Q2 2021 Flowserve Corp Earnings Call
[music].
Good day, and thank you for standing by welcome to the flow through second quarter 2021conference 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 to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I like to hand, the conference over to your Speaker today, Mike Mullin director.
The Investor Relations. Please go ahead.
Thank you Christina and good morning, everyone. We appreciate you participating in our conference call today to discuss flow through second quarter 2021 financial results on the call with me this moving as Scott Rowe flow throughs, President and Chief Executive Officer, and Amy Schwartz Senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call for questions and as a reminder, this event is being webcast and an audio replay will be available.
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.
6.2021, and they involve risks and uncertainties many of which are beyond the company's control.
Courage, 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 that closer dot com in the Investor Relations section.
I'd like to call them.
I would now like to turn the call over to Scott Rowe closer as President and Chief Executive Officer for his prepared comments great. Thank you Mike Good morning, everyone and thank you for joining our second quarter earnings call.
We're pleased with the performance and solid results in the second quarter, including adjusted EPS of <unk> 37 said with.
This represents a 32% sequential improvement and reflects our continued transformation progress.
<unk> bookings of $953 million, which is nearly an 18% year over year improvement at.
At this level in Q2 was a momentum building quarter for closer as our bookings inflected upward and we now have clear line of sight to earnings growth.
A higher level of bookings and our improved operational performance have provided us the confidence to raise our outlook further for the full year.
Our revised adjusted EPS guidance is now $1.45 to $1.65 for 2021.
Since the start of the pandemic, we indicated that recovery in our end markets was expected to be directly correlated with the progress being made with COVID-19.
Each country and geography are at different stages in fighting the pandemic, but on a global basis, a clear pattern has emerged as.
As countries rollout vaccine Covid cases declined dramatically and then mobility and consumption begin to improve.
This in turn.
This in turn drives customer spending for nearly all of our end markets.
We are confident in our ability to continue to grow the poster of enterprise. It ultimately restore bookings to pre pandemic levels in the coming quarters. There are several factors that contribute to our confidence in the outlook.
First we expect to continue to grow our MRO and aftermarket bookings as countries emerge from Covid, we're seeing higher utilization rates at our customers' facilities.
Which necessitates increased parts replacement units and service activity.
Additionally, our distribution partners are just now beginning to replenish their inventory levels. After about 6 quarters of Destocking. We are now expecting these distributors to rebuild their inventory levels over the coming quarters.
Second we believe major project activity will emerge and begin to recover in the back half of 2021 and into 2022.
In the early part of last year, we had very good visibility to a significant amount of project activity that was expected to be awarded during that year. Most of those projects were put on hold as operators were both assessing the COVID-19 impact and reducing their capital spending budgets.
Today, we are working with many of those same customers to bring those projects forward as the economic environment has improved dramatically over the past several months.
And Additionally, our activity with EPC has increased significantly this year.
Finally, we see energy transition theme as a significant opportunity for closer to date actual spending in this area is still variable, but we expect it to grow substantially in the quarters and years ahead based on the commitments of our customers the commitment that our customers are making as well as from the potential for increased regulation.
And costs associated with emissions foodservice no stranger to this type of work and I'll talk further about this growing market later in the call.
Even as the outlook and trends look promising predicting the exact timing associated with these opportunities is still challenging the debt.
Delta Varian is causing concerns for closer of operations and for our customers.
We remain diligent and focused on our safety protocols and we are successfully limited pandemic impacts at most of our global facilities during the quarter.
The recent upturn in Covid cases in the Americas due to the Delta very it has the potential to impact our return to office.
However, we do not believe that the latest COVID-19 trends will negatively impact our business and growth outlook at this time.
Unfortunately, we did experienced significant disruption in our Indian operations during the quarter. As a reminder, we have 3 large manufacturing facilities and several smaller locations in India. The good news is that we have seen tremendous improvements over the past several weeks and we are currently operating at about 80%.
Associate participation in these facilities, which is up from 20% to 30% participation that we experienced for most of the second quarter.
Our Indian based suppliers were also challenged in the quarter, which presented modest headwinds for us, but our supply chain team has done a good job mitigating the impact and leveraging our global suppliers to minimize disruptions.
Let me now turn to our second quarter bookings.
We are pleased with the 17, 9% year over year increase which brought this quarter's total bookings to $953 million.
Both original equipment and aftermarket bookings grew in the 17% to 19% range.
Very pleased to have delivered almost $525 million of aftermarket awards this quarter returning to pre pandemic bookings levels for this part of our business.
Each of our core end markets delivered year over year growth with the biggest drivers being oil and gas and chemical which increased 39 and 19% respectively.
On a regional basis, we saw solid growth across the globe with the exception of the Asia Pacific market, which was negatively impacted by India's COVID-19 resurgence in a more difficult compare period.
Our bookings performance this quarter was driven almost exclusively by our aftermarket and MRO business, which represented a large volume of small awards. In fact, we only secured 1 award that exceeded $10 million, where FCB book to $12 million nuclear power order in North America.
