Q4 2020 Flowserve Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the flow thorough Corp, Q4, 'twenty 'twenty earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone please.
Be advised that today's conference is being recorded for you.
Require any further assistance. Please press star zero I would now like to hand, the competency on speaker today, Jay Lee Vice President Treasurer, and Investor Relations. Please go ahead Sir.
Thank you Joelle and good morning, everyone.
We appreciate you participating in our conference call today to discuss flow serves fourth quarter and full year 2020 financial results on the call for me. This morning are Scott Rowe flow service, President and Chief Executive Officer, and Amy Schweppes, Senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call for questions. As a reminder, this event is being webcast.
A 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 February 24th 2021, and they involve risks uncertainties.
TS 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 for our reported results both of which are included in our press release and earnings presentation and are accessible on our website and flow serve dot com in the Investor Relations section.
I would now like to turn the call over to Scott Rowe plus service, President and Chief Executive Officer for his prepared comments great. Thank you Jay and good morning, everyone. Thank you for joining our fourth quarter earnings call.
We had a strong finish to 2020 and I want to start by thanking the flow serve associates, especially our frontline workers for their continued dedication and hard work. During this unprecedented time. Despite all the challenges throughout the year, we continued to serve our customers and provide the essential flow control equipment and services needed to keep the world running.
Our pro Serv safety is a core value and in today's environment that means not only keeping people safe operationally, but also protecting them against the spread of COVID-19.
I am proud to highlight that our associates achieved record safety performance in 2020, including in our Covid related protocols.
Additionally, I want to thank our customers. They trusted flow served during a very challenging year.
Now for my career that working through a crisis alongside our customers being there for them each step of the way truly solidifies long term relationships.
As we look to the future we believe our strong customer relationships will position us well to capture significant opportunities when the pace of the industry investment returns.
From the beginning of this pandemic driven environment, our financial priorities centered on improving our free cash flow conversion.
Managing our through cycle return on invested capital and delivering superior decremental margin performance.
Turning to the remainder of our prepared comments I think you'll hear that we successfully controlled what we could during this unprecedented period and are now focused forward the progress the closer to point out a committed leadership team and the support of our associates has enabled our company to manage the current market environment better than in the past.
Our efforts in 2020 allowed us to generate over $250 million of free cash flow.
We maximize our margin potential by taking out in excess of $100 million from our cost structure and we continue to position closer for the future.
Turning now to the 2024th quarter.
Amy will cover our financials in detail, but let me first day that we're proud of our fourth quarter results and our associates dedicated effort to finish the year strong.
The decisive structural cost actions, we took in mid 2020 are evident in our fourth quarter financials, which dropped 14% decremental margins.
As you will recall a key desired outcome of our transformation strategy was to create an operating model that could react quickly to a downturn and certainly COVID-19 had that impact to our end markets.
In the face of the pandemic, we re prioritize the timing of our closer to Plano initiatives to accelerate the cost aspects of the program.
We are pleased that in the final three quarters in 2020, each on adjusted SG&A levels below $200 million.
As a result of the quick and significant actions. We also delivered meaningful improvements in our decremental margin performance versus prior cycles.
Shifting to working capital and cash flow progress.
We made strong sequential improvement with an $84 million reduction in primary working capital this quarter, which generated an impressive fourth quarter and full year cash flow conversions.
Both of which exceeded 100% of adjusted net income.
We remain confident that our transformation driven process improvements have us on the right path to further drive working capital out of the business and to improve our overall operating cash flow.
First quarter bookings of $825 million, we're not a return to pre COVID-19 levels. The sequential quarterly growth of two 4% increases our confidence that there isn't another step down and that we are at or near a foundational level that should represent a starting point for bookings growth into 2021.
Fourth quarter consolidated aftermarket activity remained relatively stable sequentially with bookings down one 1% to 420 $420 million.
And we're down 18, 7% versus prior year.
Original equipment bookings in the quarter were $405 million down 24, 4% versus prior year and up about 6% sequentially.
Looking at bookings in greater detail as you may recall, the 2019 fourth quarter included strong oil and gas project activity in Asia Pacific as well as a number of smaller project Awards in North America, and Europe, which together exceeded $120 million of bookings comparatively the largest award received in the 2024th quarter was $15 million.
<unk>.
When this is added to our other small to medium sized project awards across diverse end markets. This quarter's project awards represented only $50 million, which highlights the challenges of the current market environment.
Fourth quarter bookings were further impacted by the absence of normal end of year, MRO spending increases with operators and distributors continuing to preserve cash and manage inventory levels rather than spend the remaining budgets.
With consistent bookings levels for the last three quarters. We are increasingly confident that we are at a foundational level and are optimistic that we may see a return to bookings growth in 2021, and we expect it to be led by our aftermarket and MRO markets as well as by smaller project activity on.
Also note that our year end backlog of $1 9 billion remains solid and we saw only modest cancellations in 2020 of less than $50 million in total.
Let me now turn to our segment level performance in the fourth quarter.
<unk> bookings decreased 25% year over year, while sales decreased only 6% as we continue to execute on its strong backlog. The bookings decline was primarily driven by original equipment, which was down 29%, while aftermarket bookings were modestly better at a decline of 23% fourth.
Fourth quarter General industries, and oil and gas bookings were down 53, and 39% respectively year over year.
Gas project awards declined roughly $60 million versus prior year chemical and power markets contributed growth of roughly 10%, while water bookings grew over 40%, including two project awards totaling $8 million.
<unk> bookings and sales were down 13, five and 12% respectfully.
Well on gas and power markets for the primary drivers down, 22% and 27% respectively.
While chemical bookings grew a modest 3%.
General industry bookings were down 9% as challenges continue across this distribution channel.
From an adjusted operating margin perspective aggressive cost actions by both segments significantly mitigated adjusted gross margin declined 260, and 200 basis points for SPD and FCB respectfully.
SPD reduce debt adjusted SG&A as a percentage of sales by 140 basis points, resulting in a 110 basis point decline in adjusted operating margin to 13, 1%.
<unk> reduced its adjusted SG&A as a percentage of sales by 200 basis points, resulting in an 80 basis point decline in adjusted operating margin to 17, 9%.
Turning now to our served end markets.
Oil and gas markets, our largest exposure continues to be most impacted by COVID-19 related declines in energy demand.
Fourth quarter bookings declined 35% year over year, but showed encouraging sequential improvement of 20%.
Again, the 2019 fourth quarter presented a challenging compare figure due to <unk> strong project environment at the time, which included several larger awards related to clean fuels upgrade activity, primarily in Asia contributing over $100 million of project Awards.
This quarter, our largest oil and gas project award was $15 million and when combined with smaller project awards totaled less than $50 million.
For the full year oil and gas bookings were down 33%. Despite the significant volatility in commodity pricing in 2020, and the related impact it had on customer spending patterns todays crude oil price is actually above where it was a year ago, assuming it remains at these levels that should help to build industry confidence that the worst may.
