Welcome to the First Quarter 2020 Earnings Call. My name is Sylvia, and I'll be your operator for today's call. [Operator Instructions]. I will now turn the call over to Jay Roueche, Vice President, Treasurer and Investor Relations. Sir, you may begin.

Thank you, Sylvia, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's first quarter 2020 financial results. Joining me this morning are Scott Rowe, Flowserve's President and Chief Executive Officer; and Amy Schwetz, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open up the call for questions. And as a reminder, this event is being webcast, and an audio replay will be available. Please also note that our earnings materials do, and this call will, include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations and other information available to management as of May 8, 2020, 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 available on our website at flowserve.com in the Investor Relations section. I would now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared comments.

Thank you, Jay, and good morning, everyone. Thank you for joining today's call. First, I hope that everyone is healthy and taking the necessary precautions to stay safe and well. The world has dramatically changed in the 2.5 months since our last call. In February, we talked about the virus impacting our China and Asian operations. Since then, the coronavirus has spread through the globe, altering the way hundreds of millions of people around the world work, interact with each other and live their day-to-day lives. This has dampened the global economy, and with very few people now driving or flying, the demand for oil, natural gas and related transportation fuels has plummeted to historic lows. The magnitude of this unprecedented crisis creates a challenging backdrop for Flowserve. However, we entered this period with a strong backlog, over $1 billion of liquidity, no debt maturities until 2022, a trusted brand, great products and services and most of all, outstanding people. Over our 230-year history, Flowserve has managed through multiple market downturns. While every crisis brings renewed challenges, I have absolute confidence that by leveraging the collective experience of our team and the progress we have made in the Flowserve 2.0 transformation program, we will come out of this situation a better and stronger company. We're using a four phased approach to position Flowserve for success throughout the COVID-19 crisis and the market downturn. COVID-19 crisis management includes focusing on the safety of our people, delivering customer support and the continuity of our business, which is about restoring our capabilities, planning and executing for the downturn and finally, positioning Flowserve to differentiate in the future. Flowserve has remained open for business throughout most of this pandemic as the vast majority of our sites and facilities are considered essential to support the…

Thanks, Scott, and good morning, everyone. As Scott mentioned, I joined the company about 3 months ago, and I'm delighted to be here at Flowserve. With the spread of COVID-19, my onboarding process has been far from what I had planned or expected. Under normal circumstances, I would have been traveling to our facilities to meet with our teams and get a firsthand view of our operations and the opportunities in front of us. Luckily, thanks to video conferences and phone calls, I have been able to do much of this remotely. However, as Scott laid out, all of us on the leadership team have been primarily focused on ensuring the safety of our employees and working diligently to guide the company through this challenging time. So while this has certainly been a case of diving into the deep end, in many ways, working through this crisis over the last few months has accelerated my climb of the learning curve. One of the attributes that attracted me to Flowserve and that is particularly valuable in the current macro environment is our strong liquidity position. Flowserve ended the first quarter with $622 million in cash and cash equivalents. Additionally, we have $721 million of available capacity under our revolving credit facility, which remains undrawn. Together, this makes for a strong position at quarter end with over $1.3 billion of available liquidity. Additionally, in our seasonally weak first quarter, we delivered free cash flow of $30 million, a 7.6% year-over-year increase despite lower earnings. I understand that this is only the second time over the past decade that Flowserve has generated positive free cash flow in the first quarter, which is an indication our focus on working capital is paying dividends, and I congratulate our team. Flowserve's current leverage primarily consists of…

Great. Thank you, Amy. Let me wrap up my prepared remarks, outline the actions we are taking to respond to the pandemic and the downturn in our markets. I'll start with the market outlook. I've spent a lot of time over the past month connecting with customers, including virtual meetings with each of our top 10 customers for direct feedback on how they are managing through the crisis. I want to start by sharing a few observations from these discussions. In general, it is expected that projects that are past FID are expected to continue to progress forward but could be slowed or descoped, while projects in the FEED stage will likely be delayed and many will never proceed. We've already seen many of our large customers announce double-digit CapEx budget cuts in 2020 due to the supply and demand issues weighing on commodity prices. Additionally, most of our customers referenced a prolonged recovery and an extended period of reduced project investment. These customers were committed to keeping their existing facilities operational, and they do not expect significant cuts in reliability and uptime-related projects and spending. With reduced greenfield and brownfield spending, aftermarket and replacement of original equipment become an even greater priority for Flowserve. While this type of work is typically more resilient, given the severity of the demand decline and limited access to our customers' facilities, we expect that in the near term, there will be reduced spending due to disruption and delayed turnarounds. Most of these facilities will continue to operate, and while timing is uncertain, the focus on uptime and productivity will lead to renewed maintenance spending. With these market realities as a starting point, we have developed and are now executing our response plan, which includes capital preservation, cost actions and reprioritization of initiatives, strategies…

