Flowserve Corporation (FLS) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Flowserve Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. Now it's my pleasure to hand the conference over to your speaker today, Mr. Jay Roueche, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thank you, Carmen, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's 2020 third quarter 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 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 November 6, 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 accessible on our website at flowserve.com in the Investor Relations section. With that, 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 third quarter earnings call. We are pleased with how Flowserve is responding to the dramatic and unprecedented change in 2020. COVID-19 continues to impact our lives on a global scale, which is impacting Flowserve's end markets and changing the way we run our company on a day-to-day basis. Considering the current environment, I truly appreciate the dedication and commitment demonstrated by Flowserve's leaders and associates, and especially those on the front line working in our manufacturing facilities and QRCs who continue to fully support our customers each and every day. While we have had associates directly impacted by COVID, our strict adherence to the operating policies and procedures we implemented earlier in the year, prevented any Flowserve to Flowserve transmission from recurring in our facilities during the quarter. We are pleased with this outcome, and we remain committed to the safety of our associates. However, it is important to acknowledge that the additional safety protocols and the disruption and have an incremental cost and impact on our overall productivity levels. Despite our best efforts in investment and ensure the health and safety of our employees and customers, COVID continues to cause sporadic disruptions within our facilities. In the third quarter, our Indian and Mexican operations were the most challenged regions, where we have several large manufacturing facilities. However, today, all of our locations are operational and providing support to our customers. The recent rise in COVID related cases in Europe and the United States is concerning. We're doing everything possible to keep these facilities open and operational throughout the fourth quarter and beyond, and we believe our system and processes will continue to keep our associates safe and productive. Before Amy covers our financials in detail, I would like to address our results at a high level. Overall, we are pleased with our execution during the quarter. Flowserve delivered adjusted earnings per share of $0.5, in line with our expectations. These solid earnings also reflect the significant cost actions we have implemented this year. End of the quarter, adjusted SG&A decreased $30.8 million year-over-year to $193 million. We continue to track ahead of our $100 million cost-out program for full year 2020 compared to last year's cost structure. As we communicated previously, these savings are about half from discretionary measures and half from structural actions we have taken. In addition to the SG&A savings, we are working hard to reduce our product cost through supply chain savings and to maintaining higher levels of productivity in our manufacturing locations. Our Flowserve 2.0 transformation program continues to deliver solid operational execution, limiting the decline in our adjusted operating margin to 60 basis points on a $71.4 million revenue decrease versus third quarter 2019, resulting in decremental margins of 19.5% in the quarter. We are confident as additional Flowserve 2.0 process improvement initiatives are implemented within the organization, we will capture more margin enhancement opportunities through further cost actions, manufacturing productivity and product cost reductions. Let me now turn to our segment level performance in the third quarter. FPD's bookings decreased 22.6%, while sales decreased 1.8% as we executed on its strong backlog. The bookings decline was driven by original equipment down 37%, while aftermarket bookings were more resilient at a decline of 12%. Oil and gas bookings were down 45% year-over-year, primarily due to a nearly $60 million decline in project awards. FPD's adjusted margins were in line with expectations, including the 110 basis point improvement in adjusted operating margin to 14.1%. Despite the modest revenue decline, adjusted operating income increased approximately 6.8% to $94.5 million, demonstrating solid operating performance, which more than offset the headwind of a 400 basis point mix shift towards original equipment. Aggressive cost actions drove a $22 million decrease in adjusted SG&A and a 280 basis point decrease in adjusted SG&A as a percentage of sales to 18.7%. FCD's bookings and sales were down 16% and 18.7%, respectively. Oil and gas, power and general industries were both primary drivers or one of the primary drivers, down 30%, 20% and 12%, respectively. Additionally, within general industries, the North American distribution channel continues to be challenged as spending has been impacted by COVID and commodity price declines. FCD's adjusted gross and operating margins were 30.3% and 12.2%, respectively. While these are not the results we typically expect from the business, I am confident that our focus on execution, cost reduction, backlog conversion and inventory reduction will drive fourth quarter margins above their second and third quarter levels. Turning now to bookings. As expected, our third quarter bookings of $806 million was generally in line with second quarter levels and represented a 21% decline year-over-year. As you may recall, last year's third quarter included strong oil and gas project activity in the Middle East and Asia Pacific as well as a number of smaller projects awards, which together totaled roughly $140 million. By contrast, the largest award we received in the 2020 third quarter was $12 million. And when combined with our other small to medium-sized project awards, the sum represented less than $60 million of project awards. On a positive note, we didn't have any material cancellations in backlog in the quarter. Third quarter aftermarket activity remained relatively stable with bookings of $424 million, down 32.5%, modestly better or modestly below our expectations. While customers continue to spend to meet safety and regulatory requirements, upgrade and productivity investment remained muted and larger scale turnaround and maintenance activity continue to face cohort related headwinds with limitations due to site access. Original equipment bookings in the quarter were $381 million, down 28% versus prior year and up about 4% sequentially. Large projects, which typically accounts for 10% to 15% of our business remain the most challenged. The majority of these projects have been delayed and are currently being reevaluated. Our customers' project spending decisions will largely depend on the status of the COVID environment. The bookings level over the last 2 quarters accurately represents the current market environment, and we expect bookings in the fourth quarter and likely the first quarter of 2021 to be similar to this year's second and third quarter. Given what we know today, I am increasingly optimistic that we begin to return to bookings growth next year as the world moves beyond the COVID crisis. We should see it first in our aftermarket bookings ahead of an inflection in project bookings, but we expect both to be better in the back half of 2021. On the aftermarket side, we feel there is pent-up demand building for parts and services and expect that growth in the -- in this area to incur earlier than the project business. We are beginning to see signs of increased aftermarket spending in 2021 as operators are planning for maintenance and turnaround events. Let me now address our served end markets. Our oil and gas markets continue to be the most impacted due to COVID related declines in energy demand. Third quarter bookings declined 42% year-over-year and were roughly flat sequentially. Last year's third quarter presented a challenging compare figure due to the strong project environment at that time, which included several larger awards related to IMO 2020 upgrade activity. 2019 third quarter included over $90 million of project awards. This quarter, our largest project awarded in oil and gas was just $12 million. Third quarter chemical bookings were down 21.6% in the quarter, primarily driven by FPD's 31% decline, while FCD's bookings were down only 5%. The quarter included one smaller award of $4 million in Asia Pacific. Our integrated customers continued to delay petrochemical investment, while specialty chemical demand presents growing opportunities. Turning to power. While the power market continues to be challenged, it has not declined as much as oil and gas or the chemical markets. Third quarter and year-to-date bookings are down just 7.5% and 9.2%, respectively. The quarter includes a few small lucrative awards totaling $9 million and a $4 million fossil fuel award in Asia. The digital industries market, which includes a significant level of distribution and was our most challenged end market in 2019, continued to show signs of recovery in the third quarter with bookings up 18.6% and up 5.9% year-to-date. FPD's 31% increase was partially offset by FCD's 11.5% decline, driven by the continued MRO slowdown in North America. FPD's growth was driven by distribution and food and beverage growth. Finally, representing our smallest market, water bookings decreased $41 million or 66%. Last year's third quarter was particularly strong, including over $20 million in awards for a large Middle East desalination project. While the 2020 third quarter included only 1 project award of $6 million in North America, we continue to expect investment opportunities from desalination, flood control and municipal water markets. Regionally, our largest dollar decline was in North America, which has seen a significant impact from COVID as well as the related downturn in energy demand. Only Latin America has delivered constant currency bookings growth in 2020, up 6% and 9% in the third quarter and year-to-date, respectively. We incurred double-digit year-over-year bookings declines in all other regions. We're seeing the most potential in the Asian markets as mobility has returned to near-normal levels, demand for processing based products has recovered and infrastructure spending continues. With limited and highly competitive project opportunities, we continue to focus on improving our position for winning available work, driving our cost structure lower to offset pricing pressure and maintaining a quality backlog to increase our installed base and create aftermarket opportunities. We believe our markets have stabilized and expect fourth quarter bookings to be in line with what we saw in the second and third quarters of this year. Let me now turn the call over to Amy to cover our financial results in greater detail before I return to provide our outlook for the fourth quarter.

