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

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

Thank you, Jay, and good morning, everyone. Thank you for joining today's call. First, I hope that everyone is healthy and taking the necessary precautions to stay safe and well. The world has dramatically changed in the 2.5 months since our last call. In February, we talked about the virus impacting our China and Asian operations. Since then, the coronavirus has spread through the globe, altering the way hundreds of millions of people around the world work, interact with each other, and live their day-to-day lives. This has dampened the global economy, and with very few people now driving or flying, the demand for oil, natural gas, and related transportation fuels has plummeted to historic lows. The magnitude of this unprecedented crisis creates a challenging backdrop for Flowserve. However, we entered this period with a strong backlog, over $1 billion of liquidity, no debt maturities until 2022, a trusted brand, great products and services, and most of all, outstanding people. Over our 230-year history, Flowserve has managed through multiple market downturns. While every crisis brings renewed challenges, I have absolute confidence that by leveraging the collective experience of our team and the progress we have made in the Flowserve 2.0 transformation program, we will come out of this situation a better and stronger company. We're using a four-phased approach to position Flowserve for success throughout the COVID-19 crisis and the market downturn. COVID-19 crisis management includes focusing on the safety of our people, delivering customer support, and ensuring the continuity of our business. This involves restoring our capabilities, planning and executing for the downturn, and finally, positioning Flowserve to differentiate in the future. Flowserve has remained open for business throughout most of this pandemic as the vast majority of our sites and facilities are considered essential to support the global energy, chemical, power, and water infrastructure complex. This is a responsibility that we don't take lightly, and we have done so by prioritizing the health and safety of our employees, customers, and suppliers. I want to express my sincere appreciation to our associates for their extraordinary efforts during these challenging and unprecedented times, and particularly, to those employees who are on the front lines and have enabled Flowserve to continue supporting our customers. Additionally, I could not be more pleased with the efforts of our company to support our local communities. Flowserve is providing equipment to improve sanitation within hospitals, collaborating to accelerate the development and manufacturing of low-cost ventilators, and providing support to hospitals and caregivers around the world. We are doing everything we can to provide assistance during this critical time. We have been closely monitoring the COVID-19 situation since the middle of January to best position Flowserve to respond to the pandemic. We stood up crisis teams in Asia, Europe, and the Americas and leveraged our global experience as the virus spread around the world. Our leadership team has met daily on the topic to coordinate the best ways to protect our associates and continue to support our customers. Our emergency response teams have been operating in compliance with and on the advice from local governments, as well as following CDC and World Health Organization recommendations. Furthermore, we implemented processes around personal protective equipment, appropriate social distancing through staggering shifts, and temperature checks for all on-site associates. Where there's been a risk of infection, we have immediately begun contact tracing, quarantine procedures, and temporary site closures for cleaning. Despite all of these efforts, we have faced a significant level of disruption as COVID-19 spread around the world, causing temporary facility closures and impacting our employees at those sites. We have associates who are directly impacted by the virus, and we operate in several of the hotspots around the world like Milan, Madrid, and India. In terms of numbers, over 90 of our facilities and offices have experienced periods of temporary closure through May 6, impacting the work routine of over 8,000 associates. In most cases, the closures were limited to 1 to 2 days, although in some cases, like Italy, Spain, China, Argentina, and India, we have experienced long periods of closure. Nevertheless, virus-related challenges delayed roughly $74 million of revenue in the first quarter. Amy will discuss more of the financial impact, but clearly, idle facilities materially impacted our results. As of today, we are open for business, but we still have 3 significant manufacturing facilities in India that have only partial staffing to comply with local regulations. We have made significant progress over the last 3 weeks, and we now have approximately 95% of our operating capacity open and are operating around 80% productivity. We still expect to deliver roughly 88% of our $2.2 billion backlog that we began 2020 with during the year, assuming the impact from the pandemic doesn't worsen and our suppliers remain stable. In the face of this challenge and disruption, we expanded our efforts to best serve our customers, working closely with them to ensure business continuity and prioritizing critical shipments. I'm extremely proud of our teams and the positive feedback received from our customers as we supported their operations. There are too many instances to share, but examples include the expedited delivery of a critical nuclear valve to prevent power disruption and accelerating vacuum pump shipments for sterilization applications in the health care and pharmaceutical industries. Our supply chain team is doing a great job managing potential delays, navigating logistics risks, and shifting to alternative vendors to maintain continuity of supply. We've established a number of hit teams and workflow processes to minimize lead times and provide assurance of materials. Presently, India is the most challenged location for our supply chain, where we source roughly $150 million a year, primarily for local Indian operations and North American valve facilities. Our Indian suppliers are facing the same manpower restrictions as we