Q1 2021 Flowserve Corp Earnings Call
[music].
Good day and welcome to the Q1 2021 third Corp earnings Conference call.
At this time all participants on a on a listen only mode Lee.
Later, we will conduct a question answer session and instructions will follow at that time.
And he wants you require assistance during the conference. Please press Star then zero on your Touchtone telephone as.
And as a reminder, this conference call is being recorded and.
And I'd like to turn the call over to your host Mr. Jay Ruche, Vice President of Investor Relations and Treasurer. Please go ahead Sir.
Thank you Angela and good morning, everyone. We appreciate you participating in our conference calls a day to discuss flow serves first quarter of 2021 financial results on.
On the call with me. This morning are Scott Rowe closer <unk>, President and Chief Executive Officer, and in English words, 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 the 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.
May four 2021, and they involve risks and uncertainties 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 and flow serve dot com and the Investor Relations section I would now.
I'd like to turn the call over to Scott Rowe, <unk>, President and Chief Executive Officer for his prepared comments.
Thanks, Jay and good morning, everyone. Thank you for joining our first quarter earnings call.
We are pleased with our strong start to 2021 closer to adjusted EPS of <unk> 28 increased over 47% compared to last year's first quarter and our bookings through the first three months of 2021 were up by over 16% compared to the average of last year's final three quarters.
We were especially encouraged with this performance given that our first quarter results are traditionally lower.
Given what we saw on the first quarter. We believe that we are off to a strong start in 2021.
And the last two earnings calls we indicated that we believe our end markets are well positioned for a post pandemic recovery.
And our first quarter results support this belief.
Although the various regions and countries. We serve are on different trajectories in terms of vaccinations infection rates returned to mobility and overall economic recovery.
We are confident that the world is making steady progress as economies emerge from this global pandemic.
As a result, we have started to see these green shoots of activity translate into sequential bookings growth.
Assuming vaccines continue to rollout globally, and COVID-19 issues subside without new setbacks we.
We are confident and our ability to deliver substantial year over year bookings growth in 2021.
With an improving environment combined with our closer to point of our growth initiatives. We were encouraged to book 945 billion and the first quarter.
Which represented over 15% growth sequentially and was driven primarily by increased MRO and aftermarket activity.
As we moved through the quarter, our bookings by month and track the overall pandemic progress.
January was slow February improved but was impacted by severe cold weather and the Gulf Coast and.
And March activity steadily increased.
In total our bookings growth this quarter exceeded our original expectations.
The market inflection seems to have begun a quarter or two earlier than we had anticipated.
And while North America led to increased activity levels, we delivered sequential bookings growth and all of our served regions.
In addition to increased aftermarket and MRO related activity.
And we're pleased that project bookings levels approached approximately 85% of 2000 Twenty's first quarter.
We saw a number of smaller projects and get awarded with the largest of these and the $10 million to $15 million range.
We also experienced good diversity and our end markets and geographic regions.
Which highlights the comprehensive nature of our reach and offering.
These projects included a nuclear upgrade and Korea, our pipeline and Central America, a refinery and Mexico and a chemical plant in Asia.
The impact of the February winter storms forced us to close our Texas and Louisiana operations for about a week.
But we did see increased repair and replacement work and the storm's aftermath, which drove an estimated $20 million of incremental repair and replacement business as.
As we supported more than 30 customer installations in the region.
And <unk> footprint and our proximity to impacted customers uniquely.
Uniquely positioned us to assist them and getting back online quickly and efficiently and.
In addition, our channel partners and distributors also received unplanned storm related business from a variety of end markets, including water and power that should benefit us in future periods as they reorder and restore their inventory positions.
I wanted to get and recognize and thank our associates and the region for their continued focus on our customers.
For the extreme weather impacted many of our team members personally.
Despite the image and power outages to their own homes, our associates, we're committed to providing the necessary equipment and services to support our customer base and restore their critical operations.
I am very proud of the number of phone calls and notes I received from our top customers thinking closer and our associates for supporting them through this difficult time.
We are confident that helping our customers and a time of need will result in stronger relationships and increased future business for closer.
There is still work to be done and some of our customers' facilities to restore their operations to normal conditions, we anticipate additional bookings at about the same level as we saw in February and March to continue throughout the second quarter related to the storm impact.
Turning now to our end markets and bookings outlook.
Our discussions with customers indicate increasing optimism.
Rising utilization levels across industrial assets should result, and an increase and theyre spending levels to maintain uptime and address pent up maintenance activity that was deferred throughout 2020.
We continue to believe that the aftermarket and MRO will lead the early phases of their recovery throughout the year.
Project activity is also beginning to pick up and we expect this to increase as the year progresses.
Currently our project funnel is about 12% higher than a year ago and.
