Flowserve Corporation (FLS) Earnings Call Transcript & Summary

Is it still morning? Yes, I think it's still morning. I'm Andrew Obin. I'm Bank of America's multi-industrial analyst. Welcome to our next morning session. We're very happy to have here Flowserve. I think it's the first time that you guys have actually come to our London conference. Yes. So it's great to have Scott Rowe here, the company's President and CEO. I think Scott is going to give some introductory remarks, no slides, just describe what's happening at Flowserve. And then we're going to go into fireside chat. And for the folks in the room, feel free to raise your hand, interrupt. We're happy to have this interact -- happy to have this being an interactive process, and we'll leave time for the Q&A at the end. Thank you, and welcome.

Great. Andrew, thank you. I appreciate you having us here in London, and thanks to BofA for holding this event. So my name is Scott Rowe. I've been at Flowserve for 6 years. It's great to be in London today and in Europe for the week. I'll give a little bit of an overview of our company and what we do and kind of where we're at and then very much looking forward to open it up to questions with the audience and with you, Andrew. So first, Flowserve is a flow control company. We do pumps, valves and mechanical seals, the barrier between the pump and the motor, and we really are participating in all kinds of flow control applications. And so we're -- we do refining, but we also do heavy water and we do everything in between from pharmaceutical, food and beverage, power industries and lots of different things. And I'll get to our strategy in a minute, but we really are moving more and more from providing equipment to services and ultimately to solutions. We have a massive global footprint. So we're roughly a $4 billion company on the bookings level. The revenues are catching up fast. We'll talk about backlog and revenue conversion. And we operate in every country around the world that has big infrastructure. In Europe, with roughly $800 million here, we operate out of most of the major countries in Europe. I was in Germany yesterday at one of our flagship sites in Germany. I fly to Spain tonight to visit with our Madrid team where we've got 2 locations in the Madrid area. But we also operate out of Italy, we're in Hungary, we're here in the U.K. And so we've got a really nice presence in the European front. In terms of strategy, we launched a strategy about a year ago. We call it our 3D strategy. It's diversify, decarbonize and digitize. And for the environment that we're in right now, the strategy is really, really well suited for what we're facing. On the diversify side, we're looking to move more and more into less cyclical markets and away from the oil and gas. It does not mean we're walking away from oil and gas. In fact, we really like our business right now. But we know we've got to move into less cyclical markets that are there for the long run, so think specialty chemicals, water and other things that provide high flow control content. On the decarbonization side, we're doing 2 things. Number one, we're helping our existing customers, so think about a refinery and their journey to decarbonize that refinery, whether it's through biodiesel conversions, whether it's through energy reduction or just helping them with what they're doing in their internal process. We're very, very involved in that. We're also involved in new energy, so think hydrogen, concentrated solar power, other forms of energy that have flow control content. We're very much moving in that. And I'm happy to entertain questions on that as we go forward. And then finally, on the digitization side, so back to this kind of products to services to solutions, we fundamentally believe by instrumenting our pumps and valves and providing a better understanding of the flow loop through data, we can be a better service provider, helping our operators avoid unplanned downtime and helping them with productivity in their flow asset or flow loop. And so that strategy is going really well and happy to talk about many examples on that as well. And then just on the journey in terms of where we are, again, I'm in year -- I've done 6 years. I've moved into year 7. We launched the transformation at the beginning of my tenure. We made a really, really good progress in 2018 and '19 across all of our financial metrics. COVID hit us really hard. Our business went down about 30%. With that came a lot of cost reductions, further consolidation. 2021 was always going to be a challenging year for us with our backlog down. We were well positioned for growth in 2022 and then hit a bunch of just unbelievably difficult contextual environmental issues. And so think COVID at the beginning of last year, labor availability, we had ports in China shut down, we had inflation, we had supply chain consternation. At this time last year, I was unwinding a $100 million Russian operation given the invasion of Ukraine, and it just was a very challenging year. On a positive note, we finished the fourth quarter very strong. We delivered $0.63 earnings per share. Our margins moved up. And so it gives me a lot of confidence as we turn the corner from 2022 into 2023. We've now got operating momentum. We're kind of back on our front foot. While supply chain issues are still out there, we feel we're in a much better position to navigate that. Our company is more nimble than it was last year at this time, and the environment is more stable. And so we're -- or we feel really good about 2023. We're coming off a great quarter in the fourth quarter. We're positioned for success with our backlog. The markets are still providing strength, and we're now back on that improvement journey as well. Andrew, so that was the short overview.