Behind us.
Strong fourth quarter chemical bookings growth of 8% did not include any material project awards.
But benefited from a favorable compare as prior year Q4 bookings for the lowest level of 2019.
Sequentially chemical bookings increased over 30% driven by specialty chemical customers and increased MRO spend.
Main optimistic going forward with regard to our chemical markets as pent up demand continues to grow with petrochemical project delays in the specialty chemical markets are looking reasonably strong.
Moving to power on.
On this market remains challenged similar to prior cycles. It has demonstrated more stability than oil and gas and chemical markets.
Third quarter and year to date bookings are down for an 8% respectfully.
The quarter included a few small nuclear awards in Asia totaling $11 million.
While 2019 fourth quarter included one project a $12 million for a concentrated solar power plant in the middle East.
As the energy transition progresses, and electricity increases as a percentage of total global energy source there'll be a need for more power supply.
Fuel of choice vary significantly between countries and regions. We believe the end market will need to increase capacity and add gigawatts to the grid presenting good opportunities for closer globally.
The general industries market, which includes a significant amount offered through distributors has been severely impacted since early 2019.
Including the decline in North American MRO activity.
While 2020 Q4 bookings were down 39% the full year has shown some signs of resiliency with bookings down just 5%.
The quarter included one mining project of $6 million, while there were no material project awards in Q4 2019.
The upside to the distributor Destocking phenomenon that we've seen for the past two years is that it should not continue for much longer inventories.
Inventories at distributors are at extremely low levels, we expect distributors to return to adjust in time ordering process first and then we could begin to see moderate to large stocking orders.
We believe this is only a matter of when and not yet.
Finally, representing our smallest market water bookings increased $10 million or <unk>, 38% Q fourth quarter project Awards totaled $8 million and include the Middle East Desalination project in our North American Municipal Award.
Other areas, where we expect continued investment opportunities.
While it's the smallest of our identified in markets, we're fairly bullish on water going forward. We believe we have the product knowledge and experience to increase our presence in water and there will be a focus area of ours moving forward.
Turning to our bookings from a regional perspective, our best performing markets on a relative basis, where Asia Pacific and Latin America, with Q4 bookings down, 6% and 15% respectively.
Down just mid single digits for the full year.
North America, our largest market and perhaps the one most impacted by Covid was down roughly 25% for both the quarter and the full year.
On the Middle East our strongest performing region in 2019 sites bookings declined 37% for the full year 2020, as they use volatile crude oil price is limited and delayed customer spending.
Finally, Q4 and full year bookings in Europe were down, 21% and <unk> 13 per spent 13% respectfully.
We continue to expect growth to return to infrastructure investment as all regions begin to experience increased energy demand similar to Asia recovery.
As the vaccine rollout progresses in transportation and mobility levels move closer to pre pandemic levels.
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 2021 and beyond.
Thanks, Scott and good morning, everyone.
In the fourth quarter, we delivered resilient performance in what continues to be a challenging operating environment.
Adjusted earnings per share for the quarter was 53, bringing.
Bringing our full year adjusted EPS to $1 74.
Fourth quarter reported EPS was <unk> 43, and included a net 10 cents of adjusted items.
Items were comprised of <unk> 11 of realignment and transformation expenses and <unk> of below the line currency impact, which were partially offset by eliminating 10 cents of our reported benefit primarily related to a discrete tax item from a reduction in foreign tax liability.
Fourth quarter sales of $985 million were down seven 8% versus the prior year, but increased sequentially by six 6%, reflecting our normal seasonality.
Fourth quarter original equipment sales decreased seven 1% driven primarily by FCB, 14% decline, while <unk> revenues were relatively flat, reflecting solid execution on our strong OE backlog entering 2020.
After market revenues decreased eight 4%, including F. P D in SCD declines of 9% and 5% respect respectively.
For full year 2020 revenues decreased five 4% to $3 $7 billion again, primarily due to aftermarket which was down seven 6% with both segments approximately in that range.
OE sales decreased just three 1% as Fpv's strong, 10% increase was offset by STD, 16% decline.
Turning now to margin for.
Quarter, adjusted gross margin decreased 250 basis points to 37%, including declines of 260, and 280 basis points at SPD and FCB, respectively. While we continue to manage and limit COVID-19 related disruptions to our operations the decline in margin.
Does reflect the ongoing impact on productivity and the associated cost incurred due to the pandemic.
Additionally, we experienced increased under absorption in certain facilities and were also impacted by SPD 200 basis point mix shift towards lower margin OE work.
For the full year adjusted gross margin decreased 200 basis points to 31, 2% with both segments down on your 90 basis points.
On a reported basis, both the fourth quarter and full year gross margins decreased 270 basis points to 30%.
In addition to Covid disruption absorption and mix headwinds the full year on fourth quarter were impacted by increased realignment spending of approximately $30 million and $2 million, respectively to support our structural cost reduction efforts and to better align the business with current volume levels.
Fourth quarter, adjusted SG&A decreased $40 million to $193 million versus prior year and was flat sequentially.
As a percentage of sales fourth quarter, adjusted SG&A declined 220 basis points versus last year and declined 130 basis points sequentially to 19, 6%.
This solid performance reflected our continued tight cost controls and the cost actions we took in mid 2020.
On a reported basis, the fourth quarter's SG&A decreased $45 million, which included a $5 million decline in adjusted items.
On a full year basis, adjusted SG&A, SG&A declined $82 million or 90 basis points to 21, 7% of sales.
Our reported SG&A expense declined $35 million in 2020, with our timely cost actions more than offsetting the $47 million increase in adjusted items.
Our fourth quarter adjusted operating margin decreased a modest 30 basis points versus prior year to 11, 3% as our decisive cost actions limited the impact of the $83 million revenue decline and delivered an adjusted decremental margin of approximately 14%.
As we noted on our third quarter call, we expected to see strong sequential improvement from FCB and they delivered with improved execution cost actions and mix benefits.
<unk> drove a 570 basis point sequential improvement in adjusted operating margin to 17, 9%.
SPD Q4, adjusted operating margin was 13, 1% a decline of 110 basis points year over year.
Reported fourth quarter operating margin decreased 10 points year over year to nine 7% while for all of 2020 reported operating margin decreased 310 basis points to six 7%, primarily driven by increased realignment spend of approximately $74 million.
Our adjusted tax rate for 2020 was 23% slightly below our initial guidance range, primarily due to the realization of certain available tax credit and the geographic mix of earnings across our portfolio.
Compared to 2015, when our adjusted tax rate was over 29%. We have worked strategically to reduce the annual tax rate, while fully complying with all the relevant laws.
Certainly U S tax reform a few years back help modestly, but with roughly two thirds of our business in international markets. It isn't the main reason for our progress.
We are pleased with the progress of our tax team and business leaders and pursuing tax efficient strategies and keeping the full income statement in mind, when making business decisions are.
