Flowserve Corporation

conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Ezell, VP Investor Relations, Treasurer, and Corporate Finance. Please go ahead.

Thank you, and good morning, everyone. Welcome to FlowServe's fourth quarter 2024 Business Update. I'm joined this morning by Scott Rowe, FlowServe's President and Chief Executive Officer and Chief Financial Officer, Amy Schwetz. Today, Scott and Amy will provide an update on their overall business performance and highlights from the quarter. Following their comments, we'll open the call for questions. I'll ask that you please keep to one question and one follow-up question and then return to the queue. Turning to slide two, 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 fourth quarter press release and today's earnings presentation, both of which are on our website. With that, I'll turn it over to Scott.

Thank you, Brian, and good morning, everyone. I'll begin on slide three. We delivered strong results in the fourth quarter, tapping a year of improved execution and significant progress towards our 2027 targets. Bookings were nearly $1.2 billion for the quarter, with strong growth in both original equipment and aftermarket bookings. Adjusted gross margins expanded 300 basis points to 32.8%. This marked the eighth consecutive quarter of -over-year margin expansion, and with additional leverage from SG&A, we delivered adjusted operating margins of .6% in the quarter. -to-bill was 1.0 times as we continued to drive revenue conversion while exiting the year with near-record backlog of $2.8 billion. Our disciplined focus on working capital supported strong operating cash flow of $197 million in the quarter. Operationally, performance in the quarter was largely as we anticipated when we provided our third quarter update in October. Those strengthening of the U.S. dollar drove an incremental currency translation headwind along with higher interest expense related to the mogus acquisition. Amy will provide more detail on this later in the call. Overall, our team executed to our plan, delivering improved results in the quarter and completing an outstanding year for closed serve in 2024. Turning to slide four, Q4 bookings grew 13% versus last year, driven by continued strength in our in-market and strong execution by our commercial teams. We continue to see robust growth from our strategy, with 3D bookings representing 31% of our total awards for the quarter. We generated $618 million of aftermarket bookings, which was the third consecutive quarter above $600 million. We are laser focused on continuing to grow our aftermarket franchise, and our dedicated aftermarket teams are driving higher levels of service and value to our customers at margins accretive to the closed serve portfolio. Fourth quarter original equipment bookings grew 14% versus last year, with a healthy mix of activity across traditional process industries, as well as within new energy markets. Our largest award in the quarter was approximately $60 million in order to supply pumps for a new nuclear power plant in Europe. For the quarter, nuclear awards totaled more than $110 million, representing the second consecutive quarter of nuclear bookings greater than $100 million. Our power bookings, which included both traditional power and nuclear, were up more than 40% versus the prior year period. The power in-market continues to be a significant opportunity, and Fosur participates in virtually all forms of power generation, from traditional hydrocarbon power, like coal and combined cyclonatural gas, to nuclear and newer energy technologies, like concentrated solar power or battery storage. Our next largest project awards were in the range of $10 to $15 million. Our selective bidding approach to large projects continues to deliver growth with our preferred customers and products at margins that create more value for closed serve. Additionally, we continue to see strength in our foundational core business of aftermarket, MRL, and short cycle activities, driven by stable asset utilization rates at our customers' operations and improved capture rates across our expansive installed base. Turning now to slide five. Looking back on 2024, we meaningfully grew bookings, expanded growth and operating margins, generated strong adjusted EPS growth, and delivered substantial cash flow, reflecting the strong execution and hard work of associates around the world. We also took significant steps in 2024 to strategically position the company and enable further value creation for our customers and shareholders. The mogus acquisition, which we completed during the fourth quarter, expands our offering and exposure to mining and minerals, an important and growing in-market that enhances our diversification efforts. We also launched the Fosur business system, a comprehensive framework to further improve our execution with consistent operating processes across the closed serve enterprise. We made significant progress last year in the areas of operational excellence and portfolio excellence, our 80-20 framework, both of which are improving the way we run our company and delivering margin expansion. Let me now address our 3D strategy in the market for 2025 as we turn to slide six. Our significant progress in 2024 gives us further confidence in our ability to deliver on our 2027 targets. And we fully anticipate continuing with this momentum in 2025. Our 3D strategy is well positioned to deliver growth and capitalize on macro trends, including ongoing energy transition, as well as global regionalization. Diversification and decarbonization remain critical strategic initiatives for Fosur in 2025. We expect to build on the strength of 2024, where diversification bookings grew 9 percent and decarbonization bookings grew 36 percent, driven by nuclear and new energy activities. On digitization, we believe we have the most advanced monitoring and prediction system within the full control space. We