Thank you for joining us for the Flowserve Corporation Third Quarter 2020 Earnings Conference Call. I would like to introduce your speaker today, Mr. Jay Roueche, Treasurer and Vice President of Investor Relations. Please proceed, 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 transmission from occurring 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 disruptions have had an incremental cost and impact on our overall productivity levels. Despite our best efforts, 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 systems 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 $0.50, in line with our expectations. These solid earnings also reflect the significant cost actions we have implemented this year. At the 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 the full year 2020 compared to last year's cost structure. As we communicated previously, these savings are roughly 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 costs through supply chain savings and 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 the third quarter of 2019, resulting in decremental margins of 19.5% in the quarter. We are confident that 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 with 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 that 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 all primary drivers, down 30%, 20%, and 12%, respectively. Additionally, within general industries, the North American distribution channel remains 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 were 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 project 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 below our expectations. While customers continue to spend to meet safety and regulatory requirements, upgrade and productivity investments remained muted, and larger scale turnaround and maintenance activity continues to face COVID-related headwinds due to limitations on 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 account 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 two 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 will 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 growth in this area to occur earlier than in the project business. We are beginning to see signs of increased aftermarket spending in 2021 as operators plan 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 comparison due to the strong project environment at that time, which included several larger awards related to IMO 2020 upgrade activity. The 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%, 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 continue to delay petrochemical investments, 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 by $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 one 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 $0.50 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, and 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 disruptions 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, 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 actions we took in the first half of the year. These measures brought adjusted SG&A down to $193 million, 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 a 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 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 balance at September 30 to over $921 million. Even absent the net proceeds of the bond issuance, Flowserve increased its cash position by $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 two 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 three 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 mentioned earlier, we are satisfied with our performance during this unprecedented year. We are navigating through the COVID pandemic, and our operational efforts with Flowserve 2.0 are positively influencing our performance during this downturn. The work on Flowserve 2.0 is ongoing, and we remain dedicated to our transformational program. We have adjusted certain work streams in response to the pandemic-driven downturn, and we are making consistent progress on further cost reduction plans while preparing for growth. In fact, we successfully reduced our cost structure by $100 million compared to 2019, thanks to our achievements in establishing a flexible Flowserve 2.0 operating model. Many of the structural cost initiatives we implemented mid-year were previously planned measures from the Flowserve 2.0 program that we expedited. In addition to managing COVID and executing our downturn strategy, we are advancing our long-term strategy and growth initiatives. Over the past 18 months, we have dedicated significant effort to analyzing our end markets and assessing our overall product portfolio. Our product teams have made substantial headway in offering differentiated products in attractive markets that have growth potential for the years ahead. This year, we have launched five new products, introduced ten product upgrades, and put six 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 year concludes. Among the new product introductions is a SIHI branded two-stage liquid ring compressor, which is designed for various gases and vapors. Our proven technology allows this product to function under harsh conditions where safety, reliability, and specific processes are crucial. This compressor will be part of the FPD segment. We also expanded our capabilities within the FCD segment. During the third quarter, we launched a Valtek compressor anti-surge valve, which offers a groundbreaking solution for anti-surge control in LNG processing, refinery gas compression, natural gas stations, and chemical plants that utilize natural gas as a feedstock. This product will provide operators with an innovative anti-surge design that ensures precise control and quick responsiveness. Additionally, we enhanced our Limitorque actuator line with the new MX Series B smart electric actuator. This IoT-enabled Flow Control solution allows for seamless commissioning, improves process control through advanced diagnostic capabilities, and ensures reliable operation in various industries and applications. Flowserve has a strong history of innovation in the Flow Control industry. With growing confidence in our new product development process, we will continue to invest in products and technology. While we firmly believe that oil and gas have a long-term place in the energy mix, we acknowledge the advancements in alternative energy technologies. Currently, oil and gas comprise about 60% of the global energy mix. With substantial investment in renewables expected through 2040, most anticipate that oil and gas will account for over 50% of the global energy mix. Nonetheless, we are enthusiastic about the increased investments in energy transition, emission reductions, and safer living conditions. Our products and services are essential in virtually every major industrial process involving liquids or gases, as well as pumps, valves, fields, and services. They are currently utilized in applications across the globe to tackle significant environmental challenges, such as supplier gas recovery, which lowers methane emissions and boosts process energy efficiency; hydrogen production in the downstream sector; carbon capture and storage to decrease industrial carbon intensity; and process maintenance and services aimed at extending service life, enhancing efficiency, and supporting local employment. We are also involved in concentrated solar and hydropower projects, seawater desalination plants that provide cost-effective access to freshwater, and flood control to protect coastlines and cities from various disasters. As technology evolves and considering Flowserve's innovative leadership in the Flow Control industry, we fully expect to play a role in helping to make the world a better place for all. Now, I would like to discuss our environmental, social, and governance efforts, or ESG. Flowserve is continually improving as a corporation, and we take our ESG program seriously. Our commitment to ESG began nearly a decade ago with the release of our first sustainability report. The vision for our program starts at the top, with our Board of Directors and senior management working together to develop a comprehensive ESG strategy focused on three pillars: planet, people, and operational excellence. We believe our proactive governance approach is aligned with our shareholders' interests, as shown by our implementation of best practices like declassifying our Board of Directors, enhancing gender and racial diversity, enabling proxy access, and most recently, allowing our shareholders to act by less than unanimous written consent. Today, I want to highlight our environmental initiatives within our ESG program. Earlier this week, we published our 2020 Sustainability report, in which we express our dedication to continuous improvement as an organization. We also announced a new goal to reduce global CO2 emissions intensity by 40% by 2030, using 2015 as a baseline. In addition to setting this ambitious target for our own emissions reduction, we plan to leverage both our existing products and develop new solutions that assist our customers in reducing their CO2 emissions and engaging in cleaner energy sources such as hydrogen, solar, and hydroelectric. At Flowserve, we believe we can enhance the world through our ESG initiatives, and establishing emissions targets while supporting energy transition are significant strides toward achieving that goal. Finally, let me share our outlook for the fourth quarter. We anticipate that fourth quarter bookings will align with the levels seen in the second and third quarters, while we expect an increase in bookings to occur in mid-to-late 2021. We are set to make considerable progress in converting our $2 billion backlog during the fourth quarter and aim to achieve our largest revenue quarter this year. As we have in the last two quarters, we plan to report strong operating margin decrementals as we effectively manage our cost structure, with fourth quarter decrementals expected to be around the 20% mark. Moreover, we forecast to generate at least $100 million in free cash flow during the last quarter of the year as we reduce primary working capital from third quarter levels. These results traditionally align with seasonal trends, showcasing the best performance for revenues, adjusted earnings, and cash flow in the fourth quarter. We anticipate the fourth quarter of 2020 will reflect this trend, barring any COVID-related issues. I am confident that our ongoing transformation will enable Flowserve to navigate through cycles at a higher level than in previous downturns and seize growth opportunities as the market recovers, ultimately driving long-term value for our associates, customers, and shareholders.