Thanks, Scott, and good morning, everyone. Looking at Flowserve's third quarter financial results in greater detail, our reported EPS of $0.39 included realignment and transformation expenses as well as below the line FX charges totaling $0.11. Adjusted EPS of $0.5 was solid, considering we continued to experience ongoing COVID related headwinds. Third quarter revenues of $924 million were flat sequentially and down 7.2% versus the prior year. FTD's revenue declined 1.8% on reduced aftermarket activity, which more than offset strong original equipment sales growth of 10% through backlog execution. Consolidated OE revenues of $479 million were down 5.6%, where FCD's 21% year-over-year decrease more than offset FPD's strength. Aftermarket revenue of $445 million was down 8.8%, with both segments down in that general range. In addition to limitations accessing our customer sites, many of the planned refinery and chemical plant turnarounds that were expected for this fall were further delayed in the active Gulf Coast hurricane season also caused temporary closures and disruptions to several of our QRCs as well as our customers' facilities. Turning to margins. Third quarter adjusted gross margin decreased 230 basis points to 31.5%, including declines of 180 and 240 basis points at FPD and FCD, respectively. In addition to the previously mentioned cost increases related to COVID and the associated disruption with our sites, margins were also negatively impacted by a 100 basis point mix shift towards original equipment revenues as a percentage of our total sales, driven by FPD's 400 basis point mix shift. On a reported basis, Flowserve's third quarter gross margins decreased 250 basis points to 30.9%, again due to COVID disruptions and mix headwinds and a $2 million increase in realignment expenses versus last year's third quarter. Third quarter adjusted SG&A decreased $30.8 million or 13.8%, demonstrating our cost control and the aggressive cost actions we took in the first half of the year. These measures brought $193 million of adjusted SG&A, down 160 basis points as a percentage of sales to 20.9% versus prior year, which was flat sequentially. On a reported basis, SG&A as a percentage of sales decreased 140 basis points, primarily due to the cost actions we implemented, considering our adjusted items were relatively flat with prior year. Third quarter adjusted operating margin decreased 60 basis points versus last year's to 10.9%. With third quarter adjusted operating income of $100.6 million and a $71.4 million year-over-year revenue decline, it represents an adjusted decremental margin of approximately 19.5%. FPD's solid operating performance delivered adjusted operating income growth at the segment level, even as its revenues declined modestly. As a result, FPD drove 110 basis points increase in its adjusted operating margin to 14.1%. FCD's adjusted operating margin of 12.2% was below our expectations, driven by a higher mix of lower-margin project work. With clear visibility and line of sight, we fully expect FCD's margins to return to around the mid-teen levels in the fourth quarter. Reported third quarter operating margin decreased 110 basis points to 9.4%, driven primarily by a loss of leverage on lower revenues and included the benefit of modestly lower adjusted items. Turning to the cash flow and liquidity. As many of you know, Flowserve's results are traditionally seasonal, and most of our full year cash flow is delivered in the second half of the year, especially in the fourth quarter. While our cash flow statement will be published in a few days with our 10-Q, I can say we feel good -- we feel very good about our cash generation during the quarter. Based on our operating cash flow of $70 million to $75 million and quarterly CapEx spending, free cash flow for the quarter will be about $57 million. This performance as well as the $300 million of net proceeds after our note issuance and tender offer, brought Flowserve's cash and cash equivalents balanced at September 30 to over $921 million. Even absent the net proceeds of the bond issuance, Flowserve increased its cash position, $59 million in the quarter. In future periods, we intend to use some of this excess cash to retire outstanding debt, considering we have maturities in 2022 and 2023. However, primary working capital as a percent of sales grew to 30% as inventory, including contract assets and liabilities increased roughly $100 million versus the prior year. This increase in inventory primarily relates to the strong OE project backlog we built as well as an increase in shipping manufacturing delays due to COVID-related disruptions in a few of our larger facilities. As a result, COVID has had a greater negative impact on working capital than our revenues might reflect. Over the last few years, Flowserve has delivered meaningful improvement in the working capital of the sales metrics through our transformation initiatives. And despite this quarter's blip, we are confident we are on the right track and that our performance in the fourth quarter will be much improved. In particular, we are actively managing and taking discrete measures to reduce the inventory levels to reflect current demand, and we also have solid visibility to upcoming shipments. It is critical for us to stringently manage inventory more intensely during challenging points in the cycle than during high growth, and our teams are incentivized accordingly. Accounts receivable has demonstrated somewhat better consistency than inventory. DSO was 73 days in the quarter versus 74 in each of the first 2 quarters of 2020. Although we still see opportunities for improvement. Despite some COVID-driven slow pay impact this year, we have made significant improvement in the last 3 years when DSO was 87 days in the third quarter of 2017. And we expect our transformation initiatives will enable us to reach our target of below 70 days, which given the competitive environment for payment terms in certain of our end markets would represent strong performance. In addition to the $500 million notes issuance and tender offer during the third quarter, we also amended our $800 million senior credit facility to provide Flowserve increased flexibility and ample access to this source of liquidity. I want to thank and express my appreciation to our partner banks for their continued support of Flowserve. We value these relationships and look forward to our ongoing work together. In total, our quarter end liquidity position increased roughly $370 million sequentially to $1.7 billion, which includes our cash balance as well as nearly $750 million of available capacity under our amended credit facility, which remains undrawn. With the continued progress on our $100 million cost reduction program, combined with the anticipated working capital improvements, disciplined capital spending and discretionary cost management, we expect to deliver significant cash from operations in the seasonally strong fourth quarter. Our expected major cash usages in 2020 remain consistent with our prior guidance, including funding our structural cost-out actions and the realignment and transformation programs. We continue to expect full year capital expenditures in the $60 million range and annual dividends of roughly $100 million. Let me close with a brief comment addressing the accounting revision that we disclosed in our press release yesterday. First, the revision is not the result of a view of increased risk related to asbestos litigation or any change to our expectations for future cash flow. As part of our third quarter close procedures, we became aware that our accounting for potential future exposure to asbestos liabilities related to certain heritage brands deviated from others with similar liabilities. Specifically, as previously disclosed, we were reporting liabilities only for those claims that were known versus using an actuary to forecast claims that were possibly incurred, but not reported to the company. As a result, we increased our liability by $74 million to $101 million in total. This liability is partially offset by $87 million of insurance coverage booked as a receivable. Cash from insurance proceeds is received as agreements are reached with carriers. Our revised financial statements and the filings reflect this incurred, but not reported liability, on the balance sheet as well as the correction of other immaterial timing items. Let me now return the call to Scott.

