Flowserve Corporation

Good day and welcome to the FlowServe first quarter 2025 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Ezell, Vice President, Treasurer and Investor Relations and Corporate Finance. Please go ahead.

Thank you. Good morning, everyone. Welcome to FlowServe's first quarter 2025 business update. I'm joined by Scott Rowe, FlowServe's President and Chief Executive Officer and our Chief Financial Officer, Amy Schwetz. Following Scott and Amy's prepared remarks, we'll open the call for questions. Turning to slide two, 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. Refer to additional information, including our note on non-GAP measures in our press release, earnings presentation, and SEC filings, which are available on our website. With that, I will turn it over to Scott.

Thank you, Brian, and good morning, everyone. I'll begin on slide three. We delivered a strong start to the year in the first quarter, demonstrating the strength of our diversified portfolio and the exceptional performance of our associates around the world, operating under the FlowServe business system. Looking at some of our headline numbers, bookings grew 18% versus last year to $1.2 billion. Revenue increased 5%, and adjusted gross margins expanded 180 basis points to 33.5%. We delivered adjusted operating margins of 12.8%, resulting in impressive incremental margins of more than 50% in the quarter. Adjusted earnings per share with $0.72 for the quarter, an increase of nearly 25% versus the prior year. We enter the second quarter encouraged by our momentum, and we remain confident in our ability to execute at a high level. However, the current tariff environment introduces a new dynamic to our outlook, which I'll touch on in more detail shortly. We also recognize there is macroeconomic uncertainty as we look ahead. Accordingly, we are reaffirming our full-year guidance and remain focused on navigating the current environment while building on the strong results of the first quarter. Amy will provide additional details on the financial outlook later in the call. Turning to slide four, our strong first quarter bookings performance resulted in a -to-bill ratio of 1.07 times, with outstanding growth in aftermarket bookings and nuclear activity. We continue to see outside growth from our 3D strategy, with 3D bookings representing 31% of our total awards for the quarter. Record aftermarket bookings of almost $690 million represented the fourth consecutive quarter above $600 million. Our focus on growing the aftermarket business is paying dividends, where our high service levels continue to translate into increased aftermarket capture. In the quarter, our aftermarket franchise benefited from a roughly $50 million nuclear aftermarket order to upgrade a major nuclear power plant in North America. Our next largest award was a $42 million original equipment award, also within the nuclear space for a new plant in Europe, followed by a $36 million award for an energy project in the Middle East. In total, nuclear bookings were more than $100 million for the third consecutive quarter, and power bookings were up more than 45% versus the prior year. We also generated 28% -over-year growth in general industries. These results underscore the ongoing demand for our products and services in critical industries. Turning to slide five, I'll provide our view of how tariffs could impact our results and what actions we are taking to manage the current environment. As trade policy continues to evolve, we are focused on responding as quickly as possible to a very dynamic situation. We have clear visibility to tariff exposures down to the product family level, and we have a number of levers in place to mitigate the impact of the current tariff program. Specific to U.S. tariffs, the vast majority of the products we sell in the U.S. are manufactured, assembled, and tested within the United States. That said, we do import certain materials, such as castings and forgings, as well as some components like electronics and motors, into the U.S. These items represent a single-digit percentage of our total cost of sales, with the largest exposures to China, India, and Mexico. We also manufacture some products in the U.S. for export to other geographies, but this activity represents a modest -single-digit percentage of our total sales and often comes with the ability to migrate this work to other -U.S. facilities. In total, based on tariff rates known today, we estimate the annualized gross impact of the new tariffs before any mitigating actions is between $90 and $100 million. Following the first round of tariffs in 2018 and the supply chain disruptions of 2022, we developed a more resilient and regionally diverse supply chain. As a result, we are better positioned to navigate these challenges than ever before with a focus on delivering the best value to our customers. Our global footprint is an advantage in this environment, and we are leveraging our network to optimize the location of our work to help mitigate the impact of tariffs. We're also actively shifting sourcing around the globe to deliver the lowest cost, highest quality products to our customers. In short, Fosur is better positioned to navigate these challenges than ever before. We have also taken select pricing actions where needed to offset the impact of higher costs. In January, we executed our typical annual price increase, and in March, we raised prices again to offset the impacts of incremental tariffs. Additionally, we are utilizing change orders to reprice projects in our backlog as appropriate. We have a dedicated team focused on understanding the dynamic trade environment and ensuring that we are utilizing all of the available tools to mitigate their impact, such as USMCA and other trade agreements. Finally, we are tightly managing discretionary spending, and as we have in the past, we are prepared to move quickly to address costs if the macro environment changes. Turning to page six. We are also focused on the potential for tariffs to impact global market demand. Despite the increased uncertainty, our in-markets currently remain healthy. Asset utilization for large process industries remains steady, and maintenance spending has currently continued as expected. The spring turnaround season has been strong, and there have been no signs at this point that customers are deferring maintenance. April bookings to date continue to look healthy across our run rate and aftermarket business. Our strong aftermarket business, which represents over 50 percent of sales, also provides some insulation from potential changes in near-term demand that might first impact project spending. Our project funnel remains at an elevated level, and it increased sequentially in some of our largest in-markets, including energy, chemical, and power. Our nuclear opportunity funnel in particular continues to grow, even as large project opportunities have converted to bookings. We are currently seeing a limited amount of project deferrals in select industries like mining and renewables. Our strong backlog at $2.9 billion is another advantage in this environment and provides a level of certainty for future revenues. At this point, we have not seen anything out of the ordinary with backlog cancellations, and we expect 2025 to be in line with what we have experienced in past years. Overall, we have good near-term visibility, and we will continue to monitor the macro environment as we move through the year. Turning to slide seven, execution remains a key priority for us. We are leveraging the Full Serve Business System to drive consistency and results across the organization. The business system is a critical tool to help us navigate today's market volatility, something we did not have in place during the COVID downturn, and we're focused on leveraging a consistent and agile framework to run the business. Within the business system, CORE, our 80-20 program, is accelerating with strong results in the first quarter, which are modestly ahead of our expectations. As an example of our progress, I recently visited one of our US locations that manufactures pumps for the North American market. At that one site, we reduced SKUs by nearly 80%. These actions significantly reduced complexity and improved margins without having a significant impact on revenue. By mid-year, all of our product revenue will be utilizing the 80-20 methodology. For the year, we continue to expect the actions we are taking will benefit gross margins by roughly 50 basis points or more at the Full Serve level and then accelerate thereafter. We remain confident in our ability to generate 200-plus basis points of margin expansion from the Portfolio Excellence Program by 2027. In summary, I am very pleased with the strong start to 2025 and the progress we have made on executing our strategic initiatives. While we are mindful of the near-term macro uncertainty, our end markets are currently healthy, bookings have been strong, and our improved execution provides a solid foundation for continued success. Let me now turn the call over to Amy.

