Q3 2020 Flowserve Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Flowserve Corporation third quarter Twentytwenty earnings Conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session to participate on that portion of the call you will need to press star one on your telephone.
Please be advised that today's conference maybe recorded if you require any further assistance disbursed star in Seattle.
Now, it's my pleasure to hand, the conference over to your Speaker today, Mr., Jay Roueche Treasurer, and Vice President of Investor Relations. Please go ahead Sir.
Thank you Carmen and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserves 2023rd quarter financial results.
On the call with me. This morning are Scott Rowe, Flowserves, President and Chief Executive Officer, and I knew Sweats, Senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call for questions and as a reminder, this event is being webcast and an audio replay will be available.
Please also note that our earnings materials do and this call will include non-GAAP measures and contain forward looking statements. These statements are based upon forecasts expectations and other information available to management as of November six 2020, and they involve risks and.
Certainties, many of which are beyond the company's control.
We encourage you to fully review, our safe Harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results both of which are included in our press release and earnings presentation and are accessible on our website at Flowserve Dot com in the Investor Relations section.
With that I would now like to turn the call over to Scott ROE plus serves president and Chief Executive Officer for his prepared comments great. Thank you Jay and good morning, everyone. Thank you for joining our third quarter earnings call.
We're pleased with how closer of responding to the dramatic and unprecedented change in 2020 Covance team continues to impact our lives on a global scale, which is impacting flowserves end markets and changing the way we run our company on a day to day basis.
Considering the current environment I truly appreciate the dedication and commitment demonstrated by posters leaders and associates and especially those in the front line working at our manufacturing facilities and cure fees, who continue to fully support our customers each and every day.
So while we have had associates directly impacted by co bid our strict adherence to the operating policies and procedures. We implemented early in the year prevented any closer to closer transmission from occurring in our facilities during the quarter.
We are pleased with this outcome, we remain committed to the safety of our associates. However, it is important to acknowledge that the additional safety protocols and the disruption and have an incremental cost and impact on our overall productivity levels.
Despite our best efforts and investment to ensure the health and safety of our employees and customers.
Cobot continues to cause sporadic disruptions within our facilities.
In the third quarter, our Indian and Mexican operations were the most challenged regions, where we have several large manufacturing facilities. However, today all of our locations are operational and providing support to our customers.
The recent rise in coated related cases in Europe, and the United States is concerning we're doing everything possible keep these facilities open and operational throughout the fourth quarter and beyond and we believe our system and processes will continue to keep our associates safe and productive.
Before Amy covers our financials in detail I would like to address our results at a high level. Overall, we are pleased with our execution during the quarter Flowserve delivered adjusted earnings per share of 50 cents in line with our expectations.
Solid earnings also reflect a significant cost actions we have implemented this year in the quarter. Adjusted EPS, you day decreased $30.8 million year over year to $193 million. We continue to track ahead of our $100 million cost out program for full year 2020, compared to last year's cost structure.
As we communicated previously these savings are about half from discretionary measures and half from structural actions we have taken.
In addition to the FDA SNA savings, we are working hard to reduce our product costs through supply chain savings into mid and to maintain higher levels of productivity in our manufacturing locations.
Our closer 2.0 transformation program continued to deliver solid operational execution limit.
Limiting the decline in our adjusted operating margin to 60 basis points on a $71.4 million revenue decrease versus third quarter 2019, resulting in detrimental margins of 19.5% in the quarter.
We are confident as additional closer 2.0 process improvement initiatives are implemented within the organization, we will capture more margin enhancement opportunities through further cost actions manufacturing productivity and product cost reductions.
Let me now turn to our segment level performance in the third quarter.
After these bookings decreased 22.6%, while sales decreased 1.8% as we executed on its strong backlog.
The bookings decline was driven by original equipment down 37%, while aftermarket bookings were more resilient added declined 12%.
Oil and gas bookings were down 45% year over year, primarily due to a nearly $60 million decline in project Awards.
At PD is adjusted margins were in line with expectations, including the 110 basis point improvement in adjusted operating margin to 14.1% despite.
Despite the modest revenue decline adjusted operating income increased approximately 6.8% to $94.5 million, demonstrating solid operating performance, which more than offset the headwind of a 400 basis point mix shift toward original equipment.
Aggressive cost actions drove a $22 million decrease in adjusted EPS DNA in a 280 basis point decrease in adjusted EBITDA as a percentage of sales to 18.7%.
FCD bookings and sales were down, 16% and 18.7%, respectively oil and gas power in General industries were both primary drivers are one of the primary drivers down 30, 20, and 12% respectively.
Additionally, within general industries in North American distribution channels continues to be challenged as India has been impacted by co bid in commodity price declines.
FCD has adjusted gross and operating margins were 30.3% and 12.2% respectively.
While these are not the results we typically expect from the business I am confident that our focus on execution cost reduction backlog conversion and inventory reduction will drive fourth quarter margins above their second and third quarter levels.
Turning now to bookings as expected our third quarter bookings of $806 million was generally in line with second quarter levels and represented a 21% decline year over year.
As you May recall last year's third quarter included strong oil and gas project activity in the Middle East and Asia Pacific as well as a number of smaller projects awards, which together totaled roughly $140 million by contrast, the largest awards we received in the 2023rd quarter was $12 million.
When combined with our other small to medium sized project towards the summer represented less than $60 million of project Awards.
On a positive note, we didnt have any material cancellations in backlog in the quarter.
Third quarter aftermarket activity remained relatively stable with bookings of $424 million.
13.5% modestly better or modestly below our expectations.
While customers continued to spend to meet safety and regulatory requirements upgrade and productivity investments remained muted and larger scale turnaround and maintenance activity continued to face coated related headwinds with limitations due to site access.
Original equipment bookings in the quarter were $381 million down 28% versus prior year and up about 4% sequentially.
Large projects with tips, which typically accounts for 10% to 15% of our business remained the most challenged.
A majority of these projects have been delayed and are currently being reevaluated.
Our customers project spending decisions will largely depend on the status of the cobot environment.
The bookings level as the last two quarters accurately represents the current market environment, and we expect bookings in the fourth quarter and likely the first quarter of 2021 to be similar to this year's second and third quarter.
Given what we know today I am increasingly optimistic that we begin to return to bookings growth next year as the world moves beyond the cobot crisis.
We should see it first in our aftermarket bookings ahead of an inflection in project bookings, but we expect both to be better in the back half of 2021.
On the aftermarket side, we feel there is pent up demand building for parts and services and expect that growth in the year in this area to incur earlier than the project business.
We are beginning to see signs of increased aftermarket spending in 2021 as operators are planning for maintenance and turnaround events.
