Flowserve Corporation Q3 FY2025 earnings call

• Momentum in Q3 with bookings of $1.2 billion, revenue growth of 4%, adjusted gross margins increasing 240 basis points to 34.8%, and adjusted operating margins at 14.8%. • Raised adjusted EPS guidance range to $3.40 to $3.50, midpoint representing 31% increase from 2024. • Returned $173 million to shareholders in Q3, including $145 million of share repurchases. • Focus on Flowserve Business System to drive margin expansion, with 80/20 complexity reduction program showing impact on Industrial Pumps, including reducing SKU count by 45% and divesting a small gear pump business. • Strong aftermarket performance with 2 out of last 3 quarters having aftermarket bookings above $650 million. • Significant opportunities in nuclear power with potential $10 billion plus nuclear flow control opportunity over next decade, leveraging market position and domain expertise.

FPD: Continued strong performance with adjusted operating margins around 20% in line with best-in-class peers. Aftermarket bookings grew mid-single digits, but negatively impacted by lower engineered pump projects. Book-to-bill for the quarter was 1.02x. FCD: Delivered strong performance with bookings growth of 24%, sales growth of 7%, and adjusted operating margins expanding 230 basis points. Benefited from Mogas acquisition, with Mogas operating margins accretive to FCD. Adjusted gross margins increased 220 basis points year-over-year and 130 basis points sequentially.

• Raised adjusted EPS guidance range to $3.40 to $3.50, midpoint 31% increase from 2024 and over 60% increase from 2023. • Confident in meeting 2025 objectives with strong bookings, margin expansion, and cash flow. • Book-to-bill target of approximately 1.0x for full year. • Continued focus on capital allocation including share repurchases and potential growth opportunities.

• Geopolitical and macro environment uncertainties affecting project timing and execution. • Intense competition in certain markets, particularly with large engineered projects. • Supply chain challenges that could impact capacity and delivery of products and services.

Q: Would you put in context what you're seeing from an environment perspective, more of a pipeline funnel thought process?

A: Robert Rowe discussed aftermarket strength with continued strong bookings and focus on driving capture rate up, while OE business is diversified with projects becoming less important for overall business. Project environment is reasonably constructive with some improvement from Q2.

Q: Can you give us a little more color into the margin inflection you saw in FCD this quarter?

A: Robert Rowe talked about Mogas integration going well, modules shipping in Q3, and FCD margins improving due to Mogas accretive margins and operational excellence. Amy Schwetz added on FCD margin progression and levers like operational excellence and 80/20 program.

Q: I'll start with congratulations on the announcement regarding the legacy asbestos. It's such a smart move here. We've seen companies like Honeywell do this successfully. And if you just take us through, like, am I correct that you paid something less than $200 million to resolve this? And could you just clarify what the cash flow implications are?

A: Amy Schwetz explained the resolution was beneficial for capital allocation, with cash flow implications of $15-$20 million annual benefit and $199 million cash allocation in Q4.

Q: Scott, I appreciate your comments on the certifications required to compete in nuclear pumps and valves. But I just wanted to ask how you're thinking about the profitability of these awards?

A: Robert Rowe discussed the long timeline for new build nuclear reactors, barriers to entry, and confidence in retaining and growing work with established nuclear operators. Amy Schwetz added focus on resources and cost structure to protect margins.

Q: I'll start with congratulations on the announcement regarding the legacy asbestos. It's such a smart move here. We've seen companies like Honeywell do this successfully. And if you just take us through, like, am I correct that you paid something less than $200 million to resolve this? And could you just clarify what the cash flow implications are?

A: Amy Schwetz explained the resolution was beneficial for capital allocation, with cash flow implications of $15-$20 million annual benefit and $199 million cash allocation in Q4.

Q: Nathan Jones: I guess I'll dig a little bit more on the nuclear side of it. $10 billion of flow control opportunity over 10 years. Maybe looking for a little bit more color on what your expected market share is?

A: Robert Rowe talked about current market share in nuclear reactors (75% of ~400 operating reactors), strong positions in North America, Europe, Korea, and focus on growing share in emerging nuclear markets like India while excluding China due to policy changes.

Q: Joseph Giordano: So I think we all appreciate the need for the power gen pickup here and nuclear is a logical way to do this. Like as you chase this business, we're throwing around a lot of numbers, right, all the companies, like $80 billion here, $100 billion there, all these gigawatts. Like how do you, one, like can we build all this stuff? And two, how do you have to think about who's backstopping this?

A: Robert Rowe and Amy Schwetz discussed capacity expansion, supply chain investments, and selective engagement with customers, including potential M&A to strengthen portfolio and leverage installed base and certifications.

Q: Andrew Obin: Can you hear me? Robert Rowe: Yes, we can hear you. Andrew Obin: Excellent. So just nuclear bookings have been great. But if you look at underlying power bookings ex nuclear, it seems that they've been quite weak this year. I think we calculate down high teens. What is this a reflection of? And does core power pick back up because I would imagine the power gen trend is broader than nuclear?

A: Robert Rowe said traditional power had timing impact, but sees investments in all forms of power and selective bidding in OE business to drive growth, with confidence in core power picking up with market conditions.