Thank you, Scott, and good morning, everyone. Turning to slide 8, we delivered another strong performance with first quarter revenue of $1.1 billion, adjusted operating margin of 12.8%, and 72 cents of adjusted earnings per share, representing earnings growth of almost 25% versus the prior period. For the quarter, we performed better than our expectations, driven by higher sales volume on improved revenue conversion and robust FPD margins on favorable mix and accelerating 80-20 benefits. Overall, revenues grew 5% versus last year, with organic growth of approximately 410 basis points and 330 basis points benefit from the MOGUS acquisition, while foreign currency translation negatively impacted reported sales growth by about 220 basis points. Original equipment and aftermarket revenues grew both 5% versus the prior period driven by FPD. Shifting to margins, we generated an adjusted gross margin of 33.5%, representing 180 basis point -over-year increase and our sixth consecutive quarter of sequential margin improvement. We believe our operational and portfolio excellence efforts position us well to continue driving margin expansion. Higher gross margins coupled with SG&A remaining consistent as the percentage of sales led to adjusted operating margin expanding 190 basis points versus the prior period to .8% and represented exceptional incremental margins. Adjusted operating income was $147 million, a 24% increase versus last year. Altogether, we delivered adjusted earnings per share of 72 cents for the first quarter. Turning to our segments, starting with FPD on slide 9. FPD delivered exceptional bookings growth of 21% versus last year with double digit growth in both original equipment and aftermarket activity. Growth was driven by continued strength and nuclear activity along with benefits in general industries and energy and markets. FPD sales growth of 2% versus last year was modest but ahead of our expectations on healthy book and ship activity and improved backlog conversion. FPD generated adjusted gross margins of 34.7%, an increase of 180 basis points versus last year, driven by favorable mix, increased productivity, and strong project management. Coupled with SG&A leverage, FPD delivered an outstanding adjusted operating margin of 17.7%, a 280 basis point increase versus the prior year period. We've made tremendous progress in FPD driving growth and expanding margins. While FPD is now ahead of 2027 adjusted operating margin targets, we still see opportunities to expand margins from here, supported by disciplined price-cost actions, continued aftermarket capture, our 80-20 complexity reduction program, and an enhanced approach to commercial excellence. Turning to FCD on slide 10, FPD delivered strong growth in the quarter with bookings growth of 10% and sales growth of 14%. MOGUS contributed 1,100 basis points of sales growth in the quarter. In FCD, aftermarket bookings increased by 19% versus last year, while original equipment bookings were up 7%, driven by general industries, energy, and power end markets. FCD adjusted gross and adjusted operating margins with .4% and .2% respectively, an increase of 120 and 110 basis points versus last year, driven by higher aftermarket margins and mix. We expect FCD margins will continue to expand as we leverage our 80-20 program, improve execution through operational excellence, and accelerate MOGUS-related synergies. Turning now to cash flow on slide 11, cash from operations was a 50 million dollar use of cash in the quarter, driven by higher temporary working capital requirements. While our receivables increased in the first quarter due to the timing of milestone billings and collections, we expect day sales outstanding to improve in the remaining periods of the year. We also paid the majority of our 2024 performance-based incentive compensation in the quarter, which impacted the accrued liabilities account. In contrast, last year's performance-based incentive compensation was paid in the second quarter. This difference in timing will be a tailwind for cash from operations next quarter. Overall, adjusted primary working capital as a percentage sales increased to 29.8%. Our efforts around a standardized inventory strategy resulted in improved inventory turns during the quarter, and we believe it points to further working capital opportunities and efficiencies ahead. From here, we expect significant improvement in our cash from operations and working capital efficiency, with full-year cash flow to adjusted net earnings of 90% or more. Turning to capital allocation on slide 12, with the recent market volatility, we view our share price at a discount to its intrinsic value. Guided by our capital allocation philosophy, we repurchased $21 million of flow-serve shares during the first quarter and bought an additional $32 million of shares during the month of April. In total, we have repurchased $53 million of shares -to-date at an average cost of $45 per share. We continue to believe that M&A will play an important role in our long-term strategy, and we are maintaining a critical eye towards opportunities to create value from a purchase price, synergy, and balance sheet perspective. Altogether, our capital allocation framework will continue to guide us in fulfilling our commitments like the dividend and maintaining our investment grade rating while deploying excess cash to the highest long-term return on investment, including share buybacks, acquisitions, and prepayable debt. Turning to our 2025 outlook on slide 13, the first quarter represents a great start to the year, and we remain focused on driving significant shareholder value in 2025. As Scott mentioned, while our end markets remain largely healthy and we're executing better than ever, we are operating in an uncertain and evolving macro environment. As we navigate the environment, we will stay nimble, leverage our significant internal capabilities, and continue delivering value for our customers with speed. With this backdrop, we are reaffirming our earnings guidance communicated in February, including organic growth of 3 to 5 percent and adjusted earnings per share of 310 to 330, representing an 18 to 25 percent increase over 2024 full-year adjusted EPS. With the recent weakening of the U.S. dollar, the sales headwinds from currency translation for the balance of the year should abate modestly. So, given the 220 basis point headwind in the first quarter and volatility and currency rates, we expect the full-year impact to range from 100 basis point headwinds to roughly neutral. Our guidance assumes tariff rates communicated to date are in place for the year. Guidance also assumes that general economic conditions and flow control demand remain relatively steady during the rest of the year. Considering the quarterly pace of performance, we expect second quarter results to be similar or slightly better than the first quarter. We anticipate modest -over-year margins. So, incrementals are likely lower than in Q1 based on the expected mix of business in Q2. Similar to historical seasonality, we would expect the second half of the year to represent a higher contribution to earnings than the first half, given our near-record backlog of $2.9 billion, accelerating benefits from the flow-serve business system and expected synergies from mogus acquisition. In summary, we are proud of our strong start to 2025 in the confidence it provides in delivering -over-year earnings growth in 2025. We are well positioned to navigate the macro environment given our global footprint and the actions Scott outlined. We remain focused on executing our strategy, serving our customers, and delivering value for our shareholders. Operator, we will now open the call for questions. Thank you.