Let me now address our served end markets.
Our oil and gas markets continued to be the most impacted due to covert related declines in energy demand third third quarter bookings declined 42% year over year and were roughly flat sequentially.
Last year's third quarter presented a challenging compare figure due to the strong project environment.
At that time, which included several larger awards related to IMO 2020 upgrade activity.
2019 third quarter included over $90 million of project Awards.
This quarter, our largest project awarded oil and gas was just $12 million.
Third quarter chemical bookings were down 21.6% in the quarter, primarily driven by SPD, 31% decline, while FCD bookings were down only 5%. The quarter included one smaller award of $4 million in Asia Pacific.
Our integrated customers continued to delay petrochemical investment, while specialty chemicals demand presents growing opportunities.
Turning to power, while the power market continues to be challenged it has not declined as much as oil and gas or the chemical markets third.
Third quarter and year to date bookings are down just 7.5% and 9.2% respectively.
The quarter includes a few small nuclear awards totaling $9 million and a $4 million fossil fuel award in Asia.
The general industries market, which includes a significant level of distribution.
And was our most challenging market in 2019 continued to show signs of recovery in the third quarter with bookings up 18.6% and up 5.9% year to date.
FTD is 31% increase was partially offset by FCD is 11.5% decline driven by the company continued to MRO slowdown in North America.
At Pts growth was driven by distribution in food and beverage growth.
Finally, representing our smallest market water bookings decreased $41 million or 66% last year's third quarter was particularly strong including over $20 million and awards for a large middle East desalination project.
While the 2023rd quarter included only one project award of $6 million in North America, We continue to expect investment opportunities from desalination flood control and municipal water markets.
Regionally, our largest dollar decline within North America, which has seen a significant impact from crude as well as the related downturn in energy demand.
Only Latin Americas delivered constant currency bookings growth in 2020 up six and 9% in the third quarter and year to date, respectively.
We incurred double digit year over year bookings declines in all other regions.
We're seeing the most potential in the Asian markets as mobility has returned to near normal levels demand for processing based products has recovered and infrastructure spending continues.
With limited at highly competitive project opportunities, we continue to focus on improving our position for winning available work driving our cost structure lower to offset pricing pressure and maintaining a quality backlog to increase our installed base and create aftermarket opportunities.
We believe our markets have stabilized and expect fourth quarter bookings to be in line with what we saw in the second and third quarters of this year.
Let me now turn the call over to Amy to cover our financial results in greater detail before I return to provide our outlook.
For the fourth quarter.
Thanks, Scott and good morning, everyone.
Looking at flows our third quarter financial results in greater detail our reported EPS of 39 cents included realignment and transformation expenses as well as below the line FX charges totaling 11 cents.
Adjusted EPS of 50 cents was solid considering we continue to experience ongoing colgate related related headwinds.
Third quarter revenues of $924 million for flat sequentially and down 7.2% versus the prior year.
FTD is revenue declined 1.8% on reduced aftermarket activity, which more than offset strong original equipment sales growth of 10% through backlog execution.
Consolidated revenues at $479 million were down 5.6% wary FCD, 21% year over year decrease more than offset SPD strain.
Aftermarket revenue of $445 million was down 8.8% with both segments down in that general range.
In addition to limitations accessing our customer site many of the planned refinery and chemical plant turnarounds that were expected for this fall. We're further delayed and in the active Gulf Coast Hurricane season also cause temporary coke closures and disruptions to several of our key our fees as well as our customers facility.
Turning to margins.
Third quarter, adjusted gross margin decreased 230 basis points to 31.5%, including declined to 180, and 240 basis points at FTD and FCD respectively.
In addition to the previously mentioned cost increases related to Kobe and the associated disruption with our site margins were also negatively impacted by a 100 basis point mix shift towards the original equipment revenue as a percentage of our total sales driven.
Driven by FCD 400 basis point mix shift.
On a reported basis flow serves third quarter gross margin decreased 250 basis points to 30.9% again due to cosmic disruptions and mix headwinds.
And a $2 million increase in realignment expenses versus last years third quarter.
Third quarter, adjusted EPS, DNA decreased $30.8 million or 13.8%, demonstrating our cost control and the aggressive cost actions. We took in the first half of the year.
These measures products 109 by our $193 million of adjusted EPS, DNA, Ghana, 160 basis points as a percentage of sales to 20.9% versus prior year, which was flat sequentially.
On a reported basis as DNA as a percentage of sales decreased 140 basis points primarily.
Primarily due to the cost actions, we implemented considering our adjusted items were relatively flat with prior year.
Third quarter, adjusted operating margin decreased 60 basis points versus last year's 10.9%.
With third quarter, adjusted operating income of $100.6 million.
And 71.4 million dollar year over year revenue decline.
It represents an adjusted decremental margin of approximately 19.5%.
FCD solid operating performance delivered adjusted operating income growth at the segment level, even as its revenues declined modestly.
As a result, FTD drove 110 basis point increase in its adjusted operating margin to 14.1%.
Fcbs adjusted operating margin of 12.2% was below our expectations driven by a higher mix of lower margin project work.
With clear visibility and line of sight, we fully expect FCD margins to return to around the mid teen levels in the fourth quarter.
Reported third quarter operating margin decreased 110 basis points to 9.4% driven primarily by a loss of leverage on lower revenue and.
And included the benefits have modestly lower adjusted items.
Turning to cash flow and liquidity.
As many of you know flow serves results are traditionally seasonal and most of our full year cash flow is delivered in the second half of the year, especially in the fourth quarter.
While our cash flow statement will be published in a few days with our 10-Q I can say we feel good we feel very good about our cash generation during the quarter.
Based on our operating cash flow of 70% to $75 million and quarterly Capex spending free.
Free cash flow for the quarter will be about $57 million.
This performance as well as the $300 million of net proceeds after our note issuance and tender offer.
Our cash and cash equivalents balance at September thirtyth to over $921 million.
Even absent the net proceeds of the bond issuance flowserve increased its cash position $59 million in the quarter.
In future periods, we intend to use some of this excess cash to retire outstanding debt, considering we have maturities in 2022 and 2023.
However, our primary working capital as a percent of sales grew to 30% as inventory, including contract assets and liabilities increased roughly $100 million versus the prior year.
This increase in inventory primarily relates to the strong OE project backlog, we felt as well as an increase in shipping and manufacturing delays due to Celtic related disruptions and a few of our larger facilities.
As a result, Covidien has had a greater negative impact on working capital than our revenues might reflect.
Over the last few years Pro Serv has delivered meaningful improvement in working capital to sales metrics through our transformation initiatives.
