Q1 2025 Flowserve Corp Earnings Call
Please standby.
Speaker Change: Good day and welcome to the flow serve first quarter 2025 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Brian email, Vice President Treasurer, and Investor Relations and corporate Finance. Please go ahead.
Speaker Change: Thank you and good morning, everyone welcome to Paul Service first quarter 2025 business update I'm Joe.
Scott Rowe: And by Scott Rowe, <unk>, President and Chief Executive Officer, and our Chief Financial Officer, Amy Sweats.
Speaker Change: And Scott in his prepared remarks, we'll open the call for questions.
Speaker Change: Turning to slide two our discussion will contain forward looking statements that are based upon information available as of today.
Speaker Change: Actual results may differ due to risks and uncertainties refer to additional information, including our note on non-GAAP measures in our press release earnings presentation, and <unk> SEC filings, which are available on our website with that I will turn it over to Scott.
Scott Rowe: Thank you, Brian and good morning, everyone I'll begin on slide three we delivered a strong start to the year in the first quarter, demonstrating the strength of our diversified portfolio and the exceptional performance of our associates around the world operating onto the wholesale business system.
Scott Rowe: Looking at some of our headline numbers bookings grew 18% versus last year to $1 $2 billion revenue increased 5% and adjusted gross margins expanded 180 basis points to 33, 5%.
Scott Rowe: We delivered adjusted operating margins of 12, 8%, resulting in impressive incremental margins of more than 50% in the quarter.
Scott Rowe: Adjusted earnings per share was <unk> 72 cents for the quarter, an increase of nearly 25% versus the prior year.
Scott Rowe: We entered the second quarter encouraged by our momentum and we remain confident in our ability to execute at a high level.
Scott Rowe: However, the current tariff environment introduces a new dynamic to our outlook, which I'll touch on in more detail shortly.
Scott Rowe: We also recognize there is macro economic uncertainty as we look ahead.
Scott Rowe: Accordingly, we are reaffirming our full year guidance and remain focused on navigating the current environment.
Scott Rowe: Building on the strong results of the first quarter.
Scott Rowe: Andrew will provide additional details on the financial outlook later in the call.
Scott Rowe: Turning to slide four our strong first quarter bookings performance resulted in a book to Bill ratio of 1.07 times.
Scott Rowe: With outstanding growth in aftermarket bookings and nuclear activity.
Scott Rowe: We continue to see outsized growth from our <unk> strategy with <unk> bookings, representing 31% of our total awards for the quarter.
Scott Rowe: Record aftermarket bookings of almost $690 million represented the fourth consecutive quarter above $600 million.
Scott Rowe: Our focus on growing the aftermarket business is paying dividends, where our high service levels continue to translate into increased aftermarket capture.
Scott Rowe: In the quarter, our aftermarket franchise benefited from a roughly $50 million nuclear aftermarket order to upgrade a major nuclear power plant in North America.
Scott Rowe: Our next largest award was up $42 million of original equipment Award also within the nuclear space for our new plant in Europe.
Scott Rowe: Caused by a $36 million award for an energy project in the Middle East.
Scott Rowe: In total nuclear bookings were more than $100 million for the third consecutive quarter and power bookings were up more than 45% versus the prior year.
Scott Rowe: We also generated 28% year over year growth and general industries.
Scott Rowe: These results underscore the ongoing demand for our products and services and critical industries.
Turning to slide five.
Scott Rowe: I'll provide a review of how tariffs could impact our results.
Scott Rowe: What actions, we're taking to manage the current environment.
Scott Rowe: As trade policy continues to evolve we are focused on responding as quickly as possible to a very dynamic situation.
Scott Rowe: We have clear visibility to tariff exposures down to the product family level, and we have a number of levers in place to mitigate the impact of the current tariff program.
Scott Rowe: Specific to U S tariffs the vast majority of the products, we sell in the U S are manufactured or assembled and tested within the United States.
Scott Rowe: That said, we do import certain materials, such as castings and forgings as well as some components like electronics and motors into the U S.
Scott Rowe: These items represent a single digit percentage of our total cost of sales with our largest exposures to China, India and Mexico.
Scott Rowe: We also manufacture seven products in the U S for export to other geographies, but this activity represents a modest mid single digit percentage of our total sales and often comes with the ability to migrate this work to other non U S facilities.
Scott Rowe: In total based on tariff rates known today, we estimate the annualized gross impact of the new tariffs before any mitigating actions is between 90 and $100 million.
Scott Rowe: Following the first round of tariffs in 2018, and the supply chain disruptions of 2022, we developed a more resilient and regionally diverse supply chain.
Scott Rowe: As a result, we are better positioned to navigate these challenges than ever before with a focus on delivering the best value to our customers.
Scott Rowe: Our global footprint is an advantage in this environment and we are leveraging our network to optimize the location of our work to help mitigate the impact of tariffs.
Scott Rowe: We're also actively shifting sourcing around the globe to deliver the lowest cost highest quality products to our customers in.
Scott Rowe: In short closer is better positioned to navigate these challenges than ever before.
Scott Rowe: We have also taken select pricing actions where needed to offset the impact of higher costs.
Scott Rowe: In January we executed our typical annual price increase and in March we raised prices again to offset the impact of incremental tariffs. Additionally.
Scott Rowe: Additionally, we are utilizing change orders to reprice projects in our backlog as appropriate.
Scott Rowe: We have a dedicated team focused on understanding the dynamic trade environment and ensuring that we are utilizing all of the available tools to mitigate their impact such as U S MCA and other trade agreements.
Scott Rowe: Finally, we are tightly managing discretionary spending and as we have in the past we are prepared to move quickly to address costs, if the macro environment changes.