Thank you. If you would like to signal with questions, please press star one on your touch tone telephone. If you're joining us today using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one if you would like to signal with questions. The first question will come from Andy Kapilets with Citigroup.

Good morning, everyone. Nice quarter.

Thanks, Andy.

Scott, maybe you can talk about the sustainability of bookings as you see it. Obviously, you said April looked pretty good. Aftermarket was very strong. You didn't put in the book to bill over one. I'm just curious about how you see the second half. I think you mentioned the funnel. Some of your end markets improved. Can that offset any project deferrals you see to continue to have relatively solid bookings, especially aftermarket, maybe a 600, 500 in aftermarket bookings?

Let me just start with Q1 bookings. We had a fantastic

start to the year. $690 million of aftermarket bookings is the highest level I've seen since I've been here. We had a $50 million nuclear award in that number. That won't repeat. We've been holding $600 million now for quite some time on aftermarket. Then I just say as we look forward, we feel pretty good about that run rate. Then Q1 projects, we also had a nice healthy list of projects, two nuclear awards, one in the energy space. Nice conversion on some of those projects. Then if we go from the end of Q1 to today, even as of last week, our markets continue to remain relatively healthy. Our run aftermarket bookings have remained elevated. We were tracking it before on a weekly basis. Amy and I are looking at it far more than ever before on a weekly basis. Even through last week, that run rate business in aftermarket remained at a very healthy level. The project funnel on the forward look is at a high level. Power, energy, and chemical growth in our forward funnel for projects is sequentially higher. Then at this point, we've seen limited project pushouts. It's hard to say that if this is normal project pushouts or maybe a fact of some of the macro concerns. We've seen this in some select markets like mining and in the renewable space. I'd say nothing too dramatic in terms of projects coming out. Again, that forward funnel is at an elevated level and very similar to what we saw at the end of Q4. Then I'd say within our backlog as well, we haven't seen any cancellations. That would be considered out of the ordinary. Up until today, the market looks reasonably good for us. The question is about the forward look. I'd say if the tariff program continues and the uncertainty caused by this dynamic environment continues, then we could potentially see a slowdown in the second half of 2025. We haven't seen this yet. I think there's a little bit of a wait and see with our customers. We're obviously staying in close contact with them. We're having a lot of discussions with our customers. We know that they're doing scenario planning on different things. At this point, we don't expect them to stop capital dramatically. I'd just say, Andy, it's really hard to call what our customer's going to do in the second half of the year given the amount of uncertainty that is out in the global market. We deliberately didn't put the full year book to bill over 1.0 in the prepared remarks. Obviously, we started Q1 at a 1.07 and so we're in a really good place. I'd say if we continue to operate how we do today, then we're going to be way above 1.0 and we feel really good with that. If the environment worsens, then there's a chance that the back half slows down.

Very helpful. Amy, just to the guidance on Q2, the similar or modestly better EPS, maybe you could talk a little more. You mentioned mix could hurt incrementals a bit. Is there any issue where tariffs ladder in before pricing or other countermeasures? What's going on there? Usually, seasonally, Q2 is a pretty decent step up from Q1.

Maybe to start with tariff impact, which we see largely as a second half issue is that works through our backlog. As we think about the second quarter, a couple of things, similar or slightly better than the first quarter, we had really strong revenue conversion on our backlog in the first quarter, which is impacting the spread of revenue across those two quarters. We obviously have really strong operational momentum coming from the first quarter. We think that 80-20 and pricing actions that we took early in the year, those increases that Scott mentioned in January provide some positive tailwinds. Then I think that as we look at really margin performance, we're looking at something that's pretty close to what we saw in the first quarter, first quarter of the year from both a gross margin and an operating margin standpoint. We will have some mixed headwinds that are in there based on what we see in the backlog today. I think overall, what can work well for us in the second quarter of the year, book to bill, staying at elevated levels will help, continued strong revenue conversion will help. Overall, I think we're still seeing our earnings profile be weighted towards the second half of the year.