Thank you, Amy. As I said earlier, we are pleased with our performance in this unprecedented year. We are managing through the COVID pandemic and our operational efforts with Flowserve 2.0 are positively impacting our downturn performance. The Flowserve 2.0 work is not done and we continue to remain committed to our transformational program. We have reprioritized certain work streams due to the pandemic driven downturn, and we continue to make steady progress on further cost reduction plans and preparing for a return to growth. In fact, the speed, with which we reduced our cost structure by $100 million versus 2019 was possible because of our success over the last few years, creating a more flexible Flowserve 2.0 operating model. Most of the structural cost initiatives we implemented midyear were comprised of measures previously planned as part of the Flowserve 2.0 program that we accelerated. In addition to managing COVID and executing our downturn playbook, we are making progress on our long-term strategy and our growth initiatives. Over the last 18 months, we've put a lot of effort in analyzing our end markets and evaluating our overall product portfolio. Our product teams have made significant progress in our efforts to have a differentiated offering in attractive markets that have growth potential for years to come. This year, we have launched 5 new products, introduced 10 product upgrades and put 6 existing products through the design-to-value process. In the third quarter alone, we launched all of the new products and expect several more before the end of the year. Included in the new product introductions is a SIHI branded 2-stage liquid ring compressor designed for a variety of gases and vapors. Our proven technology enables this product to operate under the most severe conditions, where safety, reliability and special processes are critical. This compress will be part of the FPD segment. We also added new capabilities within the FCD segment. During the third quarter, we launched a Valtek compressor anti-surge valve, which is a revolutionary solution to anti-surge control and LNG processing, refinery gas compression, natural gas stations and chemical plants using natural gas as a feedstock. This product will provide operators with an innovative anti-surge design that combines precise control and fast responsiveness. Additionally, we expanded our Limitorque actuator line with the new MX Series B smart electric actuator. This IoT-enabled Flow Control solution provides trouble-free commissioning, improved process control from advanced diagnostic capabilities and reliable operation in multiple industries and applications. Flowserve has historically been an innovative leader in the Flow Control industry. With increased confidence in our new product development process, we'll continue to increase our investment in products and technology. While we very much believe that oil and gas has a long-term future in the energy mix, we do recognize the advances in alternative energy technologies. Today, oil and gas represents about 60% of the global energy mix. With significant investment in renewables through 2040, most still expect oil and gas to provide more than 50% of the global energy mix. Nevertheless, we are excited about the increasing investment towards energy transition, reduced emissions and safer living conditions. And virtually every major industrial process involving liquids or gases, pumps, valves, fields and services are vital to that infrastructure. Our products and services are currently used in applications throughout the world to address key environmental issues such as supplier gas recovery, which reduces methane emissions and increases process energy efficiency; hydrogen production in the downstream sector; carbon capture and storage to reduce industrial carbon intensity; process maintenance and services to maximize service life, improve efficiency and employ local workers; concentrated solar and hydropower; seawater desalination plants for cost-effective access to freshwater; and flood control to protect coastlines and cities from [indiscernible] . And as technology advance and considering Flowserve's innovative leadership in the Flow Control industry, we fully expect to participate in helping make the world a better place for everyone. I would now like to spend a minute on our environment, social and government efforts, or ESG. Flowserve continues to improve as a corporation, and we take our ESG program very seriously. Our commitment to ESG began almost a decade ago when we released our first sustainability report. The vision for our program starts at the top of our organization with our Board of Directors and senior management. We've worked together to evolve and develop a comprehensive ESG program focused on 3 pillars: planet, people and operational excellence. While we believe our proactive approach to governance has been and continues to be aligned with our shareholders' best interest, as evidenced by our implementation of best practices, like declassifying our Board of Directors, improving gender and racial diversity, enacting proxy access and most recently, implementing the ability for our shareholders to act by less than unanimous written consent. Today, I would like to focus more specifically on our environmental initiatives within our ESG program. Earlier this week, we published our 2020 Sustainability report in which we discuss our commitment to becoming a continuously improving organization. We also specifically announced a new target for reducing global CO2 emissions intensity by 40% by 2030 using 2015 as a baseline. In addition to setting an ambitious target to reduce our own emissions, we intend to utilize both our existing portfolio as well as developing new products that will help our customers reduce their CO2 emissions and also further participate in cleaner sources of energy like hydrogen, solar and hydroelectric. At Flowserve, we can make -- we believe we can make the world a better place through our ESG actions, and setting our emissions targets and assisting an energy transition are big steps towards doing just that. Let me close with our fourth quarter outlook. We expect fourth quarter bookings to be in line with the second and third quarter levels. While anticipating an upward bookings inflection to occur in mid-to-late 2021. We expect to make significant progress converting our $2 billion backlog in the fourth quarter and deliver our largest revenue quarter of this year. As we have the last 2 quarters, we plan to deliver strong operating margin decrementals as we effectively manage our cost structure. Fourth quarter decrementals should be around the 20% level. Finally, we are forecasting to finish the last quarter of the year with free cash flow generation of at least $100 million as we reduced primary working capital from the third quarter levels. Those set of results are traditionally very seasonal during the year with the best performance for revenues, adjusted earnings and cash flow occurring in the fourth quarter of the year. We expect the 2020 fourth quarter to largely reflect that trend absent of any COVID-related issues. I remain confident that our transformation progress will continue to position Flowserve to execute through cycles at a higher level than previous downturns and capture growth with market recovery, driving long-term value for our associates, customers and our shareholders. Operator, this concludes our prepared remarks, and we would now like to open the call to any questions.