And to compare period includes many of the projects that were placed on hold due to the pandemic we.
We expect many of these delayed projects to progress toward funding in the coming quarters.
Opportunities are apparent across all end markets, but we expect the general industry and chemical projects to lead the return to growth and a recovering economic environment.
In conclusion, it was a strong start to the year, both on our bookings and financial results.
We believe our end markets remains well positioned to benefit from the recovering economic environment.
While we expect to see COVID-19 flare ups in some regions like what we're seeing and India. Today, we are optimistic that with increasing vaccinations. The world is beginning to move and the right direction, which will ultimately help support our ability to deliver bookings growth.
We're very pleased with our financial results and the first quarter, our adjusted EPS was up significantly compared to last year.
And the margins, we delivered and our SG&A levels continue to reflect the benefit of the decisive cost actions we took on 2020.
And the ongoing closer to Plano transformation program.
I'll now turn the call over to Amy to cover our financial results in greater detail.
Thanks, Scott and good morning, everyone.
For the first quarter, we delivered solid results, including an adjusted EPS of <unk> 28.
Which represents an increase of nearly 50% versus prior year.
On a reported basis EPS of 11 and included eight tenths of realignment.
<unk> of costs related to early retirement of debt and five <unk> of below the line FX currency impact.
As a reminder, with our focus on improving the quality of our of our earnings we are now, including 2021 transformation costs and our adjusted earnings and contrast to prior years when and then when this expense was adjusted out.
First quarter revenue of $857 million was down four 1% versus the prior year Prime.
Primarily driven by the 10% sales decline and original equipment, including Ftes and 15% of original equipment decreased.
We were pleased to see modest aftermarket sales growth as revenue of $450 million increased 2% with both SPD and FCB contributing.
Shifting to margins.
Our first quarter performance was largely driven by the significant cost actions, we took and the middle of 2020 as well as ongoing transformation driven operational improvements and a 400 basis point mix shift towards higher margin aftermarket revenue.
Partially offset by increased under absorption.
Adjusted gross margin of 34% was roughly flat versus prior year and the sequential quarter driven by SPD 60 basis point increase offset by Ftes and 170 basis point decline.
And as compared to 2000 Twenty's first quarter.
On a reported basis first quarter gross margin decreased 50 basis points to 29, 3% due primarily to absorption headwinds and higher realignment costs versus the first quarter of 2020.
First quarter, adjusted SG&A decreased $34 million to $194 million versus prior year and was largely flat on a sequential basis.
And the percentage of sales first quarter, adjusted SG&A declined 290 basis points year over year.
The decisive cost actions, we took in mid 2020, and our ongoing focus on cost control drove the improvement.
Reported SG&A decreased $47 million versus prior year, where in addition to cost action benefits adjusted items were down $13 million compared to the first quarter of 2020.
We delivered a $20 million increase and adjusted operating income and the first quarter and strong performance, considering the $36 million decrease and revenue.
As a result, adjusted operating margin improved 250 basis points versus last year to eight 1% driven by the previously mentioned cost actions ongoing operational progress and the mix shift to higher margin aftermarket products and services.
SPD and FCB improved 230, and 60 basis points to 10, three and 10, 4% percent respectively.
First quarter reported operating margin increased 380 basis points year over year to six 5% and.
Including the roughly $12 million every $12 million reduction of adjusted items.
Our first quarter adjusted tax rate of 23, 2% is in line with our full year guidance of 22% to 24%.
Turning now to cash and liquidity.
Our first quarter cash balance of $659 million decreased $436 million compared to the year end 2020 level.
Our primary use of cash was for debt reduction with the $407 million payment to retire the remaining portion of our euro notes.
Additionally, we returned over $30 million to shareholders through dividends and share repurchases.
Our ability to both pay down debt and return cash to shareholders underscores the strength of our balance sheet and our focus on value creation through capital allocation.
Total debt at quarter and was one 3 billion.
Compared to over $1 $7 billion at year end.
Compared to last year's first quarter gross debt is down over $50 million, while the cash balance is up over $35 million.
Flow through this quarter and liquidity position remains strong at over $1 4 billion.
Including $742 million of availability under our Undrawn senior credit facility.
First quarter free cash flow was approximately $25 million and for the second year in a row and only the third time and the last 15 years closer have delivered positive free cash flow and the first quarter.
This trend is an indication that our focus on cash management is delivering results.
As is typical working capital was a use was a use of cash and the first quarter at $40 million.
Driven primarily by a reduction in accounts payable.
Inventory was also a use of $17 million, but I was pleased that our focus and improve processes to control inventory drove a 60% reduction versus last year's first quarter EPS.
Accounts receivable and contract liabilities were sources of working capital cash this quarter.
Taking a look at primary working capital as a percent of sales.
