Earnings call: Flowserve announced a nearly 20% increase in revenue

  • Investing.com
  • Stock Market News
Earnings call: Flowserve announced a nearly 20% increase in revenue
Credit: © Reuters.

Flowserve Corporation (NYSE: FLS ), a leading provider of flow control products and services, has reported significant growth in its fourth quarter and full year 2023 financial results. The company announced a nearly 20% increase in year-over-year revenue and a substantial rise in adjusted earnings per share, which soared by over 90%.

With bookings surpassing $4.25 billion and a year-end backlog of $2.7 billion, Flowserve is on a firm path to achieve its financial goals for 2027. The company's strong performance is attributed to robust aftermarket bookings and a strategic focus on diversification, decarbonization, and digitization. Looking ahead to 2024, Flowserve expects continued revenue growth and has announced plans for capital allocation, including a dividend increase and share repurchase.

Key Takeaways

  • Flowserve's revenue grew nearly 20% year-over-year, with full year revenues exceeding $4.3 billion.
  • Adjusted earnings per share for the full year was $2.10, marking a 91% increase from the previous year.
  • Operating cash flow improved by over $360 million compared to 2022.
  • The company reported a strong year-end backlog of $2.7 billion, with bookings exceeding $4.25 billion.
  • Adjusted operating margin for Q4 stood at 10.5%, with full year adjusted operating margin increasing to 9.5%.
  • Flowserve anticipates a 4-6% revenue growth in 2024, with adjusted EPS projected between $2.40 to $2.60.
  • The company's 3D strategy focuses on growth through diversification, decarbonization, and digitization.
  • Flowserve is optimistic about LNG opportunities globally, particularly outside the U.S.

Company Outlook

  • Flowserve expects to continue its growth trajectory in 2024, with a revenue increase of 4-6%.
  • The adjusted EPS for 2024 is forecasted to be between $2.40 and $2.60.
  • The company plans to focus on capital allocation, including a 5% dividend increase and a share repurchase capacity of $300 million.

Bearish Highlights

  • Challenges such as labor inflation and project mix will be closely monitored in 2024.
  • A mix shift towards projects may impact margins in the FCD segment in 2024.

Bullish Highlights

  • Aftermarket bookings remained strong, generating over $500 million for the ninth consecutive quarter.
  • The company is well positioned with a solid project pipeline, especially in oil and gas and decarbonization sectors.
  • A promising outlook for LNG projects, with substantial bookings in regions outside the U.S.

Misses

  • Despite strong performance, the company is still working towards a 25-27% working capital target.
  • Inventory reduction efforts are ongoing, with further progress expected in 2024.

Q&A Highlights

  • The company discussed margin expansion above 100 basis points due to sales volume growth.
  • Price-cost dynamics are expected to be neutral to slightly positive.
  • Flowserve emphasized selectivity in project pursuits to ensure margin sustainability.
  • The company is expanding its cryogenic portfolio and developing a full cryogenic pump offering.

Flowserve Corporation's robust financial performance in the fourth quarter and full year of 2023 sets a strong foundation for continued success in the upcoming years. With a strategic focus on capital allocation and a commitment to operational excellence, Flowserve is poised to capitalize on market opportunities and enhance shareholder value. The company's progress toward its long-term financial targets reflects its resilience and adaptability in a dynamic global market.

InvestingPro Insights

Flowserve Corporation's recent financial results showcase a company on the rise, with a strong performance in the last twelve months as of Q3 2023. As investors look to gauge the stock's potential, InvestingPro data and tips provide a deeper dive into the company's financial health and stock behavior.

InvestingPro Data reveals a market capitalization of $5.55 billion, indicating a substantial presence in the industry. The company's P/E ratio stands at an adjusted 17.97 for the same period, suggesting that the stock may be trading at a reasonable valuation relative to its near-term earnings growth. Furthermore, with a PEG ratio of just 0.12, Flowserve's growth rate appears to be quite favorable when factored against its earnings.

The robust revenue growth of nearly 20% in the last twelve months as of Q3 2023, combined with a gross profit margin of 29.88%, underscores the company's strong operational performance. Additionally, the company's stock is trading near its 52-week high, with a price that is 97.48% of this peak, reflecting positive investor sentiment.

Among the InvestingPro Tips, two particularly stand out for Flowserve:

1. The company is noted for trading at a low P/E ratio relative to near-term earnings growth, which could be attractive to value-oriented investors.

2. Flowserve has maintained dividend payments for 17 consecutive years, which may appeal to those seeking steady income streams from their investments.

For those interested in a more comprehensive analysis, InvestingPro offers additional tips that could further inform investment decisions. With a total of 8 InvestingPro Tips available, investors can utilize the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, opening the door to a wealth of expert insights and data-driven investment strategies.

Full transcript - Flowserve Corp (FLS) Q4 2023:

Operator: Good day and welcome to the Fourth Quarter 2023 Flowserve Corporation Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to J Roueche, Vice President, Investor Relations and Treasurer. Please go ahead.

John Roueche: Thank you, Katie, and good morning, everybody. We appreciate you joining our call today to discuss Flowserve’s fourth quarter and full year 2023 financial results. On the call with me today are Scott Rowe, Flowserve’s President and Chief Executive Officer; and Amy Schwetz, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call for questions. As a reminder, this event is being webcast and an audio replay will be available. Please note that our earnings materials do and this call will include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations and other information available to management as of February 21, 2024, and they involve risks and uncertainties, many of which are beyond the company’s control. We encourage you to review our safe harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results, both of which are included in our press release and earnings presentation and are accessible on our website in the Investors section. I would now like to turn the call over to Scott Rowe, Flowserve’s President and Chief Executive Officer, for his prepared comments.

