Ladies and gentlemen, thank you for standing by, and welcome to the Flowserve Corporation Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised, that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference to your speaker today, Jay Roueche, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thank you, Joelle, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's fourth quarter and full year 2020 financial results. On the call with 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 the call for questions. 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 on forecasts, expectations and other information available to management as of February 24, 2021, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully review our safe harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results, both of which are included in our press release and earnings presentation and are accessible on our website 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.

Great. Thank you, Jay, and good morning, everyone. Thank you for joining our fourth quarter earnings call. We had a strong finish to 2020 and I want to start by thanking the Flowserve associates, especially our frontline workers for their continued dedication and hard work during this unprecedented time. Despite all the challenges throughout the year, we continue to serve our customers and provide the essential full control equipment and services needed to keep the world running. At Flowserve, [indiscernible] is the core value and in today's environment, that means not only keeping people safe operationally, but also protecting them against the spread of COVID-19. I am proud to highlight that our associates achieved a record safety performance in 2020 including in our COVID-related protocols. Additionally, I want to thank our customers. They tested Flowserve during a very challenging year. I remember my career that working through a crises alongside our customers, being there for them each step of the way truly solidifies long term relationships. As we look through the future, we believe our strong relationships will position us well to capture significant opportunities when the pace of the industry investment returns. From the beginning of this pandemic-driven environment, our financial priorities centered on improving our free cash flow conversion, managing our through cycle return on invested capital and delivering superior detrimental margin performance. During the remainder of our prepared comments, I think you'll hear that we successfully controlled what we could during this unprecedented period in our now focus forward. The progress of Flowserve 2.0, a committed leadership team and the support of our associates has enabled our company to manage the current market environment better than in the past. Our efforts in 2020 allowed us to generate over $250 million of free cash flow. We maximized our…

Thanks Scott and good morning, everyone. In the fourth quarter we delivered resilient performance in what continues to be challenging operating environment. Our adjusted earnings per share for the quarter was $0.53 bringing our full-year adjusted EPS to a $1.74. Fourth quarter reported EPS was $0.43 and included a net $0.10 of adjusted items. The items were comprised of $0.11 of realignment and transformation expenses and $0.09 of below the line currency impacts, which were partially offset by eliminating $0.10 of reported benefit primarily related to discrete tax items from a reduction in foreign tax liability Fourth quarter sales of $985 million were down 7.8% versus the prior year, but increased sequentially by 6.6% reflecting our normal seasonality. Fourth quarter original equipment sales decreased 7.1% driven primarily by FPD 14% decline while FPD's revenues were relatively flat reflecting solid execution on a strong OE backlog entering 2020. Aftermarket revenues decreased 8.4% including FPD and FTD declines of 9% and 5% respectively. For full year 2020, revenues decreased 5.4% to $3.7 billion again primarily due to aftermarket, which was down 7.6% with both segments approximately in that range. OE sales decreased just 3.1% as FPD strong 10% increase was offset by FTD's 16% decline. Turning now to margins; fourth quarter adjusted gross margin decreased 250 basis points to 30.7% including declines of 260 basis points and 280 basis points at FPD and FTD respectively. While we continue to manage and limit COVID-related disruptions to our operations, the decline in margin does reflect the ongoing impact on productivity and the associated cost incurred due to the pandemic. Additionally, we experienced increased under-absorption in certain facilities and were also impacted by FPD's 200 basis point mix shift towards lower margin OE work. For the full year, adjusted gross margins decreased 200 basis points…

Great. Thank you, Amy. Let me wrap up with some additional color on our Flowserve 2.0 transformation progress, our long term targets and comments on our outlook for 2021. Despite the disruption to our end markets in 2020, we made significant progress institutionalizing the transformations playbook and processes deep into our organization and functions. We are striving to make this a part of our everyday business processes. Our 2020 results reflected our progress toward building a business model to better weather the cycles in our end markets. Our goal is to substantially complete the original transformation program by the end of 2021 but ensure that the process and the discipline remain embedded in how we run the business. In 2021, we'll return our focus to the growth in optimization phases of the transformation, while we complete the operational excellence and productivity improvement initiatives. We intend to drive growth with an increased focus on our customer experience, development of innovative products and services and end market diversification, including increased participation in energy transition initiatives that are gaining investment dollars. A key component to our transformation growth initiative involves staying market led and generating consistent innovation. Our marketing technology team made significant progress in 2020 developing new and innovative products and services. During the year, we have 21 commercial launches including three new products, six products that completed our design to value process and the remaining launches were product extensions, future updates or portfolio upgrades. I am excited about our product pipeline and the opportunities that technology and innovation can bring to Flowserve. Our efforts will prove our geographic and end market diversification, accelerate digitalization through IoT and e-commerce and digitalization with better efficiency and technology to capture and repurpose carbon emissions. Flowserve has been solving technical full control challenges for over…

