Flowserve Corporation (NYSE: FLS) - CFO Amy Schwetz - Gabelli PVW Symposium

Sure, maybe I'll start. Thanks, Simon, for having us, and thanks for the continued support we receive from Gabelli. It's great to be here. 2023 and 2024 have been really exciting years at Flowserve. I've been with the company now and just celebrated my five-year anniversary. I would say we've had a nice mix of supportive end markets and self-help over the last couple of years. We really see that formula playing out again over 2025 with supportive end markets and the right focus internally to exercise self-help to continue to do the same things we did in 2023 and 2024: grow revenue, expand margins, and generate a significant amount of cash flow to make the business stronger. With that, maybe let's dive right into questions.

I'll start with our bookings in 2024. Flowserve, in this type of environment, has the leverage of a really strong backlog of projects, $2.8 billion to start the year. About 83% of that we expect to convert into revenue in 2025. As we look at the way the business has performed over the last several quarters, there's a strong backdrop for aftermarket bookings. We're coming off our third quarter in a row of aftermarket bookings over $600 million, so a strong annuity from our install base in that mix. Then as we look at our original equipment opportunities in 2025, we're very excited about it. We've been talking to investors a lot about our power business and nuclear in particular. We've had two quarters in a row — Q3 and Q4 of 2024 — of over $100 million in nuclear bookings. We're excited about that business; it's a strong margin business for us and one with a strong aftermarket as well, which gives us confidence. Also, as we look at things going on around the world, whether it's continued buildout in the Middle East, opportunities in Asia, decarbonization efforts around the world, that gives us a lot of confidence that we have room to grow again in 2025.

We see things the exact way you do. We see the Middle East continuing to try to work their way up the value chain from an oil and gas perspective, and frankly, we've benefited from that. The Jafurah project that we wrapped up in 2024 was a $240 million booking. The continuation of the Jafurah buildout in KSA has been a great opportunity for Flowserve to not only generate business on the OE side but also position ourselves well for growth in the aftermarket going forward. That environment remains very constructive, though we're seeing fewer of the mega projects. $240 million was a massive project, maybe the largest in Flowserve history. We're seeing fewer of those mega projects but still a number of really nice-size projects in the Middle East in the $20 to $40 million range, which is a nice area for us. The project management efforts are right in our wheelhouse and tend to provide slightly higher margins than those mega projects.

Power has been in our core business since Flowserve was really around, now almost 30 years as a public company, and much longer than that as the various companies and brands that make up Flowserve today. It's been about 15% of our business and continues to grow. I would say that the piece of our project funnel that has seen the highest rate of growth over the last several quarters is, in particular, nuclear. That's a business we like; there are some barriers to entry versus other areas of flow control. We play in that with all our products: we make valves for the nuclear industry, pumps for the nuclear industry, and seals that go in our pumps in the nuclear industry. We really see this as an opportunity to drive install base, which has a very long useful life. I was at one of our facilities in France last year and saw a pump that was in for repair that was about 75 years old, so you can imagine that this is an annuity we like to see play out. Whether it's around life extensions, restarts in North America, or new builds in Europe and Asia, we see that playing out nicely for us over the next several years as energy intensity in the developed world is set to increase based on what we're seeing from AI, but also as areas of the world focus on energy security. We're seeing it play out in a big way in nuclear, but also in traditional ways like combined cycle, even some coal-fired generation, and even as we look at wind and solar buildouts, we have ways we play in that space as well, whether it's valves for offshore wind or vacuum technology used to create solar panels. Growth in the power segment is a big deal for us.

That's a great question and probably one that I would say is slightly misunderstood about the Flowserve name. We've got a big portion of our business that's tied to recurring or ongoing revenue from oil and gas, and that's in the aftermarket and replacement parts. So it's less levered to what I would call capex in the oil and gas space, and less upstream, more downstream in refining efforts and some midstream in terms of LNG. We are more tied to consumption. So as we see asset utilization in refineries at relatively high levels, we're less concerned about margins at refineries or oil and gas prices as much as we are with them thinking about uptime and keeping those assets running. That's something we're good at doing, that we help our customers do, and we continue to do.

On the nuclear side, there are really two ways that we play in this space: in a traditional way for assets that are in service today, keeping those assets running longer, which is being generated in North America, the US and Canada. This idea that energy intensity is increasing, and that's being driven by AI, not by traditional ways we thought about power consumption. The outlook for some of these assets that were either set to retire or in some instances maybe even shuttered — we're seeing customers come back to us and look for ways to extend the life. Obviously safety is paramount in the nuclear space, so it's very important that the equipment is up to date and ready to handle the harsh conditions of the process. We stand at the ready to help our customers with that. In the rest of the world, it's really a new build story, and we're seeing that play out both in Western Europe and Eastern Europe as they look to move some of their dependency on gas and coal assets to nuclear, which is a greener form of electricity and one they have the assets to control as well. We're seeing the same thing in Asia as well. So a bit of a difference between new build and existing assets that we see play out. Your other question was around space. That's a niche product for us; we've played in that a couple of times out of our valve business, and it's pretty cool to see the names you see on the news appear on our customer list, but at this point it's a pretty small piece of our business.

