Flowserve Corporation

Ladies and gentlemen, good day and welcome to the Q3 2024 FlowServe Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Ezell, Vice President, Investor Relations, Treasurer, and Corporate Finance. Please go ahead, sir.

Thank you, Lisa, and good morning, everyone. Welcome to FlowServe's third quarter 2024 business update. I'm joined this morning by Scott Rowe, Full Service President and Chief Executive Officer, and Amy Schwetz, our Chief Financial Officer. Today, Scott and Amy will provide an update on our overall business performance and highlights from the quarter. Following their comments, we'll open the call for questions. As a reminder, our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties, and these are discussed in our SEC filings, which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our Q3 press release and today's earnings presentation, both of which are on our website. And with that, I'll turn it over to Scott.

Thanks, Brian, and good morning, everyone. I want to start by saying thanks to Jay Roosh for over 12 years of service at PloServe, including two different opportunities to be our interim CFO – Jay did nearly 50 FlowServe earnings calls. It was our conduit to the investor and banking communities. Jay, thank you for everything that you have done for FlowServe and making it a better company. And I wish you and your family the very best in the next chapter of your life. I would also like to welcome Brian Azell to FlowServe. Brian will lead investor relations, treasury, and FP&A. Brian brings significant experience and a wealth of knowledge to our team. And there will be several opportunities in the coming weeks for many of you to meet Brian in person. Let me now turn to our prepared remarks. We delivered another strong result in the third quarter, underscoring the positive momentum with our operations and in markets. I want to thank our associates around the world for their dedication to our customers and our company. They are truly what makes CloseServe an outstanding enterprise. I also want to welcome the associates of Mogus to our CloseServe family as we kick off an exciting journey together. We are pleased with the results in the quarter, and we believe there are substantial opportunities ahead to further improve our operational and financial performance to continue to deliver progress toward our 2027 financial targets. With bookings of $1.2 billion, our book-to-bill ratio in the quarter was over 1.06 times. We grew our backlog by $100 million sequentially, ending the quarter at $2.8 billion and laying the foundation for continued growth into 2025. We delivered 240 basis points of year-over-year adjusted operating margin expansion, resulting in an 81% incremental margin in the quarter. Our successful efforts with our customers generated both healthy project awards and strong aftermarket bookings of $615 million. We delivered nearly 30% growth in power bookings year-over-year, which brings the year-to-date bookings growth to 23%. We are optimistic about the power markets and FlowServe is well positioned to take advantage of the global increase in electrical demand. I'll discuss this in more detail shortly. We generated sales of $1.1 billion, which represented solid year-over-year top-line growth of 3.5%. Our third quarter adjusted EPS of $0.62 was a $0.12 or 24% increase versus prior year. Lastly, cash from operations of $178 million was particularly healthy, driven by working capital efficiency and earnings improvements. While our operating performance was certainly strong in the third quarter and earnings per share were higher year over year, both our reported and adjusted earnings per share were tempered by a discrete seven cents charge in the quarter, which Amy will describe in more detail. All said, our second and third quarter results were operationally consistent and in line with the commentary we provided during last quarter's earnings call, with healthy project and aftermarket bookings, strong revenue conversion, and expanded margins. Our improved results throughout 2024 reflect initial progress from the new FlowServe business system. The business system helps to define how we operate consistently across our two divisions and seven business units. We are seeing early results from the operational excellence program, which is improving our delivery consistency, shortening lead times, and enhancing our product margins. Earlier this year, we formally launched our Portfolio Excellence Program with the goal of optimizing FullServe's 200-year legacy of brands and product families. Using a data-driven approach, we are undertaking a comprehensive portfolio review across three dimensions, products, customers, and profitability. Our ultimate goal is to reduce complexity in our overall offering, improve our customer service, and significantly expand our product margins without compromising our focus on growth. We remain committed to an incremental 100 to 200 basis points of margin improvement from the Portfolio Excellence Program by 2027, and we expect to begin seeing results from this effort starting in 2025. We are excited about the progress we are making with the FlowServe business system, The early results we are seeing are promising and give us confidence that our 2027 targets are very achievable. Earlier this month, we completed our acquisition of MOGIS Industries and are excited to officially begin the integration process. We believe this transaction positions FlowServe to further grow with their severe service valve offering that is complementary to FCD's expansive valve and automation portfolio. With annual revenues of roughly $200 million that are balanced relatively evenly between mining and process industries, and with EBITDA margins that are accretive to our FCD segment, we expect MOGIS will enhance our 3D strategy, be a strong addition for flow serve, and support long-term value creation. Our thorough integration plan is intended to preserve and protect the legacy that MOGIS has created and build upon all the qualities that made MOGIS successful. from its people and brands to its unwavering commitment to customers. Leveraging our combined size and scale, we intend to utilize FlowServe's commercial relationships and aftermarket capabilities to capitalize on future market opportunities. We are committed and have a clear path to $15 million of cost synergies by the end of year two and expect to have incremental revenue synergies by pulling through actuation, pumps, and mechanical seals on the back of MOGIS project work. Let me now turn to bookings in our end markets in more detail. Overall, our market outlook remains constructive for projects, MRO, and aftermarket activity across industries and in markets. We delivered bookings of $1.2 billion during the third quarter and have averaged more than $1.1 billion per quarter in 2024, resulting in strong year-over-year bookings growth. The ongoing success of our 3D growth strategy generated approximately 34% of our total bookings in the quarter, reaching the highest level in both absolute dollars and as a percentage of total bookings since we launched the strategy in 2022. These results confirm the merits and timing of the 3D approach with strong bookings obtained from both diversification and decarbonization activity. Our bookings were balanced in the third quarter with original equipment and aftermarket work each representing about half of the total. We secured six midsize original equipment awards ranging from roughly $15 to $35 million. Combined, these project awards represent about $130 million of our total bookings. further demonstrating that our foundational core business of aftermarket, MRO, and short cycle activities is exceeding the billion-dollar threshold on its own. This activity is driven by stable asset utilization rates at our customers' operations and our growing success capturing the aftermarket on our substantial installed base. We delivered our second consecutive quarter of extremely strong aftermarket bookings at approximately $615 million, We have now delivered two consecutive quarters above the $600 million level, demonstrating the strength of our aftermarket franchise. Our customers have awarded their trust and this work to us due to our high levels of service, local presence, and healthy relationships. We believe that we can continue to grow our aftermarket business with improved service levels and further commitment to increasing our capture rate. Turning to oil and gas, our bookings were up 7% versus the prior period. to almost $455 million driven by significant and broad-based activity throughout the Middle East region, from Saudi Arabia to the UAE and Qatar. We continue to see elevated levels of project activity in the region despite the ongoing conflict in other parts of the region. Let me take a minute to provide more detail on our power in markets, including traditional power and nuclear. As mentioned earlier, power bookings were up nearly 30% to $155 million in the quarter and are up 23% year to date. We participate in virtually all forms of power generation, including traditional hydrocarbon forms like coal and combined cycle natural gas, as well as nuclear and newer energy technologies like concentrated solar power, wind, and hydrogen. As a result, we have significant power installed based across pumps, valves, and seals. Power bookings have historically comprised 10 to 15% of our total bookings in any given year, driven primarily by aftermarket MRO and some expansion activities. We believe we are at an important inflection point in the power markets, with macro factors supporting projections for global power demand to grow significantly over the next decade. Power demand has largely been flat in Europe and North America for the last 15 years due to significant efficiency improvements. However, new power generation is now needed to support the growing demand for electricity and data centers to support AI, as well as the electrification of nearly everything. These trends support the projections for power demand to grow steadily over the next decade. In particular, we see nuclear power growing substantially going forward due to its carbon-free emissions and baseload generating characteristics. In the quarter, nuclear activity saw particular strength with more than $100 million in bookings. We are currently seeing a combination of life extensions on existing assets in North America and Europe, combined with new nuclear capacity being built in Europe and in Asia. Life extension activities created substantial aftermarket opportunity for FlowServe to re-rate pumps and upgrade valves. Our project funnels for both total power and nuclear are up more than 20% versus this time last year, affirming the strong bookings we delivered in the third quarter and year to date. We believe this trend is in the early innings, and we are confident FlowServe will see growth over a long period of time as we build on our existing nuclear product and service expertise. We believe the overall macro environment and outlook remain favorable for the flow control space. We continue to see positive signals driven by key global megatrends, from energy transition and decarbonization to energy security and regionalization, and increasing strength in the power markets. Combined, these current and potential megatrends are attracting significant investments. Our traditional short cycle MRO and aftermarket business is proven resilient, and we are well positioned to drive further growth from our large installed base. Through the first nine months of the year, our book-to-bill ratio is 1.03 times, and we continue to expect that our full-year book-to-bill ratio in 2024 will exceed 1.0. Our backlog grew almost 4% sequentially to a near-record level of $2.8 billion, positioning us well for growth in 2025. I'll now turn the call over to Amy to address our third quarter results in greater detail.

