Mike Halloran: Great. Thanks, Scott. Thanks, Amy.
Scott Rowe: Thank you.
Operator: We will go next to Andrew Obin with Bank of America.
Sabrina Abrams: Hey. Good morning. You have Sabrina Abrams on for Andrew.
Amy Schwetz: Hi Sabrina.
Sabrina Abrams: So, some of your competitors have talked about seeing 100 bps to 200 bps of better margin backlog relative to what’s shipping through the P&L today. Is that a fair framework for what Flowserve is shipping in 2024 relative to its P&L?
Amy Schwetz: I would say we definitely see improvement in the pricing of our backlog, and some of that is obviously dependent on mix that you currently have in our backlog. But I think that we see that margin in backlog as a real tailwind for us going into 2024.
Sabrina Abrams: Got it. And as a follow-up, I guess I am thinking about the different components of the margins. So, you have better pricing in the backlog. There is the mix benefit from aftermarket outgrowing OE and some incremental benefit from the restructuring program. So, if you could talk about maybe the different components, the good guys and bad guys and the margin bridge for 2024. Just want to understand the components of the 100 bps of expansion that you guys are guiding to?
Amy Schwetz: Sure. So, I will start by saying we are confident in our ability to expand margins by the 100 basis points or more. And as we think about our guidance range, I would say our ability to move towards the high end of that range would likely mean margin expansion above that 100 basis points versus volume growth, given that we saw sales volume growth of nearly 20% in 2023. So, where we are at in terms of puts and takes, neutral from a – to a slightly positive on price-cost from a material inflation standpoint, and you have already touched on the margin in backlog, which we see as a positive. And we do have the structural cost savings from both the org redesign that we put in place and the activities that are taking shape with respect to op excellence.
In terms of what’s working against us in 2024, I would start with labor inflation is something that will begin to take hold kind of late in the first quarter and really start to show up in the second quarter of the year. And then although we do have a nice backlog of aftermarket mix, I think the mix of project work is going to be something that we will be monitoring and watching closely in terms of margin expectations in 2024. And I would start with what Scott has described as a large funnel of FPD large project work that we will have available for us in 2024. And although those will be at margins better than what we saw – than what we saw kind of 18 months, 24 months, 36 months ago, and those are still lower than our aftermarket more run rate work.
And secondarily, on the FCD slide, that backlog is actually right now skewed more towards project work or OE work than aftermarket. That backlog is about 300 basis points more OE this year at this time than it was last year. So, that’s the other piece of project mix that we are looking at.
Sabrina Abrams: Thank you.
Operator: Thank you. We will go next to Joe Giordano with TD Cowen.
Joe Giordano: Good morning guys.
Scott Rowe: Hey Joe. Good morning.
Joe Giordano: Hey. On LNG, obviously, a lot going on with what the President has been saying about LNG export and things like that. Is that globally fungible to you guys? Like do you care where terminals are built? Like if we do less here, or is it just going to have to be somewhere else and you will be there?
Scott Rowe: Yes. I would say our LNG work is more outside of the U.S. than in the U.S. And so we have got substantial bookings and opportunities in the Middle East. We have got some work on the books for Latin America, Africa. We have got a round two in Canada that we expect. And so I think we still feel good about the outlook of LNG. I won’t get into the politics of this, but we think natural gas is an incredible transition source of energy, and we believe it’s going to be a part of the mix for a long time to come. I think the U.S. exporting permit hold will potentially have an impact on our kind of 2025 business, but 2024 work in the U.S. has already been funded and already been approved. And so it won’t have an impact on what we see in 2024. And we will continue to migrate more of our products and services into cryogenic applications to support LNG because we are big believers in this over the next 10 years to 15 years.
Joe Giordano: Just on that point on cryo, obviously, the land acquisition didn’t work out. You bought technology – you bought R&D from Chart – like where are you with cryo kind of pumping applications? Is there more you need to do maybe an update there? And kind of related to that is, on your 3D, is there like fundamentally – are margins basically the same there as in more established markets for you guys now, or is that a gap you still need to be closed? Thanks.
