Q4 2024 Flowserve Corp Earnings Call
Speaker Change: Good day and welcome to the FlowServe fourth quarter and year-end 2024 earnings conference call.
Speaker Change: Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Ezell, VP, Investor Relations, Treasurer and Corporate Finance. Please go ahead.
Speaker Change: Thank you and good morning everyone. Welcome to FlowServe's fourth quarter 2024 business update. I'm joined this morning by Scott Rowe, FlowServe's President and Chief Executive Officer and Chief Financial Officer, Amy Schwetz. Today Scott and Amy will provide an update on their overall business performance and highlights from the quarter.
Speaker Change: Following their comments, we'll open the call for questions. I'll ask that you please keep the one question and one follow-up question and then return to the queue.
Speaker Change: Turning to slide two, as a reminder, our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties, and these are discussed in our SEC filings, which can be found on our website.
Speaker Change: Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release and today's earnings presentation, both of which are on our website. With that, I'll turn it over to Scott.
Scott Rowe: Thank you, Brian, and good morning, everyone. I'll begin on slide three. We delivered strong results in the fourth quarter, capping a year of improved execution and significant progress towards our 2027 targets.
Scott Rowe: Bookings were nearly $1.2 billion for the quarter, with strong growth in both original equipment and aftermarket bookings.
Adjusted gross margins expanded 300 basis points to 32.8 percent.
Scott Rowe: This marks the eighth consecutive quarter of year-over-year margin expansion, and with additional leverage from SG&A, we delivered adjusted operating margins of 12.6% in the quarter.
Scott Rowe: Book the bill with 1.0 times as we continue to drive revenue conversion while exiting the year with near record backlog of $2.8 billion.
Scott Rowe: Our discipline's focus on working capital supported strong operating cash flow of $197 million in the quarter.
Scott Rowe: Operationally, performance in the quarter was largely as we anticipated when we provided our third quarter update in October. Those strengthening of the U.S. dollar drove an incremental currency translation headwind along with higher interest expense related to the MOGUS acquisition.
Scott Rowe: Amy will provide more detail on this later in the call. Overall, our team executed to our plan, delivering improved results in the quarter and completing an outstanding year for FlowServe in 2024.
Speaker Change: Turning to slide 4, Q4 bookings grew 13% versus last year, driven by continued strength in our in-market and strong execution by our commercial teams.
Speaker Change: We continue to see robust growth from our strategy, with 3D bookings representing 31% of our total awards for the quarter.
Speaker Change: We generated $618 million of aftermarket bookings, which was the third consecutive quarter above $600 million.
Speaker Change: We are laser focused on continuing to grow our aftermarket franchise, and our dedicated aftermarket teams are driving higher levels of service and value to our customers at margins accretive to the FlowServe portfolio.
Speaker Change: Fourth quarter original equipment bookings grew 14% versus last year, with a healthy mix of activity across traditional process industries, as well as within new energy markets.
Speaker Change: Our largest award in the quarter was approximately $60 million in order to supply pumps for a new nuclear power plant in Europe.
Speaker Change: Our power bookings, which included both traditional power and nuclear, were up more than 40% versus the prior year period.
Speaker Change: The power in market continues to be a significant opportunity. Infosys participates in virtually all forms of power generation.
Speaker Change: From traditional hydrocarbon power like coal and combined cyclonatural gas to nuclear and newer energy technologies like concentrated solar power or battery storage.
Speaker Change: Our next largest project awards were in the range of $10 to $15 million.
Speaker Change: Our selected bidding approach to large projects continues to deliver growth with our preferred customers and products at margins that create more value for FlowServe.
Turning now to slide five.
Speaker Change: Looking back on 2024, we meaningfully grew bookings, expanded gross and operating margins,
Speaker Change: generated strong adjusted EPS growth and delivered substantial cash flow reflecting the strong execution and hard work of our associates around the world.
Speaker Change: We also took significant steps in 2024 to strategically position the company and enable further value creation for our customers and shareholders.
Speaker Change: The MOGIS acquisition, which we completed during the fourth quarter, expands our offering and exposure to mining and minerals, an important and growing end market that enhances our diversification efforts.
Speaker Change: We also launched the FlowServe Business System, a comprehensive framework to further improve our execution with consistent operating processes across the FlowServe enterprise.
Speaker Change: We made significant progress last year in the areas of operational excellence and portfolio excellence, our 80-20 framework, both of which are improving the way we run our company and delivering margin expansion.
Speaker Change: Let me now address our 3D strategy in the Market Outlook for 2025 as we turn to slide 6.
Speaker Change: Our significant progress in 2024 gives us further confidence in our ability to deliver on our 2027 targets, and we fully anticipate continuing with this momentum in 2025.