You've seen two public processes we've been involved in. The Velan play was really around nuclear, and the transaction we recently closed that we're excited about is Mogas, which gives us more of an entree into mining applications than we have at Flowserve on our own. We think about the 3D strategy as we look at acquisitions. Of the 3Ds — diversification, decarbonization, and digitization — we like to use M&A more in the diversification space. In decarbonization we have a lot of the tools, applications, and expertise internally to help our customers. But diversification M&A can give us a turbo boost into end markets or applications we might like. You mentioned our balance sheet; our balance sheet is important to us. As we look at M&A, we look to do so in a financially responsible way, one that doesn't bring on too much risk, gives us continued access to capital, and most importantly, will it make our investors money? We're supremely focused on ensuring we look at acquisitions that give us those opportunities: accretive to margins, opportunities for synergies, deliver returns over our weighted average cost of capital, and are accretive to EPS. So going through the filters you would want us to see, but with that strategic lens.

I mentioned from the outset that we think we are doing the right things and have the right focus internally to continue to make ourselves more financially attractive, and 8020 is part of that effort. 8020 is the process we're using to review our portfolio; it's an ongoing process that never stops. At this point, we have seven business units across our two segments, five of which are product-based. In 2024 we launched 8020 in three of those business units. We have two more launching over the course of 2025 at various stages of maturity. As we get all five business units actively engaged in managing their portfolio via 8020, we think we're going to see big dividends. We've been very intentional about how we've gone about this, methodically, using mostly internal resources with some limited external help to ensure we build that muscle within our business units to make it a sustainable process. Our two business units that are far along in that process anticipate they'll see 100 basis points of margin expansion in 2025 from the 8020 effort, and then we'll see some contributions from the other three over the course of 2025. Overall, that gives Flowserve about 50 basis points of margin expansion in 2025. We think that can ramp up in 2026. These efforts are on top of what we've continued to do from an operational excellence perspective, so embedded in our guidance is margin improvement of about 100 basis points year over year.

Mogas is a premium product recognized in the market as a brand that commands premium pricing. It's used in some very harsh conditions in mining and in oil and gas. We like the technology involved in Mogas. The focus on the mining industry is something we like; it's exposed to different cycle dynamics than what we see with some of our traditional business. We saw this as an opportunity to really strengthen the FCD portfolio, both through exposure to markets at relatively attractive margins. The other thing about the markets Mogas serves that we think is an embedded opportunity is really around our aftermarket capabilities. The geographic footprint for Mogas from an aftermarket perspective, as you would expect from a smaller privately held company, is much smaller than ours. We have the opportunity to grow that aftermarket. Although we don't typically base financial analysis in M&A on revenue synergies, it's something we can see happen. I'll use our acquisition of next-generation cryogenic pump technology as an example. That technology hasn't yet been commercialized, but the fact that Flowserve is now involved in cryogenic pumps has already brought aftermarket opportunities into our bookings. So when we have technology with our aftermarket footprint, we can take advantage of that on the revenue side.

As we thought about the 3D strategy — it's now been talked about publicly for about three and a half to four years — when I joined, one of the first things going on at Flowserve other than thinking through COVID was what would happen with energy transition and the threat it perhaps presented to our base-level business. Then there was this realization that although it appeared to be a threat, it was actually a great opportunity for us. We started to think about decarbonization. All our customers were in the same boat as Flowserve, trying to figure out how they would be impacted by energy transition. So we started to see refineries concerned about the carbon intensity of their processes, thinking about electricity usage in a different way. The opportunities that presented, both through selling more efficient equipment, thinking about carbon capture and storage, and providing solutions around the flow control loop with monitoring in terms of emissions and electricity usage, have supercharged the services and intimacy we have with our customers on the oil and gas side compared to where we were five or six years ago. From a diversification standpoint, we have real clarity in terms of where we want to go, both with our inorganic strategy and with our new product development and how we think about business development resources. The rallying cry this has provided internally, in addition to providing the market with real insight into how we're thinking about our product portfolio and opportunities for inorganic and new product development, has been a real benefit.

Thanks for the shout-out. We're proud of what we're doing on the margin level, but we're not done. The goal is to hit those targets and then reset. We're particularly proud of the work done in FPD; it's an indication that we're focused on the right things. We haven't seen that step change yet within the flow control division, but we think we're getting close. We've taken the right actions to get there. At our analyst day in 2023, we said the goal was to hit those targets and then come back and talk about what the next steps are for Flowserve. That's exactly what we're trying to do: make it clear that the levers we have — whether operational excellence, growth of the business, or 8020 — present opportunities beyond what we have in those 2027 targets. But let's hit those targets and then talk about what's next. More to come, stay tuned. In terms of tariffs, we've been looking at this for the last several months and feel pretty confident where we are today. The impact of tariffs has been baked into our guidance, both from a potential impact to growth and from a cost or margin expansion element. Things can change quickly, but that's where we are today. We spent a lot of time and effort during 2020 to midway through 2022 trying to shore up our supply chain, get redundancy. Where we are most concerned is in the area of castings and forgings. Those efforts to move patterns so we don't just have patterns in China but also in India and Mexico give us options to play this out over time. We also utilize our suppliers who we're using today, so this is not about finding new capacity or racing to find somebody who can make these complex castings for us. As we look at our footprint around the world, about two-thirds of our business is actually outside the US. Although there are times we would have loved to have made more progress with respect to footprint and low-cost country manufacturing, that footprint today probably serves us pretty well in terms of managing through some uncertainty caused by potential tariffs.