flowserve (fls) earnings report: q4 2015 conference call ... · flowserve (fls) earnings report: q4...

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.




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




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




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.




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.




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.





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.


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




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.


Gotit,that'shelpful,Mark.Okay,soletmeaskyouabouttheaftermarketinthecontextofyoumentionedlastcycle,obviouslythelastcyclewasaverydifferentcyclebuttheaftermarketwasflatinadifficultmarket.

Aftermarketbookingsin4Qweredown11%,sothequestionishowdowethinkaboutyouraftermarketbusinessinthecontextofsomeofthesebigcustomersseeminglycontinuingtopullbackonmaintenancespend?Doyouthinkyoucanmaintainorincreasethelevelofaftermarketbookingsfromthemid-$400millionrangethatyouhadthisquarterorcoulditgolowerstillinthecurrentenvironment?


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




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.


SoifI'mhearingyoucorrectly,assoonasoilstabilizesifithasstabilizedyoushouldseemorenormalaftermarketbehavior.Isthatfair?


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.


Yes,Idon'tthinkthere'sanysignificantshift.Ifyouthinkaboutit,Mike,youlookatthecomplexityoftheequipmentthatgoesin,thattendstoleadtomoreoutsourcingbecausethecapabilitiesinternallyforthecomplexworktheyarealwaysgoingtolooktoabsorbtheirfixedcostsingoodtimesandinbad.Thetrendsthatareoccurringistheequipmentisbecomingmorecomplex,thatiscertainlyone.




Alsoalotoftheresourcesinternallytoourcustomersareagingandretiringandtheywouldprefertooutsourcethatwork.Thenyouaddtothatsomeofthecapabilitieswehavearoundtheend-userandthisisgoingtobeanopportunity,it'snotjustmaintainingrepairandservicingbutit'showdowegetmoreefficiencyoutofthoseproducts.Wehaven'tseenalotofthatrecentlybutthattrendwillcontinue.

Butshortterm,Mike,infairnesseverybodylookstocoveranyoftheirfixedcosts.SoIcan'tsaythatdidn'thappenonthemarginbutthat'snotalong-termstrategyforarefineryoranykindofprocessingplantistotrytobringthatininternally.Shorttermmaybesomeofthethingsthey'lldobutonthecomplexequipmenttheywilltendtolettheexpertsdoit.


Yes,thatmakesalotofsense.AndthenontheIPDplantomovetowardsthatdistributionmarket,Iguessaquestiononbalance,howdoyoubalancemovingnewproductsintothatmarketversusanabilitytomaintainamarginprofile,speakingmoreontheideaofthelevelofengineeringandaftermarketthat'sgoingtogothroughthedistributionchannelsalittlelower.Sojusttalkabouthowyoucanprotectthemarginprofileifnotevendobetterthanthatasyoumoveintonewchannelsthere.


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.


Great,Iappreciatethetime,Mark.Takecare.

Operator :

CharleyBrady,SunTrustRobinsonHumphrey.

CharleyBrady(Analyst-BMOCapitalMarkets):

Thanks,andgoodmorning.ThecommentaryonEPD,onthebookingsinthequarterobviouslyreallyheavyaftermarketweighting72%orsowhichisIthinkprobablyunusuallyhighforthatbusiness.




Youkindofunderstandwhygiventhatthat'salargeprojectbusiness.ButI'mwonderingcanyoumaybetalkaboutthemarginimpactonthatsignificantmixshiftandaftermarketversusOE,whenyoutiethatinwithobviouslyyou'vedonesomeabsorptionbecauseOEisjustdroppingoffIguessmyquestionattheendofthedayiswhatlevelcanyoumaintainthemarginswithaftermarkettooffsettheabsorptionissuesyou'rehittingonEPD?


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.


Okay,thanks.Myfollow-uphereisonM&Ajustquickly,IguessdoesthecurrentmarketenvironmentaslousyasitisinoilandgaschangeyourthinkingdirectionallyonwhereyouwanttolooktowardsM&Aasyoulookouttoyourpipelineandmaybedoesitmoveyoutowardareasthatmaybeayearandahalf,twoyearsagoyoumightnothavebeenthinkingastronglyabout?