Our work isn't done and barring any major changes in tax law, we expect to continue our work to lower the effective tax rate over time.
Turning to cash and liquidity.
Our seasonally strong fourth quarter generated cash flow from operations of $196 million, which included $173 million of cash flow from working capital.
This performance drove our full year free cash flow to over $250 million and produce the cash balance of nearly $1 1 billion.
Our full year free cash flow conversions represented approximately 111% of our adjusted earnings and approximately 200% of our reported earnings.
We are pleased with the fourth quarter to 150 basis point sequential improvement in primary working capital as a percentage of sales at 28, 5%.
However, there are still significant opportunities to drive further improvement.
With our intense inventory management and strong Q4 shipments, we've reduced inventory, including contract assets and liabilities by over $75 million versus the third quarter.
That being said inventory levels are still elevated as we continue to deliver on strong OE backlog, we built in 2019 and by a few of our larger facilities that experienced shipping and manufacturing delays due to due primarily to COVID-19 related disruptions.
Looking at on our accounts receivable DSO and inventory turns were pleased to be able to maintain relatively flat measures to prior year, given the COVID-19 driven disruption to our and our customers' processes.
We will continue our pursuit of driving DSO below 70 days as we further centralize and consolidate our global collections management function and related systems inventory.
Reductions and improved terms will be driven by operational execution and increased utilization of our transformation driven integrated business planning tools and resources.
Heading into 2021, we expect to continue the momentum we built in the fourth quarter related to working capital through order to cash supply chain and inventory management transformation initiatives.
As a result, we currently expect that we will again exceed 100% free cash flow conversion in 2021.
Turning to our year end liquidity position, our combined cash and available credit facility capacity totaled over $1 8 billion.
Representing $174 million increase over the 2023rd quarter.
Our year end net debt position of approximately $630 million is down about $75 million year over year, and almost a quarter of a $1 billion since 2017.
In fact, our net debt reached its lowest level year on our.
Our lowest year end level since 2012.
As you May recall last fall, we issued $500 million of 10 year senior notes in advance of upcoming maturities in 2022 and 2023 at.
At the time of the offering we also tendered for $191 million of our outstanding Euro notes that mature in 2022.
Last week, we announced our plan to call the remaining $410 million of these securities with a completion date before the end of the first quarter.
In addition to the Euro notes previously tendered other significant cash cash usage in 2020 included the return of $136 million to shareholders through dividends and share repurchases 50.
<unk> $57 million in capital expenditures and the funding of our structural cost out actions as well as in our other realignment and transformation program.
Turning now to our 2021 outlook.
The ranges we provided reflects the late cycle nature of our business, where we are buffered at the start of a downturn by a previously built backlog.
But declines in bookings impact this at a later date.
Nonetheless, we are managing the business through the cycle with our cash conversion management of decremental margins and positioning for through cycle returns on invested capital.
The actions, we take today will better position flow serve as growth returns with stronger incremental margins and enhanced return profile.
For 2021, we are targeting full year adjusted EPS of $1 30 to $1 55.
Unexpected revenue decrease of 4% to 7%, including a modest FX tailwind and the current exchange rate environment.
The adjusted EPS target range excludes expected realignment expenses of approximately $25 million as well as below the line foreign currency effects and the impact of other potential discrete items, which may occur during the year, such as acquisitions divestitures debt retirement premiums, especially.
Initiatives tax reform laws et cetera.
Based on the known realignment spending our reported EPS range at the midpoint is about 90% of our adjusted EPS range average.
As flow serve remains committed to our focus of improving the quality of our earnings.
As such after three years of our flow serve to point out transformation efforts, we move into 2021 confident that the elements of the program are now embedded in our operations and functional team.
The remaining expenses related to the transformation will be included in both our reported and adjusted EPS going forward.
In 2021, the impact of this change in methodology is expected to reduce adjusted EPS by approximately <unk> <unk>.
Both the reported and adjusted EPS target range also assumes current foreign currency rates and commodity prices.
Our expectations are based on 2020 year end backlog anticipated bookings level and largely the continuation of current market conditions.
We expect net interest expense in the range of $55 million to $60 million and adjusted tax rate between 22% and 24%.
In terms of phasing as many of you know low service results in cash generation on normally second half weighted and we expect that to continue in 2021, although somewhat more balance than in prior years.
Finally major planned cash cash usages. This year include retiring the remaining outstanding Euro notes and.
And expectations to return over $100 million to shareholders through dividends and potential share repurchases.
We also intend to invest in our business as we expect to return to the growth growth aspects of our flow serve to point out program.
We expect capital expenditures in the $70 million to $80 million range, which includes spending for enterprise wide. It systems to further consolidate our ERP platform and support our transformation driven productivity improvement.
Let me now return the call over to Scott Great. Thank you Amy.
Let me wrap up with some additional color on our closer to par, though transformation progress our long term targets and comments on our outlook for 2021.
Despite the disruption to our end markets in 2020, we've made significant progress institutionalizing, the transformation playbook and processes deep into our organization and functions.
Driving to make this a part of our everyday business processes.
Our 2020 results reflected our progress towards building a business model to better weather the cycles in our end markets.
Our gross to substantially complete the original transformation program by the end of 2021 to ensure that the process and the discipline remained embedded in how we run the business and.
In 2021, we will return our focus to the growth and optimization phases of the transformation.
When we complete the operational excellence and productivity improvement initiatives.
We intend to drive growth with an increased focus on our customer experience.
Net of innovative products and services and end market diversification, including increased participation in energy transition initiatives that are gaining investment dollars.
A key component to our transformation growth initiatives involve staying market led and generating consistent innovation on <unk>.
Marketing and technology team made significant progress in 2020, developing new and innovative products and services guidance.
We had 21 commercial lunches, including three new products.
Six product that completed our design to value process, and the remaining launches where product extensions product extensions feature updates for portfolio upgrades.
I am excited about our product pipeline and the opportunities that technology and innovation can bring the closer.
Efforts will improve our geographic and end market diversification accelerate digitization through Iot and ecommerce.
So product de carbonization, with better efficiency and technology to capture and repurpose carbon emissions.
For server has been solving technical flow control challenges for over 200 years, our customers expect us to help improve their performance reduce their cost improve efficiency.
Help them prevent unplanned interruptions, we are committed to continuing to support our existing customers and our installed base as well as ensuring that we will participate in a meaningful way as new end markets emerge for flow control products services and solutions.
I am confident that our people our product and our technology will continue to evolve and be value added for decades to come.
As an example, this year alone flow sort provided equipment and services to carbon capture technology.
Trojan processing concentrated solar power water desalination flood control and most importantly in 2020, we provided our full suite of pumps valves and seals for COVID-19 vaccine development and production, helping to accelerate the distribution of a COVID-19 vaccine.
Our ultimate objective is to continue to be the trusted partner that poster or has been historically for all flow control customers long into the future.
