorregionthatthecustomerisin.
Operator :
JonnyWright.
JonnyWright (Analyst-Nomura):
Goodmorning,guys.Ontherestructuringifwecanjustlookatthatfromadifferentangle,Ithinkhistoricallyinthevalvesyoualwayshearalotaboutincreasedcompetitionfromlow-costChinesecompetitors.
YouguysarenowlookingtokindofpivotthemanufacturingbaseawayfromdevelopedeconomiesintoplaceslikeChina.HowdoyoumaintaintheFlowservebrandwhilstdoingthatwithyourcustomers?Andalsohowdoyouthinkaboutavoidingpassingthatprice,passingthecostdiscountsontothecustomerintheformofjustlowerpricesandbecomingmoreofalike-for-likecompetitorwiththelow-costChineseguys?
MarkBlinn (President&CEO):
Wellkeepinmindlow-costChinesearetypicallyinourlowertierproducts.Sosomeoftheseareveryhighlyengineeredpiecesofequipmentandwedon'tnecessarilyseealotofcompetitionfromChinese
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
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suppliers.Thesearehigh-endcontrolvalves,actuationhighlyengineeredpiecesofequipment.
Buthere'stheimportantthing,thewaywedothisiswiththepermissionofourcustomer.Sopartofwhatwe'vebeenworkingonoverthelastcoupleofyearsthroughtheLPO/SPOstrategyisworkingwithourcustomerstoqualifysomeofthemanufacturinginlow-costpartsoftheworld.
Anddon'tjustmentionChinabecauselaborrateshavegoneupquiteabitthere.We'retalkingaboutvariouspartsoftheworldIndia,Mexico.
ButtheotherthingtorememberwithourcustomersaswellisoftentimestheywanttodealwiththeOECDfacility.Sosometimeswhatwedowhenwetalkaboutrepurposeiswe'llmakethatfacilityengineering,assemblyandtest.Itwillstillbethefront-endbutalotoftheactivityaroundthevalueaddtothepieceofequipmentwillbedoneinalower-costpartoftheworld.
SoI'mnotsuggestingcustomersonhighlyengineeredpiecesofcriticalequipmentarewholesalemovingeverythingtolow-costpartsoftheworld.Thatmayoccurovertimeandwe'repreparedtomovewiththemindoingthat.
ButIthinktheimportantthing,thesearen'tcommoditysoldbythepoundtypeequipmentthattypicallygetfullyconvertedovertoalow-costregionoftheworld.Wedon'texpectthattooccurovertheshorttermbutweexpectittooccurfasterthanwhenithasoccurredoverthelast10yearswhichiswhywe'retakingtheseactions,oneofthereasonswe'retakingtheseactions.
Operator :
BrianKonigsberg.
BrianKonigsberg (Analyst-Vertical):
Goodafternoon.Justacoupleofquickquestions,mosthavebeenanswered,butcanyoujustgivealittlebitmoreclarityontherestructuringorthespendyou'redoingbelowtheoperatingincomeline?Whatareyoutargetingspecificallyandwhattypeofsavingsareassociatedwiththataction?
MarkBlinn (President&CEO):
Belowthelinetypicallythosearegoingtobeexittaxes,anynon-cashassetwrite-downorcertainthingsthataresittingbelowtheline.Butalotofthosearegoingtobeexittaxesinthebusiness.It'sjustnoteasytomovefromOECDcountries.
BrianKonigsberg (Analyst-Vertical):
Okay.Soisthereapaybackassociatedwiththatorisitjustspendingthatneedstobedonebecauseofthemove?
MarkBlinn (President&CEO):
Itneedstobedoneaspartofthemove.Iwouldlookatitholisticandjusttakeastepbackandsaywe'regoingtospend$350million.Mostofitiscash.
Thereissomenon-cashcomponenttothat.Mostofitiscashtoget$250millionofsavingsallofwhichiscash.It'sstillagreatpayback.
BrianKonigsberg (Analyst-Vertical):
Andalsojustmaybecanyouexpandalittlebituponjustthecustomersfromyouhadabadcustomerexpenseinthequarter,obviouslythere'sstressreallyacrosstheglobeintheoilandgasspace.Doyou
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page20of21
see--whatdoyouseefromtherestofthecustomerbase?Arethereotheraccountsthatareparticularlystressedatthistimewhereyoumighthavetotakesimilaractionsoverthecourseof2016?Anycoloronthatwouldbereallyhelpful.