Right.We'llletmetellyou,oneofourbiggestcashM&Aopportunitiesisthisrestructuring.It'sgotagreatreturn.

ButCharley,no.We'vehadourlineofsightoncertainindustrieswhichwefindattractive.Andtherealquestionisatwhattimedotheymakesense?

Ithinkwhatyoudon'twantisforustodecideallofasuddentogoinaleft-handturndirectionintosome




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.


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.




Sothosearethetypesofthingswe'regoingtolookat.Thosetypesofprogramstaketime.

Ithinkinadditionwiththerealignmentgoingonwewillseeimprovementsultimatelywhenwegetthroughthisprocess.Itwilltakeacoupleofyearsbutasweconsolidateandstreamlineoursitesweshouldseeimprovementinworkingcapital.Butinthenear-termwedon'texpectanysignificantswings.


Understandthat.IfyouthinklongertermisthereanumberthatyouthinkFlowserve'sstructureshouldoperateintermsofapercentageofsalesinworkingcapitalorworkingcapitalturnsorhoweveryouwouldliketoframeit?Becauseitdoesseemlikethere'sprobablyseveralhundredmilliondollarsinworkingcapitalthatyoucouldfreeuptoputtobetteruse.

KarynOvelmen (CFO):

Wedobelievethere'ssomevaluethere.Wedon'thavespecifictargetsatthispoint.LikeIsaidwe'regoingtolookatthisinamorestandardizedglobalperspectivesoversusreallyatthelocalsites.But,yes,wedobelievethere'ssomeimprovementtherebutwedon'thavespecifictargetsatthispoint.


AndMark,Ithinkyoumentionedinresponsetooneofthelastquestionsthattherewereafewprojectsrightthereinfrontofyouinthefourthquarterthatgotpushed.Arethosethingsthatgotpushedsignificantlyoraretheyimminent?Couldthoseorderscomethroughinthefirsthalfoftheyearorhavetheybeenpushedfurtheroutatthispoint?


Thesewerefairlywelldowntheroadandtheyseemedtomovebuttheycanmovefromquartertoquarter.We'veseenthishappenbeforebutwedidseetheymoved.

AndNathan,theycanmovestillanotherquarterortwoeasily.Westillhaveconfidencetheyaregoingtocomeonlinebutremembertheyareverycompetitive.Wewillrespondbutonlytoapointbecauseifyourememberbackin2009,2010and2011,wehadalotofbacklogthatdidn'thavevaluetoitandthatdoesn'taccomplishanythingforus.

Soitisacompetitiveenvironment.Thesethingstendtopush.Wehaveconfidencesomeofthem,particularlyintheMiddleEast,aregoingtogoforwardbutjustrememberourenvironmentisverycompetitive.


Okay,thanksverymuch.Iwilljumpbackinthequeue.

Operator :

JosephRitchie.

JosephRitchie (Analyst-GoldmanSachs):

Thanks,goodmorningeveryone.SoIguessmyfirstquestionisontherestructuringplans,Mark.

Maybeyoucantalkalittlebitaboutthemagnitudeandthecadenceoftherestructuringin2016?Andthenspecifically,isitfairtoassumethatalotoftheactionsoradisproportionateamountoftheactionsareoccurringinEPD?





SomeofthelargetransformationalonesinthelargeplantsareinEPD,yes,Joe.AndalotoftheseaswetalkedaboutareinOECDcountriesandquiteafewinEuropeandtheytaketime.

You'vegottohavealongplanningprocessintermsofjustdealingwithyourconstituencies.Butgenerallywhatmycommentswereisweexpecttoseeabout$125millionofbenefitthisyear,$185millionnextyear.Soallotherthingsbeingequalwewillgetanearningsliftnextyearfromjusttheserestructuringactivitiesandthenwe'llseetherunratein2018whichwilltakeusupto$215million.


Okayandthenfromacostperspectiveyou'reincurringabout$150millionthisyear,isthatkindofballpark-ishtherightnumber?


