Q3 2023 Flowserve Corp Earnings Call

Please standby your conference is about to begin.

Good day and welcome to the third quarter 2023 flow serve Corporation earnings Conference call Today's conference is being recorded.

At this time I'd like to turn the conference over to Jay Ruche, Vice President Investor Relations and Treasurer. Please go ahead.

Thank you Melinda and good morning, everyone.

We appreciate you joining our conference call to discuss flow serves third quarter 2023 financial results.

On the call with me today are Scott Rowe flow serves president and Chief Executive Officer, and Amy Sweats, Senior Vice President and Chief Financial Officer.

Following our prepared comments, we will open the call for your questions.

As a reminder, this event is being webcast and the audio replay will be available.

Unknown Executive: Please stand by. Your conference is about to begin. Good day, and welcome to the third quarter 2023 Flowserve Corporation earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jay Roueche, Vice President, Investor Relations, and Treasurer. Please go ahead. Thank you, Melinda, and good morning, everyone. We appreciate you joining our conference call to discuss Flowserve's third quarter 2023 financial results.

Please 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 as of October 26, 2023, and they involve risks and uncertainties many of which are beyond the company's control.

We encourage you to review our safe Harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results.

Jay Roueche: On the call with me today, or 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 to questions. As a reminder, this event is being broadcast and an audio replay will be available.

Which are included in our press release earnings presentation and are accessible on our website in the Investor Relations section.

I would 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. It was great to see so many of you in person at our analyst day, a few weeks ago in New York City, where we outlined our 2027 financial targets and our strategies to achieve them.

Jay Roueche: Please note that our earnings materials do, and let's call will, include bond gap measures, and contain forward-looking statements. These statements are based upon forecasts, expectations, and other information available to management as of October 26, 2023, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to review our safe harbor disclosures, as well as the reconciliation of our non-gap measures to our reported results, both of which are included in our press release and earnings presentation, and are accessible on our website in the Investor Relations section.

<unk> discussed our new operating model and how it has enabled the company to improve our speed accountability and cost efficiency in our operations.

We also highlighted our belief that the intersection of energy security and energy transition has full serve well positioned for accelerated growth driven by the success of our <unk> strategy, which will provide further updates and progress on today.

For anyone who hasn't reviewed the analyst day materials I'd encourage you to access them on our website in the Investor Relations section.

Scott Rowe: I would now like to turn the call over to Scott Rowe, Flowserve's president, Chief Executive Officer, for his prepared comments. Thanks, Jay, and good morning, everyone. It was great to see so many of you in person at our analyst day a few weeks ago in New York City, where we outlined our 2027 financial targets and our strategies to achieve them. We discussed our new operating model and how it has enabled the company to improve our speed, accountability, and cost efficiency in our operations.

Let's now turn to the quarter.

I am extremely pleased with the continued strong operating performance that we demonstrated again this quarter.

This performance drove admirable financial results, including adjusted earnings per share of <unk>, 50, which exceeded our internal expectations.

Our execution continued to improve during the quarter evidenced by our highest quarterly revenue since 2015 with an adjusted gross margin of nearly 30%. Despite the higher mix of original equipment revenue.

Scott Rowe: We also highlighted our belief that the intersection of energy security and energy transition has Flowserve well-positioned, but accelerated growth driven by the success of our 3D strategy, which will provide further updates and progress on today. For anyone who hasn't reviewed the analyst day materials, I'd encourage you to access them on our website in the Investor Relations section.

Our markets remain healthy and supportive and we delivered over $1 billion in bookings for the seventh consecutive quarter.

With a book to Bill of nearly one times, we largely maintained our near record backlog of $2 8 billion.

This backlog provides a strong foundation to our 2020 for revenue and earnings growth expectations.

Scott Rowe: Let's now turn to the quarter. I'm extremely pleased with the continued strong operating performance that we demonstrated again this quarter. This performance drove admirable financial results, including the adjusted earnings per share of 50 cents, which exceeded our internal expectations. Our execution continued to improve during the quarter, evidenced by our highest quarterly revenues since 2015, with an adjusted gross margin of nearly 30%, despite the higher mix of original equipment revenue. Our markets remained healthy and supportive, and we delivered over $1 billion in bookings for the seventh consecutive quarter.

Our third quarter results, coupled with our improved execution provided us the confidence to raise our full year 2023 revenue and adjusted EPS targets for the third consecutive quarter. This year.

While our operating performance was certainly strong in the third quarter, both our reported and adjusted earnings per share were tempered by a discrete $10 $7 million non cash accrual related to the annual assessment of certain long term liabilities.

This expense had a <unk> <unk> impact in the quarter for both reported and adjusted earnings per share.

Nevertheless, we continue to build on the momentum established late last year, we delivered our fourth consecutive quarter of year over year revenue and earnings growth.

Scott Rowe: With the book to bill of nearly one times, we largely maintained our near-record backlog of $2.8 billion. This backlog provides a strong foundation to our 2024 revenue and earnings growth expectations. 3rd quarter results coupled with our improved execution provided us the confidence to raise our full year 2023 revenue and adjusted EPS targets for the 3rd consecutive quarter this year. While our operating performance was certainly strong in the 3rd quarter, both our reported and adjusted earnings per share were tempered by a discrete $10.7 million non cash accrual related to the annual assessment of certain long-term liabilities.

We also took significant actions during the quarter that largely completed our new operating model intended to drive greater speed and accountability within the organization.

We have now exceeded the $50 million annualized cost reduction goal, we set out late last year, which will largely be reflected in the 2024 results.

More importantly, we are already realizing benefits from the new operating model with a more efficient and effective operating platform the.

The seven business units within our two segments are driving an improved focus on their targeted markets that enable better product positioning while the improved functional support provides the framework and processes to ensure greater operational effectiveness.

Scott Rowe: This expense had a six cents impact in the quarter for both reported and adjusted earnings per share. Nevertheless, we continue to build on the momentum established link last year. We delivered our fourth consecutive quarter of year of year revenue and earnings growth. We also took significant actions during the quarter that largely completed our new operating model intended to drive greater speed and accountability within the organization. We have now exceeded the $50 million annualized cost reduction goal we set out late last year, which will largely be reflected in the 2024 results.

I am confident that the new operating model will help drive our expectations for accelerated growth and strong financial performance.

Scott Rowe: More importantly, we are already realizing benefits from the new operating model with a more efficient and effective operating platform. The seven business units within our two segments are driving the improved focus on their targeted markets that enable better product positioning while the improved functional support provides the framework and processes to ensure greater operational effectiveness. I am confident that the new operating model will help drive our expectations for accelerated growth in strong financial performance.

During the third quarter, we generated bookings of nearly $1 1 billion.

Compared to last year's third quarter, which included the $210 million Referral award our bookings. This year were driven primarily by smaller project awards in the $5 million to $10 million range with strong aftermarket and MRO work across all regions.

Overall awards this quarter only one project exceeded the $20 million level at roughly $40 million in size.

As always predicting project award timing is difficult and then the third quarter. We saw several promising opportunities move out of the quarter and are now likely to book in the fourth quarter.

Our project funnel has grown year over year, and we have line of sight to a number of meaningful larger projects that we expect to be awarded over the next several quarters.

For instance, we see significant larger project opportunities on the horizon in the middle East for our traditional oil and gas and petrochemical markets.

Scott Rowe: During the 3rd quarter, we generated bookings of nearly $1.1 billion. Compared to last year's 3rd quarter, which included the $210 million referral award, our bookings this year were driven primarily by smaller project awards in the $5 to $10 million range with strong aftermarket and MRO work across all regions. Over our awards this quarter, only one project exceeded the $20 million level at roughly $40 million in size. As always, predicting project award timing is difficult and in the 3rd quarter, we saw several promising opportunities move out of the quarter and are now likely to book in the 4th quarter.

The improved project outlook combined with our strong backlog enable us to remain disciplined in the work that we pursue.

Our project pursuit process requires the margin expectations that we deserve given the risk in effort on these large projects.

This approach has proven successful for us to date as we continue to increase the gross margin levels of project work in our backlog and we intend to remain on this trajectory in coming quarters as we aim for continued gross margin progression.

Scott Rowe: Our project funnel has grown year-over-year and we have line of sight to a number of meaningful larger projects that we expect to be awarded over the next several quarters. For instance, we see significant larger project opportunities on the horizon in the Middle East for our traditional oil and gas and petrochemical markets. The improved project outlook combined with our strong backlog enable us to remain disciplined in the work that we pursue. Our project pursuit process requires the margin expectations that we deserve given the risk and effort on these large projects.

In line with our <unk> strategy, we continued to capitalize on growing investments in new energy initiatives, such as hydrogen and carbon capture while traditional markets remained healthy in the third quarter <unk> bookings represented roughly 26% of our total awards, including substantial New Energy Awards, where we are on track to exceed two <unk>.

<unk> million dollars for the year, a near 50% increase over 2022.

The nuclear and LNG markets are also key to our <unk> strategy, given the strong levels of expected growth.

While we didn't see any large projects in these categories in the third quarter, we booked a healthy amount of smaller awards as well as significant ongoing MRO and aftermarket work.

Scott Rowe: This approach has proven successful for us to date as we continue to increase the gross margin levels of project work in our backlog and we intend to remain on this trajectory in coming quarters as we aim for continued gross margin progression. In line with our 3D strategy, we continue to capitalize on growing investments in new energy initiatives such as hydrogen and carbon capture while traditional markets remain held.

Turning to our aftermarket business most of our customers' facilities remained highly utilized and our focus on safety uptime efficiency and emissions reductions.

<unk> remains well suited to fill these needs in the third quarter, we generated over $580 million of aftermarket bookings, marking the eighth consecutive quarter exceeding the $500 million plus threshold.

Scott Rowe: Lee. In the third quarter, 3D bookings represented roughly 26% of our total awards, including substantial new energy awards where we are on track to exceed $200 million for the year, a near 50% increase over 2022. The nuclear and energy markets are also key to our 3D strategy given the strong levels of expected growth. While we didn't see any large projects in these categories in the third quarter, we booked a healthy amount of smaller awards as well as significant ongoing MRL in aftermarket work.

We see this trend continuing with no signs of this activity receding anytime soon.

Our market outlook remains positive.

We continue to believe we are in the early years of a multiple year upcycle.

We haven't seen any indication of a slowdown in our served markets. We continue.