We are off to a great start in 2021 following years of development testing and pilot projects.
We're excited to launch and commercialize Red Raven flow serves global Iot offering.
<unk> will provide a solution for customers to optimize their full control processes.
What is uniquely positioned to provide this offering considering our extensive expertise with pumps valves and seals combined with our proprietary analytics and embedded diagnostics.
Rather than simply and easily provides our customers the ability to improve productivity avoid unplanned downtime and ultimately reduce overall cost of operations.
We have been following borrows nearly five years of development, including extensive testing great feedback from our partners and the knowledge gained from our pilot sites.
We are still on the early stages of the rollout and we have a current financial contribution from Red Robin is small we expect that red Robin will expand into a more meaningful revenue stream in part through our complete suite of aftermarket services in the years ahead as customer adoption gross.
I spoke last quarter about closer to commitment to environmental social and government issues or ESG.
These subjects remain a vital component to our mission and values.
Very proud of the progress we've made in 2020, including committing to reduce our carbon emissions. While also continuing to develop innovative solutions to help our customers do the same.
We also achieved record safety performance and continued to refresh and diversify our board of directors.
As we focus forward for several endeavor to continue being on the forefront of ESG initiatives and progress.
I would now like to spend some time on our long term financial targets that we identified in 2018 with the launch of our transformation program Lee.
Last year at this time, we are very much on pace to meet or exceed the original objectives and timeline on.
Fortunately, the pandemic driven downturn and associated business interruptions have stalled this progress.
As you May recall, we identified targets were centered around growth free cash flow operating margins and ROIC improvement.
The assumptions underlying these targets outlined a consistent business environment.
As everyone can relate the COVID-19 driven challenges of 2020 were anything but a consistent business environment.
Nevertheless, I am extremely pleased with the progress that we've made over the last three years of the program, including achieving our long term target of more than 100% free cash flow to adjusted net income early in 2020.
We have made systemic changes to inventory and receivables management and I am confident that youll continue to see improvements on working capital in the future.
Additionally, we were able to manage the balance sheet and margin decrementals in such a way to keep our ROIC well above our cost of capital and minimize the market impact on our return profile.
All the way to go to reach our mid to upper teens target. We expect the actions taken in 2020 will serve as a catalyst to delivering much stronger returns as we move to a growth environment.
To summarize our long term aspirations and goals remain the same as those previously outlined.
I remain confident that each of these targets is achievable with our continued transformation progress and.
And as the world returns to within the range of our original assumptions.
With the continued uncertainty that exists due to COVID-19 and the associated impact. It has had on our end markets. We cannot credibly commit at this time to a new date on achievement.
Once economic and market conditions permit we will share our timeline.
<unk> in the actions necessary to achieve these targets.
Let me close with our 2021 outlook.
They provided this year as official guidance in her comments the.
The transferring of on target ranges were derived using essentially current market conditions with only modest low single digit bookings growth expected from aftermarket in our MRO short cycle business later in 2021 day.
Given the uncertainty in the marketplace. Many of our customers were unwilling to predict the timing of projects, while inflection point in their business. It is clear that as Covid subsides, our customers will be spending more money to keep their operations running and advance their critical projects.
First our vision as it has traditionally been a late cycle business given the lead time with some of our large pump and valve projects.
Pandemic didn't impact our 2020 financial results as much as others, considering the strong backlog, we had entering the year. However, the double digit declines on our bookings over the last three quarters. In addition to the 14% reduction in our year over year, starting backlog, we will have a more pronounced impact in 2021.
While our guidance assumes mostly a continuation of the current environment the other.
Potential opportunities in the marketplace that could improve our expectations for the year.
Containing the virus is truly the key catalysts for closer in most of our end markets.
As that occurs we would expect to see increased activity levels.
The fourth quarter bookings were up sequentially and activity levels could be gaining traction.
Discussions are more active than anytime in the last three quarters and we see the potential for some projects in Asia, the Middle East and Latin America to move forward as conditions permit.
Additionally, I expect to see improvement in our aftermarket business and MRO business as the year progresses.
At this time, assuming the continuation of these trends and further progress containing the virus.
Clearly expect our financial results to return to growth in 2022.
In closing 2020 was an extremely challenging year for our company and our industry through.
Through the commitment and dedication of our associates combined with the positive impact of our transformation efforts.
Well to deliver strong results for our customers and implement the actions that best serve our shareholders.
I am confident that his operational progress continues in 2021 Mark.
<unk> remained focused on cash conversion financial returns and managing decremental margins. Most importantly for us there will be well positioned to win in the recovery and create long term value for our shareholders and other stakeholders.
Operator. This concludes our prepared remarks, we would now like to open the call for questions.
Thank you as a reminder to ask a question you're on mute the press star one on your telephone to withdraw your question press. The pound key please standby will be compile the Q&A roster.
Our first question comes from Andy Kaplowitz with Citigroup. Your line is now open.
Good morning, guys.
Good morning, Andy.
Scott I just wanted to focus on cash for US because you said you were going to generate $100 million plus in Q4, and you obviously generated almost double that you mentioned the 150 basis points for sequential improvement in primary working capital as a percentage of sales obviously, the 'twenty one guidance of 100% free free cash flow conversion is encouraging so it seems like youre getting your arm.
Around the cash situation, but I guess the question is working capital as a percentage of sales is in the high claim per cent range. So can you talk about where you think you can get that metric to and how you get there now is it seems like you have more confidence on the cash side than I've heard before.
Sure and thanks for thanks for the question, Andy I think starting with what we think is possible.
Scott and I are aligned around that mid twenty's as really being the spot where we think that we need debt.
Get to from a from a primary working capital as a percentage of sales perspective, and we think we've made tremendous progress over the last couple of years in a number of ways. One DSO has come down and we've been able to hold it to a level that we think is.
It is around where we want to be at or where we think we should be at around 70 days, we think theres marginal improvement in that area that can happen that can happen, but we're probably working around the edges, there, where we really see a significant amount of improvement coming in 2021.
<unk>.
Is around inventory and foundational Lee I think we've got the tools and the talent in place now to manage inventory.
In the right way within within the company and now 2021 is about delivery on those on the working capital improvements in inventory. So that's where the majority of our focus is going to be in 2021, yes, I'll just add that on what Andy said look we're really pleased with the progress that we're making I would say Q2 and Q3 were not ideal for.
US I'd, just say the COVID-19 disruption and all other things going on we kind of took a step backwards on inventory management. We're back on track. We've made good progress in Q4 and Andy what I would expect is just continued progress as we go forward and it's not going to be there wont be these giant gains, but I'd say relatively steady progress.
As Andy said, yes, mid Twenty's that certainly what I'll call on near term goal, but we're not going to stop there. We will continue to work with the best companies in the space are ready that kind of 20% I don't want to commit to that because first of all away from it.