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 MRO upgrades and maintenance can be delayed by the industry? At a certain point, things become either regulatory or safety, but how close are we to that threshold?

Yes, Deane, it's an important question. Obviously, that's been impacted by this downturn. 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. Probably the biggest impact is just in the discretionary side of it, where 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 how this will be the first sign of recovery for us. I truly expect that we're going to see 2021 be better than the run rates that we're at right now. They just can't hold off on spending a lot of this. We don’t think we're losing market share or that others are taking action, but we do think the discretionary side of this has been clamped down really hard. On the seal side, where things start to leak between that motor and the pump, they've got to replace the seals, and we're seeing that business hold up reasonably well. However, on the pump and valve parts side, that's the area that we've seen a pullback. We've also been having discussions with customers about major plans in the second half of 2021 as they're looking to do bigger maintenance-type events or turnaround activity. So hopefully, that helps there. We do think there's pent-up demand, and we're having discussions with many of our top-level customers confirming that spending should increase 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 inventory in the channel? What's your sense about the distributors right now on the stocking and destocking continuum?

Yes. The stocking distributors are really in our valve business. A few that are public and disclose their results show their inventory levels are down substantially. This destocking process really started last year. They came into 2020 with high inventory levels, and now they've been destocking and pulling inventory down. However, they are not spending money. What they've said is that they are not going to do major stock orders, and they will only buy as they need replacements. Until you see a significant inflection in their business, I don't anticipate major stock orders, but I also think the destocking is done. Their numbers are down quite a bit. In a strange way, that should help our valve business more than what we saw in Q2 and Q3. However, it's not a major uplift until we start to see inflection activity. On the pump side, we're not seeing as many stocking distributors as much of that 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, I appreciate the transparency regarding your revised assumptions on the asbestos reserve. In the scheme of things for companies facing this issue, it's relatively minor for you all, and you've got good insurance coverage. 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 following up on Deane's question and some of your comments on the timing of replenishment in the backlog with some of this book and ship and maintenance activity that needs done, how much backlog depletion would you expect as we move through the first half of next year before orders turn positive? What would be more than you would be comfortable with relative to kind of normal visibility then?