Thanks, Scott, and good morning, everyone. Looking at our third quarter financial results in more detail, we generated revenue of $1.1 billion with an 11.1% adjusted operating margin, resulting in 62 cents of adjusted earnings per share, a 24% increase versus last year. We delivered another strong operational quarter and higher adjusted earnings, which were tempered by the discrete $12 million charge to operating income related to the annual actuarial assessment of certain undiscounted long-term liabilities. This third quarter expense impacted reported and adjusted earnings by 7 cents and reduced our operating margin by more than 100 basis points. We also had 18 cents of net adjusted items, bringing our reported earnings per share to 44 cents. The two largest contributing categories of adjusted items were related to the realignment expenditures and acquisition expenses at $0.07 and $0.05, respectively. Given our results through the first nine months of the year, we are reaffirming our full-year guidance metrics, including adjusted earnings between $2.60 and $2.75 per share. This guidance includes the impact from the third quarter discrete charge for certain long-term liabilities and excludes the recently completed MOGIS acquisition. Our full-year 2025 guidance, when instated in Q1, will include MOGIS. With year-to-date adjusted earnings of $1.93 per share, we recognize our full-year guidance implies a wide range of outcomes for the fourth quarter. Based on our current outlook, we expect continued modest sequential improvement in our adjusted gross and operating margins, with our full-year adjusted earnings per share likely closer to the midpoint of our stated range. Our more consistent quarterly performance this year is driven in part by the steps we have taken over the past several quarters to smooth the historic quarterly seasonality in our business and partially by the mix of our backlog. In the fourth quarter, for example, we expect less revenue from percentage of completion activities versus last year, which included gainful sales and earnings from phase one of the large deferra project. This softens some of our traditional seasonality and creates less variation in our results quarter to quarter from less of a ramp in Q4 revenue. Let me now turn to the quarter in greater detail. Both our FCD and FPD segments contributed to our 3.5% revenue increase, generating growth of 7% and 2% respectively. By mix, we delivered year-over-year top-line growth of 5% in original equipment and 2% in aftermarket activities, respectively. Almost all CERV regions increased sales year over year as well. We generated 11% growth in the Middle East and Africa region, as well as in Latin America. Europe contributed with a 6% increase compared to last year. Shifting to margins, we generated adjusted gross margins of 32.4%, representing a 270 basis point year over year increase and 10 basis points sequentially. The improvement was largely driven by solid execution and top line leverage. We are particularly pleased with this margin expansion given the higher revenue from original equipment work, which tends to have a lower margin profile than aftermarket. We expect these actions coupled with our operational and portfolio excellence efforts to deliver further gross margin expansion as we progress towards our 2027 target levels. By segment, FPD's adjusted gross margin was 33.7%, representing a 410 basis point year over year increase. This robust segment performance is a result of improved execution, largely derived from the new operating model and divisional operational excellence initiatives. FPD delivered a 10 basis point year over year improvement with an adjusted gross margin at 29.9%. We believe FCD will deliver further sequential margin expansion in the fourth quarter due to improved revenue conversion, product mix, and cost-out activities. On a reported basis, third quarter consolidated gross margins increased by 250 basis points, to 31.5%. As improved operational execution more than offset the $2.3 million increase, and net adjusted items within cost of sales. This quarter, adjusted SG&A of $246 million increased $11 million year over year, which included the increased annual true-up of the previously mentioned actuarially determined long-term liability. Despite the dollar increase, adjusted SG&A as a percentage of sales was up only a modest 30 basis points year over year to 21.7%. reflecting the quarter's top line growth and our ongoing cost discipline efforts. On a reported basis, third quarter SG&A was higher by about $7 million. As a percent of sales, reported SG&A was 22.9%, a 10 basis point improvement versus the comparable period. Our adjusted operating income in the quarter was $126 million, a $31 million increase year over year. Our strong adjusted operating margin of 11.1% was a 240 basis point expansion and represented an incremental margin over 80%. Absent the actuarially determined charge I referenced earlier, adjusted operating margins in the quarter would have exceeded 12%. On a year-to-date basis, we have delivered an 11.5% adjusted operating margin, representing a 230 basis point improvement versus the prior year. We continue to expect our full-year adjusted operating margin to increase by at least 200 basis points compared to 2023 levels. This level of performance has flow served well on its way to achieving our 2027 adjusted operating margin target of 14% to 16%. By segment, FPD delivered a strong adjusted operating margin at 16.4%, which is a 410 basis point improvement over prior year. For two consecutive quarters, FPD has now generated adjusted operating margins of more than 16% within the range of its 2027 adjusted operating margin target. Still, FPD has further opportunities to accelerate growth and expand its adjusted operating margin to the high end of the 16% to 18% targeted range. FCD's adjusted operating margin of 14% was lower by 70 basis points, but is a 60 basis point sequential improvement. We expect to generate continued adjusted operating margin expansion in FCD during the fourth quarter, primarily derived from the expected increase in gross margin. On a reported basis, third quarter consolidated operating margins increased 270 basis points year over year to 9.1%, driven by improved operating leverage. Our third quarter adjusted and reported tax rates were 19.7% and 22.8% respectively. This quarter's reported tax rate was higher than the adjusted rate considering realignment activities and the below the line foreign exchange had unfavorable tax impacts on the rate. Turning now to cash flow, we generated record third quarter cash from operations of $178 million, driven by strong earnings and substantial working capital improvements, particularly in accounts receivable. During the second quarter, our receivables were negatively impacted by the timing of revenues. As expected, this impact reversed during the third quarter, and we generated strong cash flow from our collections. Additionally, our cash conversion cycle declined by nine days year over year, driven by improved inventory turns and payables. As a percent of sales, our third quarter adjusted primary working capital improved year over year and sequentially by 260 and 140 basis points, respectively, to 27.9%. With capital expenditures of $24 million, our third quarter free cash flow to adjusted net earnings was 189%. Historically, the fourth quarter has been our strongest cash generation quarter, and we expect a free cash flow to adjusted net earnings conversion rate at 85% or more for the full year. Altogether, we are pleased with the third quarter's operating cash flow results and our efforts to smooth the seasonality of our performance, which provide more opportunities to strategically deploy cash under our capital allocation framework. Other uses of cash during the quarter include a combined $46 million for dividends, a term loan reduction, and share repurchases. As Scott highlighted earlier, we successfully completed the acquisition of Mogus Industries earlier this month. I want to thank all of our Closerv and Mogus associates who worked tirelessly on the transaction. Additionally, we appreciate the support of our banking partners as we amended and restated Closerv's credit agreement by extending its maturity to 2029 and increasing our term loan component to provide additional flexibility and liquidity. The MOGIS transaction checked all the boxes in our capital allocation criteria, portfolio diversification, aftermarket opportunity, strong financial returns, and straightforward integration, demonstrating our commitment to value creating inorganic growth through a disciplined capital allocation approach. Our inorganic pipeline remains robust, and we expect to continue exploring acquisitions to further diversify our business and accelerate our 3D strategy. When considering the strategic use of capital, our framework will guide us in directing investment dollars to the highest long-term return option, including acquisitions, share buybacks, and prepayable debt like our term loan. In closing, we are proud of the results we delivered this quarter and through the nine months of the year. We look forward to executing on the substantial opportunities ahead to further improve our financial performance. We are committed and focused on finishing the year strong and are confident that our continued progress will enable us to achieve our 2027 targets. Let me now return the call to Scott.

