Q4 2021 Flowserve Corp Earnings Call
Good day and welcome to the floor third fourth quarter 2021 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Jay Ruche, VP Treasurer and Investor Relations. Please go ahead Sir.
Thank you Anita and good morning, everyone.
We appreciate you participating in our conference call today to discuss flow serves fourth quarter and full year 2021 financial results.
On the call with me. This morning are Scott Rowe, <unk>, President and Chief Executive Officer, and Amy Schweppes, Our senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call for questions. 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 upon forecasts expectations and other information available to management.
I'd be worried 23rd 2022, 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 <unk> Dot com in the Investor Relations section.
I'd now like to turn the call over to Scott Rowe, <unk>, President and Chief Executive Officer for his prepared comments, thanks, Jay and good morning, everyone. Thank you for joining our fourth quarter earnings call.
Before we discuss our results today I want to acknowledge the severity of the situation in Ukraine, well closer has no associated in the country, our thoughts and prayers are with their citizens and we are hoping for the most peaceful outcome possible.
The rest of the attack on the sovereign country was significant humanitarian and geopolitical consequences for years to come that are difficult to put into perspective today.
We are closer to this yearly wished for pizza in the Ukraine, and hope that eastern Europe returns to something more normal in the near future.
I'll begin my prepared remarks.
<unk> made progress across several fronts as we closed out 2021, including delivering strong booking capitalizing on the ongoing recovery in our aftermarket business and supporting a growing range of customers on their energy transition journey.
Nevertheless, the overall environment in the fourth quarter remained challenging with continuing COVID-19 related impacts to our people our operations and our customers.
I wanted to start by expressing my sincere appreciation to our associates for their commitment to closer our customers in the pursuit of excellence. During this challenging time of disruption and transition our people are truly closer as greatest asset and they have worked tirelessly to serve our customers throughout the pandemic.
From a financial standpoint, Covid had a larger impact on our 2021 financial results than it did in the prior year due primarily to the lower starting backlog position, we had entering last year our.
Our productivity in the fourth quarter was further impacted by the <unk> first in Europe , and then later in the U S.
With cases, appearing to that peaked in January we believe the majority of the impact to our operations from Covid related absenteeism is now behind us as our associates have largely returned to work.
Proud of the work we've done to keep our associates safe.
Round, the globe and despite many of the personal challenges they face our talented team has remained committed to serving our customers critical infrastructure in need throughout this pandemic years.
In addition to direct Covid related impacts, we faced increasing macroeconomic headwinds beginning in the middle of the 2021 third quarter, which continued and modestly worse into the fourth quarter, including heightened inflation supply chain and logistics disruptions and labor availability issues in many of our locations.
We have addressed these issues directly with mitigating actions, but the net impact has delayed our ability to ship product and increased our overall cost to serve our customers.
Despite these challenges we are seeing promising fundamentals across our traditional end markets.
We are encouraged with our outlook for 2022.
With the foundation, we have in place, we believe closer is well positioned to deliver solid growth this year.
We plan to further build on that foundation through the execution of our new strategic framework, which I will discuss in greater detail later in the call.
Let me first provide more color on our fourth quarter results.
As I noted earlier what are the highlights in the quarter was our bookings of $969 million.
Which were up 17, 5% over the prior year.
Aftermarket bookings of $500 million.
<unk> strong and increased 19% year over year, while OE bookings were up 15, 9%. Despite our two largest largest project awards being in the $10 million to $15 million range.
Improving global mobility, and higher asset utilization rates drove this favorable mix in our bookings growth, including aftermarket awards distribution and shorter cycle wins, which positioned closer well to deliver on this higher margin backlog.
Project activity, particularly in oil and gas remained muted and delayed in the fourth quarter.
In total fourth quarter bookings were the highest quarterly level, we have generated since the first quarter of 2020 prior to the impact of the pandemic.
The year over year and sequential growth occurred across most of our core end markets and regions.
From a strategic standpoint, we're especially encouraged by the fact, our fourth quarter awards included roughly $45 million of energy transition bookings.
Including orders from our large Gulf coast customer totaling over $15 million for flare gas recovery equipment to support their de carbonization efforts.
We remain excited about our ability to support our customers through their energy transition journey and are confident that our broad offering and new strategic initiatives can deliver increased energy efficiency cost savings and carbon reductions.
With our strong finish to the year, we delivered full year bookings of $3 8 billion, an increase of 10, 6% versus the prior year.
Throughout 2021 and in the fourth quarter, our year over year growth was consistently driven by strong MRO and aftermarket bookings with only minimal contributions from larger project work.
Our year end backlog of $2 billion is up 8% compared to the prior year, which sets a solid foundation for growth in 2022.
In 2021, our aftermarket business largely returned to pre COVID-19 levels with bookings of approximately $2 billion.
Including strong demand for and market share gains in our seals business.
From an end market perspective, our chemical and general industry bookings were up 14, 9% year over year and were at or above 2019 levels.
Water bookings also increased significantly in 2021 up about 45% year over year, while power bookings remained essentially flat.
And our largest served market oil and gas full year bookings grew nearly 13% versus 2020, while we are encouraged by this growth we are still off nearly 25% or over $400 million from our pre pandemic 2019 bookings level due to the tremendous impact of the COVID-19 induced downturn.
On the oil and gas complex.
From a regional perspective full year bookings growth was driven primarily from North America in the middle East, which were up 20% and 30% year over year with Europe , and Latin America also contributing growth of 8% and 17% respectively.
Asia Pacific bookings were down 12% due in part to a tougher compare period as bookings were less impacted in 2020 declining only 7%.
Turning now to the income statement fourth quarter revenues of roughly $920 million were up approximately 6% sequentially, which was below our expectations entering the quarter, while we expected supply chain and logistics delays and labor availability headwinds to continue during the fourth quarter those issues increase beyond.
What we had anticipated going into the quarter.
The good news is this work and the associated profit remains in our backlog cancellation remains key.
Cancellation rates remained at normal low levels and as a result, we believe this is mainly a timing issue.
We expect this environment to improve as we progress throughout the year with the potential to return to more normal operating conditions in the second half of 2022.
Shifting to our operating performance margins continued to be negatively impacted by lower year over year revenues the associated under absorption in the frictional costs associated with the supply chain and logistics disruption with that said we are pleased that the increase in sequential sales produced a nearly 50% incremental adjusted operating.
<unk>, which drove a 230 basis point sequential improvement in adjusted operating margins to nine 3%.