Speaker Change: Diversification and decarbonization remain critical strategic initiatives for FOSER in 2025.
Speaker Change: We expect to build on the strength of 2024 where diversification bookings grew 9% and decarbonization bookings grew 36% driven by nuclear and new energy activities.
Speaker Change: On digitization, we believe we have the most advanced monitoring and prediction system within the flow control space.
Speaker Change: We continue to demonstrate the value of our digital capabilities on a regular basis with our customers, improving their overall operability and reducing the cost to run their assets.
Speaker Change: In the year, we increased Red Raven monitoring assets by 14%.
Speaker Change: We believe there are scaled pathways to utilize the predictive capabilities that our domain expertise provides to generate recurring revenue and position ourselves for even higher aftermarket capture rates in 2025 and beyond.
Speaker Change: Our 3D strategy continues to be the right one in today's environment, and we expect to see strong 3D growth trends in 2025.
Speaker Change: Turning to slide 7. With strength in our traditional and 3D oriented in markets, our outlook remains constructive for projects, MRO, and aftermarket activity across industries and in markets.
Speaker Change: These opportunities continue to support our long-term organic target of 5% growth.
Speaker Change: Key global megatrends of energy security, regionalization, and electrification continue to attract significant global investments.
Speaker Change: The opportunity funnel in power is up more than 20% versus the prior year period, driven by the increased need for new power generation on the back of data center growth and electrification trends.
Speaker Change: We expect the world's existing traditional process industries to remain at solid utilization levels, and we believe we are well-positioned to capitalize on these aftermarket opportunities as we have demonstrated over the last several quarters.
Speaker Change: Moving to slide eight. Innovation remains critical to differentiate our products in the market as we leverage technology to deliver a 3D strategy.
Speaker Change: During the year, we introduced 11 new products to the market.
Speaker Change: To highlight an example of how our innovation supports our customers in the energy transition journey, we are collaborating with a customer in Denmark on the world's first molten hydroxide energy storage plant called the Molten Salt Storage, or MOS, project.
Speaker Change: The MOS process heats sodium hydroxide to over 1300 degrees Fahrenheit.
Speaker Change: The heated salt that generates steam, which can be converted to electricity.
Speaker Change: Specialized flow control equipment is essential in this severe service high temperature environment.
Speaker Change: Additionally, this technology can be used in concentrated solar power, carbon capture, and potentially used in future applications like small-module nuclear reactors.
Speaker Change: We also launched another innovative offering enabling emissions reductions of up to 80% through our gas-packed ZE seal.
Speaker Change: A dry gas field technology that enables operators to achieve zero emissions from blowdowns and standstill conditions, supporting our customers decarbonization goals.
Speaker Change: Finally, we continue to expand our capabilities of our solutions offering by combining our extensive domain expertise and flow control with new analytical and modeling tools and enhanced digitization through Red Raven.
Speaker Change: We believe this combination uniquely positions FlowServe to help our customers with their biggest flow control challenges.
Speaker Change: All together, we remain focused and committed to delivering unparalleled innovation for our customers, which we believe will deliver consistent growth and value creation for closer.
Speaker Change: I will now turn to slide 9 in the FlowSurf Business System.
Speaker Change: With a strong market backdrop and an effective long-term strategy in place, we are now leveraging the Postal Service Business System to deliver strong execution.
Speaker Change: The Closer Business System defines our approach to running the organization across five critical functional disciplines to deliver excellence.
Speaker Change: These disciplines drive consistency in how we work together across our seven business units, connecting business processes to our desired outcomes of profitable growth, margin expansion, superior customer experience, and cycle resiliency.
Our Operational Excellence Program is now hitting its stride.
Speaker Change: We have improved delivery performance and shop floor productivity while capitalizing on opportunities to further reduce our roof line.
Speaker Change: While we have made great progress operationally, we believe we have more opportunities in 2025 and beyond.
Speaker Change: Our Portfolio Excellence Program is in its early stages. Our 80-20 effort, which we've named CORE for Complexity Reduction, was launched over a year ago, and we are continuing to advance the program in 2025 by adding the remaining two product business units.
Speaker Change: Early analysis from the three business units launched in 2024 are very encouraging.
Speaker Change: We have identified opportunities to reduce the complexity in our overall offering as we eliminate and rationalize products and services that aren't fully contributing.
Speaker Change: Applying a more deliberate approach to pricing and improve our service levels for our best customers.
Speaker Change: Our current expectation is that the revenue impact from the program will be negligible in 2025.
Speaker Change: While the actions we are taking will benefit gross margins by roughly 50 basis points this year at the full serve level and then accelerate in 2026 as the program is fully implemented across all product business units.
