Flowserve's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Flowserve (FLS)

Q1 2012 Earnings Call

May 01, 2012 11:00 am ET

Executives

Mike Mullin - Director of Investor Relations

Mark A. Blinn - Chief Executive Officer, President and Director

Thomas L. Pajonas - Chief Operating Officer and Senior Vice President

Michael S. Taff - Chief Financial Officer and Senior Vice President

Analysts

Jamie Sullivan - RBC Capital Markets, LLC, Research Division

Robert Barry - UBS Investment Bank, Research Division

Charles D. Brady - BMO Capital Markets U.S.

Unknown Analyst

Kevin R. Maczka - BB&T Capital Markets, Research Division

R. Scott Graham - Jefferies & Company, Inc., Research Division

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

William D. Bremer - Maxim Group LLC, Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Stewart Scharf - S&P Equity Research

John R. Moore - CL King & Associates, Inc.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Welcome to the Flowserve Q1 2012 earnings conference call. My name is Kim, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Mike Mullin. Mr. Mullin, you may begin.

Mike Mullin

Thank you, operator. Good morning, and welcome to Flowserve's First Quarter 2012 Earnings Conference Call. Today's call is being webcast with our earnings presentation via our website at flowserve.com. Simply click on the Investor Relations tab to access the webcast and the accompanying presentation. The webcast will be posted at flowserve.com for replay approximately 2 hours following the end of this call. The replay will stay on the site for on-demand review over the next several months.

Joining us today are Mark Blinn, President and CEO; Tom Pajonas, Chief Operating Officer; and Mike Taff, our Chief Financial Officer. Following our commentary today, we will begin the Q&A session.

Regarding any forward-looking statements, I refer you to yesterday's earnings release and 10-Q filing and today's presentation slide deck for Flowserve's Safe Harbor statement on this topic. All of this information can be found at Flowserve's website under the Investor Relations section.

We encourage you to read these statements carefully with respect to our conference call this morning.

Now I would like to turn it over to Mark to begin the formal presentation. Mark?

Mark A. Blinn

Thank you, Mike, and good morning, everyone. I am pleased with our solid first quarter results and proud of the work our employees have done to create shareholder value by taking advantage of our improving end markets, including our long cycle business, for the first time in several years.

The first quarter played out largely as we anticipated. Back in February, we talked about how the first half of the year would be challenged by a tough 2011 compare due to the now stronger dollar and some large low-margin, delayed shipments going through backlog. We expect those challenging factors to also impact the second quarter, but we see improvement in the future quarters as our business cycle improves.

Our first quarter bookings represent our strongest quarter since the third quarter of 2008, in spite of the stronger dollar. The booking strength was broad based across our end markets, most notably in chemical and oil and gas, while our water markets remain challenged.

Our commitment to aftermarket end-user strategies and localization continued to pay off, with increased aftermarket bookings of 7% or 9% on a constant currency basis, resulting in an aftermarket annual run rate approaching $2 billion.

If you recall, we remained committed to growth investments during the downturn, as well as realigning our business to growth opportunities, and as a result, are now well-positioned to capitalize on what we believe is a key differentiator.

We are pleased to see our longer and later cycle project business activity begin to pick up, as demonstrated by the impressive EPD original equipment bookings.

I am proud of our employees' commitment and focus as we capitalize on the strengthening cycle. Our strong first quarter book-to-bill of 1.16 resulted in our highest first quarter backlog in 4 years. I will also emphasize that the expected margin going into backlog is improving as a result of firming markets and Tom's effort to intensify our discipline and enhance our processes.

We have also made progress on challenges around working capital and delivering our past due backlog. Work remains, but I'm confident that Tom, Mike, and our operations leadership are driving the necessary operational improvement to improve margins and bring our working capital to more efficient levels.

Looking forward to the balance of 2012, I am encouraged about how the cycle is progressing. We see increased quoting levels and progress on long planned mega infrastructure projects, in spite of lingering macro uncertainty and market softness in Europe.

We are optimistic that this increased activity will result in increased booking opportunities towards the end of the year and into 2013.

Energy development opportunities in emerging regions continue as anticipated while the unexpected chemical renaissance in the U.S., driven by shale gas development, provides additional support to our optimistic end market views. When we look at the impact shale gas is having on the energy markets globally, we have seen significant increase in the number of projects announced to take advantage of this low-cost feedstock, with increased project announcements for combined cycle power plants and chemical processing plants in the U.S., Europe, Middle East and Asia.

As it relates to power, regulatory clarity in the U.S. may provide the necessary stability to enable significant investments in domestic power to move forward. And while desalination projects have been slow to move forward over the last several years, improving macro and political environments in key regions should support long-anticipated investments.

While we are optimistic about the present state of our end markets, a meaningful impact on our reported financial results will likely lag, given the long cycle nature of many of these projects.

In addition, although these jobs provide attractive, long-term aftermarket opportunities, we must still work through some lower margin, large projects in our backlog in the second quarter of 2012. But our first quarter bookings and bid levels give us increased confidence in our ability to meet our financial goals this year and to obtain profitable growth in following years.

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