Turning to our market outlook for this year, we expect our end markets are positioned for continued growth and view, our 2021 results as the base year, leading to a multi year cyclical recovery.
In addition to our belief that we will maintain the momentum and growth in our aftermarket and MRO businesses. We are increasingly confident in the return of infrastructure investment in 2022, driven in part by the significant Underinvestment. The last two years across our end markets and particularly in oil and gas.
The project discussions with our customers are more constructive than in the past two years as many of these projects are at or nearing funding approvals.
<unk> demand growth elevated commodity prices infrastructure stimulus spending and underinvestment during the pandemic provide a constructive macro backdrop for improved project spending in 2022.
Our overall project funnel is currently up nearly 10% over this time last year and we are confident that we are well positioned to take advantage of the macro trends of the cyclical recovery in our traditional end markets.
Additionally, we continue to see growth opportunities in energy transition spending.
Even at this early stage in the year, we are now tracking over $400 million of energy transition related opportunities in 2022.
This increased visibility in the energy transition spending is driven by a number of factors, including government stated climate change targets.
Operations commitment to ESG initiatives, and emerging technologies, driving greater energy efficiencies and emissions reductions.
We further estimate our opportunity set and energy transition has nearly doubled versus this time last year, where our product and service offerings are uniquely positioned for success.
In total we expect to deliver year over year bookings growth. This year in the upper upper single digit percentage range with this level of expected activity during the year, our starting backlog position that is 8% higher than last year's we believe flow serve us well positioned to deliver revenue growth and stronger financial performance.
<unk> in 2022.
I'll now turn the call over to Amy to cover our financial results in greater detail.
Thanks, Scott and good morning, everyone as Scott discussed, we expect that 2022 will be a year of growth for flow through based on the returning strength to the markets, we serve as evidenced in our fourth quarter bookings performance.
This supported backdrop, the challenging operating environment, we experienced in the third quarter continued into the fourth quarter of 2021.
With the rapid rise development primarily.
Primarily in our European and North American Operation, We faced continued supply chain logistics and labor availability headwinds in the fourth quarter.
As a result, some shipments planned in the fourth quarter incremental to the slippage that occurred in Q3 were delayed deferring revenues and profit to the current year.
In the fourth quarter, we delivered adjusted EPS of <unk> 45 on.
On revenues of $919 million.
On a reported basis our earnings per share for the quarter was 13.
Which included only one per share of realignment expenses.
The majority of adjusted items were below the operating income line and included approximately <unk> 23 related to expenses from the early extinguishment of debt and below the line foreign currency impacts accounted for eight.
As a reminder, our starting backlog in 2021 was about 14% below the starting backlog of 2020.
Considering that we typically recognize about 85% to 90, 90% of backlog over the following 12 months.
Second that our 2021 revenues would decline year over year.
This is also why I'm pleased that our 2021 bookings were up over 10% year over year, which helped to minimize the revenue declined last year.
It's also the catalyst for the 8% growth in our backlog entering 2022.
The foundation for the expected top line growth this year.
Fourth quarter sales were down six 7% versus the prior year, but revenues increased sequentially by six 2%.
And the historical conversion rate of backlog to revenue sales would have been flat or slightly higher than the prior year. Despite the impact of the stronger U S. Dollar.
The sequential increase reflects the expected seasonality of our business. Although it was moderated by supply chain logistics and labor availability challenge challenges that persisted in the quarter, resulting in incremental deferred revenue.
Fourth quarter original equipment sales were more impacted by these factors.
Decreasing 13, 7% in total driven primarily by SPD, 16% decline, while Fcb's OE revenues were down 11%.
Year over year aftermarket revenues by contrast increased approximately 1% due mainly to fcb's, 11% growth, while MPD was relatively flat.
For the full year of 2021 revenues decreased 5% to $3 5 billion.
Primarily due to our lower starting backlog, particularly in original equipment and sales slippage to 2022.
OE revenue for the year was down 10, 3% driven by Fpv's, 18% decline as Fcb's OE sales were essentially flat.
Aftermarket sales, which typically turn faster increased slightly driven by fcb's, 9% increase that was mostly offset by <unk>, 1% decrease as aftermarket is a much larger portion of the SPD segment.
From a regional perspective, our full year revenue decline was driven by North America, the Middle East and Africa, and Europe , which were down year over year by 811, and 6%, respectively and were partially offset by a 11% growth in Latin America, and 1% growth in Asia Pacific.
Nick.
This revenue dynamics should change in 2022, given our full year 2021 bookings were up 20% year over year, and our largest region North America.
Likewise, the middle East and Africa saw bookings increased 30% and Europe was up 8%, which together has built about backlog for those regions to recognize this year.
Turning now to margins.
Fourth quarter adjusted gross margin decreased to 150 basis points to 29, 2%, primarily due to Sce's 240 basis point decline, while fpv's adjusted gross margin fell 20 basis points.
The decrease was driven by the lower revenues I just spoke to you from the beginning backlog and operating environment challenges and the related under absorption.
In addition, while closer has largely manage price cost well rising inflation levels were a modest headwind in the quarter and we did implement a price increase at the start of 2000 2000 22022 to address that.
Temporary frictional issue, however had a much larger impact in the fourth quarter, including where and how we get our inventory the increase labor overtime, we incurred and the type of freight we used to ship our products.
Don't see these frictional issues is permanent but they did impact our results in the fourth quarter, particularly in FCB.
For the full year adjusted gross margin decreased 110 basis points to 31% with FCB and SPD <unk> contributing declines of 160 and 40 basis points respectively.
We were pleased given the reduction in sales that SPD was able to mostly offset the full year margin impact through favorable mix and operational efficiencies.
And FCB again, lower sales under absorption supply chain logistics and labor availability were the primary factors for the year over year variance and Additionally, we saw these environmental issues most prevalent in two of FCB is higher margin products product line.
On a reported basis fourth quarter and full year gross margin decreased to 140 basis points to 29, and 29, 6% respectively.
Partially offsetting the incremental headwinds discussed earlier, the full year and fourth quarter benefited from decreased realignment spending of approximately $30 million and $6 million respectively.
Fourth quarter, adjusted SG&A decreased $5 million or two 6% versus prior year to $188 million, which represents the lowest quarterly SG&A level in over a decade.
Demonstrating our disciplined cost control.
As a percent of sales fourth quarter adjusted SG&A did increased 80 basis points versus last year, but the metric declined 270 basis points sequentially to 24%.
On a reported basis fourth quarter SG&A decreased $16 million.