are. Our team is assessing local viable options, but critical POs are being moved to alternative regions and secondary suppliers. We expect the supply chain disruption to continue to improve through the second quarter. Shifting to our first quarter financial results. The COVID-19 disruption in the quarter had a significant impact on our financials. As a result of some discrete non-cash charges, our reported EPS was breakeven. On an adjusted basis, our earnings were $0.21 per share. Both results included approximately $0.19 impact from the COVID-19 disruption related to delayed shipments and the costs associated with closed facilities. Constant currency revenue grew modestly, while bookings declined 6.6% on a constant currency basis as our customers reacted to the crisis and access to their facilities became more limited for our service technicians. Our free cash flow improved 8% compared to a year ago on strong working capital performance. Turning to our segments. FCD's constant currency bookings and sales were both down approximately 6% and continued to be impacted by slower MRO activity in North America and Europe. The quarter's bookings included several $3 million to $7 million awards across power, chemical, and defense markets. Adjusted operating margins declined 590 basis points to 10.1%, reflecting the revenue mix shift towards lower-margin project work away from shorter-cycle MRO as well as the impact of COVID-19 disruptions to operations. FPD's constant currency bookings decreased 6.7%. Oil and gas project activity continued in the first quarter, including 7 awards totaling over $90 million across Asia, the Middle East, and North America. Aftermarket orders of $426 million increased 1% on a constant currency basis as the CO aftermarket business performed well despite the COVID-19 challenges. Revenue increased 6.2% constant currency driven by original equipment growth of 25%. Adjusted operating margins declined 300 basis points, which was driven by a combination of pandemic-related impacts and the 600 basis point mix shift towards original equipment from aftermarket. FPD entered 2020 with a strong project backlog following 2019's original equipment order growth of over 20%. Turning to our consolidated bookings in served end markets. First quarter bookings were $977 million, producing a book-to-bill of 1.09. However, this amount was down 6.6% year-over-year on a constant currency basis. In March, we did have the highest level of monthly bookings for the quarter, as is typically the case, but the amount was muted by the global crisis. The backlog of $2.2 billion grew sequentially 3.8% on a constant currency basis. To date, we have had one small cancellation within our backlog, which was a North American chemical project that has been delayed and descoped. We have not had any material cancellations from our backlog at this time. We have had a few discussions with mainly upstream oil and gas customers in the Americas about potentially placing certain orders on hold or canceling them, although the amounts involved would not represent a material portion of our backlog. Original equipment bookings in the quarter were $475 million, down 14.6% compared to last year's first quarter. Aftermarket bookings in the first quarter were $502 million, flat to last year's bookings. While aftermarket bookings were generally good, customer site access limitations as well as delays in scheduled turnarounds impacted our aftermarket bookings this quarter as a significant amount of work has been delayed until the third and fourth quarters when operators can plan and execute on-site projects and services. I would also note that while our bookings discussions with the financial community tend to lean toward big projects, traditionally, 85% to 90% of our annual bookings are tied to existing operating facilities, our installed base, and our customers' aftermarket and MRO budgets where we expect to see more stability. Turning to our served end markets and starting with oil and gas. First quarter bookings decreased 13% year-over-year on a constant currency basis driven by FPD's 14% and FCD's 8% declines. The quarter included 8 awards in the $5 million to $40 million range totaling $90 million. The first quarter bookings included multiple pump package awards to support cleaner fuel production where we continue to benefit from emission regulation changes. On a constant currency basis, chemical bookings were down roughly 13% in the quarter, primarily driven by the FCD's 21% decline. The quarter included 2 smaller awards totaling $10 million in Europe and Asia Pacific. In 2019, the oil and gas and chemical markets accounted for roughly 60% of our bookings. Our large customers in these markets are integrated majors, national oil companies, and the big global chemical producers. Our exposure with them is heavily weighted towards the downstream markets in their fixed infrastructure. While we expect this business to be impacted by the current situation, we believe these companies will continue to invest to keep their operations safe and productive. And we have no doubt this group of companies will be there for the long run. Only a small portion, about 5%, of our oil and gas exposure serves the upstream markets where the most severe cuts and concerns are expected. Moving now to power. Our power market saw constant currency bookings down 1%, where FCD's 3% increase, including concentrated solar power and nuclear awards, was offset by FPD's 4% decrease. While general industries, and specifically distribution, continued to face headwinds from the MRO slowdown in North America, first quarter bookings increased 7% year-over-year driven by FCD's 10% increase, including growth in mining and pulp and paper markets. Finally, representing our smallest market, water bookings decreased 9% in the quarter with no significant awards. Regionally, we saw growth in Europe and Latin America of 10% and 11%, respectively. More than offsetting this growth were declines in North America, the Middle East and Africa, and Asia Pacific of 15%, 20%, and 4%, respectively. I'll return shortly to discuss our path forward and outlook, but let me now turn the call over to Amy to cover our financial results in greater detail. Amy has been with us for almost three months, and I'm pleased to have her on the team and appreciate her early contributions during this critical time. Amy?