To achieve this level of bookings without any large projects in the mix is an encouraging sign for future growth.
We expected larger project spending to lag aftermarket and MRO work and it has and.
And we are now confident in the return of project investment later this year and into early 2022 across our end markets.
Our project funnel continues to grow and is up nearly 25% compared to this time last year.
Driven by the feedback we obtained from customer discussions insights gained from EPC bidding and backlog and our interaction on the delayed projects, which we originally expected to be released in 2020.
We continue to anticipate bookings in this $950 million range in this year's third and fourth quarters, assuming continued progress with Covid.
At this level, we should see significant bookings growth in the next 2 quarters relative to the 2020 comparative periods.
Delivering these level of bookings or higher would position flow serve well to deliver a strong 2022 financial performance.
Our results. This quarter also helped that strong first half results for 2021, our adjusted decremental margins for the first 6 months.
Was just 13% with our improved market outlook, we remain focused on returning closer to growth, while driving margin expansion and increased returns I will now turn the call over to Amy to cover our financial results in greater detail.
Thanks, Scott and good morning, everyone.
Looking at flow share second quarter financial results in greater detail, our reported EPS of <unk> 35 increased significantly over the prior year period.
In addition, the quality of our earnings also improved with after tax adjusted items declining from $61 million in the prior year period to just $3 million this quarter.
Our adjusted EPS of <unk> 37 cents excluded just 2 cents of net items, including realignment expenses below the line FX charges and a gain on sale of business.
We were pleased with these results, particularly considering the impact of Covid related headwinds of about <unk> <unk>, primarily from our Indian facilities as Scott discussed.
Second quarter revenue of $898 million was down 2.9% or 70, 171% on a constant currency basis.
The decrease was primarily due to the 6.1% decline in original equipment sales driven by F. P D, 19% decrease, but partially offset by FTE, 12% increase.
As a reminder, SPD entered 2021 with an OE backlog down roughly 25% versus that started last year.
Aftermarket sales were relatively resilient up 3 tenths of a percent, but mixed in composition as F. C. DS, 11% increase was mostly offset by <unk>, 1% decline.
Turning to margins, our second quarter adjusted gross margin decreased 70 basis points to 31, 4%, primarily due to OE sales decline and related under absorption, including the previously mentioned Covid impact.
Partially offset by a 2% mix shift towards higher margin aftermarket sales.
Sequentially adjusted gross margin increased 100 basis points on a solid 53% incremental margin performance.
On a reported basis gross margin increased 180 basis points to 31%, primarily due to a $23 million decrease in realignment charges. As we took significant cost actions in last year's second quarter.
Second quarter, adjusted SG&A increased $13.9 million to $209 million versus prior year due largely to foreign exchange movements as well as a return of certain temporary cost benefits realized in 2020, such as the absence of travel that have begun to return.
Reported SG&A decreased $18.5 million versus prior year, where realignment charges declined $27 million versus prior year.
Second quarter adjusted operating margin of 8.5% increased 40 basis points sequentially, but declined 280 basis points year over year, primarily due to increased under absorption related to S. T D's OE revenue decline.
Stds adjusted operating margin increased 10 basis points year over year to 13, 3% driven.
Driven by revenue growth and Todd SG&A and tight SG&A cost control, which were partially offset by mix headwinds.
Second quarter reported operating margin increased 330 basis points year over year to 8%, including the $57 million reduction of adjusted items.
Our second quarter adjusted tax rate at 14% was driven by our income mix globally and favorable resolutions of certain foreign audits in the quarter.
The full year adjusted tax rate is expected to normalize in the low 20% range.
Turning to cash and liquidity.
Our second quarter cash balance of $630 million decreased $29 million sequentially as solid free cash flow of $14 million was more than offset by a return of $38 million to shareholders in dividends and share repurchases.
Flow serves quarter end liquidity position remains strong at nearly $1.4 billion.
Including $739 million of capacity available under our Undrawn senior credit facility.
Turning to working capital it was a $34 million use of cash in the second quarter, primarily due to accrued liabilities and timing of certain payments partially.
Offset by modest improvement in accounts receivable and inventory, including our contract assets and liabilities.
The performance was much improved from last year's second quarter, when the COVID-19 related impacts and seasonal inventory build resulted in a use of cash $36 million higher than this quarters.
Taking a look at primary working capital as a percentage of sales we saw a modest 20 basis point sequential decrease to 29, 4% driven primarily by accounts payable as well as a 4 day improvement in DSO versus the first quarter.
Despite our backlog increase of $66 million, some progress delays due to COVID-19 and the proactive purchasing of certain inventory items to mitigate potential supply chain issues. We were pleased that our inventory, including contract assets and liabilities decreased a modest $4 million sequentially.
Working capital, who remains a top priority for us and we're confident that the foundation has been laid for further improvement in the second half of the year as demand related sales volume volume increase resulted in further reduction of inventory levels.
We remain committed to delivering free cash flow conversion in excess of 100% of net income for the second consecutive year.