To expect a full year book to Bill above one which will maintain our backlog in support 2020 for growth.

Our project funnel remains above last year's third quarter level and has increased 7% since the beginning of the year.

Scott Rowe: Turning to our aftermarket business, most of our customers' facilities remain highly utilized and are focused on safety, uptime, efficiency and emissions reductions. Also remains well suited to fill these needs. In the third quarter, we generated over $580 million of aftermarket bookings, marking the eighth consecutive quarter exceeding the $500 million plus threshold. We see this trend continuing with no signs of this activity receiving any time soon. Our market outlook remained positive. We continue to believe we are in the early years of a multiple year upcycle.

We also expect that both aftermarket and MRO activity levels will remain strong into 2024 and beyond.

<unk> is well situated to capitalize on energy security and energy transition.

These global themes are expected to continue driving significant investments for decades to come and our <unk> strategy is closer or are well positioned to drive accelerated growth.

Additionally, our exposure to later cycle project investment by industries that have substantially underspent over a three year period further supports our expectation for multi year growth let.

Scott Rowe: We haven't seen any indication of a slowdown in our surge markets. We continue to expect a full year book to build above one, which will maintain our backlog in support of 2024 growth. Our project funnel remains above last year's third quarter level and has increased 7% since the beginning of the year. We also expect that both aftermarket and MRL activity levels will remain strong into 2024 and beyond. Both serve as well situated to capitalize on energy security and energy transition.

Let me now turn the call over to Amy to address our third quarter financial results in greater detail.

Thanks, Scott and good morning, everyone.

Reviewing our financial results in greater detail I'll start by reiterating how pleased we are with our operational performance and backlog conversion.

Both of which helped drive results above our expectations for the third quarter.

We generated our highest quarterly sales level in nearly eight years at $1 1 billion and from that we produced adjusted earnings per share at <unk> 50.

Scott Rowe: These global themes are expected to continue driving significant investments for decades to come, and our 3D strategy is closer to a well-positioned to drive accelerated growth. Additionally, our exposure to later cycle project investment by industries that have substantially underspent over a three-year period further supports our expectations for multi-year growth.

The annual actuarial assessment of certain long term liabilities slightly muted our results that would have otherwise been even stronger.

This accrual resulted in a $10 $7 million noncash expense to SG&A, reducing both our reported and adjusted earnings per share by roughly <unk> <unk>.

Amy Schwetz: Let me now turn the call over to Amy to address our third quarter financial results in greater detail. Thanks Scott, and good morning everyone. Reviewing our financial results in greater detail, I'll start by reiterating how pleased we are with our operational performance and backlog conversion, both of which help drive results above our expectations for the third quarter. We generated our highest quarterly sales level in nearly eight years at $1.1 billion, and from that we produced adjusted earnings per share of 50 cents.

Based on our strong year to date performance and continued execution, we raised our revenue and adjusted EPS guidance ranges for the third consecutive quarter.

This confidence comes from the improved and consistent operating performance at both segments.

Ongoing supportive end markets and the early benefits of our new organizational design.

Third quarter reported earnings per share were <unk> 35.

Which includes 15.

Net adjusted expenses, primarily realignment charges and below the line FX impact.

Amy Schwetz: The annual actuarial assessment of certain long-term liabilities slightly muted our results that would have otherwise been even stronger. This approval resulted in a $10.7 million non-cash expense to SDNA, reducing both our reported and adjusted earnings per share by roughly six cents. Based on our strong year-to-date performance and continued execution, we raised our revenue and adjusted EPS guidance ranges for the third consecutive quarter. This confidence comes from the improved and consistent operating performance of both segments, ongoing supportive end markets, and the early benefits of our new organizational Design.

This is partially offset by the release of tax valuation allowance benefit.

Revenue in the third quarter increased over 25% from the prior year representing growth in nearly all aspects of the business.

All equipment and aftermarket revenues increased 28% and 23% respectively compared to the prior year.

At the segment level Ftes original equipment sales were particularly buoyant delivering 45% year over year growth.

While FCB contributed a solid 14% increase.

While we maintain our near record aftermarket backlog at over $1 billion third quarter aftermarket revenues increased markedly compared to prior year, as well at 28% and 22% and FCB and SPD.

Amy Schwetz: Third-quarter reported earnings per share were 35 cents, which includes 15 cents of net adjusted expenses, primarily re-alignment charges, and the low-to-line FX impact. But this was partially offset by the release of PAC's valuation allowance benefits. Revenue in the third-quarter increased over 25% from the prior year, representing growth in nearly all aspects of the business. Original equipment and after-market revenues increased 28% and 23% respectively compared to the prior year. At the segment level, FPD's original equipment sales were particularly buoyant, delivering 45% year-over-year growth, while FPD contributed a solid 14% increase.

All of our regions contributed double digit sales growth as well with notable year over year improvement in the Middle East and Africa, Latin America, and North America at 50, 143, and 24% respectively.

Europe and Asia also delivered with substantial increases of 18% and 14% respectively.

Shifting to margin, we generated significant year over year improvement, reflecting the traction.

Traction we've generated from our focus on operational excellence.

As well as the leverage benefit from a rising revenues in the quarter.

Amy Schwetz: While we maintain a near-record after-market backlog at over $1 billion, third-quarter after-market revenues increased marketly compared to prior year as well, at 28% and 22% in FPD and FPD. All of our regions contributed double-digit sales growth as well, with notable year-over-year improvement in the Middle East and Africa, Latin America, and North America, at 51, 43, and 24% respectively. Europe and Asia also delivered with substantial increases of 18 and 14% respectively. Shifting to margins, we generated significant year-over-year improvement, reflecting the traction we generated from our focus on operational excellence, as well as the leverage benefit from our to 29.7%.

Our adjusted gross margin increased 230 basis points year over year to 29, 7%.

Additional factors for the improvement include our price increases initiated over the last year and improved supply chain environment and reduce frictional costs.

Partially offsetting these factors however were headwinds from the modest mix shift, resulting from increased original equipment work, including some shipments of lower margin original equipment work from backlog that was booked in challenging market conditions as well as increased performance based compensation accruals.

While we are pleased with our operating progress and year to date adjusted gross margin of 31%.

This is a foundational level, we intend to further improve upon.

As you heard at our analyst day last month, we have defined a clear path to drive margin expansion through the combination of the new organizational design and our focus on operational excellence and product management that we believe are key levers for our longer term margin targets.

Amy Schwetz: Additional factors for the improvement include our price increases initiated over the last year, and improved supply chain environment and reduced frictional costs. Partially offsetting these factors, however, were headwinds from the modest mixed shift resulting from increased original equipment work, including some shipments of lower margin of original equipment work from that was booked in challenging market conditions, as well as increased performance-based compensation accruals. While we are pleased with our operating progress and year-to-date adjusted gross margin of 30.1%, this is a foundational level we intend to further improve upon.

We have consistently increased the margin in our backlog over the past year as visibility to end markets and our bookings levels have steadily improved.

Additionally, the early benefits of our new organizational model enabled us to modestly exceed our $50 million annualized cost reduction goal, we're roughly 60% of the savings identified an action will benefit the cost of goods sold line.

On a reported basis third quarter gross margins increased 160 basis points to 29%.

Amy Schwetz: As you heard at our analyst day last month, we have defined a clear path to drive margin expansion through the combination of the new organizational design and our focus on operational excellence and product management that we believe are key levers for our longer-term margin targets. We have consistently increased the margin in our backlog over the past year, as visibility to end markets and our bookings levels have steadily improved. Additionally, the early benefits of our new organizational model enabled us to modestly exceed our $50 million annualized cost reduction goal, where roughly 60% of the savings identified and action will benefit the cost of goods sold line.

In addition to the previously discussed items the quarter was impacted by increased realignment charges of $7 6 million versus the prior year.

Third quarter, adjusted SG&A increased $11 million to $235 million.

Compared to last year.

The increase was primarily due to higher performance based incentive accruals of $11 million as well as the $3 million increase in the annual true up of the previously mentioned Actuarially determined liability, which were partially offset by $6 million by $6 million benefit from bad debt reversal.

As a percent of sales adjusted SG&A decreased 420 basis points to 21, 4% as we successfully leveraged higher revenues and realized some early benefits from our 2023 cost out plan.

Amy Schwetz: On a reported basis, third quarter gross margins increased 160 basis points to 29%. We're in addition to the previously discussed items, the quarter was impacted by increased re-alignment charges of $7.6 million versus the prior year. Third quarter adjusted SG&A increased $11 million to $235 million compared to last year. The increase was primarily due to higher performance based incentive accruals of $11 million, as well as a $3 million increase in the annual trough-up of the previously mentioned actuarially determined liability, which were partially offset by $6 million by a $6 million benefit from bad debt reversals.

As we grow our revenues and maintain our cost focus including benefits from the organizational redesign we would expect to deliver results even better than these levels in the future.

On a reported basis third quarter SG&A increased year over year by $31 million.

To $252 million.

In addition to the items just mentioned our reported amount also includes a $21 million increase in adjusted <unk>.

Adjusted items, primarily due to a $15 million increase in realignment expenses as we executed the cost reduction program and remaining expenses related to pursuing the Golan trend transaction.

Amy Schwetz: As a percent of sales, adjusted SG&A decreased 420 basis points to 21.4%, as we successfully leverage higher revenues and realize some early benefits from our 2023 cost-out plans. As we grow our revenues and maintain our cost focus, including benefits from the organizational redesign, we would expect to deliver results even better than these levels in the future. On a reported basis, third quarter SG&A increased year over year by $31 million to $252 million.

Despite the dollar increase year over year reported SG&A as a percent of sales declined 230 basis points to 23%.

Our third quarter adjusted operating margin increased 630 basis points to eight 7% reflecting.

Our strong operational performance lower frictional costs and ongoing SG&A controls.

Partially offset by the actuarial expensive corporate which impacted our margin level this quarter by approximately 100 basis points.

Amy Schwetz: In addition to the items just mentioned, our reported amount also includes the $21 million increase in adjusted items primarily due to a $15 million increase in re-alignment expenses as we executed the cost reduction program and remaining expenses related to pursuing the balance transaction. Despite the dollar increase year over year, reported SG&A as a percent of sales declined 230 basis points to 23%. Our third quarter adjusted operating margin increased 630 basis points to 8.7%.

Bye.

FCB and MPD delivered momentum building results with adjusted segment operating margins of $14, seven and 12, 3% respectively.