Andy, I'd just add, Q1 was a really, really strong performance across the board. We're starting at a elevated level as we go from Q1 to Q2. We'd be really excited to keep that or be slightly better and then prepare to deliver in the second half of the year

like we normally do.

Appreciate the color.

The next question will come from Mike Howarin with Baird.

Good morning, everyone. Good morning, Mike.

Thinking about this in terms of the competitive footprint, the ability to push price, two-fold question. One, how do you view your footprint relative to the peer group? It feels like everyone buys castings, fittings overseas. I don't know if there's really much difference there other than it seems like you're in a good position, but please love your viewpoint there. Also, how receptive has the market been to pricing as you sit here today?

Sure. Let me just start a level set, everyone, on the flow serve layout. Two-thirds of our business is outside of the US. From a manufacturing perspective, about one-third of that roof line is in North America. We've got good coverage in Europe and the Middle East region, and then we've got good manufacturing presence in Asia Pacific. I think from a manufacturing standpoint, and we put this as one of our mitigating actions, we are regionally positioned and we can typically manufacture our in the region where our customers need it. We're not getting tariffs essentially on finished goods. We don't ship a whole lot of stuff from Europe into the US as a finished good or a finished pump or valve. The impact for us is mostly on our supply chain. I'd say from a footprint standpoint, where we can manufacture, that's actually a competitive advantage. We're still cleaning up our roof line and we know we've got some more work to do with that, but right now it actually gives us an advantage and allows us to manufacture in a region that may have less tariff impact than some of our peer groups. I'll talk about going on the offense here at the end, but let me hit castings and forgings. Castings and forgings are coming primarily from China, India, Mexico. Everybody does that. We're in line with the peer group within flow control. What we're trying to do is just find a scenario or a modeling that gives us the lowest tariff impact as we think through that. We do a little bit of that material in the US, but it's just the capacity in the US just isn't there to support the overall business. I'd say we're in line with the peers of where do you go for that raw material. Then on the component level, it's motors and sensors and essentially everyone's buying from the same place. I don't think there's a big competitive advantage with the supply chain. The one thing I would say is that with the reorg design in 2023, we bolstered our supply chain and operations team. We're performing better than we ever have from an operational excellence standpoint and the ability to pivot and migrate that supplier base. We've been doing that work over the last two years in earnest. We've already seen some of the supply chain movements taking place and putting us in a really, really good position as we go forward. Then on your second question on price, Mike, we do our annual price increase at the beginning of the year. That's always reasonably sticky. It's always a modest level that goes in that we start to see a little bit of that impact in Q2 and Q3. When we put that in in the beginning of the year, we felt like that was very much a number or an amount that put us squarely above price cost and felt very good about our ability to stay positive in that ratio. Then with the tariff situation escalating, we went pretty aggressive in March with another price increase and did that at the product family level. We really focused on exactly where the tariffs were impacting. We were very clear with our customers of exactly why this price increase was going in and that we would monitor the situation globally. We did that at the base level. We didn't do it as a surcharge. Typically, we find that a little bit stickier when we go that way. I'd say we don't know exactly what the stickiness is at this point. We'll start to get some data points on that in the second quarter. The feedback is most of the peer group is doing something similar. We're relatively in line and I believe that that will go in relatively smoothly. The other thing on price I just want to add, Mike, within the 80-20 framework, we've been moving prices up in our Q2 and Q3 and those are very healthy price increases. At this point, we feel relatively good about the pricing lever. We feel good about the ability to generate the price cost ratio moving up with the aggressive price actions we've taken thus far this year.