Thanks, Scott, and good morning, everyone. As Scott mentioned, I joined the company about 3 months ago, and I'm delighted to be here at Flowserve. With the spread of COVID-19, my onboarding process has been far from what I had planned or expected. Under normal circumstances, I would have been traveling to our facilities to meet with our teams and get a firsthand view of our operations and the opportunities in front of us. Luckily, thanks to video conferences and phone calls, I have been able to do much of this remotely. However, as Scott laid out, all of us on the leadership team have been primarily focused on ensuring the safety of our employees and working diligently to guide the company through this challenging time. So while this has certainly been a case of diving into the deep end, in many ways, working through this crisis over the last few months has accelerated my climb of the learning curve. One of the attributes that attracted me to Flowserve and that is particularly valuable in the current macro environment is our strong liquidity position. Flowserve ended the first quarter with $622 million in cash and cash equivalents. Additionally, we have $721 million of available capacity under our revolving credit facility, which remains undrawn. Together, this makes for a strong position at quarter end with over $1.3 billion of available liquidity. Additionally, in our seasonally weak first quarter, we delivered free cash flow of $30 million, a 7.6% year-over-year increase despite lower earnings. I understand that this is only the second time over the past decade that Flowserve has generated positive free cash flow in the first quarter, which is an indication that our focus on working capital is paying dividends, and I congratulate our team. Flowserve's current leverage primarily consists of about $1.4 billion of low-cost fixed rate debt. We have no material maturities until 2022, and the company continues to be rated investment-grade by the major credit rating agencies. I am confident that this strong balance sheet and liquidity position, combined with an improved ability to generate cash flow, disciplined capital spending, and the actions that we're taking to manage costs, will position Flowserve well to weather the expected near-term market challenges. And as Scott discussed, we also continue to implement our Flowserve 2.0 initiatives, which will produce a more efficient and flexible business model and enhance our ability to capture opportunities and drive value creation when our served markets return to growth. Turning to the first quarter results. We delivered adjusted EPS of $0.21 on modest revenue growth. On a reported basis, first quarter EPS was breakeven, including realignment and transformation expenses of $0.10, $0.20 of non-cash tax-related valuation allowance, and $0.05 of other non-cash asset write-downs and a gain of $0.14 in below-the-line foreign currency primarily due to the revaluation of U.S. dollar-denominated items on the foreign balance sheet. As Scott mentioned, the financial impacts of the COVID-19 disruption to our operations were significant. We estimate approximately $74 million of revenue was deferred from the first quarter at locations most heavily impacted by the virus, which, combined with costs related to idled facilities and the compensation expense of unproductive labor, resulted in approximately $33 million of impact to gross profit or roughly $0.19 per share. With revenues deferred, first quarter sales of $895 million only increased 0.5% or 2.2% constant currency versus the prior year. The strong 7.7% increase in original equipment revenues drove our growth. FPD was the primary contributor with its 4.3% growth driven by a 23% increase in original equipment sales. Aftermarket revenues of $442 million were down 6%, primarily due to disruptions within our QRCs and limited access to our customers' facilities. Turning now to margins. First quarter adjusted gross margin decreased 290 basis points to 30.8%, including FPD and FCD declines of 260 and 330 basis points, respectively. In addition to the disruptions in our facilities, margins were further negatively impacted by a 400 basis point mix shift towards OE driven by FPD's 600 basis point shift. On a reported