And despite this quarter's blip. We are confident we are on the right track and that our performance in the fourth quarter will be much improved.
In particular, we are actively managing and taking discrete measures to reduce the inventory level to reflect current demand and we also have solid visibility to upcoming shipments.
It is critical for us to stringently manage inventory more intensely during challenging points in the cycle and German hydro.
And our teams are incentivized accordingly.
Accounts receivable has demonstrated somewhat better consistency than inventory.
DSL was 73 days in the quarter versus 74 in each of the first two quarters of 2020.
Although we still see opportunities for improvement.
Despite some kobe driven slow pay impact this year, we have made significant improvement in the last three years. When DSL was 87 days in the third quarter of 2017.
And we expect our transformation initiatives will and will enable us to reach our target of below 70 days.
Which given the competitive environment for payment terms to in certain of our end markets with represents strong performance.
In addition to the $500 million notes issuance and tender offer during the third quarter. We also amended our $800 million senior credit facility to provide flowserve increased flexibility and ample access to this source of liquidity I'd.
I want to thank and express my appreciation to our partner banks for their continued to support a slow first we value these relationships and look forward to our ongoing work together.
In total our quarter end liquidity position increased roughly $370 million sequentially to $1.7 billion, which includes our cash balance as well as nearly $750 million of available capacity under our amended credit facility, which remains undrawn.
With the continued progress on our 100 million dollar cost reduction program combined with the anticipated working capital improvements.
The planned capital spending and discretionary cost management, we expect to deliver significant cash from operations in the seasonally strong fourth quarter.
Our expected major cash usages in 2020 remained consistent with our prior guidance, including funding our structural cost out actions and the realignment and transformation programs. We continue to expect full year capital expenditures in the $60 million range and annual dividends of roughly $100 million.
Let me close with a brief comment addressing the accounting revision that we disclosed in our press release yesterday.
First the revision is not the result of a view of increased risk related to assess this litigation or any change to our expectations for future cash flow.
As part of our third quarter post procedures, we became aware that our accounting for potential future exposure Chet fastest liabilities related to certain heritage brands deviated from others with similar liability.
Specifically as previously disclosed we were reporting liabilities only for those claims that were you down versus using an actuary to forecast claims that were possibly incurred but not reported to the company.
As a result, we increased our liability by $74 million to $101 million in total.
This liability is partially offset by $87 million of insurance coverage booked as a receivable.
Cash from insurance proceeds received as agreements are reached with carriers.
Our revised financial statements and the filings reflect this incurred but not reported liability on the balance sheet as well as the correction of other immaterial timing items.
Let me now return the call to Scott.
Thank you Jamie.
I said earlier, we are pleased with our performance in this unprecedented year, we're managing through the coker pandemic and our operational efforts with poster of 2.0 are positively impacting our downturn performance.
The flows of 2.0 work is not done we continue to remain committed to our transformational program we.
We have reprioritized cert work streams due to the pandemic driven downturn and we continue to make steady progress on further cost reduction plans in preparing for a return to growth in.
In fact, the speed with which we reduced our cost structure by $100 million versus 2019 was possible because of our success over the last few years, creating a more flexible closer of 2.0 operating model most of the structural cost initiatives. We implemented mid year were comprised of measures previously planned as part of the closer of 2.0 program.
That we accelerated.
In addition to managing Covidien executing our downturn playbook, we're making progress on our long term strategy and our growth initiatives over the last 18 months, we put a lot of effort into into lies in our end markets in evaluating our overall product portfolio. Our product teams have made significant progress in our efforts to have a differentiated offering in a track.
Give markets that have growth potential for years to come.
This year, we have launched five new products introduced 10 product upgrades include six existing products through the design to value process.
In the third quarter alone, we launched all the new products and expect several more before the end of the year.
Included in the new product introductions is the CV branded two stage liquid written compressor designed for a variety of gases and vapors. Our proven technology enabled this product to operate under the most severe conditions, where safety reliability and special processes are critical this compressor will be part of the ASP.
Segment.
We also added new capabilities within the FCD segment during the third quarter, we launched a Val Tex compressor anti surge Bell, which is a revolutionary service solution to anti surge control in LNG processing.
Refinery gas compression natural gas stations and chemical plants using natural gas as a feedstock. This product will provide operators with an innovative anti surge design that combines precise control is fast responsiveness.
Additionally, we expanded our limit torque actuator lines with the new MX series D Smart electric actuator.
This aiotv enabled flow control solution provides trouble peak pre commissioning improved process control from advanced diagnostic capabilities and reliable operation in multiple industries and applications.
Most of its historically been an innovative leader in the flow control industry.
With increased confidence in our new product development process, we will continue to increase our investment in products and technology.
While we very much believe that oil and gas is a long term future of the energy mix, we do recognize the advances in alternative energy technologies.
Today, I will and gas represents about 60% of the global energy mix.
With significant investment in renewables through 2040, most still expect oil and gas to provide more than 50% of global energy mix.
Nevertheless, we are excited about the increasing investments towards energy transition reduced emissions and safer living conditions.
In virtually every major industrial process involving liquids or gases pumps about sales and services are vital to that infrastructure.
Our products and services are currently used in applications throughout the world to address key environmental issues, such as flare gas recovery, which reduces methane emissions and increases process energy efficiency hydrogen production in the downstream sector carbon capture and storage to reduce industrial carbon intensity.
Process maintenance and services to maximize service life improve efficiencies employee local workers concentrated solar and hydro power seawater desalination plants for cost effective access to fresh water and flood control to protect coastwise in cities from pricing fees.
And as technology advances in considering Flowserves innovative leadership in the flow control industry, we fully expect to participate in helping make the world a better place for everyone.
I would now like to spend a minute on our environmental social and government efforts or ESG both.
Flowserve continues to improve as a corporation, we take our yesterday program very seriously our commitment TSG again, almost a decade ago. When we released our first sustainability report division for our program starts at the top of our organization with our board of Directors and senior management, we're working together to evolve and develop a car.
For him to be a C. Ibs C program focused on three pillars planet people and operational excellence.
While we believe our proactive approach to government has governance has been and continues to be aligned with our shareholders best interest as evidenced by our implementation of best practices like de classifying our board of directors, improving gender and racial diversity enacting proxy access and most recently implementing the ability for our.
Shareholders to act by less than the unanimous written consent.
Today, I would like to focus more specifically on our environmental initiatives within our ERP program.
Earlier this week, we published our 2020 sustainability report in which we discussed our commitment to becoming a continuously improving organization.
We also specifically announced a new target for reducing global C. O two emissions intensity by 40% by 2030 using 2015 as a baseline.