Which included an $11 million decline in adjusted items.
On a full year basis, our adjusted SG&A declined $18 million compared to 2020, driven by the aggressive cost actions taken in the summer of 2020.
Nevertheless, adjusted SG&A as a percentage of sales increased 60 basis points to 22, 3% due to the lower denominator.
Reported SG&A expense declined over $80 million in 2021, and also reflects the $63 million reduction in adjusted items, mostly due to reduced realignment expenses.
We do expect in 2022 with modest inflationary pressures that exist that our overall SG&A spend will increase however, we anticipate that we will continue to drive SG&A as a percentage of sales lower.
Fourth quarter, adjusted operating margins of nine 3% decreased 200 basis points year over year.
SPD and FCB adjusted margins declined 340, and 670 basis points respectively.
In addition to the decline in the segment's gross profit lower total SG&A reduce the impact that our annual selling related expense allocations had on the platforms operating margins.
Fourth quarter reported operating margin decreased 40 basis points year over year to nine 3%.
Were the previously discussed challenges more than offset the $16 million reduction of adjusted items.
Our fourth quarter and full year adjusted tax rate of 14, eight and 16, 6% were lower than we had expected driven by our income mix globally as well as favorable resolutions of certain foreign audits.
Turning to cash and liquidity.
Our seasonally strong fourth quarter generated cash flow from operations of nearly $100 million.
Which included $41 million of cash flow from working capital, which was driven by reductions in inventory, including net contract assets and liabilities of $59 million and increased accounts payable of $39 million.
Our fourth quarter ramp and operating cash flows was less than historical levels due to the work that we've done to drive a more consistent cash flow cadence throughout the year.
In fact 2021 was the first time in over 15 years, we have generated positive free cash flow in each quarter of the year.
Supported by our fourth quarter performance, we delivered full year free cash flow over $195 million with a conversion to adjusted earnings of 108%.
Marking our second consecutive year of delivering free cash flow conversion above our 100% plus target.
Fourth quarter working capital as a percentage of sales was the lowest level since the pandemic began at 28, 2%.
We're pleased with the sequential and year over year improvements of 160, and 30 basis points and solid incremental progress given the continued supply chain logistics and labor challenges.
Thanks to our focused inventory management, we reduced inventory, including contract assets and liabilities by nearly $80 million versus last year's fourth quarter and $64 million sequentially.
Additionally, while backlog increased nearly $150 million to $2 billion since year end, 2020 inventory, including contract assets and liabilities as a percentage of backlog dropped 700 basis points to 33, 5% versus prior year.
We expect our working capital progress and momentum to continue into 2022, as we plan to leverage the improved tools and processes now in place as we look to grow the business.
Following our significant refinancing activity of the last two years, we ended the year with a strong liquidity position.
Our year end cash position was about $658 million with available credit facility capacity of about $615 million.
In addition to our refinancing efforts.
Other significant uses of cash in 2021 included the return of $122 million to shareholders through dividends and share repurchases approximately.
Approximately $55 million in capital expenditures.
$33 million that we contributed to our global pension plans and the funding associated with our realignment and transformation program, albeit at more modest levels than in recent years.
Turning now to our 2022 outlook, we are encouraged by our expectations for the return of solid revenue and EPS growth as we look to capitalize on our operating platform improvements are higher starting backlog stronger end market fundamentals and the opportunity we see through energy transition activities.
<unk>.
These factors support our confidence in our 2022 outlook.
We are targeting full year 2022, adjusted EPS in the $1 70 to $1 90 range, which would represent a year over year adjusted EPS increase over 30% at the midpoint.
We also expect revenues to increase in the 7% to 9% range, which includes a modest 1% to 2% FX headwind at current exchange rates.
The adjusted EPS target range excludes our expected modest realignment expenses of approximately $10 million as well as potential items that may occur during the year such as below the line foreign currency effects and the impact of other discrete items, such as acquisitions divestitures special initiatives tax reform laws.
Et cetera.
Yeah.
Excluding only the expected realignment spending we initiated our reported EPS in the range of $1 65 to $1 85.
The small differential between our adjusted and reported EPS ranges reflect closer to continued improvement in the quality of our earnings.
Both the reported and adjusted EPS target range also assumes current foreign currency current foreign currency rates reasonably stable commodity prices the continuation of current market conditions and expectations for our customers to pursue larger project investments.
We expect net interest expense in the range of $45 million to $50 million and an adjusted tax rate between 2020 two.
And in 22%.
You can see all our guidance metrics in our press release and our earnings deck.
In terms of facing low third earnings and cash flows have traditionally been second half weighted and we expect that pattern to be exaggerated in 2022.
We continue to expect and have guided for supply chain logistics and labor availability to remain challenging in the first half of 2022.
On our income statement due to omicron related absenteeism in January as well as ongoing limited availability of certain components needed to ship our products. We expect first quarter 2022 revenues to be largely flat year over year with margins suppressed by higher frictional costs related to the ongoing challenges.
Also our guidance anticipates first quarter EPS will contribute about 10% to 12% of our full year EPS expectations.
And although we would like to see our 2022 revenue conversion get off to a quicker start we believe our backlog positions us for strong full year revenue and earnings growth.
And despite the slow start expected in Q1, we do expect these constraints impacting the first half of 2022 to improve in the second half of the year.
In addition, our first quarter cash flows will be impacted by a discrete foreign tax payment of $30 million. We made in January and we expect to fund last year's incentive compensation in March this year compared to the second quarter in prior years.
Both of which will impact our first quarter 2022 cash flow performance and year over year comparisons.
Turning to our expectations for major planned cash usages. This year, we plan to return over $100 million to shareholders through dividends. We also intend to further invest in our business with capital expenditures in the $70 million to $80 million range, including the continued build out of enterprise wide it systems.
To further support our operational and productivity improvements.
Additionally, our new growth strategy that Scott will speak to in just a moment, we expect to further capitalize on emerging growth opportunities by increasing our investment in new technology and product development, including our Red Robin Iot platform as well as pursuing profitable inorganic growth to advance our strategy.
Let me now return the call to Scott Great. Thank you Amy.
To conclude our prepared remarks, I want to highlight two topics, our progress and commitment to ESG and the evolution of our long term strategy.
Made tremendous progress on ESG in 2021, and I am proud of what we have accomplished at our ESG journey.
From a people perspective, our safety program continues to be an industry leader in total recordable incident rates. Additionally, we have improved diversity across the corporation from the board of directors and the executive leadership team to our general Associate population with people is the core value of closer we are proud of our industry, leading employee engagement scores.
