Flowserve Corporation

Good day and welcome to the FlowServe fourth quarter 2021 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jay Rouge, VP Treasurer and Investor Relations. Please go ahead, sir.

Thank you, Anita, and good morning, everyone. We appreciate you participating in our conference call today to discuss FlowServe's fourth quarter and full year 2021 financial results. On the call with me this morning are Scott Roe, Close Service President and Chief Executive Officer, and Amy Schwetz, our 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 also 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 23, 2022, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully 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, at flowserv.com in the investor relations section. I would now like to turn the call over to Scott Rowe, Flowserv's President and Chief Executive Officer, for his prepared comments. Thanks, Jay, and good morning, everyone.

Thank you for joining our fourth quarter earnings call. Before we discuss our results today, I want to acknowledge the severity of the situation in Ukraine. While Flowserv has no associates in the country, our thoughts and prayers are with their citizens, and we are hoping for the most peaceful outcome possible. The Russia attack on the sovereign country will have significant humanitarian and geopolitical consequences for years to come that are difficult to put into perspective today. We at Closerv sincerely wish for peace in the Ukraine and hope that Eastern Europe returns to something more normal in the near future. I'll now begin my prepared remarks. Closerv made progress across several fronts as we closed out 2021, including delivering strong bookings capitalizing on the ongoing recovery in our aftermarket business and supporting a growing range of customers on their energy transition journey. Nevertheless, the overall environment in the fourth quarter remained challenging, with continuing COVID-related impacts to our people, our operations, and our customers. I want to start by expressing my sincere appreciation to our associates for their commitment to PloServe, our customers, and the pursuit of excellence during this challenging time of disruption and transition. Our people are truly FlowServe's greatest asset, and they have worked tirelessly to serve our customers throughout the pandemic. From a financial standpoint, COVID had a larger impact on our 2021 financial results than it did in the prior year, due primarily to the lower starting backlog position we had entering last year. Our productivity in the fourth quarter was further impacted by the Omicron variant, first in Europe and then later in the U.S. With cases appearing to have peaked in January, we believe the majority of the impact to our operations from COVID-related absenteeism is now behind us, as our associates have largely returned to work. I am proud of the work we have done to keep our associates safe around the globe, and despite many of the personal challenges they faced, our talented team has remained committed to serving our customers' critical infrastructure and needs throughout these pandemic years. In addition to direct COVID-related impacts, we faced increasing macroeconomic headwinds beginning in the middle of the 2021 third quarter, which continued and modestly worsened into the fourth quarter, including heightened inflation, supply chain and logistics disruptions, and labor availability issues in many of our locations. We have addressed these issues directly with mitigating actions, but the net impact has delayed our ability to ship product and increased our overall cost to serve our customers. Despite these challenges, we are seeing promising fundamentals across our traditional end markets and are encouraged with our outlook for 2022. With the foundation we have in place, we believe FlowServe is well positioned to deliver solid growth this year, and we plan to further build on that foundation through the execution of our new strategic framework, which I will discuss in greater detail later in the call. Let me first provide more color on our fourth quarter results. As I noted earlier, one of the highlights in the quarter was our bookings of $969 million, which were up 17.5% over the prior year. Aftermarket bookings of $500 million remained strong and increased 19% year-over-year, while OE bookings were up 15.9%, despite our two largest project awards being in the $10 million to $15 million range. Improving global mobility and higher asset utilization rates drove this favorable mix in our bookings growth, including aftermarket awards, distribution, and shorter cycle wins, which positioned FlowServe well to deliver on this higher margin backlog. Project activity, particularly in oil and gas, remained muted and delayed in the fourth quarter. In total, fourth quarter bookings were the highest quarterly level we have generated since the first quarter of 2020, prior to the impact of the pandemic. The year-over-year and sequential growth occurred across most of our core in markets and regions. From a strategic standpoint, we're especially encouraged by the fact our fourth quarter awards included roughly $45 million of energy transition bookings, including orders from a large Gulf Coast customer totaling over $15 million for flare gas recovery equipment to support their decarbonization efforts. We remain excited about our ability to support our customers through their energy transition journey and are confident that our broad offering and new strategic initiatives can deliver increased energy efficiency, cost savings, and carbon reduction. With our strong finish to the year, we delivered full-year bookings of $3.8 billion, an increase of 10.6% versus the prior year. Throughout 2021 and in the fourth quarter, our year-over-year growth was consistently driven by strong MRO and aftermarket bookings, with only minimal contributions from larger project work. Our year-end backlog of $2 billion is up 8% compared to the prior year, which sets a solid foundation for growth in 2022. In 2021, our aftermarket business largely returned to pre-COVID levels with bookings of approximately $2 billion, including strong demand for and market share gains in our seals business. From an in-market perspective, our chemical and general industry bookings were up 14.9% year-over-year and were at or above 2019 levels. Water bookings also increased significantly in 2021, up about 25% year-over-year, while power bookings remained essentially flat. In our largest served market, oil and gas, full-year bookings grew nearly 13% versus 2020. While we are encouraged by this growth, we are still off nearly 25% or over $400 million from our pre-pandemic 2019 bookings level due to the tremendous impact of the COVID-induced downturn on the oil and gas complex. From a regional perspective, full-year bookings growth was driven primarily from North America and the Middle East. which were up 20% and 30% year over year, with Europe and Latin America also contributing growth of 8% and 17% respectively. Asia Pacific bookings were down 12% due in part to a tougher compare period as bookings were less impacted in 2020, declining only 7%. Turning now to the income statement, fourth quarter revenues of roughly $920 million were up approximately 6% sequentially, which was below our expectations entering the quarter. While we expected supply chain and logistics delays and labor availability headwinds to continue during the fourth quarter, those issues increased beyond what we had anticipated going into the quarter. The good news is this work and the associated profit remains in our backlog. Cancellation rates remain at normal low levels, and as a result, we believe this is mainly a timing issue. We expect this environment to improve as we progress throughout the year with the potential to return to more normal operating conditions in the second half of 2022. Shifting to our operating performance, margins continue to be negatively impacted by lower year-over-year revenues, the associated under-absorption, and the frictional costs associated with the supply chain and logistics disruptions. With that said, we are pleased that the increase in sequential sales produced a nearly 50% incremental adjusted operating margin, which drove a 230 basis point sequential improvement in adjusting operating margins to 9.3%. Turning to our market outlook for this year, we expect our end markets are positioned for continued growth and view our 2021 results as the base year leading to a multi-year cyclical recovery. In addition to our belief that we will maintain the momentum and growth in our aftermarket in MRO businesses, we are increasingly confident in the return of infrastructure investment in 2022, driven in part by the significant underinvestment of the last two years across our end markets, and particularly in oil and gas. The project discussions with our customers are more constructive than in the past two years, as many of these projects are at or nearing funding approvals. sustained demand growth, elevated commodity prices, infrastructure stimulus spending, and underinvestment during the pandemic provide a constructive macro backdrop for improved project spending in 2022. Our overall project funnel is currently up nearly 10% over this time last year, and we are confident that we are well positioned to take advantage of the macro trends of the cyclical recovery in our traditional end markets. Additionally, we continue to see growth opportunities in energy transition spending. Even at this early stage in the year, we are now tracking over $400 million of energy transition related opportunities in 2022. This increased visibility into energy transition spending is driven by a number of factors, including government stated climate change targets, corporations commitment to ESG initiatives, and emerging technologies driving greater energy efficiencies, and emissions reductions. We further estimate our opportunity set in energy transition has nearly doubled versus this time last year, where our product and service offerings are uniquely positioned for success. In total, we expect to deliver year-over-year bookings growth this year in the upper single-digit percentage range. With this level of expected activity during the year, our starting backlog position that is 8% higher than last year's We believe FlowServe is well positioned to deliver revenue growth and stronger financial performance in 2022. I'll now turn the call over to Amy to cover our financial results in greater detail.