Turning now to our outlook for the remainder of 2021.
Based on the combination of our strong first half bookings driven mostly by shorter cycle aftermarket and MRO activity and visibility into improving end markets closer with pleased to increase our adjusted EPS guidance range for the full year to $1.45 to $1.65.
In terms of cadence, we expect volumes to increase sequentially in the third quarter and to deliver our typical fourth quarter seasonality.
Our 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.
Beyond adjusted EPS, we now expect less of a revenue decline versus 2020.
Our guidance is now for 2021 revenues to be 2% to 4% down compared to last year versus the prior guidance of down 3% to 5%.
In terms of other guidance metrics, our net interest expense remains unchanged at $55 million to $60 million and we modestly lowered our adjusted tax rate guidance to 21% to 23%.
From a bookings standpoint, we now expect full year 2021 bookings to increase in excess of 10% year over year versus our previous outlook of mid single digit growth.
Additionally, we believe a majority of this increase will come from our aftermarket and shorter cycle MRO original equipment product, where the associated revenue may be recognized in 2021.
Our expected major cash usages in 2021 remain in line with prior guidance, including dividends and share repurchases of roughly $120 million capital expenditures in the $70 million to $80 million range and funding are modest remaining real realignment programs.
In conclusion with our solid first half operating performance and improved market outlook, we look forward to continuing the momentum through the second half of 2021 and expect to be well positioned to drive margin expansion and earnings growth in 2022.
Let me now return the call to Scott.
Thanks, David Let me close with an update on our energy transition strategy and our outlook for the remainder of the year.
As I mentioned earlier <unk> is well positioned for energy transition and.
In fact energy transition de carbonization activities have been a part of our offering for the last few decades, where flow serve has a demonstrated foundation and product portfolio to capitalize on this growing market.
We estimate that even before the recent increased awareness driven by the global pandemic flow service delivering $100 million to $150 million annually of equipment and services into energy transition related work, including areas like energy efficiency enhancements upgrades retrofits.
Carbon emissions reductions solar power facilities bio friendly processes in lithium and hydrogen work.
Equally important we have been a valued partner to the customers and the industries that have among the highest opportunities available from energy transition and we are absolutely committed to supporting them today and through their energy transition journey.
With increased government regulation and potential costs on greenhouse gas emissions the financial community's increased focus on ESG metrics and individual companies public environmental commitments. It is clear to us that energy transition represents a substantial growth opportunity for closer.
The international renewable energy agency estimates that nearly $62 million will be invested over the next decade with almost half of that about focused on energy efficiency.
Efficiency is essentially a continuation of existing process industries, but conducting that business in a more environmentally friendly and efficient manner.
Year to date, we have booked nearly $100 million of energy transition related business.
We've held numerous discussions with our customers over the last year, which have confirmed our approach validated our offering in these discussions to support our growth ambitions.
Let me now highlight some of our recent success stories.
We are supporting a large customer in the United States to converted former petroleum refinery to a biodiesel facility to make the transition a number of posts or pumps required upgrades to support the new application conditions.
And improve the operator's production and energy efficiency.
Our work on the project will save the plant over $800000 in electricity annually, which is equivalent to over 9000 tons of Cotwo.
Leveraging closers expertise and book control solutions pumps and valves, we successfully support our customers shift to renewable fuel and their decarbonization efforts.
Another example comes from China earlier this year for lucid received a substantial order for over 150, <unk> drive vacuum pumps for their production of poly beautifying, succinate or PBS, which is a biodegradable plastic debt naturally decomposes into water income.
<unk> side.
Where China's recent ban on several types of Nondegradable single use plastics, PBS and other biodegradable plastics will be preferred alternative materials due to their similar plastic attributes without the harmful impact to our environment.
As I mentioned earlier, we estimated that roughly 30 trillion dollars of energy transition related investment over the next 10 years will be focused on energy efficiency.
Our Red Raven Iot offering launched earlier this year instruments pumps valves and seals systems 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 emissions.
We continued to incorporate our red Raven functionality across additional valves and pumps in the quarter, increasing the coverage of our portfolio, where we can provide advanced analytics and predictive capabilities.
Customer interest levels remain high and we continue to average roughly 1 order every week.
We believe red raise it aligns well with our customers objectives and expect to continue to grow this offering to a meaningful level in the future.
A recent example of our value of our Iot solution comes from our longtime closer customer who recently upgraded their monitoring solution to read Raven.
Shortly after the upgrade we detected that a critical pump motor was overheating, we detected the temperature spike early alerted the refinery and deployed resources to support their operations.
According to the operator's estimates had the pump failed they would've had to shut down the facility for over 3 weeks as they removed the damage pump and installed commissioned and replacement.
This downtime would've cost per refinery upwards of $20 million.
Red Raven is clearly adding value to flow serve and to our customers.
Let me now shift our focus to the remainder of the year.
During the quarter I was excited to resume a more normal travel schedule and visited a number of our U S and European facilities and many of our customers in these regions.