It remained elevated despite the challenging environment.
Im also pleased that our ESG initiatives have garnered third party recognition, including improved scores from various rating agencies as well as being listed as one of Newsweek's most responsible companies in America.
And among the top company in Forbes world's top female friendly companies.
Were also recently recognized by our customer with the <unk> supplier award, which recognizes their suppliers that distinguish themselves to quality innovation and sustainability improvements with hundreds of eligible suppliers closer as one of only four companies that <unk> selected to received their award for our performance and sustainability.
Within our own environmental footprint, we continue to make significant progress towards our Cotwo emissions reduction goal and we are currently ahead of our published target a 40% reduction by 2030.
Finally, we are taking proper measures to ensure our corporate governance performs with all of our stakeholders in mind, including our shareholders associates customers suppliers lenders and in the communities where we operate.
ESG has been and will be key to our culture strategy and our approach going forward.
Let me now turn to our long term strategy.
Following several years of transforming the way, we think act and operate at closer we're putting this mindset into actions to deliver the next phase of growth into enhanced value creation.
Even as our traditional markets appear to be returning to growth, we intend to capitalize more broadly on the opportunities available with the entire flow control space capture.
Capture our customers' increased focus on efficiencies and provide the full control solutions to enable energy transition.
We believe this strategy has the potential to drive outsized growth over multiple years, while also providing improved resilience proposed service business model through various market cycles.
Our strategy of diversified Decarbonize and digitize or the three digit growth strategy supports and aligns directly with flow serves longstanding purpose statement to.
To provide extraordinary full control solutions to make the world better for everyone.
I've outlined on past calls certain aspects and offerings that will now be part of our comprehensive <unk> initiatives.
But what is new is our laser focus on and dedicated resources for the <unk> strategy throughout the organization.
Let me take a moment to highlight the key pillars of the strategy.
The diversified component of the strategy recognizes that today closer as meaningful leverage to oil and gas in each of our divisions and more so than most of the industrial companies.
We have decades, if not centuries of experience and expertise serving other infrastructure markets within flow control. Our goal now is to aggressively reengage, our offering with market participants.
In areas like water specialty chemical and other general industries, where we maintain strong capabilities.
This strategy is also about expanding the end market reach of existing products like our vacuum pumps and seals offerings.
Finally, we look to ensure that we have the full control technology to support emerging new markets and regions that exhibit attractive long term growth prospects.
To leave no doubt, we remain fully committed to supporting our oil and gas customers today and into the future, but the diversify goals about increasing our exposure to the end markets offering long term outsized growth potential and greater resiliency through the cycle.
An example of our successful diversification approaches utilizing our highly efficient pumping technology indirect pressure exchange technology to provide reliable flow control to desalination plants around the world converted.
Converting seawater to clean water for consumption residential and industrial use is an important domestic issue for many countries around the world.
<unk> has been working with the Saudi Arabian customer to supply pumps to produce 400000 cubic meters of clean water a day.
And the de carbonization leg of this strategy, we recognize that governments and corporations around the world are increasingly focused on climate change and implementing efforts to reduce greenhouse gas emissions.
As we've discussed over the past year with our energy transition comments closer is uniquely positioned to capitalize on the full control aspect of de carbonization.
Where today, our products and services can be utilized in many aspects of our customers carbon reduction efforts.
We are confident that through continued technology investments are expected capture rate of this growing opportunity we will continue to grow considerably.
Again, our approach is to continue to support our existing customers. While we also focus on cleaner energy opportunities.
With our customers' increased awareness on the need for cleaner energy and reduce emissions. We have established we have established a dedicated team that provides support to assist operators with their existing infrastructure focused on energy efficiency and flow loop optimization.
We're now going to market with this new approach that we're calling the energy advantage program, which provides three related offerings efficiency advantage carbon advantage and cost advantage.
Additionally, we are in we will be evolving our portfolio of products and services to ensure that we have the premier full control offering for areas such as carbon capture utilization and storage hydrogen solar bio fuels and energy storage.
A recent de carbonization highlight as closer as flare gas recovery system that is supporting a major petrochemical customer.
This technology significantly reduces toxic organic compounds, enabling customers to reduce their carbon footprint and make progress towards their <unk> carbon emissions reduction targets.
Finally, digitize represents our focus on digital growth driven by our Red Raven Iot platform.
Still in its infancy, we have been encouraged by the customer acceptance and the demonstrated capabilities of this offering in its first year in the market.
We currently support over 40 customers across the diverse set of applications, including over 1000 instrumented assets, providing nearly 10000 ongoing data signals.
We now have the capability to instrument, our full offering of pumps valves and seals systems and expect significant growth in traction of Red River in 2022 and beyond.
Our goal is to instrument as many of our existing installed base and new original equipment as possible and convert our solution to a profitable recurring revenue stream like most startup initiatives achieving critical mass as our goal and we believe we have the right technology and approach to get there.
Feedback from early adopting customers indicate that red Raven has demonstrated its value.
Just recently and supportive of our customers' desire to reduce unpredictable maintenance and downtime.
Raven detected upset conditions in this power customers boiler pump alerting them well in advance and preventing catastrophic damage to the pump and costly unplanned downtime.
To summarize we believe that our added focus with a diversified decarbonize and digitized strategy will only enhance our growth outlook going forward.
The new approach Leverages, the best of <unk> capabilities to address the current macro environment and we are confident that the new strategy provides opportunities for both near and long term growth for the company.
We are fully committed to the new strategy and have incorporated execution targets into our 2020 to incentive compensation.
Look forward to updating you on the progress as we move forward.
In closing we are excited about <unk> prospects for growth and value creation in 2022 and beyond we have started the year with a strong backlog and are expecting improved conditions in our traditional markets and believe our customers' investment plans set the stage for a multiyear growth cycle.
Additionally, our <unk> growth strategy will focus our technology and product development investment dollars to target, new and higher market growth opportunities, while supporting our existing customers efficiency and de carbonization efforts.
The work to improve our operating platform and cost structure that we pursued over the last several years has closer well positioned to capitalize on what we see as an improving growth environment and.
And our ultimate desire remains to drive value for our associates customers and shareholders in 2022 and beyond.
Operator, this concludes our prepared remarks.
Now like to open the call to questions.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad, if they're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal due to the equipment again press star one to ask a question.
We'll take our first question from Nathan Jones with Stifel.
Good morning, everyone.
Hey, good morning, guys.