[Operator Instructions]. Our first question is from Deane Dray with RBC Capital Markets.

Can we start with the MRO outlook on the oil and gas side? And just your expectations about how long can the MRO upgrades and maintenance be delayed by the industry? At a certain point, things become either it's regulatory or safety, but how close are we to that threshold?

Yes. Deane, it's an important question. And obviously, that's been impacted by this downturn. And what I would say is that the regulated and the mandates are still out there, and we're seeing that work progress, but as operators can make exceptions and push some of that out, which we are seeing. But probably the biggest impact is just in the discretionary side of it, where you might -- normally, you bring the parts in when you think that there's an imminent failure or even ahead of that, and we're seeing those decisions get pushed out. In my prepared remarks, we talked about -- this will be the first sign of recovery for us. And I truly do expect that we're going to see 2021 be better than the run rates that we're at right now. And they just can't hold off on spending a lot of this. And so we don't think we're losing market share. We don't think others are taking action, but we do think there's just been -- the discretionary side of this has been clamped down really, really hard. On the seal side, where it is, if things start to leak between that motor and the pump, they've got to replace the seals, and so we're seeing that. That business hold up reasonably well. But on the pump parts and some of the valve parts, that's the area that we've seen a pullback. And so I just think -- and then the other piece, and I put this in the prepared remarks as well is that we are talking to customers about major plans in the second half of -- or in 2021 as they're looking to do bigger maintenance-type events or turnaround activity. So hopefully, that helps there. But we do think there's pent-up demand. We're having big customers with -- or discussions with a lot of our top-level customers, and they're confirming that the spending should come up in 2021.

That's really helpful. And you anticipated one of my questions about market share, you don't think there's been any market share loss. So can I ask about channel in the -- inventory in the channel. Just what's your sense about the distributors right now on the stocking, destocking continuum?

Yes. So the stocking distributors really are in our valve business. And there's a few that are public and disclose their results. And you can see their inventory levels are down substantially. And so they came in the -- it really started last year. And so they've been destocking and pulling inventory down but they are not spending money, right? And what they've said is that they're not going to do major stock orders, and they're just going to buy and replace on a regular basis. And so until you see a pretty significant inflection in their business, I don't anticipate major stock awards, but I also think the destocking is done, like, I mean, their numbers are to helm pretty dramatically. And so I think that's actually, in a weird way, that's going to help our valve business more than what we saw in Q2 and Q3. But it's not a major uplift until we start to see an inflection activity. But I just think they're at kind of the variables of inventory levels, and that will actually help our bookings within valves. And then on the pump side, we're not seeing -- we don't have as many stocking distributors. A lot of that more is passed through and they hold just a little bit of inventory. So I don't think there's a big impact on the pump side.

Great. And just lastly, it's more of a comment than a question as I appreciate the transparency and disclosure about your revised assumptions on the asbestos reserve. That is, a, in the scheme of things of companies that are facing this issue, it's tiny for you all, and you've got good insurance that you're showing against it. So I appreciate the transparency, but it looks like a non-issue to us.

Thanks, Deane. We agree with $14 million of net exposure currently on our books, it is a relatively immaterial change.

Our next question is from Joshua Pokrzywinski with Morgan Stanley.

Scott, just kind of following up on Deane's question and some of your comments on the timing of kind of replenishment in the backlog with some of this book and ship and maintenance activity that needs done and likely comes in here in the first half. How much backlog depletion would you expect as we kind of move through the first half of next year before orders turn positive, I think, in the second half? And I guess, what would be more than -- you'd be comfortable with relative to kind of normal visibility then?

Yes. Joshua, good question, and I just said, it's a really hard one to answer. And it really is with the backdrop of COVID. And so I think really this fall COVID outbreak in the Northern Hemisphere is going to really dictate kind of the comfort level and the aggressiveness on when folks can start to spend again. But I'll just say, as we think about backlog and where that is, we've given some pretty clear direction on what we see in the fourth quarter. And so you can get to a book and bill type number from there. And you can see what the backlog looks like. And then it really just becomes a question of when customers start to spend again. And right now, we do believe that at some point in 2021. And whether it's late Q1, maybe Q2, that aftermarket and MRO spending starts to happen. And we've got -- having discussions with our customers, we know there's plans to spend more versus the run rates that we're at now. But then I wouldn't expect the project activity to pick up dramatically until the back half of 2021. And so it's just kind of when does that happen. When do operators get comfortable, and a lot of this is just going to be psychology on how COVID is handled during this kind of uptick in the winter season. And then what gives them confidence that mobility and demand starts to return. And I think my guess right now and everything we see is with vaccines and living with this virus, I believe that folks start to get a lot -- in a much better place in next year at the end of Q2 and early Q3. And so that's really the best I can provide. And what we're hopeful is, as we kind of get another quarter under our belt, folks get a little more refined on their 2021 plans. We'll come out at the end of the fourth quarter with some, hopefully -- or at least we'll provide direction in terms of what we're thinking. And hopefully, we can provide more concrete guidance on 2021.