These margins represent year over year increases of 420, and 630 basis points respectively.

Third quarter reported operating margin increased 360 basis points year over year to six 4% were significant operating leverage and operational execution was partially offset by the $28 million increase in adjusted items versus prior year.

Amy Schwetz: Reflecting our strong operational performance, lower frictional costs, and ongoing SG&A controls. Partially offset by the actuarial expensive corporate, which impacted our margin level this quarter by approximately 100 basis points. By SG&FCD and SPD delivered momentum building results with adjusted segment operating margins of 14.7 and 12.3% respectively. These margins represent year over year increases of 420 and 630 basis points respectively. Third quarter reported operating margin increased 360 basis points year over year to 6.4%.

Our adjusted tax rate was 11, 2% in the third quarter and lower than our full year guidance range.

Outcome was achieved primarily due to the geographical mix of income and the timing related to certain foreign tax credits.

Our reported rate was even lower in fact, it was negative due to a $13 million valuation allowance benefit, which we excluded from our adjusted results.

Year to date, our adjusted tax rate of 18, 3% is still well within our original guidance range of 18% to 20% and.

And we also expect to finish the full year 2023 within that range at approximately 20%.

Amy Schwetz: We're a significant operating leverage and operational execution was partially offset by the $28 million increase in adjusted items versus prior year. Our adjusted tax rate was 11.2% in the third quarter and lower than our full year guidance range. This outcome was achieved primarily due to the geographical mix of income and the timing related to certain foreign tax credits. Our reported rate was even lower. In fact, it was negative due to a $13 million evaluation allowance.

Turning to cash flow, we are pleased with our year to date operating cash flow of $131 million, which represents a 241 million dollar improvement over prior year.

In addition to delivering higher earnings we reduced cash used for working capital by over $150 million, despite growing revenue and our significant backlog.

Third quarter operating cash flow of $81 million was also driven primarily by improved earnings and working capital performance.

Amy Schwetz: Lawrence, Benefit, which we excluded from our adjusted results. Year-to-date, our adjusted tax rate of 18.3% is still well within our original guidance range of 18 to 20%. And we also expect to finish the full year 2023 within that range at approximately 20%. Turning to cash flow, we are pleased with our year-to-date operating cash flow of $131 million, which represents a $241 million improvement over prior year. In addition to delivering higher earnings, we reduce cash used for working capital by over $150 million, despite growing revenue and our significant backlog.

We have now delivered positive operating cash flow in each quarter. This year, demonstrating our focus beginning late last year to smooth out some seasonality and improve our cadence throughout the year.

Even with the significant increase in revenues, we delivered in 2023 I am pleased that accounts receivable is a year to date modest source of cash, reflecting an $80 million improvement compared to prior year.

Amy Schwetz: Third quarter operating cash flow of $81 million was also driven primarily by improved earnings and working capital performance. We have now delivered our positive operating cash flow in each quarter this year, demonstrating our focus beginning late last year to smooth out some seasonality and improve our cadence throughout the year. Even with the significant increase in revenues we've delivered in 2023, I am pleased that accounts receivable is a year-to-date modest source of cash, reflecting an $80 million improvement compared to prior year.

Our collection efforts have been strong evidenced by the eight day reduction in our days sales outstanding versus the prior year.

Inventory, including contract assets and liabilities has also contributed to our working capital progress as we reduced the cash used by $21 million, bringing the year to date improvement up to $38 million.

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As a percent of sales primary working capital supporting our near record backlog improved 170 basis points versus prior year to 35% and declined sequentially 140 basis points as well.

We will remain focused on reducing our working capital investment to a level well below 30% of sales to our 25% to 27% targets outlined at the analyst day, which we expect to achieve through supply chain improvements and are more consistent and predictable execution.

Amy Schwetz: Our collection efforts have been strong, evidence by the eight-day reduction in our sales outstanding versus the prior year. Inventory, including contract assets and liabilities, has also contributed to our working capital progress as we reduce the cash used by $21 million, bringing the year-to-date improvement up to $38 million. As a percent of sales, primary working capital, supporting our near-record backlog, improved 170 basis points versus prior year to 30.5%, and declined sequentially 140 basis points as well.

Significant uses of cash in the third quarter included $26 million in dividends and $16 million in capital expenditures and a $10 million term loan debt reduction payments.

While we achieved a nearly $240 million improvement in free cash flow in 2023 compared to prior year, we still expect to see more in the traditional seasonally robust fourth quarter.

Turning to our outlook for the fourth quarter we.

We expect to build on our operating momentum and deliver solid quarterly revenue and adjusted earnings once again.

Amy Schwetz: We will remain focused on reducing our working capital investment to a level well below 30% of sales to our 25% to 27% targets outlined at the analyst day, which we expect to achieve through supply chain improvements in our more consistent and predictable execution. Significant uses of cash in the third quarter included $26 million in dividends, $16 million in capital expenditures, and a $10 million term loan debt reduction payment. While we achieved a nearly $240 million improvement in free cash flow in 2023 compared to prior year, we still expect to see more come in the traditional seasonally robust fourth quarter.

Which results in our full year revenue guidance range of 18% to 19%.

With full year adjusted earnings per share of $1 95 to 205.

At the midpoint, our full year adjusted earnings guidance represents an 80% increase over last year.

We expect our markets to remain active resulting in a full year book to bill greater than one increasing our year over year backlog to support 2020 for growth.

Our adjusted targets exclude identified realignment expenses of approximately $55 million as well as potential items that may occur during the year such as below the line currency effects and the impact of other discrete items.

Amy Schwetz: Turning to our outlook for the fourth quarter, we expect to build on our operating momentum and deliver solid quarterly revenue and adjusted earnings once again, which results in our full year revenue guidance range of 18 to 19% with full year adjusted earnings for share of $1.95 to 205. At the midpoint, our full year adjusted earnings guidance represents an 80% increase over less, last year. We expect our markets to remain active, resulting in a full year book to build greater than one, increasing our year over year backlogs to support 2024 growth.

Including the identified realignment spending and our other adjustments year to date.

We expect our reported EPS in the range of $1 40 to $1 50.

As I highlighted at our analyst day, we have a preliminary 2024 outlook that supports mid single digit revenue growth.

Adjusted operating margin improvement of approximately 100 basis points and adjusted EPS growth of 20% to 25%.

This outcome would be meaningful progress and provide confidence on the path to achieving our longer term goals.

Amy Schwetz: Our adjusted targets exclude identified realignment expenses of approximately $55 million, as well as potential items that may occur during the year, such as below the line currency effects, and the impact of other discrete items. Including the identity identified realignment spending and our other adjustments here to date, we expect our reported EPS in the range of $1.40 to $1.50. As I highlighted at our analyst day, we have a preliminary 2024 outlook that supports mid single digit revenue growth, adjusted operating margin improvement of approximately a hundred basis points, and adjusted EPS growth of 20 to 25%.

Our early view was based on entering 2024 with a higher quality backlog and building on our 2023 performance with the new organizational model fully in place and designed to increase our speed accountability and reduce costs.

As usual, we plan to initiate our official guidance in early 2024.

Until then we believe that we have built a rock solid foundation. This year and are focused on the right initiatives to drive growth and margin expansion through our operational excellence and improved product portfolio management.

Together, we will use these levers to keep flow serve on the path to achieve our 2027 goals at $5 billion plus in organic revenue with adjusted operating margins in the 14% to 16% range to drive adjusted earnings over $4 per share.

Amy Schwetz: This outcome would be meaningful progress and provide confidence on the path to achieving our longer term goals. Our early view was based on entering 2024 with higher quality backlog and building on our 2023 performance with the new organizational model fully in place and designed to increase our speed, accountability, and reduced costs. As usual, we plan to initiate our official guidance in early 2024. Until then, we believe that we have built a rock solid foundation this year, and are focused on the right initiatives to drive growth and margin expansion through operational excellence and improved product portfolio management.

Let me now return the call over to Scott.

Thanks, Amy let me now add a few comments on the termination of our previously announced acquisition of the land.

We announced our intent to acquire the land in February of this year, we obtained all the required regulatory approvals in a timely manner.

Except the approval from the French government, while we engage in a constructive process to address all of their concerns the French ministry of economy as part of its foreign direct investment review process ultimately rejected the planned acquisition.

Scott Rowe: Together, we will use these levers to keep flow serve on the path to achieve our 2027 goals at $5 billion plus in organic revenues with adjusted operating margins in the 14 to 16% range to drive adjusted earnings over $4 per share.

We are extremely disappointed in the outcome from the French government.

While we believe the acquisition would have provided numerous benefits for both companies and our stakeholders. However.

However, the termination does not change our confidence in nor the trajectory of our <unk> growth strategy.

This includes a programmatic M&A approach which targets.

Scott Rowe: Let me now return the call over to Scott. Thanks, Amy.

<unk> strategy Leverages, our existing scale provides confidence in our ability to integrate and generate returns well above our cost of capital.

Scott Rowe: Let me now add a few comments on the termination of our previously announced acquisition of the land. We now start to acquire the land in February of this year. We've gained all the required regulatory approvals in a timely manner, except the approval from the French government. While we engage in a constructive process to address all of their concerns, the French Ministry of Economy is part of its four indirect investment review process, ultimately rejected the planned acquisition.

As we have demonstrated over the past few years, our <unk> strategy continues to drive accelerated bookings growth.

<unk> does it is the right approach at the right time.

We will continue to invest both organically and inorganically and products to support this strategy.

Looking at each of the pillars of the three DS I will start with diversification.

Scott Rowe: We are extremely disappointed in the outcome from the French government. While we believe the acquisition would have provided numerous benefits for both companies and our stakeholders. However, the termination does not change our confidence in nor the trajectory of our 3D growth strategy. This includes a programmatic M&A approach which targets 3D strategy, leverages our existing scale, provides confidence in our ability to integrate and generates returns well above our cost of capital. As we have demonstrated over the past few years, our 3D strategy continues to drive accelerated booking growth, proving that it is the right approach at the right time. We will continue to invest both organically and inorganically in products to support this strategy.

We believe the markets and products, we are focused on will deliver growth in excess of full service overall growth rate.

Our vacuum pump products, which are a significant component of the diversification pillar have been delivering enhanced bookings growth over a variety of applications and industries in the last few years.

In the third quarter, we were selected to supply drive vacuum pumps for a new advanced semiconductor manufacturing facility in the U S.