That's super helpful. Last one for me then. Based on the comments, you seem very confident in the ability to manage margins in the backlog. Just maybe talk about the mechanics there, whether that's hedging, price changing orders, whatever it is and how that dynamic plays out. Thanks again.

Again, obviously, price is an important part of that. We were a little bit early on moving in March and so the intention there was to get that in front of the cost impact. Then with our projects and backlog, we've done a nice job updating our terms and conditions from what we learned in the COVID crisis and supply chain crisis. We've got the ability now in projects that are in our backlog to reprice that backlog given some of the macro dynamics. We're aggressively looking to do change orders on our cost position that got impacted by tariffs for things that are in the backlog. Sometimes that's a little bit of a negotiation, but again, with our terms and conditions position, we feel very good about our ability to get that priced in. There is a piece of business that wouldn't be able to do change orders. Our non-project work that's somewhere in that four to six week window. Then that's where we're looking for the general price increase overcome

the tariff impact. Our next question will come from Dean Dre

with RBC Capital Markets.

Thank you. Good morning, everyone.

Morning, Dean.

I would love to continue this topic following up on Mike's question. On pricing, just some of the nuances you parsed between aftermarket versus OE. Just talk about your pricing power between the two. Switching costs for a customer, demand elasticity, at what point would they walk away? It sounds like you've moved early and you have the ability to reprice backlog, which is fabulous, but just some of the nuances here aftermarket versus OE and demand elasticity.

I think on the aftermarket side, it's obviously stickier. Typically lead time, speed of quoting, making sure that we can deliver on time are far more important than price. I feel really good about our ability to get the price within the aftermarket. That impacts our sales business, it's our pump parts, it's a lot of the components within the control valve that have a heavy aftermarket content there. I'd say that part we feel really good. The pricing dynamics in the backlog with our change orders for projects, we feel good about our ability to get that done. Again, a little bit of a negotiation, but I feel confident in our ability to overcome the tariff cost. Then I just say on the price side with the go forward projects, that will be the one that we'll see what happens as we go forward. These tariffs globally have put an inflationary pressure on all costs. It's us and our peer groups. As our customers start to process the new cost profile within their project spending and their project budgets, that'll be a discussion. Obviously, we're getting some pushback with our customers on wanting to share some of those inflationary costs similar to what we're doing with some of our suppliers. I don't think there's an alternative. At this point, we feel that these projects continue to move forward. Despite the inflationary pressures with their cost profile, we feel like we're in a good position to continue to win the work that we feel we're entitled to win there.

I think one other thing just to point out from a global perspective, a number of our projects are coming from bookings outside of the US. We continue to use our global footprint to serve our customers. With two-thirds of our business outside of the US, we do view a ring fence around the tariff concerns.

I appreciate all the precision in these pricing, the pricing strategy and how it's being implemented. My follow-up question is more on the M&A side. Would love an update on MOGAS integration, early read, and what kind of contribution you're expecting.

Sure. I'll start. Maybe Amy can jump in on a couple of points. We're still excited. We're very excited about the MOGAS business. The product is highly differentiated. It positions us incredibly well within the severe service ball valve market. The bookings in the quarter were a little lighter than we would want. Most of that was driven by project bookings. What we've seen is a bit of a slowdown in project bookings over the last two to three quarters. We have good visibility to project bookings on the forward look. We're pretty excited about the order rate as we look in the back half of the year. With that said, the margins are at the gross margin levels are creative to what we see at FCD. We like what we can do there. The aftermarket business remains incredibly strong. We're seeing good MRO work, good aftermarket at really high margins. We feel like we can pull through a lot of the MOGAS product on the back of the flow serve network, and certainly our QRC network. From an integration standpoint, it's progressing ahead. In fact, we're ahead of pace in terms of some of the cost out actions that we identified early on. We feel confident in our ability to deliver our synergy target number as well as being a creative to earnings in the first year.