Thanks, Scott, and good morning, everyone. As Scott discussed, we expect that 2022 will be a year of growth for FlowServe based on the returning strength to the markets we serve as evidenced in our fourth quarter bookings performance. Despite this supportive backdrop, The challenging operating environment we experienced in the third quarter continued into the fourth quarter of 2021. With the rapid rise of Omicron, primarily in our European and North American operations, we faced continued supply chain, logistics, and labor availability headwinds in the fourth quarter. As a result, some shipments planned in the fourth quarter, incremental to the slippage that occurred in Q3, were delayed, deferring revenues and profits to the current year. In the fourth quarter, we delivered adjusted EPS of 45 cents on revenues of $919 million. On a reported basis, our earnings per share for the quarter was 13 cents, which included only one cent per share of realignment expenses. The majority of adjusted items were below the operating income line and included approximately 23 cents related to expenses from the early extinguishment of debt. and below the line foreign currency impacts accounted for eight cents. As a reminder, our starting backlog in 2021 was about 14% below the starting backlog of 2020. Considering that we typically recognize about 85 to 90% of backlog over the following 12 months, we expected that our 2021 revenues would decline year over year. This is also why I'm pleased that our 2021 bookings were up over 10% year over year, which helped minimize the revenue decline last year, but it is also the catalyst for the 8% growth in our backlog entering 2022, laying the foundation for the expected top-line growth this year. Fourth quarter sales were down 6.7% versus the prior year, but revenues increased sequentially by 6.2%. At a historical conversion rate of backlog to revenue, sales would have been flat or slightly higher than the prior year, despite the impact of the stronger U.S. dollar. The sequential increase reflects the expected seasonality of our business, although it was moderated by supply chain logistics and labor availability challenges that persisted in the quarter, resulting in incremental deferred revenue. Fourth quarter original equipment sales were more impacted by these factors. decreasing 13.7% in total, driven primarily by FPD's 16% decline, while FPD's OE revenues were down 11%. Year over year, aftermarket revenues, by contrast, increased approximately 1%, due mainly to FPD's 11% growth, while FPD was relatively flat. For the full year of 2021, revenues decreased 5% to $3.5 billion, primarily due to our lower starting backlog, particularly in original equipment, and sales slippage to 2022. OE revenue for the year was down 10.3%, driven by FPD's 18% decline, as FPD's OE sales were essentially flat. Aftermarket sales, which typically turn faster, increased slightly, driven by FPD's 9% increase that was mostly offset by FPD's 1% decrease, as aftermarket is a much larger portion of the FPD segment. From a regional perspective, our full-year revenue decline was driven by North America, the Middle East, and Africa, and Europe, which were down year-over-year by 8%, 11%, and 6% respectively, and were partially offset by 11% growth in Latin America and 1% growth in Asia Pacific. This revenue dynamic should change in 2022, given our full-year 2021 bookings were up 20% year-over-year in our largest region, North America. Likewise, the Middle East and Africa saw bookings increase 30%, and Europe was up 8%. which together has built a backlog for those regions to recognize this year. Turning now to margins. Fourth quarter adjusted gross margin decreased 150 basis points to 29.2%, primarily due to FPD's 240 basis point decline, while FPD's adjusted gross margin fell just 20 basis points. The decrease was driven by the lower revenues I just spoke to from the beginning backlog and operating environment challenges and the related underabsorption. In addition, while Closer has largely managed price costs well, rising inflation levels were a modest headwind in the quarter, and we did implement a price increase at the start of 2022 to address it. Temporary frictional issues, however, had a much larger impact in the fourth quarter. including where and how we get our inventory, the increased labor overtime we incur, and the type of phrase we use to ship our products. We don't see these frictional issues as permanent, but they did impact our results in the fourth quarter, particularly in FCD. For the full year, adjusted gross margins decreased 110 basis points to 30.1%, with FCD and STD contributing declines of 160% and 40 basis points, respectively. We were pleased, given the reduction in sales, that SPD was able to mostly offset the full-year margin impact through favorable mix and operational efficiencies. In SCD, again, lower sales, under-absorption, supply chain, logistics, and labor availability were the primary factors for the year-over-year variance. And additionally, We saw these environmental issues most prevalent in two of SCD's higher margin product lines. On a reported basis, fourth quarter and full year gross margins decreased 140 basis points to 29 and 29.6% respectively. Partially offsetting the incremental headwinds discussed earlier, the full year and fourth quarter benefited from decreased realignment spending of approximately $30 million and $6 million, respectively. Fourth quarter adjusted SG&A decreased $5 million, or 2.6% versus prior year, to $188 million, which represents the lowest quarterly SG&A level in over a decade, demonstrating our disciplined cost control. As a percent of sales, fourth quarter adjusted SG&A did increase 80 basis points versus last year, but the metric declined 270 basis points sequentially to 20.4%. On a reported basis, fourth quarter SG&A decreased $16 million, which included an $11 million decline in adjusted items. On a four-year basis, our adjusted SG&A declined $18 million compared to 2020, driven by the aggressive cost actions taken in the summer of 2020. Nevertheless, adjusted SG&A as a percentage of sales increased 60 basis points to 22.3% due to the lower denominator. Reported SG&A expense declined over $80 million in 2021 and also reflects the $63 million reduction in adjusted items, mostly due to reduced realignment expenses. We do expect in 2022 with modest inflationary pressures that exist, that our overall SG&A spend will increase. However, we anticipate that we will continue to drive SG&A as a percentage of sales lower. Fourth quarter adjusted operating margins of 9.3% decreased 200 basis points year over year. FPD and FCD adjusted margins declined 340 and 670 basis points respectively. In addition to the decline in the segment's gross