Wanted to dig in a little bit more to these three day strategy.
If I look at your oil and gas and power kind of exposure is about 50%.
Clearly going after these markets is going to result in higher growth than some of those more traditional markets.
Do you have some kind of targets for what the oil and gas and power, we will shrink Joe or what these fast growing markets will grow to over time.
Any strategies, you're using to accelerate that and what your thoughts are on <unk>.
Making some more transformational moves with acquisitions and divestitures to more focused business in these areas.
Areas.
Yes, sure happy to talk about the <unk> and the growth strategy here and so really this is all about growing and finding the areas where closer has a converted competitive advantage an attractive market and so rather than.
The other thing I would just say is we've had several many discussions with our board of directors and we're including it in our compensation plan in 2022, and so with that said we've had lots of different discussions on what are the targets and how we think about this and so rather than putting a percentage of our business in oil and gas or a percentage of our business and.
Diversify category, what we're saying is we want to grow the three DS faster than what we would expect in our traditional markets over the long term and so we put growth targets above what we would for the overall company or the traditional markets, but to your point right the oil and gas represents a big percentage of it the <unk>.
<unk> categories at least how we've kind of shape. This up is roughly $500 million to $700 million. The decarbonization bucket in 2021 was roughly $100 million and so this is already a meaningful part of our business and we expect this part of the business to have outsized growth versus the rest of the business.
And on the guarantees from the.
The standpoint of portfolio as we think about as we think about our portfolio.
We certainly want moves that we make whether or not that's investments internally and in RMB or anything that we would do inorganically to support the <unk> strategy.
In terms of looking at the portfolio, though we do like our positioning with our current oil and gas customers from the standpoint that we think it positions us well to help them meet their energy transition needs and so as we as we look at that portfolio optimization, we don't see a wholesale move or move away from our <unk>.
Traditional customers given given the benefit that it gives us in serving them and then helping them achieve their goals.
Thanks, I guess my follow up then is going to be on the energy transition pipeline you talked about tracking $400 million. You said you did $100 million in revenue in 2021, what's the typical win rate for that 400 million that you're tracking and how do you got that driving that up over time.
Sure the win rate currently and the de carbonization bucket would be higher than what we're typically seeing and so our approach there is to really target end users and some of the work goes through EPC is but a lot of it is getting getting booked or getting you generated through that end user and so we've got some really good really.
<unk> ships with the existing installed base at refineries chemical plants big water installations, and other and so just by having that strong relationship having that installed base, we're getting more looks and were getting early looks on the de carbonization space and then if we fast forward.
The existing customers that we're serving if you fast forward into the other stuff with the carbon capture.
Utilization and storage the biodiesel conversions the hydrogen what we're trying to do there is work with license ores in the technology process to make sure that we've got the flow control technology to support that and we've been successful to keep that kind of off the streets, thus far and some of the wins that we've had and we're working more diligently to get.
Become a prime supplier in the new world of energy.
Great. Thanks, very much for taking my questions I'll pass it on.
Thank you, we'll now take our next question from Deane Dray with RBC capital markets.
Thank you and good morning, everyone.
Hey, good morning, Dave.
Scott I appreciate your opening comments about the events unfolding in Ukraine. I'm also mindful you have special insights given your military background, but I guess I'll take those questions offline.
But if we were to move the chess pieces forward and some energy sanctions are imposed in Russia, what might the boost b for flow serve in terms of we'd likely see a ramp up in U S. Production is probably going to be more exports going onto our al.
Elyse, but what does that mean for closer potentially yes sure I'll start again, just reiterate my comments, yeah, we truly hope that the most peaceful outcome happens here and it's incredibly unfortunate event that's unfolding.
Let me have Amy first answer the question on what we have in Russia, because I think that sets the scene for what do we have there what potential sanctions.
What impact to our business on sanctions could happen and then I'll talk a little bit about the future geopolitical situation with oil and potentially gas as well and obviously from a from a patient perspective. It continues to be a pretty fluid situation and we're monitoring the developments.
As they emerge but for us in terms of business in Russia, It's a relatively small amount and we.
We have <unk> in Russia that generally does about $15 million.
A business a year.
In 2021 that we had about another $35 million worth of business from from an OE perspective and that was exported.
Into Russia, bringing bringing sort of a representative sales number to about to about 50 $501 billion in terms of Russian exposure. So our Russian exposure in country is relatively small and again, the sanctions or a fluid situation, but it's a relatively minor impact for us overall and then day.
Answer your question directly Dean like how does this play forward rate, obviously, Russia has a huge producer of oil as the number three producer in the world and the number two producer of natural gas.
So I just think it depends on the response rate if they get locked down from an export standpoint, which is probably what will happen. Then the world has got to figure out where it's getting this offset of oil and natural gas and the likely suspects there the middle East and North America, and we're positioned incredibly well for growth in the <unk>.
Middle East and North America, and so while we had a big target for the Middle East and for North America. This year that would only go up given some some severe sanctions on Russia itself and so yes I am.
A little hesitant to say this but I would say, it's probably a net positive for flow serve over the coming years that wont happen immediately, but if you think kind of long term and where the investments have to take place and what theyre going to invest in that.
<unk> benefits from from the long term there.
Other components to that as I talked about natural gas, but it's really LNG right because you've got to get gas into Europe . Europe currently consumes roughly 30% of the Russian export or 30% of Europe's natural gas is coming from Russia. So they've got to get it from somewhere else and the only way to do that is to liquefy it and as we've talked about before we have.
Got a really good offering on the valve side, the <unk> side and in the pumps to support LNG and <unk>.
Specifically, the liquefaction side of that and so as LNG starts to grow that's super helpful for our business.
Those are all really helpful.
Updates and I appreciate it and so for a follow up.
Any color you can provide us on the pricing actions that you took in January and then what might the carryover benefits beyond price actions that you took in 2021.
Sure So I'll I'll.
I'll start and Scott may follow up with some color here. So as we talked about we had three price increases in 2021.
With a third going into effect on the first of January which was at 5%. So these price increases cover our MRO parts field and industrial product. So the short of shorter cycle.
<unk> of our business and the other part of our business is really generally cost plus and that's on on our engineered highly engineered projects and customized orders.
And what I can say about that is that the margins that we have in backlog today are higher than what we had in <unk> in the backlog last year at this time and now now keep in mind that.
This element.
Our pricing.
<unk>.
With agreed to at the height of the pandemic and so as we look at Q4 Q3, and even some into Q1 of 2022, we are recognizing revenue on those engineered products that were priced at the height of the pandemic at very competitive rates.