That was very good. Thank you.

So maybe we can start talking about the pricing environment. And when I talk about pricing environment, I'm also talking about contract structure, so just also about terms and conditions. So what's in the backlog and how sort of current project contract structures are trending? And maybe sort of tell us of the -- these price increases in '22 or however you sort of want to measure adjustments and what are you envisioning for '23?

Yes. So just kind of going back, so 2020 was the lowest point. 2021 wasn't a great year. 2022, we grew pretty substantially at about 18% on the constant currency line. So the market is improving, right? So that's the context. We're now kind of second year of an up-cycle. Our competitors are getting more disciplined. We're getting more leverage as we fill up our facilities. And I just feel like we're in a much better place to be just more aggressive in terms of getting what we need, and that's both on the price and in the terms and conditions. And so I'd say towards the end of last year, we were doing some pretty good things in taking what I'll call very accretive work as we bleed off lower margins in backlog, replacing that with higher margins. From a price increase standpoint, last year, we did 3 different price increases. We came out of the gates at the beginning of the year with 5%. What we quickly learned by the second month this time last year -- or third month, that was nowhere near acceptable in terms of keeping up with inflation, both on material and on labor. We did another 11% in the second quarter, and then we selectively did more price increases on certain products in the second half of the year. And then to start this year, we're another 5% in. And so I'd just say, last year was incredibly challenging to keep up with labor inflation and material inflation. I'd say we were probably slightly negative as we progress through the year. We feel really good where we are right now with the incremental 5% coming in. And then what we're seeing is just better behavior with our competitors as well. And so as capacity fills up across our space, things are getting a little bit more stable. While not perfect, we feel like we're in a better position. And so now the dynamic for us is, we booked some work in 2021 that we don't really love the margins at. We had to make some strategic decisions around capacity and doing things just to keep things moving. Those are now coming through the system. They'll bleed off every quarter this year, and we're replacing that with strong incremental margins as we go forward. And then I'd say our new bookings this year will be even higher margins than what we booked last year.

And so the '21 stuff, sort of when does the bulk of it is done, by the summer, you think?

Yes. I'd say, yes, by midyear is a good point. There's a couple that kind of go into the third quarter. But for the most part, it's halfway through this year.

And just it's interesting, so it doesn't directly relate to your industry, but we had a company with automotive exposure talk about the fact that this is people thinking differently in the inflationary environment, and they were talking about the fact that even in the automotive industry, it's sort of -- their customers are recognizing the fact that maybe pricing is a new feature, which is brand new for them. Has the dialogue changed across your industries, both across your process industries on the industrial side, on water side? Do you find that it's just there's a more constructive dialogue between you and your customers?

Yes, no question. I think the inflationary data is out there. Everybody is feeling the pain both personally and in corporations. And so I'd say, while it's not necessarily hard to talk about, it's hard to get the price. There's still -- it's still a competitive market. They like to play us against our peer group. And so that's where the harder dynamics come in. And I'd just say, like for us, we see the pricing pressure on big projects. And so the bigger the project, you get more competition. You're typically bidding against somebody. But on our base business and our run rate business, we've been very successful about realizing the price increases that we put through. And so I think that dynamic continues. And so I don't -- I feel like our ability to realize the price increases are really strong. The one exception would be on the larger projects. But again, back to larger projects today, we'll be significantly incremental on the margins versus this time last year and substantially higher than what we booked in 2021.