basis, Flowserve's first quarter gross margins decreased 330 basis points to 29.7%, again, due to COVID disruptions and mix headwinds as well as increased realignment expenses of $4 million versus last year's first quarter. First quarter adjusted SG&A as a percent of sales increased 120 basis points year-over-year to 25.3%, primarily due to the timing of certain expenses as well as the year-over-year increase in the allowance for credit losses, which was due in part to the new accounting standard implemented in January. On a reported basis, SG&A as a percent of sales increased 420 basis points, primarily due to $18.7 million of higher realignment charges as last year's first quarter included a gain on the disposition of FPD assets. First quarter adjusted operating margin decreased 400 basis points to 5.9%, including FCD and FPD declines of 590 and 300 basis points, respectively. Again, underutilized and disrupted facilities, higher SG&A, and sales mix impact are the primary reasons for the decline. Reported first quarter operating margin decreased 730 basis points to 2.9%, including the previously mentioned approximately $20 million of increased realignment and transformation expenses and approximately $10 million of non-cash asset write-downs. While we continue to take measures to ensure the health and safety of our workforce and minimize the disruption in our facilities, we are also actively addressing our cost structure going forward to ensure it's aligned with expected market conditions. Turning to cash. Our cash flow from operations increased roughly $8.8 million, including strong working capital improvement of $22.2 million. Primary working capital decreased $38 million versus last year's first quarter and declined 200 basis points as a percentage of sales to 26.4%. Transformation initiatives continued to deliver working capital progress in the quarter, including our 5-day DSO improvement and modest improvement in inventory turns. First quarter free cash flow increased about 7.6% year-over-year to $30 million. This resulted in significant improvement to our free cash flow conversion metrics. We had positive free cash flow despite a small reported loss versus a 47% conversion to reported earnings last year, even with the headwind of the $6.7 million of higher CapEx. Relative to our adjusted earnings, free cash flow conversion improved to almost 110% versus last year's 52%. During the first quarter, we returned about $58 million to shareholders through both our quarterly dividend as well as by repurchasing about 1.1 million shares in the open market to offset equity compensation dilution, which is similar to our approach in 2019. Driving cash flow performance will remain a top priority in 2020. With active management of accounts receivable, inventory, and supply chain embedded in our transformation initiatives as well as a reduction in working capital that traditionally accompanies market volume declines, we are confident in our ability to generate cash during this downturn. And we view the first quarter year-over-year improvement in DSO and our free cash flow performance as an affirmation that we are on the right track. Turning to our expected cash usage in 2020 and considering our near-term focus on capital preservation. We have reduced planned capital expenditures to below $60 million versus the original estimate of $90 million to $100 million. Our investments here will largely consist of maintenance CapEx and enterprise-wide IT investments that further enable our transformation progress. With no material debt maturities this year, expected uses of cash consist primarily of realignment and transformation expenses and the funding of expected dividends of approximately $100 million. Finally, before turning the call back to Scott for his closing remarks, I would like to mention that while my initial and current priorities have been largely internally focused, both navigating this unprecedented downturn and driving the transformation progress, I do very much value and look forward to actively engaging with our shareholders and the financial community. Again, I'm proud to serve as Flowserve's Chief Financial Officer, and I'm looking forward to the years ahead. Let me now return the call to Scott.