profit, lower total SG&A reduced the impact that our annual selling-related expense allocations had on the platform's operating margins. Fourth quarter reported operating margins decreased 40 basis points year-over-year to 9.3%, where the previously discussed challenges more than offset the $16 million reduction of adjusted items. Our fourth quarter and full year adjusted tax rates of 14.8 and 16.6% were lower than we had expected, driven by our income mix globally, as well as favorable resolutions of certain foreign audits. Turning to cash and liquidity. Our seasonally strong fourth quarter generated cash flow from operations of nearly $100 million, which included $41 million of cash flow from working capital. which was driven by reductions in inventory, including net contract assets and liabilities of $59 million and increased accounts payable of $39 million. Our fourth quarter ramp in operating cash flows was less than historical levels due to the work that we have done to drive a more consistent cash flow cadence throughout the year. In fact, 2021 was the first time in over 15 years we've generated positive free cash flow in each quarter of the year. Supported by our fourth quarter performance, we delivered full-year free cash flow over $195 million, with a conversion to adjusted earnings of 108%, marking our second consecutive year of delivering free cash flow conversions above our 100% plus target. Fourth quarter, working capital as a percentage sales was the lowest level since the pandemic began at 28.2%. We're pleased with the sequential and year-over-year improvements of 160 and 30 basis points and solid incremental progress given the continued supply chain logistics and labor challenges. Thanks to our focused inventory management, we reduced inventory, including contract assets and liabilities, by nearly $80 million versus last year's fourth quarter and $64 million sequentially. Additionally, while backlog increased nearly $150 million to $2 billion since year-end 2020, inventory including contract assets and liabilities as a percentage of backlog dropped 700 basis points to 33.5% versus prior year. We expect our working capital progress and momentum to continue into 2022 as we plan to leverage the improved tools and processes now in place as we look to grow the business. Following our significant refinancing activity of the last two years, we ended the year with a strong liquidity position. Our year-end cash position was about $658 million with available credit facility capacity of about $615 million. In addition to our refinancing efforts, other significant uses of cash in 2021 included the return of $122 million to shareholders, through dividends and share repurchases, approximately $55 million in capital expenditures, $33 million that we contributed to our global pension plans, and the funding associated with our realignment and transformation programs, albeit at more modest levels than in recent years. Turning now to our 2022 outlook, we are encouraged by our expectations for the return of solid revenue and EPS growth as we look to capitalize on our operating platform improvements, a higher starting backlog, stronger end-market fundamentals, and the opportunity we see through energy transition activities. These factors support our confidence in our 2022 outlook. We are targeting full-year 2022 adjusted EPS in the $1.70 to $1.90 range, which would represent a year-over-year adjusted EPS increase over 30% at the midpoint. We also expect revenues to increase in the 7% to 9% range, which includes a modest 1% to 2% FX headwind at current exchange rates. The adjusted EPS target range excludes our expected modest realignment expenses of approximately $10 million, as well as potential items that may occur during the year, such as below-the-line foreign currency effects and the impact of other discrete items, such as acquisitions, divestitures, special initiatives, tax reform loss, etc. Excluding only the expected realignment spending, we initiated our reported EPS in the range of $1.65 to $1.85. The small differential between our adjusted and reported EPS ranges reflect FlowServe's continued improvement in the quality of our earnings. Both the reported and adjusted EPS target range also assume current foreign currency rates reasonably stable commodity prices, the continuation of current market conditions, and expectations for our customers to pursue larger project investments. We expect net interest expense in the range of 45 to 50 million dollars and an adjusted tax rate between 20 and 22 percent. You can see all our guidance metrics in our press release in our earnings deck. In terms of phasing, Low-served earnings and cash flows have traditionally been second-half weighted, and we expect that pattern to be exaggerated in 2022. We continue to expect and have guided for supply chain logistics and labor availability to remain challenging in the first half of 2022. On our income statement, due to Omicron-related absenteeism in January, as well as ongoing limited availability of certain components needed to ship our products, We expect first quarter 2022 revenues to be largely flat year over year, with margins suppressed by higher frictional costs related to the ongoing challenges. All told, our guidance anticipates first quarter EPS will contribute about 10 to 12% of our full year EPS expectations. And although we would like to see our 2022 revenue conversion get off to a quicker start We believe our backlog positions us for strong full-year revenue and earnings growth. And despite the slow start expected in Q1, we do expect these constraints impacting the first half of 2022 to improve in the second half of the year. In addition, our first quarter cash flows will be impacted by a discreet foreign tax payment of $30 million we made in January, and we expect to fund last year's incentive compensation in March this year compared to the second quarter in prior years, both of which will impact our first quarter 2022 cash flow performance and year-over-year comparisons. Turning to our expectations for major planned cash usages this year, we plan to return over $100 million to shareholders through dividends. We also intend to further invest in our business with capital expenditures in the $70 to $80 million range, including the continued build-out of enterprise-wide IT systems to further support our operational and productivity improvements. Additionally, our new growth strategy that Scott will speak to in just a moment, we expect to further capitalize on emerging growth opportunities by increasing our investment in new technology and product development, including our Red Raven IoT platform, as well as pursuing profitable inorganic growth to advance our strategy. Let me now return the call to Scott.