Speaker Change: We remain confident in our ability to generate 200 basis points of margin expansion from the Portfolio Excellence Program by 2027 as we move all five product business units fully into the core program.
Speaker Change: Commercial Excellence will be the next program to launch, which we anticipate will kick off during the second half of this year. Commercial Excellence will focus on pricing discipline, account management, and funnel management to drive profitable growth and continue to improve our customer experience.
Speaker Change: In summary, we made significant progress in 2024, and I'm excited about the opportunities to continue to create significant value in 2025.
Speaker Change: With that, I'll turn the call over to Amy to discuss our financial results and outlook in greater detail.
Amy Schwetz: Thank you, Scott, and good morning, everyone. First, let me echo Scott's comments. We are very pleased with our results in the quarter and for the full year and are excited about the opportunities to further accelerate our progress in 2025.
Amy Schwetz: Turning to the fourth quarter in greater detail on slide 10.
Amy Schwetz: We delivered another strong operational performance with nearly $1.2 billion of bookings, adjusted operating margin of 12.6%, 70 cents of adjusted earnings per share, and $197 million of operating cash flow.
Amy Schwetz: Relative to our plans coming into the quarter, the underlying operations were in line with our expectations.
Amy Schwetz: Beyond our operational performance, adjusted EPS was negatively impacted $0.02 by foreign currency translation.
Amy Schwetz: In addition, MOGIS and the related interest expense was not included in our guidance shared in October. In the quarter, MOGIS was roughly neutral to our adjusted operating profits.
Amy Schwetz: Mogus adjusted operating profit in the quarter was negatively impacted by the timing of shipments, with higher margin shipments occurring in October prior to the acquisition close.
Amy Schwetz: This led to lower sales and fixed cost absorption in our results. I'll share more in a minute about the strong outlook we have for MOGIS in 2025.
Amy Schwetz: Acquisition related financing costs negatively impacted earnings by about two cents.
Amy Schwetz: For the quarter, overall revenues grew 1% versus last year. The MOGIS acquisition contributed approximately 300 basis points to sales growth, while foreign currency translation negatively impacted reported sales growth by about 100 basis points.
Amy Schwetz: Sales growth was muted in the quarter due to the meaningful percentage of completion revenue from Phase 1 of the Jafara project in last year's fourth quarter, which did not repeat in the fourth quarter of this year.
Amy Schwetz: Aftermarket revenues grew 4% in the quarter, which was partially offset as expected by regional equipment revenues down 2%.
Amy Schwetz: Shifting to margins, we've generated an adjusted gross margin of 32.8 percent, representing a 300 basis point year-over-year increase, and our fifth consecutive quarter of sequential margin improvement.
Amy Schwetz: The launch of our FlowServe business system, which includes our operational and portfolio excellence efforts, positions us well to deliver continued gross margin expansion.
Amy Schwetz: Fourth quarter adjusted SG&A increased by $12 million versus last year, largely due to adding MOGIS in the quarter, along with the phasing of incremental corporate R&D investments.
Amy Schwetz: Adjusted operating margin increased 210 basis points versus the prior year period to 12.6%. Our best of the year and representing our highest quarterly incremental margin of the year at more than 175%.
Amy Schwetz: Adjusted operating income was $149 million, a 22% increase versus last year.
Amy Schwetz: Our adjusted tax rate for the quarter was in line with expectations at 21 percent.
Amy Schwetz: compared to the prior year fourth quarter adjusted tax rate of 8% which benefited from the release of certain valuation allowances. This year's fourth quarter tax rate was more in line with our structural rate.
Amy Schwetz: The change in tax rate versus fourth quarter last year negatively impacted adjusted EPS by approximately $0.13.
Amy Schwetz: With these items combined with the additional modest headwinds and other expense and non-controlling interest, we delivered adjusted earnings per share of $0.70 for the fourth quarter.
Turning to our segments, starting with FPD on slide 11.
Amy Schwetz: The strong momentum continued in FPD, with bookings increasing 13% versus last year.
Amy Schwetz: As expected, FPD sales declined 5% in the quarter due to a combination of the phasing of large projects in the last year comparison period and the negative impacts of foreign currency translation.
Amy Schwetz: Despite the sales decline, FPV generated adjusted gross margins of 33.4%, an increase of 450 basis points versus last year.
Amy Schwetz: Coupled with meaningful SG&A leverage, FPV delivered exceptional adjusted operating margin of 17.5 percent, a 570 basis point increase versus last year.
Amy Schwetz: We are very pleased with the significant progress FPD has made this year.
Amy Schwetz: For the full year, FPD's adjusted operating margin of 16.5% was within the targeted range of 16-18%, which we set out to deliver by 2027.