We saw 110 basis point sequential increase to 29, 6%.
And again, driven primarily by accounts payable and a lower top line.
Although our backlog increased over $30 million, we were pleased that inventory when including contract assets and liabilities decreased $4 million versus the fourth quarter of 2020.
And we continue to drive the integration and utilization of enterprise wide business planning systems and across our operations and functions. We have direct line of sight on consistent improvement and our working capital metrics throughout the year and importantly, we remain confident and achieving free cash flow conversion and excess of 100 <unk>.
<unk> in 2021.
Turning now to our outlook for the remainder of 2021.
Based on our strong first quarter bookings and visibility and to improving end market.
Hello, Sir have increased and tightened our adjusted EPS guidance range for the full year to a $1 40 to $1 60 per share and reaffirmed all other guidance metrics.
We now expect full year 2021 bookings to increase mid single digits versus our prior outlook of low single digits and.
And further expect the majority of this increase to occur and our aftermarket and shorter cycle MRO original equipment products were associated revenue may be recognized in 2021.
Based on the expected increase and short cycle activity. We now expect the revenue decline in the 3% to 5% range versus our initial guide of down 4% to 7%.
The adjusted EPS target range continues to exclude expected realignment expenses of approximately $25 million as well as below the line foreign currency effects and the impact of potential other discrete items, which may occur during the year.
On a quarterly basis, we expect our adjusted EPS to increase sequentially over the course of 2021 as we see the benefit of our first quarter bookings flow through and from the expected increase and short cycle activity.
With our closer to point out transformation program and its elements now embedded in our operations and functional teams. We expect 2021 transformation expenses of roughly $10 million.
Net representing a decline of over 50% versus the prior year.
As previously mentioned, we are now, including these costs and our adjusted EPS guidance.
Additional guidance components components remain unchanged with expected net interest expense and a range of $55 million to $60 million and and it does adjusted tax rate between 22 and 24%.
Lastly, looking at cash as is historically the case, we expect free cash flow will be weighted to the second half of the year largely in the fourth quarter major.
Major planned cash usages. This year include the recently completed retirement of our Euro notes and.
And and expectations to return over $100 million to shareholders through dividends and share repurchases.
We also intend to invest and our business as we return to the growth aspects of our closer to point out program, including capital expenditures and 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.
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In conclusion based on our first quarter performance, we are more optimistic than ever about the opportunities in 2021.
Our end markets are likely improving at a rapid pace, our balance sheet remains strong and our operational and cost discipline and has us well positioned for margin expansion and free cash flow generation as revenues grow let me now return the call to Scott.
Thank you Adrian.
To wrap up today with some comments around two key strategic priorities.
Our ongoing closer to transformation and how closer will support energy transition.
Let me first provide an update on our closer to fund our transformation progress.
And 2020, the pandemic driven downturn dictated that we focus heavily on cost reduction Richard.
And we shifted our efforts and accelerated the cost reduction aspects of the transformation last year <unk>.
Additionally, we continued to progress our strategy to improve our overall enterprise wide it systems.
These improvements and the overall rationalization on improving our visibility streamlining our operations and improving our overall productivity.
All of these enhancements support the new closer to Porto operating model.
As our new operating model takes hold throughout the enterprise, we expect to continue to deliver margin and productivity improvements throughout the business.
As we look to fully embed the transformation into our operations by the end of 2021 I am confident that are closer to Porto process improvements will continue to provide benefit to flow serve and our customers for years to come.
All of the fundamentals are now in place to fully leverage the expected market recovery.
During 2021, our transformation priorities are focused primarily on growth.
Including and improved customer experience accelerated product innovation and further market penetration.
With our strengthened operating model, we're also better positioned to pursue value added partnerships and we.
And we're more confident and our ability to integrate potential acquisitions.
And important aspect of closer.
<unk> and the coming years will be driven by the expected growth investment related to energy transition.
The energy transition theme is real and we inspect we expect investments to rapidly increase and the near term to support this global call to action.
We believe closer to is well positioned with our current portfolio to benefit from increased spending from our customers to achieve their carbon reduction targets and energy efficiency goals.
Energy transition has been at play for much of the last two decades. However.
However, 2000, Twenty's served as a pivotal year.
And began first with COVID-19.
And and acceleration of investments and alternative sources of energy and.
And further driven by social political and regulatory changes.
These multifactor dynamics are accelerating the transition, resulting and increased urgency across the industrial sector and especially within the energy sector.
Our approach to energy transition includes.
First supporting our existing customers and markets by delivering energy efficiency through systems automation.
Uptime and our lifecycle viewpoint.
Second we're scaling our flow control solutions for emerging and new value chains, and gasification carbon capture hydrogen energy storage and non fossil fuel energy sources.