Scott Rowe: Thanks, Jen, and good morning, everyone. Flowserve’s fourth quarter performance marked a strong finish to a very solid year of improved execution and consistent progress. Our financial and operating performance throughout 2023 supported raising our full year revenue and adjusted EPS guidance 3 different times as we significantly exceeded our original expectations. For the full year, we achieved year-over-year revenue growth of nearly 20%, driven by enhanced backlog conversion and operational improvement while delivering higher adjusted gross and operating margins. As a result, our adjusted earnings per share increased by over 90%, and our operating cash flow improved by over $360 million compared to 2022. Bookings exceeded $4.25 billion for just the second time since 2016, which supported our strong year-end backlog of $2.7 billion. Most importantly, Flowserve entered 2024 well positioned to drive continued momentum and success, and we are well on our way towards achieving our 2027 financial targets that were communicated last September. I want to sincerely thank all of our associates around the world for their efforts and dedication throughout the year. Our commitment to serving our customers and their passion for our business are critical to driving exceptional financial results. I’m very pleased with our results in the fourth quarter, including our adjusted earnings per share of $0.68, which brought our full year adjusted EPS to $2.10. We are seeing the impact of our improved operating model higher backlog conversion and significantly better financial performance. These improvements drove fourth quarter sales of nearly $1.2 billion and expanded our sequential adjusted operating margins to 10.5%. We also delivered $195 million of operating cash flow during the quarter, which was driven primarily by our earnings and strong working capital performance. This was a clear highlight for us as we are beginning to deliver improvements in our inventory management as our supply chain continues to normalize and lead times shorten. Our markets remain supportive as we delivered over $1 billion in bookings for the eighth consecutive quarter. While our full year 2023 book-to-bill was just below 1.0x, our backlog remains at a very healthy $2.7 billion as we entered 2024. Let me now provide some additional color on our fourth quarter bookings. General market activity remains high, and we generated bookings of $1.04 billion in the quarter. We achieved this level due to the success of our 3D growth strategy, coupled with continued high levels of aftermarket and MRO activity that we captured around the world despite the lack of a major project award. We did obtain a significant number of smaller awards in the $5 million to $10 million range which together totaled roughly $100 million across all industries and regions. Our largest project award was only $9 million in the fourth quarter. We remain disciplined on our project pricing approach and margin expectations. While this strategy may result in some lost incremental awards, we are confident that we will ultimately create more value with this selective bidding approach. Our 3D bookings represented roughly 30% of our total awards during the quarter, where we saw particular strength with LNG, nuclear and water awards. While some of the larger projects we previously expected to be awarded during the fourth quarter were delayed, they remain viable and healthy opportunities for Flowserve in 2024. For full year 2023, our bookings were nearly $4.3 billion. Turning to our aftermarket business. Most of our customers’ facilities continue to operate with high utilization rates. While their focus remains on reliability, efficiency and emissions reductions, we are positioned well to capture the aftermarket and MRO business associated with this type of work. For the ninth consecutive quarter, we generated over $500 million in aftermarket bookings. For the full year, our aftermarket bookings were nearly $2.3 billion, which were up 5% year-over-year. More importantly, we see the elevated demand for our higher-margin quicker turn aftermarket offerings continuing into 2024. Our overall market outlook for 2024 is very encouraging given the project opportunities and aftermarket trends we are seeing today. We believe the themes of energy security and decarbonization will continue to drive global spending for years to come. At year-end, our total project funnel has increased 13% versus prior year enabling us to remain disciplined and selective in the new project work we pursue. Our oil and gas funnel is up 25% year-over-year, driven primarily by mid and downstream activity in the Middle East, where we’re we are well positioned to capitalize on the significant investment in the region. Furthermore, our energy transition project funnel also increased nearly 25% year-over-year driven by decarbonization activities in the pursuit of clean energy. We believe we can secure enhanced project bookings in 2024, given the visibility that we have in our forward funnel. Beyond projects, we anticipate our aftermarket and MRO business to remain at elevated levels and support our growth into 2024 and beyond. We continue to see healthy activity levels despite some of the softening consumer trends and economic uncertainty that are highly publicized. Additionally, we are seeing signs of stability in areas that were depressed in 2023 like European chemicals. Our global install base is incredibly large and we have further opportunity to improve our aftermarket capture rates as we go forward. Overall, we believe that our global network of quick response centers combined with our commitment to serve our customers with speed and high levels of service will allow us to grow our aftermarket franchise further in 2024. I will now turn the call over to Amy to address our fourth quarter and full year financial results in greater detail.