continue to demonstrate the value of our digital capabilities on a regular basis with our customers, improving their overall operability and reducing the cost to run their assets. In the year, we increased Red Raven monitoring assets by 14 percent. We believe there are scaled pathways to utilize the predictive capabilities that our domain expertise provides to generate recurring revenue and position ourselves for even higher after market capture rates in 2025 and beyond. Our 3D strategy continues to be the right one in today's environment, and we expect to see strong 3D growth trends in 2025. Turning to slide seven, with strength in our traditional and 3D-oriented end markets, our outlook remains constructive for projects, MRO, and aftermarket activity across industries and end markets. These opportunities continue to support our long-term organic target of 5 percent growth. Key global megatrends of energy security, regionalization, and electrification continue to attract significant global investments. Our overall 12-month project opportunity funnel is roughly flat to last year. However, the funnel remains at an elevated and healthy level, particularly in some of our strongest end markets and with more projects in the smaller to midsize range. The opportunity funnel and power is up more than 20 percent versus the prior year period, driven by the increased need for new power generation on the back of data center growth and electrification trends. We expect the world's existing traditional process industries to remain solid utilization levels, and we believe we are well positioned to capitalize on these aftermarket opportunities as we have demonstrated over the last several quarters. Moving to slide eight, innovation remains critical to differentiate our products in the market as we leverage technology to deliver a 3D strategy. During the year, we introduced 11 new products to the market. To highlight an example of how our innovation supports our customers in the energy transition journey, we are collaborating with a customer in Denmark on the world's first molten hydroxide energy storage plant called the Molten Salt Storage, or MOS project. The MOS process heats sodium hydroxide to over 1300 degrees Fahrenheit. The heated salt then generates steam, which can be converted to electricity. A specialized flow control equipment is essential in this severe service high temperature environment. Additionally, this technology can be used in concentrated solar power, carbon capture, and potentially used in future applications like small module nuclear reactors. We also launched another innovative offering enabling emissions reductions of up to 80 percent through our GAS-PAC ZE-SEAL, a dry gas field technology that enables operators to achieve zero emissions from blowdowns and stands still conditions supporting our customers' decarbonization goals. Finally, we continue to expand our capabilities of our solutions offering by combining our extensive domain expertise and flow control with new analytical and modeling tools and enhanced digitization through Red Raven. We believe this combination uniquely positions FlowServe to help our customers with their biggest flow control challenges. Altogether, we remain focused and committed to delivering unparalleled innovation for our customers, which we believe will deliver consistent growth and value creation for FlowServe. I will now turn to slide nine in the FlowServe business system. With a strong market backdrop and an effective long-term strategy in place, we are now leveraging the FlowServe business system to deliver strong execution. The FlowServe business system defines our approach for running the organization across five critical functional disciplines to deliver excellence. These disciplines drive consistency in how we work together across our seven business units, connecting business processes to our desired outcomes of profitable growth, margin expansion, superior customer experience, and cycle resiliency. Our operational excellence program is now hitting its stride. We have improved delivery performance and shop floor productivity while capitalizing on opportunities to further reduce our roofline. While we have made great progress operationally, we believe we have more opportunities in 2025 and beyond. Our portfolio excellence program is in its early stages. Our 80-20 effort, which we've named core for complexity reduction, was launched over a year ago, and we are continuing to advance the program in 2025 by adding the remaining two product business units. Early analysis from the three business units launched in 2024 are very encouraging. We have identified opportunities to reduce the complexity in our overall offering as we eliminate and rationalize products and services that aren't fully contributing, applying a more deliberate approach to pricing, and improve our service levels for our best customers. Our current expectation is that the revenue impact from the program will be negligible in 2025, while the actions we are taking will benefit gross margins by roughly 50 basis points this year at the level, and then accelerate in 2026 as the program is fully implemented across all product business units. We remain confident in our ability to generate 200 basis points of margin expansion from the portfolio excellence program by 2027 as we move all five product business units fully into the core program. Commercial excellence will be the next program to launch, which we anticipate will kick off during the second half of this year. Commercial excellence will focus on pricing discipline, account management, and funnel management to drive profitable growth and continue to improve our customer experience. In summary, we made significant progress in 2024, and I'm excited about the opportunities to continue to create significant value in 2025. With that, I'll turn the call over to Amy to discuss our financial results and outlook in greater detail.