Amy Schwetz: FPV continues to generate benefits from a more selective approach to bidding while also driving productivity through our Operational Excellence Program.
Amy Schwetz: We expect to see further margin expansion in FPD in 2025 from the continued maturity of these programs and our 80-20 complexity reduction program.
Amy Schwetz: Turning to slide 12, FCD, including MOGIS, delivered sales and bookings growth of 15 and 11 percent, respectively. MOGIS contributed 11 points of sales growth in the quarter.
Amy Schwetz: In FCD, aftermarket bookings increased 20% in the quarter, while original equipment bookings were up 8%, driven by strength in both general industries and oil and gas.
Amy Schwetz: FCD Adjusted Growth and Adjusted Operating Margins were 31.8 and 15.3% respectively for the quarter. A sequential improvement versus the third quarter.
Amy Schwetz: Mogus was a slight drag for FCD's margins in the quarter given the timing and mix of shipments and related under-absorption that I mentioned earlier. Absent Mogus, FCD's underlying operational margins were roughly flat year-over-year.
Amy Schwetz: FCD exits 2024 with improving momentum. We're benefiting from solid revenue conversion, improved mix, and enhanced execution.
Amy Schwetz: We are focused on expanding FCD margins and driving growth as we leverage the FlowServe business system to improve execution while also accelerating opportunities through the integration of MOGIS.
Amy Schwetz: Turning now to cash flow on slide 13. During the quarter, we generated very strong cash from operations of $197 million, bringing our full year cash from operations to $425 million.
Amy Schwetz: As a percent of sales, fourth quarter adjusted primary working capital was 28%, on par with last year. We continue to see improvements in our cash conversion cycle, which improved by roughly one day in 2024.
Amy Schwetz: Working capital efficiency is a continued area of focus for our team, and while we have seen the benefits of improving our operations management system, we see more runway ahead as we leverage the FlowServe business system to drive a standard inventory strategy.
Amy Schwetz: For the full year, with capital expenditures of $81 million, we generated strong free cash flow of $344 million, our highest level in more than a decade.
Amy Schwetz: Free cash flow conversion ratio of 99% was significantly higher than our target of 85% or more for the year, and a strong indicator that our efforts in this area have momentum.
Amy Schwetz: Other sources and uses of cash during the quarter included increasing our term loan in conjunction with the MOGUS acquisition and a combined $37 million for dividends and a term loan reduction.
Scott Rowe: Turning to our 2025 outlook on slide 14, as Scott outlined, we are well positioned to once again make significant progress towards our 2027 targets.
Scott Rowe: In 2025, we expect organic sales growth of 3 to 5 percent, which reflects the strong momentum from 2024, a healthy starting backlog, supportive end markets, and further advancing of our 80-20 effort.
Scott Rowe: We expect reported NITS sales growth to benefit roughly 300 basis points from the MOGIS acquisition.
Scott Rowe: Currency will somewhat offset sales growth as we continue to see headwinds from the stronger US dollar. Based on recent prevailing foreign currency exchange rates, we expect reported sales to be negatively impacted by approximately 100 basis points.
Scott Rowe: We anticipate a full-year book-to-bill ratio of over 1.0, given the constructive market backdrop.
Scott Rowe: Turning to profits, we anticipate continuing to expand gross and operating margins as we drive higher volumes and leverage our 80-20 program to reduce costs through a more simplified product portfolio.
Scott Rowe: Incremental interest expense related to financing the acquisition is expected to partially offset the operational benefits.
Scott Rowe: Overall, we expect adjusted earnings per share of $3.10 to $3.30.
Scott Rowe: This includes absorbing an estimated $0.05 headwind from foreign currency translation. At the midpoint, our adjusted earnings guidance represents an increase of 22% versus the prior quarter.
Scott Rowe: In contrast to 2024, we anticipate the profile of our 2025 quarterly revenue and earnings results will be similar to historical trends, with first quarter earnings the lowest and fourth quarter earnings the highest.
Scott Rowe: The impact of MOGIS, including the benefit of synergies, along with the benefits from our Portfolio Excellence Initiative, will accelerate through the year.
Scott Rowe: We expect first quarter sales and earnings to be similar to the first quarter of 2024. A strong aftermarket growth is offset by lower percentage of completion revenue on a year-over-year basis.
Scott Rowe: We also expect to leverage our cash to repurchase shares to offset equity compensation.
Scott Rowe: We are focused on continuing to invest in the business for growth, both organically and through M&A.
Scott Rowe: We have a strong M&A pipeline and continue to actively review opportunities that would accelerate our 3D strategy, further diversify the portfolio, leverage our scale, and drive both margin and EPS expansion.
