Good day and thank you for standing by. Welcome to the 2021 Flowserve Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers 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 over to your speaker today, Mike Mullin, Director of Investor Relations. Please go ahead.

Thank you, Christina, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's second quarter 2021 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. And as a reminder, this event is being webcast, and an audio replay will be available. Please also note that our earnings materials do in 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 August 6, 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 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 $0.37, which represents a 32% sequential improvement. It reflects our continued transformation progress. We were encouraged by our bookings of $953 million, which is nearly an 18% year-over-year improvement. At this level, Q2 was a momentum building quarter for Flowserve as our bookings inflected upward, and we now have clear line of sight to earnings growth. The 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 countries roll out vaccines COVID cases declined dramatically, and then mobility and consumption began to improve. This in turn drives customer spending for nearly all of our end markets. We are confident in our ability to continue to grow the Flowserve enterprise and 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 are seeing higher utilization rates in 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 six quarters of de-stocking, we are now expecting these…

Thanks Scott and good morning everyone. Looking at Flowserve's second quarter financial results in greater detail, our reported EPS of $0.35 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 $0.37 excluded just $0.02 of net items, including realignment expenses, the 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 $0.02, primarily from our Indian facilities as Scott discussed. Second quarter revenue of $898 million was down 2.9% or 7.1% on a constant currency basis. The decrease was primarily due to the 6.1% decline in original equipment sales, driven by FPDs 19% decrease, but partially offset by FCDs 12% increase. As a reminder FPD entered 2021 with an OE backlog down roughly 25% versus the start of last year. Aftermarket sales were relatively resilient at three tenths of a percent, but mixed in composition as FPDs 11% increase was mostly offset by FPDs 1% decline. Turning to margins, our second quarter adjusted gross margin decreased 70 basis points to 31.4% primarily due to early sales decline and related under absorption, including the previously mentioned COVID impacts, 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…

Thanks Amy. Let me close with an update on our energy transition strategy and our outlook for the remainder of the year. As I mentioned earlier, Flowserve is well positioned for energy transition. In fact, energy transition and de-carbonization activities have been a part of our offering for the last few decades where Flowserve 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 Flowserve is 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 and emissions reductions, solar power facilities, bio friendly processes in lithium and hydrogen work. Equally important, we have been a valued partner to the customers in 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 company's public environmental commitments, it is clear to us that energy transition represents a substantial growth opportunity for Flowserve. The International Renewable Energy Agency estimates that nearly $60 trillion will be invested over the next decade, with almost half of that about focused on energy efficiency. Energy 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've booked nearly $100 million of energy transition related business. We have held numerous discussions with our customers over the last year, which have confirmed our approach, validated our offering and these discussions support our growth ambitions. Let me now highlight some of our recent success stories. We're supporting…

[Operator Instructions] And your first question comes from the line of John Walsh with Credit Suisse.

Hi, good morning.

Hey, John.

Obviously, you sound very confident in the forward trajectory here, taking up the order expectations. It appears by our mass that implies backlog trough last quarter. And is it fair to say you'll continue to build backlog as we go through the year and potentially exit in that $2 billion plus zip code?

Yeah, certainly, we've had two quarters now with book-to-bill over one, 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, right, it grew this year and - 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 signer walk 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 that corporate allocation, it's really a component of SG&A in totality and the piece that's not been allocated out to our platform. So 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 that between call it $6 million and $7 million of impact in the second quarter. And then the second piece as you've indicated is really some austerity measures that were put in place either by necessity or by design in the second quarter of last year. So travel was obviously halted. We started to see some of that activity come back, 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 in 2020. That is coming back to more like 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 business activities. And I point out that as you look at where we're at from a margin perspective, right now, the long cycle nature of our business means that although we started to see improvement in bookings, we're really at a trough from a margin perspective. And so as we make our way sequentially through the year and start to see the benefit of those higher sales volumes, we'll start to see improvement in those margin levels.

Just to add there John, obviously, we have different parts of the business in different parts of the cycle, right. And so the pumps has got that lower longer cycle business. And that's the part that we've got to get that through the trough of the downturn and moving up. We're seeing recovery in our seal business, our aftermarket business and the valve business, which is shorter cycle. And so that's what you would expect. But that longer cycle is just taking a little bit longer to move through the pricing pressures that we saw at the end of the year, in the beginning of this year and then that 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.

Thank you. Good morning, everyone.

Good morning Deane.

Hey, Deane.