Thank you. [Operator Instructions] Our first question comes from Andy Kaplowitz with Citigroup. Your line is now open.

Good morning guys.

Good morning, Andy.

Hi, Andy.

Scott and Amy, I just want to focus on cash first, because you said you were going to generate $100 million plus in Q4 and you obviously generated almost double that. You mentioned 150 basis points of sequential improvement in primary working capital as percent of sales. Obviously, the ‘21 guidance of 100% free cash flow conversion is encouraging. So it seems like you're getting your arms around the cash situation. But I guess the question is working capital as a percent of sales is in the high 20% range. So can you talk about where you think you can get that metric to? And how you get there now as it seems like you have more confidence on the cash side than I've heard before?

Sure, thanks for the question, Andy. I think starting with, what we think is possible. Scott and I are aligned around that mid-20s as really being the spot where we think that we need to get to from a primary working capital as a percentage of sales perspective. And we think we've made tremendous progress over the last couple of years in a number of ways, one DSO has come down and we've been able to hold it to a level that that we think is around where we want to be at or where we think we should be at around 70 days. We think there's marginal improvement in that area that can happen. But we're probably working around the edges there, where we really see a significant amount of improvement coming in 2021 is around inventory. And foundationally, I think we've got the tools and the talent in place now to manage inventory in the right way within the company and now 2021 is about delivery on the working capital improvements in inventory. So that's where the majority of our focus is going to be in 2021.

I’ll just add to what Amy said, we’re really pleased with the progress that we're making. I'd say Q2 and Q3 were not ideal for us to say the COVID disruption and all the things going on, we kind of took a step backwards on the inventory management, we're back on track, we made good progress in Q4. And Amy, what I expect is just continued progress as we go forward. And it's not going to be, there won't be these giant gains, but I'd say relatively steady progress. And as Amy said, mid-20s is certainly what I'll call a near-term goal. But we're not going to stop there. We'll continue to work this, the best companies in the space are right at kind of 20%. I don't want to commit to that because far away from it, but I do think, we'll make progress. And as Amy said, the focus right now is inventory, the receivable side was gotten cleaned up, and we're at a pretty good spot, there might be a little more improvement, but not a whole lot. But the past for us is inventory management, our teams know, we've got the tools, the visibility and the process in place, we just need to execute now.

Thanks for that tough one. And Scott, you mentioned oil price refinery utilization is stable or improving MRO activity, you talked about expect to increase. But you also mentioned you haven't seen improvement yet in aftermarket bookings, at least sequentially. So what do you think your customers need to see to ratchet-up MRO demand? How much you think higher oil prices help, could the Texas weather related issues be a catalyst? And have you seen any discernible incremental improvement in bookings for the first couple of months of this year?

That's like six questions. You got to be efficient.

I didn’t see that.