Great. Thank you, Amy. To conclude our prepared remarks, I want to highlight two topics, our progress and commitment to ESG and the evolution of our long-term strategy. We made tremendous progress on ESG in 2021, and I'm proud of what we have accomplished on our ESG journey. From a people perspective, our safety program continues to be an industry leader in total recordable incident rates. Additionally, we have improved diversity across the corporation from the board of directors and the executive leadership team, to our general associate population. With people as a core value at FlowServe, we are proud of our industry-leading employee engagement scores that remain elevated despite the challenging environment. I'm also pleased that our ESG initiatives have garnered third-party recognition, including improved scores from various rating agencies, as well as being listed as one of Newsweek's most responsible companies in America and among the top company in Forbes' world's top female-friendly companies. We were also recently recognized by our customer with the Chemours Supplier Award, which recognizes their suppliers that distinguish themselves through quality, innovation, and sustainability improvements. With hundreds of eligible suppliers, CloseServe is one of only four companies that Chemours selected to receive their award for our performance and sustainability. Within our own environmental footprint, we continue to make significant progress towards our CO2 emissions reduction goal, and we are currently ahead of our published target of 40% reduction by 2030. Finally, we are taking proper measures to ensure our corporate governance performs with all of our stakeholders in mind, including our shareholders, associates, customers, suppliers, lenders, and in the communities where we operate. ESG has been and will be key to our culture, strategy, and our approach going forward. Let me now turn to our long-term strategy. Following several years of transforming the way we think, act, and operate at FlowServe, we are putting this mindset into actions to deliver the next phase of growth into enhanced value creation. Even as our traditional markets appear to be returning to growth, we intend to capitalize more broadly on the opportunities available with the entire flow control space. capture our customers' increased focus on efficiencies, and provide the flow control solutions to enable energy transition. We believe this strategy has the potential to drive outsized growth over multiple years, while also providing improved resilience for a flow service business model through various in-market cycles. Our strategy of diversify, decarbonize, and digitize, or the 3D Growth Strategy, supports and aligns directly with FlowServe's longstanding purpose statement, to provide extraordinary flow control solutions to make the world better for everyone. I've outlined on past calls certain aspects and offerings that will now be part of our comprehensive 3D initiative, but what is new is our laser focus on and dedicated resources for the 3D strategy throughout the organization. Let me take a moment to highlight the key pillars of the strategy. The diversified component of this strategy recognizes that today, FlowServe is meaningful leverage to oil and gas in each of our divisions and more so than most of the industrial companies. We have decades, if not centuries, of experience and expertise serving other infrastructure markets within Flow Control. Our goal now is to aggressively reengage our offering with market participants in areas like water, specialty chemical, and other general industries where we maintain strong capabilities. This strategy is also about expanding the end market reach of existing products, like our vacuum pumps and seals offering. Finally, we look to ensure that we have the full control technology to support emerging new markets and regions that exhibit attractive long-term growth prospects. To leave no doubt, we remain fully committed to supporting our oil and gas customers today and into the future. But the Diversify goal is about increasing our exposure to the end markets, offering long-term outsized growth potential and greater resiliency through the cycle. An example of our successful diversification approach is utilizing our highly efficient pumping technology and our pressure exchange technology to provide reliable flow control to desalination plants around the world. Converting seawater to clean water for consumption, residential, and industrial use is an important domestic issue for many countries around the world. FlowServe has been working with a Saudi Arabian customer to supply pumps to produce 400,000 cubic meters of clean water a day. In the decarbonization leg of the strategy, we recognize that governments and corporations around the world are increasingly focused on climate change and implementing efforts to reduce greenhouse gas emissions. As we've discussed over the past year with our energy transition comments, FlowServe is uniquely positioned to capitalize on the flow control aspect of decarbonization. where today our products and services can be utilized in many aspects of our customers' carbon reduction efforts. We are confident that through continued technology investment, our expected capture rate of this growing opportunity will continue to grow considerably. Again, our approach is to continue to support our existing customers while we also focus on cleaner energy opportunities. With our customers' increased awareness on the need for cleaner energy and reduced emissions, We have established a dedicated team that provides support to assist operators with their existing infrastructure focused on energy efficiency and flow loop optimization. We're now going to market with this new approach that we're calling the Energy Advantage Program, which provides three related offerings, efficiency advantage, carbon advantage, and cost advantage. Additionally, we are and we will be evolving our portfolio of products and services to ensure that we have the premier flow control offering for areas such as carbon capture utilization and storage, hydrogen, solar, biofuels, and energy storage. A recent decarbonization highlight is Flosser's Flare Gas Recovery System that is supporting a major petrochemical customer. This technology significantly reduces toxic organic compounds, enabling customers to reduce their carbon footprint and make progress toward their CO2 carbon emissions reduction targets. Finally, Digitize represents our focus on digital growth driven by our Red Raven IoT platform. While still in its infancy, we have been encouraged by the customer acceptance and the demonstrated capabilities of this offering in its first year in the market. We currently support over 40 customers across a diverse set of applications, including over 1,000 instrumented assets providing nearly 10,000 ongoing data signals. We now have the capability to instrument our full offering of pumps, valves, and seal systems and expect significant growth and traction of Red Raven in 2022 and beyond. Our goal is to instrument as many of our existing installed base and new original equipment as possible and convert our solution to a profitable recurring revenue stream. Like most startup initiatives, achieving critical mass is our goal, and we believe we have the right technology and approach to get there. Feedback from early adopting customers indicate that Red Raven has demonstrated its value. Just recently, in supporting of a customer's desire to reduce unpredictable maintenance and downtime, Red Raven detected upset conditions in this power customer's boiler pump, alerting them well in advance in preventing catastrophic damage to the pump and costly unplanned downtime. To summarize, we believe that our added focus with the diversify, decarbonize, and digitize strategy will only enhance our growth outlook going forward. The new approach leverages the best of FlowServe's capabilities to address the current macro environment, and we are confident that the new strategy provides opportunities for both near and long-term growth for the companies. We are fully committed to the new strategy and have incorporated execution targets into our 2022 incentive compensation. We look forward to updating you on the progress as we move forward. In closing, we are excited about closed service prospects for growth and value creation in 2022 and beyond. We have started the year with a strong backlog, are expecting improved conditions in our traditional markets, and believe our customers' investment plans set the stage for a multi-year growth cycle. Additionally, our 3D growth strategy will focus our technology and product development investment dollars to target new and higher market growth opportunities while supporting our existing customers' efficiency and decarbonization efforts. The work to improve our operating platform and cost structure that we've pursued over the last several years has FlowServe well-positioned to capitalize on what we see as an improving growth environment, And our ultimate desire remains to drive value for our associates, customers, and shareholders in 2022 and beyond. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star 1 to ask a question. We'll take our first question from Nathan Jones with Stiefel.