Scott Rowe: For the year, capital expenditure investments to further grow the business and drive efficiency in our operations are expected to be $80 to $90 million.
Scott Rowe: As I close, let me reiterate how proud I am of the FlowServe team.
Scott Rowe: We delivered significant value in 2024 across all metrics, bookings, sales, earnings, and cash flow. Our 2025 guidance is another step towards unlocking further value creation for our shareholders. With that, let me now turn the call back to Scott.
Scott Rowe: Thanks, Amy. Before we open the call for questions, let's go to slide 16.
Scott Rowe: We made tremendous progress in 2024, and we believe 2025 represents another meaningful step towards delivering our 2027 financial targets.
Scott Rowe: Our end markets are healthy and growing. Our 3D strategy is working.
Scott Rowe: Our execution has improved significantly, and we are seeing the early benefits of our closer business system.
Scott Rowe: Overall, we are pleased with the remarkable progress in 2024, but we know there is more opportunity in front of us, and our work is not done.
Scott Rowe: Our 2025 guidance represents another step to achieving our 2027 targets, and I have more confidence today than ever before in our team and our approach to deliver these results.
Scott Rowe: We are excited about the journey ahead and have a clear roadmap to deliver significant value for our customers, our associates, and our shareholders.
Operator will now open the call for questions. Thank you.
Scott Rowe: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad.
Scott Rowe: If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal.
We'll take our first question from Nathan Jones with Stiefel.
Good morning, everyone.
I guess so. Morning, Nathan.
Speaker Change: you know, higher than they've ever been historically. I wonder if you could just talk a little bit more about the strategies that you've deployed to really drive the aftermarket capture rates, to drive the growth in bookings around aftermarket to start with. Thanks.
Speaker Change: $618 million in the quarter. It's, you know, several quarters in a row now that we've been over $600 million. And, you know, I don't know if that's the new floor, but I would say certainly a 550 number would be the floor on on aftermarket bookings. And, you know, as you said, Nathan, this is absolutely a result of the good work from the teams. And so
Speaker Change: We have a massive installed base of both pumps and valves. We've got a great local presence with our quick response centers. We've got strong customer relationships.
Speaker Change: And what we're really focused on is that high level of customer service. The mantra within our teams is speed wins.
Speaker Change: And so we focus substantially on reducing the cycle time of our quotes.
Speaker Change: Reducing the cycle time of getting parts to our customers, reducing cycle times of repairs.
Speaker Change: and just being available to service them. And so we've got a nice record that we use within the aftermarket teams. We can see that the capture rates are continuing to move up and we're confident that we can continue to make progress with this. And then I just add that the macro backdrop is reasonably good.
Speaker Change: The utilization around the world on these big plants and infrastructures are at a relatively high level.
Speaker Change: And we expect those levels to maintain in 2025 and beyond. And so we like where we are with aftermarket. We've got aggressive growth targets on all of our aftermarket type businesses. And we feel like if we keep executing like we are, we'll continue to move that capture rate up.
Speaker Change: Awesome. I guess my follow-up question is going to be around the 80-20 framework, your core initiatives.
Speaker Change: Pretty much every company I've covered that has deployed this kind of system has always seen a headwind to revenue from getting out of products that aren't profitable or getting out of customers that aren't profitable.
Speaker Change: It's a credit to EPS to see those headwinds in sales. I'm just wondering if you can comment on, and maybe why you're not seeing a revenue headwind from these 80-20 initiatives. Is that something that we should expect in the future or just your approach to that? Thanks.
Speaker Change: Sure, let me provide a little context first just to get everyone kind of grounded. I know that you know this well on the 80-20 journey, but just as a reminder for everyone else, we launched three of our business units within 80-20 last year. We call our initiative Core for Complexity Reduction because essentially that's what you're doing. You're using a Pareto type approach to reduce the complexity in your business. And FlowServe has been around for a long, long time
So, this initiative and this effort is something that's...
Speaker Change: That's really impactful to FlowServe and we've got high expectations as we go forward.
Speaker Change: As we think about the two business units that are now kind of a full year into this, you know, what we're seeing is skew reduction by somewhere in the magnitude of 10 to 15% in the year.
Speaker Change: And Nathan, as you indicate, that is going to be a little bit of a headwind to our revenue as those SKUs are out of our offering.
Speaker Change: The philosophy is that we take those resources that were, you know, used to sell that product or that channel to market, and we're repositioning them to our best products and our best customers.
Speaker Change: And at this point, at least in 2025, we feel like that that revenue impact is negligible as we start to invest in our best products in our best customers. And so, you know, we're one year in with two business units. That's how we see things today.
Speaker Change: and I think we'll be able to maintain that into 2025.