MarkBlinn (President&CEO):
Wellthingscouldhappen.Typicallyalotofourcustomerswedon'thavehighcustomerconcentrationsintermsofsalesbuttherearecertainlyat-riskpartsoftheworld.IfyoulookatLatinAmericathere'scertainlythingsthataregoingondownthere.
Wedon'ttypicallyhave--weservealotoflargecustomersbutthesethingscanoccur.Oneofthesewasarelativelymedium-sizeddistributororasmall-sizeddistributorthatwentoutofbusiness.Soyoutypicallywhenyouseethestraininourindustryittypicallyoccursinthefirst18months,maybetwoyears.
Wedon'tsupplynecessarilyalotoftheupstream,smallerupstreamtypecompanies,E&Pcompaniesthatyou'rehearingabout.Alotofthecompaniesthatweservearelargenamesorongoingprocesscapabilities.Butwewatchthisverycarefully.
BrianKonigsberg (Analyst-Vertical):
IfIcouldsneakjustonelastquickonein,justonfreecashflow,soIunderstandyouhadhighCapExin2015associatedwiththemovepresumably.Butevenifyounormalizethat,wehaven'tseennetincomeequalfreecashflowreallysince2007atthispoint.
Iknowthere'saquestiononworkingcapitalpreviously.Butcanyoujustmaybeconceptuallyjusttalkaboutwheredoyouthinkthisbusinessshouldbeonarunratebasisfromafreecashflowconversionperspective.AndIdon'tthinkyougave2016expectations.Iassumethat'sgoingtobetrailingaswell.
Butifyoucouldtalkaroundthatsubjectitwouldbehelpful.Thanks.
KarynOvelmen (CFO):
Yes,sogoingforwardfromacashflowperspectivefirstquartertheregenerallyismorecashoutflowfromoperationsassociatedwithtaxes,thosetypesofthingsthatwehaveinthenormalfirst-quartercadence.Ourcapitalexpensewillbesignificantlylower.Wehadapproximately$180millioninCapExin2015.
Theexpectationisthat'sgoingtobemoreinlinewitharound$110millionin2016.Soin2015wehadhigherthannormalCapEx,wehadalicenseandsomecarryoverCapExworkin2014.GenerallyspeakingontheworkingcapitallikeIsaidwiththismarketit'salittletough.
Wedon'texpectsignificantswingsinourinventoriesaswegoforward.AndlikeIsaidoverthecourseofthenextfewyearsasweexecuteontherealignmentwedohaveexpectationsthatwewillbeabletobringtheworkingcapitaldownbutdon'tseeanysignificantleversintheshortterm.
BrianKonigsberg (Analyst-Vertical):
Doyouthinkthatnetincomeandfreecashflowwillbeabletoconvergesometimeoverthenextcoupleofyears?Itjustseemstohavebeentosowellbelownetincomeforanextendedperiodoftime,I'mjusttryingtogetasenseofshouldwebeexpectingthisbusinessasit'sitrunsandyouexpectittoberuntobeconvertingintofreecashflowinlinewiththenetincome?
MarkBlinn (President&CEO):
Partofourreducingcomplexityisdesignedtodothat.Itshouldstartapproachingit.It'sgoingtotakeawhile.
CompanyName:FlowserveCorpCompanyTicker:FLSSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q42015EarningsCallMarketCapasofEventDate:5.65BPriceasofEventDate:41.39
©2014TheStreet,Inc.Al l R ightsReserved Page21of21
We'regoingtoconsolidatefacilities,thenKarynintheyearsouthasinitiativesthatwestartdrivingsharedservicemodelsandthingsthathelpreallydrivemoreefficiencyacrossthesystem.Butlet'skeepinmindwe'reafairlydistributedCompanyacrossmultiplecountries,multiplefacilities.
Butnoquestionthataswetakeout30%ofourcapacityindoingsomeofthereductionsandcomplexitywhichwethinkourcustomersaregoingtodemandlongterm,weshouldgetbetterfreecashflowinourbusiness.We'vebeenasfrustratedasanybodyelsehasintermsoftryingtoseekthatgoalbutwe'redeterminedtogetthere.
Operator :
Ladiesandgentlemen,wehavereachedourallottedtime.Thisconcludestoday'sconference.
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