And finally by evolving flow control into autonomous slow using data and science to monitor diagnose incorrect through built in intelligence utilizing our recently launched red raise and platform.
As part of our first quarter bookings, we participated and projects related to biodiesel concentrated solar power and carbon capture and energy efficiency and.
And we believe that this is just the beginning.
As an example, and the third quarter of 2020, we introduced a new liquid ring compressors designed specifically for flare gas and other vapor recovery.
This product positions us to support our customers' greenhouse gas emission reduction goals through the production of blue hydrogen and carbon capture.
Since introduction, we have already received over $30 million of orders for the product and we see growing demand for years to come.
The more conversations I have with our customers about their energy transition plans.
The more excited I get about the opportunities that energy transition can offer functions.
We are making good progress on developing our go to market strategy and we are currently working closely with a few select customers to demonstrate improved power suite of capabilities can help them to drive efficiency and reduce emissions.
In addition to our current customers. We also believe energy transition will provide opportunities across the industrial spectrum.
Including in markets, where we currently have limited scale like water food and beverage cement and steel and mining.
We expect the largest near term opportunities for closer and we will be helping our existing customers achieve improved energy efficiency and reduced emissions, we believe that our flow control expertise across pumps valves and seals combined with enhanced data analytics and dramatically improve our customers' energy consumption.
And reduce carbon emissions.
We are also actively developing technology to expand our presence and other forms of energy, including solar hydrogen and lithium mining and processing.
Overall, we feel that foodservice uniquely positioned to help our customers today and grow our business through the energy transition.
In January we launched our red rave and Iot offerings, which can further instrument pumps valves and seals to provide the capability to assist our customers with a data driven approach on how to improve their operations increase asset uptime and reduce associated energy consumption.
We're really pleased with the market's response to our Iot offerings.
Since the rollout of Red Robin we had been awarded on average one new contract or site installation per week and the pipeline of interesting parties continues to build.
As I conclude my prepared remarks, let me provide a quick summary.
The first quarter provided us a better start to the year than we previously expected with bookings inflicting earlier and at a higher level than we initially assumed in our February guidance.
With an improved outlook for the remainder of the year, we feel confident and our ability to raise our adjusted EPS guidance.
We have improved visibility to market growth and our confidence and our ability to execute.
We believe we are firmly and recovery from the pandemic driven downturn.
And many countries around the world are announcing significant infrastructure spending plans that will inevitably inevitably include flow control equipment.
And finally, we are confident and our longer term outlook and see energy transition as a significant growth opportunity for closer.
After three years of hard work on our closer to point out a transformation program. We are now operating at a higher level and we are well positioned to transition to growth and.
I'm confident that we will capitalize on the opportunities ahead of us.
And create value for our shareholders and other stakeholders.
Operator. This concludes our prepared remarks, and we'd now like to open the call to questions Mike.
Ladies and gentlemen, if you have a question and at this time. Please press the star and the number one key on your touched on telephone and for your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Deane Dray with RBC capital markets. Please go ahead.
Yeah.
Okay.
Line is open.
Your line is muted and he may want it on mute.
Yes, sorry about that.
Technical difficulties.
Hey, congratulations on the quarter here and it literally looks to us at one of the inflections is this debt.
Net orders are coming back and selecting positively sooner and I know you've been talking about and mid to late 2021 and.
If you could just point to the factors here how much of this is just.
CEO confidence vaccine.
A little bit less COVID-19 uncertainty is oil pricing that or is that is that a factor here and how much of a rebound are you assuming and these orders for the balance of the year. If we could start there. Please.
Thanks, Dean and glad you could join us today.
945 was a really good number for you.
For the first quarter, and certainly a little higher than what we had expected.
And we really thought kind of a Q2 Q3 is when we'd start to see the recovery and we didn't expect it to be a 15% sequential pop there, but look we're pleased with it and I'd say, it's just a number of factors that are all contributing here one is.
It really is the sentiment and the mentality of COVID-19 and so as North America, Subsides, and Europe together to make progress with vaccines and in COVID-19 cases reductions.
Customers, who are customer base across all of the industries are now more confident and their ability to spend money and.
And so and then you see then the other factor there is just the utilization of the different assets that we support and so whether it's refining petrochemical and chemical plants.
Food and beverage volume you're pharmaceuticals any of those are all higher than what they were a year ago and so we're seeing good growth on MRO, we're seeing good growth on aftermarket and then we're just seeing far more customer confidence and before now there is still concerns right, India's and not and a good place right. Now there are other parts of the World Latin America that are still struggling.
Through that but I think the path to getting out of this is starting to become far more.
Sure than it was in the past and so we feel good about $9 45, and Q1, we're excited about that number and then as we project forward for the rest of 2000 22021, we've got good visibility to a similar bookings number in Q2 and so.