Thank you, Scott, and good morning, everyone. First, let me echo Scott's comments. We are very pleased with our results in the quarter and for the full year, and are excited about the opportunities to further accelerate our progress in 2025. Turning to the fourth quarter in greater detail on slide 10, we delivered another strong operational performance with nearly $1.2 billion of bookings, adjusted operating margin of 12.6%, 70 cents of adjusted earnings per share, and $197 million of operating cash flow. Relative to our plans coming into the quarter, the underlying operations were in line with our expectations. Beyond our operational performance, adjusted EPS was negatively impacted two cents by foreign currency translation. In addition, MOGUS and the related interest expense was not included in our guidance shared in October. In the quarter, MOGUS was roughly neutral to our adjusted operating profits. MOGUS adjusted operating profit in the quarter was negatively impacted by the timing of shipments, with higher margin shipments occurring in October prior to the acquisition close. This led to lower sales and fixed cost absorption in our results. I'll share more in a minute about the strong outlook we have for MOGUS in 2025. Acquisition-related financing costs negatively impacted earnings by about two cents. For the quarter, overall revenues grew 1% versus last year. The MOGUS acquisition contributed approximately 300 basis points to sales growth, while foreign currency translation negatively impacted reported sales growth by about 100 basis points. Sales growth was muted in the quarter due to the meaningful percentage of completion revenue from phase one of the Jafferah project in last year's fourth quarter, which did not repeat in the fourth quarter of this year. Aftermarket revenues grew 4% in the quarter, which was partially offset as expected by original equipment revenues down 2%. Shifting to margins, we generated an adjusted gross margin of 32.8%, representing a 300 basis point -over-year increase. And our fifth consecutive quarter of sequential margin improvement. The launch of our flow-serve business system, which includes our operational and portfolio excellence efforts, positions us well to deliver continued gross margin expansion. Fourth quarter adjusted SG&A increased by $12 million versus last year, largely due to adding MOGUS in the quarter, along with the phasing of incremental corporate R&D investments. Adjusted operating margin increased 210 basis points versus the prior year period to 12.6%. Our best of the year and representing our highest quarterly incremental margin of the year at more than 175%. Adjusted operating income was $149 million, a 22% increase versus last year. Our adjusted tax rate for the quarter was in line with expectations at 21%. Compared to the prior year fourth quarter adjusted tax rate of 8%, which benefited from the release of certain valuation allowances, this year's fourth quarter tax rate was more in line with our structural rate. The change in tax rate versus fourth quarter last year negatively impacted adjusted EPS by approximately $0.13. With these items, combined with the additional modest headwinds in other expense and non-controlling interest, we delivered adjusted earnings per share of $0.70 for the fourth quarter. Turning to our segments, starting with FPV on slide 11, the strong momentum continued in FPV with bookings increasing 13% versus last year. As expected, FPV sales declined 5% in the quarter due to a combination of the phasing of large projects in the last year comparison period and the negative impacts of foreign currency translation. Despite the sales decline, FPV generated adjusted gross margins of 33.4%, an increase of 450 basis points versus last year. Coupled with meaningful SG&A leverage, FPV delivered exceptional adjusted operating margin of 17.5%, a 570 basis point increase versus last year. We are very pleased with the significant progress FPD has made this year. For the full year, FPD's adjusted operating margin of .5% was within the targeted range of 16 to 18%, which we set out to deliver by 2027. FPV continues to generate benefits from a more selective approach to bidding, while also driving productivity through our operational excellence program. We expect to see further margin expansion in FPD in 2025 from the continued maturity of these programs and our 80-20 complexity reduction program. Turning to slide 12, FCD, including MOGUS, delivered sales and bookings growth of 15% and 11% respectively. MOGUS contributed 11 points of sales growth in the quarter. In FCD, after market bookings increased 20% in the quarter, while original equipment bookings were up 8%, driven by strengths in both general industries and oil and gas. FCD adjusted growth and adjusted operating margins were 31.8 and 15.3%, respectively, for the quarter, a sequential improvement versus