Amy Schwetz: Thank you, Scott, and good morning, everyone. Let me also start by saying how pleased I am with our fourth quarter results, which demonstrated continued operational momentum, disciplined cost management and strong cash generation. For the fourth quarter, we achieved our best quarterly sales level since 2015, an adjusted operating margin of 10.5%, our highest quarter of the year and $0.68 of adjusted earnings per share. Our operating cash flow was also strong at $195 million in the quarter, representing a year-over-year improvement of $125 million. These results continued our recent trend of sequential quarterly improvement across many areas, which led to our outstanding full year 2023 results. Starting with other details in the quarter. Our reported earnings per share were $0.47, which included $0.21 of net adjusted expenses, primarily below the line FX impacts and realignment charges. Improved operating performance drove a 12% increase in revenues over prior year, comprised of FPDs and FCD’s growth of 13% and 11%, respectively. We also generated strong top line growth in both original equipment and aftermarket, with revenue increases of 15% and 9%, respectively. Many of our regions contributed to the double-digit sales growth as well, with notable year-over-year improvement in the Middle East and Africa, North America and Europe, of 27%, 14% and 13% respectively. Shifting to margins. We generated adjusted gross margins of 29.8% during the quarter, a 100 basis point increase compared to the prior year’s fourth quarter despite higher performance-based compensation expense and the modest mix shift to original equipment. The margin improvement was driven by increased sales leverage, benefits from our new operating model and continued traction with operational excellence initiatives and an improving supply chain environment. At a segment level, we are particularly pleased to see FCD realize its highest quarterly adjusted gross margins since 2019. At 32.2%, representing a 310 basis point year-over-year improvement. On a reported basis, fourth quarter consolidated gross margins increased 70 basis points to 29.1%. Despite the net increase in realignment and asset write-downs of $4.1 million, versus prior year. Fourth quarter adjusted SG&A increased $39 million to $230 million compared to last year. The increase was primarily due to $13 million in higher year-over-year performance-based incentive compensation and an increase in bad debt of $6 million as well as some benefits in 2022 that did not recur this year, such as the $9 million legal settlement and a small gain on an asset sale of $4 million. Despite these somewhat discrete items, adjusted SG&A as a percent of sales was 19.7%, driven by solid operating leverage during the quarter. On a reported basis, fourth quarter SG&A increased year-over-year by $41 million to $235 million. In addition to the items just mentioned, our reported amount also includes a net $2 million increase in adjusted items, primarily from realignment expenses. Adjusted operating margin in the quarter was 10.5%, just 30 basis points lower compared to prior year. While our adjusted gross margins this quarter were essentially equivalent to those of the 2023 third quarter, I am very pleased that the sequential adjusted operating margins expanded by 180 basis points for a nearly 40% sequential incremental. On a reported basis, fourth quarter operating margins decreased 70 basis points year-over-year to 9.4%. Due to higher performance-based incentive compensation, the onetime discrete SG&A items previously discussed and a $6 million increase in adjusted items compared to the prior year, again primarily related to the realignment actions. Our fourth quarter adjusted tax rate of 7.8% was notably lower than expected, primarily due to the release of valuation allowance on certain net foreign deferred tax assets. Our reported rate of 5.6% reflects the items just mentioned as well as the tax impact associated with realignment charges, which we excluded from our adjusted results. Turning to our full year results. We delivered adjusted earnings per share of $2.10, a 91% increase year-over-year. The performance exceeded our latest revised guidance range from October of $1.95 to $2.05 and with nearly 30% above the midpoint of our initial 2023 target range we provided this time a year ago. Our full year 2023 revenues were over $4.3 billion, up nearly 20% compared to the prior year as our backlog conversion cadence significantly improved with our operational performance. On this sales level, we generated adjusted gross margins of 30.1% for the year, modestly exceeding our prior expectations. Importantly, we remain confident in our ability to expand margins further by accelerating our operational excellence initiatives and ongoing product management of our portfolio. Adjusted SG&A as a percentage of sales was 20.9% for the year, representing our lowest level since 2015. This performance was driven by our focus on cost containment, including the benefits from our recent cost-out program and organizational redesign as well as increasing top line leverage. While we are pleased with the progress we have made to date, we know that the work on this front is never done, and we will remain focused on driving even better results. Our full year adjusted operating margin was 9.5%, a meaningful increase of 330 basis points over the prior year. Both FCD and FPD delivered solid 2023 performance, keeping pace with significant increases in adjusted segment operating margin of roughly 320 and 330 basis points, respectively, to 14% and 12.4%. Looking ahead, we are well positioned towards our longer-term 2027 consolidated adjusted operating margin target of 14% to 16% that we shared at our Analyst Day in September. Our adjusted tax rate of 15.1% for the full year finished below our previous expectations, primarily driven by the release of valuation allowances on specific foreign net deferred tax assets as we believe those benefits will now be realized based on our improving financial results and help mitigate future cash taxes. Turning now to cash flow. We delivered outstanding full year operating cash flow of $326 million, which represented a nearly $366 million year-over-year improvement. In addition to our higher earnings, I’m also very pleased that we improved cash from working capital by nearly $240 million, and our cash conversion cycle decreased by roughly 10 days compared to 2022. During the fourth quarter, we generated operating cash flow of $195 million, an increase of $125 million compared to the prior year. The improvement can largely be attributed to our strong working capital performance. Accounts receivable was a modest source of cash this quarter despite our increased revenues, but represented a $77 million improvement compared to the prior year. Collections results have been robust all year. But notably are evidenced by the nearly 7-day reduction in our day sales outstanding year-over-year in the fourth quarter. Inventory also contributed to working capital progress as we’ve reduced the cash used by over $50 million for both the fourth quarter and the full year compared to the respective periods of 2022. As a percent of sales, we improved our year-end primary working capital by approximately 450 basis points to 27.9% and improved sequentially by 260 basis points as well. We made great strides towards reducing our working capital and investment to our 25% to 27% long-term target and it will remain a major focus area for us going forward. Capital expenditures were $20 million during the quarter, bringing this year’s free cash flow to $175 million. This year-over-year improvement exceeds $100 million and resulted in a free cash flow to adjusted net income conversion of 194%. Other significant uses of cash in the fourth quarter included $26 million for dividends and a $10 million term loan reduction. Turning to our 2024 outlook. We expect to continue building on our operating momentum to deliver full year revenue growth of 4% to 6%, with adjusted earnings per share between $2.40 to $2.60, both consistent with the qualitative guidance we provided at our September Analyst Day. At the midpoint, our 2024 adjusted earnings guidance represents a roughly 20% increase over last year. As Scott mentioned, our markets continue to remain active, and we expect to generate a full year book-to-bill ratio over 1x, building backlog to spur multiyear revenue growth. We also expect net interest expense in the range of $60 million to $65 million and an adjusted tax rate of approximately 20%. Our adjusted targets exclude expected realignment expenses of approximately $30 million as well as other potential items that may occur during the year, such as below-the-line foreign currency effects and the impact of other discrete items. Including the potential realignment spending, we expect our reported EPS to be in the range of $2.25 to $2.45 per share. Similar to last year, we will work to minimize top line reduction as we move from the sequentially strong last quarter of the year to the first quarter. That said, we would anticipate our general trend of seasonality and earnings will continue in 2024, with the first quarter being our lowest earnings quarter of the year and the fourth quarter being the strongest. We intend to further drive value creation through our capital allocation approach. As we weigh opportunities to allocate capital, we are guided by our enduring framework to deploy excess cash to the highest long-term return while remaining impartial as to how value is created. Our Board has authorized a 5% increase to our dividend to $0.21 per share. Additionally, the Board also replenished our authorized share repurchase capacity to $300 million. As we indicated at the Analyst Day, we view share repurchases to offset equity compensation as a commitment and with the increased capacity of the new plan, we also can act opportunistically. That said, we believe there are ample opportunities to invest in the business, both through internal programs and inorganic growth. We expect capital expenditures between $75 million and $85 million this year, and we are well positioned to pursue M&A opportunities to further expand our portfolio of flow control offerings to better support and accelerate our 3D strategy. We are most interested in targets that provide the opportunity to leverage our scale and that can be effectively integrated with our broader business. Financial discipline and economic returns are table stakes. So the returns on any acquisition would be in excess of our average cost of capital as well as the margin and cash EPS accretive. Through it all, our capital allocation approach is designed to maintain our investment-grade rating, and we intend to reduce our term loan by $60 million this year. I am proud of the strong foundation we established during 2023 and feel confident that we can drive continued margin and earnings per share growth, while deploying capital to deliver long-term shareholder value as we progress towards our longer-term targets. I fully expect 2024 to be a great start on that journey. Let me now return the call to Scott.