Okay, let's focus on aftermarket and MRO. And I'll hit kind of two of the key points there. I was pretty clear in the last in the Q3 earnings call talking about, that we would see return to growth on MRO and aftermarket at some point in 2021. We're still confident in that. And yes, I think it's more of a timing issue, I will tell the Texas weather event and the Gulf Coast weather, because that's a whole different issue. But I'm going to come back to that. But if we say pre-weather events in kind of where we’re going, I think our customers as long as they're getting more confident that things return to normal right, stability on oil prices, mobility goes up, then they're going to have confidence to invest in their facilities. And I’d say we feel very good MRO and aftermarket spending returns in 2021. The question is, are we going to see it in Q1, 2Q or Q3 I’d say certainly by mid-year, we start to see that that inflection up. And lots of customer discussions and data support that, there's a lot of pent-up demand and cost avoidance that at some point, catches up to them. Now, I don't know what the Texas weather and I’d say obviously that was last week. And we're still trying to get to the bottom of it. But, in the Gulf Coast region, we're tracking over 30 plus installations that have some emergency type request in the Flowserve on parts or services. And so we see it as a net positive for us. The downside is that we were offline for three to four days in most of our facilities. So we've got to overcome that. But I think there's a lot of damage out there from the freezing weather. And we're seeing already orders for pumps, valves and seals. And so I don't think this is a material number. But it's upside that we didn't plan for and we didn't necessarily have in the guidance. I think probably most importantly, it's an opportunity for Flowserve to demonstrate support of our customers in these situations. And we can come and help them restore their operation which solidify kind of our presence on site, and they know they can trust us. And so it's an unfortunate situation, because a lot of people were incredibly uncomfortable from heady days. But for Flowserve, this will be an opportunity and some sort of regulation that comes out of it, that Texas required to do something more substantial with these installations then any time those upgrades or new standards will capitalize that as well as we put in more beefy equipment that can stand through any temperature range both high and low.

Appreciate that, Scott.

Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.

Hey, good morning, everyone.

Good morning, Mike.

So let's follow-up in Andy's first question there, obviously really nice cash flow this year, good to see the guidance for next year. You’re kind of at the point where you can start playing some offense given the liquidity, giving the more consistent cash generation, how are you thinking about that internally? Has the radar shifted towards M&A at all and if so, what does the opportunity set look like there?

Yes, so as Scott pointed out, we were pleased in 2020 that was a tough year that we were able to deliver ROIC well above our cost of capital. And we frankly think that delivering those type of returns with line of sight into the future to returns above 15% does allow us to think about reinvesting in the business. We think about that in terms of both organic and inorganic growth. Obviously, any type of project that we look at, or any type of acquisition that we would look at, would need to fit within our criteria. It's all towards achieving those financial objectives that we set out, meaning accretive to ROIC, accretive to market margins over time as well. So we think about it through that lens. That being said, we do have commitments embedded into our cash usage for 2021, as well. So as I pointed out, we’re going to retire those Euro notes in the first quarter of the year. We’re committed to maintaining our capital spend for maintenance and for those ERP projects over the course of the year. And of course, we want to return money to our shareholders as well via our dividends, and we do have about over $100 million left on our share repurchase program. So to the extent that it makes sense, at points during the year to deploy any of that capacity, we'll look at that as an option as well.

Just to add to that, Amy and the team have put us in a nice position with the balance sheet. And so we're definitely more open to moving to the offense than in years past. So one of the things that was holding us back was we really wanted to get the 2.0 in the process improvement embedded in the organization and really wanted to have that done to give us confidence in our ability to integrate any deal that we do. I'm feeling better than ever before that we've got good business process, and we're executing at a higher level. And it gives us a stronger appetite to start looking at things on the offense. And so I would expect, we’re not going to do anything imminent, we're not going to do anything crazy. But we’re interested and starting to add to the portfolio in the right places that help diversify our end-markets a little bit and helps to bolster what we're trying to do in the long run.

Thanks for that. And then on the margin side, just make sure I understand here. Saw decrementals in the fourth quarter there, puts and takes when we think about 2021 how we think about discretionary costs coming back versus structural savings, what price cost mechanisms look like for you and any other important large bucket items that that would impact how you're thinking about it?

Yes, so we do have a number of moving parts, as we look at 2021 margins. And we do think there's some pressure on margins entering into 2021, starting with the challenges, obviously the lower beginning backlog and lower volume generally, as we've highlighted in our sales guidance is a headwind and included in that is absorption pressure at our locations, and we do have some inflationary pressure that's built into that as well. There are some opportunities, as we think about that or some things that are helping to offset that. So thinking about the mix shift, the mix in 2020 was very heavy, OE we see that transitioning to a more normal level in 2021. And we do have productivity improvements that are embedded into the 2021 plan as a result of transformation efforts. So as we think about those and we think about the ongoing savings from SG&A, which in 2021 will be much closer to our third and fourth quarter run rate than it has been to historical levels. What we're excited about is as we return to growth as Scott has highlighted, we think will be the case with our book in 2020 and 2021. We see many of these cost saving initiatives as sustainable and building momentum as we return in that direction.

Thank you for that, Amy. Thanks, Scott.

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

Thanks, good morning everybody.