Good morning, everyone.

Hey, good morning, Nathan. I wanted to dig in a little bit more to this 3D strategy. If I look at it, your oil and gas and power kind of exposure is about 50%. You know, clearly going after these markets is going to result in higher growth than some of these more traditional markets. Do you have some kind of targets for, you know, what the oil and gas and power will shrink to or what these faster growing markets will grow to over time? You know, any strategies you're using to accelerate that and what your thoughts are on You know, making some more transformational moves with acquisitions and divestitures to more focus the business in these areas.

Yeah, sure, Nathan. I'm happy to talk about the three Ds and the growth strategy here. And so really this is all about growing and finding the areas where post-serve has a competitive advantage and attractive markets. And so rather than, you know, and the other thing I would just say is we've had several, you know, many discussions with our board of directors, and we're including it in our compensation plan in 2022. And so with that said, we've had lots of different discussions on what are the targets and how we think about this. And so rather than putting a percentage of our business in oil and gas or a percentage of our business in the diversify category, What we're saying is we want to grow the 3Ds faster than what we would expect in our traditional markets over the long term. And so we put growth targets above what we would for the overall company or the traditional markets. But to your point, right, that, you know, oil and gas represents a big percentage of it. The diversify categories, at least how we've kind of, you know, shaped this up is roughly, you know, 500 to 700 million dollars. The degarbonization bucket in 2021 was roughly $100 million. And so this is already a meaningful part of our business. And we expect this part of the business to have outsized growth versus the rest of the business.

And I might just add there, too, from the standpoint of portfolio, as we think about our portfolios, We certainly want moves that we make, whether or not that's investments internally in R&D or anything that we would do inorganically to support the 3D strategy. In terms of looking at the portfolio, though, we do like our positioning with our current oil and gas customers from the standpoint that we think it positions us well to help them meet their energy transition needs. And so as we look at that portfolio optimization strategy, we don't see a wholesale move or move away from our traditional customers, given the benefits that it gives us in serving them and in helping them achieve their goals.

Thanks. I guess my follow-up then is going to be on the energy transition pipeline. You talked about tracking $400 million. You said you did $100 million in revenue in 2021. What's a typical win rate for that $400 million that you're tracking, and how do you go about driving that up over time?

Sure. The wind rate currently in the decarbonization bucket would be higher than what we're typically seeing. And so our approach there is to really target end users. And some of the work goes through EPCs, but a lot of it's getting booked or getting generated through that end user. And so we've got some really good relationships with the existing installed base at refineries, chemical plants, big water installations and other. And so just by having that strong relationship, having that installed base, we're getting more looks and we're getting early looks on the decarbonization space. And then if we fast forward, that's the existing customers that we're serving. If you fast forward into the other stuff with the carbon capture and utilization and storage, the biodiesel conversions, the hydrogen conversions, What we're trying to do there is work with licensors and the technology process to make sure that we've got the flow control technology to support that. And we've been successful to keep that kind of off the streets thus far in some of the wins that we've had, and we're working more diligently to become a prime supplier in the new world of energy.

Great.

Thanks very much for taking my questions. I'll pause it on.

Thank you. We'll now take our next question from Dean Dre with RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Dean.

Scott, I appreciate your opening comments about the events unfolding in Ukraine. I'm also mindful you have special insights given your military background, but I guess I'll take those questions offline. But if we were to move the chess pieces forward and some energy sanctions are imposed on Russia, what might the boost be for FlowServe in terms of, you know, we'd likely see a ramp up in U.S. production. There's probably going to be more exports going on to our allies. But what does that mean for FlowServe potentially?

Yeah, sure. I'll start again, just reiterate my comments. We truly hope that the most peaceful outcome happens here, and it's an incredibly unfortunate event that's unfolding. Let me have Amy first answer the question on what we have in Russia, because I think that sets the scene for what do we have there, what potential sanctions exist. or what impact to our business on sanctions could happen. And then I'll talk a little bit about the future geopolitical situation with oil and potentially gas as well.

Obviously, from a sanctions perspective, it continues to be a pretty fluid situation, and we're monitoring the developments as they emerge. But for us, in terms of business in Russia, it's a relatively small amount. We have one QRC in Russia that generally does about $15 million of business a year. In 2021, we had about another $35 million worth of business from an OE perspective that was exported into Russia, bringing sort of a representative sales number to about $50 million in terms of Russian exposure.

So our Russian exposure in country is relatively small. And again, the sanctions are a fluid situation, but it's a relatively minor impact for us overall. And then to answer your question directly, Dean, how does this play forward? Obviously, Russia is a huge producer of oil. They're the number three producer in the world and the number two producer of natural gas. And so I just think it depends on the response. If they get locked down from an export standpoint, which is probably what will happen, then the world has got to figure out where it's getting this offset of oil and natural gas. And the likely suspects there are the Middle East and North America. And we're positioned incredibly well for growth in the Middle East and North America. And so while we had a big target for the Middle East and for North America this year, that would only go up given some severe sanctions on Russia itself. And so You know, I'm a little hesitant to say this, but I'd say it's probably a net positive for flow serve over the coming years. It won't happen immediately. But if you think kind of long-term and where the investments have to take place and what they're going to invest in, then flow serve benefits from the long-term there. The other component to that is, yeah, I talked about natural gas, but it's really LNG, right? Because you've got to get gas into Europe. Europe currently consumes roughly 30% of the Russian exports. or 30% of Europe's natural gas is coming from Russia. So they've got to get it from somewhere else. And the only way to do that is to liquefy it. And as we've talked about before, we've got a really good offering on the valve side, the seal side, and in the pumps to support LNG, and specifically the liquefaction side of that. And so as LNG starts to grow, that's super helpful for our business.

Those are all really helpful updates and I appreciate it. And so for a follow-up, any color you can provide us on the pricing actions that you took in January and then what might the carryover benefits be on price actions that you took in 2021?

Sure. So I'll start and Scott may follow up with some color here. So as we talked about, we had three price increases in 2021 with a third going into effect on the 1st of January, which was at 5%. So these price increases cover our MRO, parts, seals, and industrial products. So the shorter cycle component of our business. The other part of our business is really generally cost plus, and that's on our engineered, highly engineered projects and customized orders. And what I can say about that is that the margins that we have in backlog today are higher than what we had in the backlog last year at this time. Now, keep in mind that this element of pricing is, was agreed to at the height of the pandemic. And so as we look at Q4, Q3, and even some into Q1 of 2022, we are recognizing revenue on those engineered products that were priced at the height of the pandemic at very competitive rates. So overall, as you know, I look at those two pieces of the business together. I wouldn't say that we're ahead of price cost, but I'm confident that we're not far behind. and that we're taking the actions that we need to in order to position us well in 2022. And we're pretty confident that with respect to that, we can stay neutral.