[Operator Instructions]. And our first question comes from Mike Halloran.

I hope everyone is doing well. So first, could you put some of the comments in historical context? When you think back historically, obviously, aftermarket tends to lead. Bookings take a fair amount of time to recover. So in the context of that, when you look back historically, how long has it typically been since you start seeing -- I don't even mean large-scale projects, just more normal project activity out there? And then also, what is the customer's ability to defer aftermarket more than a quarter or 2 like you saw, say, in '15 and '16 where the deferrals were longer. My suspicion is the deferrals won't be as significant this time around, but I'd love some thoughts on that as well.

Yes. So Mike, let me talk -- we'll talk about the '14, '15 kind of industrial recession as the guideline there. Let me talk OE first, and then I'll come to aftermarket. And I'd just say, the fundamental difference really is that now we've got a virus that doesn't allow people to interact and perform work. But let's talk OE first. And so in '14 and '15, we saw kind of a 20% down on our overall bookings with a 25%, 30% OE reduction in '15 and into '16 and then started to climb out of that in '17 and '18. And what I'll say is what I saw coming in, in '17 is there's probably some things that we could have done a little bit earlier to get bookings going. And we had some issues operationally during the realignment program. And so I think -- I don't know if that's to go by. I think every crisis is a little bit different. What I would say is the energy -- or the downturn in energy on this one is significant. But at the same time, the world is reacting significantly faster than what we saw in '14 and '15, right? And what you can see is production already starting to come down in North America. You're seeing rig count come down. And so by taking this decisive action so quickly, you hope that, that duration could be shorter than what we saw in '14 and '15. And then on the aftermarket side, what we saw in '15 was about a 10% decline in our aftermarket business. And so what that showed you is customers were still willing to spend money on maintenance, on reliability, on uptime. And I think that's a decent example right now. What I would say,…

That's super helpful. And then appreciate the good color you gave on how you're reprioritizing, how you're putting your capital to work within the context of the 2.0 transformation. Could you also give a little color on what that means for any of the R&D, the innovation side of this? Obviously, you're still pushing forward with the commercial initiatives, so I'm guessing they're tied. But any thoughts on how you're thinking about that relative to the cash preservation liquidity that you're focused on as well?

Yes. Mike, as you know, and as every company is doing right now, it's a balance of what do you have to do in the near term and then making sure that you can differentiate and do good things in the future, and it's no different for Flowserve. And so I'd just say, right now, we're relooking everything. So we're absolutely relooking our technology and our R&D. There are some projects that still make a ton of sense, and we're going to accelerate and keep those moving. There are some things that we are working on that we're -- for the upstream market that we'll put on hold because it just doesn't make sense anymore to invest good money into that when we know that it's going to be a little bit longer until you get to commercialization. So I expect probably slightly reduced spending there, but it's more a reprioritization. And as we start to pick up other type projects, I do expect to continue the investment in technology as we go forward. And I'm still a believer that Flowserve has got some of the best products out there. I believe that by continued investment in our products and our services that we can differentiate technically, and so there's really no change to philosophical approach there. We'll continue to put money into R&D. It's just that our reprioritization given everything that's happened here in the last 10 weeks.

Our next question comes from Andy Kaplowitz from Citigroup.

Scott, you mentioned the down, I think 15% to 25%, in orders in Q2. Do you think that represents the bottom of demand for Flowserve? Is that what you saw in revenue in April? And if it is, is the aftermarket sort of trending at that level, too, given the shelter-in-place initiatives? And I think you just mentioned evidence that there are Q3 turnarounds and major maintenance events planned. So despite the risk of delays, do you see sort of Q3 starting to recover from Q2 on the aftermarket side?