I do think we'll make progress and as Andy said the focus right now is inventory the receivables side and we've gotten cleaned up and we're on a pretty good spot there might be a little more improvement, but not a whole lot, but the path for us is inventory management. Our teams know we've got the tools the visibility on the process in place, we just need to execute now.
Thanks for that's helpful on and Scott you mentioned oil price refinery utilization stable or improving MRO activity you talked about expect to increase but you also mentioned you haven't seen improving yet in aftermarket bookings at least sequentially. So what do you think your customers need to see to ratchet up MRO demand how much do you think higher oil prices help.
For the Texas weather related issues be a catalyst and have you seen any discernible incremental improvement in bookings for the first couple of months of this year.
And that's like six questions.
Scott will be efficient with our time.
I assume that.
Okay.
Focus on aftermarket and MRO and I'll hit kind of two of the key points there.
I was pretty clear on the lapse in the Q3 earnings call talking about debt, we would see returned to growth on MRO and aftermarket at some point in 2021, we're still confident in that and I think it's more of a timing issue.
On a filed the Texas weather than in the Gulf Coast weather, because that's a whole different issue, but I might come back to that but if we say pre weather event and kind of where we were growing I think our customers as long as theyre getting more confidence that things return to normal right stability on oil prices mobility goes up then.
They're going to have confidence to invest in their facilities and.
So we feel very good MRO and aftermarket spending returns in 2021. New question is are we going to see it in Q1 Q2 or Q3.
I would say certainly by mid year, we start to see that inflection up in debt.
Lots of customer discussions and data support that there is a lot of pent up demand and cost avoidance that at some point catches up to them and I don't know, what the Texas weather event and I would.
Obviously that was last week, and we're still trying to get to the bottom of it.
Yes.
Both coast region, we're tracking over 30, plus installations that have some emergency type request in the form serve on parts of our services and so we see it as a net positive for us the downside as we were offline for three to four days and most of our facilities. So we've got to overcome.
But I think there's a lot of damage out there from the freezing weather.
Seeing already orders for pumps valves and seals and so I don't think this is a material number but it is upside that we didn't plan for and we didn't necessarily have in the guidance.
Probably most importantly, it's an opportunity for closer to demonstrate support of our customers in these situations and we can come and help them get restore their operation we solidified our presence on site and they know they can trust us and so yes, it's an unfortunate situation because a lot of people were incredibly uncomfortable from heavy days.
But for <unk> this will be an opportunity.
Some sort of regulation that comes out of this debt, Texas will require something more substantial with these installations than any time, those upgrades or new standards, we will capitalize that on as well as we put in more beat the equipment that can stay with.
What can can stay on through any temperature range, both high and low.
I appreciate that Scott.
Okay.
Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.
Hey, good morning, everyone.
Good morning, Mike, Let's follow up on Andy's first question, there, obviously really nice cash flow. This year good to see the guidance for next year.
It kind of at the point, where you can start playing some offense getting on liquidity given the more consistent cash generation. How are you thinking about that internally is the radar shifted towards M&A at all and if so what does the opportunity set look like there.
Yes, so as Scott pointed out.
We were pleased in two.
2020 that was a tough year that we were able to deliver on ROIC, well above or our cost of capital and we frankly think that delivering those type of returns with with line of sight into the future to returns above above 15% does.
Does allow us to think about reinvesting in the business and we think about that in terms of both organic and inorganic growth. Obviously any type of projects that we look at or any type of acquisition that we would look at with need to fit within our criteria, it's all towards achieving.
And those those financial objectives that we set out meaning accretive to <unk>.
Accretive to margins.
Over time as well so we think about it through that lens that being said, we do have commitments embedded into our cash usage for 2021 as well so as I pointed out we are going to retire those euro notes.
In the first quarter of the year and we are committed to maintaining our capital spend.
For maintenance and for those ERP projects over the course of the year and of course, we want to return.
Money to our shareholders as well via our dividend and we do have about over $100 million left on our share repurchase program. So to the extent that it makes sense at points during the year to deploy on.
Any of that capacity will look at that as an option as well, yes, just to add to that Amy on the team have put us in a nice position with the balance sheet and so we're definitely more open to moving to the offense than in years past.
One other things that was holding US back was we really wanted to get the two point now in the process improvement embedded in the organization and really wanted to have that done to give us confidence in our ability to integrate any deal that we do and so on.
I'm feeling better than ever before that we've got good business process and we are executing at a higher level and it gives us a stronger appetite to start looking at things on the offence and so I would expect.
I don't have anything imminent, we're not going to do anything crazy, but we are interested in starting to add to the portfolio in the right places that help diversify our end markets a little bit and helps to bolster what were trying to do in the long run.
Thanks for that and then and then on the margin side, just make sure I understand here solid decrementals in the fourth quarter there.
Puts and takes when we think about 2021, how do we think about discretionary costs coming back versus structural savings with price cost mechanisms look like for you and any other important large bucket items debt that would impact how you're thinking about it.
Yes, so we do have a number of moving parts.
As we look at as we look at 2021 margins and we do think there is some pressure on margins entering into 2021, starting starting with the challenges obviously, the lower beginning backlog and lower volume generally as we've highlighted on our sales sales guidance.
Is is a headwind and in included in that is absorption pressure at our locations and we do have some inflationary pressure that's built into that as well.
There are some day there are some opportunities as we think about that or some things that are helping to offset that so thinking about the mix shift.
The mix in 2020 was very heavy E. We see that we see that transitioning to a more normal level in 2021, and we do have productivity improvements that are that are embedded into into the 2021 plan as a result of transformation efforts.
So.
As we think about those and we think about the ongoing savings.
From SG&A, which which in 2021 will be much closer to our third and fourth quarter run rate than it has been to historical levels.
What we're excited about is as we return to growth as as Scott has highlighted we think will be that we think will be the case with our with our book.
In 2020 and 2021, we see many at these cost saving initiatives at sustainable and building momentum.
Mentum.
As we return in that direction.
Thank you for that Amy Thanks, Scott.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.
Thanks, Good morning, everybody.
Hi, Joe.
Hey, Hey, Scott as you kind of think about the longer term operating margin targets and kind of like where where you sit today.
What kind of like revenue top line do you think we need to get to get to those margin targets and I know that it's really difficult at this point to give some kind of timeframe, but I'm just curious kind of like what the base case scenario is to try to get better.
Yes so.
So when we first put these targets out back in early 2017 early 18, we said, we should be able to achieve the targets on.
Are there any revenue so basically at this status quo, while on a growth environment and I think that still holds true and so even if we work to grow I still think we've got the opportunity to get the margin up we've got the opportunity to get the return now what I would add is that any growth only helps the situation dramatically right and so if we can start.
A reasonable quip for 3% to 5% when I start to feel really good about getting into that margin range that we've laid out.
Got it and then maybe Mike on my follow on question and really nice to see the progress that you're making on cash flow I guess, how should we think about kind of capex longer term I know, obviously 2020 was that was that a little bit of a down year, but what's the right way to think about capex from normalized capex for the business.