Can we just talk sort of taking a view out? What end markets is Flowserve the most excited in '23? And what excites you in 3 to 5 years? And then part two, I'm going to ask you about sort of your participation in things like energy transition, water, so that's -- let's put that aside a little bit.

Sure. Well, I'd say the most, to me, the most attractive things right now are twofold: one is energy security and then energy transition. I know we'll talk about energy transition, but it is one of the most -- it's our fastest-growing market right now. But let's take energy security first. Obviously, with the war in Ukraine and what's happening in Russia, energy security is on everybody's mind. It's front and center, certainly in Europe, but it is around the world as well. And so what we're seeing is this move to energy security and regionalization. And so just an example last year is we booked work for a coal-fired power plant in Germany. We would -- I would have never guessed that like last year. But in addition to that, what we're seeing is a renewed focus on nuclear. And so we're seeing that in Europe, we're seeing it in India. We're seeing a continued movement in Asia as well. And then also in the Americas, we're seeing life extensions on nuclear. And so that is a space that...

So it's real -- is that interest? Or you started to see...

No, we booked a lot of work last year, and our funnel is nearly up over 100% from what we saw last year. And so we'll book a significant amount of work this year as well. And so I'd say that's one of the things that we're very interested. In addition to nuclear, you have liquid natural gas, right, so providing natural gas to places that can't produce it. And so we do really well on the liquefaction side, but we also do regasification. We're aligning our portfolio to be more and more into LNG. But we booked over $100 million last year. That will grow probably 20% this year as well. And so that is an area that we're super excited about. So that energy security is something very important for 2023. But then kind of 3 to 5 years out, like it's not going to change, right? Because certainly, on the nuclear side, these are long projects. They take time to design and build. And I think that trend will continue for us for years to come. And then on the energy transition side, that's become a significant part of our business. It's the fastest-growing part of our business. That funnel nearly doubled last year from the beginning of the year to the end of the year. We're looking at about 6 -- well, it's about $800 million of opportunity out there over a multiyear period, but we're now booking in the hundreds of millions of dollars there. And so when we think about energy transition, again, it's twofold. It's decarbonizing existing assets, so converting a refinery to sustainable aviation fuel or a biodiesel facility. It's also doing recyclable plastics on the front end of chemical plants. It's doing recyclable plastics, which is a partnership we announced here recently with Clariter. That breaks down plastics into the base elements and moves them back into food-grade material or other production. It's also around doing different things in carbon capture and sequestration. We've done a project here in Europe called Northern Lights. That was in Norway. It's the largest carbon capture project in Europe. We've done a big project in the U.S. We're about to do a big project for direct air capture. And so this is a space that's good for us right now and continues to grow. It's also the hydrogen lane and green energy. And so we booked a big project in Saudi Arabia called NEOM last year. We did our valves with that in a partnership with Linde. But that continues to go forward. And I'd say from a -- while it's exciting now and it's a big part of our business in 2023, in 5 years from now, that's going to be substantial. And the 2 areas that we're most interested in 5 years from now would be the hydrogen lane and the recyclable plastics lane.

And can we just talk about, just to build a little bit, so are the customer -- the customers, right, as you talk about hydrogen and you talk about carbon capture and storage, right, is the -- anything different about the underlying technology? Are you dealing with different customer base? Or is it the same people sort of having to change what they do?