the third quarter. MOGUS was a slight drag for FCD's margins in the quarter, given the timing and mix of shipments and related under absorption that I mentioned earlier. Absent MOGUS, FCD's underlying operational margins were roughly flat year over year. FCD exits 2024 with improving momentum. We're benefiting from solid revenue conversion, improved mix, and enhanced execution. We are focused on expanding FCD margins and driving growth as we leverage the flow serve business system to improve execution, while also accelerating opportunities through the integration of MOGUS. Turning now to cash flow on slide 13. During the quarter, we generated very strong cash from operations of $197 million, bringing our full year cash from operations to $425 million. As a percent of sales, fourth quarter adjusted primary working capital was 28% on par with last year. We continue to see improvements in our cash conversion cycle, which improved by roughly one day in 2024. Working capital efficiency is a continued area of focus for our team. And while we have seen the benefits of improving our operations management system, we see more runway ahead as we leverage the flow serve business system to drive a standard inventory strategy. For the full year with capital expenditures of $81 million, we generated strong free cash flow of $344 million, our highest level in more than a decade. Free cash flow conversion ratio of 99% was significantly higher than our target of 85% or more for the year, and a strong indicator that our efforts in this area have momentum. Other sources and uses of cash during the quarter included increasing our term loan in conjunction with the mogus acquisition and a combined $37 million for dividends and a term loan reduction. Turning to our 2025 outlook on slide 14, as Scott outlined, we are well positioned to once again make significant progress towards our 2027 targets. In 2025, we expect organic sales growth of 3 to 5%, which reflects the strong momentum from 2024, a healthy starting backlog, supportive end markets, and further advancing of our 80-20 effort. We expect reported nits sales growth to benefit roughly 300 basis points from the mogus acquisition. Currency will somewhat offset sales growth as we continue to see headwinds from the stronger US dollar. Based on recent prevailing foreign currency exchange rates, we expect reported sales to be negatively impacted by approximately 100 basis points. We anticipate a full year -to-bill ratio of over 1.0, given the constructive market backdrop. Turning to profits, we anticipate continuing to expand growth and operating margins as we drive higher volumes and leverage our 80-20 program to reduce costs through a more simplified product portfolio. Mogus is also expected to drive profit growth in 2025. Our guidance assumes mogus operations will benefit adjusted earnings by an estimated $0.16, which includes $7 million of in-year cost synergy benefit. Incremental interest expense related to financing the acquisition is expected to partially offset the operational benefits. Overall, we expect adjusted earnings per share of $3.10 to $3.30. This includes absorbing an estimated $0.05 headwind from foreign currency translation. At the midpoint, our adjusted earnings guidance represents an increase of 22% versus the prior year. In contrast to 2024, we anticipate the profile of our 2025 quarterly revenue and earnings results will be similar to historical trends, with first quarter earnings the lowest and fourth quarter earnings the highest. The impact of mogus, including the benefit of synergies, along with the benefits from our portfolio excellence initiative, will accelerate through the year. We expect first quarter sales and earnings to be similar to the first quarter of 2024, as strong aftermarket growth is offset by lower percentage of completion revenue on a We continue to leverage our framework to deploy excess cash to the highest long-term return. Our board is authorized a quarterly dividend of 21 cents per share. We also expect to leverage our cash to repurchase shares to offset equity compensation. We are focused on continuing to invest in the business for growth, both organically and through M&A. We have a strong M&A pipeline and we continue to actively review opportunities that would accelerate our 3D strategy, further diversify the portfolio, leverage our scale, and drive both margin and EPS expansion. For the year, capital expenditure investments to further grow the business and drive efficiency in our operations are expected to be 80 to 90 million dollars. As I close, let me reiterate how proud I am of the flow serve team. We delivered significant value in 2024 across all metrics, bookings, sales, earnings, and cash flow. Our 2025 guidance is another step towards unlocking further value creation for our shareholders. With that, let me now turn the call back to Scott.