Great. Thank you, Amy. Let me wrap up my prepared remarks, outline the actions we are taking to respond to the pandemic and the downturn in our markets. I'll start with the market outlook. I've spent a lot of time over the past month connecting with customers, including virtual meetings with each of our top 10 customers for direct feedback on how they are managing through the crisis. I want to start by sharing a few observations from these discussions. In general, it is expected that projects that are past FID are expected to continue to progress forward but could be slowed or descoped, while projects in the FEED stage will likely be delayed and many will never proceed. We've already seen many of our large customers announce double-digit CapEx budget cuts in 2020 due to the supply and demand issues weighing on commodity prices. Additionally, most of our customers referenced a prolonged recovery and an extended period of reduced project investment. These customers were committed to keeping their existing facilities operational, and they do not expect significant cuts in reliability and uptime-related projects and spending. With reduced greenfield and brownfield spending, maintenance and replacement of original equipment become an even greater priority for Flowserve. While this type of work is typically more resilient, given the severity of the demand decline and limited access to our customers' facilities, we expect that in the near term, there will be reduced spending due to disruption and delayed turnarounds. Most of these facilities will continue to operate, and while timing is uncertain, the focus on uptime and productivity will lead to renewed maintenance spending. With these market realities as a starting point, we have developed and are now executing our response plan, which includes capital preservation, cost actions, and reprioritization of initiatives, strategies, and the transformation program. We are planning $100 million of cost reductions within 2020 as compared to the prior year with a similar cost reduction number on a run rate basis entering 2021. Our near-term actions will largely be focused on variable costs associated with expected volume changes, SG&A reductions, and decreased capital spending. In addition to these structural changes, we have already deferred annual merit increases for 2020, have frozen new hiring, eliminated nonessential travel, and expect a significant reduction to annual incentive compensation. We also plan to substantially reduce capital expenditures to below $60 million, deliver greater supply chain savings, and we'll continue to right-size our workforce to current market conditions. We will continue to invest in manufacturing productivity and enterprise IT systems that can improve our ability to operate more cost-effectively. We are in the middle of this process right now, and out of respect for our associates around the world, I will not be able to provide more details until the second quarter earnings call. I can assure you that we are taking aggressive cost actions to ensure that our cost structure is rightsized to the new reality of our business. On our last earnings call, I highlighted that we are roughly halfway through our transformation journey to build a more efficient and flexible operating model. We've made significant progress over the last 2 years, and the transformation has driven fundamental improvements in our culture and performance. Our operational execution progress, improved cash flow, and stronger financial returns encourage me that Flowserve is significantly better positioned today than at any other time in our history to address this crisis. We remain committed to advancing the transformation agenda and the long-term vision for Flowserve 2.0. However, in light of the continuing impact from COVID-19 on our markets, we are proactively reprioritizing planned transformation initiatives. We will accelerate the cost-focused elements of the transformation like supply chain, design to value, G&A reduction, and manufacturing optimization. We will also continue to focus on serving our customers through the commercial intensity program and a reprioritized strike zone initiative. We must ensure that we're winning the work that is available to Flowserve while remaining committed to our disciplined approach. I am confident that the Flowserve 2.0 program has positioned us for success in this downturn, and I have no doubt that Flowserve 2.0 will continue to drive outperformance despite the market conditions. In short, we are focused on controlling what we can control. With the actions we are taking, we are positioning both for the present and the future. In April, we withdrew our full-year guidance due to the rapidly changing environment and the limited long-term visibility. At this time, we are not going to reinstate guidance, but I will provide some color on how we're thinking about the second quarter. We believe bookings might decline by as much as 15% to 25% year-over-year, primarily driven by declines in original equipment bookings and moderate declines in aftermarket bookings. We believe revenue will be similar to this year's first quarter, subject to our ability to keep our manufacturing locations open and operating. Thus far, we have had more success in April than we had in March. The cost control actions that I just discussed will have a small benefit to gross margins and SG&A in the second quarter but will have a much bigger impact in the second half of the year. Our operating margins in the second quarter will again depend on keeping our operations open, but at this time, we do not anticipate operating margin deterioration. I would expect that our adjusted earnings per share in the second quarter to be at or better than the first quarter, subject to our ability to keep operations open for business. In summary, I am proud of how Flowserve has responded to this crisis, provided support to our customers, and worked through the difficult decisions and challenges of a significant downturn. We will continue to drive towards a more efficient Flowserve operating model as we continue to build on the fundamental improvement and momentum of our Flowserve 2.0 transformation. We believe that all of our actions will position Flowserve to navigate the current market environment and capture the eventual growth opportunities as markets recover in the future. We remain committed to driving value for our associates, customers, and our shareholders. Operator, that concludes our prepared remarks, and we'd now like to open the call for Q&A.