Wouldn't say, we do think we grow from there, but I don't think we're gonna be growing dramatically throughout the year, but we like this level of kind of mid to low 900, and that feels pretty good right now with our customer discussions and kind of what we're seeing then where we start to grow as when the larger projects begin to move forward, which we expect and.
Later 2021 and early 'twenty, two and then we start to move back into that $1 billion plus range of bookings on a quarterly basis.
Alright, Thats really helpful. And then my second question relates to this pivot to the energy.
Transition that's happening and it looks like you guys are pretty well positioned and I would be interested in knowing what the mix is today what percent of your revenues today are what you would characterize as more energy transition leverage whether it's gasification buyouts.
Diesel solar Theres, a long list, but.
What's the mix today and are you are you ready to talk about a three to five year goal as to where you would see the mix.
And that timeframe.
Sure.
Really excited about what's happening in this space I would say it is evolving and incredibly fast and so things are changing and you know a year ago.
And we saw this as a headwind and now we see it as a tremendous opportunity and so as customers are evolving and trying to work through their own energy emissions targets and carbon reduction goals and youre trying to achieve net zero, they're developing plant plans incredibly quickly, but today, it's a relatively small percentage.
And we haven't come out and stated that publicly I think we will and the in the coming quarters as we shape up our strategy and then we'll also put out a target in terms of what we think it can happen, but we did share a spending number back in February and one of the investor conferences, and we talked about a 60 trillion dollars.
Number that was needed by 2030, and if you just could be a small percentage of that and flow control you get to some particularly big numbers. So a percent and a half of full control on 60 trillion is a $90 billion market.
$90 million potential market for flow control and so we really are sharpening our pencil and we're trying to figure out exactly what that means for us and where we can play and it's just a it's a dynamic environment right now and so you've got different operators pursuing different paths.
But we feel really good that flow control will be a big part of whatever they do and we believe that our offering across pumps valves and seals really does fit our sweet spot in terms of what they're looking for right. So we can help on energy reduction with pumps or one of the largest consumers of energies and any large installation.
Valves and play a significant part of their full control and their optimization and then the fields are really around emissions and controlling leaks and on the gas side any fugitive emission leaks. There. So we feel like we're in a good place again relatively small today, but growing quickly and as.
And this market firms up and and restart you'll continue to make progress on our strategy, we will share our long term goals and set some targets here.
Great. Thank you for all the color.
Your next question comes from the line of Andy Kaplowitz with Citi. Please go ahead.
Good morning nice quarter.
Good morning, Andy.
And Scott we know many of your customers have deferred and replacement over the last one and a half years, how much does that has to do with the upturn and bookings and do you see any larger projects is likely to come down for the rest of the year. I know you mentioned, you know 945 million and that's kind of a similar run rate you expect in Q2, which makes sense, but if you could.
And with your March run rate is it possible that you could sustainably start to book that billion dollar number again and that you've done in the past and you really need larger projects to come back to see that amount of bookings.
Sure, Let's just talk about the MRO and the aftermarket side and so what we're seeing and these installations is that there was certainly some pent up demand on maintenance and replacement and just as education for everybody. Our MRO number that would talk about would include some of our new equipment and so these are replacement valves replace.
And with pumps, and we categorize those and in OE, but we call it MRO.
And so what's happening there is we're getting a lot of replacement work that we believe that the pent up and then also as we think about utilization rates you know all of our customers almost across the spectrum are running their assets at a higher level. So again, we've got a lot of confidence that kind of a 900 number and above is going to sustain.
And throughout the year.
I'm not ready to commit to a $1 billion, yet Andy but I do think as I figure it out and start to move in the back half of the year. Then we can start to move up and creep into that territory, but right now we feel good about a similar number here in Q2 and kind of this mid nine hundreds and feel really good for the balance of the year.
That's helpful. Scott and then and can you help us think about and debt and margin expectation now for the rest of the 'twenty, One night and I know you've talked about SG&A for a while here. It's continued to be relatively stable. So and you start to grow again can you keep this sort of flattish as she now and I think your guy and he's still to 20 and 30% Decrementals for 'twenty, one, but how do you think.
And about price versus cost and its impact on margin and do you see a decent chance of segment margin expansion actually for both segments like you had on the first quarter.
Yeah, Let me, let I'll, let Amy hits kind of yesterday, and tomorrow and said that I can talk about price cost and what we're seeing there yeah. So Andy as we as I indicated in my remarks, we do see and opportunity to grow earnings sequentially over over the course of the year and that's really a couple of things and if we look at the second quarter, and we still think that theres going to be.
Some under absorption and that we're dealing with it it's sort of a suboptimal volume levels, but as we make our way through the year and we see the benefit.