Speaker Change: As we kick off two more business units in 2025, we'll see the dynamics of what the data shows us and what we think the revenue impact will be. But again, that probably won't show up until 2026.
Speaker Change: And then on the margin side, you know, I'll add that in the two business units that are now kind of a full year in here, you know, we we fully expect in 2025 100 basis points in the gross margin level, because of the the efforts that that we're doing with 8020 and
Speaker Change: I guess in closing on 8020, I'll just say, you know, we are following the methodology very rigidly. And we are on track with our expectations and what, you know, other companies have done when they when they use the 8020 framework. And so we're pretty excited about this, see modest improvements in 2025. And we'll start to accelerate those improvements in 2026 and beyond.
Speaker Change: And, you know, just reiterate that we remain confident that this initiative, which we put under our portfolio excellence, will continue to drive kind of 200 basis points plus.
Speaker Change: as we reach our long-term goals of 2027. Yeah, and Nathan, I might just add there that as we talk about sort of negligible impact
Speaker Change: I think another way to say that is it's factored into our organic revenue guidance that we've put out of three to 5%. So what would a 3% year look like? And it could look like
Speaker Change: More more revenue loss from from 80 20 that doesn't necessarily sacrifice our potential to reach our EPS guidance
Speaker Change: It makes perfect sense. Thanks very much for taking my questions.
Speaker Change: We'll take our next question from Dean Dre with RBC Capital Markets.
Thank you. Good morning, everyone.
Morning.
Hey, maybe we'll start on the 25 guide.
Speaker Change: With the expectation that you think you'll be above one on book-to-bill, just how calibrated are you on that so far? I mean, you do have some good earnings visibility on some of these longer cycle projects, so is there a front log that's giving you that confidence that you'll be able to
Speaker Change: And do you have confidence in maintaining this streak of over a billion dollar of orders and, you know, at some point, you know, is that going to come to an end and and maybe some observations there?
Speaker Change: Sure, Dean, I just hit the aftermarket in great detail, so I'll focus on kind of the OE and the projects.
Speaker Change: You know, our forward, when we look at our forward funnel within our CRM system, it's essentially flat year over year.
Speaker Change: It doesn't give us substantial cause for concern. It's at a very elevated level. I would say oil and gas is a little bit down, powers up substantially, chemicals down just a fraction.
Speaker Change: General Industries up. With all of that said, you know, we feel like we've got great visibility to the project universe out there and driving growth within the OE bookings. And, you know, as I said previously, the aftermarket, we're very confident in our ability to continue to grow that.
Speaker Change: And so right now, you know, everything we see is a book to bill over 1.0, you know, the mega trends that we continue to refer to our decarbonization, you know, and despite some of the rhetoric, maybe in the US kind of shifting away from that we're we continue to see a lot of projects in the decarbonization space.
Speaker Change: We book carbon capture in the fourth quarter. We've got carbon capture visibility in Q1. We've got more carbon capture for the rest of the year. There's other things in decarbonization that we're pretty excited about. The nuclear outlook is incredibly strong on the power side. So the power and electrification continues to go forward. And so we've got great visibility there. And then general industry and kind of run rate business for us has been reasonably strong as well. And so.
Speaker Change: When we think about the megatrends and the end markets, it's all relatively stable. The soft spot, we've said this before, is chemicals in Europe. That remains a little bit soft. We're kind of a year and a half now with that softness. And so I would expect at some point we start to see an inflection to growth.
Speaker Change: And then, Dean, maybe the last thing I'll add is, you know, what we saw with the January order rate was reasonably healthy.
Our run rate business, our aftermarket business.
Speaker Change: Both in North America, Europe, and around the world, it all looks good, and we've got real nice visibility to project type awards.
Speaker Change: You know, at this point, you know, it's a dynamic world out there. There's a lot of things going on, whether it's in the political arena or, you know, the geopolitics. But, you know, we've got good visibility to a sustainable growth rate and at this point committing to book the bill over 1.0.
Speaker Change: That's really helpful. And Amy knows this would typically be the time I would ask about free cash flow, but it was really strong in the quarter. So that I think I'll leave that one there. But, Scott, you mentioned the geopolitical side.
Speaker Change: Just, is there anything as you see the businesses today that would be impacted on tariffs in just in terms of what headlines you've seen, any kind of preparation, a playbook that you have that would, that you need to have to put into play here?
Speaker Change: Sure, you know, we've obviously gone through this once before, you know, with the Trump administration in the first pass, and then, you know, quite frankly, the Biden administration moved tariffs up even further.
Speaker Change: in terms of exactly what happens. But what I would add is that we are incredibly confident in our ability to manage this.
Speaker Change: We've got great visibility, not only to where our supply chain is coming from, but also what the impact would be at a product line level in any tariff scenario.