These business reviews I came away highly encouraged by the operational progress we continue to make hit our transformation journey.
The visits validated the improvement we're making in a number of key performance metrics and I'm confident we're on the right path to fully embed the transformation work and activities into our daily processes.
The closer of 2 point, our operating model is being driven throughout the enterprise. It would continue to expect the transformation to be fully embedded by the end of the year.
With our operations and functions now taking ownership, we expect continuous improvement to remain post 2021.
Our improved model is expected to deliver a more consistent margin profile and ongoing productivity improvements, which would position <unk> well to leverage and capture the value of the improved market opportunities.
The visits also confirm that we are strongly positioned to shift our focus to growth optimization and strategic initiatives, including inorganic opportunities.
The success of our transformation in a consistent operating approach provides us confidence in our ability to integrate acquired businesses should we see the right assets and economics.
Our operational and functional organizations have made significant progress throughout this journey and.
And we are now prepared to do more.
In closing, we began our closer to Bordeaux transformation journey in 2008.
And even as the pandemic required midcourse adjustments, we are approaching the full institutionalization of the playbooks and processes of our ongoing operating model.
We're increasingly well positioned to support our customers capitalize on the improved market environment and create long term value for our shareholders and other stakeholders.
Operator. This concludes our prepared remarks, and we would now like to open the call to questions.
As a reminder to ask a question you'll need to press star 1 on your telephone to withdraw your question press the pound key.
And your first question comes from the line of John Walsh with Credit Suisse.
Hi, good morning.
Hey, Jonathan.
Okay.
Obviously, you sound very confident in the forward trajectory here, taking up the order expectations.
It appears by our math that implies backlog trough last quarter.
So is it fair to say you will continue to build backlog as we go through the year and potentially exit.
$2 billion.
Plus Zip code.
Yes, certainly I mean, we've had 2 quarters now with book to Bill over 1 and we expect to continue that we might have a little bit of a different dynamic in the fourth quarter as our revenues typically come up but we expect to have a higher backlog at the end of the year certainly higher than what we ended last year at and as you pointed out rate. It grew this year or this quarter.
And we expect that to continue next quarter as well.
Okay, Great and then.
Maybe just on some of the items you called out as it relates to the margin bridge.
I know, we all call it corporate and unallocated and it's not true corporate because it's kind of what spills out that you don't allocate to the businesses but.
Could you help us with a finer work on some of the items that impacted this quarter I think you called out temporary costs I'm not sure if I heard FX.
Just kind of a little more color around those items. Thank you sure John you're absolutely right that as we think about as we think about that corporate allocation, it's really a component of SG&A in totality and the piece that's not been allocated out.
Out to out to our platform.
As we look at that as we look at the bridge, particularly year over year FX is certainly a factor and it's actually the largest factor in the mix between call it $6.7 million of.
Impact.
In the second quarter and then the second piece as you indicated is really from some austerity measures that were put in place either by necessity or by design and in in the second quarter of last year. So.
Travel was obviously Paul pit, we've started to see some of that activity come back and particularly in the second quarter of this year.
Some of our discretionary incentive programs did what they're designed to do which was to pay out significantly below target.
Based on business results and in in 'twenty in 2020, and that is coming back to more more Mike targeted levels and.
In the appropriate relation to our business results as we move forward. So we're starting to see the return of some of those normal normal business activities and I would point out that as you look at where we're at from a margin perspective right now.
Long cycle nature of our business means that although we started to see improvement in bookings, we're really at a trough.
A margin perspective, and so as as we make our way sequentially through the year and start to see the benefit of that was higher sales volume and we'll start to see improvement in the in those margin levels.
Yeah, just to add there John obviously, we have different parts of the business in different parts of the cycle right and so the pumps as Scott that lower longer cycle business.
That's the part that we've got to get that through the trough of the downturn and moving up we're seeing the recovery in our <unk> business, our aftermarket business in the valve business, which is shorter cycle and so that's what you would expect but that longer cycle has taken a little bit longer.
Move through the pricing pressures that we saw at the end of the year and the beginning of this year and then net absorption piece as well.
Great. Thank you I'll pass the baton.
Your next question comes from the line of Deane Dray with RBC capital markets.
Good morning, everyone.
Good morning Lee.
If we compare your conference call your prepared remarks to a number of the other just about all of the other industrial companies you stand out as not complaining.
Loudly about price cost, which is admirable because you also you just don't see a big margin hit and then you have to explain the margin shortfall. So.
Historically, you've always been good about getting price. So could you talk a bit about the dynamics here and price costs from both sides of the equation. Scott you did mention that there was some working capital.
Bill that maybe that was Amy working capital build in preparation you know not a formal hedge but some pre buy but it didn't skew your inventory numbers. So just take us through price cost where does it stand today first half what are your assumptions per second half. Thanks sure. Yeah. We certainly didn't complained about it but I will say is it is a major impact and it has impact.
Our business and so as you know and others that have listen to industrial calls. This is an incredibly dynamic landscape and certainly Q2.