Ithinkthat'sthenumberthatwetalkedaboutearlier.


Okay.Andthenmaybemyonefollow-upisreallyaroundpricing.Itlookedlikeyourgrossmarginsinthefourthquarterdeceleratedalittlebitversustherestoftheyear.

Justcurioustohearwhatyou'reseeingonthepricingenvironment.Havethingshavegottenworse?AndgiventhatyouhaveseensignificantCapExcutstostarttheyearfromsomeofyourcustomers,I'mjustcurioustohearwhatyou'rehearingfromyourcustomerstoday.


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.





Thanks,Mark.

Operator :

RobertBarry,Susquehanna.

Unidentif iedPart icipant :

Goodmorning,guysthisis[PhillipeForlorne]onthecallforRobtoday.Sofirstquestion,goingbacktotherestructuring,Imeanthebenefitofcourselooksupnicelyversustheprevioustargetbutthereturnontheinvestmentlookslower.Isthatthemessagethatincrementalsavingsarebecominghardertofindandisthereanypotentialupsidetothesenumbersiftheenvironmentweretogetworse?


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.


Okay,thatmakesalotofsense.Andthenonyour2016outlookdoesthatimplyanyrecoveryinrefiningMROspending?Andwhat'sthelatestoutlooktheregivenyourdiscussionwithcustomers?


Wellthereisanassumptionthattherewillbesomestabilizationandsomeinvestmentinsomerepairandmaintenanceinthebusiness.Butwe'renotreallyexpectingtheaftermarketupgradeandcertainlynotthetiedtounitstocomebackduringthatperiodoftime.Butitdoeshavesomeofourinitiativesaroundimprovingthego-to-marketstrategyandIPDthat'sinthat.

Soit'snotamatterofusjustsittingbackandlettingthemarketsdealwhattheyaregoingtodeal.Wehavetogoandexecutesomeofourstrategicinitiativestoachieveourguidance.





Okay,thanksguys.

Operator :

ChaseJacobson,WilliamBlair.

ChaseJacobson (Analyst-WilliamBlair):

Hi,howareyou?SoMark,youtalkedaboutincreasingtheaftermarketsalesanddoingabetterjobtrackingwhereyourequipmentisgoing.ButyoualsotalkedaboutmoresalesgoingthroughdistributionwhichIthoughtwouldmaybemakeithardertotracktheproductsandcapturetheaftermarket.

SoIguessone,canyouaddressthat?Andtwo,asyoudotrytotracktheproductsbetterandcapturetheaftermarketareyouputtingmorepeopleonthegroundorareyoudoingsomethingwhereyou'readdingmoretechnologytoyourproducts?


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.




Thesearen'tmultimilliondollarpiecesofequipment.Thesecanbeinthehundredsoreveninthelowthousands,sotimeisoftheessence.

ChaseJacobson (Analyst-WilliamBlair):

Okay,that'shelpful.Andthenwhenyoudoyourduediligenceonsomeofthelargerprospects,Imeanitseemslikealwaysandespeciallyinthisenvironmentthecustomerstell,whetherit'stheE&Ccompanyortheequipmentsupplierstheytellyouthattheprojectsaregoingforwarduntiltheyarenot.SoIguesswhatisFlowservedoingdifferentlynowtomakesurethatyou'reputtingmoreresourcesaftertheprojectsthatareactuallygoingtogoforwardversustheonesthatarejustalwaysoutthereandalwaysgettingpushed?


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.





Itis,itisincremental.Ifyoulookatourvalvebusinessapproximately35%to40%oftheirbusinessgoesthroughdistribution.Andwe'resittingprobablylessthan10%ontheindustrialside.

InfairnessIwouldn'tsaythat30%differentialisallincrementalbecausepartofwhatweneedtodoishavedisciplinearoundwhatproductsgothroughoursalesforceandwhatgoesthroughdistribution.Becausefranklyasalesorganizationwouldwanttohavealltheirproductsattheirdisposaltosellbutthefactistheywillonlyreallyfocusonsellingafewandwe'veseenthat.Butalotofthatisgoingtobeincrementalinthebusinessifwegetituptotheratethatourvalvebusinessisoperatingat.