Yes, so we put our guidance out for 2021, which just as a reminder, $70 million to $80 million.
I think that Mike.
B a couple of years, where we come up to that maybe touch on the $100 million level. If we're doing something major but I think this is a reasonably good range for us and so kind of that $80 million to $90 million for sure as we go forward.
A lot of that investment in fact, more almost half of it is going to our it systems and so as we continue to make progress to get on more efficient and more simplification on our system architecture.
That spending starts to subside and then we start to look more into kind of the automation and technology around manufacturing, but I think this is a reasonably good run rate for us I don't see it going significantly above 100 ever and it will just depend on some of the projects that we line up year over year.
Great. Thank you very much.
Thank you. Our next question comes from Nathan Jones with Stifel. Your line is now open.
Good morning, everyone.
Alright.
Just a follow up here first on on the guidance it looks to me like the low starting backlog is really responsible for all of the guided revenue decline in 2021, which then implies that kind of your bookings on business. In 2021 is flat with 2020, let's say there are a few tailwind that you should have on the book in turn.
Business relative to <unk> 'twenty Covid may.
It's a headwind in the first quarter.
But improving oil prices and all those kinds of things.
Conservatism built in that in that 4% to 7% kind of.
More likely to say upside than downside.
Yes Nathan.
Call. It conservatism given all of that craziness that we've been dealing with for the last four quarters.
And if you just if you just go back a few short weeks ago, we had our highest COVID-19 case counts and the most disruptive impact on our operations within the month of January like literally for weeks ago, we were shutting facilities down because we couldnt get enough people to come in and so.
I would say things have improved for eight and every week seems to be getting slightly better.
We really struggled on whether or not to give guidance or not just given how crazy. The situation is that we're dealing with in fact I would just add that as things continue to improve right stability in oil pricing COVID-19 cases, going down mobility data improving debt.
Then on.
Operators will spend more money like it's going to happen and if that happens that our book to Bill has the opportunity to come up from what we had before but to say that it's conservative right now would be really share.
To use that word because I don't think its the case, but I'll, let Mike.
Do think there is upside if things continue to progress like we've seen quite frankly in the last two to three weeks.
Okay, I think Thats fair.
My follow up question is on the.
Bigger focus put back on the growth side of flow to point out going into 2021 is there an increase in the investments that are running through the P&L, that's potentially a headwind.
Margins in 2021.
If there is what kind of ramp up that you are looking at and should we see that continue to increase as we go into 2022.
Yes, we are on <unk>.
I wanted to spend a lot more money on new product development and technology.
And on the 2021 is what I would say is a reasonably consistent rate I think its up slightly but it's not anything material.
And.
Turning to do and I made this comment in the third quarter earnings call, but we've been really focused on the process of innovation in the process of new product development and we've got that what I'll call dialed in pretty well now and so as we start to run more through that we do want to add projects, we want to add resources and we ultimately wanted to.
Mark to bring that up but the net spending in 2021 isn't going to be substantially different than what you saw in 2020 or 2019.
Because not only do you plan on increasing net spending in 2022 and beyond but you also I think you've got better processes in order to be more efficient spending.
Absolutely and that again that has been the focus has really been on our innovation process, our new product development process and Thats on a really good with the team and what we're doing on that and so we're getting more things through we're getting more meaningful innovation to the end markets that are going to convert to revenue and EBITDA.
And we're spending less time and less dollars on getting those products through the system.
Thanks for taking my questions.
Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is now open.
Hello, Good morning, everyone.
Good morning, John.
I guess there is one final guidance item to touch on.
Just thinking about the tax rate and the ability to maintain it going forward does this kind of the right Zip code.
This 22 to 'twenty three as we look forward.
So I'll take a stab at that I think for the.
The foreseeable future, we feel pretty good about about that effective tax rate.
I'll tell you that when when Scott and I and my tax Department sit down he continues to challenge us to look for.
For look for appropriate ways to bring that effective tax rate down. So we're pleased with where we've come from we started out at near 29% so to bring it down for the 23% level.
In 2020 and look for improvements beyond that in 2021 that we have line of sight too and we think it is a good place to be and debt, but we will continue to challenge that as we move forward and look for opportunities to improve on it.
Great and then maybe a question here on on Red Raven.
There's actually some really great Youtube material out there on on what you guys are doing but wanted to ask you are there going to be kind of public I don't know metrics or goalposts youre going to be providing so that we can see kind of the adoption rate and the <unk>.
Traction, you're making with that initiatives.
Yes, I don't know, we haven't gotten that far John we just launched it two weeks ago, but certainly as this becomes a more meaningful product part of our business will come out and talk about it more and we will provide color on some of the metrics that we're looking at I can provide a little bit more than what I shared on the prepared remarks.
We've been working on this for about five years wherever really got less the partners both on the customer side and other third parties that are helping us with this offering and making sure that we've got a solution that is truly differentiated and something that our customers want.
And over 25 different installations, we've got a long list of new opportunities that we're tracking and so we think we can certainly double that in the next 12 months and we've deployed now almost 6000 different sensors and we're collecting unbelievable amounts of data.
Part of our program is monitoring and our customers are.
They are asking for that and Thats important, but we've also really pushed the predictive side and so we've already been able to prevent and predict failures on site and so as we get more case history and cases examples we'll share those externally, but that becomes whats going to help us drive this and Robert.
For him itself will generate revenue and we're excited about it what we're really excited about is being closer to our customers and really making sure that we can provide that thermal suite of expertise and full control history and knowledge to help our customers with their operations and that pulls through our aftermarket businesses it pulls through.
Our services, it's parts and all of that and so on and we think about it it's really more of a holistic offering from our aftermarket services and solution than just the system itself.
Great. Thanks for taking the questions.
Thank you. Our next question comes from Jonathan for Glenn <unk> with Morgan Stanley. Your line is now open.
Hey, good morning folks I think that's me.
Hey, Joe Hey, Joe.
So two questions. If we come at all a lot of ground already I guess first one Scott.
On the the customer projects that sort of went on the shelf.
With Covid and oil prices retrenching or other commodity prices as well for that matter.
What's the conversation like today, I mean, obviously orders haven't really rebounded yet but is it your suspicion or is it customers intention to place orders with us.
Similar type project or re scoped version of it or is it kind of back to the drawing board across.
Across all of those things that were planned maybe just on a year ago.
Sure Yes.
On a go a little bit careful because all of our customers are facing different situations and different challenges and so middle Eastern production project will be different than a petrochemical project in the Gulf Coast.
Specialty chemical project in Europe, but I would say just in general right everybody put the brakes on big time.
Kind of February March April timeframe last year as Covid impacting the entire world from a consumption and demand standpoint and from.
Throughout last year, they've been re looking did the projects make sense that they originally had on the drawing board and now they've got kind of six to nine months of working through that potentially making changes or modifications to their programs in their designs.