Scott Rowe: Great. Thank you, Amy. Let me now offer a few comments on our 3D strategy. which, as we discussed at our September Analyst Day, is directly aligned with the market environment that we see today and in the future. The strategy is intended to drive accelerated growth for years to come. While we are well suited to serve our customer base today, we are continuing to invest in product and service offerings, including through potential inorganic opportunities that further build our portfolio to support diverse markets in the new emerging sources of energy. Let me start with Diversified where our bookings remain very healthy in 2023 as we continue to apply our portfolio into served end markets that present an above-average growth profile. Our vacuum pump products are a great example of our efforts and represent a significant component of the diversification pillar. Our focus to grow our vacuum products in general industrial applications has delivered outsized growth over the last several years. In the fourth quarter, we were selected to supply dry vacuum pumps for a state-of-the-art marine solvents production facility in Europe that will support the circular economy. The site will convert biomass waste into 1,000 metric tons of non-toxic solvents annually to be utilized in pharmaceuticals, agrochemicals, electronics and other applications. Moving to decarbonize. We produced another quarter of strong bookings led by nuclear and LNG awards. We remain excited about the nuclear outlook as countries around the globe are focused on providing clean and reliable energy within their borders. We continue to be very optimistic on the nuclear outlook as countries begin to develop investment plans that have nuclear energy output tripling by 2050. Our strong portfolio of nuclear pumps, valves and seals are well positioned to meet this growing demand, including life extensions on existing assets and the building of new nuclear power facilities in Asia and Europe. New energy applications are another key driver behind our decarbonized initiative. Flowserve was recently selected to supply our specialty ball valves to support the production of liquid green hydrogen in the United States. This project is expected to produce nearly 11,000 tons of hydrogen to enable operations for one of the world’s largest e-commerce companies. Lastly, on digitize. We believe our ability to digitize our solutions and leverage our large installed base and aftermarket capabilities will enable Flowserve to be better equipped to provide true solutions for our customers. We believe our offering is at an inflection point of growth, and we have significant visibility to new installations. We now have over 80 customer locations using Red Raven (NASDAQ: RAVN ) technology with almost 2,100 assets instrumented. We remain committed to adding value to our customers with this digital offering by instrumenting pumps and valves to monitor, predict and ultimately better optimize the full flow loop. Flowserve have recently partnered with three European-based petrochemical facilities to increase reliability and efficiency with our Red Raven technology. We are pleased to continue expanding our IoT presence in petrochemicals, an industry where we are seeing an increasing level of acceptance, providing us with an opportunity to offer more of our solutions portfolio and capabilities to help solve our customers’ toughest flow control challenges. In conclusion, I’m extremely pleased with our progress in 2023. The new organization design is driving enhanced execution, improved accountability and is allowing us to operate with speed. This new design better supports our 3D strategy and will allow Flowserve to further our advantage in securing the market opportunities in front of us. I’m confident in our ability to maintain the momentum created in 2023 and continue driving improvements in 2024 and beyond. The trajectory to our longer-term financial goals outlined at our Analyst Day begins with the delivery of our 2024 targets, including 4% to 6% revenue growth, more than 100 basis points adjusted operating margin improvement and roughly 20% adjusted EPS growth at the midpoint of our guidance. Finally, I am pleased that our efforts and strategy continue to be recognized by third-party organizations. In recent weeks, Flowserve was named by the Newsweek as one of America’s most responsible companies and we are named in Forbes list of most successful mid-cap companies in 2024. The financial and operational performance we delivered last year creates a solid foundation to build upon, and I am excited about the opportunities for Flowserve in 2024. We have substantially improved our ability to execute and serve our customers, and I’m confident that this progress will carry into 2024 as we expect to deliver another significant year of improved financial results. We are fully focused this year on profitably converting our near-record $2.7 billion backlog, continuing our pursuit of outsized growth driven by our 3D strategy, and driving higher operating margins through further operational improvements. We remain committed to driving long-term value for our associates, customers and shareholders. Operator, this concludes our prepared remarks and we would now like to open the call to questions.