Scott Rowe: Turning to page six.
Scott Rowe: We are also focused on the potential for tariffs the impact global market demand.
Scott Rowe: The increased uncertainty our end markets currently remained healthy.
Scott Rowe: Asset utilization for large process industries remained steady and maintenance spending has currently continued as expected.
Scott Rowe: The spring turnaround season has been strong and there have been no signs at this point that customers are deferring maintenance.
Scott Rowe: April bookings to date continue to look healthy across our run rate and aftermarket business.
Scott Rowe: Our strong aftermarket business, which represents over 50% of sales also provides some insulation from potential changes in near term demand that my first impact project spending.
Scott Rowe: Our project funnel remains at an elevated level and an increase sequentially in some of our largest end markets, including energy chemical and power.
Scott Rowe: Our nuclear opportunity funnel in particular continues to grow even as large project opportunities have converted the bookings.
Scott Rowe: We are currently seeing a limited amount of project deferrals in select industries like mining and renewables.
Scott Rowe: Our strong backlog at $2 9 billion is another advantage in this environment and provides a level of certainty for future revenues.
Scott Rowe: At this point, we have not seen anything out of the ordinary with backlog cancellations and we expect 2025 to be in line with what we have experienced in past years.
Scott Rowe: Overall, we have good near term visibility and we will continue to monitor the macro environment as we move through the year.
Scott Rowe: Turning to slide seven.
Scott Rowe: Execution remains a key priority for us.
Scott Rowe: We are leveraging the closer of business system to drive consistency and results across the organization.
Scott Rowe: The business system is a critical tool to help us navigate todays market volatility something we did not have in place during the COVID-19 downturn and we're focused on leveraging our consistent and agile framework to run the business.
Scott Rowe: Within the business system core our 80 20 program is accelerating with strong results in the first quarter, which were modestly ahead of our expectations.
Scott Rowe: As an example of our progress I recently visited one of our U S locations that manufacturers pumps for the North American market.
Scott Rowe: At that one site.
Scott Rowe: We reduced skus by nearly 80%.
Scott Rowe: These actions significantly reduce complexity and improve margins without having a significant impact on revenue.
Scott Rowe: By mid year, all of our product revenue will be utilizing the 80 20 methodology.
Scott Rowe: For the year, we continue to expect the actions we are taking will benefit gross margins by roughly 50 basis points or more at the <unk> level and then accelerate thereafter.
Scott Rowe: We remain confident in our ability to generate 200 plus basis points of margin expansion from the portfolio Excellence program by 2027.
Scott Rowe: In summary, I am very pleased with the strong start to 2025 and the progress we have made on executing our strategic initiatives.
Scott Rowe: While we are mindful of the near term macro uncertainty our end markets are currently healthy bookings have been strong and our improved execution provides a solid foundation for continued success let.
Amy: Let me now turn the call over to Amy.
Amy: Thank you Scott and good morning, everyone.
Amy: Turning to slide eight we delivered another strong performance with first quarter revenue of $1 1 billion adjusted operating margin of 12, 8% and 72 of adjusted earnings per share representing earnings growth of almost 25% versus the prior period.
Amy: For the quarter, we performed better than our expectations driven by higher sales volume on improved revenue conversion and robust FPV margins unfavorable mix and accelerating 80 20 benefit.
Amy: Overall revenues grew 5% versus last year with organic growth of approximately 410 basis points and 330 basis points benefit from the <unk> acquisition, while foreign currency translation negatively impacted reported sales growth by about 220 basis points.
Regional equipment and aftermarket revenues grew by 5% versus the prior period driven by FCB.
Amy: Shifting to margins, we generated an adjusted gross margin at 33, 5%, representing a 180 basis point year over year increase in our sixth consecutive quarter of sequential margin improvement.
Amy: We believe our operational and portfolio excellence efforts position us well to continue driving margin expansion.
Amy: Higher gross margins, coupled with SG&A remaining consistent as a percentage of sales led to adjusted operating margin expanding 190 basis points versus the prior period to 12, 8% and represented exceptional incremental margin.
Amy: Adjusted operating income was $147 million at 24% increase versus last year.
Amy: Altogether, we delivered adjusted earnings per share at <unk> 72 for the first quarter.
Amy: Turning to our segments, starting with SPD on slide nine.
Amy: <unk> delivered exceptional bookings growth of 21% versus last year with double digit growth in both original equipment and aftermarket activity.
Amy: Growth was driven by continued strength in nuclear activity, along with benefits and general industries and energy end market.
Amy: <unk> sales growth at 2% versus last year with modest but ahead of our expectations unhealthy book and ship activity and improved backlog conversion.
Amy: <unk> generated adjusted gross margins at 34, 7% an increase of 180 basis points versus last year, driven by favorable mix increased productivity and strong project management.
Amy: Coupled with SG&A leverage FPV delivered an outstanding adjusted operating margin of 17, 7% at 280 basis point increase versus the prior year period.
Amy: We've made tremendous progress in SPD driving growth and expanding margins. While FPV is now ahead of 2027 adjusted operating margin targets.
Amy: Still see opportunities to expand margins from here supported by disciplined price cost actions continued aftermarket capture our 80 20 complexity reduction program and an enhanced approach to commercial excellence.
Amy: Turning to FCB on slide 10.
Amy: <unk> delivered strong growth in the quarter with bookings growth of 10% and sales growth of 14%.
Amy: <unk> contributed 1100 basis points of sales growth in the quarter.
Amy: FCB aftermarket bookings increased by 19% versus last year, while original equipment bookings were up 7% driven by general industries energy and power end markets.
Amy: FCB adjusted growth and adjusted operating margins were 34% and 12, 2% respectively.