The only other thing that I'll point out to what Scott added on synergies is just the acceleration of those synergies and getting up to run rate levels is part of the first half back half story for us from an earnings perspective. We're seeing that play out with MOGAS being a creative to earnings in the first quarter, and we can continue to think that that will accelerate over the course of 2025.

Thank you. We'll take a question from Nathan Jones with Stiefel. Good morning, everyone. I

guess starting off with a question on the visibility into the project pipeline. I think typically when you're booking project orders, those projects are fairly advanced. If you were to see a drop off in project orders, it probably doesn't happen in the first quarter. It doesn't happen in the second quarter. It might not even happen in the third quarter of this year, but maybe a bit further out. Do you guys have visibility to those projects that might turn into orders for flow served six, 12, 18 months ahead? Is that where you would see project pushouts if they were to occur?

Yeah, I think it's a really good point. Again, I want to reemphasize what Amy said. A lot of our projects are outside of the US and we're well positioned to manufacture that work with our global footprint manufacturing presence outside the US. To your point on timing, it's a really good one. When we think about project visibility in the second quarter and even into the third quarter, a lot of those projects have already received FID and they're well, well down the line of engineering procurement and construction. Unwinding that project, pausing that project, we really don't ever see that. Even in the COVID downturn, you don't see a whole lot of that. Our funnel for Q2 and Q3 would remain as is. Obviously, we're competing for that work and we'll put our best foot forward, but we're very confident in that visibility in moving those projects forward. The FID decisions that could be made in the second quarter or potentially delayed given some of the global environment would impact our bookings in 2026 and maybe even in 2027. Again, we haven't seen that at this point. We typically will get a one-year out visibility for these large projects. We'll get a little bit of the commentary from some of our larger customers. They'll talk about it in earnings calls or investor presentations, but it's difficult for us to see that type of visibility beyond a one-year. Now, the one market that is a little bit different would be nuclear. We get very, very long visibility into our nuclear orders. We'll typically start to track those projects two years, maybe two and a half years before we would get the order. Because of it's such a long natured type, and I'm talking really about nuclear power generation, big traditional nuclear power plants. So we'll get strong visibility for up to two years there. That funnel is still incredibly robust, and we still feel that we're going to continue to have outsized nuclear bookings as we go forward. And those obviously are dependent on governments and energy security, and I really don't see those trends changing as we go forward.

Yeah, and the other thing that I just comment on the nuclear funnel, Nathan, which is comforting in uncertain times is we've had three quarters in a row over $100 million of nuclear bookings. And that does impact the amount of our backlog that shifts within the next 12 months. So it starts to provide us visibility into revenue, not just in the current year, but in upcoming years. And I think particularly environments, in environments like this, it's a nice piece of business to have.

Excellent. Thanks very much for that. I guess the second question, I guess this is on tariffs, you've had $90 to $100 million of gross unmitigated impact. Can you talk about what you intend to offset with price and what you intend to offset with other supply chain initiatives or manufacturing initiatives?

Sure.

Yeah, I'll just let me make sure folks understand. So it's $90 to $100 million of gross tariff impact. That's unmitigated,

and that's the annualized number. In our headquarters here that we watch

very carefully because that number has changed a lot over the last month and a half. And then what we do is also track the activities toward mitigating that. And so obviously price is a big lever there. We think prices could mitigate potentially half of that. And then we're really deliberately working through those supply chain actions to make sure that we're repositioning the supply chain to the lowest tariff impacted country or potentially moving that into the region where there is no tariff impact. And then secondly is the repositioning of the manufacturing that I talked about earlier. We feel like with our manufacturing network, we've got a bit of a competitive advantage to move things around the world and reposition them where we need to. And so I think that's actually an opportunity in this dynamic time to win a little bit more work and take some market share given our presence in the region. And then finally, I would just say I want to touch on 80-20. And while it might not be obvious that that would be a help here, anytime you're reducing the complexity in your portfolio, it allows us to focus on the areas that make the biggest impact. And so when we talk about moving supply chain or repositioning some of that assembly, we're really talking about our Quad One products. And now that's dramatically a much shorter list, dramatically less complexity than what we've had in the past. And it allows us to move with speed as we're doing some of this repositioning. So we feel very good about our ability to mitigate. Obviously we're leveraging trade agreements as well. And so there's been a lot of work of just making sure that all of our coding is in the right place and making sure that we can capitalize on those trade agreements. And so we feel that the combination of efforts does allow us to fully mitigate the impact. We think the timing could be a little bit mismatched as we work through the quarters. But overall, for the full year of 20-25, and we said this in the prepared remarks, we feel like we can mitigate the full $90 to $100 million.