Operator: Thank you. [Operator Instructions] We will go first to Nathan Jones with Stifel.

Nathan Jones: Good morning, everyone.

Scott Rowe: Hello, Nathan.

Nathan Jones: I’m going to start with the questions on the bookings outlook. I think, Amy, in your prepared remarks, you talked about a book-to-bill above 1. Scott, you talked about growth in the pipeline. I think the book-to-bill above 1 kind of implies mid to high single-digit bookings growth. So – just any more color you can give us on how that splits out between projects and aftermarket? What kind of projects are in the pipeline and the confidence that those will convert to orders this year?

Scott Rowe: Sure. Yes. It’s a really good question, Nathan. Let me start with aftermarket and then I’ll go to kind of traditional end markets, and I’ll touch on projects as well. On the aftermarket side, we saw tremendous growth in 2023. We delivered about 5% for the full Flowserve and we expect that to continue. And so when we look at utilization rates and we look at kind of what’s happening with the customer installations, we see that, that aftermarket work will continue as we go forward. And then secondly, we believe there’s an ability to drive our capture rate up. We’re – we don’t disclose what that rate is. But what I’ll say is we know we have opportunities to do better there. And in the Analyst Day, we outlined some of those opportunities, both on the pump side and the valve side. And so we believe we’ve got kind of market share or capture rate opportunities on top of what we’ll say is a very constructive environment for our aftermarket business. So we see something similar to 2023 in terms of growing that side of the business. And then like the Analyst Day or within the Analyst Day, we talked about our traditional end markets, and we showed kind of some like more GDP-type results at this 3% to 5% growth for those end markets. And again, when we look at our model, nothing has changed there. And so we see reasonably good growth on the traditional end markets across the board. And then where we see really exciting growth is in the new energy and the decarbonization side. And so that’s where we see that outsized growth above that kind of 3% to 5%. And we had a really good year in 2023 across all aspects of our business in terms of bookings growth with the exception of large projects. And so when we look at our project funnel, what we see is the project funnel overall is up 13%. Our oil and gas funnel is up 25%, and that decarbonization of new energy is up 25%. And so that gives us a lot of confidence on our project outlook and making sure that we can acquire and win awards that makes sense on our margins and value creation. And so I’d say, overall, we feel really good about where we are in terms of the overall market and the outlook. And I think we can – at this point, we believe that we can deliver certainly above 1.0 on our book-to-bill and drive to that 5% growth target that we put out in the Analyst Day.

Nathan Jones: One follow-up on orders and specifically, the oil and gas pipeline being up 25%. That’s obviously still your biggest end market. And so that’s 1 that could move the needle. And probably where the large projects are as well. Does this above 1.0 include the conversion of any large projects? Or would those be kind of gravy on top and what’s your confidence that they actually get awarded in ‘24.

Scott Rowe: Yes. The project market in oil and gas has stacked up pretty substantially. It’s primarily delivered – or primarily in the Middle East. And I was there 3 weeks ago – and quite frankly, I was overwhelmed with the amount of work that’s out there and the spending that’s happening. Now obviously, things could change that – but I would say with Saudi’s 2030 vision with what we see in the rest of the region across countries like the UAE, Kuwait, Qatar, Oman, the activity is substantial. And so to your question directly, there’s a long list of large projects out there. If we get two or three of those, that would be gravy to compare to what we’re talking about, but I would say there are a couple of those projects that are kind of more moderate size that are embedded in our growth projections. But again, we feel good about it. We’ve been very selective, specifically in 2023 in terms of what we want to win. We’ve been very disciplined in that approach. And I feel really good that we’re going to start to win some work, but when work that makes sense from a margin perspective and value creation perspective.