Speaker Change: That visibility is allowing us to move much quicker in terms of actions. And actions would be repositioning the supply chain, raising prices as we feel impacted.
Speaker Change: And so our teams are very geared up with this. We've modeled out more scenarios than I want to talk about on the call. But I'd say given what we know today, we feel really good about our ability to manage this.
Speaker Change: And then just maybe some grounding for others. Two-thirds of our revenue is outside of the U.S. For the work that is in the United States, we still have a significant manufacturing presence.
Speaker Change: in the U.S. in all of our products, so pumps, valves, and seals. And our exposure in the U.S. is more supply chain related than finished goods. And so where we're getting impacted is...
Speaker Change: is our importing of castings and forgings and bar stock. And so we'll continue to work through this. At this point, I feel very confident in our ability to do that. And the impact historically has been very moderate to a very low number. Obviously with the new scenarios, that goes up though.
Appreciate all that, Kahlar. Thank you.
We'll take our next question from Mike Halloran with Baird.
Good morning, everyone.
Good morning, Mike.
Speaker Change: He's talking through a couple things here. First, when you look at the 100 to 200 basis points plus you threw out on the slide on
Robert Rowe, Unknown Executive, Amy Schwetz
Speaker Change: And then also a reminder, what is the volume component of that 2027 guidance as we sit here today, or the revenue growth component, and how much is firmly within your control versus market factors?
Speaker Change: So maybe starting with the 80-20 work and what we're seeing with that.
Speaker Change: As we laid out our 2027 targets, we'd envisioned sort of 200 basis points from portfolio management, and I would think of 80-20.
Speaker Change: as the process that we're using to drive that portfolio management.
Speaker Change: Improvement. I think we've we've also made it pretty clear with the 2027 targets.
Amy Schwetz, Robert Rowe, Unknown Executive, Amy Schwetz
Speaker Change: Unknown Executive, Amy Schwetz, Robert Rowe, Unknown Executive, Amy Schwetz, Unknown Executive,
was really around operational excellence and so.
Speaker Change: I think we've made tremendous progress on the Ops Excellence side, particularly if you look at, at the results that we've seen running through the FPD segment. We've laid the groundwork for that within, within FCD. And so I think really the top end of our range, if you look at kind of where we, where we want to be from an OI segment, I would think of that as
Scott Rowe: The operating, the operating leverage from volume that that we would anticipate getting. So overall, just to reiterate what what Scott said in his remarks, what I've commented on, we feel really good about hitting these, these 2027, 2027 targets.
Scott Rowe: and we think we have the tools in place to do it.
Speaker Change: Thanks for that and then maybe a question on the guidance then and making sure I understand the cadence and so
Speaker Change: If I heard the prepared remarks correctly, first quarter revenue and earnings are roughly similar to last year.
Speaker Change: Just making sure on that. And then as you think about the year, is this cadencing...
Speaker Change: expectation for relatively normal seasonality, relatively normal or balanced conversion on some of these some of the backlogs through the year what any other nuances we should think about through the year and any thoughts on the corporate expense side?
Sure, so.
Speaker Change: A little bit to unpack there, I'd start with, you know, kind of, as we think about 2025, you're right, that we look at that phasing as being.
Speaker Change: closer to our historical seasonality. And, and I say that it's being impacted by a couple of reasons from from an earnings perspective, to start with, we've commented throughout kind of 2024 on the phasing of that large defer a contract.
Speaker Change: that we shipped across 2024 and to a certain extent recognized revenue in 2023. So the first quarter of last year was our highest revenue quarter.
Speaker Change: from that and so that that does impact what we see.
in the first quarter.
Speaker Change: Secondarily, I think we've got the impacts of 80-20 that are impacting our profitability and will ramp throughout the year. And the third is really around MOGIS, that I expect that as we progress through the year and begin to recognize synergies to get to our ultimate run rate of kind of that
Speaker Change: 15 to $15 million plus of synergies that will see the fourth quarter be our be our best quarter of the year.
Speaker Change: But we see a few things embedded in there that are going to be offsets, and that's really around the additional interest expense from MOGIS, which is roughly two cents a quarter, so eight cents for the year, and the ramp up of those synergies.
Speaker Change: Oh, and then I'll just touch briefly on on corporate expense. Sorry. I think overall, we see corporate expenses being neutral in total over over the course of of 2025 so similar levels to what we see and saw in 2024, the phasing of that can change based on based on the kind of lumpiness.
Speaker Change: of some of those expenses. But overall, in total, that number will be pretty close to what we saw in 2024.
Appreciate it. Thanks, Amy.
Hey, guys. Good morning. I wanted to unpack that corporate.
I wanted to unpack that corporate expense a bit.