In addition to setting an ambitious target to reduce our own emissions, we intend to utilize both our existing portfolio as well as developing new products that will help our customers reduce their cotwo emissions and also further participating cleaner sources of energy like hydrogen solar and hydro electric.
Outflows or if we can make we believe we can make the world a better place through our LSG actions in setting our emissions targets in assisting in energy transition our big steps towards doing just that.
Let me close with our fourth fourth quarter outlook.
We expect fourth quarter bookings to be in line with the second and third quarter levels, while anticipating an upward bookings inflection to occur in mid to late 2021.
We expect to make significant progress converting our $2 billion backlog in the fourth quarter and deliver our largest revenue quarter of this year.
As we have the last two quarters, we plan to deliver strong operating margin decrementals as we effectively manage our cost structure.
Fourth quarter decremental should be around the 20% level.
Finally, we are forecasting to finish the last quarter of the year with free cash flow generation of at least $100 million as we reduce primary working capital from the third quarter levels.
Those results are traditionally very seasonal during the year with the best performance for revenues adjusted earnings in cash flow occurring in the fourth quarter of the year, we expect the 2024th quarter to largely reflects that trend absent of any co grid related issues.
I remain confident that our transformation progress will continue to position flowserve to execute through cycles at a higher level than previous downturns and capture growth with market recovery driving long term value for our associates customers and our shareholders.
Operator. This concludes our prepared remarks, and we would now like to open the call to any questions.
Thank you and if I remind our ladies and gentlemen to ask a question just press star one on your telephone.
To withdraw your question press the hatch on councils.
Our first question comes from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Hey, good morning, Hey, can we start with the MRO outlook on the oil and gas side and just your expectations about how long can the MRO upgrades and maintenance be delayed by the industry.
Certain point things become either its regulatory or safety, but how close are we to that threshold.
Yes, no data, it's an important question and obviously thats been impacted by this downturn and what I'd say is that the regulated and that the mandates are still out there and we're seeing that work progress, but as operators to make exceptions in push push some of that out which we are seeing but probably the.
Biggest impact is just in the discretionary side of it where you might you are normally used to bring the parts and when you think that there is an eminent failure or even ahead of that and we're seeing those decisions get pushed out and in my prepared remarks, we talked about this this will be the first sign of recovery for us and I truly do expect.
That we're going to see 2021 of the better than the run rates that were at right now and they just can't hold off on and spending a lot of this and so we don't think we're losing market share. We don't think others are taken action, but we do think theres just been the district. The discretionary side of this has been clamp down the really really hard on the field side, where.
It is if things start to lease between that motor in the pub, they've got to replace the fields and so we're seeing that.
That business hold up reasonably well, but on the pump parts and some of the Valspar Thats the area that we've seen the receipt of pull back and so I just think we and then the other piece that I put this in the prepared prepared remarks as well is that we are talking to customers about major plans.
In the second half or in the in 2021, as they're looking to do bigger maintenance type events or turnaround activity. So.
So hopefully that.
Helps there, but we do think there is pent up demand and we're having big customers was the third discussions with a lot of our top level customers and they are confirming that the spending should come up in 2021, that's real helpful venue and dissipated one of my questions about the market.
Market share and you don't think theres been any market share loss.
So can I ask about channel in the in inventory in the channel just what's your sense about the distributors right now on the stocking Destocking continue on.
Yes. So is this the stocking distributors really are in our valve business and there's a few that are public and disclose the results and you can see their inventory levels are down substantially and so yes. They came into it really started last year and so they've been destocking and pulling inventory down.
But they are not spending money right and what they've said is that they're not going to do major stock orders and they're just going to buy and replace on to on a regular basis and so until you see a pretty significant inflection in their business I don't anticipate major stock awards, but I also think the Destocking is done and like I say their third third third numbers are to home.
Pretty pretty dramatically and so I think thats going to actually in in a weird way that's going to help our valve business more than what we saw in Q2 in Q3, but it's not a major uplift until we start to see an inflection activity, but I. Just think they are at kind of the variables of inventory levels and that that will actually help.
Our bookings within valves and then on the pump side, we're not seeing we don't have as many stocking distributors a lot of that more as pass through and they hold just a little bit inventory. So I don't think theres, a big impact on the pump sales growth.
Great and just lastly, it's more of a comment than a question as I appreciate the the transparency and disclosure about your revised assumptions on the a specialist reserve that is a in the scheme of things of companies are facing this issue. It's tiny for you all and you've got good insurance.
That you're showing against it so I appreciate the transparency, but it looks like a non issue to us. Thank you.
Thanks, Deane, we agree with $14 million as of net net exposure currently on our books it is a.
Relatively immaterial change agreed thank you.
Thank you our next question comes from.
Josh locally teamed with Morgan Stanley.
Hi, good morning, guys.
Hi, Josh.
Scott just a couple.
Kind of following up on on Seans question and from your comments on the timing of kind of replenishment in the backlog with some of this book and ship and maintenance activity that needs Don and likely comes in here in the first half.
How much backlog depletion.
Would you expect as we kind of move through the first half of next year before orders turn positive I think in the second half and I guess what would be more than.
You'd be comfortable with relative to kind of normal visibility though.
Yes, yes sure good question and I, just said, it's a really hard one to answer and it really is with the backdrop of coated and so I think you know really this Paul cobot outbreak in the northern Hemisphere is going to really dictate kind of the comfort level in the aggressiveness on when folks can start to spend again.
But I would say is as we think about backlog and where that is we've given some pretty clear.
Direction on what we see the fourth quarter and so you Didnt you can get to a book and Bill type number from there and you can see what the backlog looks like and then it really just becomes a question of when customers start to spend again and you are right now we do believe that at some point in 2021.
Whether it's late Q1, maybe Q2, you are that that aftermarket and MRO spending starts to happen and we've got having discussions with our customers. We know there's plans to spend more.
Versus the run rates that were at now but did I I wouldn't expect the project activity to pick up dramatically until the back half of 2021, and so it just kind of Yo. It's when does that happen when do operators get comfortable it is a lot of this is just going to be psychology on on how covance has handled during this kind of.
The uptick in the winter season, and then what gives them confidence that mobility in demand starts to return and yes. I think you know my guess right now and everything we see is with vaccines and living with this this virus I believe that folks start to get a lot in a much better place in the end.
Next year at the end of Q2, and early Q3, and so thats really the best I can provide and what we're hopeful as you know as we kind of said you'll get another quarter under our belt.
Folks get a little more refined on their 2021 plant will come out at the end of the fourth quarter with some hopefully at least will provide direction in terms of what we're thinking and hopefully we can provide more concrete guidance on 2021.
Okay got it does that make sense.