And our first question comes from Mike Halloran.

I hope everyone is doing well. First, could you provide some historical context on your comments? Historically, aftermarket tends to lead, and bookings generally take time to recover. Considering that, how long has it usually been before you start seeing typical project activity? Also, what is the customer's ability to defer aftermarket more than a quarter or two, as seen in 2015 and 2016 when deferrals were longer? I suspect the deferrals won't be as significant this time, but I would appreciate your insights on that as well.

Yes. So Mike, let me first address the original equipment aspect before discussing the aftermarket. The key difference now is the presence of a virus that restricts interactions and work. In 2014 and 2015, we experienced a drop of about 20% in our overall bookings, with a reduction of 25% to 30% in original equipment in 2015 and into 2016, followed by a recovery in 2017 and 2018. Looking back at 2017, there were certainly actions we could have taken sooner to boost bookings, though we faced operational challenges during the realignment program. Each crisis presents its own unique circumstances. This downturn in energy is substantial, but we are seeing a quicker response from the world compared to 2014 and 2015. Production is already decreasing in North America, and rig counts are dropping. By taking decisive action promptly, we hope that the downturn’s duration will be shorter this time. On the aftermarket side, in 2015, our aftermarket business saw about a 10% decline, indicating that customers were still investing in maintenance and reliability. However, many operators in 2015 cut maintenance too aggressively, which hurt their productivity. While I cannot predict spending patterns precisely, a 10% decline is a reasonable estimate to consider. Currently, though, the virus is preventing many customers from bringing personnel onto their sites. They've reduced staffing to minimal levels for maintenance and are only allowing suppliers for essential work, which will affect us in Q2 and Q3. The key variable is when the world will return to a more normal state, allowing for planning of maintenance and turnaround activities. Many customers are now postponing these activities to Q3, and we could see some maintenance tasks pushed into Q4 and even 2021. Each downturn is unique, and it will take several quarters for us to fully comprehend the implications of this one.

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

Yes. Mike, as you know, every company is currently balancing immediate needs with future differentiation. This applies to Flowserve as well. Right now, we are reevaluating everything, including our technology and R&D efforts. Some projects are still very viable, and we will continue to accelerate those. However, we are pausing certain initiatives for the upstream market because investing further does not make financial sense when commercialization is expected to take longer. I anticipate a slight reduction in spending, but it's more about reprioritization. As we explore new projects, I plan to maintain our investment in technology moving forward. I firmly believe that Flowserve has some of the best products available, and with ongoing investment in our products and services, we can maintain a technological edge. There’s no change to our philosophical approach; we will keep investing in R&D, but we are adjusting priorities based on recent developments over the last 10 weeks.

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

Yes, Andy. When we discuss the aftermarket, there is a potential increase from Q2 to Q3, but it's challenging to be certain about this since we don't have clarity on the situation regarding the virus and when quarantine measures and regulations will be lifted. If conditions improve and regulations are relaxed, allowing people to return to various sites, I believe Q3 could be a stronger quarter for the aftermarket. If progress does not occur, we may see this pushed back to Q4 or even Q1 of 2021. The aftermarket has experienced a significant downturn since the last two weeks of March and throughout April, already showing a decline of around 10%, reminiscent of the levels we saw in 2015. Ultimately, the outcome hinges on the status of the virus and when people can safely return to different locations.

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

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

Let me first address decrementals. I understand this has been a topic of much discussion in the industrial earnings context. There are two main points to consider. First, we aim to minimize decrementals as much as possible. With all the efforts we've put into Flowserve 2.0, I expect Flowserve to improve on our past performance regarding decrementals. However, there are two caveats. One is that we're still in the process of getting people onto the sites and into their roles. This means we have had a lot of unproductive time in our manufacturing facilities, like we experienced in Q1 and will likely see at the beginning of Q2. This makes it challenging to compare decrementals or even discuss them effectively. I’m hopeful that by the end of Q2, we will have a much clearer ability to address this topic. The other challenge with decrementals relates to the margin mix between original equipment and aftermarket services, which is something we previously mentioned at the end of the fourth quarter. Last year, we experienced 20% growth in OE bookings, which is now creating a mixed headwind that is reflected in our Q1 numbers. This situation will persist for the rest of the year and may pressure our ability to achieve better decrementals. On a positive note, we are implementing aggressive cost reduction measures, including the $100 million initiative, which should take effect relatively quickly and help mitigate the headwinds related to disruption and the mix issue. Regarding the second part of your question, Andy, let's move on to that.