You mentioned it's tied to like specific R&D.
Speaker Change: and things like that. I mean, it was definitely higher. And now we're saying that 2025 is neutral. One, I just want to know what's kind of what's what's causing this ramp? How long does it kind of stay at that level? And when you say it's neutral in 2025,
Speaker Change: Like the 2024 number had like 12 million dollars of, you know, of extra costs from asbestos. Is it like you're saying it's going to be equal to that inclusive of that extra 12 and then we'll see what asbestos is for this year. Thanks.
Speaker Change: So think in terms of in terms of corp dev, R&D costs that are not necessarily attributed specifically to to either segment.
Speaker Change: And it also includes elements of incentives, including both annual incentives and NAIP in the mix, and it does include the IVNR true up that we do every year, we have included a placeholder for IVNR in the third quarter of this year. And so absent that I would anticipate.
Speaker Change: and the cost would go down year over year over year, Joe. But I think one thing to point out just about these elevated costs is, given that incentive element, as we look at 2023 and 2024, as a company has began to perform closer to targeted levels,
Speaker Change: Both share-based compensation, which includes the performance component and annual incentives, are higher than what we might have seen in 2022 and 2021.
Speaker Change: That's fair. And then just if I could follow up on some of the in-process R&D that you bought on the cryo side of things, where are those today in terms of like commercial deployment?
Speaker Change: Sure yeah we remain very excited about that the LNG market in general you know obviously with the the new administration there's there's new life to new build LNG in the United States
Speaker Change: We've got a very global look on the LNG side, and we're able to put a lot of our valves and other product in there. And so, you know, now, obviously, we have to commercialize our pump, that is making, you know, very good progress. And, you know, I would say it's somewhere kind of in the second half of the year, we've gotten through our testing protocol, and we're starting to bring that to market.
Speaker Change: On a positive side, we're already seeing our ability to support the aftermarket business in LNG, and so the technology that we've developed.
Thanks, guys.
Speaker Change: As a reminder, if you would like to ask a question, you may press star one on your telephone keypad now. Again, that's star one if you would like to join the queue.
Speaker Change: We'll move to our next question from Brett Lindsey with Mizuho.
Hey, good morning, all.
Speaker Change: I wanted to come back to the SKU reduction. You noted the two business units are underway, I think commensurate 10 to 15% reduction there, two more being reviewed this year. Where do you see the reduction ultimately landing at the end of the program on a SKU basis?
Speaker Change: And should we think of potentially more benefit above just 80-20 practice as you get better throughput on, you know, what would be a more standardized, simplified skew count?
Unknown Speaker 0
Speaker Change: Sure, let me just start, I'll answer the few first and then we'll talk about just the other benefits related to 80-20.
Speaker Change: because there's a long list of that. But on the skew, the first two business units, again, they're about a year through the program now. And what we're seeing is that 10% to 15% reduction in the first year.
Speaker Change: and repurposing your resources to the ones that create value for the enterprise.
Speaker Change: Again, we'll follow that pretty religiously as we go forward. There's a lot of little caveats in terms of aftermarket and a product that supports one of your best customers. You maybe keep that a little bit longer as you're repositioning them to a different type of a product.
Speaker Change: And then to the second part of your question, which is a really important one, as we continue to reduce complexity, there's all kinds of knock-on benefits, and whether that's your overhead-type cost in the manufacturing or in the quoting side, that starts to get a lot
Speaker Change: A lot simpler because you're quoting less products and you're more focused on your best products, you can start to drive efficiencies in these different kind of work centers or different population groups.
Speaker Change: And then on the shop floor, we haven't modeled any of this to date, but we do believe and we've seen other companies that do get a productivity uplift with the simplification of what's going through the manufacturing process. And so there's a ton of knock on benefits. It goes all the way through the process from quoting to engineering the shop floor, your supply chain gets simplified as well. And so as we continue to work through the initiatives, we'll continue to make sure that we are getting the benefits.
and each step of the manufacturing process.
Robert Rowe, Unknown Executive, Amy Schwetz
Speaker Change: Should we look to the channel to maybe gain some comfort holding more inventory over the next couple years or still stay pretty lean?
Speaker Change: Yeah, I'll keep this discussion in the U.S. because that's where we typically will see our stocking distributors.
Speaker Change: The stocking distributors have pulled back on inventory pretty substantially, and they're at a reasonably low level. They've managed their working capital very well. They put a lot of pressure on us to reduce our lead times and be there.
Speaker Change: for them in a much quicker response. And so I think at this point forward, my view would be that their inventory does start to come up. I think that the North American outlook across the energy sector and across some of the general industry is remains relatively bullish.
Speaker Change: As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation. You may disconnect and have a great day.