Amy: An increase of 120, and 110 basis points versus last year, driven by higher aftermarket margins and mix.
Amy: We expect FCB margins will continue to expand as we leverage our 80 20 program improve execution through operational excellence and accelerate mortgage related synergies.
Amy: Turning now to cash flow on slide 11 cash from operations was $50 million use of cash in the quarter driven by higher temporary working capital requirements.
Amy: While our receivables increased in the first quarter due to the timing of milestone billings and collections.
Amy: We expect days sales outstanding to improve in the remaining periods of the year.
Amy: We also paid the majority of our 2020 for performance based incentive compensation in the quarter, which impacted the accrued liability account.
Amy: In contrast last year's performance based incentive compensation was paid in the second quarter.
Amy: This difference in timing will be a tailwind for cash from operations next quarter.
Amy: Overall adjusted primary working capital as a percentage of sales increased to 29, 8%.
Amy: Our efforts around a standardized inventory strategy resulted in improved inventory turns during the quarter and we believe it points to further working capital opportunities and efficiencies ahead.
Amy: From here, we expect significant improvement in our cash from operations and working capital efficiency with full year cash flow to adjusted net earnings of 90% or more.
Amy: Turning to capital allocation on slide 12, with the recent market volatility, we view our share price at a discount to its intrinsic value.
Amy: Guided by our capital allocation philosophy, we repurchased $21 million or closer shares during the first quarter and bought an additional $32 million of shares during the month of April.
Amy: In total we have repurchased $53 million of shares year to date at an average cost of $45 per share.
Amy: We continue to believe that M&A will play an important role in our long term strategy and we are maintaining a critical eye towards opportunities to create value from our purchase price synergy and balance sheet perspective.
Amy: Altogether, our capital allocation framework, we will continue to guide us and fulfilling our commitments like the dividend and maintaining our investment grade rating, while deploying excess cash to the highest long term return on investment, including share buybacks acquisitions and pre payable debt.
Amy: Turning to our 2025 outlook on slide 13.
Amy: The first quarter represents a great start to the year and we remain focused on driving significant shareholder value in 2025.
Amy: As Scott mentioned, while our end markets remain largely healthy and we're executing better than ever we are operating in an uncertain and evolving macro environment.
Amy: As we navigate the environment, we will stay nimble leverage our significant internal capabilities and continue delivering value for our customers with speed.
Amy: With this backdrop, we are reaffirming our earnings guidance communicated in February including organic growth of 3% to 5% and adjusted earnings per share at $3 10 to $3 30, representing an 18% to 25% increase over 2020 for full year adjusted EPS.
Amy: With the recent weakening of the U S dollar the sales headwind from currency translation for the balance of the year should abate modestly so given the 220 basis point headwind in the first quarter and volatility in currency rates, we expect the full year impact to range from 100 basis point headwind to roughly.
Amy: Neutral.
Our guidance assumes tariff rates communicated to date are in place for the year.
Amy: Guidance also assumes that general economic conditions and flow control demand remained relatively steady during the rest of the year.
Amy: Considering the quarterly pace of performance, we expect second quarter results to be similar or slightly better than the first quarter. We.
Amy: We anticipate modest year over year top line growth and flow through margin expansion with solid incremental margins. So incrementals are likely lower than in Q1 based on the expected mix of business in Q2.
Similar to historical seasonality, we would expect the second half of the year to represent a higher contribution to earnings in the first half given our near record backlog of $2 9 billion.
Amy: Accelerating benefits from the <unk> business system and expected synergies from the <unk> acquisition.
Amy: In summary, we are proud of our strong start to 2025 and the confidence that provides in delivering year over year earnings growth in 2025.
Speaker Change: We are well positioned to navigate the macro environment, given our global footprint and the actions Scott outlined.
Speaker Change: We remain focused on executing our strategy, serving our customers and delivering value for our shareholders.
Speaker Change: Operator, we will now open the call for questions. Thank you.
Speaker Change: Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone if you join US today use a speaker phone. Please make sure new function is turned off to allow your signal to reach our equipment again that is star one if you would like to signal with questions.
Speaker Change: First question will come from Andy Kaplowitz with Citigroup.
Andy Kaplowitz: Good morning, everyone nice quarter.
Scott Rowe: Thanks, Andy Scott, maybe you can just.
Speaker Change: Maybe you can talk about the sustainability of bookings as you see it obviously as that April pretty good aftermarket.
Scott Rowe: Was very strong.
Scott Rowe: Didn't put in the book to Bill over one I'm just curious about how you see the second half I think you mentioned the funnel some of your end markets.
Scott Rowe: Proves so cannot sort of offset.
Scott Rowe: Any project deferrals, you see to continue to have relatively solid bookings, especially aftermarket maybe a 600, the new 500 in aftermarket bookings.
Speaker Change: Sure. Let me just start with Q1 bookings, we had a fantastic start to the year $690 million of aftermarket bookings is the highest level I've seen since I've been here.
Speaker Change: A little we had a $50 million nuclear award in that number and so that won't repeat but we've been holding $600 million now for quite some time on aftermarket and then I'd just say as we kind of look forward, we feel pretty good about that run rate and then Q1 projects. We also had a nice healthy lift a list of projects to nuclear awards, one in the energy space and so nice <unk>.
Speaker Change: Version on some of those projects and then if we go from the end of Q1 to today, even as of last week. Our markets continue to remain relatively healthy our run rate aftermarket bookings have remained elevated we track. This now I mean, we're talking about Florida weekly basis I'm looking at it they are looking at it far more than ever before.
Speaker Change: On a weekly basis and even through last week that run rate business and aftermarket remained at a very healthy level for the project funnel on the forward look is at a high level power energy and chemical growth in our forward funnel for projects is sequentially higher and then at this point we've seen.