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

The $0.19 attributed to COVID disruption consists of two components. First is the revenue we missed out on along with the associated gross margin, totaling $0.14 per share. The second part pertains to the costs incurred from not being able to send our employees to the site, as we continued to pay them even when they weren't working, which adds another $0.05. This accounts for the $0.19 overall. We experienced a significant amount of unproductive time in March. Looking ahead, the beginning of April was not ideal, but currently, we are up and running globally, except for India. Unfortunately, India has three major locations that account for significant revenue for both FCD and FPD, and we are currently required to operate with less than 50% of our staff. This will impact our performance in Q2. However, I remain optimistic that as the virus situation improves, we will start to see a return to more normal operations by Q3. And then what the $0.19 doesn't represent, Andy, and it's really important, is we didn't quantify just the loss of productivity from all of the kind of 2-day closures and the work from home. And so we had a bunch of facilities, and we talked about it in the prepared remarks, where folks were in for a couple of days and then we had to take them offline for 2 more days, and then they came back in, and it just didn't equate to strong productivity. And so there's some other noise in there on margin disruption in Q1. What I would say is we're doing a much better job learning how to work in the new environment, and we're starting to see our productivity improve pretty significantly here already in Q2 with the exception of our inability to get to India.

Scott, I have a quick question for you. I appreciate you explaining the differences between now and the hard landing in 2015 and 2016. One thing that seems different is the current situation with no one driving, issues with crude storage, and low demand for refined products. Is there an overhang due to customers facing storage problems or low demand causing them to reduce their utilization? Is this affecting your comments on orders or productivity?

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

Got it. That's helpful. I have a longer-term question. Some of your end markets, particularly oil and gas, are experiencing their second major shock in five years. How has this influenced your customers' thinking? Is the three-year planning horizon too far out to predict the future? Have they narrowed their project scope in discussions to a more manageable timeline? Or is it too early for those considerations? Any thoughts on your end or insights from customers would be appreciated.

No, I think it's a little early to assess the situation fully. It's crucial to consider this from both a geographical perspective and an upstream versus downstream perspective. The upstream operators in North America are facing significant challenges, making long-term planning very difficult for them as they are in crisis mode, focused on cost preservation. In contrast, most downstream operators are still able to think in terms of 3 to 5 years. Fortunately, these are primarily our larger customers who have historically managed their costs well and can adapt to various environments. On the chemical side, the scenario is similar; they are working through their longer-term business plans and while they acknowledge the short-term issues, they plan to remain operational in the next 3 to 5 years. It's essential to analyze different markets and regions to understand what strategies will be effective. We know that North America will continue to face significant challenges, while the Middle East is likely to maintain a robust spending rate. In Asia, continued investment can be expected, though at a slower pace than in recent years.

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

Yes. Looking at 2019 in our bookings, we only exceeded aftermarket by 20% last year. This headwind will continue to impact us throughout 2020, and I don't anticipate a return to normal until 2021. As we transition the backlog in original equipment, it will indeed start to decrease. However, I still expect that original equipment will outpace aftermarket in the second, third, and fourth quarters.

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

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

Welcome to Amy. Just to clarify on the second quarter bookings comment of the framework, Jay reminded us about the tougher comp. But what is your assessment of where your distributors stand today? Did the typical destocking occur this quarter, or do you anticipate more in the second quarter as well?