Yes. It's all of the above. And I'll give you 2 examples. I'll give you the traditional example, we'll tie in a new one. And let's just take -- so Shell here out of the Netherlands, we did a big project for them in the Netherlands where they were putting recyclable plastics on the front end of their existing chemical plant. And so we're working with Shell, but we're also working with new process licensor called BlueAlp. What BlueAlp does is bring the technology to do the recyclable plastics that allows them to push the elements back into the chemical process. And so BlueAlp is brand new. It's a start-up company. We've never worked with them before. We never knew them. We got introduced to them through Shell. And now what we've been able to do is realign our product portfolio. And this isn't like -- don't think massive R&D. Think minor kind of temperature and specification changes to our valves and to our pumps to now be part of this process. And so as BlueAlp moves forward on recyclable plastics in the front end of these different industries, we're participating in that in a big way. The Clariter partnership that I mentioned, that's another start-up company though. And so we've got a group that's focused on our old industries that are trying to do the right things to decarbonize and be a better steward of the environment. But then there's also this new group of very entrepreneurial, lots of venture money going into it, that we've got to be selective on who we partner with and how do we participate. But they're doing amazing things, and they're bringing fresh ideas to a lot of the older and more established industries. But we feel like we can help them because they can't -- they don't necessarily know how to scale. And so we can come in and say, look, we can help you with the flow control side with pumps and valves and your environmental barrier with the seals. And then we can help them scale that process up. And so far, that's working pretty well.

But effectively, if you work with hydrogen or if you work with carbon, CO2, you can use your existing manufacturing footprint to deliver the...

Yes, for the manufacturing footprint, for sure. What we're trying to do though is just continuing to realign the products. And I'd just say on hydrogen, CCUS specifically, we can do the liquid handling really well. We can do the gas side of it with our valves. We've got to move more and more of our compression technology into that space. And so we've got some of that today, particularly out of our German plant that I was at yesterday. But we've got to continue to evolve that to get more of that available market on the compression side.

Can we talk about sort of OE and aftermarket mix? I think the past few years have been a fairly steady distribution, OE versus aftermarket. As the markets start to recover, how should we think about the mix? And how should we think about the impact of the mix on margins? So maybe talk about '23 and then sort of longer term.

Sure. Yes, we've been really stable at almost 50-50 original equipment to our aftermarket, and I'd say that trend will be roughly the same. Our intention is to grow both. Like we are focused on growing both of those pretty aggressively. The original equipment bookings last year grew substantially, right? It was really high. It was over 20%. And the aftermarket grew at about 11% to 12%. So this -- as we think about 2023, we might tick up kind of maybe 100 basis points and maybe it's 51-49 original equipment to aftermarket, but I think that normalizes back to a 50-50 mix. Over the long term, maybe 10 years from now, it's probably a little bit higher on the aftermarket side, would be the trend there, just as our installed base continues to grow aggressively and now we're servicing that installed base. And so I think over time, we move in that direction. But I'd say in the short cycle, you might move 1 or 2 points one way or the other, but I think it's going to be pretty consistent at that 50-50.

But more aftermarket is good?

Yes, more aftermarket is great. And again, we've had really strong bookings in the last 2 years on aftermarket growth, over 10% in both years. And that's -- I don't see any slowdown on that. There's a lot of underspending in the COVID years, a lot of maintenance is needed. There's still turnarounds going at the big assets, and our installed base is bigger. And so we'll continue to grow that aftermarket pretty aggressively.

Got you. And maybe talk about sort of the market share. What do you think happened to your market share given the supply chain constraints and elevated lead times? And what's the path forward?

Yes, sure. I mean we have a very broad portfolio, and so it's hard to answer that in one general term. But I'd say, overall, with the bookings growth last year and what we saw the year before, I would say we're -- when we look at the peers, whether it's in the valve side or the pump side, we're certainly holding our own. I'd say last year, we probably took market share in pumps given some of the bigger projects that we won. We won a giant award called Jafurah in the Middle East, it was $200 million. We basically beat a lot of people and took substantial market share in the Middle East with that award alone. So I'd say pumps side, we've done really well. We continue to move up on the industrial pump side as well with the focus on diversification. The valve side, I'd say we're probably holding our own on market share. We didn't gain a whole lot. We didn't lose a whole lot. In the mechanical seals, we were very aggressive to go after work in 2020 and 2021. And so we knew in the downturn, we deliberately took kind of 300 to 400 basis points of market share in that business. And that's our highest-margin business, and so we're pretty excited about that. I'd say at this point, we're very selective on work. We're -- with the backlog that we're at, we're more interested in getting margin accretion than necessarily market share right now. But we're not going to lose good work that we've worked hard to secure.