Hi, Joe.

Hey Scott, as you kind of think about the longer-term operating margin targets and kind of like where you sit today. What kind of like revenue top line do you think we need to get achieve those margin targets and I know that it's really difficult at this point to give some kind of timeframe, but I'm just curious kind of like what the base case scenario is to try to get there?

Yes, so when we first put these targets out, back in early end of ’17, early ’18, we said we should be able to achieve the targets under any revenue. So basically, at the status quo or in an growth environment. And I think that still holds true. And so even if we were to grow, I still think we've got the opportunity to get the margin up, we've got the opportunity to get the return. Now, what I would add is that any growth only helps the situation dramatically. Right and so if we can start growing at a reasonable clip at 3% to 5%, then I’ll start to feel really good about getting into that, that margin range that we've laid out.

Got it. And then maybe my follow-up question and look really nice to see the progress that you're making on cash flow, I guess, how should we think about kind of CapEx longer-term. I know obviously, 2020 was a little bit of a down year. But what's the right way to think about CapEx, normalized CapEx for the business?

Yes, so we put our guidance out for 2021, which just as a reminder, $70 million to $80 million. I think that might be a couple years where we come up to that, maybe touching the $100 million level if we're doing something major, but I think this is a reasonably good range for us. And so kind of that $80 million to $90 million for sure, as we go forward. A lot of that investment is more, almost half of it is going through our IT systems. And so as we continue to make progress to get on more efficient and more simplification on our system architecture, then that spending starts to subside, and then we start to look more into kind of the automation and technology around manufacturing. But I think this is a reasonably good run rate for us. I don't see it going significantly above $100 million ever. It'll just depend on some of the projects that we line-up year-over-year.

Great, thank you very much.

Thank you. Our next question comes from Nathan Jones with Stifel. Your line is now open.

Good morning, everyone.

Hi, Nathan.

Hi, Nathan.

Just a follow-up here first on the guidance. It looks to me like the lower starting backlog is really responsible for all of the guided revenue decline in 2021, which then implies that kind of your book and turn business in 2021 is flat with 2020, would say there are a few tailwinds that you should have on the book and turn business relative to 2Q ‘20 COVID. Maybe it's a headwind in the first quarter. But improving oil prices and all those kinds of things, is there some conservatism built in that 4% to 7% kind of more likely to see upside than downside?

Yes, Nathan I don’t want to carve conservatism given all of the craziness that we've been dealing with for the last four quarters. If you just go back a few short weeks ago, we had a highest COVID case counts in the most disruptive impact to our operations was in the month of January like and then literally four weeks ago, we were shutting facilities down because we couldn't get enough people to come in. And so I would say things have improved right and every week seems to be getting slightly better. We really struggled on whether or not to give guidance or not just given how crazy the situation is that we're dealing with. In fact, I’d just add that as things continue to improve right stability at oil pricing, COVID cases going down, mobility data improving, I'm confident that operators will spend more money like it's going to happen. And if that happens, then our book to bill has the opportunity to come up from what we had before. But to say that it's conservative right now would be really, I don’t want to use that word because I don't think it's the case. But I really do think there's upside if things continue to progress, like we've seen quite frankly, in the last two to three weeks.

Okay, I think that's fair. My follow-up question is on the bigger focus pull back on the growth side of Flowserve 2.0 going into 2021? Is there an increase in the investments that are running through the P&L that’s potentially a headwind to margins in 2021? And if there is what kind of ramp-up that you're looking at, and should we say that continue to increase as we go into 2022?

Yes, we ultimately want to spend a lot more money on new product development and technology. In 2021, is what I would say is a reasonably consistent rate as it gets up slightly, but it's not anything material, and what we're trying to do, and I made this comment in the third quarter earnings call, but we've been really focused on the process of innovation and the process of new product development. And we've got that what’ll call dialed in pretty well now. And so as we start to run more through that, we do want to add projects, we want to add resources and we ultimately want to start to bring that up, but the net spending in 2021 isn't going to be substantially different than what you saw in 2020 or 2019.

Because then not only do you plan on increasing that spending in 2022 and beyond, but you also think you've got better processes in order to be more efficient with that spending?