Our volume coming through and particularly the mix.
Net volume coming through with some of our shorter cycle type of business, we see the opportunity and to expand margins over over the course of 2021, we're going to continue to control SG&A as tightly as we can and.
And there is it varies a lot.
Our cost reduction that was built into the savings that you saw in 2020 and and came through and in 2021 well.
Well over well over half of the benefit that we saw year over year was actually and in head count savings on year over year.
And now there'll be some cost that creep back in its travel returns to normal that quite frankly, we're viewing that as a nice problem to have so we really see the ability.
Control SG&A quite well and over the course of 2021 is as well.
And there's been a there's been a lot made you know from them in terms of input cost and and generally and.
And we are seeing some of that and creep in that overall, our supply chain group has done and has done a great job mitigating that over the course of the year and from a flight supply chain perspective, we really see that concern being more around and around logistics, and particularly given where some of the COVID-19 hotspot.
And are currently.
And then our and ability to offset some of the cost increases that we're seeing and then.
And I'll, just add a little bit more on the on the inflation side, we're clearly in an inflationary environment with commodity prices. In fact, we saw a massive surge in Q1 and our view right. Now is that this is certainly peaked and.
And that it's relatively short term with some speculation and so we actually see this kind of come down and settle here in the back half of the year, but as Amy said I just want to call out and Influencer to point out that supply chain work stream was one of our largest efforts we've been working on this for three years and we continue to see some really good progress.
On supply chain and so even in Q1, there was a very slight net positive for us I wouldn't call. It a huge win but we were able to offset a lot of the things that were happening and we feel really good about continuing to make progress as we rationalized suppliers as we move more to proactive spend as we start to do some of the things that good cash.
And he is due on the supply chain.
I feel good about that and then as Andy said, the logistics and transportation is the one that is concerning that was a negative for us and Q1, and we really don't see that day, we don't see that subsiding here and in Q2 or Q3.
And then if I hit the price side 2020 was a difficult environment on pricing for US and this is you know customer service to our customers.
And I really expect that the worst is behind US now I think most of our customers are seeing the where most of our competitors are seeing the increased activity and so I think pricing on our side starts to firm up.
And I don't expect to see.
See that get worse.
You still have some of that pricing coming through the system right. So we saw that a little bit and balance here in Q1, we will continue to see some headwinds and in Q2, but as we book New work, we're starting to move our pricing up and we feel like we'll be in a much better position here at the end of the year.
I appreciate the color.
Your next question is from the line of Nathan Jones with Stifel. Please go ahead.
Good morning, everyone.
Good morning, Ed.
Couple of follow ups actually here.
On the increased under absorption comment.
You know you did say that revenue declined slow a little bit so on.
Little surprised that you're saying increased under absorption and the first quarter. So if you could talk about that and then does that imply that you need to take more cost out here or is it now carry those costs for the recovery and then what does that imply for incremental margins once we return to growth.
Sure I can address that and what you see is with the lower revenue number in Q1, there are certainly some some under absorption and so our sales are down roughly 10% and really that's more on the manufacturing side and assets fixed assets that are supporting that.
We did the aggressive cost out actions last year and in Q2 and worked its way into Q3 and at this point, we don't we don't and you said this but we don't feel like we need to take any more aggressive nature on on driving cost out with that said, though as some of our backlog comes down and our long cycle facilities.
The revenue will continue to come down there into Q2, and Q3, and we will move our direct labor and the workforce at the sites down has that backlog does come down, but really I think given the bookings number and given the discussion that we've already had this morning, we're kind of leaning in and making sure that we have the capacity and the ability to support our COO.
Customers as things move up and 15% growth sequentially is a big number and so right now I'm more concerned about our ability to keep lead times low and support our customers than I am about taking additional cost out of the system now I will say overall rate, we still have opportunity on on roofline and we've talked about.
And that in prior earnings calls and we will continue to systematically make progress on our overall manufacturing footprint, but we're gonna do that deliberately and and systematically over the coming years.
And then any comment on on.
If you if you're carrying this unabsorbed overhead.
What that implies on Incrementals as we get back to growth next year, I mean, I would think that would mean that that should be pretty good.
Yeah, I think a couple of things Nathan I think really that bad.
Under absorption and that we're seeing is really you know at this point on on the OE side and as we see as we see that backlog continuing to build even over the course of 2021 oriented supporting that those margins that the margins will expand particularly by the time, we get to that did you get to the fourth quarter.
On the year.
And and obviously this is all very dependent on on mix as we move our way through the year, but and and he talked about the first quarter and particular, just one thing to point out is that from a from an adjusted perspective really the change and mix largely offset that impact and impact of under absorption. So as we do.
And that backlog and we should have and we.
Have a nice.