Yes, Joshua, good question, and I would just say it's a really hard one to answer. It really is with the backdrop of COVID. The fall COVID outbreak in the Northern Hemisphere is going to dictate the comfort level and the aggressiveness on when folks can start to spend again. As we think about backlog and where that is, we've given some clear direction on what we see in the fourth quarter, and you can get to a book and bill type number from there. At this moment, we do feel that at some point in 2021, whether late Q1 or maybe Q2, that aftermarket and MRO spending starts to happen. We've been having discussions with our customers, and they are confirming that there are plans to increase spending beyond what current run rates are. But I wouldn't expect project activity to pick up dramatically until the back half of 2021, so it really depends on when this happens and how operators get comfortable, which is largely psychological depending on how COVID is handled during this winter season. I think our guess is that with vaccines and living with the virus, people will be in a much better mindset by the end of Q2 and early Q3 next year.

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

Yes. I'll just kind of reiterate what I said with Deane. We are having discussions with 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 making those errors again. The difference here is just with COVID and site access. In many cases around the world, it has been physically impossible to conduct that maintenance work. I think overall, I'm more optimistic that the MRO and maintenance sides return to levels we were operating at pre-COVID. There is certainly pent-up demand, especially for parts. Overall, I think we could see growth in 2021. It’s going to depend on how intense this winter wave of COVID impacts decision-making.

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've talked about the actions you took. I think half of them were temporary in nature. There was another half that was structural. It sounds like you're announcing new products, which maybe help with some price and create demand from new products. 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 headwinds?

Sure. Yes, it’s a complicated situation, right? The first one to consider is the mix side. As we get the OE backlog out, and the mix starts to return to a more normal aftermarket versus original equipment, the aftermarket margins are higher. You will also get a tailwind from the cost-outs we have communicated, and you can measure those against the cost structure that we still have. The Flowserve 2.0 initiatives are still in flight, and we have made strides on manufacturing productivity, lean operations, and driving supply chain effectiveness. We discussed the process where we leverage design-to-value, and every time we put a product through there, we’re seeing anywhere from a 10% to 20% cost-saving on the overall landed cost of the product. Then, on the headwinds side, revenues are lower, so you have absorption and overhead that we need to overcome.

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%, and that one I thought was a little bit more back-end loaded, if I remember your commentary. What are the big headwinds or 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. As we indicated, we're just shy of $60 million of free cash flow this quarter. As Scott indicated, we're driving towards at least $100 million or better of free cash flow in the fourth quarter of the year. Realistically, we've made some investments in 2020, weighing on those numbers, including the costs it took to right-size the business in the first half of the year. We continue to see primary working capital as a huge lever for cash flow generation. Although we were disappointed with where we landed in the third quarter, we believe there is a significant opportunity with respect to inventory. We're focused on managing that very carefully as we close out the year, and this focus is not just to close the year out strong, but really to reset the bar in terms of where primary working capital should be as a percentage of sales. We plan to provide an update at our year-end in terms of where our transformation initiatives land. Our aim for a cash flow conversion target of 100% remains.

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 that refiners could or are shutting down capacity as demand stays lower for longer. So do you see the 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. Refiners are indeed challenged right now, which you can see in the utilization numbers. There are operators that have announced both temporary and permanent closures, primarily on smaller refineries that just haven't been economically viable. The refined product demand has seen a massive hit as mobility has grounded to a halt during the early phases of COVID, and it is slowing down again in this recent rise of COVID. I think it is a more challenging market, but we are seeing more opportunities in specialty chemicals, gases, and infrastructure spending; we think will pickup. While the refining investment in Asia and the Middle East will ultimately continue, I believe that more push would come in the second half of 2021. The Asia market is essentially at near to pre-COVID levels; therefore, we expect to see lots more activity there.

Very helpful. And then, Scott, you've seen Flowserve 2.0 operate during the pandemic. While many of the work streams have improved, one could argue that the benefits are more difficult to see in areas such as aftermarket and growth. How much incremental impact could there be on the business as you get all of the work streams on the right track in 2021 and beyond?

We still think there's a big prize here. We announced at the beginning of the year that we were halfway done with these initiatives. We accelerated a number of implementations in the cost out. In terms of manufacturing productivity, there's significant work to make our facilities more effective, and there are opportunities in our product development organization. We've also focused on identifying appealing markets aligned with our products, and we want to achieve technology differentiation. This was especially true this year, as we launched five new products that we think will make significant differences in our markets.