Scott Rowe: Yes. I will answer that one first because it’s easy. The 3D and certainly, the energy transition margin expectations are basically in line with the rest of the portfolio. And then back to cryogenic applications, I would say the bow portfolio is more rounded out than the pumps at this point. And so we have got control valves. We have isolation valves that can all do cryogenic, both LNG and hydrogen. There are opportunities, though, to grow that pretty substantially. And what we liked about Velan is they were better positioned with some of their technology and products than we were. And so continued M&A work on expanding that cryogenic portfolio in valves will continue to happen in 2024 and beyond. And then on the pumps side, we have got kind of two things.
The acquisition that we did with Chart was really around hydrogen distribution, but we can take that technology and know-how and imply it into LNG and cryogenic applications. And so we are in the very late stages of developing a full cryogenic pump offering. And that, what we really like about that is it can be used for liquefaction transportation and into the re-gas application. And so by the – certainly, by kind of mid-year, late year, we will have a full kind of cryogenic pumping solution that will serve – that can be potentially used in – what we used in LNG but potentially used in hydrogen as well.
Joe Giordano: Thanks guys.
Operator: Thank you. We will go next to Deane Dray with RBC Capital Markets.
Deane Dray: Thank you. Good morning everyone.
Scott Rowe: Good morning Deane.
Deane Dray: I would like to circle back on the comments regarding the mix of bookings this quarter, really interesting that no big orders, which kind of gives you a strong sense of the underlying demand that you are seeing, but I would love to hear some commentary. You called out both some project delays as well as selectivity. Can you just kind of give us directionally how much of an impact were the delays versus selectivity. And then maybe just – I don’t know if there is any other factors that would have kept the larger orders to a minimum this quarter, but just size for us, the impact of it.
Scott Rowe: Yes. So, in Q4, we had visibility to, let’s call it, two or three awards, more on the pump side than the valve side, that did get delayed. And some of that was delayed into Q1 and some of it is going to be delayed probably the back half of the year. And as you know, you followed our business a long time. There is lots of reasons for delays. Project timing is incredibly hard to predict. But what I would say is those opportunities did not get canceled. They didn’t get turned off. They might be slightly smaller, a little bit different than what we anticipated, but we are confident that they go forward in 2024. We are also confident given the selectivity that those will deliver the margins that we deserve as we go forward.
And then I would just say on the selectivity side and turning things off, I think that was a trend predominantly throughout the whole year. There wasn’t something major that we kind of missed out on in Q4. It’s more about just putting the right resources upfront and doing the work that’s required to prepare for these large tenders. And so when something comes out, it’s we are pulling the entire team. There is usually anywhere from 10 to 30 people that are working on these. And we have just been really selective at the front end and directing our resources to things that we think make more sense economically and can support that customer through the life cycle of their asset. So, I would say the Q4 was probably more a little bit of slip out than being selective, but again, we feel really good about what we are seeing in 2024 on the projects.
Deane Dray: That’s great color. And just what’s the balancing act that you have to do when the higher you ratchet up selectivity, then the downside is you missed kind of building the installed base and your ability to capture aftermarket. And look, the winner’s curse on these bigger deals is that there is margin pressure. So, there is a balancing act, but maybe you can just share with us some of the mechanics.
Scott Rowe: It is a delicate balancing act Deane. And I will just say, between Amy and myself and Lamar Duhon, leads our Pumps division, that’s probably the single biggest topic that we have with him and his team. And it’s not easy because we do know when you get the installed base, it’s pulling our seal business through, it’s pulling parts through, it’s pulling service through. And so we are actively pursuing installed base. At the same time, we are now modeling that out and looking at it on a returns basis. And so we can more accurately predict, like is that customer going to give us the aftermarket, or do they go out and bid some of that aftermarket. And so we can kind of model in what that probability of success looks like on the aftermarket and make much better decisions about where we will populate the installed base and where we won’t.
And so I would say we have improved dramatically in the last year about what we should pursue and where we shouldn’t, but continuing to have a robust installed base and continuing to drive aftermarket support is important. And then the other thing I would say is we are also now with our aftermarket franchise and some of our business processes there that continue to improve on speed in winning, we are starting to win aftermarket work for third-party equipment. And so that’s something we steered away from probably 4 years or 5 years ago. We are not openly going out and targeting our competitive aftermarket. But with our presence there, with our ability to drive speed and serve our customers in a timely manner, we are starting to see more and more work on stuff that’s not necessarily our original equipment.