Nathan Jones: Great. Thanks very much for taking the questions.

Operator: Thank you. We will go next to Mike Halloran with Baird.

Mike Halloran: Yes, thank you. Good morning, everyone.

Scott Rowe: Good morning.

Mike Halloran: Maybe we just follow-up on the comment you just made there. Certainly, understand the diligence behind project selection and where you want to win and focus on the margins. But when you take a step back, how would you describe the overall competitive landscape right now, given the amount of opportunity out there, you see a little bit more diligence from some of the competitor base or just a little bit more logical pricing mechanisms? Or is it still pretty project by project? Any thought on that side?

Scott Rowe: Sure. If we compare it to – let’s go to 2 years ago when folks were very, very hungry for work. The environment is substantially better than that. But what I’ll say is the project environment is always attractive. Everybody wants to bid and participate in it. And so it remains somewhat challenging. And so through our selected bidding approach, what we’re looking at is customers we know we can work with, customers where we know that we can deliver the margin expectations that we signed up for in the bidding phase. And then we’re also looking for making sure that we can get the aftermarket associated with the work there. And so I think that’s probably the biggest change for us is really getting a more holistic look at what we wanted to work or what we want to work on geographically, but then also with the customers in supporting that aftermarket. And then when we think about the competitive landscape, everybody is substantially fuller in terms of capacity than what we saw 2 years ago. We are seeing discipline improve pretty substantially, but every now and then, we’ll get a surprise by somebody that doesn’t kind of stay in that disciplined approach. And we’ll just accept that and move on and make sure that we can win work that’s more suitable to the margin expectations that we deserve.

Mike Halloran: Great. Makes sense. And then good to see the cash generation this quarter. Could you maybe talk to the ‘24 expectations that layer it as well usage of that cash, the buyback authorization [indiscernible] certainly here in these remarks around it. Is there any more intent there to be opportunistic? And how do you see the M&A landscape with the cash generation?

Amy Schwetz: Sure. So I’d start with our expectations continue to continue to generate nice levels of cash as we move into 2024. At the Analyst Day, we talked about kind of a guiding principal between 80% and 100% free cash flow conversion, I think we’ll be at the low end or slightly below that in 2024, just given some of the realignment activities that we expect to continue to occur. In terms of capital allocation, I think that what we wanted to do with this most recent action with the Board is to really just increase the opportunity set that we have out there modest dividend increase, acknowledging that we had not had an increase in our dividend level since early in 2020. And then again, at the Analyst Day, we had recommitted to the practice of share buybacks to offset equity dilution. We’ve not done that in the last couple of years. So we want the opportunity to be able to do that. So that’s probably a little bit of catch-up this year. I will say, overall, I think that our bias, which needs to be tested each time we have the opportunity is to invest those dollars either in internal growth or inorganic growth to boost really our top line, find opportunities that are accretive to margins and EPS and ultimately grow earnings for our shareholders. But I think that with the actions the Board took this year, we have an opportunity to have a full suite of options available to us as we make our way into 2024.

Mike Halloran: Great. Thanks, Scott. Thanks, Amy.

Scott Rowe: Thank you.

Operator: We will go next to Andrew Obin with Bank of America (NYSE: BAC ).

Sabrina Abrams: Hey. Good morning. You have Sabrina Abrams on for Andrew.

Amy Schwetz: Hi Sabrina.

Sabrina Abrams: So, some of your competitors have talked about seeing 100 bps to 200 bps of better margin backlog relative to what’s shipping through the P&L today. Is that a fair framework for what Flowserve is shipping in 2024 relative to its P&L?

Amy Schwetz: I would say we definitely see improvement in the pricing of our backlog, and some of that is obviously dependent on mix that you currently have in our backlog. But I think that we see that margin in backlog as a real tailwind for us going into 2024.

Sabrina Abrams: Got it. And as a follow-up, I guess I am thinking about the different components of the margins. So, you have better pricing in the backlog. There is the mix benefit from aftermarket outgrowing OE and some incremental benefit from the restructuring program. So, if you could talk about maybe the different components, the good guys and bad guys and the margin bridge for 2024. Just want to understand the components of the 100 bps of expansion that you guys are guiding to?

Amy Schwetz: Sure. So, I will start by saying we are confident in our ability to expand margins by the 100 basis points or more. And as we think about our guidance range, I would say our ability to move towards the high end of that range would likely mean margin expansion above that 100 basis points versus volume growth, given that we saw sales volume growth of nearly 20% in 2023. So, where we are at in terms of puts and takes, neutral from a – to a slightly positive on price-cost from a material inflation standpoint, and you have already touched on the margin in backlog, which we see as a positive. And we do have the structural cost savings from both the org redesign that we put in place and the activities that are taking shape with respect to op excellence. In terms of what’s working against us in 2024, I would start with labor inflation is something that will begin to take hold kind of late in the first quarter and really start to show up in the second quarter of the year. And then although we do have a nice backlog of aftermarket mix, I think the mix of project work is going to be something that we will be monitoring and watching closely in terms of margin expectations in 2024. And I would start with what Scott has described as a large funnel of FPD large project work that we will have available for us in 2024. And although those will be at margins better than what we saw – than what we saw kind of 18 months, 24 months, 36 months ago, and those are still lower than our aftermarket more run rate work. And secondarily, on the FCD slide, that backlog is actually right now skewed more towards project work or OE work than aftermarket. That backlog is about 300 basis points more OE this year at this time than it was last year. So, that’s the other piece of project mix that we are looking at.