Was that a peak of the dynamics and so what we saw in Q2 was continued inflation on the cost side and we saw that really across the globe, but for us the highest inflation has been on motors and electronics, and then logistics and so thats the area that we're really working to.
To mitigate those inflationary metrics.
I'd say our supply chain team is doing a really really nice job and doing the best we can to accommodate for those price increases with our suppliers, but net net it was a headwind for us in Q2, I would say it was not a substantial headwind, but it certainly was that we werent on the favorable side of profit.
<unk> costs in Q2, when it comes to pricing we have.
Did announce at the beginning of the Q of Q3, our price increase that was pretty holistic across most if not all of our product product in the portfolio that we really won't be seeing the benefit that until Q4 and early 2022, but that will be the second.
Nice increase that we've done this year and then from a disruption standpoint, the biggest area of disrupt 1 regionally was India right. So Andrea was really devastated in the second quarter a lot of our suppliers went offline we were able to mitigate that with backup suppliers in Europe and in China and then the <unk>.
Other disruption impact has been in logistics and electronics and so on the logistics side, we're seeing significant price increase but we're also seeing significant delays and the ability to get logistics providers. So we are seeing some normalization of that here recently, but I think that will still be a headwind in Q2 in Q3.
And then on the electronics side, we are seeing substantial delays and just lack of capacity and I think this is an area where we have purchased ahead, it's not a major dollar item for us we've built inventory there and we don't expect significant delays or disruption with our red Raven portfolio, our control valves or.
Our electric actuators, so we feel like we've been able to mitigate the disruption side reasonably well and while the cost side. It has been a challenge I'd say, we're at a slight negative on the cost price, but not something material.
Just to clarify what's included in that.
This cost do you include.
The logistics freight and then what about labor.
Yeah, I put logistics in there we wouldn't consider labor when we talked price cost alright, because every company has got a different twist yeah.
Really good point.
I understand and I would say on the labor side labor side, we're feeling reasonably good there's a lot of talk and you know certainly today with the labor.
The jobs number out there, but right now we've done a lot of work on our culture. We've got a lot of work on making sure that we're paying at the right levels and.
Our turnover, we haven't seen a major increase there so theres areas of concerns, but overall, we feel pretty good with the levels of our workforce, our ability to attract talent and it hasn't been a disruption for us thus far alright, terrific, especially like hearing that last piece on the labor side.
And then second question is the the idea that they are.
The larger project funnel is beginning to come together and we heard this a very clearly from Emerson as well and I know you track. This so just maybe share with us a bit of a precision that you have it's more than just customer discussions you mentioned the EPC bidding so just.
What is what are all the indicators that you pulled together.
Maybe formalizes this as a leading indicator for you.
Sure So gosh.
Cash at the beginning of I'm trying to think of the year and its all running together now for me Dean, but at the beginning of the transformation, we launched a CRM project. It was 1 of our first enterprise wide it systems and as you know CRM as customer resource management and essentially now we're putting all of our salesmen around the world are putting their forecast.
Into the system. So we have good visibility, we separate it by end market and geography, and customers and Thats, a robust tool and it's part of our DNA and our internal process today and so now we've got good metrics that we can compare year over year quarter over quarter as we look at our project funnel and we look at our opportunity.
<unk> going forward and so what we're seeing right now is at 25% increase in our forward funnel from what we saw last year at this time and what we've seen is every quarter that sequentially that number continues to build and move up and then if you complement that with our customer discussions.
I personally visited with many of our top customers in the second quarter, everybody has got a much more positive outlook in terms of their project spending releasing projects into <unk> and getting financing funded and then just as they think through the what's happening globally.
Getting more and more confidence on the ability to release those projects I think the question still is timing.
And you know do we see an uptick here at the end of the year or is it in 2022 I'm not we're not prepared to make that call, but I do think you start to see more and more projects start to trickle in this year with a pretty significant increase here in 2022.
That's really helpful. Thank you.
And your next question comes from the line of Andy Kaplowitz with Citigroup.
Good morning, guys.
Hey, Andy.
Scott I just wanted to follow up on that line of questioning in the sense that you guide for as you know basically says relatively flattish in the second half of the year versus what you just did in Q2.
You do say you say that you expect more project activity, but are you just kind of not.
Putting it in the guide in more or less when you think about $950 million or so of quarters each quarter and then you know the aftermarket side, obviously very very strong.
Is there a 1 time sort of deferral component to it or do you think you can sort of rise from there.
So alright, and your hopes youre getting granular odd-man hold me accountable for that so I like that so $950 million is kind of the run rate and that obviously this quarter included significant aftermarket and MRO. We expect that to continue in Q3 and Q4 and then we do think Theres a modest project build in the back half of the year.
But if that happens in Q4, theres upside to $9.50 number so projects come back we should be above it if they're kind of at this level or slightly higher than were essentially flat running at 950 into Q3 and Q4, and then again I'd say, we're not exactly sure does it happen in Q4 or does it happen in 2022.
Not exactly sure, but we know that its coming and so picking that precise time of when these projects occur is very difficult.