Great. Thank you, Amy. I want to provide a few comments on our 3D strategy. We delivered record bookings in the quarter from our 3D strategy, representing nearly $410 million. Our strategy is working in today's environment, and we fully expect continued growth in our 3D bookings looking forward. Our focus remains on supporting our existing customers in the energy transition journey through decarbonization initiatives, as well as adding value to new energy technologies like hydrogen and carbon capture. We intend to further diversify our portfolio into attractive markets like specialty chemicals and mining, as we did in the MOGIS transaction. Additionally, we continue to make progress with our digital offering, Red Raven. We believe we have a differentiated technology and extensive domain expertise to monitor pump and valve performance, prevent unplanned downtime through predictive analytics, and ultimately help our customers optimize their flow loops. Let me highlight a few examples of our 3D strategy in action. Our focus on specialty chemicals is an example of our diversification efforts. During the quarter, we received an order to supply vacuum pumps for a US-based pharmaceutical company. To keep up with the growing demand, our equipment offers process efficiency to help increase the supply of critical medication to patients across the country. In the decarbonization lane, we want a contract to supply pumps and valves for the construction of a new nuclear power station in the United Kingdom. The nuclear facility is expected to generate enough low-carbon electricity to power 6 million homes. We are excited to participate in this flagship project in the UK, which will provide reliable and clean energy to support their growing demands. Lastly, on Digitize, our ability to instrument our products with our Red Raven IoT offering positions FlowServe to provide true solutions for our customers and demonstrates the value of our digital capabilities. In the third quarter, we want a three-year contract to monitor dry vacuum pumps for a leading global soft drink company. With our 24-7 monitoring and predictive analytics, we expect to improve the uptime and productivity for this global customer. In conclusion, we delivered another strong operational quarter and are confident in our ability to build on these results. The macro backdrop remains positive, and we believe we can continue to drive growth in both our new and aftermarket businesses. We remain committed to our 3D growth strategy as it has proved successful over the past two years. Lastly, we believe we are currently ahead of pace on the journey towards our long-term financial goals. We have made great progress in the past two years, and we have a clear roadmap utilizing the closed-serve business system to deliver our growth and margin targets that we defined for you last year. Operator, this now concludes our prepared remarks, and we would now like to open the call for questions.