Thanks, Amy. Before we open the call for questions, let's go to slide 16. We made tremendous progress in 2024 and we believe 2025 represents another meaningful step towards delivering our 2027 financial targets. Our end markets are healthy and growing. Our 3D strategy is working. Our execution has improved significantly and we are seeing the early benefits of our flow serve business system. Overall, we are pleased with the remarkable progress in 2024, but we know there is more opportunity in front of us and our work is not done. Our 2025 guidance represents another step to achieving our 2027 targets and I have more confidence today than ever before in our team and our approach to deliver these results. We are excited about the journey ahead and have a clear roadmap to deliver significant value for our customers, our associates, and our shareholders. Operator will now open the call for questions. Thank you.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We will take our first question from Nathan Jones with Stiefel.

Good morning, everyone.

I guess I will start with a question on the aftermarket bookings. They have certainly ramped up over the last few years and are two levels higher than they have ever been historically. I wonder if you could just talk a little bit more about the strategies that you've deployed to really drive the aftermarket capture rates to drive the growth in bookings around aftermarket. Start with thanks.

Sure. We're super excited about the aftermarket bookings. Six hundred and eighteen million dollars in the quarter. It's several quarters in a row now that we've been over six hundred million dollars. And I don't know if that's the new floor, but I would say certainly a five fifty number would be the floor on on aftermarket bookings. And as you said, Nathan, this is absolutely a result of the good work from the teams. And so we have a massive installed base of both pumps and valves. We've got a great local presence with our quick response centers. We've got strong customer relationships. And what we're really focused on is that high level of customer service. The mantra within our teams is speed wins. And so we focus substantially on reducing the cycle time of our quotes, reducing the cycle time of getting parts to our customers, reducing cycle times of repairs and just being available to service them. And so we've got a nice record that we use within the aftermarket teams. We can see that the capture rates are continuing to move up and we're confident that we can continue to make progress with this. And then I just add that the macro backdrop is reasonably good. The utilization around the world on these big plants and infrastructures are at a relatively high level. And we expect those levels to maintain in 2025 and beyond. And so we like where we are with aftermarket. We've got aggressive growth targets on all of our aftermarket type businesses. And we feel like if we keep executing like we are, we'll continue to move that capture rate up.

Awesome. I guess my follow-up question is going to be around the 80-20 framework, your core initiatives. One of the comments or in the slide that I found interesting was that you don't expect it to really be a negative headwind on the sales side. Pretty much every company I've covered that has deployed this kind of system has always seen a headwind to revenue from getting out of products that aren't profitable or getting out of customers that aren't profitable. It's a creative to EBS to see those headwinds in sales. I'm just seeing a revenue headwind from these 80-20 initiatives. If that's something that we should expect in the future or just your approach to that.

Thanks. Sure. Let me provide a little context first just to get everyone kind of grounded. You know this well on the 80-20 journey, but just as a reminder for everyone else, we launched three of our business units within 80-20 last year. We call our initiative Core for Complexity Reduction because essentially that's what you're doing. You're using a Pareto type approach to reduce the complexity in your business. FlowServe has been around for a long, long time and we have a lot of complexity. This initiative and this effort is something that's really impactful to FlowServe and we've got high expectations as we go forward. As we think about the two business units that are kind of a full year into this, what we're seeing is skew reduction by somewhere in the magnitude of 10 to 15 percent in the year. As you indicate, that is going to be a little bit of a headwind to our revenue as those skews are out of our offering. The philosophy is that we take those resources that were used to sell that product or that channel to market and we're repositioning to our best products and our best customers. At this point, at least in 2025, we feel like that revenue impact is negligible as we start to invest in our best products and our best customers. We're one year in with two business units. That's how we see things today. I think we'll be able to maintain that into 2025. As we kick off two more business units in 2025, we'll see the dynamics of what the data shows us and what we think the revenue impact will be. But again, that probably won't show up until 2026. Then on the margin side, I'll add that in the two business units that are now kind of a full year in here, we fully expect in 2025, 100 basis points in the gross margin level because of the efforts that we're doing with 80-20. I guess in closing on 80-20, I'll just say, we are following the methodology very rigidly and we are on track with our expectations and what other companies have done when they use the 80-20 framework. We're pretty excited about this. We'll see modest improvements in 2025 and we'll start to accelerate those improvements in 2026 and beyond. Just reiterate that we remain confident that this initiative, which we put under our portfolio excellence, will continue to drive 200 basis points plus as we reach our long-term goals of 2027.