Speaker Change: Limited project push outs.
Speaker Change: Hard to say that if this is kind of normal project push outs.
Speaker Change: Or maybe the effect of some of the macro concerns we.
Speaker Change: We've seen this in some select markets like mining and in the renewable space.
Speaker Change: But I'd say nothing like too dramatic in terms of projects coming out and again that forward funnel is at an elevated level.
Speaker Change: Very similar to what we saw at the end of Q4, and then I'd say within our backlog as well we haven't seen any cancellations that would be considered out of the ordinary and so up until today the market looks reasonably good for us.
Speaker Change: The question is about the forward look and I'd say, if the tariff program continues and the uncertainty caused by this dynamic environment continues then we could potentially see a slowdown in the second half of 2025, we haven't seen this yet I think there is a little bit of a.
Speaker Change: Wait and see with our customers. We're obviously staying in close contact with them, we're having a lot of discussions with our customers. We know that theyre doing scenario planning on different things, but at this point, we don't expect them to stop capital dramatically, but I'd, just say, Andy it's really hard to call kind of what.
Speaker Change: Our customer is going to do in the second half of the year given the amount of uncertainty that is out in the global market and so we deliberately didn't put the full year book to Bill over one point in the prepared remarks, obviously, we started Q1 at a 1.07 and so we're in a really good place and I would say if we continue to operate how we do.
Speaker Change: Today than we were going to be way above 1.0, and we feel really good with that if the environment worsens and theres a chance at the back half flows down.
Speaker Change: Very helpful. And then Amy just to the guidance on Q2 that sort of similar or modestly better EPS, maybe you could talk a little bit more you mentioned sort of mix could hurt incrementals of beds is there any sort of issue where tariffs ladder and before pricing or other countermeasures.
Speaker Change: What's going on there because usually seasonally Q2 is a pretty decent step up from Q1.
Speaker Change: Yeah, So maybe to start with the tariff impact, which we see largely as as a second half issue as that works through our backlog and so as we think about the second quarter a couple of things.
Speaker Change: Similar or slightly better than the first quarter, we had really strong revenue conversion on our backlog and in the first quarter, which is kind of impacting the spread of revenue across those two quarters. We obviously have really strong operational momentum coming from the first quarter and we think that $80.
Speaker Change: <unk>.
Speaker Change: And pricing actions that we took early in the year.
Speaker Change: Those increases that Scott mentioned in January provide some positive tailwind.
Speaker Change: And then I think that as we look at.
Speaker Change: Really margin performance, we're looking at something that's pretty close to what we saw in the first quarter first quarter of the year from both a gross margin in an operating margin standpoint, but we will have some mix headwinds that are that are in there based on what we see in the backlog today, So I think overall.
Speaker Change: What can work well for us in the second quarter of the year book to Bill staying at elevated levels will help continued strong revenue conversion will help but overall I think we're still seeing our earnings profile be weighted towards the second half of the year.
Scott Rowe: And Andy I would just add Q1 was as it was.
Scott Rowe: A really really strong performance across the board and so we're starting at a very elevated level as we go from Q1 to Q2 wed be really excited to keep that or be slightly better and then and then prepare to deliver in the second half of the year like we normally do.
Speaker Change: Appreciate the color.
Speaker Change: And the next question will come from Mike Halloran with Baird.
Mike Halloran: Hey, good morning, everyone.
Speaker Change: Hum.
Speaker Change: Good morning, Mike.
Speaker Change: Thinking about this in terms of the footprint the competitive footprint the ability to push price.
Speaker Change: Twofold question, one how do you view your footprint relative to the peer group feels like everyone bus castings fittings overseas. So I don't I don't know if there's really much difference there other than.
Speaker Change: It seems like you are in a good position, but please.
Speaker Change: Your viewpoint, there and then also how receptive is the market and the pricing as you sit here today.
Speaker Change: Sure. Let me just start a level set everyone on the flow serve kind of the lay out two thirds of our business is outside of the U S and from a manufacturing perspective about one third of that refund is in North America. We've got good coverage in kind of that Europe, and the Middle East region and then we've got good manufacturing presence in Asia Pacific and <unk>.
Speaker Change: So I think from a manufacturing standpoint, and we put this is one of our mitigating actions. We are regionally positioned and we can typically manufacture our products in the region, where our customers need it and so we're not getting tariffs essentially on finished goods. So we're not we don't ship a whole lot of stuff from Europe into the U.
Speaker Change: As a finished goods or finished pumper valve the impact for us is mostly on our supply chain and so I'd say from a footprint standpoint, where we can manufacture that's actually a competitive advantage and we're still cleaning up our roofline and we know we've got some more work to do with that but right now it actually gives us an advantage in <unk>.
Speaker Change: How's us to manufacture in a region that may have a less tariff impact in some of our peer groups and so I'll talk about going on the offense here at the end, but let me hit castings and forgings.
Speaker Change: Castings and forgings are coming primarily from China, India, Mexico, everybody does that so we're in line with the peer group within flow control and what we're trying to do is just find a scenario or a modeling that gives us the lowest tariff impact as we think through that we do a little bit of that material in the U S. But it's just the.
Speaker Change: The capacity in the U S. Just isn't there to support the overall business and so I'd say we're in line with appears of where do you go for that raw material and then on the component level, its motors and sensors and essentially everyone's buying from the same place and so I don't think Theres, a big competitive advantage with the supply chain. The one thing I would say is that with the re org design and <unk>.
Speaker Change: 'twenty three we bolstered our supply chain and operations team, we're performing better than we ever have from an operational excellence standpoint, and the ability to pivot and migrate that supplier base. We've been doing that work over the last two years in earnest we've already seen some of the supply chain movements, taking place and putting us in a really really good position as we can.
