Flowserve 4Q15 Earnings Call Notes

Mark Blinn

The downturn was more severe and widespread than originally anticipated

“The downturn in our served markets during 2015 was more severe, widespread and persistent than we and the industry at larger originally anticipated a year ago. The sharp declined that began in upstream oil and gas spread across the industrial complex as year progressed. ”

End markets are sound though cyclically challenged

“As we look to the future, global macro fundamentals suggest that Flowserve’s end markets will continue their longer term secular growth patterns confirming we serve the right strategic industries. Population growth in an emerging middle class will drive energy demand. And aging infrastructure in energy, power, chemical and general industries will require refurbishment or replacement. Our end markets are inherently sound over the long run. Although, they are currently cyclically challenged.”

There is a building tailwind the longer maintenance is delayed

“And while we won’t predict the timing, we do realize there is a building aftermarket tailwind coming from last year’s deferred maintenance activities. As we’ve seen in the past, the longer facilities continuously run, the greater the workload is available to us when customers do catch up. ”

Near term market visibility will remain limited

“In closing, Flowserve expects near term market visibility to remain limited as customers calibrate around the persistent macro uncertainties. We expect this will result in continued delays in investment decision. However, as you have heard the near term market challenges provide us the opportunity to focus on cost take out, our operational performance and growth opportunities while remaining disciplined in our bidding. ”

Engineering projects do get pushed out

“our business primarily in EPD is what you call late cycle. And as we talked about before and you started to see this happen in the middle part of 2014, they start to curtail their CapEx expenditures, you’ve seen this with the multinationals trying to protect their dividend. And the fact is as those things can go off the drawing board, get pushed a little bit and they don’t come back real quick from — primarily from the multinationals so they don’t decide necessarily over night to bring it back online.”

CHina isn’t necessarily the only low cost manufacturing area since labor rates have gone up

“part of what we’ve been working on over the last couple of years through the LPO/SPO strategy is working with our customers to qualify some of the manufacturing in low cost parts of the world. And don’t just mention China because labor rates are gone up quite a bit there. We are talking about various parts of the world, India, Mexico. But the other thing to remember with our customers as well is often times they want to deal with the OECD facilities”

Karyn Ovelmen

Latin America is most challenged region

” Latin America, our most challenged region throughout 2015 remains extremely soft with delays occurring in nearly all projects with our important customers in Brazil, Venezuela and Argentina. Considering the quarterly volatility in our served end markets and region we experienced this year, our visibility heading into 2016 remains limited”

Flowserve 1Q15 Earnings Call Notes

Broad based spending decline in oil and gas, did not get usual uptick at quarter end

“Our first quarter 2015 results were challenged by a broad based capital spending decline originating in the oil and gas markets as well as currency headwinds caused by a stronger dollar. Going into the quarter, we anticipated some customer hesitancy and reduced activity due to oil price volatility but did not foresee the full extent of the reaction both in our downstream and midstream markets as well as in other served industries.

We also saw restrained spending in our customers’ repair and maintenance budgets occur in the quarter. This market slowdown was further compounded by economic and geopolitical conditions in Latin America and the Middle East and by strikes at several U.S. refineries. Specifically in March, we did not experience the typical uptick in activity that we usually see towards quarter end.”

Activity may pick up as oil has stabilized

“We do see signs of some activity ahead as oil has stabilized, albeit at a lower level, but recognize the market will be competitive and not all industries will move in sync. Customers will remain deliberate and driving value for them will be increasingly important. We have the capability to drive their short-term and long term value.”

Stronger dollar does offset some of the benefit of weaker gas prices for chemicals plants

“We continue to expect ethylene expansion in North America with the derivative plants related to the new capacity expected to come online over the next few years. Although the current strong dollar is partially offsetting the advantages of the low cost U.S. natural gas and may be a cause for a delay in some derivative plants.”

Increasing uncertainty in China and other emerging markets

“in addition to a volatile oil market and currency challenges, there were a multitude of other factors that emerged late in the quarter. We increasingly saw larger project work not materializing, increased macro uncertainty in China emerging, Latin America continuing to experience issues and a more uncertain Middle East environment.”

People are in a wait and see mode, but you can’t defer maintenance spend forever

“if you think about that from a project standpoint and then you step back again and look at what happens on some of our run-rate and aftermarket business, again, the environment we’re in in the first quarter is people are uncertain about their capital budgets. If you look at the integrated oil companies, they’re focused on cash flow. What that will cause folks to do is wait and see and develop their budget and certainly defer maintenance. We saw that in the beginning of 2009 but you can’t defer it forever. So we do expect that to stabilize over a period of time.”

You run your refineries in good times and bad

“It’s not like an oil well where they cap the oil well or shut the oil well for a period of time or the production platform. They continue to operate these downstream facilities in good times and bad. In good times and bad they’re looking for ways of course to keep them maintained and operating for safety purposes but also, they’re looking for ways to drive additional efficiency.”

Currencies impact multinationals in the short term but they balance out over the long term

“That’s the benefit of having a global footprint. We have the ability to do work in low cost regions of the world or there are certainly other parts of the world. I would tell you Deane, if you look at currency movements, over the short-term they do impact multinationals but over long term things balance out.”