Got it. That makes sense. And then just thinking about the magnitude of MRO spend, and I know a lot of the timing is subject to site access and COVID and a lot of the moving pieces there. But if I think back to kind of the '15-'16 time frame, too much got pushed out, and then we had a big catch-up and customer would say, with the benefit of hindsight, I don't want to do that again. How would you contextualize the conversations with the management teams of some of these customers? And that is this MRO getting back to normal practices? Or has there been kind of a snowplow effect of stuff that didn't get done, that all pushes into a smaller range as you're able to get this work done again?

Yes. So I'll just kind of -- I'll reiterate a little bit what I said with Deane. We are having discussions at the top level of our customers. And I think unanimously, they all understand the impact of what happened in '15 and '16, and they want to avoid that. I think the difference here is just with COVID and site access and people working from home, it was in a lot of cases, in a lot of parts of the world, it was physically impossible to conduct that work. And so I'm optimistic that the MRO and the maintenance side does return back to the levels that we were operating pre-COVID. And I do think there's some pent-up demand there, certainly on our parts side. And so I'm probably more optimistic on growth and return here. Again, it's going to depend on how intense is this kind of winter wave of COVID, and then the psychological impact of that. And where do they think demand on whatever process industry that they're supporting is. But again, in our discussions, there are things planned in the first half of 2021, that would be significantly more than the rate that we're seeing right now. And so we feel pretty good about getting some growth here within 2021.

Our next question comes from John Walsh with Crédit Suisse.

I wanted to talk a little bit about how to think about even conceptually some type of margin bridge into next year. I mean you talked about of the actions, I think, you took. Half of them were temporary in nature. There was another half that was structural. It sounds like you're announcing new products, which maybe that helps with some price and creating some demand from new products. But can you help us understand because it seems like you are pointing to a top line headwind, at least, as a base case, just what we should be thinking about in our margin walk year-over-year as we think about next year and the tailwinds and the headwinds?

Sure. Yes. No, there's a -- it's a complicated situation, right? But I'll give you kind of a little bit of things to think about. The first one would just be the mix side, right? And so as we kind of get the OE backlog out and the mix starts to return to a little bit more normal aftermarket versus OE. The aftermarket margins are obviously higher. And so we'll get a tailwind from that mix. You're also -- that $100 million that we've talked about is secure. And so you get a tailwind on the cost out there. And then the other thing I'd just say is the Flowserve 2.0 initiatives that were going before are all still very much in flight. And so we've made big strides on manufacturing productivity. We're making strides on lean. We're driving our supply chains to be more cost effective. We talked about on the product side, this design to value. And every time we put a product through there, we're seeing anywhere from 10% to 20% cost out on the overall landed cost of the product. And so there's still a lot left in the tank in terms of Flowserve 2.0. And then obviously, the headwind would be -- the revenues are lower. And so you've got absorption and overhead that we've got to overcome. And then the other one that we haven't talked about yet is just pricing. And so we are seeing an impact on pricing in a negative manner as folks are competing for limited work. I would say it's not across all of our business. It's more imminent in the large projects and particularly on the pump side. And we're doing everything we can to price things accordingly and accurately that generate value for Flowserve in the long run. So I think those are kind of the big levers. I'm looking at Amy. Did I miss one, Amy?

Yes. The only thing that I would clarify, you commented on the $100 million being 50-50 structural and cost avoidance in 2020. Just as a reminder, we only got about 6 months of the benefit of those structural changes. So we anticipate that they pull forward into 2021, actually $100 million of run rate savings.

Yes. And then the only other thing I'd just say, just to kind of put a fine point on it is we were pretty aggressive and quick in the -- really at the end of Q1, beginning of Q2, putting our cost reduction plans in place. And so we know we can get cost out as our backlog comes down or in the event that something goes a little bit differently on the booking side than we expect. And so we're going to continue to watch this, and we'll make sure that the cost structure is where it needs to be in 2021 and beyond.

Great. Maybe we could do the same exercise on kind of free cash flow conversion. Obviously, I know it's a little bit tougher this quarter just with the way the disclosure worked. But as we think going forward, you did have the target of 100%, that one I thought was a little bit more back-end loaded, if I remember your commentary on how you achieve that. What are kind of the big headwinds, tailwinds as you look into next year from a free cash flow perspective?

Yes. We think that 2020 is a good indication that Flowserve can generate a strong free cash flow in good and challenging markets. We are seasonal with respect to our cash flow. So as we indicated, we're just shy of $60 million of free cash flow this quarter. As Scott indicated, we're driving towards the $100 million or better of free cash flow in the fourth quarter of the year. And realistically, there's been -- we've made some investments in 2020 that's weighing on those numbers, including the cost that it took to rightsize the business in the first half of the year. We continue to see working capital and primary working capital as a huge lever for cash flow generation. As we've indicated or I indicated in my prepared remarks, we are disappointed with where we landed in the third quarter as a percentage of primary working capital as a percentage of sales, but we're going to continue to drive that number down. And specifically, where we sit now, we think there's a huge opportunity with respect to inventory. And that's really our focus area as we close out the year. And I would comment that, that focus is not just to close the year out strong, but that's really to reset the bar in terms of where primary working capital should be as a percentage of sales. And to drive that number to the mid-20s and lower as we pick up momentum. Like everything else, with respect to transformation initiatives, we plan to provide an update at the end of the year in terms of where we stand and where we sit with those goals. But we think that free cash flow for that cash flow conversion of 100% is still where we want to be at as a company.

Our next question comes from Andy Kaplowitz with Citigroup.

Scott, could you give us some more color into what you're seeing in a couple of your larger end markets? I think there's some investor concern -- increased investor concern out there that refiners could or are shutting capacity as demand stays lower for longer. So do you see risk of a more extended downturn in refining? And then you mentioned that specialty chemical demand is recovering. Do you see chemical-related projects under aftermarket beginning to come back?