Go forward and then on your second question on price, Mike, We do our annual price increase at the beginning of the year, that's always reasonable reasonably sticky it's always a modest level that goes in that we start to see a little bit of that impact in Q2 and Q3, when we put that in in the beginning of the year, we felt like that was very much.
Speaker Change: A number or an amount that put us squarely above price cost.
Speaker Change: Felt very good about our ability to stay positive in that ratio and then with the tariff situation escalating we went pretty aggressive in March with another price increase.
Speaker Change: And did that asked the product family level and so we really focused on exactly where are the tariffs were impacting we're very clear with our customers of exactly why this price increase was going in and that we would monitor the situation globally.
Speaker Change: Did that at the base level, we didn't do it as a surcharge and typically we find that a little bit stickier. When we go that way and so I would say, we don't know exactly what the stickiness is at this point, we will start to get some data points on that in the second quarter, but the feedback is most of the peer group is doing something similar.
Speaker Change: <unk> were relatively in line and I believe that that will go in relatively smoothly.
Speaker Change: Other thing on price I, just wanted to add Mike within the 80 20 framework, we've been moving prices up in our quad two in quad three and those are very very healthy price increases and so at this point, we feel relatively good about the pricing lever we feel good about the ability to generate.
Speaker Change: The price cost ratio moving up with the aggressive price actions, we've taken thus far this year.
Speaker Change: That's super helpful last one for me then just.
Speaker Change: Based on the comments you seem very confident in the ability to manage margins in the backlog. So just maybe talk about the mechanics, there that whether it's hedging price change orders or whatever it is and how that dynamic plays out. Thanks again.
Speaker Change: Yes. So again, obviously prices are important part of that we are a little bit early on moving in March and so the intention there was to get that in front of the cost impact and then with our projects and backlog we've done a nice job of updating our terms and conditions from what we learned in the Covid crisis and supply chain crisis and so we've got.
Speaker Change: The ability now in projects that are in our backlog to reprice that backlog given some of the macro dynamics and so we're aggressively looking to do change orders on our cost position that got impacted by tariffs for things that are in the backlog and sometimes that's a little bit of a negotiation, but again with our terms and.
Speaker Change: <unk> position, we feel very good about our ability to get that price. Then there is a piece of business that that wouldn't be able to do price or wouldn't be able to do change orders are non project work, that's somewhere in that kind of 4% to six week window and then that's what we're looking for the general price increase to over costs overcome that.
Speaker Change: Tariff impact.
Deane Dray: And our next question will come from Deane Dray with RBC capital markets.
Deane Dray: Thank you and good morning, everyone.
Speaker Change: Good morning Deane.
Speaker Change: To continue this this topic following up on Mikes question. So on.
Speaker Change: On pricing just some of the nuances you parse between aftermarket versus OE, just kind of talk about your pricing power between the two.
Speaker Change: Switching costs.
Speaker Change: For our customer.
Speaker Change: Demand elasticity at what point would they walk away and just because it sounds like you've moved early and you have the ability to reprice backlog, which is fabulous, but just some of the nuances here.
Speaker Change: Aftermarket versus OE and demand elasticity.
Speaker Change: Sure I think on the aftermarket side, it's obviously stickier.
Speaker Change: Typically lead times speed of quoting making sure that we can deliver on time are far more important than price since I feel really good about our ability to get the price within the aftermarket so that impacts our seals business. It's our pump parts. It's a lot of the components within the control valve that have a heavy aftermarket.
Speaker Change: The content, there and so I'd say that part we feel really good the pricing dynamics in the backlog with our change orders for projects, we feel good about our ability to get that done again, a little bit of a negotiation, but I feel confident in our ability to overcome the tariff cost.
Speaker Change: And then I'd just say on the price side with the go forward projects that that'll be the one that we will see what happens as we go forward and so these tariffs globally have put an inflationary pressure on on all costs, it's us and our peer groups and so as our customers start to process the new cost profile.
Speaker Change: Within their project spending and their project budgets, yeah that'll be a discussion obviously, we're getting some pushback with our customers on wanting to share some of those inflationary costs similar to what we're doing with some of our suppliers, but I don't think there is an alternative and so at this point, we feel that these projects continue to move forward.
Speaker Change: Despite the inflationary pressures with their cost profile when we feel like we're in a good position to continue to win the work that we feel we're entitled to win there and I think one other thing just to point out from a from a global perspective.
Number of our projects are coming from bookings outside of the U S and so we continue to use our global footprint.
Speaker Change: To serve our customers so with two thirds of our business outside of outside of the U S. We do view sort of a ring fence around around the tariff concerns.
Speaker Change: I appreciate all the precision and these pricing.
Speaker Change: The pricing strategy and how it's being implemented and my follow up question is more on the M&A side would love an update on Mo gas.
Speaker Change: Integration early read.
Speaker Change: And what kind of contribution you're expecting.
Speaker Change: Sure I'll start and maybe Amy can jump in on a couple of points.
Speaker Change: But we're still excited or we were very excited about the mortgage business.
Speaker Change: Product is highly differentiated it puts us positions us incredibly well within the severe service ball our ball valve market. The bookings in the quarter were a little lighter than we would want and most of that was driven by project bookings and so what we've seen is a bit of a slowdown in project bookings over the last two to three quarters, we have.
Good visibility to project bookings on the forward look and we're pretty excited about the order rate as we look in the back half of the year with that said the margins are at the gross level gross margin levels are accretive to what we see at FCB, we like what we can do there the aftermarket business remains incredibly strong and so we're seeing good.
Speaker Change: MRO work good aftermarket at really high margins.
