Throughout 2012 and 2013, the majority of Flowserve s focus was on margin improvement and capital returns. These remain focus areas for the company, but management now views growth as the top priority, and the company reiterated its expectation for at least $2 billion in growth investment (internal and external) from 2014-2018. Related to acquisitions, the company will look to fill product and/or geographic gaps and indicated a recent increase in dialogues with potential acquisition targets.
Flowserve continues to have an optimistic outlook regarding its award prospects, led foremost by projects proposed to monetize cost-advantaged feedstocks in North America. In aggregate, the quantity of prospects is solid, with new prospects continuing to replace awarded projects in Flowserve s pipeline of opportunities, and the amount of front-end engineering and design (FEED) progress industrywide remains encouraging. However, the timing of awards continues to get stretched out (customers continue to be deliberate). A key catalyst to watch, in our view, is when awards are made to EPC contractors, given that Flowserve s awards typically follow these contract awards, usually on a lag of two to four quarters.
Internationally, Flowserve was optimistic about growth in Asia (including India), Russia (although being selective given the geopolitical environment), as well as in South America. Flowserve has demonstrated strong margin improvement over the last two years. While incremental margin may not be as robust as it has been (32% incremental operating margin over last 2 years), it believes it can sustain incremental margin around 25% for the near term.
Flowserve mentioned better project management capabilities several times as a key driver for further margin improvement, as this in turn drives better on-time delivery for large projects (on-time delivery has improved to the low- to mid-90% range, with a target to reach the upper-90% range). The pricing environment overall in Flowserve s markets was characterized as stable.