Yes, sure, Andy. I would agree. I mean, refineries are challenged right now. You can see that with the utilization numbers. And then there are operators that are announcing -- some have announced temporary closures, and some have announced permanent closures as well. What I would say is the closures are largely in North America and Europe, that would be the smaller refineries that just the economics haven't worked well for them. And quite frankly, they weren't spending a lot with us in terms of upgrading their equipment and things like that. But at the same time, the refined product has taken a massive hit as mobility has grounded to a halt in the early phases of COVID, and it's slowing down again in this wave of COVID now. So I think it's a more challenged market. And as we look at our funnel within the Flowserve system, we're definitely seeing more opportunities in specialty chemical. We're seeing more opportunities in gases. And you've seen some LNG type awards and discussions and projects moving forward. We're seeing the water markets progress. And so I think there are -- I think we're going to see more things outside the refinery early, but I also believe that your refining investment in Asia and the Middle East will definitely continue. And again, I think that's kind of a second half of 2021. And then just kind of thinking a little bit more broadly, infrastructure spending around the world is picking up. We're seeing that a lot in Asia, and we do think you'll see more of that globally. And then I'd say the Asia market is essentially -- I'm not going to say it's fully pre-COVID levels. But it picked up in Q3, and we're seeing lots of activity there. And then the Middle East, while a little bit different than kind of China and the rest of Asia, we do feel confident that the Middle East projects do progress in 2021. And that would be more of the refining and the oil-related type work there.

Very helpful. And then, Scott, you've done the -- see Flowserve 2.0 operate during the pandemic. And while it seems like, as you mentioned, many of the work streams that you've outlined were going to improve, they have improved. One could argue that the benefits are more difficult to see in work streams such as aftermarket and growth. And you mentioned the positives of Flowserve 2.0 as it today includes lean, design and value, but how much incremental impact could there be on the Flowserve business, you can get all of the work streams on the right track in 2021 and beyond?

We still think there's a big prize here, right? And so we announced at the beginning of the year that we were kind of halfway done with these initiatives. We did accelerate a bunch of stuff on the cost and the cost outside this year. But there's still opportunities. And we're in a full-scale transformation. And I'd say where we see -- there's 2 areas that we see a lot of potential. And one is it's still on the manufacturing side, the manufacturing productivity. And so there's a lot of work there to make our facilities more effective. There's some roof line optimization that we still have to do. And so we'll continue to work on that and become just a far better provider of products and short-cycle time and inventory management and all the good stuff that comes with that. And then the other thing, we talked about it is that kind of new product development organization, we call it marketing and technology. We've been priming the pump now for 2 years. It was part of Flowserve 2.0, where we redid the new product development process. We really put a lot of effort and focus in defining attractive markets. Obviously, energy transition plays a big role in the backdrop of kind of where we're going to put our money and where we're going to put our investments in products. And I'm really pleased with what we've done this year. And so this is kind of the first time that you're seeing Flowserve come to the market with new products and new introductions that we think are differentiated and that we think can drive growth over the long run. And so as we gain confidence in that organization, we're going to continue to put more money and put more resources there. And we truly do want to be a technology differentiated company. And so you'll hear more and more from us around how we're doing that and where we think we can differentiate in the future.

Our next question comes from Joe Ritchie with Goldman Sachs.

So Scott, I know we touched on margins a little bit. And I guess, kind of hard to pin down here just given where we are heading into 2021. But I guess, as I kind of think about the framework, you guys have done a lot from a cost perspective to take cost out. Revenues are likely to be lower than, let's say, where you kind of troughed in 2017 and I think margins troughed around like 8.7%. I think just given the cost outs, I mean is it fair to assume that we expect margins are above the 2017 levels. I'm just trying to -- provide a baseline for next year.

Yes. I think really -- we'll provide that in the fourth quarter call where we get a lot more specific about 2021. Yes, the only thing I'd just say is that we continue to do all of the right things to manage this business throughout the cycle, right? Whether it's a down cycle or up cycle, and I'm just -- I'm confident in what we're doing with the Flowserve 2.0. And so we're going to continue to do that. And as a result, we want to have -- as the business comes down, we want to have the best decrementals in the peer group. We want to preserve our margins as best as possible. And at the same time, we want to be preparing for growth in the upside. And so that's kind of the transition point we're at right now. Is that downturn execution, we feel reasonably good on it, and we'll continue to do the right things to manage through the downturn, but we've also got to be pivoting for growth and making sure that we are ready growing the markets return. And so I'd just say, we are focused on the right things. And at the end of the fourth quarter and the fourth quarter earnings call, we'll get real specific about 2021 and what we think we can do.

Got it. No, that makes sense. And then I think one last question. Going back to some of your prepared comments around like the percentage of the global energy mix today. I think you said 60% is oil and expected to be 50% going forward. I guess just within that context, can you just kind of again, just baselining, like what portion of your business today is tied to like traditional fossil fuels? And then given some of these product introductions and where you're focusing kind of moving where the puck is going, where do you think that mix can kind of shift to in the coming years?

Yes, so we decided a couple of public sources there. And basically, it's -- and these are all reasonably recognized names and I'd say generally accepted. And so currently, kind of oil and gas makes up the 60%, we think it gets to about 50%. We highlighted 2040 as the number there. And then when you look at our end markets, and we put a chart out there, gosh, I think it was either Q1 or Q2, right, when we put it into the presentation. And it breaks down our end market outlook pretty specifically where we get to downstream showing kind of 25% to 30%. And then the midstream at about 10% in oil and gas on the upstream side being about 5%. And so that's our exposure there. And then just on the chemical side, there is some petrochemical stuff there as well. But I'd just say, overall, with energy transition as the backdrop, we know that, that mix starts to come down, right? It's inevitable. And my personal view is COVID has accelerated this. And so everything that we're looking at is how can we participate in infrastructure and process spending that involves flow, right? So anything that's moving materials whether it's liquids or gas, we want to be a participant in that and truly become a Flow Control solution provider. And so the new products that we talked about work in lots of different applications. And so the CE liquid ring compressor, that works in carbon sequestration. It works in hydrogen. It works in other gas applications. The anti-surge valve is really what that does is it protects the compression stations. And so that works incredibly well in LNG and other gas applications. And then the limiter to the IoT-enabled smart actuator, that can work in all kinds of different industries. And so whether it's water or other infrastructure, that electric actuator is pretty ubiquitous across the different end markets. And so when energy transition is the backdrop, we've got to focus on selective markets that we think are attractive and have long-term growth potential. And it's been part of our strategy now for 18 months, and you're starting to see the fruits of that labor in those discussions that we're having with our leadership team.

Our next question comes from Nathan Jones with Stifel.