That's good to hear. And I also appreciate hearing a specific price, that 5 percentage points of increase in January. That's helpful. And then last is just a comment. I think you all have done a really good job on the free cash flow. especially the past two years, being above 100%. Long followers of LowServe knew that there was a potential there, but finally it's coming through, and just congrats to you and the team on that. Keep it up. Thank you. Thanks.

That's much appreciated.

Thank you. We'll now take our next question from John Walsh with Credit Suisse.

Hi. Good morning, everyone.

Morning, John.

Maybe first question, can you size or dimensionalize these frictional costs that you've kind of absorbed here in 21? And maybe that's part of a conversation as we think about the bridge to I think it's like 9.5% operating margin at your midpoint. Just want to understand how to kind of bridge there year over year as we think about the Profitability, obviously you talked about backlog margin being up year on year. I'm assuming some of these frictional costs go away. Any other things you can point to?

Sure. So as we think about our margin performance in Q3 and Q4, and we look forward to 2022, it's really a combination of a few things. One is under absorption related to revenue levels. But we're now at a point with the size of our backlog that that revenue level is being driven by lower conversion rates. So, for example, in the fourth quarter, had we converted at our historical conversion rates overall that we have seen in the fourth quarter, which would have been our expectation going into the quarter, we would have seen revenues relatively flat with 2021. Now, as we think about what these frictional costs are, they are impacting margins, but they're a temporary element of the cost structure. So, these are things like expediting fees that we're paying in order to get parts into our factories quicker, using air freight versus grounder fee to bring products into our into our production facilities quicker, the overtime that we're paying, and in some instances, redundancy spending on some consumables in order to ensure that we have what we need. And the impact of this means that as we look at our margin rates for 2022, and you're spot on in terms of looking at what that rate is for 2022 at the midpoint, we see that margin rate expanding over the course of the year as both our conversion rate improves. And we see that really happening at some point in the second quarter of the year. And as these frictional costs start to move out of the system and we get to a more normalized supply chain. So as we think about that midpoint or that average operating income margin for the course of 2022, the exit rate is going to look much different than the average for the full year.

Gotcha. Gotcha. No, that makes a lot of sense.

And then I think maybe just as a follow-on, if I heard correctly, Scott, I think you said orders would be up a high single-digit rate. And if that is the case, if I just run out kind of orders and the midpoint of your guidance, I think you'd be assuming that you're going to end 2022 with higher backlog year over year, which makes sense given that you're a long cycle business. But I just want to make sure I heard that correctly. Thank you.

Yes. So currently we anticipate high single digits on our overall bookings growth. And we think the aftermarket and MRO continues to grow. But the outsized growth is going to come from this return of the project spending that comes in. And then just so by definition, the projects are going to take longer. They're longer cycles. They're going to take longer to get back, and we do expect backlog to build at the end of, you know, through the 2020 year and ending higher at the end of the year than at the beginning of the year.

Great. Appreciate you taking the questions. Thank you. Thanks, Sean.

Thank you. We'll now take our next question from Mike Halloran with Baird. Hi.

Good morning, everyone. Good morning. A couple follow-ups on earlier questions. First, you know, Nate's first question there on the energy transition side. Maybe just some thought on how the structure on the go-to-market strategy is, and when you think about the cyclical opportunity and the more traditional businesses that I think you feel more comfortable with, how do you ensure that there's not a loss of focus as you're pursuing both of those things, and Is it as simple as there's enough channel overlap so the same people are hitting the same customer up so that you can have a unified approach, or is there something broader to it?

Yeah. So, Mike, this is the challenge, right? And this is what our leadership team is facing. It's been the big question with our board of directors. And so the way we are pursuing this is we really can't and do not want to walk away from the existing customers we have and the business that's out there. And You know, we believe the core markets are actually going to grow pretty nicely over the next couple of years, but we also recognize that, you know, five, 10, 15 years down the line, the world's going to be very different and we've got to be positioned for that change. And so what we're doing from a resource allocation standpoint is where we think that it's needed. We're creating designated teams with executive sponsorship to make sure that we are moving the needle and driving the strategy forward. So an example of that would be our Energy Advantage team. And so I mentioned that in the prepared remarks, but this is now a designated team that's looking for opportunities with our existing customers to help them through their energy transition, to help them drive down their efficiency, to drive down their CO2 emissions, and to improve their uptime and reliability. And so these are existing associates within CloseServe, but we pulled them all together to really go out to launch our Energy Advantage offerings. And then similar in Diversify, we're going to have to augment some of the teams that we have today, particularly in the water channel and others, and we'll do that through a combination of distribution and agents, but also refocusing some of our existing associates to get more aligned with the growth in water. So it'll be a combination, but I'd say this is probably the biggest challenge for us is that the internal resource allocation of people and focus and time and energy is And then you complement that with the dollar allocation of our product development and then potentially in the M&A space to make sure that we're investing in the future.

That makes sense. And then on the margin line, specifically on mix, you look back historically, when the mix skews towards aftermarket, margins tend to look a little better. Fourth quarter, it felt like, based on the comments you made, that a combination of these transitional costs plus the – call it tougher margins on the original equipment with a main headwind, but how should we think about the margin profile on that aftermarket business? Is it relatively consistent to how you think about it historically when adjusting for revenue levels, or are there incremental pressure points you're seeing on that side?

It is, Mike, it's a great question and something, again, that we talk a lot about internally. And And I made a comment in my prepared remarks about FPD's gross margin performance over the course of the year, which as you look at the reduction in volume that that segment had, we really used a couple of things to overcome that. And that is, one, the favorable mix that we saw between aftermarket and OEs. and then, of course, operational efficiencies. But as we look at some of these large facilities, particularly these facilities that are focused on large, highly engineered projects, the underabsorption levels that we saw in 2021 were far greater than what we would have expected to experience in other years. And so as we move into 2022 and we see the reemergence of projects spend we see that improving pretty significantly. And then the other thing that I want to comment on, and this is more relevant in FCD than it is within FTD, but there is actually, I'll say, a mix within a mix, if you will, in terms of our product. And as we look at the supply chain issues that we've had in terms of availability, they've really been focused on motors, electronics, and soft goods. And those types of components are going into some of our products that are really our highest margin product lines. And so as we look at portions of our business that when we perform well because we've got the backlog, we see nice margins, we frankly have not seen the revenue conversion of our backlogs. that we'd like to see in order to enhance those margins. And as we continue to point out, although there's some frictional costs involved in this, as that backlog actually makes its way into revenue, those margins are not lost forever, but they're deferred to future periods.