Speaker Change: And we feel like we can pull through a lot of the mortgage product on the back of the closer of network and certainly our QR network from an integration standpoint. It's it's progressing ahead that fact, we are ahead of pace in terms of some of the cost out actions that we identified early on and we feel confident in our ability to deliver our.
Speaker Change: Synergy target number as well as being accretive to earnings in the first year, Yeah, and the only other thing that I'll point out to what Scott at Scott added on synergies. This is just the acceleration of those synergies and getting up to run rate levels is part of the first half back half story for us from an earnings perspective.
Speaker Change: And so we're seeing that we're seeing that play out with with <unk> being accretive to earnings in the first quarter and we continue to think that that will accelerate over the course of 2025.
Speaker Change: Thank you.
Speaker Change: And we'll take a question from Nathan Jones with Stifel.
Nathan Jones: Good morning, everyone.
Nathan Jones: Okay, and then I guess I guess starting off with a question on the visit visibility into the project pipeline.
Nathan Jones: I think typically.
When you're booking projects as those projects are fairly advanced in so if you were to see a drop off in project orders it probably doesn't happen in the first quarter. It does after the second quarter, even happening in the third quarter of this year that may be a bit further out do you guys have visibility to those projects that might tie into into orders.
Nathan Jones: The flows.
Nathan Jones: 18 months ahead and is that where you would see project push outs, if they were to occur.
Speaker Change: Yeah, I think it's a it's a really good point and again I want to reemphasize, what Amy said a lot of our projects are are outside of the U S and we're well positioned to manufacture that work with our global our global footprint manufacturing presence outside the U S. But.
Speaker Change: To your point on timing, it's a really good one and so when we think about project visibility in the second quarter and even into the third quarter a lot of those projects have already received.
Speaker Change: And they are well down the line of engineering procurement and construction and so on.
Speaker Change: Winding that project pausing that project, we really don't ever see that even in the Covid downturn, you don't see a whole lot of that and so our funnel for Q2 and Q3 would would remain kind of as is and you know obviously, we're competing for that work and we'll put our best foot forward, but we're very confident in that.
Speaker Change: <unk> ability and moving those projects forward.
Speaker Change: The <unk> decisions that could be made in the second quarter or potentially delayed given some of the global environment would impact our bookings in 2026, and maybe even in 2027, but again, we haven't seen that at this point, we typically will get kind of a one year out visibility for these <unk>.
Speaker Change: Large project.
Speaker Change: We'll get a little bit on the commentary from some of our larger customers they'll talk about it in an earnings calls or investor presentations, but it's difficult for us to see that type of visibility beyond kind of a one year no. The one market that is a little bit different would be nuclear we get very very long visibility into our nuclear orders.
Speaker Change: We will typically start to track those projects two years, maybe two and a half years before we would get the order and because of its such a long nature type and I'm talking about really about nuclear power generation. So big traditional nuclear power plants. So we will get strong visibility for up to two years there that funnel is.
Speaker Change: Still incredibly robust and we still feel that we're going to continue to have outsized nuclear bookings as we go forward and those obviously are dependent on governments and energy security and I really don't see those trends changing as we go forward yeah and the other thing that I would just comment on the nuclear final Nathan.
Which is it's comforting in uncertain times is we've had three three quarters in a row over $100 million of nuclear bookings.
Speaker Change: And that does impact the amount of our of our backlog that shipped within the next 12 months. So it starts to provide us visibility into into revenue not just in the current year, but in upcoming years.
Speaker Change: And I think particularly environments in environments like this and it's a nice piece of business to have.
Speaker Change: Okay.
Speaker Change: Excellent thanks, very much for that.
Speaker Change: Second question.
Speaker Change: I guess this is on towers.
Speaker Change: You had $90 million to $100 million.
Speaker Change: Gross unmitigated impact can.
Speaker Change: Can you talk about what you intend to offset with price and what you intend to offset with other.
Speaker Change: Supply chain initiatives on manufacturing initiatives.
Speaker Change: Sure Yeah, I'll, just let me make sure folks understand so its $90 million to $100 million of gross tariff impact.
Speaker Change: Unmitigated and Thats the annualized number.
Speaker Change: Sure.
Speaker Change: So ruben whether in our headquarters here that.
Speaker Change: We watch very carefully because that number has changed a lot over the last month and a half and then what we do is also track the activities towards mitigating that and so obviously price is a big lever. There we think prices could mitigate potentially half of that and then we're really deliberately working through those supply.
Speaker Change: Jane actions to make sure that we're repositioning the supply chain to the lowest tariff impacted country or potentially moving that into the region, where there is no no no tariff impact and then secondly is the repositioning of the manufacturing that I talked about earlier, we feel like with our vast manufacturing network, we've got a bit of.
Speaker Change: Our competitive advantage to move things around the world and reposition them, where we need to.
Speaker Change: So I think that's actually an opportunity in this dynamic time to win a little bit more work and take some market share given our presence in the region and then finally I would just say I wanted to touch on 80, 20, and while it might not be obvious that that would be of help here anytime youre, reducing the complexity in your portfolio. It allows us to focus on.
Speaker Change: On the areas they make the biggest impact and so when we talk about moving supply chain or repositioning some of that assembly, we're really talking about our quad one products and now that's dramatically a much shorter list dramatically less complexity than what we've had in the past and that allows us to move with speed as we are doing.
Speaker Change: Some of this repositioning so we feel very good about our ability to mitigate obviously, we're leveraging trade agreements as well and so there's been a lot of work of just making sure that all of our coding is in the right place and making sure that we can capitalize on those trade agreements and so we feel that the combination of efforts does allow us to.