Thank you, sir. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. Our first question comes from Andy Kaplowitz with Citi.

Good morning, everyone.

Good morning, Andy.

Scott, can you give us more color into what you're seeing in terms of bookings? At least one of your competitors, I think, talked about some slowing in process. And I think there is some concern regarding slowed spending in the Middle East, both of which it doesn't seem like you're seeing. So do you see continued strength in the Middle East and overall process markets? And I know you reiterated Closter's bookings should exceed one time for the year, but do you still believe your markets overall are relatively early in their up cycle and book to bill could be over one time for the next several quarters?

Sure, and happy to talk about that. Let me start with aftermarket, then I'll go to projects. The aftermarket business is incredibly healthy. We're two quarters in a row now at $600 million. And I'd say that the underlying health there is twofold. One, the process industries, the utilization rates, while maybe not at record levels, are incredibly healthy. And what we're seeing is the operators spending money to maintain those levels of operation. So turnarounds are back to kind of a more normalized level. We're getting parts pulled through. We're getting service work. And then the second part of this is, you know, we've got a significant focus with the new org design on two of our business units, which are services and solutions for pumps and services and solutions for the FCD segment. That is all around capture rate and making sure that we get the value from our extensive installed base. And so we're tracking essentially market share gains with improved capture rate on both the pump side and the valve side. And so I'd say, you know, normalized levels of utilization with the process industries combined with our ability to drive capture rate up, we're confident that we can continue to see very healthy aftermarket work And, you know, in theory, continue to grow that business as we move forward. And then maybe move into projects. You know, right now we see a very healthy pipeline for the foreseeable future. You know, project activity has been robust this year. Primarily, you know, oil and gas, Middle East has been one of the biggest drivers. That's what, you know, those awards made up a lot of the bookings, the project bookings in the third quarter. we still have visibility to very strong Middle Eastern work. And so despite some of the hostilities in the region or in other parts, we're seeing Saudi Arabia, UAE, Qatar, Oman, Kuwait, continuing to invest and progress forward. And while a lot of our work is in the oil and gas side, it is the process industries like gas processing, LNG, refining expansion, We believe there's more work and substantial opportunities as that region continues to diversify. And so we know there's a strong need for power generation next year. We've got very good visibility to that. We also know that the water demands in the Middle East continue to grow. And so there's desalination opportunities. There's municipal water opportunities. And then the chemical side is continuing to expand as well. And so I'm excited about the Middle East. We're there. We visit regularly. I was supposed to go last week but went to Europe instead. But I'll be back in January. And at this time, we don't see any slowdown. And then for the rest of the world on projects, I'd say it's a little bit of a mixed bag. The U.S. and Europe project activity has slowed a little bit. With that said, we still continue to see very healthy activity in anything decarbonization, primarily around carbon capture. Some of the biodiesel or bioconversion is still happening. Recyclable plastics are still a big thing in the decarbonization lane. And then probably the next biggest bright spot is on power. And I talked about that in the prepared remarks, but our power overall funnel is up 20%. We've got very strong visibility to awards next year and the year beyond that. And then we think nuclear is a very long-term play. These projects take a long, long time. But we booked over $100 million of nuclear work in the quarter. And we expect to see continued growth from nuclear as we go forward. So I'd say overall, look, the aftermarket business is healthy. We see growth opportunities there. And then we've got several different levels on the project activity around the world. And today we feel confident about our project outlook.

Very helpful, Scott. And then, Amy, maybe just in terms of the Q4 EPS, Scott, I think you're going to decently under 30% of the year's EPS in Q4. Historically, I think you're decently over 30%. As you said, is that just kind of Jafaro one leading to much higher front end? And we know you're purposely intending to balance your career learnings, but is there anything else that's a little bit lower or slower than you originally thought for Q4?

No, you've really hit on it. I think, you know, as we look at the fourth quarter this year, our ramp in revenue is a lot smaller than what we've traditionally experienced in the fourth quarter. Some of that is our efforts to improve conversion rates and the strength of the aftermarket business that Scott's referenced. But in 2024, we just don't see that OE sales ramp that we saw in 2023 that largely came from Jafura 1. In fact, Jafura 1, our heaviest revenue quarters in 2024, were actually Q1 followed by Q2. I think we'll still see a bit of progression in margins, particularly driven by FCD, where we should see a benefit from mix, as well as some of the cost-out activities that they're going through currently. FPD should be relatively in line with what... with what we've seen. I will comment that, you know, any opportunity that we have to get to the higher end of the guidance range, which was somewhat... mitigated by the size of the discrete charge that we saw in the third quarter would come from hitting the higher end of our revenue guidance range. Right now, I would suspect we'll be closer to the midpoint of that range, but if we see stronger book-to-ship revenue in the quarter or POC performance outpacing what we're currently scheduled to do from a production standpoint that drives sales to the higher end of the range. I think that would be our path to the upper end.

Appreciate all the color. My best to Jay, and welcome, Brian.

Yeah. Thanks, Andy.

Thanks, Andy.

And our next question comes from Nathan Jones with Stiefel.

Good morning, everyone. Morning, Nathan.

