Scott Rowe: Great. Thank you, Amy. Let me now offer a few comments on our 3D strategy. which, as we discussed at our September Analyst Day, is directly aligned with the market environment that we see today and in the future. The strategy is intended to drive accelerated growth for years to come. While we are well suited to serve our customer base today, we are continuing to invest in product and service offerings, including through potential inorganic opportunities that further build our portfolio to support diverse markets in the new emerging sources of energy. Let me start with Diversified where our bookings remain very healthy in 2023 as we continue to apply our portfolio into served end markets that present an above-average growth profile.
Our vacuum pump products are a great example of our efforts and represent a significant component of the diversification pillar. Our focus to grow our vacuum products in general industrial applications has delivered outsized growth over the last several years. In the fourth quarter, we were selected to supply dry vacuum pumps for a state-of-the-art marine solvents production facility in Europe that will support the circular economy. The site will convert biomass waste into 1,000 metric tons of non-toxic solvents annually to be utilized in pharmaceuticals, agrochemicals, electronics and other applications. Moving to decarbonize. We produced another quarter of strong bookings led by nuclear and LNG awards. We remain excited about the nuclear outlook as countries around the globe are focused on providing clean and reliable energy within their borders.
We continue to be very optimistic on the nuclear outlook as countries begin to develop investment plans that have nuclear energy output tripling by 2050. Our strong portfolio of nuclear pumps, valves and seals are well positioned to meet this growing demand, including life extensions on existing assets and the building of new nuclear power facilities in Asia and Europe. New energy applications are another key driver behind our decarbonized initiative. Flowserve was recently selected to supply our specialty ball valves to support the production of liquid green hydrogen in the United States. This project is expected to produce nearly 11,000 tons of hydrogen to enable operations for one of the world’s largest e-commerce companies. Lastly, on digitize.
We believe our ability to digitize our solutions and leverage our large installed base and aftermarket capabilities will enable Flowserve to be better equipped to provide true solutions for our customers. We believe our offering is at an inflection point of growth, and we have significant visibility to new installations. We now have over 80 customer locations using Red Raven technology with almost 2,100 assets instrumented. We remain committed to adding value to our customers with this digital offering by instrumenting pumps and valves to monitor, predict and ultimately better optimize the full flow loop. Flowserve have recently partnered with three European-based petrochemical facilities to increase reliability and efficiency with our Red Raven technology.
We are pleased to continue expanding our IoT presence in petrochemicals, an industry where we are seeing an increasing level of acceptance, providing us with an opportunity to offer more of our solutions portfolio and capabilities to help solve our customers’ toughest flow control challenges. In conclusion, I’m extremely pleased with our progress in 2023. The new organization design is driving enhanced execution, improved accountability and is allowing us to operate with speed. This new design better supports our 3D strategy and will allow Flowserve to further our advantage in securing the market opportunities in front of us. I’m confident in our ability to maintain the momentum created in 2023 and continue driving improvements in 2024 and beyond.
The trajectory to our longer-term financial goals outlined at our Analyst Day begins with the delivery of our 2024 targets, including 4% to 6% revenue growth, more than 100 basis points adjusted operating margin improvement and roughly 20% adjusted EPS growth at the midpoint of our guidance. Finally, I am pleased that our efforts and strategy continue to be recognized by third-party organizations. In recent weeks, Flowserve was named by the Newsweek as one of America’s most responsible companies and we are named in Forbes list of most successful mid-cap companies in 2024. The financial and operational performance we delivered last year creates a solid foundation to build upon, and I am excited about the opportunities for Flowserve in 2024.
We have substantially improved our ability to execute and serve our customers, and I’m confident that this progress will carry into 2024 as we expect to deliver another significant year of improved financial results. We are fully focused this year on profitably converting our near-record $2.7 billion backlog, continuing our pursuit of outsized growth driven by our 3D strategy, and driving higher operating margins through further operational improvements. We remain committed to driving long-term value for our associates, customers and shareholders. Operator, this concludes our prepared remarks and we would now like to open the call to questions.
Operator: Thank you. [Operator Instructions] We will go first to Nathan Jones with Stifel.
Nathan Jones: Good morning, everyone.
Scott Rowe: Hello, Nathan.
Nathan Jones: I’m going to start with the questions on the bookings outlook. I think, Amy, in your prepared remarks, you talked about a book-to-bill above 1. Scott, you talked about growth in the pipeline. I think the book-to-bill above 1 kind of implies mid to high single-digit bookings growth. So – just any more color you can give us on how that splits out between projects and aftermarket? What kind of projects are in the pipeline and the confidence that those will convert to orders this year?
Scott Rowe: Sure. Yes. It’s a really good question, Nathan. Let me start with aftermarket and then I’ll go to kind of traditional end markets, and I’ll touch on projects as well. On the aftermarket side, we saw tremendous growth in 2023. We delivered about 5% for the full Flowserve and we expect that to continue. And so when we look at utilization rates and we look at kind of what’s happening with the customer installations, we see that, that aftermarket work will continue as we go forward. And then secondly, we believe there’s an ability to drive our capture rate up. We’re – we don’t disclose what that rate is. But what I’ll say is we know we have opportunities to do better there. And in the Analyst Day, we outlined some of those opportunities, both on the pump side and the valve side.