Our next question comes from Joe Ritchie with Goldman Sachs.

So Scott, I know we touched on margins a little bit. It's hard to pin down here just given where we are heading into 2021. However, as I 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 where you kind of troughed in 2017, and margins troughed around 8.7%. Given all the cost-outs, is it fair to assume that we expect margins to be above the 2017 levels? I'm just trying to provide a baseline for next year.

Yes. That’s a great question, and we will provide more specific guidance as we approach the fourth quarter call. We do have confidence in what we’re doing with the Flowserve 2.0 initiative, and while we're executing our trend with lower revenues, we're focused on ensuring the best decrementals in our peer group. Our goal is to preserve margins while also preparing for growth on the upside.

Got it. No, that makes sense. And then going back to some of your comments around the percentage of the global energy mix today, you mentioned 60% is oil and expected to be around 50% going forward. For context, can you share what portion of your business is tied to fossil fuels and how you think that mix might shift in the coming years?

Yes, when we look at oil and gas, we see it representing about 60%, but we think it could drop to about 50% in the future. Based on our overall markets, roughly breakdown shows that oil and gas accounts for 25% to 30%, with additional components from midstream and upstream. As we shift more towards energy transition, we believe this mix will start to change, and our portfolio will become more diversified.

Our next question comes from Nathan Jones with Stifel.

Just wanted to follow up on one of the cost comments you made. The $100 million of cost out this year, is it correct that for 2021, given you reported an increase in structural savings overall that you might end up with an even greater net tailwind?

Yes, I can confirm that the $100 million cost-out program is secure, and as we annualize that, there’s an uplift into 2021. We anticipate the discretionary costs will come back but not as aggressively as we had once thought. Overall, we are focused on maintaining a cost structure aligned with the environment we are in.

Got it. The next question is on price. I think I asked you this last quarter, Scott. Typically, in these environments, you see challenging pricing, particularly on large projects. Given that order rates are lower for longer and pricing may be more challenging than anticipated, how do you balance filling the backlog with projects that may be low-margin versus the need to absorb fixed costs?

Yes, the pricing pressure is real, and it really hasn't changed. The longer this goes on, the more concerning it gets. Our teams are doing a good job of maximizing the pricing that we have available; however, it is a challenging market. The supply chain constraints are starting to alleviate, with costs in some commodities now starting to come down. We're definitely working on maximizing price while ensuring we meet our cost structure needs, and it's a delicate balance.

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

My first question is just on the QRC strategy. As part of the broader organizational realignment, are those getting restructured out or lower as part of the branch network? What do you see in terms of the trend of QRC and its expansion in next year?

The QRCs are definitely a differentiation for us. I don’t have the exact number, but it's a significant presence worldwide. We constantly look at how to improve that network. This year, while we have taken a few out to optimize productivity, I wouldn’t expect a net reduction overall. Instead, we're keen on opening new centers in high-demand areas, particularly where there are large investments to support our customers.

Good to hear. Just thinking about CapEx, you've reduced it to about $60 million, what are you thinking for this year and for next year?

We anticipate we will be around that $60 million mark again this year. I wouldn’t call that a floor necessarily but do expect us to stay at that level or increase modestly in 2021 as we focus on ensuring the necessary infrastructure is in place while balancing safety and maintenance capital.

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

You highlighted some supply chain issues. Do you think the industry will change where it sources from and become more localized? Will you adjust your supply chain geographically based on cost, and how has the COVID pandemic impacted your thoughts on the length and location of the supply chain?

Let me go back to the original Flowserve 2.0 and what we found. When we started the transformation, we found a highly fragmented and non-responsive supply chain. A lot of our locations were sourcing locally, resulting in missed leverage on consolidated spend. Over the last two and a half years, we have been developing a more sophisticated supply chain that we can leverage globally. Given COVID and geopolitical concerns, we're also emphasizing the need to have preferred suppliers with backup options to ensure we can flexibly respond to market demands. So regardless of external challenges, we're making good progress on restructuring our supply chain for improved performance.

Thank you for such an extensive answer. As part of Flowserve 2.0, are you guys advancing initiatives like digital remote monitoring? Are customers more open to this technology in light of COVID?

Definitely. We've made significant headway with our IoT solution and have been working on strategies to help reduce costs for our operators and improve productivity through better data insights. We have several pilots that have progressed well, and our customers are appreciating the value of the data we can provide. We expect to discuss more concrete updates at the end of the fourth quarter and into Q1.

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