And a nice opportunity to expand those margins and just what I'm real happy to talk about incrementals, rather than Decrementals, but what you saw last year was improved.
Improved decrementals from historical downturns and everything we're doing we're closer to Paul I know is focused on having better incrementals as we come up and so we're trying to create this operating model that works through the cycle and I'm confident that we can have really good incrementals as we start to book some good work here.
<unk>.
And I had one specifically.
On pricing and specifically on project bids you're seeing very rapid inflation and have seen very rapid inflation, how do you protect those bids and the margins on those bids from the time you submit that beach and maybe the time, it's accepted on the inbuilt contract mechanisms that adjusted for the input costs there that protect protect you.
And from some of these be done on.
From that inflation and then how do you manage the costs when you get a project bid.
Where you're seeing this steep inflation, but you it might be you know 12 months 18 months from from book to ship.
Yeah. So you know and they've been really on the projects that that really has a lot of our engineered to order work and so what possible work up those costs when we put the quota.
On the quota and to our customer and into your force. Your point that concern that has from time of close to the time of award how much changes there and I think there's certainly some but I'm not overly concerned with that.
And typically we will get hard quotes and if anything our teams do a really nice job as we start to get more certainty toward winning that work and we're able to drive costs down rather than come up and so I'm not overly concerned with that and then just the other thing I'd add is part of closer to <unk> and <unk>.
Partnering with our supply chain, we've got really good pricing contracts now that are long term and so we've got some pretty good ability to project, what the costing and looks like we can incorporate that into our our cost plus modeling on the big projects and you know historically, we don't see a big deviation from what we do.
At the as bid to what we deliver on the third party buyouts.
While it could be a concern and I think it's more concerning for some others that have a much larger project business and.
And our longer cycle there.
I'm not overly concerned about that proposal.
That's really helpful. Thanks, I'll pass it along.
Your next question is from the line of Joe Boitano with Cowen. Please go ahead.
Hey, good afternoon, everyone.
Hey, Joseph.
And Scott I appreciate the stuff you said about the energy transition today, So I had two questions on that.
And one I guess, how do you balance internally, some finite pool of human and financial capital towards new applications like this.
And servicing.
Listing applications and your legacy base, which are still going to be massive and for like the foreseeable future.
Sure, what we say and our tagline is we're going to support our customers today and through the energy transition and so we really do think that we can do both.
Again, this is a and incredibly quickly evolving marketplace and what I'd say is our marketing technology and our R&D teams are really starting to put a lot more effort around.
You are aware our product fit and how do we do this and so the the theme within our marketing and technology today is diversified decarbonize and digitized and all of the efforts that we're doing really fit in one of those three buckets and so we're very very focused on that and then when you think about operations.
And installations right, we've got long term service contracts and called lifecycle agreements with a lot of these big installations and with these lifecycle agreements our metrics around productivity around uptime and around other things that benefit our customers, but also can benefit closer and so as we can.
Think about energy transition right one of the big things here is how do we help our customers have more.
<unk> energy efficiency and their operation and we believe we are uniquely positioned to do that because we've got the highest energy consumers and the pumps and then we've also got the ability to control flow with our control valves and our electric actuators and so we think that energy efficiency is a really nice add into our.
Michael agreements and so those are a lot of the discussions that we're having now is to really come and partner with some select customers to say hey, we'd like to help you with your energy efficiency goals, we're willing to put this in our lifecycle agreement contracts were willing to take a performance based approach to this and if we deliver savings we want.
A share in the upside and so we're working on that now around energy efficiency and it aligns exactly with what we're doing with our <unk> network and our lifecycle advantage and then we also believe that a point and time.
And also Paul in the carbon emissions as well right and so that would be kind of the next step is saying, okay look we're aligned on productivity. We're aligned on uptime. We're now aligned on energy efficiency can we also get aligned on carbon emissions reduction and if we do that as part of our long term contracts. We believe we can help our customers access.
<unk> their transition and then we think that benefits both serve and our shareholders as well.
Yes that makes that makes a lot of sense, and then kind of on a related basis and I'll preface. This by saying it does feel different this time, but you know how do you and when you think about new applications right like if I go back 10 years ago people were going crazy about rare earth and uranium and stuff like that and then no one cared for a long time so Mike.
And how do you kind of think through that and Mike what are we doing for the next 10, and where do we really want to dedicate capital.
Yes, no I too have lived through several of these hidden.
I think energy transitions real this time and.
I think when you look at just the political and the social pressure around the world.
I don't see this changing and so we're not exactly sure what path it takes and how big hydrogen as a player and how green that is versus how blue and so I think all of that will firm up over time, but I really believe that certainly the energy industry and the industrial folks are really focused on driving energy.