And how should we think about the market dynamic? Because I would imagine a lot of sort of decarbonization work, a lot of -- well, I think it's probably going to be a complicated answer.

It always is, right?

But it just seems generally, environmental work is driving a lot of CapEx, a lot of capacity upgrades, new supply chains in the West, right? I think one of the sort of features of the market over the past 10, 20 years was, first, as Korean EPCs and Chinese EPCs come in to the market, they tend to bring their supply chain with them. I would imagine that as there's more CapEx spent in the West, that plays to your strength.

Absolutely.

So if you could care to expand on sort of what do these big industry dynamic mean for Flowserve from your operating model and also your capacity needs, how should we think about that going forward?

No, it's a good point. And certainly, with the decarbonization work, that's all happening in the West, right, whether it's Europe or North America. I'd say on the Europe side, it's more on the recyclable plastics, it's on the biodiesel stuff. In Americas, right now the big focus is carbon capture. And that hydrogen will come across both sides, probably Europe before the Americas. But those are either the established players or these new start-ups, and they're typically working through the Western EPCs, and we do really, really well there. On the Asia side, it is more competitive. A Chinese EPC is going to lend itself more to a Chinese OEM product. We do well in China when we have a niche product that has a specialized technology, and we can still get good margins there. But I'd say net-net, it allows us to be a little bit more favorable. And then when we think about the biggest market for greenfield, it would be the Middle East, and that's a combination of Asian EPCs and some of the Western ones as well. The good news there is we've got local content. And so we're in Saudi Arabia. We've got massive facility there for both pumps and for valves. We've got -- actually, we've got 4 facilities in Saudi, and those all support the localization. And so as we can participate in Saudization and working our IKTVA scores up, then we get preferential treatment. And that's how we got the Jafurah award. But I'd say the rest of the Middle East remains somewhat competitive. We'll be selective there. And what we're looking at is making sure that we can get the margins we deserve on the front end, but really locking in that aftermarket and the annuity over the long run.

How real is hydrogen? Because I think Siemens Power -- or Siemens Energy, I think they're more conservative. I think if you talk to folks in the U.S., they seem to be more optimistic. I think people talk about IRA pushing hydrogen forward by 10 to 15 years from -- as -- you as a supplier, you talk to folks, where do you guys come out as to how real hydrogen will be?

Yes. Well, I mean it's real today, right? And you get this umbrella, right? You get gray and blue and green and all that. I would say green is just -- yes, and there's lots of in-betweens, right? Economically, on green, I don't know how it works. I think at some point, the technology changes where it does work and it becomes an efficient and clean form of energy. That's moving forward in Saudi Arabia, but nothing has to work in Saudi Arabia for them to move projects forward. And then there's select smaller projects around the world. But I personally believe the technology evolves to a point that economically, it will make sense. Right now, it needs a subsidy whether it's in Europe or in the Americas. Now what I'd say is on the gray side then, that is working, and we've been participating in that market for a long, long time. And so I don't think there's any change other than continued investment to get more hydrogen out of existing process. But ultimately, the green side is going to take some government subsidy before the technology catches up. But I think it's, by far, the biggest opportunity for flow control will be hydrogen 10 years from now.

Yes. That's great. So maybe going back to your operations, right, because I think you have positively preannounced. So that's -- we're very happy to see that. So structurally, how do you think about margin improvement? Said differently, how high can margins go if everything goes right? If you get volume, capacity absorption, price and '12, '13 level, I think it's the high bar, what would it take to get back there or at least close most of the gap?