Upon completion, the site will manufacture products for a number of applications, including <unk> networking and processing power to support the enhanced demand from artificial intelligence.

From a de carbonization perspective, our bookings remained strong driven in part by nuclear and LNG activities.

Scott Rowe: Ritchie. Looking at each of the pillars of the 3Ds, I will start with diversification. We believe the markets and products we are focused on will deliver growth in excess of Flowserve's overall growth rate. Our vacuum pump products, which are a significant component of the diversification pillar, have been delivering enhanced booking growth over a variety of applications and industries in the last few years. In the third quarter, we were selected to supply dry vacuum pumps for a new advanced semiconductor manufacturing facility in the US.

We continue to be excited about the outlook for the nuclear industry, where <unk> has a broad portfolio of products.

Developed countries with older nuclear facilities are currently focused on extending the life of these assets, while emerging regions like India and eastern Europe have substantial plans for new nuclear facilities to provide clean and reliable energy.

Another key driver in the de Carbonization pillar is energy transition. We're closer was recently selected supply pumps and valves for a new blue ammonia plant in the U S.

Scott Rowe: Upon completion, the site will manufacture products for a number of applications, including 5G networking and processing power to support the enhanced demand from artificial intelligence. From a decarbonization perspective, our bookings remain strong driven in part by nuclear and LNG activities. We continue to be excited about the outlook for the nuclear industry where Flowserve has a broad portfolio of products. Developed countries with older nuclear facilities are currently focused on extending the life of these assets, while emerging regions like India and Eastern Europe have substantial plans for new nuclear facilities to provide clean and reliable energy.

The facility will include auto thermal reforming with carbon capture the.

The complex is expected to supply clean hydrogen and nitrogen to a blue ammonia plant, while capturing $1 7 million metric tons of Sidoti <unk> annually.

Lastly on Digitization.

We believe our ability to digitize, our offering positions closer to move up the value chain from products and services to become more of a solutions provider to our customers.

Our offering is growing at twice the rate it did last year and we now have over 75 customer facilities utilizing red Raven technology.

Scott Rowe: Another key driver in the decarbonization pillar is energy transition, where Flowserve was recently selected to supply pumps and valves for a new blue ammonia plant in the US. The facility will include auto thermal reforming with carbon capture. The complex is expected to supply clean hydrogen and nitrogen to a blue ammonia plant, while capturing 1.7 million metric tons of CO2 emissions annually. Lastly, on digitization, we believe our ability to digitize our offering positions Flowserve to move up the value chain from products and services to become more of a solutions provider to our customers.

With over 2000 instruments assets supporting our customers with monitoring predictive capabilities and flow loop optimization.

Both have recently partnered with the Scottish Scottish beverage producer instrument in over 100 assets to increase reliability efficiency and uptime.

We are gaining traction across a variety of targeted industries and we are encouraged to see existing customers renew and expand these contracts.

Overall, our focus remains on profitably converting our near record $2 8 billion backlog, while generating outsized growth for the <unk> strategy.

We intend to achieve the 2027 financial goals, we shared at our analyst day.

Scott Rowe: Our offering is growing twice the rate it did last year, and we now have over 75 customer facilities utilizing redraven technology, with over 2000 instrumented assets supporting our customers with monitoring, predictive capabilities, and full loop optimization. Both are recently partnered with a Scottish beverage producer, instrumenting over 100 assets to increase reliability, efficiency, and uptime. We are gaining traction across a variety of targeted industries, and we are encouraged to see existing customers renew and expand these contracts.

Including to grow revenues at a 5% CAGR over the period expanded adjusting operating margins to 14% to 16%.

And generated adjusted earnings per share of $4.

We're confident that with ongoing strength in our end markets.

With our <unk> strategy that we can drive revenue growth.

And that the new operating model combined with the successful implementation of our operational excellence program and improved product manager processes will help deliver on our margin expansion targets.

Together these initiatives will enable closer to deliver long term value for our customers associates and shareholders.

Scott Rowe: Overall, our focus remains on profitably converting our near record $2.8 billion backlog, while generating outsides growth to the 3D strategy. We intend to achieve the 2027 financial goals we shared at our analyst day, including the grow revenues at a 5% cater over the period, expand adjusting operating margins to 14 to 16%, and generate adjusted earnings for share of $4. We are confident that we, with ongoing strengths in our end markets, combine with our 3D strategy that we can drive revenue growth, and that the new operating model, combined with the successful implementation of our Operation Excellence Program, and improved product manager processes, will help deliver on our margin expansion target. Together, these initiatives will enable closer to deliver long-term value for our customers, associates, and shareholders.

In closing I want to thank our associates for their hard work and dedication in the quarter and for embracing our new operating model to drive improved execution speed and accountability.

The <unk> strategy is working and we are well positioned to capitalize on the strong market environment.

I am confident in our ability to maintain our operating momentum and deliver further improvement as we close out the year and turn the quarter into 2024.

Operator, this concludes our prepared remarks, and we'd now like to open the call to questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again that is star one to signal for a question and we'll pause just briefly to assemble our queue.

Scott Rowe: In closing, I want to thank our associates for their hard work and dedication in the quarter, and for embracing our new operating model to drive improved execution, speed and accountability. The 3D strategy is working and we are well positioned to capitalize on the strong market environment. I am confident that our ability to maintain our operating momentum and deliver further improvement as we close out the year and turn the quarter into 2024.

<unk>.

And we go to our first question from Andy Kaplowitz with Citigroup. Please go ahead.

Good morning, everyone.

Hey, Andy.

Scott can you give us more color into the bookings environment moving forward I know you mentioned you have a number of larger projects on the horizon, but what's the confidence level that you'd be able to book. These over the next quarter or two and what are your customers, saying given all of the cross currents out there either economically or geopolitical issues do you see book to bill staying above one.

Unknown Executive: Operator, this concludes our prepared remarks and would now like to open the call to questions. Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to signal for a question, and we'll pause just briefly to assemble our queue.

In 2024.

Sure, Yes, Im happy to answer that and then I'll, just say I'll start by saying I'm not a whole lot has changed in terms of our market outlook that we shared last month at the analyst day, and so we remain committed to the 5% growth through 2027, and I would just say the core market activity, we showed that three 3% number.

Andrew Kaplowitz: And we go to our first question from Andy Kaplowicz with City Group. Please go ahead. Good morning, everyone. Hey, Andy. Scott, can you give us more color into the book's environment moving forward? I know you mentioned you have a number of larger projects in the horizon, but what's the confidence level that you'd be able to book these over the next quarter to? And what are customers saying, given all the cross-currence out there, either economically or geopolitically, do you see book to those things above one in 2024? Sure. Yeah, I'm happy to answer that.

But if you remember that was more like a GDP number and we're actually pretty excited about that in the core existing markets and then you combine the <unk> strategy, which picks up the diversification and the de carbonization youre generating at least 5% growth going forward and so again.

Nothing significantly has changed we're still committed to that and then if you break it down between our aftermarket and MRO and our project the aftermarket.

MRO has maintained a super high level of activity. This year, we see existing sites and facilities running at very high utilization levels and I don't see that changing right. So we're not seeing massive new expansion of refinery and capability in the U S and Europe, nor in the chemical side.

Scott Rowe: And I just say I'll start by saying not a whole lot has changed in terms of our market outlook that we shared last month at the analyst day. And so we remain committed to the 5% growth through 2027. And I just say the core market activity, you know, we showed that 3.3% number. But if you remember, that was more like a GDP number. And we were actually pretty excited about that in the core existing markets.

So with that we're seeing these assets being run even harder generating higher aftermarket and MRO and so again I don't see that trend changing we've been to over $500 million now for eight quarters in a row.

Scott Rowe: And then you combine the 3D strategy, which picks up the diversification and the decarbonization, you're generating at least 5% growth going forward. And so again, nothing significantly has changed. We're still committed to that. And then if you break it down between our aftermarket and MRO and our project, the aftermarket and MRO has maintained a super high level of activity this year. We see existing sites and facilities running at, you know, very high utilization levels.

I expect that to continue and continue to grow as we work on some of the initiatives that we shared in the Investor Investor Day last month, and then on the project side, what we're seeing there is incredibly healthy and so the project funnel is up 5% year on year, 7% since the beginning of the year.

And so we've got great visibility.

Our CRM system to track these projects when we look at our customers on the EPC side many of those customers their backlog is up over 30% and that's all happened within the last 12 months and a lot of those big orders have not been let down to the Oems like a folk serve and then finally in the middle East we see tremendous.

Scott Rowe: And I don't see that changing, right? So, you know, we're not seeing massive new expansion of refinery capability in the U.S, and Europe, nor in the chemical side. And so with that, we're seeing these assets being run even harder, generating higher aftermarket and MRO. And so again, I don't see that trend changing. You know, we've been over $500 million now for 8 quarters in a row. And I expect that to continue and continue to grow as we work on some of the initiatives that we shared in the investor investor day last month.

When this opportunity with the existing kind of industries on.

Both the refining side in the chemical side with a pretty significant list of projects that are about the book.

Within the next 12 months and I would just say one example, we obviously booked the deferral award last year at this time it was over $200 million on pumps alone since we picked up valve orders, but <unk> is coming so the epc's are just now getting awarded this job and given the incumbency of bus and in the first three or 401 in our <unk>.

Scott Rowe: And then on the project side, you know, what we're seeing there is incredibly healthy. And so we're, the project funnel is up 5% year on year, 7% since the beginning of the year. And so we've got great visibility, you know, within our CRM system to track these projects. When we look at our customers on the EPC side, many of those customers, their backlog is up over 30%. And that's all happened within the last 12 months.

Strong execution to support a ramp go work hub grid that we pick up a pretty large share of that project as it turns into referred to.

And then I'd, just say just adding one more kind of lens on this obviously theres discussion the discussion of recession high interest rates, we track our bookings geographically and we track them by in markets as well and right now we're really not seeing any slowdown on that traditional run rate business.

Scott Rowe: And a lot of those big orders have not been let down to the OEMs like a folks serve. And then finally, in the Middle East, we see tremendous opportunity with the existing kind of industries on, you know, both the refining side and the chemical side. With a pretty significant list of projects that are about to book within the next 12 months. And I just say one example, you know, we obviously booked the GeForo Award last year at this time.

They have anywhere there is a little bit of concern with the chemicals business in Europe, and we've seen very very modest destocking with some of our distributors in the Americas outside of that though our general industries is up about 11%.