But we feel confident that the projects are moving forward.
Very helpful. Scott and then for a follow up maybe an assessment you talk a little bit about flow through of 2 pointed out in the prepared remarks, but you know how it's performing so far as we start hopefully this up cycle.
I know you said in the analyst day, a few years ago, you want to record organic growth on the order of 2% above industry growth, it's hard to sort of measure that but as we're starting to come out you know when you look at sort of some of your longer term programs such as strike zone or commercial intensity how are they sharing and you know how did that contribute to for instance that aftermarket bookings number.
Sure No I think those programs have worked really well and so commercial intensity is really focused on aftermarket and MRO and to book a 500 plus number this quarter is fantastic and so we're now at pre pandemic levels for our aftermarket and MRO business I don't think we would be there without that commercial intensity.
Program, and so I think the growth focused our strike zone and commercial intensity and some of the other things that we've done on our product side are absolutely helping US return this business to growth in fact, I feel really good that we've made that progress it's institutionalized in that you're deep into our organization.
And that continues to drive bookings as we go forward.
And then the other piece to that is the distribution channel hasn't come back as we you really thought that that would happen at the beginning of this year, we haven't seen that but in our discussions with distributors and some of the day.
Comments that are made publicly from those that do report public financials.
Fully expect those distribution bookings to come back in the second half of the year and that only helps our general industry category, but it helps that MRO work as well.
I appreciate it Scott.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Good morning Nathan.
I'd like to just have that discussion on the incremental margins a decremental margin I think it's probably instructive. If we split those up saying is F pay day is likely to have.
Revenue declines in our state as likely to have revenue increases in 2021.
The S. P D decremental in the second quarter was 40%, which I think in order to get to the full year decremental numbers, you're likely to need to say that improve.
We think makes us 1 of the raises debt that should improve going forward, but if you could just talk about what the expectations off of Decrementals correct pay day in the second half and why they should improve.
Sure and Nathan I think Youre looking at it the way that we are which is taking taking 2020.
Net versus 2021 at the full year versus the first this quarter by quarter. So some of the cost actions that we took in the second quarter of last year resulted in a significantly lower and lower cost structure, while we were still benefiting from a from a relatively healthy backlog.
So as we look at the second half of the year, you're absolutely correct that sequentially, we are anticipating really strong.
<unk> margins from the first half of the year to date to the second half of the year and that is that is benefiting from the mix that we're seeing in the bookings that we recorded this year, but what is the headwind there is that those SPD original equipment and sales volume is really not.
Coming back into the last quarter and per year and that means that those facilities, where it's really hard to get to get cost out we are experiencing under absorption at salaries.
Those pump facilities and that is impacting us so as we make our way sequentially through 2021, we think we're going to see better margins in the third quarter than we saw in the second quarter, but we're really going to see a strong uptick in consolidated margins in the fourth quarter as we get those volume back to more hits.
Store up a level and from.
From an F. P D perspective, and we're benefiting from that mix shift that we're seeing in our bookings right now.
Thank you for that 1 and then the incremental margin in X day day in the quarter was a bit lower than I would've expected at the 10% maybe.
Maybe that has something to do again with the with the cost actions temporary cost actions taken in 2020, but just if you can talk about what drives the improvement in incremental margin in FSA day in the back half of the year.
Yeah, So I think even within within the FCB space there.
There still is there still a margin or a mix and mix benefits that we're going to continue to get from <unk>.
From that increased MRO book.
Bookings that we saw in the first half of the year. So although the mix looks looks good we're going to continue to see that the sort of winded our back in the in the backyard of wind in our sales in the back half of the year.
Great. Thanks for taking my questions.
Your next question comes from the line of Joe Giordano with Cowen.
Hey, good afternoon guys.
Hey, Joe.
Hey, so.
Yeah Directionally you're.
EPS targets going up and Youre raising your guidance on on orders.
I think that does the messaging there is pretty clear, but Scott internally.
Don't give quarterly guidance, so like how do you how do you kind of rate <unk> relative to what you thought.
3 months ago, and has your kind of confidence on delivering the full year, how does that compare versus 3 months ago.
Yes, Q2 is essentially where we had expected and so there's always a little bit of puts and takes here and there but overall it largely came in how we were anticipating and then I'd say as we think about the back half of the year. We provided the EPS guidance range, there and I'd just encourage you to think about that normal seasonality from Q3 to Q.
But we feel very good debt yeah, we can achieve the guidance range that we put out there and I'd say, we're encouraged with the market activity, we're encouraged with the aftermarket bookings.
And then we fully expect our ability to execute has continued to improve with the full serve to point out program.
And then my follow up is on your you made a comment on Red Raven.
You stopped like a $20 million of shutdown.
Customer.
How do you leverage an outcome like that whether it's until like being able to price for value like how do you make sure. That's a big that's a lot of savings for our customers. So like how are you adequately compensated for providing that sort of cover for them.