Yes, absolutely. And that again, that has been the focus has really been on our innovation process, our new product development process. And I felt really good with the team and what we're doing on that. And so we're getting more things through, we're getting more meaningful innovation to the end markets that are going to convert to revenue and EBITDA and we were spending less time and less dollars on getting those products through the system.

Okay, thanks for taking my questions.

Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is now open.

Hello, good morning, everyone.

Good morning, John.

I guess there's one final guidance item to touch on. I guess just thinking about the tax rate and the ability to maintain it going forward, is this kind of the right zip code, this 22 to 23 as we look forward?

So I'll take a stab at that. I think for the foreseeable future, we feel pretty good about that effective tax rate. I’ll tell you that when Scott and I and my tax department sit down, he continues to challenge us to look for appropriate ways to bring that effective tax rate down. So we're pleased with where we've come from, we started out at near 29%. So to bring it down to the 23% level in 2020, and look for improvements beyond that in 2021, that we have line of sight to, we think is a good place to be. But we'll continue to challenge that as we move forward and look for opportunities to improve on it.

Great, and then maybe a question here on RedRaven, there's actually some really great YouTube material out there on what you guys are doing. But wanted to ask you, are there going to be kind of public, I don't know metrics or goalposts, you're going to be providing so that we can see kind of the adoption rate and the traction you're making with that initiative?

Yes, I don't know, we haven't gotten that far, John. We just watched it two weeks ago. But certainly as this becomes a more meaningful part of our business, yes, we'll come out and talk about it more. And we'll provide color on some of the metrics that we're looking at, I can’t provide a little bit more than what I shared in the prepared remarks. We've been working on this for about five years, we have a really good list of partners, both on the customer side, and other third parties that are helping us with this offering and making sure that yes, we've got a solution that's truly differentiated and something that our customers want. But over 25 different installations, we've got a long list of new opportunities that we're tracking. And so we think we can certainly double that in the next 12 months. And we've deployed now almost 6,000 different sensors, and we're collecting unbelievable amounts of data. And part of our program is monitoring. And our customers are, they're asking for that. And that's important. But we've also really pushed the predictive side. And so we've already been able to prevent and predict failures on site. And so as we get more case history and case examples, we'll share those externally, but that becomes what's going to help us drive this. And while the platform itself will generate revenue, and we're excited about it, what we're really excited about is being closer to our customers, and really making sure that we can provide that full suite of expertise and full control history and knowledge to help our customers with their operations. And that flows through our aftermarket businesses, it pulls to our services, its parts, and all of that. And so when we think about it, it's really more of a holistic offering from our aftermarket services and solution than just the system itself.

Great, thanks for taking the questions.

Thank you. Our next question comes from Joshua Pokrzywinski with Morgan Stanley. Your line is now open.

Hey, good morning folks. I think that's me.

Hey, Josh. Yes.

So two questions. We've covered a lot of ground already. I guess, first one Scott. On the customer projects that sort of went on the shelf with COVID and oil prices are trenching or other commodity prices as well for that matter. What's the conversation like today? I mean, obviously orders haven't really rebounded yet. But is it your suspicion or is it customers intention to place orders with a similar type project or rescope version of it? Or is it kind of back to the drawing board across all those things that were planned maybe this time a year-ago?

Sure, yes, I got to be a little bit careful because all of our customers are facing different situations and different challenges. And so Middle Eastern production project will be different than a petrochemical project in the Gulf Coast or a specialty chemical project in Europe. But I would say just in general right, everybody puts the brakes on big time in kind of February, March, April timeframe last year as COVID is impacting the entire world from a consumption and demand standpoint and throughout last year, they've been relooking, did the projects make sense that they originally had on the drawing board. And now they've got kind of six to nine months of working through that, potentially making changes or modifications to their programs and their designs. Unfortunately, asking us for more price reduction to support the economics. And what we're now seeing is most of those projects were delayed in 2020. And now they're starting to move back through the system, right, so they're now back into kind of the App ID or the financial decision for approval. And we do expect those to be released at some point in perhaps sometime in mid-2021, or late 2021 and then certainly into 2022. Some of the projects were cancelled, but the vast majority of them are, at least at this point delayed. And yes, I just think as they get more confidence that COVID subsides, as you get more confidence in demand numbers, more confidence in mobility, then they feel confident to pull the trigger on this, and we're having better discussions than we ever had in the last three quarters. And we're starting to see some movement with these projects. And so again, I feel reasonably good that the aftermarket and MRO picks up kind of mid-2021. And I think we start to see some movement on smaller projects hopefully, earlier in the year, but certainly kind of mid to late year, in that I think you start to see some real activity in 2022.