I wanted to talk a little bit about a comment you made, Scott, in your opening remarks on a data-driven approach to portfolio review with products, customers, margins, and the 100 to 200 basis points target by 2027. sounds a lot like an 80 20 quadrant driven kind of model there and i'm interested to see where you think you are in the evolution of that process are we still segmenting the business uh in terms of those products customers margins are you to the deployment phase of that yet uh and just any color you can give us on on how that progresses over the next couple years

Yeah, absolutely. And happy to talk about the full-serve business system. And we did some kind of precursor to this last year in the analyst day where we talked about product management and portfolio optimization. And essentially at the beginning of this year, we launched a truly formal portfolio excellence program. And yes, it is truly an 80-20 framework. We're using an incredible data-driven approach to look at our products, our customers, and our profitability in making long-term strategic decisions on what is the best products for our customers, but also how do we generate value for FlowServe. And so We've launched this formally. We've got three business units in flight right now. And so we've had one business unit started in January, one started in the second quarter, and we had one just recently start. But we fully expect all of the product business units, all five of them, to go through this by 2025. And we're seeing very early results to this. But think about more systematic price increases, eliminating some products that don't necessarily contribute to the overall portfolio flow surface. And when you think about full serve, right, we've got a very long legacy of product families and substantial complexity within the portfolio itself. And so I'm pretty excited about what that complexity reduction can do and that increased focus on the product families that really do create value for full serve and our customers. And so, you know, I'd say we'll formally launch this a little bit later in the quarter. And so you'll hear more from us, but, you know, we're excited about the early kind of opportunities that we're seeing. And I'd just say it reaffirms what we said last year in the analyst day, that we were expecting 100 to 200 basis points from product management and portfolio excellence. And now, given the early results of this, we've got a lot more confidence to hit that as our 2027 target.

I don't want to get too far ahead of you on promising your targets, but Flozev has over the years been a very complex organization with a lot of skews and different products in it that maybe could be rationalized out of it. And other companies who've gone through this kind of process have delivered, you know, margins that margin expansion that not only would be, you know, a hundred basis points a year for the next few years, but on beyond that, it would seem Flosov has probably a lot of raw material to work with there. So any commentary you can give us on, on kind of the duration past the targets that you've put out there to date or, you know, potential for you to outperform those targets over the next few years?

I'll just start with kind of the history of this. We started something similar with FullServe 2.0, and I just say the organization at the time wasn't mature, you know, fully mature enough to do this. Now is absolutely the right time. The data integrity is better than ever, and so Really, what I'm trying to say is we are in a position to truly capitalize on this today, given where we are with the business unit structure and the quality of the data or the improved quality of the data. We still have opportunities there. Overall, it's far better than what it used to be. And so to your point, you know, what we've seen is other companies that have launched a very formal 80-20 framework get substantial margin opportunity and expansion over kind of a, you know, let's call it a, you know, a two to four year period. And so, you know, we're not, we're going to stick with our 2027 targets of 100 to 200 basis points. But I would say if that was the end state for us, I would be incredibly disappointed.

Awesome. Thanks very much for taking my questions.

And our next question comes from Dean Dre with RBC Capital Markets.

Thank you. Good morning, everyone. And I'm sure he's listening, but I wish Jay all the best and a welcome to Brian. Thanks for that, Dean. Sure. All right. And for Amy, and I guess Scott, too, I know you guys don't like to use the word asbestos. But let's just confirm that that $0.07 non-cash charge is related to this, what we know is a routine annual accrual true-up to your 30-year undiscounted asbestos liability. Again, I'll emphasize the routine part of it. But that's what we're talking about, right?

Yes. It's a process that we undertake every year in the third quarter of the year. based on claims experience for a number of years, including the current year. And that's what the seven cents is this period. And you're correct. That is an undiscounted number. The duration of that liability is 30 years.

Good. All right. Just want to make sure that was clear. And then can we talk about free cash flow? And it's just I love the saying that you are so far above your typical third quarter conversion. Amy, you talk about the day's improvement in the cycle because when I see structural changes like this, it makes me think that that 85% target conversion eventually is going to start inching up and Hopefully we'll get to that 100% threshold at some point, but just kind of take us through what structurally has changed.

Sure. So I think a couple of things, you know, we were pleased actually to start the year relatively strong from a free cash flow conversion standpoint for FlowServe with positive free cash flow in the first quarter. The second quarter, the timing of our sales worked out in a way where we saw an accounts receivable build in the quarter, which is something that we've focused on pretty early with respect to our cash conversion efforts. And we did see some of that reverse in the third quarter. So in some ways, I see this performance in the third quarter being a little bit about a full year performance in terms of the timing of those cash flows or a year-to-date performance. But I think what we're incredibly pleased to see – in the third quarter of this year in that nine-day conversion, cash conversion cycle improvement, is improvement coming from inventory. And so, you know, As we look at our operational excellence initiatives, that's obviously around margin expansion. Margin expansion does help cash conversion, but operational excellence also goes to how efficiently are we with our inventory processes. And so we are starting to see that improvement in inventory and day sales and inventory as And that's something that we have to stay focused on, we have to stay mindful of, and I do believe is a structural change. in the business. And I'll quote Scott here, you know, with respect to the margin expansion opportunities that we have, I'd be incredibly disappointed if we stopped at 85% free cash flow conversion. The goal is really to get investing class with respect to those. And, you know, the primary working capital performance we have as a percentage of sales, that's something over time that we see it's possible to drive more to the mid-20s and even lower than that over time as we expand margins and improve our working capital efficiency.

All right. That's a great recap there and some good framework for us to monitor. And just as a follow-up for Scott, so you're now 11 quarters above a billion dollars in orders. And just kind of reflect here in terms of, you know, the duration of this streak, the importance, you know, for the organization, and just maybe some assurance that you're still being, using selectivity in terms of, I wouldn't want a streak duration, you know, compromise at all the selectivity that you've been exercising. So kind of just take us through the importance of the streak and the importance of selectivity.