<unk> and bringing down their energy consumption and as a result also driving down their carbon emissions and so I think those two are absolutely going to progress I think the transition to green hydrogen and some of the other things will take time and we'll see how that plays out but I think there's meaningful.
Opportunity for closer regardless, because all of these things have flow control and flow control solution aspects to them and so we think this is a big opportunity for us we've been doing full control solutions for 200 years and many different industries and we think we can participate in that and participated in and.
And as you transition and a very meaningful way.
Thanks, guys.
Your next question is from the line of Turner Hendricks with Goldman Sachs. Please go ahead.
Hey, guys congrats on a solid quarter.
Okay, great. Thank you.
So on <unk> call last week. They noted inventories are pretty low and referred to a modest inventory build for the remainder of the year are you all seeing any restocking going on currently and how are you thinking about restocking going forward.
Sure. So MRC is a big customer of ours and I'll, just say I was very surprised that their inventory level felt in Q1, and so I'm pretty confident that we will not see that go down any further and.
And I would say, we're not seeing any aggressive inventory builds we're seeing some pretty steady order rates there, but when you look through our you know what is the role of a distributor right, it's providing inventory and services at a point of location and you know quite frankly, there is there much of a logistics company.
Thing else and if our lead times are the same as their lead times, then and their business model becomes irrelevant. So I actually think that they are at about as low as they can go I think they start to come up from this point forward, we haven't really seen that at this point, but.
But I really believe in Q2 and Q3, we started to see them and build stocks with that I'd just say the other thing and North America and predominantly in the Gulf Coast is the winter storm did deplete their inventory levels and so I think thats part of the build as they they are part of the reduction is that they've got a spike in demand because of the freeze and servicing some of their customer base.
But I really can't see them going lower than they are today and so I think this is actually a tailwind for us and as we transition into Q2, and <unk> and beyond and at some point they'll start.
Putting some pretty significant stocking orders on closer of and and other Oems.
Great. Thanks.
On geographic mix, I mean, I see Europe, and Asia were both up double digits, while North America, and it's still down.
Could you describe how youre thinking about just the geographic mix going forward and as things normalize and what the trajectory of different geographic regions could look like and sort of impacts that might affect that.
Sure So our MRO and aftermarket business will be largely on COVID-19 abatement and vaccines coming out and so as these parts of the world's returned and mobility and economic growth and then we will see our business start to come up and so I feel good about on the MRO and aftermarket side I feel good about North America I feel.
Good about Europe, I feel good about parts of Asia, and so I think we see good growth there.
What are their concerns would be India, and Latin America, and South America, where I don't think we're going to see that side of the business come back and the next couple of quarters and then on the project side, Youll, primarily Asia Pacific and the Middle East for the larger projects and those will be greenfield projects or even expansion through existing aspect or existing.
<unk>.
And then I think North America has got a pretty carefully.
<unk> list, that's going to start to take place here in the back half of the year and so I think the concern any concerns on the geography would really be around India and the situation. There and then I think South America is gonna be problematic for a few more quarters until they get through the worst of COVID-19.
Yes.
Great. Thank you I appreciate the color.
And once again, thank you and like to ask a question. Please press star one on your Touchtone phone.
Next question is from the line of three Borawski with Jefferies. Please go ahead.
Hi, Thanks for fitting me in and so and FCB OE bookings were $2 25, and three is the highest level since the fourth quarter of 2019 do you believe bookings to remain at this level and if so could sales actually be up year on.
And that's part of the business.
Yeah.
Sure. Yeah. So you know again I think our comments were largely around overall closer, but I think they apply to FCB as well and so we think we can carry these this level of bookings.
And out the year.
So a lot of that is with MRO based and so just replacement valves and we had good geographic mix, even within F. C D and so we feel pretty good about the outlook of SCD FCB bookings and to your point. If we can continue at this rate, we would really like to see revenue increase year over year and it certainly.
Within the realm of possibility.
And we're starting to get close to having good visibility to revenue growth.
Great and then just on my last question and response to Texas, you talked a little about that and the beginning of the call, but did you see a margin benefit from Jersey, and the parts business that could be nonrecurring there. Thanks.
And so in general I would I would say that.
Our aftermarket business and generate nice margins and we generally don't look at and so.
It was off it was timed and.
And as an opportunity to increase margins, we view it more as an opportunity to enhance our relationships with with our customers and show that we can and.
And deliver real value to them based on that based on our on location and and our intimacy and.
And with with their site, so I don't necessarily see a margin expansion from the event other than and a slight mix shift perhaps from from from OE to aftermarket and we would generally see but not necessarily in the pricing that we had for those services.
Okay.
Great. Thanks for taking my questions.
And I'm showing no further questions at this time, ladies and gentlemen.
This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
Yeah.
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