Got it, that's helpful. And then on the destocking comment that that you mentioned, anything you can put around that on percentage of the business you think that would apply to that went through distributors that had destocked over the last few years? And what you think that cost you like how much you under sold the market in the last couple of years? It might be a little hard to precisely know. But best guess in that?

Yes, so the stocking distributors, I mean it does impact our business, it really impacts the valve business more than any, our percentage of business runs through distribution and valves kind of 40% plus or minus 5%. And what we saw certainly in North America was this was already starting to come down in 2019. And then with the COVID impact in 2020, it's come down dramatically. And as two public companies out there that disclose their inventory levels. And when they produce their fourth quarter numbers, I was actually shocked at how low it was, and in our discussions with them, we know that they can't maintain this and even at the existing level of market activity. And so I feel pretty good that we're going to get some tailwinds in the valve business, even if we stayed at this rate, because they can't take stuff off the shelf from there, if they keep doing that, they're essentially not fulfilling their obligation or their purpose and [indiscernible] like us to start going to our end customers ourselves. And so I actually think we get a little bit of a tailwind here. And then with the recent activity in kind of just confidence that things are improving, they're going to start putting more inventory on the shelves, they got to do that. And so I think this gives us some uplift. And again, it's primarily in our valve business, we'll get a little bit of, there's some stocking distributors in the pump world, but primarily this impacts valves.

Got it. Very helpful. Thanks for the color guys.

Thank you. Our next question comes from Brett Linzey with Vertical. Your line is now open.

Yes, good morning. I wanted to come back to supply chain and price cost, obviously, a lot going on out there and not just an impact on Flowserve. But thinking about price cost, what are you assuming for price this year and then in terms of just the profit weighting, are you thinking that maybe weights a little more towards H2 versus H1, just given some of the price cost dynamics early in the year in supply chain?

Sure. So unfortunately, the price cost situation is not great right now, right. And so our customers are really challenged and struggling or most of them, right. Certainly, the oil and gas, some of the petrochemical and other ones. And so we've had a lot of pricing pressure, I'd say the pressure is coming more on the project side as these big projects are going back through kind of what it takes for that project to be financially viable. That’s impacting our OE pump business more than anywhere else in the system. But we're also seeing pricing pressure on the valve side. And then we're seeing some pricing issues on the seal side as well. And then on the cost side, we're very much in the inflationary environment when it comes to materials. In fact, if you look at any of the metal indices, right, they're all moving up and they're moving up reasonably quickly. However, we're closer to 2.0 in the supply chain initiatives that we're doing, we think we can offset all of that through further supply chain rationalization and some of the good work that's going through the transformation. And so we think anything on the inflation side, we can off up or offset with just the self help in the initiatives. But the pricing is significant. And my hope is, as things start to tighten up and move forward, then we'll start to get into a little better pricing scenario. And then from a timing standpoint, I just started back in March, April timeframe. And so this happened pretty early, we're seeing that start to come through the system, even in the fourth quarter, but certainly Q1, Q2, and so we’re going to be dealing with this for a couple quarters until things tighten. And I just say that this isn't any different than our competitors. They're all seeing the same situation. And I will just got to keep doing a really good job on the internal opportunities of maintaining good manufacturing productivity, and working those supply chain savings to offset this.

Okay, and I guess just a follow on that, clearly, you've mentioned the competitiveness for like you said, a couple of months now. Should we think of backlog margins being negative in the OE business year-over-year as it maybe in the second half?

No, but I would say, yes, we’re seeing our margin in backlog today is definitely lower than what it was six months ago. And again, that's more OE pump is the biggest impact. But we're definitely not taking negative OE margins.

And I didn't mean negative, I guess get down year-over-year, but okay. And then just last one on ERP and IT, obviously a big investment there. If it's half of the CapEx, how far along are we in that rollout? And in terms of the progression there as we work towards more of the deployment phase, does some of that start to work through the P&L as an expense versus CapEx? Just trying to think about the phasing there.