And Nathan, just to double down on one point with Core or 80-20 and other sort of benefits from the way we run the business through the flow serve business system we see playing out over the year. When we reiterated guidance, we're reiterating our margin expansion as well for the full year. And so we said in February, 100 basis points of operating margin expansion year over year. Our Q1 operating margin performance was actually 100 basis points better than our full year 20-24 operating margin performance. So we feel like we've got a really strong start to the year from that perspective. Now what I will say is as we looked at tariffs, there is a bit of a disparity in terms of our segments that are impacted. So a higher proportion of our tariff exposure is actually on the flow control side of the business, the valve side of the business, than on FPV. So as we look at margin expansion playing out over the course of the year, we may see valves being slightly more pressured than pumps in this area.

And just a quick clarification, the timing being a bit mismatched would imply that there's a bit of margin pressure in the second quarter and a bit less in the second quarter.

I would consider the margin pressure to be more between the third and fourth quarters. So I think second quarter as we look at our backlog, a lot of that is going to be fulfilled with materials that are in inventory already. And so really the second half I think is where we see more pressure coming in and that price mismatch probably occurring more between the third and fourth quarters.

Thanks very much for taking my questions.

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

This is David Ridley Lane on for Andrew Obin. Last quarter you said that inventory positions at your distributors were at pretty normal levels. Wondering if you saw any pre-buy activity from your distributors maybe ahead of the March price action?

Sure, we'll talk about our distributors and these would be the stocking distributors that are primarily in the valve business, but we have a little bit of this in pumps and our mechanical seals. They have been under a lot of pressure on inventory management over the last year and a half and so we really didn't see a whole lot of pre-buying. We know there was a little bit of it with a few of our distributors, but really nothing material and no big boost to kind of the February or March bookings levels through that distribution channel.

Understood. And then do you see any need to add to your capacity as you are seeing these elevated nuclear orders continue? And maybe you know would you need to add to capacity on some of the more specialized LNG or power generation projects? Sure,

we're blessed and cursed with a large roofline and so at this point we don't see any scenario where we need to add incremental roofline. In fact we're continuing to take roofline out of the global network. With that said, there are a lot of things that we can do to expand capacity within the sites that we have. And so obviously we've got dedicated nuclear facilities to support the rigid quality plans that are required in the nuclear product space and in those sites we are looking to expand that capacity. But we can do that with minimal investment. It's more through process change and staffing effectively and a lot of that work really relies more on the front end with your project management and your engineering. And so we've got a pretty good view of forward product demand. We'll ensure that we can continue to increase capacity more through our operational excellence program as part of the full-serve business system than needing to drive incremental roofline or add facilities into the network.

Okay, understood. Thank you very much.

Yep, thank you.

And our next question will come from Joe Giordano with TD Cowan.

Hey guys, good morning.

Morning, Joe.

So maybe

I'll start. The 3D bookings obviously have a lot of momentum here. How do you square that with some of the actions taken from a policy standpoint? I think recently DOE is saying cutting something like $10 billion in funding for clean energy projects, spanning carbon capture and hydrogen and some of the stuff that you've been doing very well and at customers that you serve. So how do you see that in your play?

Sure, those would all fall in our decarbonization line. We continue to see a lot of activity around decarbonization. I would say it's changing. The mix is changing a bit in terms of less focus on kind of the things that were further out like green hydrogen. But we're seeing continued support for carbon capture. And obviously Europe has been a big proponent of the energy transition type bookings or the decarbonization type bookings. But the US activity hasn't changed either. And so I think companies are pretty focused on reducing their carbon footprint and ensuring that their assets are running at a reasonably clean type level. And so we haven't seen any slowdown in our forward foot funnel there. We have seen some projects come off the list that were never economical or never were going to make a whole lot of sense. So I'd say even for US decarbonization activity, we still think that moves forward. I just say we also have LNG within our decarbonization lane. And obviously the rhetoric in the United States is now very, very promotional around natural gas and around the LNG export side. And so we feel pretty good about the visibility to LNG projects globally, but certainly a kind of a resurgence in the US LNG activity.

And then the second question on just I want to understand what's embedded in the guidance from a macro standpoint. I know the slide deck says you're assuming that kind of general economic conditions stay largely the same. But at the same time, I guess you're raising prices here. It seems like you built in somewhat of a contingency on volumes going down as a result of price because the organic growth is the same despite the higher price component. So like, is it fair to say that if macro conditions really do stay the same and you're booking like one, one, one, two, like under normal circumstances, you'd probably be raising now?