Amy Schwetz: And I might just put an exclamation point on that from a portfolio perspective because we have committed to the long-term targets in terms of both revenue growth and margin expansion. And what we are trying to do is expand our installed base within the constraints as those – as that margin expansion and volume growth paradigm. So, I think as Scott pointed out, we are in a better position than we have ever been to do that. But as you can imagine, as a finance person, I absolutely love the aftermarket capture rate strategy and trying to be more aggressive about going after that higher margin business.
Deane Dray: Alright. I appreciate all that insight. And just one other question, and it’s for Amy, that’s really impressive free cash flow this quarter. Just where do you stand now on the whole releasing of buffer inventory? You gave lots of specifics about how much of each of the components of working capital improved, I would be interested in hearing a bit more about what we are seeing on these releases of buffer inventory now with the supply chain is normalizing. So, how much more do you have to go there? Thanks.
Amy Schwetz: Yes. So, I will start. I think that 2024 from a working capital perspective was a journey. We saw collections throughout 2024 or 2023, excuse me, be quite strong. We were pleased with the way the organization collaborated with that to make sure that we got those where we wanted them to be. And really, the third quarter and the fourth quarter we had an opportunity to set ourselves up for inventory reduction by the end of the year, and that was partially sales volume, partially our planning processes getting better. If I were to put this in baseball terms, I think we are still in the, call it, the fourth innings of inventory reduction. I think we can continue to get smarter with that and our improvement of planning processes is really playing a key role in that.
I think we are going to continue to make progress on that within 2024, but we have made it clear to the organization that we have also committed to growth. And so we have to be very smart about how we reduce that inventory over time and where and how we do that. So, I feel like we are striking the right balance, but we are going to march methodically towards that 25% to 27% working capital target.
Deane Dray: Thank you.
Operator: Thank you. We will go next to Saree Boroditsky with Jefferies.
Unidentified Analyst: Hi there. Well, this is James on for Saree. Thanks for taking questions. So, I just wanted to kind of go back on the margins in the backlogs. So, I think you said the margins are coming at higher levels. But I think you said the orders are still not at the 2019 margin levels. So, where does that stand now? And what is the missing gap here since the demand seems strong. Thank you.
Amy Schwetz: Yes. So, I would probably stop short of saying that we are not at 2019 margin levels yet in backlog. I think along the way, we are making progress from an operational excellence standpoint. We are working smarter at our facilities. And frankly, we are playing in different markets than we did in 2019 as we look at the growth of those 3D and energy transition markets. So, I certainly think that the margins in backlog today are a tailwind for us going into 2024. But we are going to continue to do the things that we need to do to improve that as we convert backlog into revenue. And that’s really around making the most of these structural cost savings that we have in place and embedding operational excellence into each and every one of our facilities and processes.
And then really ramping up our activities with respect to product management and using that as a lever, I think that becomes a lever more in the back half of 2024 than it is in the front half, but I expect that to be an area that we continue to progress and build momentum as we make our way through the year.
Unidentified Analyst: Got it. Thanks for the color. And I kind of wanted to ask on the FCD. I think the margins here expanded nicely and kind of reached the long-term target of the segment. So, can you kind of talk about the drivers here, kind of add more color here? And how should we think about the margin for FCD going into 2024? Thank you.
Amy Schwetz: Yes. FCD has been a great story from a margin expansion standpoint in 2023. And how they ended the year was actually right in line with what our expectations were for them in 2023. I think as we move into 2024, we will see that moderate a bit with volume in the first quarter of the year and continue to make their way up sequentially again. The real headwind that FCD is going to have in 2024 is around mix. And in that they are now more focused in their backlog towards project versus aftermarket. There is about a 300 basis point shift there in terms of the makeup of backlog. So, that aftermarket strength we talk about in mix is really occurring on the FPD side. So, I would imagine that initially during 2024, we will see that margin expansion more on the FPD side than on FCD.