Nathan, I might just add there that as we talk about negligible impact, I think another way to say that is it's factored into our organic revenue guidance that we've put out of 3% to 5%. What would 3% year look like? It could look like more revenue loss from 80-20 that doesn't necessarily sacrifice our potential to reach our EPS guidance.

Makes perfect sense. Thanks very much for taking my questions.

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

Thank you. Good morning,

everyone. Good morning.

Hey, maybe we start on the 25 guide with the expectation that you think you'll be above one on book to bill. Just how calibrated are you on that so far? I mean, you do have some good earnings visibility on some of these longer cycle projects. So is there a front log that's giving you that confidence that you'll be able to and do you have confidence in maintaining this streak of over a billion dollars of orders? At some point, is that going to come to an end and maybe some observations there?

Sure, Dean. I just hit the aftermarket in great detail. So I'll focus on the OE and the projects. When we look at our forward funnel within our CRM system, it's essentially flat year over year. It doesn't give us substantial cause for concern. It's at a very elevated level. I would say oil and gas is a little bit down, power's up substantially, chemicals down just a fraction, general industry's up. With all of that said, we feel like we've got great visibility to the project universe out there and driving growth within the OE bookings. As I said previously, the aftermarket, we're very confident in our ability to continue to grow that. Right now, everything we see is a book to bill over 1.0. The megatrends that we continue to refer to are decarbonization. Despite some of the rhetoric maybe in the US kind of shifting away from that, we continue to see a lot of projects in the decarbonization space. We book carbon capture in the fourth quarter. We've got carbon capture visibility in Q1. We've got more carbon capture for the rest of the year. There's other things in decarbonization that we're pretty excited about. The nuclear outlook is incredibly strong on the power side. So the power and electrification continues to go forward. And so we've got great visibility there. And then the general industry and kind of run rate business for us has been reasonably strong as well. And so when we think about the megatrends and the end markets, it's all relatively stable. The soft spot, we've said this before, is chemicals in Europe. That remains a little bit soft. We're kind of a year and a half now with that softness. And so I would expect at some point, we start to see an inflection to growth. And then, Dean, maybe the last thing I'll add is what we saw with the January order rate was reasonably healthy. Our run rate business, our aftermarket business, both in North America, Europe, and around the world, it all looks good. And we've got real nice visibility to project type awards. And so at this point, it's a dynamic world out there. There's a lot of things going on, whether it's in the political arena or the geopolitics. But we've got good visibility to a sustainable growth rate and at this point, committing to book the bill over 1.0.

That's really helpful. And Amy knows this would typically be the time I would ask about free cash flow, but it was really strong in the quarter. So I think I'll leave that one there. But Scott, you mentioned the geopolitical side. Just, is there anything, as you see the businesses today, that would be impacted on tariffs, just in terms of what headlines you've seen, any kind of preparation, a playbook that you have that you need to have to put into play here?

Sure. We've obviously gone through this once before with the Trump administration in the first pass. And then, quite frankly, the Biden administration moved tariffs up even further. So we've got a good view of what to do with the tariffs. It's obviously a very dynamic situation and there's still some uncertainty in terms of exactly what happens. But what I would add is that we are incredibly confident in our ability to manage this. Full Serve historically has not been the most nimble company. I believe we're changing that pretty dramatically. We've got great visibility, not only to where our supply chain is coming from, but also what the impact would be at a product line level in any tariff scenario. And so that visibility is allowing us to move much quicker in terms of actions. And actions would be repositioning the supply chain, raising prices as we feel impacted. And so our teams are very geared up with this. We've modeled out more scenarios than I want to talk about on the call. But I would say given what we know today, we feel really good about our ability to manage this. And then just maybe some grounding for others. Two-thirds of our revenue is outside of the US. And for the work that is in the United States, we still have a significant manufacturing presence in the US in all of our products, so the pumps, valves, and seals in our exposure in the US is more supply chain related than finished goods. And so where we're getting impacted is our importing of castings and forgings and bar stock. And so we'll continue to work through this. At this point, I feel very confident in our ability to do that. And the impact historically has been very moderate to a very low number. Obviously, with the new scenarios, that goes up,

though. Appreciate all that, Kalar. Thank you.

We'll take our next question from Mike Halloran with Baird.

Hey, good morning, everyone.

Good morning, Mike.