Yes. Andy, if we talk just aftermarket, I do think there's -- from Q2 to Q3, there's a potential uplift, but it's really hard to like be definitive about that because we just don't know how the world is going to be -- where the virus is and where the quarantine and the regulations start to get lifted. I'd just say, if things are progressing and regulations lifted and people are interacting and allowed onto these different sites, then I would think Q3 would be a better aftermarket quarter for us. If that doesn't progress, then that gets pushed into Q4 or even Q1 of 2021. But I think things have been pretty drastically turned off for aftermarket certainly from the last two weeks in March and through April. And so it's already down at that kind of 10% that we saw in 2015. And I think it's just -- it really is a function of where the virus is and when people are allowed to return to different sites.

Andy, probably the one thing I would add, and I know you know this, but for the benefit of others, it is worth noting that Q2 of '19 was our highest bookings quarter last year, and it was the first time we were over $1.1 billion in a quarter since probably 2014.

And then, Scott, maybe just talking about decremental margin, I mean, this might be framing, but should you be able to achieve at or better than your gross margin, which is in the low 30s going forward? Any color on how the $100 million of cost can ladder out over time? And maybe you could give us more color regarding the $0.19 of COVID impact in Q1. How much of that impact was just threats in manufacturing or supply chain disruption that may go away in Q2 or shortly thereafter?

Yes. Let me talk decrementals first. I know it's been a subject of discussion with a lot of the industrial earnings here. And so 2 things. One is we obviously want to minimize decrementals as best as possible. And given all the work that we've done on Flowserve 2.0, I fully expect Flowserve to ultimately be better than what we've delivered in the past on decrementals. The 2 caveats to that are, one, we're still trying to get people into the sites and start working. And so when you've got a lot of unproductive time in your manufacturing locations like we had in Q1 and we'll have in the beginning of Q2, then it becomes really difficult to compare decrementals or, quite frankly, to even talk about them. And so I'd say, by the -- I'm optimistic by the end of Q2, we're going to have a much better ability to talk about it. The other headwind on the decrementals is just -- and it's the same thing with our -- that we talked about at the end of the fourth quarter was this margin mix of OE to aftermarket. And so last year, we had 20% growth in the OE bookings, which is now causing a mixed headwind. You can see it in the Q1 numbers. It's going to play out for the remainder of the year, and it's going to put pressure in our ability to deliver better decrementals. On the positive side, we're taking aggressive action on costs. We talked about it on the $100 million, and so that starts to come in reasonably quickly and that will certainly offset the headwinds on disruption and the headwinds on the mix issue as well. And then on the second part of your question was on -- there are 2 -- go to the second part of your question, Andy.

The $0.19 in terms of once the disruptions fade, does that just sort of go away? And with the cost, $100 million, laddering in by Q3, is that sort of basically gone?

Yes.

Okay. So the $0.19 of COVID disruption is made up of 2 things. One is the revenue that we weren't able to get out and the gross margin associated with that, and so that's $0.14 of EPS. And then the other part was that basically, just the inability to get our folks onto site. And it's basically we were paying them, right? So we didn't want to impact them personally because of this virus. And so we're paying them while they're not doing work, and that costs us another $0.05. And so that's what the $0.19 is. We had a significant amount of days of unproduction in March. What I'd say on a go-forward basis is the beginning of April was not great. But where we are today is we're up and operational around the world with the exception of India. Now unfortunately, India represents -- we've got 3 large locations there. It represents significant revenue for FCD and for FPD, and we're mandated right now to only operate at less than 50% of our staffing. And so we're going to see some impact in Q2. Again, I'm optimistic as the virus subsides that, in Q3, we start to return to a more normal place. And then what the $0.19 doesn't represent, Andy, and it's really important, is we didn't quantify just the loss of productivity from all of the kind of 2-day closures and the work from home. And so we had a bunch of facilities, and we talked about it in the prepared remarks, where folks were in for a couple of days and then we had to take them off-line for 2 more days, and then they came back in, and it just didn't equate to strong productivity. And so there's some other noise in there on margin disruption in Q1. What I would say is we're doing a much better job learning how to work in the new environment, and we're starting to see our productivity improve pretty significantly here already in Q2 with the exception of our inability to get to India.