Unfortunately, asking us for Mark price reduction to us to support the economics and what we're now seeing is most of those projects were delayed in 2020 and now they're starting to move back through the system right. So they're now back into kind of the <unk> or the financial decision for approval and we do it.
Expect those to be released at some point.
Perhaps sometime in mid 2021 or late 2021, and then certainly into 2022 for me.
Any other some of the projects were canceled but the vast majority of them are at least at this point delayed and I just think as they get more confidence that COVID-19 subsides as you get more confidence in demand numbers more confidence and mobility than they feel confident to pull the trigger on this end.
We're having better discussions than we ever had in the last three quarters.
We're starting to see some movement with these projects and so again I feel reasonably good that the aftermarket and MRO picks up kind of mid 2021, and I think we start to see some movement on smaller projects.
Upgrade earlier in the year, but certainly kind of mid to late year, and then I start and then I think you start to see some real activity in 2022.
Got it that's helpful and then on the the Destocking comment that you mentioned you can put around that on.
Percentage of the business do you think that would apply to that went through distributors that had destocking over the last few years.
What you think that cost you like how much you undersold the market in the last couple of years it might be a little hard to debt.
Precisely now, but that's GAAP yet enough.
Yes, so the stocking distributors I mean, while it does impact our pump business it really impacts the valve business more than any.
Our percentage of business running through distribution and valves is kind of 40% plus or minus 5% and what we saw certainly in North America was this was already starting to come down in 2019, and then with the Covid impact in 2020, it's come down dramatically and Thats two public companies out there that disclosed their inventory levels.
And when they produce their fourth quarter numbers I was actually shocked at how low it was and in our discussions with them. We know that they can't maintain this even at the existing level of market activity and so I feel pretty good that we're going to get some tailwind in the valve business. Even if we stayed at this rate because they can't.
Take stuff off the shelf from there.
If they keep going on that there are essentially not fulfilling their obligation on their purpose and the Oems like us to start going to our end customers ourselves.
I actually think we get a little bit of a tailwind here and then with the recent activity and.
Kind of just confidence that things are improving.
We're going to start putting more inventory on the shelf that got to do that and so I think that gives us some uplift and again, it's primarily at our valve business will get a little bit.
Some stocking distributors in the pump world, but primarily this impact valves.
Got it very helpful. Thanks for the color guys.
Thank you. Our next question comes from Brett Linzey with vertical your line is now open.
Good morning.
I wanted to come back to supply chain and price cost obviously.
A lot going on out there and not just an impact on flow serve but thinking about price cost what are you assuming for price. This year and then in terms of just the profit waiting or you're thinking debt.
Maybe wait for a little more towards each two versus each one just given some of the price cost dynamics early in the year.
Supply chain.
Sure. So unfortunately, the price cost situation is not great right now right and so on our customers are really challenged and struggling or most of them right certainly the oil and gas some of the petrochemical with other ones and so we've had a lot of pricing pressure I would say the pressure is coming more on the project side as these big projects are going back.
Through kind of what it takes for that project to be financially viable that's impacting our wee EE pump business more than anywhere else in the system, but we're also seeing pricing pressure on the outside and then we're seeing some pricing issues on the fuel side as well and then on the cost side.
Much at an inflationary environment when it comes on materials and sorry, if you look at any of the metal indices right Theyre, all moving up and Theyre moving up reasonably quickly.
We are closer to par, though in the supply chain initiatives that we're doing we think we can offset that through further supply chain rationalization and some of the good work that's going through the transformation and so we think anything on the inflation side. We can opt out are offset with just the self help and the initiatives, but the pricing is siggi.
<unk> and my hope is as things start to tighten up and move forward, but it will start to get into a little bit better pricing scenario and then from a timing standpoint. This started back in March April timeframe and so this happened pretty early we are seeing that start to come through the system, even even in the fourth quarter, but.
Certainly Q on Q2, and so we're going to begin with this for a couple of quarters until things tightened and I would just say that this isn't any different than our competitors. They are all seeing the same situation and then we just got to keep doing a really good job on the internal opportunities maintaining good manufacturing productivity and working.
Those supply chain savings to offset this.
Okay, and I guess just for fall on that.
Clearly you've mentioned the competitiveness for like you said a couple of months now.
Should we think of backlog margins being negative in the OE business year over year.
And then maybe on the second half.
The negative now, but I would say we are seeing on our margin in backlog today is definitely lower than what it was six months ago.
And again that's more.
Pump is the biggest impact, but we're definitely not taking negative OE margins didn't mean negative I guess down year over year, but okay. Yes.
And then just last one on ERP.
Obviously, a big investment there if it's half of the Capex how far along are we in that rollout and in terms of the progression there as we work towards more of the deployment phase.
Some of that start to work through the P&L as an expense versus capex.
Trying to think about the phasing there.
Yes sure.
Talk about the progress I'll, let Amy hit kind of the Capex and where it showed on the P&L.
On a tremendous progress and for those that have followed us for a long time on our systems architect and landscape was incredibly fragmented.
We've reduced our ERP systems by over 25% since I've been here, we still have a long way to go but we're confident with our approach and solution and so we've now got a full sort of standard that's embedded in parts of our operation and we will continue to make progress as we clean that up.
We're not going to kind of.
One single instance, ERP system Big Bang, we're systematically doing this we'll end up with a handful of systems, but we've got one system that will sit on top of this in the cloud and we're confident that we can get the visibility and the productivity out of the design and architecture that we have and I'll just let Amy talk.
About how much capital and capital versus expense share. So I guess, you know as Scott pointed out nearly half of our capital guidance range. This year and is going towards enterprise.
<unk> related projects.
That's not just all about the ERP system that about systems that will be using the standardized processes.
Across our cross flow serve generally.
As we think about costs going forward certainly there are costs associated with running ERP systems. However, net.
It also benefits that we're going to see run through our SG&A expense over time as as well so I actually see this as this this journey as being a tailwind towards our SG&A expense rather than something that is going to be additive to it over time.
Got it I appreciate the color and best of luck.
Thank you.
Thank you. Our next question comes from Andrew <unk> with Bank of America. Your line is now open.
I guess good afternoon, my time still good morning your time.
[laughter].
Understood.
I'm doing well.
A question on <unk>, you guys have done a great job sort of pushing the business.
Just can you just talk a little bit about what were the specific operational changes.
Drove it look at the numbers of aftermarket.
Since I have been really good for both on sales and bookings, but if you could just provide more.
Granularity as to what exactly you were able to do on how rat coupled replicable it is across the company.
Yes, so FCB had a nice quarter, we had a good revenue uplift in the fourth quarter on the margins followed.
Definitely some cash.
We took that came through the system in Q4, and then just a lot of focus on doing the right things I will say some of that is some mix, where we got more MRO and we got some higher margin projects that did come through the system.
We're very focused on the FCB margins in what I would say one other things that we're working with the team is to be more consistent throughout the year and so we really want to kind of level out a little bit more on the revenue side, we wanted to be more consistent on the operating income but.