So just talking through a couple things here. First, when you look at the 100 to 200 basis points plus you threw out on the slide on the 80-20 and then the commercial excellence program you're about to launch. And you guys said on the prepared remarks more like 200 plus. But you think about those, just a reminder, how much of that is embedded in what's previously embedded in the guidance for 2027? And then also a reminder, what is the volume component of that 2027 guidance as we sit here today or the revenue growth component? In other words, how much is firmly within your control versus market factors?

Sure. So maybe starting with the 80-20 work and what we're seeing with that. As we laid out our 2027 targets, we'd envision sort of 200 basis points from portfolio management. And I would think of 80-20 as the process that we're using to drive that portfolio management improvement. I think we've also made it pretty clear with the 2027 targets that we don't intend on stopping there. And so we felt confident in November as we started to see the results of 80-20 that really 200 basis points becomes a 200 basis points plus related to these programs. So we're bullish on the benefits that we could see from them. And then I think the other 200 basis points that we saw as we looked at is we looked at our ability to hit those long-term targets was really around operational excellence. And so I think we've made tremendous progress on the ops excellence side, particularly if you look at the results that we've seen running through the FPD segment. We've laid the groundwork for that within FCD. And so I think really that the top end of our range, if you look at kind of where we want to be from an OI segment, I would think of that as the operating leverage from volume that we would anticipate getting. So overall, just to reiterate what Scott said in his remarks, what I've commented on, we feel really good about hitting these 2027 targets. And we think we have the tools in place to do it.

Thanks for that. And then maybe a question on the guidance then and making sure I understand the cadence. And so if I heard the prepared remarks correctly, first quarter revenue and earnings are roughly similar to last year. Just making sure on that. And then as you think about the year, is this cadencing expectation for relatively normal seasonality, relatively normal or balanced conversion on some of the backlogs through the year? Any other nuances we should think about through the year and any thoughts on the corporate expense side?

Sure. So a little bit to unpack there. I'd start with, you know, kind of as we think about 2025, you're right that we look at that phasing as being closer to our historical seasonality. And I say that it's being impacted by a couple of reasons from an earnings perspective. To start with, we've commented throughout kind of 2024 on the phasing of that large Jafferra contract that we shipped across 2024 and to a certain extent recognized revenue in 2023. So the first quarter of last year was our highest revenue quarter from that. And so that does impact what we see in the first quarter. Secondarily, I think we've got the impacts of 80-20 that are impacting our profitability and will ramp throughout the year. And the third is really around MOGUS that I expect that as we progress through the year and begin to recognize synergies to get to our ultimate run rate of kind of that 15 million dollars plus of synergies that we'll see the fourth quarter be our best quarter of the year. And so those are the things that are working that I see playing out over the course of the year. And I do want to comment on the first quarter overall from the standpoint that you will see improvement embedded in the quarter from an operating performance perspective. We expect that gross margin will be improving again year over year to reflect the programs that we've made part of the way that we run the business going forward. But we see a few things embedded in there that are going to be offsets. And that's really around the additional interest expense from MOGUS, which is roughly two cents a quarter, so eight cents for the year, and the ramp up of those synergies. Oh, and then I'll just touch briefly on corporate expense. Sorry. I think overall we see corporate expenses being neutral in total over the course of 2025. So similar levels to what we saw in 2024. The phasing of that can change based on the kind of lumpiness of some of those expenses. But overall in total that number will be pretty close to what we saw in 2024.

Appreciate it. Thanks, Amy.

Our next question comes from Joe Giordano with TD Cowan.

Hey, guys. Good morning. I wanted to unpack that corporate expense a bit. You mentioned it's tied to like specific R&D and things like that. I mean, it was definitely higher. And now we're saying 2025 is neutral. I just want to know what's causing this ramp? How long does it stay at that level? And when you say it's neutral in 2025, like the 2024 number had like $12 million of extra cost from asbestos. Is it like you're saying it's going to be equal to that, inclusive of that extra 12? And then we'll see what asbestos is for this year? Thanks.

Sure. So the corporate costs just in general in terms of the basket of costs. So corporate costs that we do not allocate out to the divisions. So things in terms of in terms of corporate dev, R&D costs that are not necessarily attributed specifically to either segment. And it also includes elements of incentives, including both annual incentives and AIP in the mix. And it does include the IBM R true up that we do every year. We have included a placeholder for IBM R in the third quarter of this year. And so absent that I would anticipate the costs would go down year over year, Joe. But I think one thing to point out just about these elevated costs is given that incentive element, as we look at 2023 and 2024, as the company has began to perform closer to targeted levels, both share based compensation, which includes a performance component and annual incentives are higher than what we might have seen in 2022 and 2021.