Our following question comes from Josh Pokrzywinski from Morgan Stanley.

Scott, just a quick question for you, I guess, and I appreciate you outlining the differences between now and kind of the '15, '16 hard landing. I guess one thing that is maybe a little bit different with no one driving anywhere, kind of lack of storage on the crude side, the low demand for refined products kind of at the other end of it, anything that kind of results in an overhang because either those customers have a storage issue or just demand is so low that they're really trying to throttle back their own utilization? Is that playing into that -- those order comments or productivity comments, et cetera?

Absolutely, right? And so in my discussions to you, I talked to a lot of downstream operators, upstream operators, the EPCs. And the whole issue here is that demand is down. I mean there's a couple of estimates out there, but pick a number, 7% to 10% on the demand for oil. And so then you look at what the production has been doing, and that keeps going, and so now you've got the whole system is essentially full and you've got stores now at maximum levels and no place to put it and dislocation of pricing and negative oil pricing in April. And so these are significant events that are having major implications across the whole system. And the refiners are operating at kind of 70%. We're seeing some of those already idled. And so I mean these are major events that are having a massive impact. I feel pretty good about the Q2 numbers that I shared in terms of being down. And then I think, really, what the big factor is for Q3, Q4 and beyond is, again, when does the virus start to subside? When do folks start on driving and getting transportation fuel going? When do you start flying again? And that really is going to dictate the time line of return to more normal oil and gas fundamentals.

Got it. That's helpful. And maybe just a longer-term question. I mean some of your end markets, namely oil and gas, but I guess anything in the process world right now, are now on their kind of second big shock in 5 years. How has that kind of tempered or altered the way your customers think? Is the 3-year planning horizon for something just too far out to predict the future? Have they kind of narrowed their project scope in those -- some of those discussions you're having, just on -- over a time line they can more readily predict? Or too soon for all of that? Just any kind of thought on your end or what you're hearing from customers would be helpful.

No, I think it's a little early. But I also think what's really important is just kind of you've got to look at this on a geographic basis and an upstream/downstream basis, right? And so when you look at who's going to be challenged the most, the upstream operators in North America are just incredibly challenged, right? And so a 3-year planning window there is very much out the window, and they're in complete crisis mode and trying to preserve costs and do the best they can during this. But if you look at kind of the downstream side, I think most of those operators are still thinking more 3 years, 5 years. The good news is that's the majority of our customer base. They're typically bigger customers who have historically operated at -- with good cost discretion and can live in most different environments. And then on the chemical side, I think it's the same thing, where they're still working through their longer-term business plans. They know the short term is not good, but they're going to be there and they're going to continue to operate 3 to 5 years from now. And so I just think you got to really look at the different markets. You've got to look at the different geographies as you think through kind of what's going to work and what's not going to work. And so when I say we got to reprioritize our strike zone and our R&D, that's why we have to do it because there's just going to be a lot of different ways to operate depending on whether you're upstream or downstream or whether you're in special chemicals or petrochemicals, and then the geography is going to be really important as well. And so we know North America will be incredibly challenged. The Middle East will probably continue to spend and move at a more robust rate than other parts of the world. And we believe that in Asia, that you're going to see continued investment there but -- albeit at a slower pace than what we've seen over the last couple of years.

Our next question comes from John Walsh from Crédit Suisse.

Maybe just first a clarification, I think, Scott, in your answer to Andy's question. I might have thought as we got to the back half of the year that the headwinds from the aftermarket mix might dissipate. Maybe I misheard the answer. Or is that the right way to think about it? I'm just looking on a year-over-year basis, the aftermarket mix, and you were at 49% in the back half of last year.

Yes. So really, you got to look at '19 in our bookings, and we only out-booked aftermarket by 20% last year. And so that headwind really is going to play in for all of 2020, and I don't expect that to get more normalized until 2021. And so as we shift the backlog in OE, it will obviously start to come down. But I wouldn't expect -- you're going to still see more OE than aftermarket in Q2, Q3 and in Q4.

Got you. Okay. And then I don't think I heard it in the prepared remarks, but can you talk a little bit about your experience that you saw in China kind of as they got on the other side of COVID, what you saw in terms of activity levels through the year, maybe comparing and contrasting February with April?