We are striving to get that result.
The result on average moving up and getting us back into kind of that mid to high teens, whereas this business has been historically and we still think we have a lot of opportunities with closer to par and the other stuff we're doing to move that in the right direction.
Gotcha and then just another question just sort of thinking about your exposure on the refining side.
I've been asking this question from a lot of companies but.
How have thinking from your clients and I'm not talking about over the next six to 12 months, but our longer term thinking about spending.
In the refining sector is changing.
And I'm sort of thinking about upgrades versus efficiency versus capacity expansion, what kind of conversations are you having with the customer base about the mix of their capex going forward and how does it impact your business model with them. Thank you.
No. It's a good question on refining is our largest end market, we call on oil and gas and the majority of our oil and gas is truly the downstream side. So this is something that's incredibly important to us and we.
We watch it we talked to customers all the time.
Again, some of my previous comments talked about a refiner for refining company is different around the world and so if we think about where things are growing certainly in Asia and India.
China, India, and the Middle East are going to continue to invest in it.
Very meaningful way over the next decade or two.
Going to see increased investment there are opportunities on new build or major expansions are almost exclusively in those regions and then what we saw in 2020 in Europe, and North America with some pretty significant permanent shutdowns in the system and when we talk to those customers.
Really is about helping them with productivity, helping them with cost out and helping them with the unplanned downtime.
For a lot of other things that we're doing with red rather than a lot of other things that we're doing with our aftermarket services is for.
Really important but as long as those.
Different facilities are up and running then we continue to get the seals business. We continue to get the parts for for pumps and parts for our balance replacement valves and so really it's in our best interest that we help them continue to drive productivity and movement and then the other thing I'd just add is that any time there.
As a regulation change whether it's correct clean if you will or a temperature standard or whatever.
That is regulation changes are opportunities for us because they'll need the re plumb or add that different pump for a different valve or do something to rounded emissions control that could potentially lead to new seals are a change out there.
Regulation actually helps us in anything where they're changing a process and refining.
Energy transition as a major topic and it's something that we're watching and we're going to make sure. We've got a portfolio that works for the long run we're not going to abandon our refining customers. We've got a massive installed base.
Every step of the way that they've got their own plans for energy transitions around reduced emissions moving some to biofuels and things like that and we're going to support that transition with them and so we feel good about having the right products and the right equipment to help them one on the productivity side to on cost reduction and also helping.
Them through the transition and then we're going to make sure that we participate in these growing markets for the years to come from.
Got it. Thank you for an extensive answer I appreciate it.
Thank you. Our next question comes from Joe Giordano with Cowen. Your line is now open.
Hey, guys.
Keep it quick.
On on.
<unk>.
On the Iot platform.
More existential question on Mike Who's domain.
Right now the.
Equipment providers are coming out with with technologies like this like yourselves.
The automation providers on with themselves on third party companies that come in with sensors that can go on anyone's equipment and they can pull data to select one on customers want we didn't want to actually do this in like what are you hearing in terms of feedback on that Mike who should who should be the one.
No. It's a really good question and one other thing is it's an incredibly dynamic market right now and so what we've done is we've tried to go down a path that keeps us kind of.
Really the best way to describe it would be open source are agnostic to the system Thats there.
We wanted to do is we want to instrument, our pumps valves and our <unk> systems, and we also want to be able to instrument other pumps valves and seals systems, even if it's a competitor and we have the differentiated technology or the proprietary knowledge as we do this all over the world and different.
Customers different applications and we feel like we can provide information around how does the pump work how can a pump to be more efficient when does the pump how does the backlog of work and when does it.
And is it towards end of life and then how do you really protect the environment with the ceiling systems.
And so that's kind of where we bring in the Knowhow and then as long as our <unk> platform. We will work with any end user and any automation provider. Then we can bring in and kind of talk on a solution in on the assets that we understand incredibly well and have 200 plus years of history with it. So that's been on our approach.
As really being kind of open source, we've got a lot of collaboration partners. Some of those on automation providers and we'll redo that it's working incredibly well and so on.
Sales to our customers is growing and saying Hey, we don't care, what overall system, you're using what we want to be able to do is provide you the information and the insights to make good decisions on your operations and wanted to use our platform.
Provide the right information, whether it's in the Red Raven diagnostic system for tenant automation provider.
Push it back into yours.
I'll say that is where we're seeing the most success is using on a red Raven platform.
Giving them, some really slick kind of handheld devices and screens that allow them to see the information that they want very clearly and allows them to make decisions with that information and that data in a real time fashion.
Great. Thanks.
Thank you. Our next question comes from Deane Dray with RBC capital markets. Your line is now open.
Hi, Thanks. This is Andrew krill on for Deane, Thanks for squeezing us day in and I just saw on the Astro quickly on the cost savings actions on just wanted to clarify for 2021 are you expecting any net headwind.
When you are lapping the kind of more temporary COVID-19 related cost savings or do you think you have enough on other actions underway to like balance.
Yes.
Sure I guess I guess, a couple of things one from from an SG&A perspective.
We're a significant.
<unk> component of our savings came in.
In 2020, and we're anticipating working at around the run rate that you saw in the third and fourth quarter as we move into as we move into 2021 now there are some headwinds associated associated with that.
From from inflation to at some point the restart of travel, but the fact is that the full year benefit.
As of the savings that debt or the actions that we took midway through 2020 sort of offset that so so we're now at a level that we see as being.
On much more much more sustainable from.
From a cost of sales perspective, I think a couple of things one there are actions that we took.
In 2020 debt carried through into 2021.
But also additional actions are planned as we make our way through the year and bring that.
And bring that backlog down and we're continuing to try and adjust the cost structure to manage those decrementals.
Through the course of 2021 and Thats why we are forecasting.
<unk> in the guidance range some spend on realignment as we move into as we move into 2021.
Okay, Great and then a quick Paul just on the closer to point costs now being included like we'd like to see that from a quality of earnings standpoint, just to give any other color on what the deciding factor was tipped over the edge there. Thanks.
Sure a couple of things one culturally we do now feels like the transformation process is is embedded.
Into the into the DNA of who we are as flow serve so from an operational level from a functional level.
We understand that pursuit of continuous improvement and process improvement.
As part of our day jobs.
And this reflects that from a cultural standpoint, but what I would say it's also we've reached much more of a run rate from.
From a spend perspective, so in in 2020.
Transformation costs were around 13 cents per share and this year, we think we'll be closer to.
<unk> per.
For share and it reflects more of the run rate of what the what the embedded cost of that those efforts are in our business.
So we felt from a quality of earnings perspective that as we've gotten to that run rate. It makes sense to include.
In our adjusted EPS.
Okay. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
No.
[music].
Okay.
Okay.
Yes.
[music].
Yes.
Yes.
[music].
Yes.
[music].
[music].
[music].
[music].