Scott Rowe: It was over $200 million on pumps alone, since then we picked up valve orders. But GeForo 2 is coming. So the EPCs are just now getting awarded this job. And you know, given the competency of us in the first GeForo 1 in our strong execution, the supporter and go work on it that we pick up a pretty large share of that project as it turns into GeForo 2. And then I just say just adding one more kind of lens on this, you know, obviously there's discussion of discussion of recession, high interest rates.

This quarter year on year, and we still feel good about the outlook and so I would say right now we're positioned for success through 2024 and beyond and we're committed to what we said last month at the Investor day of growing this business at 5% going forward.

Scott very helpful. And then maybe you were I mean like just could you comment on the incremental margin you recorded in Q3, I think mid thirties.

And the sustainability of that margin going Florida, I know you have an easy comp against more difficult supply chain last year, but as you said you've been implementing that $50 million cost program that will be reflected more in 'twenty four results and you prefer to hear new organizational design, so with all that understanding and I think Jim you talked about 100 basis points of <unk>.

Scott Rowe: You know, we track our bookings geographically and we track them by in markets as well. And right now, like we're really not seeing any slowdown on that traditional run right business. I'd say of anywhere there's a little bit of concern with the chemicals business in Europe. And we've seen very, very modest destocking with some of our distributors in the Americas. Outside of that though, our general industries is up about 11% this quarter year on year.

Improvement in dialed in so far for 24 could that expectation actually be a bit conservative or at least the confidence level given the Q3 is higher here.

Well I'll start with Andy by saying, we're not going to stop there.

Scott Rowe: And we still feel good about the outlook. And so I'd say right now, you know, we're positioned for success through 2024 and beyond. And we're committed to what we said, you know, last month at the investor day of growing this business at 5% going forward. Scott, very helpful. And maybe you're, I mean, like, just, could you comment on the incremental margin you're recording Q3? I think in the 30s, and the sustainability of that margin going forward.

As we as we hit those targets that we've that we've outlined.

We're pretty pleased with where are we with where we finished the third quarter.

And certainly significant improvement year over year as we look across our seven business units, we really saw improvement in each of them year on year, and we expect to see that trend continue as we make our way into the fourth quarter, one thing that'll be a little bit different in this fourth quarter is we're not anticipating.

Scott Rowe: I know you have an easy comp, you know, against more difficult supply chain last year, but as you said, you've been implementing the $50 million cost program that will be reflected more in 24 results, and, you know, you're perfecting your new organizational design. So with all that understanding, and I think Amy talked about a hundred basements of margin improvement. And I'll then so far for 24. Could that expectation actually be a bit conservative, or at least the confidence level given the Q3 is higher here?

Uh huh.

Heroic increase in revenue from from third quarter to fourth quarter, we really see.

A nice trajectory of revenue growth, but more stable across our run rate business and as we look at transitioning from Q3 to Q4, where we are anticipating seeing a pretty significant increase in revenue and an accounting for the majority of that increase from Q3 to Q4 is in our region.

Scott Rowe: Well, I'll start with Andy by saying we're not going to stop there, because we, as we hit those targets that we've, that we've outlined, and we are pretty pleased with where we, with where we finished the third quarter, and certainly significant improvement year over year. As we look across our seven business units, we really saw improvement in each of them year on year, and we expect to see that trend continue as we make our way into the fourth quarter.

All equipment pump area of the business, where we've significantly expanded margins over where we were at last year at this time, but it will create a bit of a change in our in our mix and in in the fourth quarter. So we're anticipating.

And to see that to see that a bit in gross margins on an operating margin.

Scott Rowe: One thing that'll be a little bit different in this fourth quarter is we're not anticipating a heroic increase in revenue from from third quarter to fourth quarter. We really see a nice trajectory of revenue growth, but more stable across our run rate business, as we look at transitioning from Q3 to Q4, where we are anticipating seeing a pretty significant increase in revenue and accounting for the majority of that increase from Q3 to Q4 is in our original equipment top area of the business, where we've significantly expanded margins over where we were at last year.

Margin perspective, we're going to see those those margins.

At around 10% to exit the year with gross margins around 30%, which will give us a really nice space.

To grow in in 2024.

I appreciate all the color.

If you find that your question's been answered you may remove yourself from the queue by pressing star two and next we go to the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

So couple of questions.

Scott Rowe: We're at this time, but it will, we'll create a bit of a change in our, in our mix in, in the fourth quarter, so we're anticipating to see that, to see that a bit in growth margins on an operating margin perspective. We're going to see those margins at around 10% to exit the year with growth margins around 30%, which will give us a really nice face to grow in in 2024. Appreciate it on the color.

First on the.

Cash usage from here and how you're thinking about it.

Obviously youre in a really good position on the cash side so.

Or a pipeline of activity that you think you can move on towards now.

The one deal didn't close or buybacks at all in the pictures you as you think about afford it.

The usage of cash on a forward basis.

Sure. So I'll start by saying, it's a it's a nice position to be in to have a cash and liquidity position and that we can talk about meaningful allocation of capital and we outlined some of our strategies in more detail at the analyst day, So I'll start by saying that we start that with with thoughtful.

Unknown Executive: If you find that your questions been answered, you may remove yourself from the queue by pressing star two and next we go to the line of my calorie with bird, please go ahead.

Round, our commitments and one of the things that we outlined at the analyst day is an expectation that we would return to the practice of a.

Unknown Executive: Hey, morning everyone. So, a couple of questions. First time on the cast you should from here and how you're thinking about it, you know, obviously you're in a really good position on the cash side. So is there a pipeline of activity that you think you can move on towards now that's a long deal didn't close or buybacks at all in the pictures you, as you think about a forward pick the usage of cash on a forward basis.

Buybacks to offset dilution from from equity comp. So I think that's something that you can start to expect to see in terms of our cash usage going forward from there. We're really we're really weighing our choices between reinvestments in the business inorganic growth as well as <unk>.

Larger scale buybacks or dividend increases I will tell you right now we see we see abundant opportunities out there in terms of in terms of both reinvestment and Ana and a pipeline of kind of bolt on complementary.

Unknown Executive: Sure, so I'll start by saying it's a nice position to be in to have a cash and liquidity position and that we can talk about meaningful allocation of capital and we outline some of our strategies and more detail at the analyst day. So I'll start by saying that we start that with thoughts around our commitments and one of the things that we outlined at the analyst day is an expectation that we would return to the practice of buybacks to offset dilution from equity comp.

And that would help bolster our product portfolio and lead us into markets that we like from a <unk> perspective. So we continue to work through that and that potential M&A portfolio to manage to manage our products, but at the same time I think we I like to use the word agnostic when I.

Unknown Executive: So I think that's something that you can start to expect to see in terms of our cash usage going forward. From there, we're really weighing our choices between reinvestments in the business in organic growth as well as larger scale buybacks or dividend increases. I will tell you right now we see we see abundant opportunities out there in terms of in terms of both reinvestment in a in a pipeline of kind of bolt on complimentary MNA and that would help bolster our product portfolio and lead us into markets that we like from a 3D perspective.

Described it we have to always weigh those choices with the opportunity to create long term value through through shareholder returns as well and then just to add on the programmatic M&A funnel.

Obviously, we are in in pursuit of the <unk> transaction and so some of those got put on hold we've now kind of re ramp that there are it is a highly fragmented full control space and so we're excited about the potential to do something we don't have anything in the immediate term, but I would certainly expect us to continue to progress in 2020.

And ideally we're acquiring one to two programmatic M&A style businesses every year that support the <unk> strategy.

Unknown Executive: So we continue to work through that that potential MNA portfolio to manage to manage our products. But at the same time, I think we I like to use the word agnostic when I describe this we have to always weigh those choices with the opportunity to create long term value through through shareholder returns as well. And then just to add on the programmatic emanate funnel, you know, obviously we're in, you know, in pursuit of the philanthropy transaction.

We appreciate that and then on the on the pricing side of things, obviously, you're very comfortable with the margins that you're pulling into the backlog here, but maybe give some context to the market pricing environment how.

How much of that confidence in the margin in the backlog.

<unk> that you're specifically getting us more closer specific and you're in.

And you're just being diligent about what kind of pricing received versus how competitive the market places and if there's any variation.

Unknown Executive: And so some of those got put on hold, you know, we've now kind of revamped that there are, you know, it is a highly fragmented whole control space. And so you know, we're excited about the potential to do something. And we don't have anything in the immediate term, but I would certainly expect us to continue to progress this in 2024 and ideally we're requiring one to two programmatic emanate style businesses every year that supports the 3D strategy.

<unk> that youre seeing out there.

Sure. Let me split that question between kind of our project business and our run rate in MRO business on the run rate MRO aftermarket parts seals replacement valves all of that we typically would go with the price was strategy, we're doing our best to balance price cost and I think this year, we finally got it.

A more positive position than we've seen over the last 12 or 18 months and so we did a 5% price increase at the beginning of this year.

Scott Rowe: I appreciate that. And then I'm the pricing side of things. Obviously, you're very comfortable with the margins that you're pulling into the backlog here, but maybe give some context to the market pricing environment. How much of that confidence, the margin, the backlog, the pricing that you're specifically getting is more flow serve specific and you're, and you just being diligent about what kind of pricing we see versus how competitive the marketplace is, and if there's any variation that you're seeing out there.

I remember exactly it was like the fourth one we've done in two years, but we feel really good about that we will announce our new price increase for 2024 at the end of this year and we will move pricing up again, and so I feel very good on kind of the run rate business on where our pricing is.

Basically our raw materials inflation has subsided and so we feel like we can kind of take another step up on price cost with that side of the business.

Scott Rowe: Sure, let me split that question between kind of our project business and our run rate in our own business. On the run rate, MRO, aftermarket, part field, replacement valves, all of that, we typically go with the priceless strategy. We're doing our best to balance price costs. And I think you know, this year we finally got in a more positive position than we've seen over the last 12 or 18 months. And so we did a 5% price increase at the beginning of this year.

Now, let me switch to project pricing and I would say.

Yes. This is still an area that I'm not satisfied with in terms of kind of the global marketplace.

It's still very competitive with the larger projects and the more kind of youre attractive projects potentially and.

What are the energy transition lanes or some of the very large ones in the middle East and so.