And then just thinking about the magnitude of MRM spend and I know a lot of the timing is subject to slight access from Covidien a lot about the moving pieces there, but if I think back to kind of the 15 16 timeframe too much got pushed out and then we had a big catch up and customer was would say with the benefit of hindsight I want.
Got it.
How would you contextualize the conversations with you know with the management teams and some of these customers in that.
Is this el Morro getting back to normal practices or is there been kind of a snowplow effect of stuff that didnt get done that all pushes into a smaller range.
As you are able to get this worked on again.
Yes, so I'll just kind of reiterate a little bit what I said was with dean.
We we are having discussions that at the top level of our customers I think in the end of mostly they all they understand the impact of what happened in 15, and 16 and they want to avoid that I think the difference here is just with co bid insight access and people working from home. It was in a lot of cases and a lot of.
Parts of the world It was physically impossible to conduct that work and so I'm optimistic that the MRO and that the maintenance side does return back to the levels that we were operating pre co bid and I do think there is some pent up demand there certainly on our part side and so I'm probably more optimistic.
On growth and return here again, it's going to depend on how intense is this kind of winter wave of coated and then the psychological impact of that and where do they think demand on whatever process industries that they're supporting is but again at our discussions you over there are things planned in the first half of 2000.
21 that would be significantly more than the rate that we're seeing right now and so we feel pretty good about getting some growth here within 2021.
Got it perfect appreciate the color and best thought she's got.
Yes.
Thank you. Our next question comes from John Walsh with Credit Suisse.
Hi, good morning.
They were to drop.
I wanted to talk a little bit about how to think about.
Even conceptually some type of margin bridge into next year, I mean, you talked about.
Of the actions I think you took half of them were temporary in nature. There was another half that was structural it sounds like you're announcing new products, which maybe that helps with.
Some price and creating some demand.
You know from new products, but can you help us understand because it seems like you are pointing to a topline headwind.
At least as a base case, just what we should be thinking about in our margin walk.
Year over year, as we think about next year and the Tailwinds and the headwinds.
Sure, Yes, and others. It's a it's a complicated situation right, but I'll give you kind of a a little bit of things to think about the first one would just be the mix side right and so as we kind of gets Oh, we backlog out in the mix starts to return to a little bit more normal aftermarket versus Oh, we got.
The market margins are obviously higher and so we'll get a tailwind from that mix.
We're also show that $100 million that we've talked about is you know is secure and so you get a tailwind on the cost out there and then the other thing I'd just say is that.
The closer of 2.0 initiatives that were going before all still very much in flight and so we've made.
Good strides on manufacturing productivity, we're making strides on lean, we're driving our supply chains to be more cost effective.
We talked about on the product side. This design to value and every time, we put a product through there were seeing anywhere from 10% to 20% cost out on the overall landed cost of the product and so there's still a lot left in the tank in terms of closer to 2.0, and then obviously the headwind would be the revenues are lower and so you've got absorption.
And overhead that we've got to overcome and then the other one that we haven't talked about yet is just pricing and so we are seeing an impact on on pricing in a negative manner as as folks are competing for limited work I would say, it's not across all of our business. It's more imminent in the the large projects in.
Finally on the pump side and we're doing everything we can to set pricing the quarterly and accurately that generate value for full serve and in the long run. So I think those are the those are kind of the big levers I'm looking at Ace Me did I Miss one David the only thing that I would clarify you commented on on the $100 million scene and being asked.
50, 50 structure all in cost of living thing in in 2020, just as a reminder, we only got about six months of the benefit of those structural changes. So we anticipate that they pull forward into 2021 actually $100 million on a run rate of run rate savings.
Yeah, and then the silly other thing I'd, just say just to kind of put a fine point on it is we were pretty aggressive in quick in the beat really at the end of Q1, beginning of Q2, putting our cost reduction plans in place and so we know we can get cost out as our backlog comes down or in the event that something goes a little bit differently on the booking side.
Than we expect and so we're going to continue to watch this and we'll make sure that the cost structures, where it needs to be and 2021 and beyond.
Great. Thank you for that maybe we could do the same same exercise on a kind of free cash flow conversion.
So I know, it's a little bit tougher.
This quarter, just with the way the disclosure works, but you know as we see going forward.
Did have the target of 100% you know that when I saw it was a little bit more backend loaded if I remember your commentary on how you achieve that.
You know what are kind of the big headwinds Tailwinds as you look into next year from a free cash flow perspective.
Yeah, we think that 2020 into is a good indication that that flowserve can generate strong free cash flow in and in good and in challenging markets and we are seasonal and with respect to our cash flows sales as we indicated here were just shy of $60 million that free cash.
Hello, and did this quarter and as Scott indicated, we're driving towards $100 million or better as free cash flow and in in the fourth quarter every year and realistically. There's been we've made some investments in 2020 and that's weighing on those numbers.
Including including the cost that it took to right size the business and in the first in the first half of the year. We continue to see working capital in primary working capital as a is a huge lever for cash flow generation and a lead indicator I indicated in my in my prepared remarks, we are disappointed with where we are.
Landed and in in the third quarter as a percentage of primary working capital and as a percentage of sales, but we're going to continue to drive that number down and specifically where we sit now we think there is a huge opportunity and with respect to inventory and Thats really our focus areas. We closed as we close out the year and.
I would comment that that and that that focus is not just to close the year out strong, but thats really to reset the bar in terms of where primary working capital should be as a percentage of sales and to drive that number and to get to the mid Twentys, then and lower as we as we pick up as we pick up momentum like every.
Nothing else with respect to transformation initiatives, we plan to provide and provide an update on.
And at the end of the year in terms of in terms of where we stand and where we are we sit with alcohol. So we think that free cash flow scared that cash flow conversion as a 100% on its still where we want to be at time for us as a company.
Thank you. Our next question comes from Andy Kaplowitz with Citigroup.
Hey, good morning, everyone.
Andy.
Scott could you give us some more color into what you're seeing in a couple of your larger end markets. I think there's some investor concern increased investor concern out there that refiners could or or shutting capacity as demand stays lower for longer. So do you see risk of a more extended downturn in refining and then you mentioned that specialty chemical demands are covering.
Do you see chemical related related projects and are aftermarket beginning to come back.
Yes, sure Andy I would agree I mean refineries are are challenged right. Now you can see that with utilization numbers and then you know there are operators that are announcing some of announced temporary closures and some of the now permanent closures as well what I would say is that the closures are largely in in North America in Europe.
That would be the smaller refineries that just the economics havent worked well for them and quite frankly, they werent spending a lot with us in terms of upgrading their equipment and things like that but at the same time. The refined product is taken a massive hit as mobility has grown to a halt in the early phases of coated.