Great. One last, if I may. With all the moving pieces to what the work you did in the fourth quarter was on the debt side and interest side, How should we think about interest expense in 2022?

Sure. So we are pretty excited about the deals we were able to execute late in the third quarter and into the fourth quarter. We're anticipating our net interest expense will be in the range of $45 to $50 million over the course of 2022. Great.

Really appreciate it. Thanks for the time. Thank you.

Thank you. We'll now take our next question from Joe Giordano with Cowen.

Hey, guys. Good afternoon. Hey, Joe.

So on margins, as we talk about projects starting to pick up, I know the projects that you're delivering now, as you guys mentioned, are recognizing pricing that was done at a different time and very competitively. But as that goes in and new projects are coming through your P&L, And it's still going to impact the mix negatively against aftermarket just as a percentage. So how should we think about the margin progression? Like does it put a, you know, not a cap, but does it like mute the margin expansion we might expect in growth towards like, you know, high single-digit growth?

Yeah. So overall, I see the tailwind that we're getting from the absorption benefits from those large project bookings. overcoming the friction that we might have from the mixed elements. And we'll actually see the mix that is still pretty favorable work to our benefit over the course of 2022. The item that I just want to continue to hone in on is that as we look at 2022 and we think about where our revenue conversion rates are, we know that those revenue conversion rates are going to improve over the course of the year. We hope to get up to speed in the second quarter of the year, and we're really going to see a stair step in volume, and therefore the related benefits, both from a volume perspective, but also, and when I say volume, I'm specifically talking about that absorption element of our margins.

Great. And then on the 3D and diversification, I'm just curious as how much, you know, to really make this an important part of Fullserve, like how much do you need to bring in capabilities that you guys don't have right now? Like when I think about $100 million of bookings this year, you're talking $400 million of pipeline that you're looking at for next year. Let's say you want a third of that. You know, it's 20% growth essentially, but it's still less than 3% of sales. So hard for like investors to really make that a centerpiece. You know, how do we, what do we have to do, because 20% growth is really good, but what do we have to do to make this like a real significant part of revenue? Is it, you know, do you have to bring in outside stuff?

Sure. I think, you know, we are investing internally and potentially externally as well. And so, as we think about, let's just take decarbonization. We did $100 million today. We think this is one of the fastest growing segments that we have out there. And we believe that this just continues to grow. And so if you think the next five years, the CAGR could be high double digits for sure, we believe that we can make this a meaningful part of our offering. And then if we think about how do we introduce new products into this or potentially an acquisition, then it becomes something of substance for post-serve overall. And so right now we're committing internally. We've got new folks on board that are more geared toward the hydrogen markets, they understand the gas side of the equation, they understand some of the things in energy transition that we weren't focused before, and they're helping us with our offering. And that offering is both a combination of products and services as we go forward. So I feel really good about, you know, even though we're starting at $100 million, like, I feel very good about the growth outcome and that this becomes a meaningful part of FOSR going forward. And then on the diversified, these are big markets today already for us. So if you think water, and especially, Kim, in the general industry segment, that's related to a more diverse portfolio, that's over $600 million today. And again, our focus here is to grow that faster than the overall business. We've got some pretty big targets there in growing that side of the business. And same thing, we're investing in experts around the water side, especially Kim's side. We're going to invest in how do we get our products repositioned. We've been doing that now for two years. And we expect that to continue to grow as we go forward.

If you don't mind me sneaking one last one on Red Raven, I'm just curious, what percentage of your products that are going out have this capability embedded in it? Whether or not the customer decides to use it or pay for it or turn it on, different question. But how much of your stuff that's going out the door actually has the capability to use this?

Yeah, so right now the products that would be instrumented and ready to turn on at a customer decision is relatively low. Where we're seeing that is the engineer-to-order type products. So I think big critical service pumps that are highly critical to an operation, if they have downtime issues, then that's catastrophic to their operation. And so those are going out instrumented and ready to turn on and enable. But I would say that's less than 5% of the overall portfolio. Our goal is to start to ramp that up as we go forward into future years.

Thanks, guys.

Thank you. We'll now take our next question from Brett Lindsey with Mizuho Americas.

Hi. Good morning, all. Hey, Brett. I just wanted to come back to free cash flow and certainly echo the comments regarding the progress the teams have made. But could you just put a finer point on the Q1 item you called out? Is that one time in nature? And then on a full year basis, how are you thinking about conversion this year? just considering some of the inventory will be a use of cash?

Sure. So two items that I called out in terms of Q1 cash flow, one of which is a discrete and non-recurring item, which is we made a large foreign tax payment in the first month of the year. That was about $30 million. The second was a timing of our incentive compensation plans. which is generally made in the first week of April. This year, that will be timed in the first week of, or last week of March, so that'll be a little bit of difference in timing, but will not impact full-year free cash flow And in general, we are anticipating that we'll be delivering free cash flow in the 90% to 100% range. And my caveat around that is not necessarily related to the two items, or that range is not necessarily related to the two items that I discussed for Q1, but really a recognition that as we return to growth, there may be some need for some working capital investments, particularly particularly as it relates to some of these large project orders. We believe that we've made progress, and we're going to manage that better than we ever have at FlowServe, but that's the genesis of that range between 90% to 100%.

Yep, that all makes sense. And just on the aftermarket bookings, very steady improvement there. Could you just talk about the nature of activity you're seeing? Is it Is it orders that are satisfying immediate demand, or are you starting to see some replenishment in those distributor channels or elsewhere?