Yes, yes. So we are maniacally focused on one step at a time on this. And so our target right now is getting back to 30% gross margins is where we need to be. We've done a lot of really good work on the cost structure. And so if we can get 30% gross margins, our SG&A is in pretty good shape and we start to drop nice profitability. So that would be the starting point, and that's what we've publicly said we want to finish the year at. If we can get there earlier, kind of midyear, then we'll be in really good shape. But the whole organization is lined up to this kind of over 30% gross margin and starting to deliver some really nice OE margins -- or OI margin, sorry. And then what that does is it's about a 50% growth is what our guidance was from last year. So it's a pretty substantial step up. I will say the bar was low last year. We did not do what we needed to do. And so -- but it gets us back on track to start to move margins in the right direction. And then what's the realm of possibilities here? We get to above 30% with the pricing, which we talked about, we start to get good absorption within our facilities and then we're starting to just be more productive with the different manufacturing sites that we have. I fully believe that getting gross margins up another 200 basis points is well within the realm of possibilities. We continue to grow, leverage the existing cost structure. Getting back to the years that you talked about, those were some amazing years. I don't know if we'd get there, but we certainly get back into kind of where we were before this kind of 2019 bar. I think we're there within 2 years, like for sure. And so our goal right now is we got to deliver 2023, we got to earn some confidence back. We had a great fourth quarter. We're lined up for a really nice year when we execute in Q1 and Q2. Then we can come back out to the market with some of our long-term financial goals and reestablish what we think those targets are. But I'd say right now, it is a nice, steady progression upwards, and I don't see any reason why that momentum doesn't carry forward for a couple of years now.

And what would it take -- you sort of alluded that you can hit these 30% gross margins early if things go right. So what needs to go right for you to sort of be able to hit 30% earlier?

Yes. I think 30% -- I'm kind of laughing because it's not a high bar, and I recognize that. And so to get there is really eliminating some of the pain that we had last year. And so there's just so much frictional cost in the system last year. And whether it was COVID absenteeism or massive turnover in hiring people or suppliers locking down or ports not delivering and we have to air freight, and so just us doing the basics without all of this noise and frictional cost gets us to 30%, which sounds easy. But in today's environment, there are still things out there that we're challenged with. But if we can operate just relatively well, we start to move over 30%.

That sounds good.

Yes. And then we start to move price in, we start to talk about productivity, we start to get the absorption with the revenue and we start to move up from there.

And just to go back, you sort of alluded to that, but can you just go back and just a comment between the mix between large, medium and small projects? So are we going to see -- you are sort of talking about larger projects. So how will the mix trend over the next couple of years?

Yes. So last year was really the first -- 2022, first time we've seen large projects since 2019. The Jafurah one was a really big award at $200 million. There's not many of those in the history of Flowserve. It's by far the largest. But typically, you'd see kind of every third year a $100 million kind of project. I think we're in that kind of time -- that's what we're facing right now is there could be something in the kind of above $50 million, below $100 million this year. And then there'll be a Jafurah 2 next year. As we execute the first phase of this, we'll get the second phase. And so I think there's a nice steady pipeline of large ones. We're going to be really selective on those. We were selective last year, we'll continue to be selective. What we really like is this kind of $25 million to $50 million range, and we're starting to see a lot of that work. And so again, the Middle East is big there, but a lot of the decarbonization stuff that we talked about falls into that spot. You just get less competition in those. We can get a little bit higher margins. They're easier to execute. They stay in our backlog less, and so we can turn them faster. And so that's kind of what we'd like. That's what we're seeing right now in our funnel is a lot of that kind of $25 million to $50 million work, and it's things that we like. And so that's really our focus. If the large ones come through that makes sense financially, we can get the terms and we know we can get the aftermarket, then we'll pursue those. But I'd say we're going to be more selective on the big stuff going forward.

Can we just talk to about LNG and deep offshore. I think we estimate that it's roughly 3% to 5% of your revenue.

Yes, that's about right.

If you think about process. So out of process, they may be up to 10% each. So -- but where can this go? And maybe we can sort of put them separately. LNG, that's sort of a big focus. Starting -- it seems like this is starting to move forward. So maybe we can start with LNG, how high can this -- what can happen to this business in 3 to 5 years?