And is slowing down again in this in this wave of Cove. It now.
So I think it's a more challenged market and as we look at our funnel within the closed four system, we're definitely seeing more opportunities in specialty chemical we're seeing more opportunities in gases and there are you seeing some LNG type of awards in discussion and projects moving forward, we're seeing the water markets for us.
Breast and so I think you are there are I think we're going to see more things outside the refinery early but I also believe that your refining investment in Asia and the Middle East will definitely continue and again I think thats kind of a second half of 2021.
And then just kind of thinking a little bit more broadly infrastructure spending around the world is picking up we're seeing that a lot in Asia and we do think you'll see more of that globally and then I'd say the Asia market is essentially I'm not going to say it fully pre covert levels, but your weighted it picked up in Q3 and you know we're seeing lot.
Sales of activity, there and then the middle east, while a little bit different than kind of China and the rest of Asia, We do feel confident that the middle East projects do progress in 2021 and that would be more of the refining and the oil related type of work there.
Very helpful and then Scott you've gotten to see flow through of 2.0 operate during the pandemic and while it seems like as you mentioned many of the where change that you've outlined we're going to improve.
They have improved.
One could argue that the benefits are more difficult to see and work streams, such as asking marketing growth and you mentioned the positive flow through 2.0 as of today includes lean design to value, but how much incremental impact could there be on the flow through of business. You can get all of the work streams on the right track in 2021 and beyond.
No. We still think there was a big prize here right and so we announced at the beginning of the year that we're kind of halfway done with these initiatives, we did accelerate a bunch of stuff on the cost and the cost outside this year, but there are still opportunities that were.
We're in a full scale transformation than I'd say, where we see probably there's two areas that we see a lot of a potential and what is still on the manufacturing side of the manufacturing productivity and so there's a lot of work there to make our facilities more effective.
There is some roofline optimization that we still have to do and so we'll continue to work on that and become just a far better provider of products and short short cycle time, and inventory management and all that good stuff that comes with that and then the other thing we talked about it is that kind of new product development organization.
Should we call it marketing and technology, we've been priming the pump now for two years. It was part of closer to 2.0, where we redid the new product development process, we really put a lot of effort in focus in defining attractive markets.
Obviously energy transition plays a big role in the backdrop of kind of where we're going to put our money and where we're going to put our investments in products and I'm really pleased with what we've done this year and so this is kind of the first time that youre seeing youre closer come to the market with new products and new introductions that we think are differentiated and that we think can.
Drive growth over the long run and so as we gain confidence in that organization, we're going to continue to put more money and put more resources, there and we truly do want to be a technology differentiated company in sales, you'll hear more and more from us around how we're doing that in where we think we can differentiate in the.
Future.
Appreciate it Scott.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs.
Thanks.
Good good morning, everybody.
Hey, Joe Good morning.
So Scott.
No we touched on margins, a little bit and I guess kind of hard to pin down here, just given given where we are heading into 2021, but I guess is that kind of think about the framework you guys have done a lot from a cost perspective to take cost out.
You know revenues are likely to be lower than let's say, where we where you kind of a trough in 2017, and I think margins troughed around like 8.7% I think just given the cost outs I mean is it fair to assume at least that margins are above that 2017 levels and district, just want to just kind of trying to provide a baseline for for next year.
Yeah.
Yes, I think it really will all provide that in the fourth quarter call, where where we get real real a lot more specific about 2021 yeah.
The only thing I'd, just say is that we continue to do all of the right things to manage this business throughout the cycle right, whether it's a down cycle or upcycle and I'm just I'm confident in what we're doing with the closer of 2.0, and so we're going to continue to do that and as a result, we want to have as the business comes down we want to have the.
Yes, decrementals in the peer group, we want to preserve our margins is as best as possible.
At the same time, we want to be preparing for growth in the upside and so that's kind of the transition point. We're at right now is that downturn execution, we feel reasonably good about and we'll continue to do the right things to manage through the downturn, but we've also got to be pivoting for growth and making sure that we are ready for when the markets return and so yeah I just say were.
We are focused on the right things and at the end of the fourth quarter in the fourth quarter earnings call. We'll we'll get real specific about 2021, and what we think we can do.
Got it now that makes sense and then I think once one last question.
Going back to some of your prepared comments.
Around like that the percentage of the global energy makes today I think you said, 60% is oil and expected to be 50% going forward I guess, just you just within that context.
You know can you just kind of again, just baselining like what portion of your business today is tied to like traditional fossil fuels and then given some of these product introductions and where you're focusing.
Yeah kind of moving where the puck is going where do you think that mix can kind of shift to in the coming years.
Yes, Yes, we decided a couple of public sources, there and you know it.
Basically yes. These are all reasonably recognized gains and I'd say generally accepted and so youre currently kind of your oil and gas makes up 60% and we think it gets to about 50%. We highlighted 2040 as the number there and then when you look at our end markets and we put a chartered out there gosh I think Brazil.
Q1, or Q2 right Jay when we put it in the presentation. It breaks down our end market outlook pretty pretty specifically, where we get to your downstream showing kind of 25% to 30% and then the midstream at about 10% in oil and gas.
The upstream side be at about 5% in so thats our exposure there and then just in the chemical side. There is some petrochemical stop there as well, but I'd just say overall with energy transition is the backdrop, we know that that mix starts to come down right. It's inevitable that my personal view is cogut has accelerated this.
And so everything that we're looking at is how can we participate in infrastructure and process spending that involves flow right. So anything that's moving materials in your whether its liquid zohr gas, we want to be a participant in that and truly become a full control solution provider.
And so the new products that we talked about work in lots of different applications and so the CE liquid ring compressor that works in carbon sequestration that works in hydrogen it works and other gas applications. The anti surge valve is really what that does is it protect the compression stations.
And so that works incredibly well in LNG and other gas applications and then deliver towards the the Io T. enabled smart actuator that can work and all kinds of different industries into whether it's water rather infrastructure that electric actuator is pretty ubiquitous across the different end markets and so you know it energy transition is the.
Backdrop, we've got to focus on selective markets that we think are attractive and have long term growth potential. It has been part of our strategy now for 18 months and you're starting to see the fruits of that labor in those discussions that we're having with our leadership team.
All right that's good to hear thanks Scott.
Thank you. Our next question comes from Nathan Jones with Stifel.
Good morning, everyone.
Hey, Jason.
I just want to follow up on one of the call comments that you made.
Scott I mean, it's a $100 million of cost out this year and my understanding.