Just wanted to follow-up on one of the cost comments that you made there, Scott. I mean it's $100 million of cost out this year. In my understanding, maybe when you reported second quarter earnings, was that 2021 was going to be a wash between carryover structural savings and the return of some of the temporary costs. The way you were talking here this morning, it sounds a little bit like it might be a net tailwind now in your expectations into 2021. Is that from maybe volumes a little bit lower than you were anticipating in 2021, so some of those temporary costs don't come back? Just any color you could give us around that?

Yes. I don't -- yes, maybe tail was probably not the right word. But what I would say is we're confident in the $100 million, half of it was structural. And as you annualize that, you get a little bit of an uplift here in 2021. I think the discretionary and some of those temporary measures will come back. I would say with where we are with COVID. I don't think it comes back as aggressively as we might thought when we first put those targets out. And then just the other thing I'd just add to this is -- I said this earlier, but we are very focused on the cost structure. And anytime in a down environment, it's got to be the focus. We've got to be tight on cost. There's more things that we need to do around cost structure, and our team is looking at that, and we'll make sure that the cost structure is in line with the environment that we're in. Amy, do you want to add anything else on that?

No. I think that the key point is we're not done looking, and we continue to try and adjust our expectations based on what we're seeing in the market. We know that the cost-out program that we put in place delivered and is delivering what we expected to, and we want to ensure that we've got -- that we keep that momentum going into 2021 and that we realize those structural savings and beyond.

Got it. Next one is on price. I think I asked you the same question, Scott, last quarter. Typically, in these environments, you see very challenging pricing, particularly on large projects. And then you've got the additional challenge of figuring out what you need to do with price versus filling factories to absorb overhead and those kinds of things. It seems like the order rates are lower for longer than maybe we thought three months ago, pricing's may be a little more challenging than you thought it was going to be three months ago. Just your current views on how you balance those two things of not filling the backlog full of things that are very low-margin versus the need to absorb your fixed costs?

Yes. No, you did ask this last quarter. And unfortunately, I'm going to answer it very similar to last quarter as well. And I just said that the pricing pressure is real, and it really hasn't changed. And to your point, the longer this goes on, then they're more concerning it gets. What I will say is, I think our teams are doing a really good job in terms of maximizing the pricing that's out there. But it is a difficult market. And I'd say oil and gas is more challenging than some of the others because those customers are struggling with their own financials. But there are places that our price has been pretty resilient. And so we're really trying to be very selective on where we think we can get price and how do we maximize price. But to your point, right, offsetting that with how do we think about absorption and what the benefits are there. And then the other thing I'd just say is, on the cost side, and this might be a little bit different than last quarter. We are starting to see relief in our supply chain. And so we're very committed to getting savings through the supply chain we're seeing some of the commodities that are down in the materials that we deal with. And so we're trying our best to offset pricing with the supply chain save things there. And then I'd just say, again, there's other levels -- levers here on the cost side with design-to-value and productivity and roof line optimization. And so we're going to continue to work through that. But it's definitely a challenge in pricing right now.

Our next question comes from Brett Linzey with Vertical Research Partners.

My first question is just on the QRC strategy. I guess, as part of the broader organizational realignment, are those getting restructured out or lower as a part of the branch network? And just kind of thinking about the next year, how does that trend in terms of the QRC and the expansiveness of it?

Sure. Yes. So the QRCs are definitely a differentiation for us. And I don't have the exact number where we're at, but it's a large number around the world. And we constantly look at that. And so this year, we've actually taken out a few of those, but it's not because -- it's just because we think there's opportunity to rationalize and we can service from somewhere else. I would say our long-term strategy isn't net reduction here. It's taking a few down where we can optimize the productivity of a network of QRCs and then repopulating those in areas that make a lot of sense for us. And so I do think we -- I can't -- Jay might know for sure. We -- I think we opened 1 up earlier this year in Asia Pacific. And then last year, I know for sure, we had openings in the Middle East and Asia Pacific as well. But we're constantly looking at this. And again, I wouldn't expect a net reduction overall. However, there will be some consolidations this year. And then again, as we continue to grow and things move forward, we'll continue to add to best support our customers. And for us, we want those QRCs in proximity of big investments in installations. And so as projects move forward in advance in Asia Pacific and the Middle East, we've got to continue to up our presence and be in proximity of those locations.

Good to hear. And just somewhat related in terms of CapEx, you reduced it to I think $60 million was the last update. What are you thinking for this year? And then as we roll into next year, I mean, should that number move higher? Or is $60 million sort of a good place to be for a couple of years here?

Yes. So we're -- we are anticipating we'll be around the $60 million mark this year. And although I wouldn't call that a floor necessarily. I don't necessarily see us going lower than that number as we head into 2021. We're really focused on building our enterprise system structure within Flowserve and obviously focused on spending the money that we need to for safety and maintenance capital. So as we look at 2021, we're still working through the numbers, but I would anticipate we'll be at that level or modestly higher.

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

Just a question. You sort of highlighted some supply chain issues. And as industry is evolving, I'm just sort of thinking in terms of both global supply and your supply chain, do you think, a, the industry will change where it will source from and become sort of maybe more localized, more price conscious? And do you think you will adjust your own supply chain geographically shorten it or change it based on cost? And I guess the bigger question is, how does the COVID pandemic impact your and industry thoughts about the length and location of the supply chain?

Yes. So Andrew, I just -- let me go back to the original Flowserve 2.0 and what we found and what we needed to do within our supply chain. And so when we started this, what we found was a highly fragmented and responsive supply chain within Flowserve. And so a lot of our locations we're buying very locally to our manufacturing location with relationships that they had for decades. And while that's not necessarily bad, what we saw is that it doesn't allow us to leverage consolidated spend across our enterprise. And so now over the last kind of 2.5 years, we've been on this journey to really get a more sophisticated supply chain that we can leverage on an international scale. And so we've made pretty good progress here. Similar with the overall transformation, we're probably maybe not even halfway done with that effort at the beginning of this year. And so we're still on this path to get to preferred partners that we've got agreements with, proactive spend. We've got quality requirements. We share ideas and collaborate around lean, around safety and how we do things and truly have partnership at the critical supply level. And so we've got a team highly focused on this, and we are making great progress. Now when you throw the backdrop of COVID, and I'll just add the other twist is just kind of the geopolitical range, what we always want to do is have a set of primary suppliers as well as backup. And I'd just say, as we're kind of -- we are already in the process of doing things significantly different. The impact of COVID and the impact of some of the geopolitical situation really hasn't changed our approach at all. And we're just continuing to try to reduce that supply and then really start to work with these partnerships with a handful of people. And for us, I'll just say, our big spend is castings is a big one for us. And so we're working that one really hard. Motors on the pump side is really important to get that into a group of selective suppliers. And then we've got some other miscellaneous categories that we're really looking to formalize and make good progress here. And so I think regardless of COVID, regardless of the geopolitical situation, I think our supply chain improves dramatically in the next two years versus where we were as an organization over the last thank you for such an extensive answer.