It's a good question. I'll separate our pump distribution from our valve distribution. On the pump side, it performed reasonably well in Q1 as much of that product is directed towards MRO and maintaining downstream facilities. We had acceptable bookings on the valve side with the major stockists, and when comparing to Q1 last year, much of it was driven by our natural gas products, with a bit coming from our actuation products moving more towards the midstream sector. However, everything significantly declined in March and April, which is evident from the difficulties faced by public companies like DNOW and MRC. Their struggles are largely due to their dependence on the North American market and the heavy focus on the upstream sector. Unfortunately, unlike a quarter ago when I thought we might benefit from destocking, we are now facing another decline in destocking from the main valve distributors. I believe we have a few products that might perform decently due to reduced inventory, particularly our downstream valve products and some natural gas-related items. But overall, the situation with our distributors is expected to worsen before it improves.

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

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

Great. That makes sense. I just have one last quick question. Did I hear correctly that there were some asset write-downs in the quarter? Were those related to COVID?

I would like to mention that the asset write-downs fell into a couple of different categories. First, in our adjusted earnings per share, we recorded a write-down of our deferred tax assets in Italy, which had an impact of about $25 million or roughly $0.20 per share. This was accelerated by COVID-related activities in Italy and the disruptions we experienced at those sites. Additionally, there were some write-downs related to inventory and accounts receivable tied to specific projects in Latin America, which were also influenced by current oil prices that triggered those write-downs.

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

Sure, it's an important question and I'm glad to address it. First, we fully recognize the scale of this crisis, which is why we are moving faster and with larger numbers than before in executing our plans. I must be cautious about details, as we are currently in discussions with various labor groups globally. However, I can say that approximately $50 million of the $100 million this year will come from cost avoidance actions, while the other $50 million will result from structural changes. This gives you a framework to consider. Looking ahead, some cost avoidance measures may revert, while others may not, but we will have a full year of structural savings instead of just 6.5 or 7 months. It's worth mentioning that this situation is highly fluid and dynamic. While we believe we are making the right decisions now, we are prepared to take further actions if conditions worsen. Also, we still have a backlog of $2.2 billion to manage, which requires us to maintain certain costs while we work through it. As we reduce the backlog, we will start adjusting the labor directly involved in delivering our products. You can expect further updates from us as time goes on. None of these decisions are pleasant, but we strongly believe they are necessary given our current outlook and objectives. As for our margin targets for the future, we remain committed to achieving better results than last year and improving upon our current standing, though we anticipate some challenges related to pricing as we reduce the business scale. Let's monitor how things evolve over the next quarter or two. By year's end, similar to last year, we will reevaluate and provide updates on our targets for 2022. This is indeed a very dynamic period, and we will do whatever it takes to protect our margins and ensure that we maintain a robust business for the future, fully prepared for what lies ahead.

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

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

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

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

First of all, I'd like to extend a warm welcome to Amy. Welcome on board, even though times are quite challenging. My first question is regarding free cash flow. Could you address the difficulties of releasing working capital throughout 2020 in an industry impacted by low oil prices, and considering that the supply chain is inherently long-term due to contracts? How should we view the potential for releasing working capital in 2020?

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

No, that has certainly been one of the things you did very well. Regarding a follow-up question on the longer term, you mentioned the challenges in getting your technologies onto customer sites. So, I have a two-part question. First, can you provide more details on which geographies are particularly challenging? Second, looking ahead, considering your previous highlights at Analyst Day and the ongoing increased investment, do you see the industrial IoT opportunity related to remote monitoring as a driver for acceleration? We've heard from various companies that online services are much more relevant in the current environment. So, that's my two-part question.

In terms of getting people on-site in different regions, North America faces challenges due to widespread work-from-home policies. In Europe, the situation remains quite severe, with most employees still working remotely and only minimal easing of those restrictions. China is managing to bring back many of our service technicians, but globally, there aren't many positive developments at the moment. Europe has been the most impacted, North America has had difficulties with access, and Latin America faced significant challenges back in April, though things weren’t as difficult in mid-March. Our ability to operate is largely dictated by the virus and case numbers. On the second part of your question, there is no doubt that remote operations and monitoring of our equipment are becoming increasingly vital. We showcased our technology about a year and a half ago, and we've made significant progress in advancing to the next generation. Our technology is currently active on numerous sites worldwide, and I believe that this investment in asset monitoring, which does not require physical presence, will only gain momentum due to the COVID-19 situation.

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