Yeah, I mean, I don't think we see this as a streak per se. I mean, what we're interested in is continuing to drive growth at Full Serve. And, you know, we put out targets, long-term targets, about a 5% growth rate, you know, from an organic perspective. And that's what the organization is is fully focused on. And so when we think about the seven business units, you know, each of those seven business units has a growth target and truly has growth initiatives that they're working on from either a product portfolio standpoint or customer account management standpoint or market share or parts capture rate. Like all of those are are deliberate actions. And so I'd say, you know, what we're not waiting for is, you know, we're not waiting to see what the market gives us. We're truly going out and being aggressive about making sure that we can win the work that we believe we're entitled to. Just the comment on the project side and selectivity, I will say we are absolutely being selective. We are not backing away from that. We're seeing our ability to be selective and win the right work. And when we're selective, we're winning work that, one, gives us the margins we believe that we deserve, given the risk of some of those projects. But two, it's with customers that we know we're going to get the aftermarket entitlement over the long term. And so that's not going to change. We continue to be incredibly selective. We've passed up on many projects. And some of our sales folks are absolutely thrilled about that. But it's the right thing to do for full serve and for our shareholders. And so we'll continue that approach. And I just say on the kind of the level of bookings, You know, the aftermarket business is incredibly healthy at that $600 million run rate. We expect to see that to continue to kind of tick up as we go forward. Projects always lumpy, but, you know, we've got good visibility and a healthy funnel there. And I'd just say, you know, kind of that $1.1 billion level now is something that, you know, we aspire to be above on every quarter as we go forward.

Great to hear. Thank you.

And ladies and gentlemen, our next question comes from Mike Halloran with Bayard.

Hey, good morning, everyone. Morning, Mike. First, just on the morning. So just on the power side of things, obviously the seculars are starting to move in Fosser's favor, which is great. How do you see that playing out from a duration conversation? Starting to see some of the aftermarket pieces today, but some of that refurb work can take time. The projects can take time, but, you know, obviously a ton of excitement, order books, good funnel book funnel is good. So maybe just frame up how that should play out over the next few years here.

Yeah, I would say that the horizon is even longer than two years, Mike. This is a really slow-to-move industry, and certainly on the nuclear side. And so we've seen nice growth year-to-date, up 23%. We like the bookings in the quarter. Power is $150 million-plus. with $100 million of nuclear. The composition there was life extension in North America. So we had two nice awards there, giving us a healthy mix of bookings. And then also the spotlight award that I talked about on the new nuclear power in the UK. And then I'd say just generally what we're seeing is we're seeing traditional power discussions about how do we get power into – so think about bigger refineries, process industries, desalination plants. So there's a significant need for power to support those. And then that's kind of that normal base load and traditionally has always been the highest – now combined with this new need to power substantially large data centers. And so you're seeing some pretty crazy stuff, right, where you get some of the big players in the tech space securing capacity with traditional power or even with nuclear power plants. And we're seeing different dynamics in this industry than we've ever seen before. And so I just say as we think through short-term and long-term, we've got a good, healthy funnel around all power activity, both traditional and nuclear. But then over the longer term, kind of the next 10 years, we really believe that nuclear will drive substantial growth. And I think you'll see more life extensions in North America. You'll see more kind of plants that have been taken offline getting moved to go online all of those facilities in the US have closer content in it. In the in Europe you're going to see plans for new build that's going to take place over the next 10 to 15 years. India's got plans for new build. And Asia Pacific has plans for new build. And so this is, I'd say, just a very steady kind of long-term growth outlook for FlowServe and for our kind of product families that support both traditional and the nuclear side.

Thanks for that. Makes a lot of sense there. And then, obviously, the recent acquisition, really good fit. How are you thinking about the funnel from here of opportunities for the willingness for you to go after that funnel in light of mortgage acquisition, bandwidth, you know, anything along those lines, just to give some context for how aggressive the funnel looks and your willingness to go after it.

Sure. So I think we continue to be, to be active and grow, um, our opportunity funnel from an inorganic standpoint. There's a lot of excitement around the MOGIS transaction and in part within our organization because it's such a great fit. And so I just highlight the elements that we think make this work. One, fits the strategy, helps us diversify. It is, you know, an attractive but fair purchase price. synergies available to us kind of at the $15 million run rate by the end of the second year. And the last point that I'll make goes to your bandwidth, Mike, which is that it's a relatively straightforward integration for us. And so We think as we, you know, finish out 2024, move into 2025, that we do have bandwidth as an organization, both from the strength of our balance sheet, which continues to get stronger, you know, by the day, but also within the organization to integrate acquisitions going forward.

Great. Really appreciate it. Thank you.

And our next question comes from Andrew Obin with Bank of America.

I guess, good morning.

Morning, Andrew.

Hi, who are you? Just a question on FCD and, you know, not to take away from sort of great progress over the past year plus, but just maybe you can give us more color on FCD, just margins and also decline in OE bookings in the quarter and year to date. What gets this to inflect positive and just maybe more color as to what's driving this decline. Thank you.

Sure. So I think to start with, one, we were pleased with the operational performance overall of the business in the third quarter. If we had one surprise, we did anticipate seeing a bit more margin expansion in FCB during the quarter. Mix was a little less favorable than we anticipated. and the business determined they were going to undertake some more cost-out efforts. I'm not concerned about the bookings level that we're seeing, Andrew. We would like to see that mix shift a little bit to the MRO aftermarket side as we move forward to help that marginality. I would say overall, as a business unit, we are focused – laid out that we are focused on both growth and margin expansions. Certainly within our four business units in FPD, we are focused on growth and then margin expansion because we're happy. We're not satisfied, but we're pleased with the progress that we've made. As we look at FPD overall, we would like to see margin expansion and then growth. And so the bookings performance in the quarter is not necessarily where we want to be for three or four quarters, but if we can find a way to expand margins over this period of time, we would be more focused on that than the book to bill.

Just to add to that, the team's got several initiatives around how to expand margins We're working on a couple of different things. And so I think you can expect to see margin progression as we go forward, even finishing the year, but also into 2025.

Excellent. And just a follow-up question on power. I know people are focused on nuclear, but we're also hearing that people are likely to keep coal plants open for longer. And I was just wondering, what are you hearing from your customers about that? and what's potential impact on earnings. I appreciate that Nuclea is very profitable, but I would guess that coal is one of these legacy businesses is profitable as well. Thank you.