JimFoung (Analyst-Gabelli):

Sonetyou'reinthedistributive--you'reinalowermarginthroughthedistributors,net-netyourbottomlinewouldimprovefromjustthehighervolume.


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?


Wellkeepinmindlow-costChinesearetypicallyinourlowertierproducts.Sosomeoftheseareveryhighlyengineeredpiecesofequipmentandwedon'tnecessarilyseealotofcompetitionfromChinese




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?


Belowthelinetypicallythosearegoingtobeexittaxes,anynon-cashassetwrite-downorcertainthingsthataresittingbelowtheline.Butalotofthosearegoingtobeexittaxesinthebusiness.It'sjustnoteasytomovefromOECDcountries.


Okay.Soisthereapaybackassociatedwiththatorisitjustspendingthatneedstobedonebecauseofthemove?


Itneedstobedoneaspartofthemove.Iwouldlookatitholisticandjusttakeastepbackandsaywe'regoingtospend$350million.Mostofitiscash.

Thereissomenon-cashcomponenttothat.Mostofitiscashtoget$250millionofsavingsallofwhichiscash.It'sstillagreatpayback.


Andalsojustmaybecanyouexpandalittlebituponjustthecustomersfromyouhadabadcustomerexpenseinthequarter,obviouslythere'sstressreallyacrosstheglobeintheoilandgasspace.Doyou




see--whatdoyouseefromtherestofthecustomerbase?Arethereotheraccountsthatareparticularlystressedatthistimewhereyoumighthavetotakesimilaractionsoverthecourseof2016?Anycoloronthatwouldbereallyhelpful.


Wellthingscouldhappen.Typicallyalotofourcustomerswedon'thavehighcustomerconcentrationsintermsofsalesbuttherearecertainlyat-riskpartsoftheworld.IfyoulookatLatinAmericathere'scertainlythingsthataregoingondownthere.

Wedon'ttypicallyhave--weservealotoflargecustomersbutthesethingscanoccur.Oneofthesewasarelativelymedium-sizeddistributororasmall-sizeddistributorthatwentoutofbusiness.Soyoutypicallywhenyouseethestraininourindustryittypicallyoccursinthefirst18months,maybetwoyears.

Wedon'tsupplynecessarilyalotoftheupstream,smallerupstreamtypecompanies,E&Pcompaniesthatyou'rehearingabout.Alotofthecompaniesthatweservearelargenamesorongoingprocesscapabilities.Butwewatchthisverycarefully.


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.


Doyouthinkthatnetincomeandfreecashflowwillbeabletoconvergesometimeoverthenextcoupleofyears?Itjustseemstohavebeentosowellbelownetincomeforanextendedperiodoftime,I'mjusttryingtogetasenseofshouldwebeexpectingthisbusinessasit'sitrunsandyouexpectittoberuntobeconvertingintofreecashflowinlinewiththenetincome?


Partofourreducingcomplexityisdesignedtodothat.Itshouldstartapproachingit.It'sgoingtotakeawhile.




We'regoingtoconsolidatefacilities,thenKarynintheyearsouthasinitiativesthatwestartdrivingsharedservicemodelsandthingsthathelpreallydrivemoreefficiencyacrossthesystem.Butlet'skeepinmindwe'reafairlydistributedCompanyacrossmultiplecountries,multiplefacilities.

Butnoquestionthataswetakeout30%ofourcapacityindoingsomeofthereductionsandcomplexitywhichwethinkourcustomersaregoingtodemandlongterm,weshouldgetbetterfreecashflowinourbusiness.We'vebeenasfrustratedasanybodyelsehasintermsoftryingtoseekthatgoalbutwe'redeterminedtogetthere.

Operator :

Ladiesandgentlemen,wehavereachedourallottedtime.Thisconcludestoday'sconference.

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THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

flowserve (fls) earnings report: q4 2015 conference call ... · flowserve (fls) earnings report: q4...

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