So overall, if I look at those two pieces of the business together I wouldn't say that we're ahead of price cost, but I'm confident that we're not far behind and that we're taking the actions that we need to in order to position us well in 2022, and we're pretty confident that with respect to that we can stay neutral.
That's good to hear and.
I also appreciate hearing a specific price that five percentage points of increase in January that's helpful. And then lastly, just a comment.
Thank you all have done a really good job on the free cash flow, especially the past two years being above 100%.
Bond followers closer.
There was a potential there, but finally, it's coming through and just congrats to you and the team on that and keep it up thank you.
Thanks, guys much appreciated.
Thank you we'll now take our next question from John Walsh with Credit Suisse.
Hi.
Good morning, everyone.
Good morning, Joe.
Maybe first question can you.
Size or Dimensionalize these frictional costs.
You've kind of absorbed here in 'twenty one.
Maybe that's part of our conversation as we think about the bridge. So I think it's like 95% operating margin at your midpoint just want to understand.
How to kind of bridge there year over year as we think about the profitability. Obviously, you talked about backlog margin being up year on year I'm, assuming some of these frictional costs go away and any other things you can point to.
Sure. So as we as we think about our margin performance in Q3, and Q4 and we look forward to 2022, it's really a combination.
A few things one.
<unk> is under absorption related to revenue levels, but we're now at a point with the size of our backlog that that that that revenue level is being driven by lower conversion rates. So for example in the fourth quarter had we converted at our historical conversion rate.
Sure.
Overall that we've seen in the fourth quarter, which would have been our expectation going into the and going going into the quarter, we would've seen revenues relatively flat with 2021 now.
Now as we think about as we think about what these frictional costs are.
And they are impacting margins, but they are a temporary element of the cost structure. So these are things like expediting fees that we're paying in order to get parts into our factories quicker.
Using airfreight versus ground your fee to bring products into our <unk>.
Our production facilities quicker the overtime that we're paying and in some instances redundancy spending on some consumables and in order to ensure that we have we have what we need and the impact of this means that as we look at our margin rates for for 2022 and you're spot on in terms of in terms of looking at what that right.
It is for 2022 at the midpoint, we see that margin rate expanding over the course of the year and as these.
As both our conversion rate improved and we see that really happening.
At some point in the in the second quarter of the year and as these frictional costs start to start to move out of the system and we get to a more normalized.
More normalized supply chain. So as we think about that that midpoint or that that average operating income margin for the course of 2022. The exit rate is going to look much different than the average for the full year.
Gotcha Gotcha that makes a lot of sense and then I think maybe just as a follow on if I heard correctly. Scott. Thank you said orders would be up a high single digit rate.
And if that is the case, if I just run out.
Orders in the midpoint of your guidance I think you'd be assuming that youre going to end 2022 with higher backlog year over year, which makes sense given that youre.
Long cycle business, but I just wanted to make sure I heard that correctly. Thank you.
So currently we anticipate high single digits on our overall bookings growth and we think the aftermarket and MRO continues to grow but the outsized growth is going to come from this return of the project spending that comes in and then just so by definition. The projects are going to take longer they are longer cycle, they're going to take longer to get back.
And we do expect backlog to build at the end of <unk> through the 2020 year and ending higher at the end of the year than at the beginning of the year.
Great I appreciate you taking the questions. Thank you.
Thanks, Joe.
You will now take our next question from Mike Halloran with Baird.
Hey, good morning, everyone.
Good morning so.
A couple of a couple of follow ups on earlier questions first needs first question there on the energy transition side.
Maybe just some thoughts on how the structure on the go to market strategy is and when you think about the cyclical opportunity in the more traditional businesses that I think you've seen more comfortable with how do you ensure that there is not a loss of focus as you're pursuing both of those things and is it as simple as there's enough channel overlap. So the same people are hitting the same.
Customer up so that you can have a unified approach or <unk> or is there something broader to it.
Yes, so Mike this is the challenge right and this is what our leadership team is facing is the big question with our board of directors and so the way. We are pursuing this is we really do not want to walk away from the existing customers. We have in the business. That's out there and we believe the core markets are actually going to grow pretty nicely.
Over the next couple of years, but we also recognize that five.
510, 15 years down the line the world is going to be very different and we've got to be positioned for that change.
So what we're doing from a resource allocation standpoint is where we think that it's needed we're creating designated teams with executive sponsorship to make sure that we are moving the needle and driving the strategy forward. So an example of that would be our energy advantage team and so I mentioned that in the prepared remarks, but this is now.
A designated team that's looking for opportunities with our existing customers to help them through their energy transition to help them drive down their efficiency to drive down their <unk> emissions and to improve their uptime and reliability and so these are existing associates within closer, but we pulled them all together to really go.
Out to launch our energy advantage offering and then similar and diversify we're going to have to augment some of the teams that we have today, particularly in the water channel and others and we will do that through a combination of distribution and agents, but also refocusing some of our existing associates to get more aligned with the growth in water.
So it'll be a combination, but I would say this is probably the biggest challenge for US is the internal resource allocation of people and focus and time and energy and then you complement that with the dollar allocation of our product development and then potentially in the M&A space to make sure that we're investing in the future.
Makes sense and then.
On the margin line, specifically on mix when you look back historically when the mix skews towards aftermarket margins tend to look a little better fourth quarter. It felt like based on the comments you made the combination of these transitional costs.
Plus the.
Call it tougher margins on the original equipment with a big headwind.
How should we think about the margin profile on that aftermarket business is relatively.
Consistent to how you'd think about it historically when adjusting for revenue levels or are there incremental pressure points you are seeing on that side.
Idiots.
It's a great question and something again that we talked a lot about internally and I made a comment in my prepared remarks about about F. P. DS gross margin performance over there over the course of the year, which as you look at the reduction in volume.
That segment had we really used a couple of things to overcome and overcome that and that is one the favorable mix that we saw between aftermarket.
And then of course operational efficiencies, but as we look at some of these large facilities, particularly these beads facilities that are focused on large highly engineered product project.
On the under absorption levels that we saw in 2021.
We are far greater than what we did what we would've expected to experience than in other years and so as we move into 2022, and we see the reemergence of project spend we see that we see that improving pretty significantly and then the other thing that I want to comment on and this is this is more.
Relevant in FCB than it is.
And then it is within F. T D. But there is actually a I'll say a mixed within our mix. If you will in terms of in terms of our product and as we look at the supply chain issues that we've had in terms of availability they've really been focused on motors electronics and soft goods and no it's not.