Maybe when you recall reported second quarter earnings was that 2021 was going to be a wash between carrier the structural savings and the return of some of the temporary cost. The way you were talking here. This morning, it sounds a little bit like it might be a net tailwind now and your expectations into 2021 is that from maybe volume.
It's a little bit lower than you are anticipating in 2021 to some of those temporary costs.
Don't come back just any color you can give us around that.
Yeah, I know you have a retail is probably not the right word, but what I would say is that we're confident in the $100 million half of it was structural and as you annualize that you get you get a little bit of an uplift here.
In 2021, I think the discretionary in some of those temporary measures will come back I would say with where we are with Covance I don't think it comes back as aggressively as we might thought when we first put those those targets out and then just the other thing I'd just add to this is you said this earlier, but we are very folks.
Just on the cost structure and any time in the in a down environment. It's got to be the focus we've got to be tied on cost. There's there's more things that we need to do around cost structure and our team is looking at that and we'll make sure that the the cost structure is in line with the environment that we're in Doug.
Want to add anything else on that no I think the key point is we're not done looking and we continue to try and adjust our expectations based on and based on what we're what we're seeing in the market.
We know that the cost out program that we put in place delivered and is delivering what we what we expect it to and we want to ensure that we've got and that with that we keep that momentum going into going into 2021.
We realized sales structural savings and beyond.
But next one's on price I think I'll answer your second question Scott last quarter typically in these environments, you say very challenging pricing, particularly on large projects.
And then you've got the additional challenges of figuring out what you need to do with processes filling factories to absorb overhead and those kinds of things.
It seems like the order rates are lower for longer than maybe we thought three months ago pricing, maybe a little bit more challenging than you thought it was going to be three months ago. Just your current views on on how you balance those two things are not filling that backlog full of things.
That a very low margin versus the need to absorb your fixed cost.
Yeah.
You did ask this last quarter and unfortunately to answer it very similar to last quarter as well I, just say that the pricing pressure is real and it really hasn't changed and to your point the longer. This goes on then they are more concerned and you get what I will say is I think our teams are doing a really good job in terms of maximizing the pricing that's out there but it is.
A difficult market and I'd say oil and gas is more challenging than some of the others because those customers are struggling with their own financials.
But there are places that our price has been pretty resilient and so we're really trying to be very selective on where we think we can get price and how do we maximize price, but to your point right offsetting that with how do we think about absorption to what the benefits are there and then the other thing I'd just say on that on the cost side of this.
Might be a little bit different than last quarter, we are starting to see relief on in our supply chain and so we're very committed to take getting savings through the supply chain. We're seeing some of the commodities that are are down in the in the materials that we deal with and so we're trying our best to offset pricing with the supply chain.
Sales things there and then I'd just say go again, there's other couples your levers here on the cost side with design to value in productivity and refine optimization and so we're going to continue to work through that but but it's definitely a challenge in pricing right now.
Great. Thanks, I'll pass it along.
Mm Hmm.
Right.
On them.
Hey, good morning, all.
My first question is just on the secure C strategy I guess is part of the broader organizational realignment are those getting restructured out or or lower as part of the branch network.
And just kind of thinking about next year.
How does that trend in terms of the.
Q RC and the Expansiveness of it.
Sure, Yes, no securities are definitely a differentiation for us and no I don't have the exact number where we're at but it's it's a large number around the world and we constantly look at that and so this year, we've actually taken out a few of those but it's not because it's just because we think there's opportunity to rationalize and we can see.
Service from somewhere else, but I would say our long term strategy isn't net reduction here. It's you know, it's taking a few down where we can optimize the productivity of a network of Q R. C. And then re populating those in areas that make a lot of sense for us and so I do think we.
I can't Jay might know for sure and we hope I think we opened one up earlier this year and in Asia Pacific and then last year I know for sure. We had a we had openings in the middle East and Asia Pacific as well.
But we're constantly looking at this and you know again I wouldn't expect a net reduction overall, however, there will be some consolidations. This year and then again as we continue to grow and things move forward, we'll continue to add to best support our customers and for US we want those trc is in proximity of.
A big investments in installations, and so as projects move forward and advance in Asia Pacific and the Middle East Weve got to continue to up our presence and be in proximity of those locations.
Good to hear and just somewhat related in terms of Capex reduced to two I think 60 million was the last update what are you thinking for this year and then as we go.
Roll into next year, I mean should that number move move higher.
Or 60 million sort of a good a good place to be for a couple of years here.
And so and so where we are anticipating will be around the 60 million million dollar Mark this year, and although I wouldn't I wouldn't call that a up floor necessarily I don't I don't necessarily see us going lower than that number as we as we head into 2021, we're really focused on.
On and building our enterprise system structure within within Flowserve, and obviously focused on spending the money that we need to for safety and maintenance and maintenance capital. So as we look at 2021 were still working through the numbers and that I would anticipate we'll be at that level or modestly higher.
Okay, great appreciate the color.
Thank you. Our next question comes from Andrew Obin with Bank of America.
Yes, good afternoon, I guess, good morning, where you guys are.
[laughter] Ed.
Hey, just a question you sort of highlighted some supply chain issues and as industry is evolving.
Im just sort of thinking in terms of both global supply and your supply chain do you think a the industry will change where it will source from and become sort of maybe.
More localize more price conscious and do you think you will adjust your own supply chain geographically shorten it or change it based on cost and I guess the bigger question is how does the cobot pandemic impact youre an industry his thoughts about the length and location of the supply chain.
Yes, sorry.
So Andrew I, just let me go back to the original closer to 2.0 and in what we found and what we needed to do within our supply chain and so it when we started this what we found was a highly fragmented and responsive supply chain within full service. So a lot of our locations were buying very locally to our manufacturing location.
You know with relationships that they had for.
Decades, and well that's not necessarily bad what we saw is that it doesn't allow us to leverage consolidated spend across our enterprise and so now over the last kind of two and a half years. We've been on this journey to really get a more sophisticated supply chain that we can leverage on an international scale.
So we've made pretty good progress here.
Similar with the overall transformation, we're probably maybe maybe not even halfway done with that effort at the beginning of this year and so we're still on the path to get to preferred partners that we've got agreements with proactive spin we've got quality requirements, we share ideas or in collaboration around.
Seen around safety and how we do things and truly have partnership at the critical supply level until we've got a team highly focused on this and we are making great progress now when you throw the backdrop of co bid. It I'll just add the other twist is just kind of the geopolitical rage, what we always want to do is.
Have a set of primary suppliers as well as backup and I'd just say as were kind of we were already in the process of doing things significantly different if.
The impact of colder than the impact of some of the geopolitical situation really hasn't changed our approach at all.