Yeah, absolutely. So in the coal-fired power plants, we actually have a substantial installed base. And so, you know, we benefit when there's a life extension of a coal-fired power plant. You know, typically there's not really any new coal other than potentially some in China. But we are seeing extension of life on the coal side. We're seeing this in Europe as natural gas kind of dried up given the Ukraine conflict. We saw several operations in Germany and some other countries where they've extended the life of their coal assets. And then we're seeing a little bit of that in the U.S., and I would say that's probably more dependent on what happens in the election here. But I'd just say the overall comment, and this is probably more U.S. and Europe, given the demand side of power right now, these markets are going to need all forms of electricity. And so whether that's coming from traditional power of coal or combined cycle with natural gas or nuclear or gas, some of the greener forms of energy like solar and wind, everything's going to need to contribute to match the demand growth that we're seeing.

That's exactly right. Really appreciate your comment. Thanks so much.

And our next question comes from Joe Giordano with TD Cowell. Please go ahead.

Hey, guys. Thanks for taking my questions. You know, I wanted to touch on nuclear. I know we spent a bunch of time there already, but If you were to think that a lot of stuff is being contemplated in that sector now in terms of how to bring on new capacity, whether it's SMRs or things like that. So how should we think about your opportunity set for some of these newer technologies versus like, you know, a restart of an old legacy type of nuclear plant?

Yeah, I think that's a really good question. All of my comments were on what I'll call traditional nuclear. And so these are big power, nuclear power facilities driving substantial capacity onto the grid. On the SMR side, we are optimistic about... ...for different consortiums, including the Department of Energy... on the different technology needed to support small modular reactors. But what I'll say is like, this is not going to happen anytime soon. And so we're, we're still very much in development phase. There's a lot of R and D that still needs to go forward to make this a viable option. And I would just say, you know, kind of Scott's horizon is probably not, you're not going to see SMR be a meaningful part of the full serve portfolio for, for the next decade. Beyond that, though, I'd say is anybody's guess. I think some of the technology is incredibly promising. Some of the different ventures out there, both in the U.S. and in Europe, seem to make a lot of sense. But I just say it's just not moving very quickly. And, again, we're partnered with kind of three or four different technology players. I think there's, and I don't know the exact number, but let's say there's kind of 18 to 25 out there. And we hope we're picking winning horses, but it's hard to say right now who the winners will be on the SMR side.

Just to confirm on that, is there any reason to think that, like, on a gigawatt basis, that your, like, opportunity on something like that should be meaningfully different versus a traditional plant? And then I just had one follow-up on the asbestos. Is there a way, like, go ahead, sorry.

Well, I was just going to say on the SMR side, yeah, I think that's a good way to say it. I mean, even on a small modular reactor, you're going to have pumps and valves. And I think that's just put it on the ratio of kind of what traditional looks like to SMR for our entitlement.

Perfect. And then just on the asbestos side, how are you guys thinking about packaging that up and selling it to an insurance company or something like that? We've seen competitors and other companies take advantage of that. How does the economics of that look currently?

Certainly, you know, that's something we take a look at from time to time. You know, in the past, these programs have been fairly well funded by insurance, and we think well managed within FlowServe. But we're continuing to dust off that analysis and make sure that we're doing the right thing from our shareholders by continuing to manage this internally.

Thanks, guys.

And we'll move to our next question from Damian Karras with UBS.

Hi, good morning, everyone. Morning, Damian. Morning, Scott.

So sorry if I missed this, hopping over a little late from another call, but just the updated full-year guidance kind of on both the sales guide and just EPS, You know, it kind of implies a pretty wide range of outcomes in the fourth quarter. Would you maybe just comment a little bit on that range and kind of the swing factors, you know, from the low end to the high end?

Sure. So just to reiterate, I think right now our outlook would point to something more at the midpoint of the range and midpoint of the revenue guidance range. And that is in part due to the impact of the discrete item in the quarter in terms of that assessment at the midpoint range. Really, our ability to reach to the higher point of the range would be around revenue. So right now, we're anticipating not as big a step up as we would generally see going from the third quarter to the fourth quarter. That's largely driven by less POC revenue quarter over quarter from the fourth quarter of last year from the Jafura project that's coming into play. So touching that kind of 6% at the high end of the revenue guide would require a really strong book-to-bill quarter or pulling forward some of the POC revenue that we anticipate coming in 2025. So looking at something more at the midpoint at this stage in the quarter.

Okay, got it. That's helpful. And then I wanted to ask you about the water and market. You had some pretty notable booking strength there. Curious if there are any large project awards that stick out, or are you just seeing broader-based strength? And given some of the unfortunate damages caused from the hurricanes in the Southeast U.S., just curious if there's any such associated projects Drivers there may be factoring in.

Sure, yeah, so we did have a really healthy water bookings in the quarter, kind of $90 million, which is essentially double from what we saw last year. A lot of that was around flood control and industrial wastewater. And so where we do well is kind of the more complex water where you're moving either a lot of water on kind of flood control or we're working with industrial waste to kind of recycle that or clean it up. And then we also do reasonably well on desalinization, although that's become a very competitive market area. And so what we saw in the quarter were several awards in North America. And these were around urban areas that were truly around waste and flood control. And that would be our sweet spot in North America. And so we had two nice projects there. Nothing too large, but let's call it $5 to $10 million. And then we also won one desalination project in the Middle East that was reasonably large. And we continue to watch the desalination market. We think there's substantial growth opportunities there, although that's become incredibly competitive with some of the peer group. But we do think there's ways to drive more of a system approach when we think about pressure exchange technology, process improvement, Red Raven IoT, and then combining that with some of our high-energy pumps. But I would say overall, water is becoming more scarce, so desalination opportunities continue to grow. And then I'd say just, you know, we're seeing more and more investment with, you know, kind of local municipalities around making sure that they can manage either, you know, catastrophes from weather or just upgrading their flood control and industrial systems to make sure that they can support their local populations.

Got it. Thanks for your thoughts. I'll pass it along.

And our next question comes from Sarie Boroditsky with Jefferies.

Hi. Thanks for squeezing me in. Just to clarify, the guidance doesn't include the impact from OGAS, but given that you have closed, could you just update us on the contribution in the fourth quarter and then to start with and then for 2025? Thank you. Sure.