That's fair. And then just if I could follow up on some of the in process R&D that you bought on the cryo side of things. Where are those today in terms of like commercial deployment?

Sure. Yeah, we remain very excited about that the LNG market in general. Obviously, with the new administration, there's new life to new build LNG in the United States. We've got a very global look on the LNG side, and we're able to put a lot of our valves and other product in there. And so now, obviously, we have to commercialize our pump that is making very good progress. And I would say it's somewhere kind of in the second half of the year, we've gotten through our testing protocol, and we're starting to bring that to market. On a positive side, we're already seeing our ability to support the aftermarket business in LNG. And so the technology that we've developed, we're now out there repairing and installing some of our product in replacement opportunities on existing LNG. And so we're already starting to see revenue come in the door on the back of this technology acquisition. And we're confident that over the long term, this will be a really nice addition to the overall portfolio supporting what we believe is a really strong in market for us.

Thanks, guys.

As a reminder, if you would like to ask a question, you may press star one on your telephone keypad now. Again, that's star one if you would like to join the queue. We'll move to our next question from Brett Lindsay with Mizuho.

Hey, good morning, all. When I come back to the skew reduction, you noted the two business units are underway, I think commensurate 10 to 15% reduction there, two more being reviewed this year. Where do you see the reduction ultimately landing at the end of the program on a skew basis? And should we think of potentially more benefit above just 80-20 practice as you get better throughput on what would be a more standardized simplified skew count? Sure.

Let me just start. I'll answer the skew first and then we'll talk about just the other benefits related to 80-20 because there's a long list to that. But on the skew, the first two business units, again, they're about a year through the program now. And what we're seeing is that 10 to 15% reduction in the first year. As we recut the data in year two, that number only gets bigger. And so there will be further reduction as we go forward. I don't think we're going to double the size of the skew reduction, but I think you could see those numbers going up to kind of a 15 to 20% within each of those first business units. And so, we'll continue to follow the methodology. Every time you recut your quads, you're moving products and potentially customers out of the mix and repurposing your resources to the ones that create value for the enterprise. And again, we'll follow that pretty religiously as we go forward. There's a lot of little caveats in terms of aftermarket and a product that supports one of your best customers. You may keep that a little bit longer as you're repositioning them to a different type of a product. And then to the second part of your question, which is a really important one, as we continue to reduce complexity, there's all kinds of knock-on benefits. And whether that's your overhead type cost in the manufacturing or in the quoting side, that starts to get a lot simpler because you're quoting less products and you're more focused on your best products. You can start to drive efficiencies in these different kind of work centers or different population groups. And then on the shop floor, we haven't modeled any of this to date, but we do believe, and we've seen other companies that do get a productivity uplift with the simplification of what's going through the manufacturing process. And so there's a ton of knock-on benefits. It goes all the way through the process from quoting to engineering, the shop floor, your supply chain gets simplified as well. And so as we continue to work through the initiatives, we'll continue to make sure that we are getting the benefits in each step of the manufacturing process.

That's very helpful. Maybe just one on inventory. So it still looks pretty lean to us. What's your assessment on inventories in the channels? And I guess if we're entering a modestly more favorable operating backdrop for just traditional energy deregulation, et cetera, should we look to the channel to maybe gain some comfort holding more inventory over the last couple years or still stay pretty lean?

Yeah, I'll keep this discussion in the U.S. because that's where we typically will start stocking distributors. The stocking distributors have pulled back on inventory pretty substantially, and they're at a reasonably low level. They've managed their working capital very well. They put a lot of pressure on us to reduce our lead times and be there for them in a much quicker response. And so I think at this point forward, my view would be that their inventory does start to come up. I think the North American outlook across the energy sector and across some of the general industry remains relatively bullish. And so I would expect a little bit of inventory build here in the coming quarters. I wouldn't expect anything crazy, like a 15 to 20 percent build, but I don't think they're cutting inventory. And again, I would expect modest growth on inventory levels as we progress forward.

Appreciate the insight. Best of luck.

As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation. You may disconnect and have a great day.