And so we believe we’ve got kind of market share or capture rate opportunities on top of what we’ll say is a very constructive environment for our aftermarket business. So we see something similar to 2023 in terms of growing that side of the business. And then like the Analyst Day or within the Analyst Day, we talked about our traditional end markets, and we showed kind of some like more GDP-type results at this 3% to 5% growth for those end markets. And again, when we look at our model, nothing has changed there. And so we see reasonably good growth on the traditional end markets across the board. And then where we see really exciting growth is in the new energy and the decarbonization side. And so that’s where we see that outsized growth above that kind of 3% to 5%.
And we had a really good year in 2023 across all aspects of our business in terms of bookings growth with the exception of large projects. And so when we look at our project funnel, what we see is the project funnel overall is up 13%. Our oil and gas funnel is up 25%, and that decarbonization of new energy is up 25%. And so that gives us a lot of confidence on our project outlook and making sure that we can acquire and win awards that makes sense on our margins and value creation. And so I’d say, overall, we feel really good about where we are in terms of the overall market and the outlook. And I think we can – at this point, we believe that we can deliver certainly above 1.0 on our book-to-bill and drive to that 5% growth target that we put out in the Analyst Day.
Nathan Jones: One follow-up on orders and specifically, the oil and gas pipeline being up 25%. That’s obviously still your biggest end market. And so that’s 1 that could move the needle. And probably where the large projects are as well. Does this above 1.0 include the conversion of any large projects? Or would those be kind of gravy on top and what’s your confidence that they actually get awarded in ‘24.
Scott Rowe: Yes. The project market in oil and gas has stacked up pretty substantially. It’s primarily delivered – or primarily in the Middle East. And I was there 3 weeks ago – and quite frankly, I was overwhelmed with the amount of work that’s out there and the spending that’s happening. Now obviously, things could change that – but I would say with Saudi’s 2030 vision with what we see in the rest of the region across countries like the UAE, Kuwait, Qatar, Oman, the activity is substantial. And so to your question directly, there’s a long list of large projects out there. If we get two or three of those, that would be gravy to compare to what we’re talking about, but I would say there are a couple of those projects that are kind of more moderate size that are embedded in our growth projections.
But again, we feel good about it. We’ve been very selective, specifically in 2023 in terms of what we want to win. We’ve been very disciplined in that approach. And I feel really good that we’re going to start to win some work, but when work that makes sense from a margin perspective and value creation perspective.
Nathan Jones: Great. Thanks very much for taking the questions.
Operator: Thank you. We will go next to Mike Halloran with Baird.
Mike Halloran: Yes, thank you. Good morning, everyone.
Scott Rowe: Good morning.
Mike Halloran: Maybe we just follow-up on the comment you just made there. Certainly, understand the diligence behind project selection and where you want to win and focus on the margins. But when you take a step back, how would you describe the overall competitive landscape right now, given the amount of opportunity out there, you see a little bit more diligence from some of the competitor base or just a little bit more logical pricing mechanisms? Or is it still pretty project by project? Any thought on that side?
Scott Rowe: Sure. If we compare it to – let’s go to 2 years ago when folks were very, very hungry for work. The environment is substantially better than that. But what I’ll say is the project environment is always attractive. Everybody wants to bid and participate in it. And so it remains somewhat challenging. And so through our selected bidding approach, what we’re looking at is customers we know we can work with, customers where we know that we can deliver the margin expectations that we signed up for in the bidding phase. And then we’re also looking for making sure that we can get the aftermarket associated with the work there. And so I think that’s probably the biggest change for us is really getting a more holistic look at what we wanted to work or what we want to work on geographically, but then also with the customers in supporting that aftermarket.
And then when we think about the competitive landscape, everybody is substantially fuller in terms of capacity than what we saw 2 years ago. We are seeing discipline improve pretty substantially, but every now and then, we’ll get a surprise by somebody that doesn’t kind of stay in that disciplined approach. And we’ll just accept that and move on and make sure that we can win work that’s more suitable to the margin expectations that we deserve.
Mike Halloran: Great. Makes sense. And then good to see the cash generation this quarter. Could you maybe talk to the ‘24 expectations that layer it as well usage of that cash, the buyback authorization [indiscernible] certainly here in these remarks around it. Is there any more intent there to be opportunistic? And how do you see the M&A landscape with the cash generation?
Amy Schwetz: Sure. So I’d start with our expectations continue to continue to generate nice levels of cash as we move into 2024. At the Analyst Day, we talked about kind of a guiding principal between 80% and 100% free cash flow conversion, I think we’ll be at the low end or slightly below that in 2024, just given some of the realignment activities that we expect to continue to occur. In terms of capital allocation, I think that what we wanted to do with this most recent action with the Board is to really just increase the opportunity set that we have out there modest dividend increase, acknowledging that we had not had an increase in our dividend level since early in 2020. And then again, at the Analyst Day, we had recommitted to the practice of share buybacks to offset equity dilution.
We’ve not done that in the last couple of years. So we want the opportunity to be able to do that. So that’s probably a little bit of catch-up this year. I will say, overall, I think that our bias, which needs to be tested each time we have the opportunity is to invest those dollars either in internal growth or inorganic growth to boost really our top line, find opportunities that are accretive to margins and EPS and ultimately grow earnings for our shareholders. But I think that with the actions the Board took this year, we have an opportunity to have a full suite of options available to us as we make our way into 2024.