Hey, if we compare your conference call, your prepared remarks to a number of the other - just about all the other industrial companies, you stand out as not complaining loudly about price cost, which is admirable, because you're 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 in price costs from both sides of the equation? Scott, you did mention that there was some working capital build or maybe that was Amy, working capital build and preparation not a formal hedge, but some pre buy, but it didn't skew your inventory numbers. So just take us through price costs where does it stand today, first half, what are your assumptions for second half? Thanks.

Sure. Yeah, we certainly didn't complain about it. But I will say it is a major impact and it is impacting our business. And so as you know and others that have listened to industrial calls, it is an incredibly dynamic landscape and certainly Q2 was at 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, in electronics, and then logistics. And so that's the area that we're really working 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 weren't on the favorable side of price cost in Q2. When it comes to pricing, we have a - we did announce at the beginning of Q3, a price increase that was pretty holistic across most, if not all of our products in the portfolio. Now we really won't be seeing the benefit of that until Q4 and early 2022, but that will be the second price increase that we've done this year. And then from a disruption standpoint, the biggest area of disruptors to - one regionally was India, right, so India 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 other disruption impact has been 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 Q3. And then on the electronic 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 RedRaven 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 has been a challenge, I'd say we're at a slight negative on the cost price, but not something material.

And just to clarify what's included in that price cost? Do you include the logistics, freight and then what about labor?

Yeah, I'd put logistics in there. We wouldn't consider labor when we talk price costs.

Alright, good, every company's got a different twist.

Yeah, that's a really good point. Let's say on the labor side - labor side, we're feeling reasonably good. There's a lot of talking, certainly today with the labor, the jobs number out there. But you're right now we've done a lot of work on our culture, we've done a lot of work on making sure that we're paying at the right levels and our turnover, and we haven't seen a major increase there. And so there's 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.

All right, terrific. I especially like hearing that last piece on the labor side. And then second question is the idea that the larger project funnel is beginning to come together. And we heard this very clearly from Emerson as well. And I know you track this, so just maybe share with us a bit of the precision that you have. It's more than just customer discussions. You mentioned the EPC bidding. So just what are all the indicators that you pull together that maybe formalizes this as a leading indicator for you?

Sure. So at the beginning of - I'm trying to think of the year and it's all running together now for me Deane, but at the beginning of the transformation, we launched a CRM project, it was one of our first enterprise wide IT systems. And as CRM is customer resource management, and essentially now we're putting, all of our salesmen around the world are putting their forecasts into the system. So we have good visibility, we separate it by end markets and geography and customers. And that's 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 opportunities going forward. And so what we're seeing right now is a 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 that I personally visited with many of our top customers in the second quarter, everybody's got a much more positive outlook in terms of their project spending, releasing projects into FID and getting financed and funded. And then just as they think through this, what's happening globally, we're getting more and more confidence on the ability to release those projects. I think the question still is timing. Will it happen? 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'd 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?

Yeah. Hey, Andy.

Scott, I just wanted to follow up on that line of questioning in the sense that your gut for orders basically says relatively flattish in the second half of the year versus what you just did in Q2. You do say that you expect more project activity, but are you just kind of not putting in the guide more or less when you think about 950 million or so of orders each quarter? And then the aftermarket side, obviously very, very strong, has - is there a onetime sort of deferral component to it or do you think you can sort of rise from there?

Yeah, so alright and you're getting granular on me and hold me accountable for this, 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 there's a modest project build in the back half of the year. But if that happens in Q4, there's upside to a 950 number. So projects come back, we should be above it. If they're kind of at this level, or slightly higher than we're 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? Does it happen in 2022? Not exactly sure, but we know that it's 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 talked a little bit about Flowserve 2.0 in the prepared remarks, but how it's performing so far as we start, hopefully, this up cycle? I know, you said and I don't want to say few years ago, you want to record organic growth in the order of 2% above industry growth. It's hard to sort of measure that. But as we're starting to come out when you look at sort of some of your longer term programs such as strike zone or commercial intensity how are they faring? And 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 aftermarket and MRO business. I don't think we would be there without that commercial intensity program. And so I think the growth focused strike zone, 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. And so I feel really good that we've made that progress. Its institutionalized deep into our organization and that continues to drive bookings as we go forward. And the other piece to that is the distribution channel hasn't come back as we 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 comments that are made publicly from those that do report public financials, I fully expect those distribution bookings to come back in the second half of the year. And that only helps our - that general industries category, but it helps that MRO work as well.