Scott Rowe: I don't remember exactly it was like the fourth one we've done in two years, but we feel really good about that. We'll announce our new price increase for 2024 at the end of this year, and we'll move pricing up again. And so I feel very good on kind of the run rate business on where our pricing is. We're seeing basically our raw materials, the inflation is subsided. And so we feel like we can kind of take another step up on price costs with that side of the business.

Given our current backlog and given kind of how we view the world and the outlook going forward, we've been incredibly selective and in fact, we walked away from a very large project in the third quarter that didnt meet our pricing expectations and so the disciplined while it's gotten tremendously better than a year ago, it's still.

Not exactly where we would like to see it hopefully will start to see a little bit more disciplined behavior in some of the larger projects as we turned the corner into 2024 as most of the peer groups certainly on the engineered pumps is now significantly fuller in terms of capacity and so I would say the environment will improve in 2024.

Scott Rowe: Now let me switch to project pricing. You know, this is still an area that I'm not satisfied with in terms of kind of the global marketplace. It's still very competitive with the larger projects and the more kind of attractive projects potentially in one of the energy transition lanes or some of the very large ones in the Middle East. And so given our current backlog and given kind of how we view the world and the outlook going forward, we've been incredibly selective.

Sure, we're very close to being at the expectations that we believe we deserve given the risk of execution and the technology that we put into these projects and so again I feel good about the pricing environment, it's dramatically better than a year ago, our margins in backlog are higher across the board within <unk>.

Scott Rowe: And in fact, we walked away from a very large project in the third quarter that didn't meet our pricing expectations. And so the discipline while it's gotten tremendously better than a year ago, it's still not exactly where we would like to see it. Now hopefully we'll start to see a little bit more discipline behavior in some of the larger projects as we turn the corner into 2024 as most of the peer groups certainly on the engineer pumps is now significantly fuller in terms of capacity.

And I believe that our disciplined and the new focus with the Org design will allow us to price effectively as we go into 2024.

Great really appreciate that a lot of help.

Our next question or comment comes from the line of Damian Caris with UBS. Please go ahead.

Hey, good morning, everyone.

Good morning.

Scott Rowe: And so I would say the environment will improve in 2024. We're very close to being at the expectations that we believe we deserve given the risk of execution and the technology that we put into these projects. And so, you know, again, I feel good about the pricing environment. It's dramatically better than a year ago, our margins and backlog are higher across the board within closer. And I believe that our discipline and the new focus with the org design will allow us to price effectively as we go into 2024.

Hey, I mean, obviously you guys are reiterating those 27 targets a month later good stuff.

Unknown Executive: Really appreciate that. A lot of help.

[laughter] I appreciate that.

I was just curious.

So you talked a little bit about some of these projects in the funnel that kind of continues to grow is there any sense, you could give us or the cumulative size of these projects.

They're lining up and how we should think about the timing there whether more first half second half of next year really any color or any additional color you can provide.

Sure Yes. The project funnel is healthy and we're seeing a lot of awards and I would say the middle East is where we're seeing the largest size projects. So obviously aramco is investing substantial money to meet some of their big commitments that they've made in terms of driving a mix shift in their economy, but I would say the whole <unk>.

Damian Harris: Our next question or comment comes from the line of Damien Harris with you, UBS, please go ahead. Hey, good morning, everyone. Glad to see that. Hey, Amy, glad to see you guys are reiterating those 27 targets a month later. Good stuff. Appreciate that. I was just curious, you talked a little bit about some of these projects in the funnel that kind of continues to grow.

Middle East looks really really good right now and so we've got visibility to several projects there and then in addition to that.

We've talked about this last month at the Investor Day, LNG and nuclear are both very attractive markets and those projects can have a pretty sizeable content in them call. It somewhere between 40 and $80 million and so we're seeing a nice lineup on the LNG side and on the nuclear side.

Amy Schwetz: Is there any sense you could give us for the cumulative size of these projects that are lining up and how we should think about the timing there, whether or more first half, second half of next year, really any color, any additional color you can provide? Sure. Yeah, the project funnel healthy and we're seeing a lot of awards. And I would say the Middle East is where we're seeing the largest size project.

Say on the timing comment Josh It is really hard to predict when these projects get awarded we get visibility to urban just inevitably they slide to the right and so you're committing first half versus second half becomes very difficult I did mentioned in the prepared comments, though we had a few of the projects slide from Q2 or Q3.

Amy Schwetz: So, obviously, Aramco is investing some substantial money to meet some of their big commitments that they've made in terms of you're driving a mixtureship in their economy. But I would say the whole Middle East looks really, really good right now. And so we've got visibility to several projects there. And then in addition to that, we talked about this last month at the investor day, LNG and nuclear are both very attractive markets. And those projects can have pretty sizable content in them, you'll call it somewhere between 40 and kind of $80 million. And so we're seeing a nice lineup on the LNG side and on the nuclear side.

Into Q4, so we do expect to see kind of a little bit of an uptick none is a bigger projects above kind of $50 million to $100 million, but youre very nice sized projects over the $20 million Mark get booked in Q4.

I'd just say our expectations for next year would be certainly when we look at the full year. We're gonna have improved project bookings in 2024 over 2023 timing is uncertain in terms of which quarter They show up.

Scott Rowe: And then I just say on the timing comment, gosh, it is really hard to predict when these projects get awarded. We get visibility to them and just inevitably they slide to the right. And so you're committing first half versus second half becomes very difficult. I did mention in the prepared comments though we had a few of the projects slide from Q3 into Q4. So we do expect to see kind of a little bit of an upkick.

Totally understood.

And as you highlighted earlier, Scott that vacuum technology.

The <unk> the semiconductor manufacturing vacuum technology, so that caught my attention I'm just curious.

When you bid on a project like that that nature of kind of what kind of profit margin. Do you are you are you anticipating.

On a project like that.

Scott Rowe: Like none of the bigger projects above kind of 50 to 100 million, but very nice as projects over the $20 million mark yet booked in Q4. And then I just say our expectations for next year would be you know certainly when we look at the full year, we're going to have improved project bookings in 2024 over 2023 timing is uncertain on in terms of which quarter they show up. Totally understood. And then you highlighted earlier Scott that vaccine technology on the 3D the semiconductor manufacturing vacuum technology.

Sure. The vacuum technology is is a really good product for us it's differentiated and the competition is relatively smaller than some of our other products and so this is an area where we can get good margins on the OE side, but I'd say more importantly, the vacuum technology has substantial aftermarket.

Ability and so when a new customer is putting in a greenfield facility for semiconductors. They obviously uptime and reliability would be front and center in terms of what they're what they expect from their OEM and so we really like the OE business is that what I'll call yield.

Scott Rowe: So that caught my attention. I'm just curious. You know, when you bid on a project like that that nature kind of what kind of profit margin do you are you are you anticipating on a project like that. Yeah, the vacuum technology is a really good product for us. It's differentiated and the competition is relatively smaller than some of our other products. And so this is an area where we can get good margins on the OE side, but say more importantly, the vacuum technology has substantial aftermarket capability.

Normal levels for the pumps division, but then that aftermarket drive substantially accretive margins as we start to replace spindles and upgrade and repair those vacuum products.

I also just wanted to add your vacuum has been on our list of areas to grow we haven't done a great job in the semi conductor market historically.

So we've now you really made an effort to get into this growing market, especially as companies look to reposition their supply chain in their production closer to the regions, where the consumer is and so this is an area that we're very excited about again limited competition compared to some of the other applications.

Scott Rowe: And so when a new customer is putting in a greenfield facility for semiconductors, they obviously you know uptime and reliability would be front and center in terms of what they're what they expect from their OEM. And so you know we really like the OE business. It's at you know what I'll call you normal levels for you know the pumps division. But then that aftermarket drives substantially a creative margins as we start to replace spindles and upgrade and repair those vacuum products.

And we're very excited about the technology that we can put into this end market.

Great well congrats on the continued progress thanks for the time.

Thank you.

Well go next to the line of Mr. Ribeiro <unk> with Jefferies. Please go ahead.

Yes.

Scott Rowe: But I also just want to add, you know, vacuum's been on our list of areas to grow. We haven't done a great job in the semiconductor market historically. And so we've now really made an effort to get into this growing market, especially as companies look to reposition, you know, their supply chain and their production closer to the regions where the consumer is. And so this is an area that we're very excited about again, you know limited competition compared to some of the other applications. And we're very excited about the technology that we can put into this in market. Great.

Hi, congrats on the corner.

You have some moderate destocking in the distribution channel where inventory levels today, and what was the catalyst for Destocking, given what seems like a pretty positive outlook.

Sure Yeah, the Destocking really for us impacts our valve division and again very modest and so we've seen some of the public comments with our with the <unk>.

Distributors and some of the comments that directly that our teams had theres just a lot of pressure on their inventory levels and they are being cautious about it but I would say overall, it's been very minor to our bookings and when you look at the general industry side of our bookings, we're seeing tremendous growth year over year and so.

Unknown Executive: Well, congrats on the continued progress. Thanks for the time. Thank you.

Cerebral Diski: I'd go next to the line of cerebral diski with Jeffrey. Please go ahead. Hi, congrats on the quarter. You highlighted some moderate destocking in the distribution channel. Where are inventory levels today? And what was the catalyst for destocking given what seems like a pretty positive outlook? Sure, yeah, the destocking really for us impacts our valve division. And again, very modest. And so we've seen some of the public comments with the distributors and some of the comments that directly that our keens had.

I actually expect them to start ordering more inventory as we close out the year and they transition to revenue growth in 2024, so while we've seen it modestly.

Cerebral Diski: There's just a lot of pressure on their inventory levels and they're being cautious about it. But I would say overall, like it's been very minor to our bookings. And when you look at the general industry side of our bookings, we're seeing tremendous growth year over year. And so I actually expect them to start ordering more inventory as we close out the year and they transition to revenue growth in 2024. So, you know, while we've seen it modestly, not a major concern for us.

Not a major concern for us and again we.

We remain very positive about our ability to grow not only the valves business, but the overall business within the general industries category.

Makes sense and you had a nice step in step up in margins in two days sequentially is there anything one time that we should contemplate here would you expect margins to improve sequentially into <unk> per normal seasonality. Thank you.

Yeah, we are.

Start by saying that we're really pleased with the trajectory that we see FCB on.

They've done a nice job and they particularly did a nice job in the third quarter.

Leveraging that incremental incremental volume to see to see the dropdown.