Sure. Yes. So for us, we've got manufacturing and operations in Suzhou, which is kind of east of Wuhan in the epicenter. And we were shut down for 2 weeks post the Chinese Lunar New Year, which equated to about 3 weeks off-line. We've been able to get that operation up and running, and we've essentially got our supply chain in China almost fully restored and operating in normal. And then on the customer side, we had decent bookings in Q1. We had bookings in China in February for large projects. And in fact, one of the oil and gas projects that we mentioned was in China. And so I think for them, a lot of the planned investment that was already in the works is absolutely continuing and moving forward. What I would say is I do think you're going to see reduced spending there. I think that it ultimately slows down, but they didn't cancel anything or at least that we were involved in during that time frame. Now I'd also say that, as I think most people fully know, China was incredibly robust in terms of their precautions and their clamp-down to really make sure that the virus did not get out of Wuhan and tried to contain it as best as possible. And it's been very difficult for the rest of the world to follow the model that China did. And so I think it's going to be interesting to see how the rest of the world responds as we get to the other side of this. But I do think China will probably be one of the better examples, along with South Korea and a few others, that have done a really good job of the shutdown and then in reimplementation. But I think for us, right now, we feel good operationally that our China facility is up and going. We feel reasonably good about our ability to keep the supply chain consistent and constant and support our operations. And in Q1, at least we saw decent order rates in China itself.

Our next question comes from Deane Dray from RBC Capital Markets.

Welcome to Amy. Just to clarify on the second quarter bookings comment of the framework, Jay was nice to remind us about the tougher comp. But what about -- where do you think your distributors stand today? All the destocking that typically happens, did that happen this quarter? Or you think you still see some in the second quarter, too?

Yes. It's a good question, and I'll separate the kind of our pump distribution from our valve distribution. On the pump side, it was reasonably good in Q1 as a lot of that product is going to the MRO and keeping the downstream facilities up. We did have okay bookings on the valve side for the big stockists, and you can see the number versus Q1 last year. A lot of that was some of our natural gas products on the valve side, and then a little bit was our actuation product going more to the midstream side. The problem, though, is with everything really turning dramatically down in March and April, and you can see this with the public companies that are out there, right, DNOW and MRC. I mean they're really struggling right now because their business is predominantly North America and just have such a big mix to the upstream side. And so unfortunately, unlike -- a quarter ago, where I thought we might have some tailwinds on this destocking, there's going to be another layer -- leg down on destocking from the valve main distributors. I think we have a few products that will do okay because they've got reduced inventory. And I'd say those would be more of our downstream valve products and more of our natural gas-type products. But overall, net-net, it gets worse with our distributors before it gets better.

Yes, that makes sense. And then just to clarify on the capital allocation front, I'm not sure I heard you say whether buybacks are on hold. Or is that still open? Is it still addressing share creep? Where does that all stand?

Yes. I think we'll let Amy take this one.

So with respect to capital allocation, there really hasn't been a change of philosophy for the company since I've joined. We did repurchase shares in the first quarter, but that was really to offset equity dilution that we had from those compensation plans. And so we're not anticipating significant share repurchases over the course of 2020. We do maintain an active plan. We've got about $113 million still available under that plan. But taking into account the global pandemic, our current leverage and credit ratings, there's probably more pressing issues than share repurchases, but you can never say never.

Great. That makes sense. And just last quick one. Did I hear -- or we see that there was some asset write-downs in the quarter. Were those COVID-related?

So I would say that those asset write-downs, a couple of different buckets for those. First, in our adjusted EPS, you did see us record a write-down of our deferred tax assets in Italy. That was about a $25 million impact or about $0.20 per share. That was expedited, I would say, by COVID-related activities in Italy and the disruption that we saw at those sites. We also had some inventory and AR-related write-downs that were specific to certain projects in Latin America that -- I would say that the current oil prices did have an impact in triggering that write-down as well.

And what was the amount on that one?

So about $7.5 million on the project.

Our next question comes from Joe Ritchie from Goldman Sachs.

Welcome to Amy as well. So my first question, maybe just kind of starting on the restructuring actions, Scott. I know you can't give us a lot of details on them today. But to the extent that you can maybe kind of parse out how much of it is temporary versus structural, and that's the $100 million. And then in the context of 2021 with the additional $100 million, maybe you can kind of put that in the context of like the longer-term margin target, the 15% to 17% that you guys are targeting for 2022.