And we're just continuing to try to to reduce that supply and then really start to work with these partnerships with a handful of people and for US I'll just say our big Spenders castings is a big one for us and so we're working that when really hard motors on the pump side is really important to get that and give you a group of full.
Active suppliers and then we've got some other miscellaneous categories that were really looking to formalize and make good progress here. It's I think regardless to go good regardless of of the geopolitical situation. You know I think our supply chain improves dramatically in the next two years versus where we were as an organization over the last two years.
Thank you for us, especially extensive answer and a follow up question.
Part of the flows of 2.0, you guys sort of we're talking about doing stuff I assume was PTC does.
Just a remote monitoring can you give us examples are you guys, making headway with these initiatives and the cobot environment does it make customers more open.
Just sort of having more of this kind of technology. If any numbers you can put around that that would be great. Thank you.
Sure. It is it the short answer is yes, we've made a lot of progress in kind of our I O T solution and what we want to do in this kind of new world of moderating and in providing diagnostics and really gives you a better understanding the data that's out there and the data that we can collect and provide useful information to its not only ourselves but.
To our operators to reduce or maintenance costs and to read to improve their productivity and so one of the things that I am excited about and this year is we have made great progress on that and so we've communicated some pilots and some things that we're testing and working with some strategic partners all of that continues to advance.
Yeah, what a sales you know we're not at a point of kind of going full scale yet in terms of our future operating and what we think we can do but I would say they do it in the Q4 earnings call. Our Q1, we're going to be prepared to talk about this in great detail, but I would say yeah, we're there with that.
Certainly with our peer group and some of the others in terms of how do we think about this and what that value could be.
And then my last point here is all of the customers that we're talking to you in either you know either refining petrochemical specialty chem or other infrastructure investments everybody is starting to appreciate and understand the value of collecting data and using that data and so we think this is an exciting space.
We think there's a a pretty big opportunity for closer in what we want to do is combine our knowledge of of full control and so we've got a unique position where on the valve side, we've got isolation, where we've got the smarts and our inventory smart electric actuator allows us to collect to transmit data that we.
Weren't able to do before it so you've got that now and isolation with the actuation. We've got it in control valves in terms of controlling flow and then on the energy side with our pump business. We're now collecting in enabling a lot more on the pump side and so we think we're in a unique position with isolation control and energy to provide better.
Our solutions to our customers and so you know I don't want to go too far into this and so we are prepared to talk probably into Q4 Q1 in terms of what our aspiration is what we are doing and what we think that that that potential value prizes for closer.
But all the cobot noise, it's hard to sort of focus on how big a deal. This is going to be for you guys. So look forward to update thank you.
Yes.
Thank you. Our next question comes from tool tolling Dano with Cowen. Please go ahead.
[noise] they go here.
Hey.
[laughter].
Yes, you talked about the balance sheet highlight is now with the.
No with hopefully the worst is this kind of the lease.
Working its way through your thought process and kind of kind of bottomed out.
Do you think about deploying that balance sheet.
You mentioned energy transition are you targeting things in that area to kind of gain.
Gainshare there is things transition.
Sure all start on that credit the inorganic and kind of way when we look at investments and maybe you can talk about some of the other items on the balance sheet like a few of the debt maturities and things like that.
Thank you Amy the team has done a nice job to put us in an incredibly healthy position and so we feel good about the balance.
Right, we've got some firepower with spectrum deployed that effectively for long term value creation.
So we're going to.
Talked before about it was more about the high end up as an advocate for two attractive markets and looking at different things second enhancing our fixed the portfolio.
Sure. So we are we are looking at Sator, Victoria, Fortunately real estate buyers and sellers to come to is really good.
So sometimes we don't control the timing of it but I'd say that we're actively looking at different things to add to the portfolio. Maybe you want to add to that is that.
Sure.
Hi, Thanks transmission had this quarter.
Refinancing and tender and obviously, we do plan to deploy some of that slack in the relatively early retirement too.
And to address that maturity you can we have coming in 20, 2020, 2023, 20, and I would say that Scott mentioned were you ever think about and how he thinks about M&A and really through the land.
Financially attractive enactment.
That were happening economics.
Great. Thank you and into our busy again and as you say.
With respect to the deployment of capital.
And our focus is on around optimizing shareholder value.
An entertaining your financial personnel working.
Work continues.
Kits to try and weigh our options and as as we move them as we move into 2021 to ensure that that's what we're doing.
Thank you and our next question comes from Mike Halloran with Baird.
Hey, good morning, everyone. So just one from my end when you think about where you are from a commercialization R&D new product development perspective, maybe just talk about how far you are in that journey and then related when you think about this trip. This energy transition that's ongoing and some new products, you're trying to bring forward too.
We're fully fully participate in that is that something you think you can do internally or is it going to require layering on targeted M&A from an environment to more fully participate.
Sure August I'm talking about new product development first and then we'll talk about energy transition, but it.
Again, I'm really pleased with what we're doing here and we created a marketing and technology organization about three years ago.
You know it it's taken a little bit of time that one get the right focus to improve the process and three start to see things come out of the other side of it but.
But right now I think we're doing good things and so we've got a great team of engineers in folks that truly understand our markets and it's a nice combination of a lot of experience understanding our end markets combined with a a lot of innovative thinkers that I, just think theres theres a lot more to come here and so this was always something that was really a.
Important to me, we know that legacy upload services that we're a technology company and we've got products that were first in many different applications and I really wanted to restore that luster in and make sure that we can kind of lead in technology and product differentiation and so I think we're kind of at the beginning we're at the beginning of seeing the result.
So that but we've done a lot of hard work to begin in a position to where we truly understand what we want to do and how we're going to do it and so I feel really good about that and then just on kind of energy transition and where do we put our efforts.
Most of its always going to be a combination and so we want to have a robust portfolio within the new product development organization, but we also want to be looking at the extra landscape right in to Jamie's point. It to you. If we believe that there is a a value creation opportunity inorganically and we can do it faster and we can make better return.
Hers and do it internally then then we're going to definitely look at that and so there will be some areas that we you know we know we want to go externally just because in our industry, it's really hard to overcome some of the customer references and getting on those approved they be els and so when we know that we just can't make the pace that we want then we're going to look to do some.
The Inorganically and go outside but I do think it will be a balanced approach both both in house and looking at things externally, but I feel good about what we have right and so we've got 200 years of legacy product experience, we've got valves and pumps and pretty much any application that's out there and it's really just about.
Handling those resources getting folks focus in committing the organization to behind what we believe is that the long term future and what we think are attractive markets.
The Cisco I appreciate it.
Thank you ladies and gentlemen, this concludes our Q and a session and program for today. Thank you for participating please have a great day.
[noise].
[music].
[music].
[music].