Speaker Change: To fully mitigate the impact we think the timing could be a little bit mismatched as we work through the quarters.
Speaker Change: But overall for the full year of 2025, and we said this in the prepared remarks, we feel like we can mitigate the full $90 million to $100 million.
Nathan Jones: And Nathan just said just double down on one point with with core or 80, 20, and other sort of benefits from the way we run the business through the <unk> business system, we see playing out over the year. When we reiterated guidance, we're reiterating our margin expansion as well for the full year and so.
We said in February of 100 basis points of operating margin.
Nathan Jones: Expansion year over year, our Q1 operating margin performance was actually 100 basis points better than our full year 2024, and operating margin performance. So we feel like we've got a really strong start to.
Nathan Jones: For the year from that perspective, now what I will say is as we look at tariffs there is a bit of a <unk>.
Nathan Jones: Disparity in terms of our segments that are impacted so a higher proportion of our tariff exposure is actually on the flow control side of the business of outside of the business and on SPD. So as we look at margin expansion playing out over the course of the year, we may see bounce being slightly more pressured than pumps in this area.
Nathan Jones: Yeah.
Nathan Jones: And just a quick clarification, the timing being a bit mismatched would imply that there's a bit of margin pressure in the second quarter and a bit less in the second half.
Nathan Jones: I would I would consider the margin and the margin pressure to be more between the third and fourth quarters. So I think second quarter as we as we look at our backlog on a lot of that.
Nathan Jones: Is gonna be fulfilled with with materials that are in inventory already and so really the second half I think is where we see more pressure coming in in that price mismatch probably occurring more between the third and fourth quarters.
Speaker Change: Thanks, very much for taking my questions.
Andrew: And the next question comes from Andrew opened with Bank of America.
David: This is David.
Andrew: <unk> on for Andrew <unk>.
Andrew: Hum.
Speaker Change: Last quarter, you said the inventory positions at your distributors were at a pretty normal levels wondering if you saw any pre buy activity from your distributors. Maybe ahead of the March price action.
Andrew: Okay.
Andrew: Sure we will talk about our distributors and these would be the stocking distributors that are primarily in the valve business, but we have a little bit of this in pumps and our mechanical seals.
Andrew: It had been under a lot of pressure on inventory management over the last year and a half and so we really didn't see a whole lot of pre buying we know there was a little bit of it with a few of our distributors, but really nothing material in no big boost to kind of the February or March bookings levels through that distribution channel.
Andrew: Understood.
Andrew: Then.
Speaker Change: Do you see any need to add to your capacity as you are seeing these elevated nuclear orders continue.
And maybe.
Speaker Change: You need to add capacity on the on some of the specialized LNG or power generation.
Speaker Change: Projects mature.
Speaker Change: Sure, we're blessed and cursed with a large roofline and so at this point, we don't see any scenario, where we need to add incremental roofline. In fact, we're continuing to to take roofline out of the global network with that said there are a lot of things that we can do to expand capacity.
Speaker Change: Within the sites that we have and so obviously, we've got dedicated nuclear facilities to support the rigid quality plans that are required in the nuclear product space and in those sites. We are looking to expand that capacity, but we can do that with minimal investment it's more through process change in staffing effectively and a lot of that work.
Speaker Change: Really relies more on the front end with your project management and your engineering and so we've got a pretty good view of our forward product demand will ensure that we can continue to increase capacity more through our operational excellence program as part of the upholstery business system, then needing to drive incremental roofline or or.
Speaker Change: Add facilities into the network.
Okay understood. Thank you very much.
Speaker Change: Yes. Thank you.
Speaker Change: And our next question will come from Joe Giordano with TD Cowen.
Joe Giordano: Hey, guys good morning.
Speaker Change: Good morning, Joe.
Joe Giordano: Maybe I'll start.
Joe Giordano: <unk> bookings, obviously, you have a lot of momentum here, how do you square that with some of the actions taken from a policy standpoint, I think recently.
Joe Giordano: I'm, just saying like cutting something like $10 billion in funding funding for clean energy projects spanning carbon capture and hydrogen and some of the stuff that you've been doing very well and at customers that you serve so how do you how do you see that interplay.
Joe Giordano: Sure those would all fall in our de Carbonization line, we continue to see a lot of activity around deep carbonization I would say is it's changing the mix is changing a bit in terms of less focus on kind of the things that were further out like a green hydrogen.
But we're seeing continued support for carbon capture.
Joe Giordano: Europe is a has been a big big proponent of the energy transition type bookings of the de carbonization type bookings, but the U S activity hasnt changed either and so I I think companies are pretty focused on reducing their carbon footprint and ensuring that their assets are running at a.
Joe Giordano: A reasonably clean type level and so we haven't seen any slowdown in our forward funnel. There we have seen some projects come off the list that were never economical or whatever we're going to make a whole lot of sense. So I would say even for U S de carbonization activity, we still think that moves forward.
Joe Giordano: Say, we also have LNG within our de Carbonization Lane and obviously the rhetoric in the United States is now very very promotional around natural gas and around the LNG export side, and so we feel pretty pretty good about the visibility to LNG projects globally, but certainly a kind of a resurgence in.
Joe Giordano: The U S LNG activity.
Joe Giordano: And then second question on just want to understand what's embedded in the guidance from a macro standpoint, I know the slide deck says youre, assuming that kind of general economic conditions stay largely the same but at the same time I guess youre raising prices here. It seems like you've built into somewhat of a contingency on volumes going down.
Joe Giordano: As a result of price.
Joe Giordano: The organic growth is the same despite the higher price component. So like is it fair to say that if macro conditions really do stay the same in your booking like 1112.
Joe Giordano: Their normal circumstances, you'd probably be raising now.