So I think we talked a lot about our guidance range internally before today. And I'd start with saying that our strong execution in the first quarter gives us a lot of confidence in our ability to perform over the course of the full year. So what we factored into our guidance is what we know today. So tariff climate as it is today, inflation as what we know today, and demand signals that we're seeing through kind of the last several weeks. We also considered our risks and opportunities. And we feel like we have a very clear path or I should say actually path to delivering on our original guidance. And it might help to kind of frame this within the context of what the low end of the range and what the high end of the range might look like. So if we were to deliver at the low end of our range, which still, by the way, provides 18% earnings growth year over year for flow serve, that would include some mismatch in tariff impact and mitigating actions over the course of the year. And it might include some level of demand destruction in the back half of the year. Delivering at the high end of the range means that we execute well on our mitigation actions. And we continue to the strong book to bill business that we've seen in the first quarter of the year and into April. And we see continued momentum under the flow serve business system with both operational excellence and the 80-20 activities. I think either way, we're going to see margin expansion year over year. And I would say the other wild card out there is certainly around FX. The current environment, and when I say current, I'll say the last week has been very favorable. Obviously, that's been volatile as well. But the US dollar remaining at relatively weak levels in comparison to the first quarter could be a tailwind as well.

Yeah. So just to reiterate what Amy said, this is, we put the guidance out there, given everything that we know today. Obviously, this is a very dynamic environment. But right now, we feel very confident that we can deliver. And as a reminder, that guidance for 2020 and 2025 is 18% higher on the low end and 25% higher on the high end, which would be outstanding performance in any operating environment. And so we'll monitor the next 90 days here, and we'll get a chance to talk about guidance at the end of our second quarter. And if things change, we'll certainly update the guidance to

reflect those changes. Very clear. Thanks, guys.

And we have a question from Sari Borodzki with Jeffreys.

Good morning. This is James Ohm for Sari. Thanks for taking questions. I wanted to understand 1Q and 2Q dynamic a little bit more here. So you talked about strong backlog conversion in the quarter that is kind of impacting the spread between 1Q and 2Q. So can you talk about what drove the strong conversion? I think you talked about there wasn't really a pre-buy, so I just wanted to understand why there was such a strong conversion.

Sure. So it really, the conversion and backlog was really around things that were already in backlog entering the year in our more engineered business. So just continuing to execute well from an operational excellence perspective, hitting milestones, delivering kind of what we say we're even over-delivering in those instances. And I think that this is really just an indication that operational excellence is in a really good place within our platforms. And that's really the conversion that we saw in the first quarter.

Got it. Thanks for the call. And I guess I wanted to touch on the margin side a little bit more. So I think going into the year, I think you were expecting FPD to show a little bit better margin expansion compared to FPD, but it seems like FPD can perform better in the quarter. So how should we think about the margin expansion in each segment?

Sure. So FPD has been on a really great run. The results that we posted in the first quarter of this year are the best that we've seen since that segment's been in existence as it is today. So we really can't say enough about the performance from that segment. And we think there's still more gas in the tank there. So we're just starting to see the benefits of 80-20 come through the system there. They continue to focus on operating and operational excellence under the flow-serve business system and delivering on the benefits of that as well. They've also seen a strong mix benefit in the numbers with really the focus on growing the aftermarket and investing in the right type of -to-order projects. And so we think there's still more room above the levels that we saw in Q1. And we're at our long-term target levels for 2027. We're going to continue to try and surpass those and determine what we think is the art of the possible in terms of margin performance in FPD. Turning to FCD, we have made important structural changes within FCD to bring our margins up. And under normal circumstances, we do or we would see FCD margins expanding more than FPD in the current year. And just to kind of outline what those are, it's really around footprint decisions that were made and executed in 2024. It's around the MOGUS acquisition, which already is accretive at the gross margin level. And it's about really selective bidding and margins and backlog that we saw coming into 2025. The headwinds that we face are what I referenced in one of the earlier questions, which is just that the tariff impact and exposure is greater on the FCD side of the business. That's in part because they've done a nice job shifting their supply chain to low-cost countries and also manufacture more in low-cost countries in certain instances than FPD. And so as we work our way through the course of 2025, the risk around the mismatch of the timing between mitigating actions and our order delivery is greater on that side of the business. And then I want to finish what's a long answer to a simple question by saying, just to reiterate, we feel very good about overall margin expansion for workflow serve up or of 100 basis points or better in 2025. And we're going to continue to deliver that knowing that is incredibly important to our investors.

Great. Thanks for the call.

Thank you. And that does conclude the question and answer session. I now turn the call back over to Brian for any additional or closing remarks.

Great. Thank you to everyone for joining the call today. We look forward to seeing many of you at upcoming conferences. And then again, when we report Q2 earnings, if you have any questions following the call, please reach out to the investor relations team. We'll be happy to connect. And with that, we appreciate the time. Have a great day.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.