<unk> operating margins and Thats actually something we see continuing into the fourth quarter, we'll see we'll see some modest revenue growth.

And very modest as we as we make our way into the fourth quarter and but we're going to continue to see that margin expansion. Both at the gross margin level and at the operating margin level. So I think what what is particularly pleasing about that as we think about those long term targets for SPD at sort of 16% plus on an operating margin line.

Cerebral Diski: And again, you know, we remain very positive about our ability to grow not only the valve business, but the overall business within the general industry's category. Makes sense. Then you had a nice step up in margins and FTB sequentially. Is there anything one time that we should contemplate here? Would you expect margins to improve sequentially into 4Q per normal seasonality? Thank you. Yeah, we're, I'll start by saying that we are really pleased with the trajectory that we see FTB on.

We're really going to exit this year with with clear line of sight.

To those targets going going forward.

Great I appreciate it. Thank you congrats on the quarter again.

Cerebral Diski: They've done a nice job and they particularly did a nice job in the third quarter, leveraging that incremental, incremental volume to see the drop down to operating margins. And that's actually something we see continuing into the fourth quarter. We'll see some modest revenue growth and very modest as we make our way into the fourth quarter. But we're going to continue to see that margin expansion both at the gross margin level and at the operating margin level.

Thank you.

We'll go next to the line of Deane Dray with RBC capital markets. Please go ahead.

Hi, This is Kenny cement 14 trades.

Just following up on the earlier question you talked about some big projects in the orders in the pipeline, but as you work through the backlog in defense, that's a macro geopolitics oil price volatility how does it impact the way you approach and stay disciplined on the streets.

Yeah again, we feel very good about the health of the project funnel right now and so despite all of the noise of the rhetoric out there on in the marketplace. These are big projects. There are big commitments from governments, they're big commitments from companies and they have to play in these years in advance and if you go.

Cerebral Diski: So I think what is particularly pleasing about that is we think about those long-term targets for FTB at sort of 16% plus on an operating margin line. We're really going to exit this year with clear line of sight to those targets going going forward. Great. I appreciate it. Thank you. Crafts from a quarter again. Thank you.

Backwards 2022, sorry, 2000, 22021 and into 2022, there is a substantial lack of investment on some of this big infrastructure spending and so again feel very confident that what they've laid out and where these things are moving and if we look at FY <unk> levels, which is funding of the.

Dean Dre: We'll go next to the line of Dean Dre with RBC Capital Markets. Please go ahead. I think this is Kenny Simons for Dean Dre. Just following up on the earlier question, you talked about some big projects and orders in the pipeline. But as you work through the backlog, it gets us a macro geopolitics or price volatility. How does it impact a way approach and stay disciplined in this phase? Yeah, again, we feel very good about the health of the project funnel right now.

We look at the EPC backlogs all of those point to awards for Oems as we put equipment into these big projects.

Thank you and then looking into the implied fourth quarter.

Any seasonality that we should be mindful of in terms of free cash flow growth for the segments or any other metrics that you can talk about thank you.

Dean Dre: And so despite all of the noise and the rhetoric out there in the marketplace, these are big projects, they're big commitments from governments, they're big commitments from companies. And they have to plan these years in advance. And if you go backwards, you know, 2022, or sorry, 2020, 2021, and in 2022, there is a substantial lack of investment on some of this big infrastructure spending. And so again, feel very confident that what they've laid out and where these things are moving.

Sure. So just from a from a seasonality perspective, I think as you can see our revenue for the full year is is is up significantly we're seeing more modest revenue growth against a pretty tough comp.

From from last year in the fourth quarter that said, we would anticipate that will expand our operating margins as we move from Q3 to Q4 to provide us a really sound.

Dean Dre: And if we look at FID levels, which is funding of the projects, we look at the EPC backlogs, all of those point to awards for OEMs as we put equipment into these big projects. Thanks. Thank you.

<unk> point to build upon them within within 2024 and from a cash flow perspective, we've been much more ratable with our with our cash flow over the course of 2023 with positive operating cash flow in each of the first three quarters and we would anticipate.

Unknown Executive: And then looking into the implies force quarter, any seasonality that we should be mind-floor in terms of, say, free cash flow growth for the segments or any other metrics that you can talk about. Thank you. Sure. So just from a seasonality perspective, I think as you can see our revenue for the full year is is is up significantly. We're seeing more modest revenue growth against a pretty tough comp from from last year in in the fourth quarter.

Pete that that will ramp up as we as we exit the year and we will see stronger free cash flow in the fourth quarter as we generally do.

And then I'd just add we're working very hard to provide more of a balanced view on results every quarter and so you saw this year a relatively strong first quarter, our second and third quarter that were pretty similar and I'd. Just say you know unlike yours in the past, where we're saving everything through the fourth quarter, we're doing.

Unknown Executive: That said, we would anticipate that we'll expand our operating margins as we move from Q3 to Q4 to provide us a really sound exit point to build upon within within 2024. And from a cash flow perspective, we've we've been much more readable with our with our cash flow over the course of 2023 with positive operating cash flow in each of the first three quarters. And we would anticipate that that will ramp up as we as we exit the year and we'll see stronger free cash flow in the fourth quarter as we generally do.

A much better job, making sure that we're getting healthy revenue and margins in all of our quarters and I would certainly expect to see that as we turn into the first quarter of next year.

Next we go to the line of Joe Ritchie with Goldman Sachs. Your line is open.

Thanks, Good morning, guys and nice quarter.

Okay. Thanks, Joey maybe.

Scott maybe you just answered my last question.

Does like historically, when you've taken you've taken a look at the seasonality in the fourth quarter versus the third quarter.

Unknown Executive: And then I just add we were working very hard to provide more of a balanced view on results every quarter. And so you saw this year a relatively strong first quarter, a second and third quarter that were pretty similar. And I just say, unlike years in the past, we're saving everything to the fourth quarter. We're doing a much better job making sure that we're getting healthy revenue and margins in all of our quarters. And I would certainly expect to see that as we turn into the first quarter of next year.

<unk> seen a pretty big uptick in revenues, particularly in a P D and Amy I heard you say a few times on this on this call that you are only expecting a modest improvement. So just help us understand why it's modest because you can go back to several several years and it's typically a pretty nice uptick.

Yeah, and I'll, just I'll reiterate what I just said we are really focused on our.

Our material planning scheduling and really trying to take out the variability quarter over quarter and you said it like if you go back in history, especially on the FCB side, we got some pretty wild swings on revenue and margins and so again. The teams are doing a really nice job planning their work planning the supply chain and <unk>.

Joe Richie: Next we go to the line of Joe Richie with Goldman Sachs. Your line is open. Thanks. Good morning, guys. And nice quarter. Yeah, thanks. Maybe Scott, maybe just answered my last question because like historically, when you've taken, you've taken a look at the seasonality in the fourth quarter versus the third quarter, you've seen a pretty big uptick in revenues, particularly in FPD. And Amy, I've heard you say a few times on this on this call that you're only expecting a modest improvement.

Joe Richie: So to help us understand why it's modest because mean go back to several several years and it's typically like a pretty nice up thick. Yeah, I'll just reiterate what I just said, we are really focused on our material planning, scheduling and really trying to take out the variability quarter over quarter. And you said, Joe, like if you go back in history, especially on the FPD side, we got some pretty wild swings on revenue and margins.

Wrestling that work more continually throughout the year and what it what it should what you should see and expect from US as we go forward is Q1 is always going to be slightly lower than the rest of the quarters, but you'll see you know call. It down in the first quarter a bit, but then relatively strong on Q2, and Q3, which should be about.

And then just a modest uplift in Q4, but Amy can provide a little more color on that and Joe.

The backlogs in place with FCB, we had a positive book to bill within within that segment again this quarter the backlogs in place and we've been able to make our way through the year in a really rational way.

The way that that makes the operations be able to operate on a normal in a normal trajectory avoid the swing really the big increase that we've seen is from Q1 to the third quarter, where we increased revenue nearly $50 million.

Joe Richie: And so again, the teams are doing a really nice job planning their work, planning the supply chain and progressing that work more continually throughout the year. And what it should, what you should see and expect from us as we go forward is, you know, Q1 is always going to be slightly lower than the rest of the quarters. But you'll see, you'll call it down in the first quarter a bit, but then relatively strong on Q2 and Q3, which should be about the same.

For the segment over that period of time.

So going about it the way that we are what we see is we're hoping to avoid that Q4 to Q1.

Redemption that we see them really trying to really trying to reduce.

Unknown Executive: And then just a modest uplift in Q4, but Amy can provide a little more color on that. Yeah, and Joe, I'd say, you know, the backlogs in place with FCD, we had a positive book to bill within within that segment again, this quarter, the backlogs in place. And we've been able to make our way through the year in a really rational way that that makes the operations be able to operate on a normal in a normal trajectory avoids the swings.

And that shrinkage in revenue that we've traditionally seen between Q4 and Q1 and.

A couple of times I'm really pleased with what we've seen in terms of.

And that that conversion of that backlog from the valve portfolio over the course of 2023.

Got it that's super helpful and great to hear I guess.

My other follow up question I guess as you can.

I think through clearly like the margin expansion has been grade remains on track.

Unknown Executive: And really the big increase that we've seen is from Q1 to the third quarter, where we increase revenue nearly $50 million for the segment over that period of time. So going about it the way that we are, what we see is we're hoping to avoid that Q4 to Q1 reduction that we see and really trying to reduce that shrinkage and revenue that we've traditionally seen between Q4 and Q1. And as I said a couple of times, I'm really pleased with what we've seen in terms of the the conversion of that backlog from the valve portfolio over the course of 2023.

Trying to kind of think through the dynamics.

Of the cost to achieve going forward beyond 2023.

And then ultimately what that means for your free cash flow conversion rate because.

There's a cash component to the restructuring costs, it's impacting your free cash flow but.

But clearly.

Getting adjusted out of the earnings components. So how do we think about that beyond 2023.

Sure. So we've put in the I mean, we put in the forecast the things that we're aware of at this point in time, we're obviously going to continue to look for opportunities to reduce our cost structurally and as as we move forward and certainly of the of the restructuring that we've taken.

Joe Richie: God, that's super helpful and great to hear. I guess my other follow up question, I guess, if you kind of think through clearly like the margin expansion has been great remains on track, I'm trying to kind of think through the dynamics of the cost to achieve going forward beyond 2023. And in ultimately what that means for your free cash flow conversion, right? Because yeah, there's a cash component to the restructuring cost that's impacting your free cash flow.