Joe Giordano: So I think we talked a lot about our guidance range internally before before today and I'd I'd start with saying that our strong execution in the first quarter gives us a lot a little bit a lot of confidence in our ability to perform over the course of the full year.
Joe Giordano: So what we factored into our guidance is what we know today so tariff.
Joe Giordano: Tariff climate as it is today inflation as what we know today and demand signals.
Joe Giordano: And that we're seeing through kind of the last several several weeks, we also considered our risks and opportunities.
Joe Giordano: And we feel like we have a very clear path or I should say actually path to delivering on our original guidance and it might help to kind of frame. This within the context of what the low end of the range of what the high end of the range might look like so if we were to deliver at the low end of our range, which still by the.
Joe Giordano: <unk> provides 18% earnings growth year over year for closer that would include and.
Joe Giordano: Some mismatch in in tariff impact and mitigating actions over the course of the year and it might include some level of demand.
Joe Giordano: <unk> destruction.
Joe Giordano: In the back half of the year and delivering at the high end of the range means that we execute well on our on our mitigation actions and we continued the strong book to Bill business that we've seen in the first quarter of the year and into April and we see continued momentum under the slow start business system with both.
Joe Giordano: Both operational excellence and the 80 20 activities I think either way, we're going to see margin expansion.
Joe Giordano: Year over year, and I would say the other wildcard out there is certainly around around FX. The current environment and when I say current I'll say the last week has been very favorable obviously, that's been volatile as well, but the U S. Dollar remaining relatively weak levels in comparison to the first quarter could be.
Joe Giordano: Could be a tailwind as well so just to reiterate what you said. This is we put the guidance out there given everything that we know today. Obviously this is a very dynamic environment.
Joe Giordano: But right now we feel very confident that we can deliver and as a reminder that guidance for 2025 is 18% higher on the low end and 25% higher on the high end, which would be outstanding performance in any operating environment and so we'll monitor the next 90 days here and we will get a chance to talk about <unk>.
Joe Giordano: <unk> at the end of our second quarter, and if things change, we will certainly update the guidance to reflect those changes.
Joe Giordano: Very clear thanks, guys.
Speaker Change: And we have a question from <unk> with Jefferies.
James: Oh. Good morning. This is James filling for series, Thanks for taking the questions.
James: I wanted to understand <unk>, two acute dynamic a little bit more here. So you talked about strong backlog conversion in the quarter that is kind of impacting felt like spread between <unk> and <unk>. So can you talk about what drove the strong conversion I think you talked about there wasn't really a pre buy so I just wanted to understand why there was such a strong conversion rate.
James: Sure.
James: Sure so it really.
James: Conversion and backlog was really around things that were already in backlog entering the year in our in our more engineered business. So just continuing to execute well from an operational excellence perspective, hitting milestones and delivering kind of what we say we're going to do for for our customers are in.
James: Some cases, even even over delivering in those instances and I think that this is really just an indication that operational excellence is in is in a really good place and with it within our platforms and that's really that conversion that we saw in the first quarter.
James: Got it thanks for the color and I guess I wanted to touch on the margin side, a little bit more so I think going into the year. I think you were expecting <unk> to show will be better margin expansion compared to SPD.
James: But it seems like Thats PD performed better in the quarter. So how should we think about the merchant expansion in each segment.
James: Sure. So F. P. D has been on a on a really great run that the results that we posted.
James: In the first quarter of this year are the best that we've seen since that that segment has been in existence as it is today. So we really can't say enough about about the performance from that segment and we think theres still more gas in the tank there so and we're just starting to see that the and the.
James: The benefits of 80 20 come through the system. There. They continue to focus on operating and operational excellence under the flows to our business system.
James: And and delivering them on the benefits of that as well they've also seen a strong a strong mix benefit in the numbers with really the focus on growing the aftermarket and investing in the right type of engineered to order projects and so we think theres still.
James: More room above the levels that we saw in Q1.
James: And and we are at our long term target levels for 2027, and we're going to continue to try and surpass those and determine what we think is the art of the possible in terms of margin performance in F. P D.
James: Turning to FCB and we have made important structural changes within FCB to bring to bring our margins up and under normal circumstances, we do or we would see at CD margins expanding more than F. P. D. In the current year and just to kind of outline what those what those are it's really at.
James: Round around footprint decisions that were made and executed in <unk> and in 2024, it's around the <unk> acquisition, which already is accretive at the gross margin margin level and it's about really selective bidding in margins and backlog that we saw coming into.
James: Our 2025, the headwinds that we face are what I referenced in one of the earlier questions, which is just that and that the tariff impact and exposure is greater on the FCB side of the business. That's in part because they've done a nice job shifting their supply chain to low cost countries.
James: And also manufacture more in low cost countries and in certain instances and then F. P D and so as we work our way through the course of a course of 2025 and the risk around the mismatch of the timing between mitigating actions.
James: And in our order delivery is greater on that side of the business and then I want to finish that work. So long answer to a simple question by saying and just to reiterate we feel very good about overall margin expansion for poor flow serve or at a 100 basis points or better.
James: In 2025, and we're going to continue to deliver that knowing that is an incredibly important to our investors.
Speaker Change: Great. Thanks for the color.
Speaker Change: Thank you and that does conclude the question and answer session I'll now turn the call back over to Brian <unk> for any additional or closing remarks.
Brian Email: Great. Thank you to everyone for joining the call today, we look forward to seeing many of you at upcoming conferences and then again when we report Q2 earnings. If you have any questions. Following the call. Please reach out to the Investor Relations team will be happy to connect and with that we appreciate the time have a great day.
Brian Email: Thank you that does conclude today's conference. We do thank you for your participation and have an excellent day.