Sure. Yes. It's a good question. Happy to address it. So I'll just start with we fully understand the magnitude of this crisis, and thus, the bigger number and the quicker action than you've seen in the past on executing this. I do need to be a little bit careful because this -- out of respect to our employees, this is an ongoing effort, and we're in discussions right now with various labor groups around the world. But what I can share is that of the $100 million, roughly half of that this year would be the cost avoidance-type actions, with the other half coming from structural actions. I think that's probably a decent way to look at it. And then so if you think forward, right, some of the cost avoidance, things come back, some don't come back, but then you're getting a full year of structural savings versus kind of 6.5, 7 months of the structural savings. So that's probably the easiest way to look at it. And then just the other thing I would say is this has been an incredibly fluid and dynamic environment. And so while we think this is the right thing to do right now, if things get worse, then we'll take more actions. And then the other important point is we still have $2.2 billion of backlog, right? And so we've got to get the backlog out. We've got to support our customers. And so we've got a lot of costs that we've got to preserve as we're working through that backlog to get that out. I mean as the backlog comes down, then we start to work out some of that -- the labor that's directly related to getting the product out. And so I think you'll see more from us…

No. That makes a lot of sense, Scott. I appreciate the details. I guess maybe my one follow-up. You mentioned earlier that your -- projects that are in the FEED stage are basically getting deferred, but the ones that are in FID are continuing to move forward. I guess just in that vein, when you look at your pumps division and the backlog that's in that business today, is it the expectation that you're going to be able to continue to work off that backlog throughout the year and the pumps division will actually grow in 2020?

Yes. Look, we have substantial backlog in pumps. And so we're going to have good revenue in that platform. I'm not going to commit to growth just because we're not sure what the book and ship numbers look like, but I did give some color on Q2 overall. And in Q2, we expect the revenue to be very similar to the Q1 revenue numbers. And then as we finish the second quarter, we'll provide some better and clearer guidance as we're thinking about the back half of the year.

Our next question comes from Joe Giordano from Cowen.

Scott, I just wanted to clarify something you said earlier just to make sure I heard it right. So on the operating margin, you said you do not anticipate deterioration. I assume that's sequentially. I just want to make sure I have that right.

Yes. I apologize. I kind of stuttered on that one here. Let me walk through the Q2 outlook just so we're super clear. So first, on the bookings side, we expect 15% to 25% down. Color on that, OE will be down more than the aftermarket, and then FCD will probably be impacted more than pumps. And so the 15% to 25% would be a comparison to last year's Q2. And as Jay said, Q2 last year was our highest bookings month at -- or bookings quarter at $1.1 billion. And then when we look at revenue, right, we think Q2 revenue will look something similar to Q1. And again, it's really subject to our ability to keep those facilities open and operational. And then on the gross margin line, I would expect gross margin percentage to be a little bit better than Q1 of this year, but again, it just depends how much disruption we have. And so if we can avoid that kind of $8 million of paid time-off, then our margins start to look better than what we had in Q1. And then what we were saying is on the OI or the EPS side, right, the operating income and the EPS should be at least what we saw in Q1 2020, but again, subject to our ability to keep things open and operational. And then I made the comments in the prepared remarks, right? The SG&A in Q2 will be better than what we saw in Q1, but really, the full impact of those cost changes really start to show up in Q3 and Q4.

That's clear. And just -- I know this is not going to be something that's on your mind as much right now, but once this is -- once we finally get through all this stuff, call it two years out, whatever it is, you're a company that has big leverage to markets that have had two generational corrections in five years. So like, how do you think about that long term? And how do you structurally want to be organized as a company? And do there need to be kind of more material changes to ensure portfolio resilience long term?