Yeah, that's a great question, Joe and it's 1 that we've talked about a lot here and flow serve and so we've done a lot of work on the different contracting models with Red Raven and so we moved originally from from selling some of our prototypes and installing that to now subscription and recurring revenue models and ultimately what we want to get.
2 as some sort of performance metrics that we would we would put on the back of instrumented and enabling Iot across the customer's infrastructure and so I can just say that we are we are highly focused and extracting as much value as we can from this solution.
It has been a little bit challenging as we've kind of pioneered and push this thing out, but I'd say, we're evolving more and more to performance based contracts, which I think is absolutely the direction that we need to go and then the other thing I'll just I wanted to add is we're continuing to see a great uptick with our customers and their adopt.
<unk> of our technology.
So I said this in the prepared remarks, but we continue that to book about 1 new contract or 1 new installation every week and we've now instrumented over 5000 assets with Red Raven and so 1 of the things that we'll continue to track is how many assets are out there and how many we continue to move forward under our system.
Monitoring and then the more data that we get from this the better solution that we can provide our customers and so the example of the pump nearly failing with the overheating that I provided in the prepared remarks that now becomes the case study, it's part of how we sell it and we've got lots of examples like that that we're using and so.
As we continue to show the value we continue to talk about the different case studies of use I expect us to continue to deploy and grow this offering significantly in the years to come.
Perfect. Thanks, guys.
Your next question comes from the line of Josh Christmas Day with Morgan Stanley.
Hi, good morning, guys.
Good morning, Josh Josh.
Just I guess follow up on Andy's question from earlier about kind of the order cadence maybe relative to some of the stuff youre seeing out there.
Scott I guess hear you loud and clear on the on the big projects I guess, some more idea on the distributor restocking.
What do you think that.
That order of magnitude in terms of what that could look like just based on.
Your guys impression of sell in versus sell out or where inventories versus normal.
Can go and is that contemplated in the $9.50 run rate you guys had talked about.
Sure we've embedded the distributor uptick is embedded in our numbers, it's kind of similar to what Mike said and projects. So if we see a significant.
Distribution restocking program, then we've got some upside to our MRO and aftermarket numbers.
I think we've had a lot of good discussions with our distributors, we looked at their public financials as well and essentially what you saw was very.
Very strong revenue and bookings growth for them in the second quarter with inventories flat to slightly down from where they were and the public companies that are out there have all talked about they have to build inventory in the back half of the year.
I don't expect them to go crazy and build significant inventory, but I do think we see a uptick for us primarily at our valve business and some of the pumps product as well. So I think it's a modest uplift for us I don't think its something thats going to be significant in hundreds of millions of dollars, but it is.
Certainly a step in the right direction and there are important channel to market for US we've got a large percentage of our revenue that does go through distribution. So any increase they have on their inventory levels as positive to folks or.
Got it and then just stepping over to the ESG side energy transition I appreciate the color there.
Yeah, I guess if.
We just take a step back do you view that as sort of being you know kind of decoupled from your customers kind of a typical capital cycles or maybe even their own cash flows like it's more of the spending in voluntary where do you see it's still having some measure of kind of.
No correlation with the overall kind of economic health.
I think what we're seeing specifically in the energy efficiency side, right, where we're coming in and we're talking about the efficiency of their pumps and their entire flow loop those discussions and when we get that work and we've got a couple of those that are moving forward right now it appears that that's outside of <unk>.
Their normal operational spending and so it's something that they're thinking about they want to do they're making external commitments on cotwo reduction and what we're finding is we're coming in consulting and having incredible rich and collaborative dialogue across our 2 organizations and when we identify.
<unk> the size of the price like the example, we showed it in the prepared remarks, when we see those savings numbers of nearly a $1 billion a year on costs combined with our cotwo carbon intensity reduction than that it's really hard not to fund that and so I think it's outside of their norm.
<unk> operating plan and what we've got to do though is sell at the right level, but again, it's a very consultative sales. So we're involved heavily with looking at their data and working with their engineers, but then we can redefine the size of that price, it's really hard to ignore that and so we're in several discussions that are ongoing and I expect this.
Part of our business to grow pretty substantially as we go forward and then 1 additional comment I would make here is unlike our.
Other large spending cycle.
The spending won't necessarily just be tied to GDP growth because to the expense hit their regulations that come in to come into play. This spend may become part of what it cost to do business versus something that you can do as revenues increase so I think that that is a is a distinction versus spending.
Cycles, we've seen in the past.
Excellent I appreciate the detail there and best of luck in the second half.
Alright, thank you.
Your next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everybody.
Hi, Joe.
Hey, so I appreciate the color earlier on the challenges that you faced on in India. This past quarter I was actually curious about China, I remember about a year ago.
You guys had some supply chain disruption and just given the.
The Delta.
Delta variant.
It is proving to be more challenging today and I'm just curious like how are things in China, right now, particularly from a supply chain perspective.
Sure, we're watching China very closely I would say today no major issues, but it's something that's on our radar screen and I think the good news. There is we do have similar to what we did in India. We do have backup supply chain outside of that region, and so I don't see that having a material impact to our ability to exit.