Thank you for such an extensive answer. And a follow-up question. As part of Flowserve 2.0, you guys sort of were talking about doing stuff, I think, with PTC, digital remote monitoring. Can you give us examples? Are you guys making headway with these initiatives in the COVID environment? Does it make customers more open to sort of having more of this kind of technology. If any numbers you can put around that, that would be great.

Sure. The short answer is yes. We've made a lot of progress in kind of our IoT solution and what we want to do in this kind of new world of monitoring and providing diagnostics and really just better understanding the data that's out there and the data that we can collect and providing useful information to not only ourselves, but to our operators to reduce our maintenance costs and to improve their productivity. And so one of the things that I am excited about in this year is we have made great progress on that. And so we had communicated some pilots and some things that we are testing and working with some strategic partners, all of that continues to advance. And what I would say is we're not at the point of kind of going full-scale yet in terms of our future offering and what we think we can do. But I would say either in the Q4 earnings call or Q1, we're going to be prepared to talk about this in great detail. But I would say we're there with certainly with our peer group and some of the others in terms of how do we think about this and what that value could be. But -- and then my last point here is all of the customers that we're talking to, and these are either refining, petrochemicals, specialty chem or other infrastructure investments, everybody is starting to appreciate and understand the value of collecting data and using that data. And so we think this is an exciting space. We think there's a pretty big opportunity for Flowserve. And what we want to do is combine our knowledge of Flow Control. And so we've got a unique position, where on the valve side, we've got isolation, where we've got the smarts and our limiter smart electric actuator allows us to collect and transmit data that we weren't able to do before. And so you've got that now in isolation with the actuation. We've got it in control valves in terms of controlling flow. And then on the energy side with our pump business, we're now collecting and enabling a lot more on the pump side. And so we think we're in a unique position with isolation, control and energy to provide better solutions to our customers. And so I don't want to go too far into this, and we are prepared to talk probably at the end of Q4 or Q1 in terms of what our aspiration is, what we're doing and what we think that the potential value prize is for post.

And all the COVID noise, it's hard to sort of focus on how big a deal this is going to be for you guys. So look forward to the update. Thank you.

Yes.

Our next question comes from Joe Giordano with Cowen.

You talked about the balance sheet, you highlighted it. Now with the -- with hopefully the worst of this kind of at least working its way through your thought process and kind of kind of bottomed out. How do you think about deploying that balance sheet? And you mentioned the energy transition, are you targeting things in that area to kind of gain share there as things transition?

Sure. I'll start on kind of the inorganic and kind of way we're looking at investments. And then maybe Amy can talk about some of the other firms on the balance sheet, like the debt maturities and things like that. But we're -- Amy and the team have done a nice job to put us in an incredibly healthy position. And so we feel good about the balance sheet. We feel like we got some firepower to start to deploy that effectively for long-term value creation. And so we're going to talk before about a and programmatic offers to attractive markets and looking at different things that can enhance and augment the portfolio closer. So we are looking at dates. But unfortunately, it takes fires and sours to come to. And so sometimes we can pull timing is, but I would say that we're actively looking at different things to add to the portfolio. Maybe you want to add that something there.

Sure. So I'd just say that with this quarter's refinancing and tender, obviously, we do plan to deploy some of that cash in the relative near-term to address maturities that we had coming in 2022 and 2023, 10. I would say that Scott mentioned where we think about and how we think about M&A really through the lens of financially attractive investments that we're confident that we can integrate successfully into our business. And as we make decisions with respect to the deployment of capital. And our focus is always around optimizing shareholder value and maintaining financial flexibility. So we'll continue to try and weigh our options as we move into 2021 to ensure that that's we're doing.

And our next question comes from Mike Halloran with Baird.

So just one from my end. When you think about where you are from a commercialization, R&D, new product development perspective, maybe just talk about how far you are in that journey? And then related, when you think about this energy transition that's ongoing and some of the new products you're trying to bring forward to more fully participate in that. Is that something you think you can do internally? Or is it going to require layering on targeted M&A from an environment to more fully participate?

Sure. I'll talk about new product development first, and then we'll talk about energy transition. But again, I'm really pleased with what we're doing here. And we created a marketing and technology organization about 3 years ago. And it's taken a little bit of time to, one, get the right focus, two, improve the process and three, start to see things come out of the other side of it. But right now, I think we're doing good things. And so we've got a great team of engineers and folks that truly understand our markets, and it's a nice combination of a lot of experience understanding our end markets, combined with a lot of innovative thinkers. But I just think there's a lot more to come here. And so this was always something that was really important to me. The legacy of Flowserve is that we're a technology company, and we've got products that were first in many different applications. And I really wanted to restore that luster and make sure that we can kind of lean in on technology and product differentiation. And so I think we're kind of at the beginning -- we're at the beginning of seeing the results of that, but we've done a lot of hard work to get in a position to where we truly understand what we want to do and how we're going to do it. And so I feel really good about that. And then just on kind of energy transition and where do we put our efforts, at Flowserve, it's always going to be a combination. And so we want to have a robust portfolio within the new product development organization, but we also want to be looking at the extra landscape, right? And to Amy's point, it's -- we believe that there's a value creation opportunity inorganically, and we can do it faster and we can make better returns than do it internally, then we're going to definitely look at that. And so there will be some areas that we know we want to go externally just because in our industry, it's really hard to overcome some of the customer references and getting on those approved AVLs. And so when we know that we just can't make the pace that we want, then we're going to look to do something inorganically and go outside. But I do think it will be a balanced approach, both in-house and looking at things externally. But I feel good about what we have, right? And so we've got 200 years of legacy product experience. We've got valves and pumps and pretty much any application that's out there. And it's really just about channeling those resources, getting folks focused and committing the organization behind what we believe is the long-term future and what we think are attractive markets.

Thank you, ladies and gentlemen. This concludes our Q&A session and program for today. Thank you for participating. Please have a great day.