Sabrina Abrams: Thank you.

Operator: Thank you. We will go next to Joe Giordano with TD Cowen.

Joe Giordano: Good morning guys.

Scott Rowe: Hey Joe. Good morning.

Joe Giordano: Hey. On LNG, obviously, a lot going on with what the President has been saying about LNG export and things like that. Is that globally fungible to you guys? Like do you care where terminals are built? Like if we do less here, or is it just going to have to be somewhere else and you will be there?

Scott Rowe: Yes. I would say our LNG work is more outside of the U.S. than in the U.S. And so we have got substantial bookings and opportunities in the Middle East. We have got some work on the books for Latin America, Africa. We have got a round two in Canada that we expect. And so I think we still feel good about the outlook of LNG. I won’t get into the politics of this, but we think natural gas is an incredible transition source of energy, and we believe it’s going to be a part of the mix for a long time to come. I think the U.S. exporting permit hold will potentially have an impact on our kind of 2025 business, but 2024 work in the U.S. has already been funded and already been approved. And so it won’t have an impact on what we see in 2024. And we will continue to migrate more of our products and services into cryogenic applications to support LNG because we are big believers in this over the next 10 years to 15 years.

Joe Giordano: Just on that point on cryo, obviously, the land acquisition didn’t work out. You bought technology – you bought R&D from Chart – like where are you with cryo kind of pumping applications? Is there more you need to do maybe an update there? And kind of related to that is, on your 3D, is there like fundamentally – are margins basically the same there as in more established markets for you guys now, or is that a gap you still need to be closed? Thanks.

Scott Rowe: Yes. I will answer that one first because it’s easy. The 3D and certainly, the energy transition margin expectations are basically in line with the rest of the portfolio. And then back to cryogenic applications, I would say the bow portfolio is more rounded out than the pumps at this point. And so we have got control valves. We have isolation valves that can all do cryogenic, both LNG and hydrogen. There are opportunities, though, to grow that pretty substantially. And what we liked about Velan is they were better positioned with some of their technology and products than we were. And so continued M&A work on expanding that cryogenic portfolio in valves will continue to happen in 2024 and beyond. And then on the pumps side, we have got kind of two things. The acquisition that we did with Chart was really around hydrogen distribution, but we can take that technology and know-how and imply it into LNG and cryogenic applications. And so we are in the very late stages of developing a full cryogenic pump offering. And that, what we really like about that is it can be used for liquefaction transportation and into the re-gas application. And so by the – certainly, by kind of mid-year, late year, we will have a full kind of cryogenic pumping solution that will serve – that can be potentially used in – what we used in LNG but potentially used in hydrogen as well.

Joe Giordano: Thanks guys.

Operator: Thank you. We will go next to Deane Dray with RBC Capital Markets.

Deane Dray: Thank you. Good morning everyone.

Scott Rowe: Good morning Deane.

Deane Dray: I would like to circle back on the comments regarding the mix of bookings this quarter, really interesting that no big orders, which kind of gives you a strong sense of the underlying demand that you are seeing, but I would love to hear some commentary. You called out both some project delays as well as selectivity. Can you just kind of give us directionally how much of an impact were the delays versus selectivity. And then maybe just – I don’t know if there is any other factors that would have kept the larger orders to a minimum this quarter, but just size for us, the impact of it.

Scott Rowe: Yes. So, in Q4, we had visibility to, let’s call it, two or three awards, more on the pump side than the valve side, that did get delayed. And some of that was delayed into Q1 and some of it is going to be delayed probably the back half of the year. And as you know, you followed our business a long time. There is lots of reasons for delays. Project timing is incredibly hard to predict. But what I would say is those opportunities did not get canceled. They didn’t get turned off. They might be slightly smaller, a little bit different than what we anticipated, but we are confident that they go forward in 2024. We are also confident given the selectivity that those will deliver the margins that we deserve as we go forward. And then I would just say on the selectivity side and turning things off, I think that was a trend predominantly throughout the whole year. There wasn’t something major that we kind of missed out on in Q4. It’s more about just putting the right resources upfront and doing the work that’s required to prepare for these large tenders. And so when something comes out, it’s we are pulling the entire team. There is usually anywhere from 10 to 30 people that are working on these. And we have just been really selective at the front end and directing our resources to things that we think make more sense economically and can support that customer through the life cycle of their asset. So, I would say the Q4 was probably more a little bit of slip out than being selective, but again, we feel really good about what we are seeing in 2024 on the projects.

Deane Dray: That’s great color. And just what’s the balancing act that you have to do when the higher you ratchet up selectivity, then the downside is you missed kind of building the installed base and your ability to capture aftermarket. And look, the winner’s curse on these bigger deals is that there is margin pressure. So, there is a balancing act, but maybe you can just share with us some of the mechanics.