Acute and operate in the back half of the year.
Okay. That's good to hear Scott I guess, maybe just my follow on question I know you guys.
Feel better about you know potential order in Blackburn and talking about the funnel.
How confident you feel about it I guess.
Can you kind of look at your your OE orders, so far first half of the year, it's still it's still pretty low relative to history.
And I know under absorption has been an issue for margin, but I'm. Just curious Mike is there anything you can continue to do to maybe right size the fixed cost structure of the business.
That's that the under absorption is less of an issue if in fact, it takes longer or.
Original equipment orders to come back.
Sure no. It is it is an incredibly important part of what we're doing and I'd say, there's really 2 main drivers here, but 1 is the absorption and so we've got an ongoing program to take roofline out of our total infrastructure as it relates to flow serve and so we've now completed 2 of those active.
<unk> year to date 2021, and we will continue to do that so right now the OE volumes are we think at the absolute low it only comes up from here and so there was super important to do those exercises in 2019, 'twenty and year to date, but what I would say is as we continue or the other important point here is.
As we continue our lean activities and as we continue to get more and more productive under the 2.0 transformation. We feel we still have opportunities to consolidate and reduce roofline and so I really believe that we can continue to do kind of 2 to 3 facilities every year and continue to take out that fixed cost.
Within the enterprise.
Okay, great. Thank you.
And your last question comes from the line of Andrew <unk> with Bank of America.
Hi, Yes. Good morning, Thank you for fitting me in.
Yeah, Hey, Andrew.
Hey, how are you just a question on free cash flow.
Seasonal pattern I think has changed materially from what it used to be right consistently cash generative.
Early in the year and I was just wondering industry.
As volumes improve is this something that will carry over.
You know us.
Industry normalizes or will you need sort of to commit working capital or debt.
To return to the past I'm just maybe you can also talk about what kind of long term changes you've made to your processes to enable better cash flow conversion from thank you.
Sure.
We're pretty pleased with the progress that we've made related to working capital in in 2021.
Particularly because we think that we're doing it against a fairly challenging backdrop. So as we as we look at when it's difficult to make working capital step changes it's during times of.
In increase increased bookings.
<unk> supply chain and time to supply chain disruptions and so we sort of got all of those things going on right now and we've still been able to see sequential improvements and I think that that's really a result.
The processes that have been put in place as part of that as part of the transformation.
So on that journey, we really started.
And with with what was happening in terms of cash collections, and and driving down DSO, which we debt again this quarter.
Sequentially and year over year.
And then we really focused on.
Putting processes in place to drive improvement.
Inventory levels and so we see that with planning that's taking place between sales and our operations on on a weekly cadence.
That that allow us allows for us to really focus on the inventory items that that are hard to get and you need.
So even though we're taking some proactive steps to make sure that we have the items in stock that we need to meet demand. We're still we're still able to drive that number down as we make our way through 2021, I think that we're going to see that we're going to get some help from the denominator.
So as our sales volume increases in the third and fourth quarter I think we're going to start to see that was that was pwc and as a percentage of sales come down closer to where we were at in 2019 and ultimately make some movement into what is Scott nice goal of getting to the mid mid twenty's from a from a <unk>.
Mary working capital standpoint, so to come back to kind of the original tenant of your question. We don't think that debt at the movement that we've seen in the first half of this year needs to be an anomaly. It's the second year in a row that we've driven on free cash flow in.
In the first half of the year and in fact, I think as we look forward, we're going to continue to look for less seasonality rather than more in our free cash flow conversion.
That's great and just a follow up question.
As we're sort of moving once again.
Hum.
How is the quality of the bookings right because you know at the bottom of the cycle. There is more competition for what's out there and people need to sort of cover their fixed costs.
As the cycle recovers, we'll look at your bookings clearly still not a lot of large projects, which tend to be more competitive right. So the mixed probably as good book on the other hand, I think it was a big shock to the system. So how shall we think about quality of backlog, whether pricing or terms and how long do think.
It takes 4 sort of things to normalize.
It was sort of business getting back to normal in terms of the bidding process. Thank you.
So obviously in the depths of the downturn in late 2020, there was a lot of just uncertainty and just a lot of our competitors taking price down significantly and so in order to compete and continue to win work. We did have to follow suit and I would say that that was the primary.
Or the biggest impact for poster was in the pub OE business.
The valves in the field that are aftermarket we've been able to keep our pricing relatively stable and I would say, where we are today versus a year ago as we're in a much better position there.
There are still a challenge on the pump OE pricing.
I do think that gets better as projects start to move forward and so as we start to see an uptick in those that level of bookings and activity I do think that we start to move in a positive place on the pricing side and so while we're not where we want to be it's substantially better than a year ago, and I think it'll be a lot better.
6 months from now than it is even today.
Oh, thanks, so much cash from bookings show how hard the team has more thanks a lot.
So we appreciate that thank you.
There are no further questions at this time. This concludes today's conference call. Thank you for participating and you may now disconnect.
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