Yeah, it's really all of the above. And so on the aftermarket side, it's really about asset utilization, right? So as refining and petrochemical plants and other large facilities continue to operate at a high utilization rate, then they just turn through the consumable products. And so for us, that's the mechanical seal. it's parts in our pumps business, it's parts in our valves business, and then ultimately we get replacements as well. And so what we're seeing just with the return of mobility, the GDP increase around the world, kind of this coming out of COVID, everything's now operating at reasonably high levels, and our aftermarket business is certainly following suit there. And so We feel really good about, one, the stability of that, and then, two, the ability to continue to just have a nice, steady, progressive growth with aftermarket. And so that seems incredibly focused on how do we kind of move up the maturity curve of services. And so moving from just providing parts and call-out services to now to moving to long-term service agreements, expanding our lifecycle agreement opportunities with seals and pumps, and then ultimately as we instrument all of our products, we want to move into more solutions, right? So helping our customers with uptime, reliability, flow loop optimization. And so we've got a clear path to move up this maturity curve. And I just think the install base and our ability to generate revenue from that is just a significant advantage that FlowServe has. And again, I'm confident that we're able to continue to grow that. And I'm confident that we continue to become more of a service and solution provider than ever before.

Great. And just a last one on exposures. Of your ONG exposure, how much is the U.S. and Middle East today?

I'm sorry, of the oil and gas exposure?

Yeah, of the ONG bucket, how much is U.S. and Middle East for you guys? Percent or millions, roughly?

Yeah, I don't have that number off the top of my head.

Jay, do you have that? Well, I would suggest in North America it is probably not overly different from the split of the overall mix. Middle East clearly would be a much higher percentage related to oil, gas, and chemical.

Okay, great. Thanks so much. Thank you.

Thank you. We'll now take our next question from Joe Ricci with Goldman Sachs.

Thanks. Good morning, everyone.

Good morning.

So, I guess my first question is really just, like, you guys have provided a lot of, you know, good qualitative detail around the frictional costs. I'm curious, like, do you guys have, like, a quantification of what that number was that impacted 4Q? And really what I'm trying to understand is, you know, kind of how much that's impacting the 1Q margin, which I know based on the comments, it sounds like 1Q margins will be kind of like around the 6% to 7% range.

Yeah, so I might just start again by talking a little bit about what we're anticipating for Q1. So with respect to Q1, we're anticipating sales relatively flat with 2020, but we're anticipating only about 10% to 12% of our earnings is going to come from Q1. So obviously the implication of that is some margin degradation as we look at the movement from Q4 into Q1 and then steady progression over the course of 2022 to get us to that average level that we've discussed on the call and ultimately give us an exit rate that's obviously far higher than where we started, than where we're starting the year, and where we're at today. Some of these frictional costs are pretty difficult to calculate in terms of what's the difference between buying, what are decisions our buyers making based on placing an order with one supplier versus another because of lead time, what's the cost of choosing one mode of transportation versus... versus the other, we know that we have seen significant increases in our logistics costs as an example, and we know in general our rates with respect to many of our modes of transportation have actually seen improvement as a result of the transformation activities. So we have not quantified what those frictional costs are other than to say that we know that they're real, and as we make our way through 2022, we're going to need to work to remove them from the system in order to fully realize margin expansion.

Got it. That's hopefully me. And then just to clarify one thing you said, it was the flat revenues versus a 2021 number, right? Not 2020?

That's correct. Thank you.

Okay.

Thank you for that clarification.

Yeah. And then just thinking about this, like, you know, the SG&A opportunity. So obviously, you know, lots of progress made there in the fourth quarter. I'm just curious, like, how do you think about the buckets there in terms of, like, what can be structural? Is there, like, a potential target for, you know, maybe as a percentage of sales where you can drive SG&A maybe structurally leaner longer term? Yeah.

Sure. I think what we've said before is that, you know, our target is really to get into that 20% as SG&A. We still have some work to go there. And I'd say, you know, over the last, you know, with WorldServe 2.0, you're taking, you're really looking at our cost structure in the downturn. We've done a lot of good work here. And so right now we want to be able to leverage the structure that we have as we grow the business. So back to my remarks, We're very confident in our ability to grow. We're citing high single-digit growth as we go forward, and so it's really about leveraging the infrastructure and the folks that we have there today. But for this business, 20% is a good number, and that's where we'll ultimately desire to get to.

Okay, great. Thanks, guys.

Thank you. We'll now take our last question from Damian Karras with UBS. Yes.

Hi, good morning, everyone. Morning, David.

So I was having some tech issues earlier. My apologies if I end up doubling up on anything already discussed. But as it relates to your bookings, could you just comment on what the, you know, January and February trends have looked like thus far? And being that you saw bookings first inflect positive in the second quarter of last year, you know, what would you expect those bookings growth rates to kind of look off the rest of the year as you start lapping those positive comps?

Yeah, I would say our January bookings were reasonably solid and we're off to a good start. And so typically at the end of the year, you see some things get pulled in and you get a little bit concerned that did we take anything out of the first quarter that would normally be there. But I don't see that. Our January is off to a solid start. Our MRO bookings were there and kind of back to this pipeline of projects. We feel pretty good about that outlook and converting the pipeline to true opportunities and bookings.

Okay, great.

And Amy, I think you made the comment earlier that you're expecting reasonably stable commodity prices this year, which is kind of interesting. I mean, we have seen steel prices move a good bit lower over the last couple months. I think that's one of your larger material exposures. But maybe you could just elaborate on your key commodity cost expectations and whether there's maybe any potential margin tailwinds this year, just thinking about where some of those materials had been pricing last year. Sure.

So I think, you know, in general, from an inflationary perspective, we anticipated – we saw a number of those increases come through in 2021. And so, I don't think that we're gonna see $40 a barrel again from an oil perspective again this year. And I think that we've absorbed a number of the commodities, there have been increases that we expected that were coming in 2021. It's obviously an area that we continue to monitor closely. And also I would point out that on our really large projects that are really commodity-focused, we are getting firm quotes at the beginning of those projects, and so we've locked in prices. So from that perspective, we feel like we give ourselves a pretty good opportunity to hedge any inflections that we see with respect to commodities. as we go through the year. There obviously can be blips and we'll continue to watch out for those. But overall, I'm much more worried about the frictional element of the supply chain versus inflation as we look forward to 2022.

Yeah, I'd just say we have a really good handle of the commodities that impact our cost structure. We watch it carefully. And it has been an incredibly dynamic situation. If those continue to go up, we'll raise our prices. But to Amy's point, the bigger concern for us has been the frictional costs with the disruption, this expediting, the air freighting, the overtime and all of that. That's what's really hurting us. We'll continue to be right at that neutral line, hopefully turning the positive on price costs, and we'll continue to watch the commodities that impact our cost structure.

Understood. Thanks for your thoughts. Best of luck with it all. Great. Thank you.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.