Yes, so I'll talk about the progress. I’ll let Amy hit kind of the CapEx and where it’s showed on the P&L, we've made tremendous progress. And for those that have followed us for a long time, our systems architect and landscape was incredibly fragmented. We've reduced our ERP systems by over 25%. Since I've been here, we still have a long way to go. But we're confident with our approach and solution. And so we've now got a closer standard that's embedded in parts of our operation. And we'll continue to make progress as we clean that up, we're not going to kind of a one single instance ERP system, Big Bang, we’re systematically doing this, we'll end up with a handful of systems. But we've got one system that will sit on top of this in the Cloud. And we're confident that we can get the visibility and the productivity out of the design and architecture that we have. I’ll just let Amy talk about kind of how much capital and capital versus expense.

Sure, so I guess you know as Scott pointed out nearly half of our capital guidance range this year is going towards IT enterprise related projects. That's not just all about the ERP system, but about systems that we'll be using to standardize processes across our Flowserve generally. As we think about costs going forward, certainly there are costs associated with running ERP systems. However, there's also benefits that we're going to see run through our SG&A expense over time as well. So I actually see this as this journey is being a tailwind towards our SG&A expense, rather than something that's going to be additive to it over time.

Got it. Appreciate the color and best of luck.

Thank you.

Thank you.

Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.

Hi guys, I guess good afternoon. My time still good morning, your time.

How are you doing?

I’m doing well and just a question on FCD, you guys have done a great job sort of pushing the business. Can you just talk a little bit about what were the specific operational changes that drove it looking at the numbers. Aftermarket seem to have been really good also both in sales and bookings. But if you could just provide more granularity as to what exactly you were able to do and how replicable it is across the company?

Yes, so FCD had a nice quarter. We had a good revenue uplift in the fourth quarter and the margins followed. There is definitely some cost actions that we took that came through the system in Q4, and then just a lot of focus on doing the right things. I will say some of that is some mix where we got more MRO and we got some higher margin projects that did come through the system. We're very focused on the FCD margins. And what I'd say one of the things that we're working with the team is to be more consistent throughout the year. And so we really want to kind of level out a little bit more on the revenue side, we want to be more consistent on the operating income. But we're striving to get that that year-end result on average, moving up and getting us back into kind of that the mid to high teens, where this business has been historically, we still think we have a lot of opportunities with Flowserve 2.0. And the other stuff we're doing to move that in the right direction.

Got you and just another question, just sort of thinking about your exposure on the refining side. And I've been asking this question from a lot of companies, but how has thinking from your clients, and I'm not sort of talking about over the next six to 12 months, but longer-term thinking about spending in the refining sector is changing and I'm sort of thinking about upgrades versus efficiency versus capacity expansion. What kind of conversations are you having with the customer base about the mix of the CapEx going forward? And how does it impact your business model with them? Thank you.

Yes, it's a good question. Refining is our largest in market, we call it oil and gas, and the majority of our oil and gas is truly the downstream side. So this is something that's incredibly important to us. And we walk in, we talk to customers all the time. Again, some of my previous comments talked about refining company is different around the world. And so if we think about where things are growing, certainly in Asia, in India, China, India, in the Middle East are going to continue to invest in a very meaningful way over the next decade or two. And so we're going to see increased investment there, our opportunities on new build, or major expansions are almost exclusively in those regions. And then what we saw in 2020 in Europe and North America with some pretty significant permanent shutdowns in the system. And when we talk to those customers, it really is about helping them with productivity, helping them with cost down and helping them with the unplanned downtime. And so a lot of the things that we're doing with RedRaven, a lot of the things that we're doing with our aftermarket services is still really important. But as long as those different facilities are up and running, then we continue to get the seals business, we continue to get the parts for pumps, and parts for valves, replacement valves. And so right, it's in our best interest that we've helped them continue to drive productivity and movement. And then the other thing I’d just add is that anytime there's a regulation change, whether it's to a clean fuel, or a temperature standard or whatever, then those regulation changes are opportunities for us because they'll need to replumb or add a different pump or a different valve or do something around it emissions control that could potentially lead to new seals or a change out there. Regulation actually helps us in anything where they're changing a process in refining. So energy transitions are a major topic and it's something that we're watching and we're going to make sure we've got a portfolio that works for the long-run. We're not going to abandon our refining customers, we've got a massive installed base with them every step of the way. They've got their own plants for energy transitions around reduced emissions, moving some to biofuels and things like that. And we're going to support that transition with them. And so we feel good about having the right products and the right equipment to help them, one on the productivity side, two on cost reduction and also helping them through the transition. And then we're going to make sure that we participate in these growing markets for the years to come.

