FLOWSERVE CORP Q3 FY2024 earnings call

• Thanked Jay Roush for his service and welcomed Brian Ezzell. - Completed acquisition of MOGAS Industries, which is complementary to Flowserve's portfolio. - Progress with Flowserve business system and operational excellence program. - 3D growth strategy delivering record bookings, with 34% of total bookings from diversification and decarbonization. - Strong aftermarket bookings at $615 million for two consecutive quarters. - Power bookings up nearly 30% year-over-year, with optimism about power markets including nuclear. - Margin expansion driven by execution and top-line leverage, with FPD showing robust segment performance from new operating model. - Successful completion of credit agreement amendment for additional flexibility.

Both FCD and FPD segments contributed to the 3.5% revenue increase, with FCD generating 7% growth and FPD 2% growth. By mix, year-over-year top-line growth was 5% in original equipment and 2% in aftermarket activities. FPD's adjusted gross margin was 33.7%, a 410-basis point year-over-year increase. FCD's adjusted gross margin was 29.9%, a 10-basis point year-over-year improvement. Adjusted operating margin was 11.1%, a 240-basis point expansion year-over-year. Cash from operations was $178 million in the third quarter, driven by strong earnings and working capital improvements.

• Full year adjusted earnings per share guidance between $2.60 and $2.75, excluding MOGAS impact. - Fourth quarter expected to have less revenue from percentage of completion activities vs last year. - Full year free cash flow to adjusted net earnings conversion rate expected at 85% or more. - Midpoint of guidance range expected for Q4, with potential to reach upper end if book-to-ship revenue or POC performance exceeds expectations.

• Market uncertainties impacting project activity. - Regulatory changes potentially affecting energy project activity. - Challenges in the chemical market with oversupply and regional slowdowns. - Uncertainty around the impact of elections on energy project regulation.

Q: Can you give more color into what you're seeing in terms of bookings?

A: Aftermarket business is healthy with high utilization rates and capture rate improvement. Project activity has strong pipeline with healthy Middle East work and opportunities in power, nuclear, etc.

Q: Maybe just in terms of the Q4 EPS, Scott, I think you're guiding to decently under 30% of the year's EPS in Q4. Historically, I think you're decently over 30%. As you said, is that just kind of deferral one leading to much higher front end?

A: Fourth quarter revenue ramp is smaller than traditional due to less OE sales ramp from Jafurah 1. Margins expected to progress, particularly in FCD from mix and cost out activities.

Q: I wanted to talk a little bit about a comment you made, Scott, in your opening remarks on data-driven approach to portfolio review with products, customers, margins and the 100 basis points to 200 basis points target by 2027. Are we still segmenting the business in terms of those products, customers, margins? Are you to the deployment phase of that yet?

A: Launched formal portfolio excellence program with 80/20 framework, three business units in flight, and early results give confidence to hit 2027 targets.

Q: For Amy and I guess Scott too. I know you guys don't like to use the word asbestos, but let's just confirm that that $0.07 non-cash charge is related to this, what we know is a routine annual accrual true-up to your 30 year undiscounted asbestos liability. Again, I'll emphasize the routine part of it, but that's what we're talking about, right?

A: Yes, it's a routine annual accrual true-up based on claims experience for a 30-year undiscounted liability.

Q: Just on the power side of things, obviously the seculars are starting to move in Flowserve, which is great. How do you see that playing out from a duration conversation?

A: Power markets have long-term growth outlook with nuclear and other forms of power generation needed. SMRs are in development phase and not a meaningful part of portfolio in next decade.

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

A: SMRs are in development phase and not likely to be meaningful in Flowserve's portfolio for next decade. Traditional nuclear plants have substantial installed base and growth opportunities.

Q: Just to clarify, the guidance doesn't include the impact from MOGAS, but given that you have closed, could you just update us on the contribution in the fourth quarter and then to start within that for 2025.

A: MOGAS is about $200 million of revenue annually with accretive margins, but details on fourth quarter contribution and 2025 outlook are being worked through.

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

A: Customers in oil and gas prefer less regulation for project progress, but Flowserve will continue to drive growth regardless of regulatory outcomes.

Q: I guess I work for Flowserve now. My first question, Scott, you mentioned, look, it's great to see the aftermarket bookings above 600 in the last 2 quarters. You talked about the capture rates in both of the different segments. I'm curious like as you think about the runway to capture your installed base, I don't know if you want to use a baseball analogy or if you want to maybe just like give us a sense for how much room there is to continue to capture more of your installed base?

A: There is significant runway with capture rates currently low in some areas, and efforts like speed wins and focus on services and solutions are driving improvement.

Q: Bookings growth appears to be broad-based from what it seems, except within temps. Can you maybe double-click into that and the challenges there and when we should expect a rebound in Europe?

A: Chemical market has been challenged, particularly in Europe and some U.S. areas with oversupply. Opportunities exist in recyclable plastics, efficiency programs, and RedRaven IoT, with Middle East expected to see petrochemical market growth in 2025 and beyond.