This year there is.

A fairly sizable component of that I think around $13 million, that's actually non cash we continue to see some of that make its way through although of the restructuring that we've.

That that we've taken this year certainly some of that will.

The cash outlays for that will occur over the course of 2024.

Joe Richie: But clearly, you know, you know, getting adjusted out of the earnings component. So how do we think about that beyond 2023? Sure, so we've put in the fore, I mean, we put in the forecast the things that we're aware of at this point in time. We're obviously going to continue to look for opportunities to reduce our cost structurally as we move forward. And certainly of the restructuring that we've taken this year, there is a fairly sizeable component of that.

And is that is the cost to achieve in 2024 are going to be like a similar size to 2023 are there are there is there any quantification of what that number is going to look like.

We have not quantified that number yet Joe I think that that's it.

But that's a rational and rational assumption can make going going forward, but those particular initiatives and what that what that might look like have yet to be identified.

Okay, great. Thank you.

Okay.

Joe Richie: I think around $13 million that's actually non-cash. We've continued to see some of that make its way through, although of the restructuring that we've taken this year, certainly some of that will, the cash outlaid for that will occur over the course of 2024. And is the cost to achieve in 2024 going to be like a similar size to 2023? Or is there any quantification of what that number is going to look like? We have not quantified that number yet, Joe. So I think that that's a rational assumption to make it going forward, but those particular initiatives and what that might look like have yet to be identified.

Well go next to the line of Brett Linzey with Mizuho. Please go ahead.

Unknown Executive: Okay, great, thank you.

Hi, everyone. This is Peter Costa on for Brett Linzey.

So it was really impressive growth in the middle East in Africa.

Are you seeing any emerging risk or throttling back in future activity in the region given the current geopolitical environment.

Sure.

It's a good question, it's something that we're watching very closely and so youre geopolitics today is a little bit of a wildcard right or we still have war in Ukraine with Russia, We've got the middle East now with lots of concern that with Israel and Palestine.

It's just something that we're watching I'd say.

Any conflict drives uncertainty and so I'd say its not a net positive however, given kind of where things are and what's going on in the world. We remain confident that the projects that we have visibility to.

Peter Costa: We'll go next to the line of Brett Lindsay with Mizzouho, please go ahead. Hi, everyone, this is Peter Costa, I'm from Brett Lindsay. Those really impressive roles in the Middle East and Africa. Are you guys seeing any emerging risk or swallowing back of future activity in the region given the current geopolitical environment? Thank you.

Saudi Arabia, and the UAE star that those continue to progress forward and so I think there's always an element of geopolitical risk in our business given the significant international exposure that we have but again today, we feel confident in our projections and our plans given everything we know.

Scott Rowe: Sure, it's a good question, it's something that we're watching very closely, and so your geopolitics today is a little bit of a wild car, right? We still have war in Ukraine with Russia, we've got the Middle East now with lots of concern with Israel and Palestine. So it's just something that we're watching. I'd say any conflict drives uncertainty, and so I'd say it's not a net positive. However, given kind of where things are and what's going on in the world, we remain confident that the projects that we have visibility to in Saudi Arabia, in the UAE, in Qatar, that those continue to progress forward, and so I think there's always an element of geopolitical risk in our business, given the significant international exposures that we have. But again, today, we feel confident in our projections, in our plans, given everything we know and that we're watching in the world.

And that we're watching in the world.

Thanks, and then you also noted that 100 basis point impact of noncash adjustments to the long term liabilities I'm. Just curious if you could potentially move that out of your adjusted results moving forward.

I mean, it's certainly something that and that has been presented to us by a number the number of the analysts.

We've tried to be consistent in year from year to year in terms of in terms of how we presented this but obviously as we start each new year. We we think about how we take a look at these things and it's certainly something that we'll consider going forward. Obviously, what we hope is to avoid charges at this size going going forward.

And when we've not adjusted it we intend to be transparent about what those have been.

Yes.

Great. Thank you.

We go next to Nathan Jones with Stifel. Please go ahead.

Amy Schwetz: Thanks, and then you also noted that 100 basis point impact of non-cash adjustments to the long-term Myabilities. I'm just curious if you could potentially move that out of the adjusted results moving forward. It's certainly something that has been presented to us by a number of the number of the analysts. We've tried to be consistent in year from year to year in terms of in terms of how we've presented this. But obviously, as we start each new year, we think about how we take a look at these things, and it's certainly something that we'll consider going forward. Obviously, what we hope is to avoid charges of this size going going forward. And when we've not adjusted it, we intend to be transparent about what those have been.

Good morning, everyone.

Unknown Executive: Great. Thank you.

Hey, Nathan.

I guess I'll ask my second question by saying is it's a follow up to the last one.

It's a pretty well defined playbook for getting those liabilities off the balance sheet.

Several other companies have done it now that you have a little bit more flexibility in the balance sheet. What are your thoughts about actually moving that that liability off the balance sheet. So we don't have to worry about these charges anymore.

So it's certainly something that we continue to monitor and talk about internally. Yeah. There are the liability is a isn't on gets counted them.

Liability that we have on our balance sheet. We also have a receivable that partially offset fits so the net size of the liability is about $60 million and we believe it's we believe it's manageable.

Nathan Jones: We go next to Nathan Jones with Steve, please go ahead.

Nathan Jones: Good morning, everyone. Hey, Nathan. I guess I'll ask my second question first thing is to follow up to the last one. There's a pretty well-defined playbook for getting those liabilities off the balance sheet. Several other companies have done it now that you have a little bit more flexibility in the balance sheet. What are your thoughts about actually moving that liability off the balance sheet so we don't have to worry about these charges anymore?

Many transactions that have been executed.

Around around that liability management have been much larger than that as we look at what's happened in the market. So as we as we think about it. It's the same decision that we're making around capital allocation for other opportunities where is the greatest long term return to our shareholders and currently given the way our legal.

<unk> has been able to manage this liability in the reinsurance insurance proceeds that we've that we've received to date to net against this we viewed higher and better uses for capital allocation, but that will continue to be to be under consideration. We will look at it every year.

Nathan Jones: It's certainly something that we continue to monitor and talk about internally. The liability is an undiscounted liability that we have on our balance sheet. We also have a receivable that partially all sets it. So the net size of the liability is about $60 million. We believe it's manageable. Many transactions that have been executed around liability management have been much larger than that as we look at what's happened in the market. As we think about this, it's the same decision that we're making around capital allocation for other opportunities.

And then make the best decision at the time that we can.

Okay second question I wanted to ask about is the.

The stability on the project pipeline that Youre talking about a number of the large project and EPC backlogs and things moving into the stage and so I think the flows as visibility is pretty good here.

Projects getting to EPC backlogs.

Nathan Jones: Where is the greatest long-term return to our shareholders? And currently, given the way our legal team has been able to manage this liability in the insurance proceeds that we've received to date to net against this, we've viewed higher and better uses for capital allocation. But that will continue to be under consideration. We'll look at it every year and make the best decision at the time that we can. Okay.

Theyre pretty much going to be executed on them once they get to being awarded to flows.

Dave pretty much always get.

Executed on the projects behind that the ones that haven't got too.

The ones that are probably more at risk in your pipeline.

If we think about how far away they are.

Is that.

A year from now that we might see some disruption if we assume the market turns down is it two years away that we might see some disruption if the market turns down just maybe you can give some more color on your visibility into that pipeline.

Scott Rowe: The second question I wanted to ask about is the visibility on the project's pipeline. You're talking about a number of these large projects in APC backlogs and things moving into the FID stage. And so I think that flows of visibility is pretty good here. I mean, once projects get into APC backlogs, they're pretty much going to be executed on. And once they get to being awarded to flows of, they pretty much always get executed on the projects behind that, the ones that haven't got to FID out of the ones that are probably more at risk in your pipeline.

And your level of confidence that those get executed on.

Sure No I think that's a really good point, Nathan and I'll kind of reiterate some of the things that you said so if we think about let's just call. It our near term pipeline one year out why do we have confidence in that we've got our own internal funnel and opportunities. We know these projects have passed.

And they are now showing up with orders within the EPC backlog and I will just from a historical perspective once you get up and once you see it in the EPC is very very rarely will you see a project stopped or cancel unless something dramatically goes wrong and so we have very good visibility in our one.

Scott Rowe: Brian, if we think about how far away they are, like is that a year from now that we might see some disruption if we assume the market turns down, is it two years away that we might see some disruption if the market turns down, just maybe you can get some more color around your visibility into that pipeline and your level of confidence that those get executed on. Sure, no, I think that's a really good point Nathan and I'll kind of reiterate some of the things that you said and so if we think about let's just call it our near term pipeline one year out, why do we have confidence in that you know we've got our own internal funnel and opportunities we know these projects have passed FID and they're now showing up with orders within the EPC backlog and I'll just you know from a historical perspective once you get FID and once you see it in the EPC's very, very rarely will you see a project stopped or cancel unless something dramatically goes on.

Your funnel in terms of larger projects and outlook I would say beyond the one year Mark that's when you start to see some.

Uncertainty that could be driven by our cost inflation or interest rates in terms of how they lever up some of these projects and project financing or potentially some of the geopolitical risks, which we referenced earlier.

On the positive side, though again, we've had substantial underinvestment, we've got in market pricing on the oil and gas side that is incredibly constructive.

And we also have the dynamic of energy security and energy transition and so very similar to my comments a month ago at the Investor day like we still feel really good about that long term view of activity around the world, giving the dynamics of energy security and energy transition.

Scott Rowe: And so we have very good visibility in our one year funnel in terms of larger projects and outlook that would say beyond the one year mark that's when you start to see some uncertainty that could be driven by a cost inflation or interest rates in terms of how they lever up some of these projects and project and anything or potentially some of the geopolitical risks which we reference earlier. You know on the positive side though again we've had substantial under investment we've got you know in market pricing on you know the oil and gas side that is incredibly constructive and we also have the dynamic of energy security and energy transition and so very similar to my comments a month ago at the investor day like we still feel really good. About that long term view of activity around the world giving the dynamics of energy security and energy transition. Thanks very much for taking my questions. Yep thank you David.

Thanks, very much for taking my questions.

Yes, Thank you David.

And this does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.

Unknown Executive: And this does conclude today's teleconference we thank you for your participation you may disconnect your lines at this time.