Thank you for an extensive answer. Appreciate it.

Thank you. Our next question comes from Joe Giordano with Cowen. Your line is now open.

Hey guys, I'll just keep it quick. On the IoT platform, just more existential question on like, whose domain is this because right now, the equipment providers are coming out with technologies like this, like the automation providers have it themselves, there is third-party companies that come in with sensors that can go on anyone's equipment, and they can pull data too. So like, what do customers want, would they want to actually do this? And like, what are you hearing in terms of feedback on that like who should be the one that does this?

Right, it's a really good question. And what I'll say is, it's an incredibly dynamic market right now. And so what we've done is we've tried to go down a path that keeps us kind of really, the best way to describe it would be open source or agnostic to the system that’s there and so what we want to do is we want to instrument our pumps, valves and our seal systems, and also want to be able to instrument other pumps, valves, and seal systems, even if it's a competitor. And where we have the differentiated technology or the proprietary knowledge is we do this all over the world in different customers, different applications. We feel like we can provide information around how does the pump work? How can a pump be more efficient? When does the pump throw? How does the valve work? And when is it, when is it toward end of life? And then how do you really protect the environment with the sealing systems. And so that's kind of where we bring in the know how, and then as long as our RedRaven platform will work with any end user in any automation provider, then we can bring in and kind of tuck our solution in on the assets that we understand incredibly well and have 200 plus years of history with. And so that's been our approach is really being kind of open source. Yes, we've had a lot of collaboration partners, some of those are automation providers. And while we do that, it's working incredibly well. And so our staff, our customers is going in saying, hey, we don't care what overall system you're using. Now, what we want to be able to do is provide you the information and the insights to make good decisions on your operations and want to use our platform, we’ll provide the right information, whether it's in the RedRaven diagnostic system, or if it’s an automation provider, or if we push it back into yours. Well, I’ll say where we're seeing the most success is using our RedRaven platform. And we're giving them some really slick kind of handheld devices and screens that allow them to see the information that they want very clearly, and allows them to make decisions with that information in that data in a real time fashion.

Great, thanks.

Thank you. Our next question comes from Deane Dray with RBC Capital Markets, your line is now open.

Hi, thanks. This is Andrew Krill on for Deane. And thanks for squeezing us in. I just wanted to ask real quickly on the cost savings actions, I just want to clarify for 2021 are you expecting any net headwinds when you're lapping like more temporary COVID related cost savings or do you think given other actions underway to like balance those? Thanks.

Sure, I guess a couple of things, one from an SG&A perspective, where a significant component of our savings came in 2020. We're anticipating working at around the run rate that you saw in the third and fourth quarter, as we move into 2021. Now there are some headwinds associated with that from inflation to, at some point the restart of travel, but the fact is that the full-year benefit of the savings that or the actions that we took midway through 2020 sort of offset that. So we're now at a level that we see as being much more sustainable. From a cost of sales perspective, I think a couple of things. One, there are actions that we took in 2020 that carry through into 2021. But also additional actions are planned as we make our way through the year and bring that backlog down. We're continuing to try and adjust the cost structure to manage those decrementals through the course of 2021 and that's why we’re forecasting included in the guidance range some spend on realignment as we move into 2021.

Okay, great. And then a quick follow-up just on the Flowserve 2.0 cost now being included, we like to see that from call it earnings standpoint, just could you give any other color on what the deciding factor was that puts you over the edge there? Thanks.

Sure. A couple of things, one culturally we do [indiscernible] transformation process is embedded into the D&A of who we are at Flowserve. So from an operational level, from a functional level, we understand the pursuit of continuous improvement and process improvement is part of our day jobs and this reflects that from a cultural standpoint. But what I would say is also we reach much more of a run rate from a spend perspective, so in 2020 transformation costs were around $0.30 per share, this year we think will be closer to $0.05 per share and it reflects more of the run rate of what the embedded cost of those efforts are in our business. I mean so we felt from a quality of earnings perspective, that as we’ve gotten to that run rate, it makes sense to include in our adjusted EPS.

Okay, thank you.

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.