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 a discussion on the incremental margins or the decremental margins. I think it's probably instructive if we split those up saying as FPDs likely to have revenue declines and FCDs likely to have revenue increases in 2021. The FPD 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 see that improve. I would think mix is one of the reasons that that should improve going forward. But if you could just talk about what the expectations are for decrementals for FPD in the second half and why they should improve.

Sure. And Nathan, I think you're looking at it the way that we are which is taking 2020 versus 2021 as a full year versus quarter-by-quarter. So, some of the cost actions that we took in the second quarter of last year resulted in a significantly lower cost structure while we were still benefiting from a relatively healthy backlog. So as we look at the second half of the year, you're absolutely correct is that sequentially we are anticipating really strong incremental margins from the first half of the year to the second half of the year. And that is benefiting from the mix that we're seeing in the bookings that we've recorded this year. But what is a headwind there is that those FPD original equipment sales volume is really not coming back until the last quarter of the year. And that means that those facilities where it's really hard to get cost out, we are experiencing under absorption at 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 volumes back to more historical levels from an FPD perspective, and we're benefiting from that mix shift that we're seeing in our bookings right now.

Thanks for that one and then the incremental margin in FCD in the quarter was a bit lower than I would have expected at 13%. Maybe that has something to do, again, with the cost actions, temporary cost actions taken in 2020. But just if you can talk about what drives the improvement in incremental margins in FCD in the back half of the year.

Yeah. So I think even within - within the FCB space, there still is margin or mix benefits that we're going to continue to get from that increased MRO bookings that we saw in the first half of the year. So although the mix looks good, we're going to continue to see that the sort of wind in our sails 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 directionally I hear EPS targets going up, you're raising your guidance on orders. So I think that those - the messaging there is pretty clear. But Scott, internally, you don't give quarterly guidance. So like, how do you kind of rate 2Q relative to what you thought, three months ago? And has your kind of confidence on delivering the full year, how does that compare versus three months ago?

Yeah, Q2 is essentially where we had expected. And so there's always 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've provided the EPS guidance range there. And I just encourage you to think about that normal seasonality from Q3 to Q4. But we feel very good that 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 can fully expect our ability to execute is continue to improve with the Flowserve 2.0 program.

And then my follow up is on - you made a comment on RedRaven and you stopped like a $20 million shutdown at a customer. How do you leverage an outcome like that whether it's until like being able to price this for value? Like, how do you make sure - that's a big - that's a lot of savings for a customer? 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 one that we talk about a lot here Flowserve and so we've done a lot of work on the different contracting models with RedRaven. And so we moved originally from selling some of our prototypes, and installing that to now subscription and recurring revenue models. And ultimately, what we want to get to is some sort of performance metrics that we would put on the back of instrumenting and enabling IoT across the customer's infrastructure. And so I can just say that we are highly focused in extracting as much value as we can from this solution. It has been a little bit challenging as we've kind of pioneered and pushed this thing out. But 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 want to add is we're continuing to see a great uptick with our customers, and their adoption of our technology. And so I said this in the prepared remarks, but we continue to book about one new contract or one new installation every week. And we've now instrumented over 5000 assets with RedRaven. And so one 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 and 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 a 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 we've used 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 Pokrzywinski with Morgan Stanley.

Good morning, guys.

Good morning, Josh.

Hey, Josh.

Just, I guess a follow up on Andy's question from earlier about kind of the order cadence maybe relative to some of the stuff you're 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 order of magnitude in terms of what that could look like just based on your guys' impression of sell-in versus sell-out, or we're inventories versus normal can go and is that contemplated in the 950 run rate you guys have talked about?

Sure, we've embedded - the distributor uptick is embedded in our numbers. It's kind of similar to what I said in projects. So if we see a significant distribution restocking program then there 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 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 an uptick for us primarily in our valve business and some of the pumps products as well. So I think it's a modest uplift for us. I don't think it's something that's going to be significant in hundreds of millions dollars, but it's certainly a step in the right direction. And they're important channels of 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 is positive to Flowserve.

Got it and then just coming over to the ESG side and energy transition, I appreciate the color there. I guess if we you guys take a step back, do you view that as sort of being kind of decoupled from your customers' kind of typical capital cycles? Or maybe even their own cash flows? Like, is more of this spending involuntary? Or do you see it's still having some measure of kind of correlation with the overall kind of economic health?