So just with respect to MOGIS, overall, we think this is a business that's about $200 million of revenue annually at margins that are accretive to FlowServe. If you looked at the presentation, you can see the size of the valves and actuation that we're talking about as we look at them. And so as you might anticipate, there is a higher percentage of POC revenue than we have on the rest of the valves portfolio. So we're going to need to sort through sort of the existing backlog and shipments to understand how that $200 million would have fallen out this year under LOSERV's revenue recognition model. And so we have stopped short of providing a guide for MOGIS as we work through those details. That said, you know, given, you know, Two and a half months of performance I don't anticipate that it's going to be incredibly impactful for the first quarter, and we will be able to give a good read through based on what we see this quarter going into 2025.

Okay that's helpful and then just follow up you mentioned the election, but given that it's next week, one of the items that's come up is the impact of regulation on energy projects. Could you just maybe comment on if your customers have talked about the impact of regulation, and if this is decreased, would you expect to see higher activity levels and thus sales for you?

Sure. This is the one question that I didn't want to talk about, but... What I will say is obviously there's two different parties, and one party supports less regulation. And so our customers, traditionally in the oil and gas side, would prefer less regulation. And they believe that less regulation allows them to move some of the projects forward, particularly the LNG side. and some of the pipeline kind of, you know, growth that still needs some interconnection across the United States. And so we'll see what happens. But what I would say is overall is, you know, CloseServe is going to, you know, we're going to keep our head down. We're going to continue to work on, you know, with our customers to drive growth. And we believe regardless of what happens, we'll be able to continue to drive success at CloseServe.

Appreciate the comments.

And our next question comes from Joe Ritchie with FlowServe.

Hi. Good morning, everybody. I guess I work for FlowServe now. Welcome to the team, Joe. Okay, my first question. Scott, you mentioned, look, it's great to see the aftermarket bookings above 600 the last two quarters. You talked about the capture rates in both of the different segments. I'm curious, as you think about the runway to capture your installed base, I don't know if you want to use a baseball analogy or if you want to maybe just give us a sense for how much room there is to continue to capture more of your installed base.

Sure. I'll give you a specific example. Last week, I was in Europe. I was with our European services and solutions team on the pump side, and I actually visited one of our pumps parts manufacturing locations in Italy. That team was incredibly optimistic. Even this year, we've seen growth in what I'll call a relatively challenged market with the process industries in Europe. We've been able to move the capture rate up a couple hundred basis points this year, and I believe there's incredible runway to keep moving that up. And while we would love to say that our pump parts capture rate is in the high 60s or 70s, in reality, we're substantially lower than that, somewhere in that kind of 30% to 40% range. And so I think with the increased focus on our ability to quote incredibly fast, so think minutes and hours versus days, And then the ability to generate a part within days and not months is something that can still move the needle for us. And so that team is laser focused on speed. They have a mantra called speed wins. And I just say that whole team is incredibly passionate and aligned with the strategy to continue to support our customers. And so We're doing some really innovative stuff there. I'm excited. I was very excited and pleased with what I saw in Europe last week, and I believe we can continue that success globally from a services and solutions perspective.

That's super helpful and encouraging. And I guess maybe the follow-on question, I don't know if you guys are willing to lay out any pieces yet on the 2025 framework, but to the extent you are, I'd be curious. even if it's just broad parameters for how you're thinking about next year?

Yeah, maybe I'll start and Amy can jump in. You know, really what we're thinking right now is, you know, we put out the 2027 targets last year. We said 5% growth when we talked about some, you know, expanded margin and then an EPS target. And, you know, we've made incredible progress over the last 12 months, you know, along that. And I just say, you know, as we think about 2025, you know, That's how we're thinking about it, and just continuing that momentum, continuing to connect dots to the 2027 long-term targets.

Yeah, Scott's hit on it, and maybe just to touch a little bit more on the segments, and I referenced this earlier. I think that in FCD, we've seen tremendous sales growth there. Coming from 23 to 24, next year is going to be more about margin expansion than sales growth versus on the FPD side where we're not satisfied with margin expansion, but we're pleased with the progress that we've made. So we're focused on kind of growing that business. And you see that within the makeup of our backlog currently. So maybe that's just a little bit more color for you at the segment level.

And then obviously, you know, in the next earnings call, we'll provide full year guidance and a lot of color on how we see the outlook for 2025.

Helpful. Thank you.

And our next question comes from Brett Lindsey with Mizuho. Please go ahead.

Hi. This is Eric Luck on for Brett Lindsey. Growth appears to be broad-based from what it seems, except within chems. Can you maybe double-click into that and the challenges there and when we should expect a rebound in Europe? Thanks.

Sure. Yeah, the chemical market has been, you know, a little bit challenged that we've seen. I'd say, you know, where we're seeing the areas of some concern would be Europe, particularly a little bit in the U.S., and then, you know, we're seeing an oversupply of production chemicals at this point, and You know, we're still highly levered to the chemical industry with our installed base, and so the aftermarket is important to us. I will say, and again, I was in Europe last week. I visited with some of our customers. There are real opportunities as they think about how they're going to manage their business differently. And so I'd say some of the exciting things are putting recyclable plastics or other recyclables on the front end of their process, which is a change in flow loop, and there's flow control applications for that. And then secondly, just really thinking about how they drive more efficiency and productivity at their existing sites. And so You know, we've talked to them about our energy advantage program. We're talking to them about, you know, Red Raven and instrumenting and monitoring their pumps and valves. And then we're also talking about doing things differently in terms of how do we think about, you know, uptime, reliability, and then more of a long-term service contract than some of the traditional call-outs. And so even though it's been a challenging time in the chemical space, I think there's opportunities for us as we go forward to On a positive side, you know, we do expect the Middle East to really, you know, we'll start to see some significant investment around the petrochemical and base chemical markets and capacity expansion in the Middle East. And we're well positioned to take advantage of that as we see that growth start in 2025 and beyond.

Thank you. I'll leave it up there. Okay.

Thanks, Eric.

And ladies and gentlemen, this concludes today's question and answer session and concludes today's call. Thank you for your participation. You may now disconnect.