Scott Rowe: It is a delicate balancing act Deane. And I will just say, between Amy and myself and Lamar Duhon, leads our Pumps division, that’s probably the single biggest topic that we have with him and his team. And it’s not easy because we do know when you get the installed base, it’s pulling our seal business through, it’s pulling parts through, it’s pulling service through. And so we are actively pursuing installed base. At the same time, we are now modeling that out and looking at it on a returns basis. And so we can more accurately predict, like is that customer going to give us the aftermarket, or do they go out and bid some of that aftermarket. And so we can kind of model in what that probability of success looks like on the aftermarket and make much better decisions about where we will populate the installed base and where we won’t. And so I would say we have improved dramatically in the last year about what we should pursue and where we shouldn’t, but continuing to have a robust installed base and continuing to drive aftermarket support is important. And then the other thing I would say is we are also now with our aftermarket franchise and some of our business processes there that continue to improve on speed in winning, we are starting to win aftermarket work for third-party equipment. And so that’s something we steered away from probably 4 years or 5 years ago. We are not openly going out and targeting our competitive aftermarket. But with our presence there, with our ability to drive speed and serve our customers in a timely manner, we are starting to see more and more work on stuff that’s not necessarily our original equipment.

Amy Schwetz: And I might just put an exclamation point on that from a portfolio perspective because we have committed to the long-term targets in terms of both revenue growth and margin expansion. And what we are trying to do is expand our installed base within the constraints as those – as that margin expansion and volume growth paradigm. So, I think as Scott pointed out, we are in a better position than we have ever been to do that. But as you can imagine, as a finance person, I absolutely love the aftermarket capture rate strategy and trying to be more aggressive about going after that higher margin business.

Deane Dray: Alright. I appreciate all that insight. And just one other question, and it’s for Amy, that’s really impressive free cash flow this quarter. Just where do you stand now on the whole releasing of buffer inventory? You gave lots of specifics about how much of each of the components of working capital improved, I would be interested in hearing a bit more about what we are seeing on these releases of buffer inventory now with the supply chain is normalizing. So, how much more do you have to go there? Thanks.

Amy Schwetz: Yes. So, I will start. I think that 2024 from a working capital perspective was a journey. We saw collections throughout 2024 or 2023, excuse me, be quite strong. We were pleased with the way the organization collaborated with that to make sure that we got those where we wanted them to be. And really, the third quarter and the fourth quarter we had an opportunity to set ourselves up for inventory reduction by the end of the year, and that was partially sales volume, partially our planning processes getting better. If I were to put this in baseball terms, I think we are still in the, call it, the fourth innings of inventory reduction. I think we can continue to get smarter with that and our improvement of planning processes is really playing a key role in that. I think we are going to continue to make progress on that within 2024, but we have made it clear to the organization that we have also committed to growth. And so we have to be very smart about how we reduce that inventory over time and where and how we do that. So, I feel like we are striking the right balance, but we are going to march methodically towards that 25% to 27% working capital target.

Deane Dray: Thank you.

Operator: Thank you. We will go next to Saree Boroditsky with Jefferies.

Unidentified Analyst: Hi there. Well, this is James on for Saree. Thanks for taking questions. So, I just wanted to kind of go back on the margins in the backlogs. So, I think you said the margins are coming at higher levels. But I think you said the orders are still not at the 2019 margin levels. So, where does that stand now? And what is the missing gap here since the demand seems strong. Thank you.

Amy Schwetz: Yes. So, I would probably stop short of saying that we are not at 2019 margin levels yet in backlog. I think along the way, we are making progress from an operational excellence standpoint. We are working smarter at our facilities. And frankly, we are playing in different markets than we did in 2019 as we look at the growth of those 3D and energy transition markets. So, I certainly think that the margins in backlog today are a tailwind for us going into 2024. But we are going to continue to do the things that we need to do to improve that as we convert backlog into revenue. And that’s really around making the most of these structural cost savings that we have in place and embedding operational excellence into each and every one of our facilities and processes. And then really ramping up our activities with respect to product management and using that as a lever, I think that becomes a lever more in the back half of 2024 than it is in the front half, but I expect that to be an area that we continue to progress and build momentum as we make our way through the year.

Unidentified Analyst: Got it. Thanks for the color. And I kind of wanted to ask on the FCD. I think the margins here expanded nicely and kind of reached the long-term target of the segment. So, can you kind of talk about the drivers here, kind of add more color here? And how should we think about the margin for FCD going into 2024? Thank you.

Amy Schwetz: Yes. FCD has been a great story from a margin expansion standpoint in 2023. And how they ended the year was actually right in line with what our expectations were for them in 2023. I think as we move into 2024, we will see that moderate a bit with volume in the first quarter of the year and continue to make their way up sequentially again. The real headwind that FCD is going to have in 2024 is around mix. And in that they are now more focused in their backlog towards project versus aftermarket. There is about a 300 basis point shift there in terms of the makeup of backlog. So, that aftermarket strength we talk about in mix is really occurring on the FPD side. So, I would imagine that initially during 2024, we will see that margin expansion more on the FPD side than on FCD.

Scott Rowe: Yes. And I would just add overall on margins. We had communicated earlier in the year that we were striving to get to 30% gross margins for the portfolio. We did that a little bit earlier than we expected. And so we feel really good about that margin trajection as we go forward. And as Amy said, it’s going to come more on the pumps side in 2024 than on the FCD side, but we still see nice progression forward and very much on the trajectory alignment towards our 2027 goals.

Unidentified Analyst: Great. Thank you.

Operator: Thank you. That will conclude our Q&A portion, and it also will conclude the Flowserve Corporation fourth quarter 2023 conference call. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Drop an image here or Supported formats: *.jpg, *.png, *.gif up to 5mb

Error: File type not supported

Drop an image here or

100