Sure. So obviously, we have been heavily focused on Flowserve 2.0 since I've been here. What we did with the Board, though, this February was like rewriting the long-term strategic direction for Flowserve. I'll just share a couple of things on that. But number one is we do want to stay committed to what we do well, and that's the flow control space. And then the second thing we're really starting to think through was 10 years from now and 20 years from now, what do our markets look like and where do we want to play. And so we talked a lot about diversifying. We talked a lot about how do we get in things that we know will continue to be there. We certainly didn't anticipate what we're seeing right now when we talked through that, but we've got some ideas to solidify the growth and the long-term outlook for Flowserve, and so we'll continue to progress on that. I'm not going to commit to anything right now in terms of directionally and what we're doing. But there were probably 10 big ideas that we walked through that if we can kind of execute on 2 or 3 of those, it starts to put another leg in what we're doing on our -- another leg to the stool and kind of gets us really well balanced and positioned regardless of kind of what the different markets are doing.

Our next question comes from Andrew Obin from Bank of America.

First of all, I'll just join everybody in extending my welcome to Amy. Welcome on board, although times are quite challenging. But -- so the first question I have on free cash flow, could you just talk about the challenges of releasing working capital throughout 2020 in an industry that's sort of been hit by low oil prices and maybe the nature of the supply chain just by design and contracts is very long term? So how should we think about the sort of ability to release working capital in 2020?

Sure. And let me just start by doubling down on something that was in my remarks, which is we do expect to generate free cash flow in 2020. Working capital has been a huge focus of the company long before I came on board, and you really are starting to see those improvements take hold with good comparative progression, DSO improvement 5 days better than it was in Q1 of last year. And frankly, that's despite headwinds, if you think about productivity, about people working from home and the efforts from a collection side that goes into that. Certainly, the market will present some challenges, but we've moved pretty quickly to preserve cash. And so if you look at what we've done from a CapEx perspective, bringing that spending to match it with the current environment down to $60 million or less, deferred merit, eliminated discretionary spend, we think that we've taken the cost actions necessary to help us preserve that, and that's backed up by our strong backlog. So if you think about that and what we'll do from a revenue perspective over the course of 2020, that gives us some line of sight. So I think that, although there are clearly some headwinds, we think if we continue to do what we're doing with incremental focus, I think, on both inventory management and what's going on, on the supply chain side, we're going to continue to see progress in the area of working capital over the course of 2020.

Yes. And I'll just add on here. Yes. This is the one area I'm incredibly pleased with our progress since I've been here. We're at 26% working capital this quarter. And when I started, we were over 30%. And so we're making good progress. Most of that was through the Flowserve 2.0 initiative, and what I would say is the investment in systems and processes really starting to show itself. And so I don't expect us to back off. I mean, obviously, there's going to be some challenges on different parts of working capital, but I do think we'll be able to release the working capital as the business comes down. And quite frankly, I'm still expecting us to improve our working capital as a ratio as we move forward.

No, that certainly has been sort of one of the things you did very well. And just a follow-up question on sort of longer term, you sort of highlighted inability to get your techs on customer sites. So 2-part question. First, maybe more color on what geographies are particularly challenging. But the second question, sort of longer term, how do you think -- you did highlight at your Analyst Day and consistently more investment. But sort of industrial IoT opportunity as it relates to remote monitoring, do you think this will be sort of an impetus to accelerating this? Because we've heard from multiple companies that this online stuff is just a lot more relevant in this environment. So sort of 2-part question.

Sure. Yes. In terms of getting people on-site into different areas in the geography, I'd say, certainly, North America's challenge on that is there's been broad work-from-home restrictions. In Europe, it is incredibly prevalent and still is the case where most people are working from home, and there hasn't been -- or very little relaxation of those constraints. Really, Asia is the part where -- in China, we're allowed to get a lot of our service techs back in, and I'm trying to think another bright spot around the world, and there really isn't right now. So geographic, I'd say Europe was the worst. North America has been challenged in terms of getting people into locations. Latin America has been challenged certainly in April, maybe not so much in mid-March. And so I think you just -- you got to just kind of follow where the virus is and where the case counts are, which tells you whether or not we're able to work there. But I do think -- let's go to your second part of the question. There is absolutely no doubt that the ability to do things remotely and monitor our equipment and provide value-added insights around reliability and uptime and prediction only becomes more and more important. And we showcased our technology, gosh, 1.5 years ago. We continue to make really good progress in moving through kind of next generation of that. We've got our technology up and operational on many sites around the world. And I really believe that this is -- this type of investment and this approach to monitoring assets without people on the location only gets accelerated with COVID-19.

That is all the time we have allotted for questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.