I think what we're seeing specifically in the energy efficiency side, right, 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 their normal operational spending. And so it's something that they're thinking about, they want to do, they're making external commitments on CO2 reduction. And what we're finding is we're coming in consulting and having incredibly rich and collaborative dialogue across our two organizations. And when we identified the size of the prize, like the example we showed in the prepared remarks, when we see those savings numbers of nearly a million dollars a year on costs, combined with the CO2, carbon intensity reduction, then it's really hard not to fund that. And so I think it's outside of their normal operating plan. And what we've got to do though is sell at the right level, but again, it's a very consultative sell. So we're involved heavily with looking at their data and working with their engineers. But then when we define the size of that prize, 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 the one additional comment I would make there is, unlike other large spending cycles, this spending won't necessarily just be tied to GDP growth, because to the extent that there are regulations that come into place, this spend may become part of what it costs to do business, versus something that you can do as revenues increase. So I think that that is a distinction versus spending cycles we've seen in the past.

Excellent. Appreciate the detail there. And best of luck in the second half.

Yeah, thank you.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Thanks, good morning, everybody.

Hi, Joe.

Good morning Joe.

Hey, so I appreciate the color earlier and the challenges that you faced 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 Delta variant is proving to be more challenging today. 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 that the good news there is we do have you 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 execute 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 the potential order inflexion. And talking about the funnel and how confident you feel about it. I guess if you kind of look at your OE orders so far, first half of the year, still pretty low relative to history. And I know under absorption has been an issue for margins. I'm just curious, like, is there anything you can continue to do to maybe right size the fixed cost structure of the business such that the under absorption is less of an issue, if in fact it takes longer for original equipment orders to come back?

Sure. So it is it is an incredibly important part of what we're doing. And I'd say there's really two main drivers here, but one is the absorption. And so we've got an ongoing program to take roofline out of our total infrastructure as it relates to Flowserve. And so we've now completed two of those activities, 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 that was super important to do those exercises in 2019, '20 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 yeah, I really believe that we can continue to do kind of two to three facilities every year, and continue to take out that fixed costs within the enterprise.

Okay, great. Thank you.

And your last question comes from the line of Andrew Obin with Bank of America.

I guess good morning. Thank you for putting me in.

Yeah. Hey, Andrew.

Hey, how are you? Just a question on free cash flow, your 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, as the industry - as volumes improve, is this something that will carry over as the industry normalizes? Or will you need sort of committed working capital which was the pattern to return to the past? And 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 throughout the year. Thank you.

Sure, we're pretty pleased with the progress that we've made related to working capital in 2021. Particularly, because we think that we're doing it against a fairly challenging backdrop. So as we look at when it's difficult to make working capital step changes, it's during times of increased bookings, during supply chain - times with supply chain disruptions. And so we've 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 of the processes that have been put in place as part of the transformation. So on that journey, we really started with what was happening in terms of cash collections, and driving down DSO, which we did again this quarter, sequentially and year-over-year. And then we really focused on putting processes in place to drive improvements in inventory levels. And so we see that with planning that's taking place between sales and our operations on a weekly cadence that allow for us to really focus on the inventory items that are hard to get and we need. And 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 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. And so as our sales volume increases in the third and fourth quarter, I think we're going to start to see those PWC as a percentage of sales come down closer to where we were at in 2019 and ultimately make some movement into what is Scott and I's goal of getting to the mid 20s from a primary working capital standpoint. So to come back to kind of the original tenant of your questions, we don't think that the movement that we've seen in the first half of this year needs to be an anomaly. It's a second year in a row that we've driven free cash flow 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 as sort of seems like we're starting to see light at the end of the tunnel with the cycle, how is the quality of the bookings, right? Because 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. And as the cycle recovers as well as the bookings, clearly, still not a lot of large projects, which tend to be more competitive, right, so the mix probably is good, but on the other hand, I think was a big shock to the system. So how should we think about quality of backlog whether pricing or terms? And how long do you think it takes for sort of things to normalize as to sort of business getting back to normal in terms of the bidding process? Thank you.

Yeah. 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 the suit. And I would say that that was the primarily - or the biggest impact for Flowserve was in the pump OE business, the valves and the seals and our aftermarket, we've been able to keep our pricing relatively stable. And I'd say where we are today versus a year ago is we're in a much better position. There's 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 into 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 six months from now than it is even today.

No, thanks so much. Cash and bookings show how hard the team has worked. 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.