The components are going are going into some of our products that are really our highest margin product lines and so as we look at where parts of portions of our business.
That when we performed well because we've got the backlog we see nice margin, we frankly have not seen the revenue conversion of our backlog that we'd like to see in order to enhance those margins and as we continue to point out. Although there is some frictional costs involved in this.
And as that.
That backlog actually makes its way into revenue.
Margins are not lost forever.
There they are deferred to future periods.
Great one last if I may with all the moving pieces to what's the work you did in the fourth quarter was on the debt side of the interest side, how should we think about interest expense in 'twenty two.
Sure. So we are pretty pretty excited about about how we.
That the deals we were able to execute Leighton that late in the third quarter and into the fourth quarter.
Anticipating our net interest expense will be in the range of $45 million to $50 million over the course of 2022.
Great really appreciate it thanks for the time.
Great. Thank you.
Thank you, we'll now take our next question from Joe Giordano with Cowen.
Hey, guys good afternoon.
Hey, Joe.
So.
On margins as we talk about projects starting to pick up I know the projects that you are delivering now.
Guys mentioned, we're recognizing pricing that was done at a different time and very competitively, but as we.
As that goes in and new projects are coming through your P&L and it's still going to impact the mix negatively against aftermarket and just as a percentage. So how should we think about the margin progression like does it put a I'm not.
Cap, but does it like mute the margin expansion we might.
Western growth towards like high single digit growth.
Yeah. So overall I see the tailwind that we're getting from the absorption benefit from those large project bookings.
Overcoming the friction that we might have from from.
From the from the mix element and will actually will actually see that see the mix there.
It's still pretty favorable and worked to our benefit over the course of 2022.
That the item that I just wanted to continue to hone in on that as we look at 2022, and we think about where our revenue conversion rates are we know that those revenue conversion rates are going to improve.
Over the course of the and you hope to get up to speed.
Quarter of the year, and we're really going to see a stair step in volume and therefore the related benefits.
Both from both from a volume perspective, but also and when I talk when I say volume I'm, specifically talking about that absorption element.
Of of our margin.
Great and then on the three D and diversification.
I'm just curious as how much to really make this an important part of what was sort of like how much do you need to bring in capabilities that you guys don't have right now like when I think about $100 million of bookings this year, you're talking $400 million of pipeline that youre looking at for next year, Let's say you want a third of that.
Its 20% growth essentially but it's still less than 3% of sales so hard for investors to really make that a centerpiece.
How do we what do we have to do 20% growth is really good but what do we have to do to make this a real significant part of revenue is it do you have to bring in outside.
Sure I think we are investing internally and potentially externally as well and so as we think about let's just take de carbonization, we did $100 million. Today. We think this is one of the fastest growing segments that we have out there and we believe that this just continues to grow and so we think if you think the <unk>.
Five years, the CAGR could be high.
High double digits for sure.
We believe that we can make this a meaningful part of our offering and then if we think about how do we introduce new products into this or potentially an acquisition then it becomes something of substance for closer of overall and so you are right now we're committing internally we've got new folks on board that are more.
Geared toward the hydrogen markets they understand the gas side of the equation. They understand some of the things and there is a transition that we werent focused before and they are helping us with our offering and that offering is both the combination of products and services as we go forward.
Feel really good about even though we're starting at a $100 million like I feel very good about the growth outcome and that this becomes a meaningful part of <unk> going forward and then on the diversify these are big markets today already for US if you think water and specialty Chem in the general industry segment, that's related to a more diverse portfolio that's over $600 million today.
And again, our focus here is to grow that faster than the overall business. We've got some pretty big targets, there and growing growing that side of the business and same thing we're investing in experts around the water side, the specialty Chem side, we're going to invest and how do we get our products reposition we've been doing that now for two years and we.
Expect that to continue to grow as we go forward.
If you don't mind me sneaking in one last one on <unk> I'm, just curious what percentage of your products that are going out like have this capability embedded in it whether or not the customer decides to use it or pay for it or turn it on different question, but like how much of your stuff that's going out the door actually has the capability to use it.
Yes, so right now the products that we would.
Would we would be instrumented and ready to turn on or the customer decision is relatively low where we're seeing that as the engineered to order type products. So I think big critical service pumps that are highly critical to an operation. If they have downtime issues, then that's catastrophic to their operation and so those.
We're growing our instrumented and ready to turn on and enable but I would say that's less than 5% of the overall portfolio. Our goal is to start to ramp that up as we go forward into future years.
Thanks, guys.
Yes.
Okay.
Thank you, we'll now take our next question from Brett Linzey with Mizuho Americas.
Hi, good morning, all.
My breath.
Just wanted to come back to free cash flow and certainly echo the comments regarding the progress. The teams have made but could you just put a finer point on the Q1 item you called out is that onetime in nature and then on a full year basis. How are you thinking about conversion. This year, just considering some of the inventory will be a use of.
Cash.
Sure.
Two two items that I called out in terms of Q1 cash flow one of which is a discrete and nonrecurring item, which is we made a we made a large foreign.
Tax payment in the first in the first months of the year that was about $30 million. The second was.
Timing of of our incentive compensation plan, which is generally need and in the first week in April this year that will be signed in the first weekend.
Last week of March so and so that'll be a little bit of difference in timing, but will not impact full year full year free cash flow and in general we are anticipating that we will be delivering free cash flow.
In the 90% to 100% range and my caveat around that is not necessarily related to the two items or that range is not necessarily related to the two items that I discussed.
For Q1, but really a recognition that as we return to growth there may be some need for some working capital investments, particularly particularly as it relates to as it relates to some of these large project orders. We believe that we've made progress and we're going to manage that better than than we than we ever have.
At flow serve but that's the genesis of that range between 90% to 100%.
Yes that all makes sense and just on the aftermarket bookings very steady improvement there could you just talk about the nature of activity Youre seeing is it is it orders that are satisfying immediate demand are you starting to see some replenishment in those distributor channels or elsewhere.
Yes, it's really all of the above and so on the aftermarket side, it's really about asset utilization right says refining and petrochemical plants and other large facilities.
To operate at a high utilization rate than they just they churn through the consumable products and so for US that's the mechanical seal it's parts in our pumps business. Its purpose in our valves business and then ultimately we get replacements as well and so what we're seeing just with the return of mobility the GDP increase.
Around the world kind of as Youre coming out of Covid everything is now operating at reasonably high levels and our aftermarket business is certainly following in following suit there and so we feel really good about the one the stability of that and then two the ability to continue to just have a nice steady progressive growth with aftermarket and so.
That seems incredibly focused on how do we kind of move up the maturity curve of services and so moving from just providing parts and call out services to know, it's a moving to long term service agreements expanding our lifecycle agreement opportunities with fields and pumps and then ultimately as we instrument all of our products.
We wanted to move into more solutions right, so, helping our customers with uptime reliability flow loop optimization and so we've got a clear path to move up this maturity curve and I, just think that the installed base and our ability to generate revenue from that is just a significant advantage that <unk> has and again I'm confident they will.
We're able to continue to grow that and I'm confident that we continue to become more of a service and solution provider than ever before.
Great and just one last one on exposures of your <unk> exposure, how much is the U S and middle East today.
I am sorry of the oil and gas exposure.
Yes of the OMG bucket, how much is U S and middle East for you guys.
Percent of millions.
Okay.
Yes, I don't have that number off top my head.
Yeah.
This suggests the North America, it is probably not overly different from from the overall of the overall mix.
Middle East clearly would be a much higher percentage related to oil and gas and chemical.
Okay, great. Thanks, so much.
Thank you.
Thank you, we'll now take our next question from jewelry to with Goldman Sachs.
Thanks, Good morning, everyone.
Good morning.
So.
I guess my first question is really just like you guys have provided a lot of good qualitative detail around the frictional cost I'm curious like.
You guys have like a quantification of what that number was that impacted <unk> and.
Really what I'm trying to understand is kind of that.
That's impacting the <unk> margin, which I know.
Just on the comments it sounds like <unk> margins will be kind of like we're almost 6% to 7% range.
Yeah, So I might just start again by.
Talking a little bit about what we're anticipating for Q1, so with respect to Q1.
Lee.
We're anticipating sales relatively flat with 2020.
But we're about we're anticipating only about 10% to 12%.
Our earnings is going to come from from Q1. So obviously the implication of that is some marvin margin degradation as we as we look at the movement from Q4 into Q1, and then steady progression over the course of 2022 to get us to that average average.
Level that we've discussed on the call and ultimately give us an exit rate, that's obviously far higher.
Then than where we started and where we're starting the year and where we're at today. Some of these frictional costs are pretty difficult.
Do you have to get to.
In terms of what's the difference between buying what.
Our decisions are buyers, making based on placing an order with one supplier versus another because of because of lead time, what's the cost of choosing one mode of transportation versus.
Versus the other we know that we have seen significant increases in our logistics cost as an example, and we know in general our rates with respect to many of our modes of transportation have actually seen improvement as a result of the transformation activities. So we have not quantified what those frictional what those frictional costs are.
Other than to say that we know that they are real and as we make our way through 2022.
Going to need to work to remove them from the system in order to fully realize.
Margin expansion.
Got it that's helpful. And then just to clarify one thing you said it was flat revenues versus the 2021 number right that 2020.
That's correct. Thank you okay. Thank you.
Yeah and then.
Just thinking about this like the SG&A opportunities obviously.
Lots of progress made there in the fourth quarter I'm just curious like.
How do you think about the buckets there in terms of like what can be structural or is there like a potential target for.
Maybe as a percentage of sales, where you can drive SG&A, maybe structurally structurally leaner longer term.
Sure I think what we said before is that our target is really to get into that 20% as SG&A. We still have some work to go there and I'd say as you know over the last year with closer to four I know you.
Really look to get our cost structure in the downturn, we've done a lot of good work here and so right now we want to be able to leverage the structure that we have as we grow the business. So back to my remarks, we're very confident in our ability to grow we're citing high single digit growth as we go forward and so it's really about leveraging.
The infrastructure and the folks that we have there today, but for this business is 20% a good number and that's where we'll ultimately desire to get to.
Okay, great. Thanks, guys.
Thank you, we'll now take one last question from Damian Kenneth with UBS.
Hi, good morning, everyone.
Good morning, David.
So I was having some tech issues earlier my apologies, if I end up double up doubling up on anything already discussed, but as it relates to your bookings could you just comment on what the January and February trends have looked like thus far.
Being that you saw bookings first and flip positive in the second quarter of last year, what would you expect as well.
<unk> growth rates to kind of walk off the rest of the year as you start lapping those positive comps.
Yeah, I would say our January bookings were reasonably solid and we're off to a good start and so typically at the end of the year you see some things get pulled in and we get a little bit concerned that did we did we take anything out of the first quarter that would normally be there, but I don't see that our January was off to a solid start.
<unk> bookings were there and kind of back to this pipeline of projects, we feel pretty good about that outlook and converting the pipeline to through opportunities in bookings.
Okay great.
And Amy I think you made the comment earlier that you are expecting reasonably stable commodity prices this year.
This is kind of interesting I mean, we have seen steel prices move a good bit lower over the last couple of months I think that's one of your larger material exposures.
But maybe you could just elaborate on your key commodity cost expectations.
And whether there is maybe any potential margin tailwind this year.
Just thinking about where some of those material had been pricing last year.
Sure. So I think in general from an inflationary perspective.
We anticipated.
We saw a number of those increases come through in <unk>.
In 2000 in 2021 and so.
I know I don't think that I don't think that we're going to see $40 a barrel again.
From an oil perspective again, this year and I think that we've absorbed a number of the commodities and increases that we expected that and that were coming in 2021. It's obviously an area that we continue to.
To monitor closely and also I would point out that on our really large projects that are really commodity focus we are getting firm quotes at the beginning of those.
As those projects and so we've locked in we locked in prices so.
So from that from that perspective, we feel like we give ourselves a pretty good opportunity to.
To hedge that.
Any inflections that we see with respect to commodities.
As we go through the year, there, obviously can be blips and we'll continue to watch out for those but.
But overall I'm much more worried about about the friction all elements of the supply chain.
Versus versus inflation as we look forward to 2022, yes, I would just say we have a really good handle of the commodities that impact our cost structure and we watch it carefully.
And it has been an incredibly dynamic situation. If those continue to go up or raise our prices, but to <unk> point the bigger concern for us has been the frictional cost with the disruption. This expediting the air Freighting overtime and all of that that that's what's really hurting us we will continue to be right at that neutral why and hopefully turning to positive on <unk>.
<unk> cost and we'll continue to watch that the commodities that impact our cost structure.
Understood. Thanks for your thoughts best of luck with it all.
Great. Thank you.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.