Yes. So last year is about $100 million of bookings for us in LNG. It's something that's growing rapidly. Our funnel is up about 25%. So this is a space that's super exciting for us. And we've got technology on the valve side to do both cryogenic and the non-cryogenic application. On the pump side, we don't have the cryogenic technology today, but we've got the ability to do all the other fluid handling around the site. We're in the middle of a development for the cryogenic pumps. That will be commercialized by midyear. And as we do that, that unlocks a lot of the available market to us. And so I think doubling in the LNG space for us is not out of the question over a couple of years here. And so the market is not only growing, but we're doing things to open this up for us in a bigger way. And so we're very excited about LNG. We think there's -- our visibility and funnel is up substantially, and it's something that we're repositioning our portfolio to make sure that we can participate in a meaningful way. On the deepwater side, that's a space historically we've done really well. And so there's a couple of things on deepwater. When they're doing water injection into a well, there's really big pumps that are high-energy pumps that do water injection into the oil or natural gas well. We -- there's like 2 people that can do that, so we always get a good look at that, and they're decent margins for us. But then when you think about the processing on a floating production platform or on an FPSO, it's all fluid handling. And so we get valves, we get pumps on that. And as that market starts to pick up, we start to do some things that are pretty good on the fluid handling of that. I'd say I'm less excited about that, but it is moving in the right direction. So I think that's an incredibly cyclical part of our business. We've seen growth last year. We'll see growth over the next couple of years, for sure. It's not one strategically we'll double down on, but it's certainly one that we know the -- we have the relationships, we have the products. We don't need to do anything different to participate in that.

And so should I think about deep offshore was pretty big? I know you divested part of the business. It was dead for a while.

Yes, it was dead, dead.

Dead, dead, right. It is coming back. And I think at this point, it's too early to say how sustainable the comeback will be. Is that a fair...

No, I'd say -- yes. And I think -- I mean this is my background, where I came from, I ran a deepwater business. I think the oil on land is easier and accessible today than deepwater. And so the projects are more challenged. They're not going to be as big as they were in the past, but the market is moving up. And so the question just is, to your point, it's like is this a 5-year up-cycle at a relatively stable pace? Does it go crazy for a couple of years and then come back down? I don't know. What I do know is we're absolutely positioned for success there. We're up this year on bookings. We'll be up next year on bookings within that space, and we'll continue to participate here. But I wouldn't expect dramatic growth there. I think it's going to be a very gradual steady pace. But I don't -- I think it's a long up-cycle. I don't see a -- this is not a 3 years and done. The under investment was -- I mean, literally, nothing got spent in deepwater over 3 years.

That would -- that's a good business for you.

Yes, it's a very good business for us.

Okay. So I think you announced, I think, your first acquisition?

We did, yes.

So what is your perspective on the M&A environment? Are there -- because I remember there was a big thesis a decade ago that you could really consolidate the industry and then it turned out your customers didn't really like it. And they could sort of counteract the consolidation. And also, I think the physical consolidation of the assets is tricky as well.

It's really hard.

But what is your perspective on the M&A environment? Are there other tuck-in acquisitions Flowserve is looking forward? And what are the areas that sort of that you view as interesting opportunities?

Yes, let me first start by -- we announced last month an acquisition of a company called Velan. They're out of Canada. They're at Montreal...

I did not know how to pronounce that.

Yes, it's Velan actually is how they say it. The Americans would say Velan. But the Velan business is fantastic. It's roughly $400 million of revenue. We bought it for $200 million. It's all valves. They participate heavily in nuclear, especially out of France. And they support EDF, which is a fantastic customer for us. So that gives us another kind of $100 million, $150 million on the nuclear side. And then the rest of the portfolio is geared to severe service. And so roughly $400 million of revenue, we're paying $200 million for it. We publicly announced $20 million of hard synergies or cost synergies. I would say that's a really good number. Our ambition is to be substantially over that from a synergy perspective. And so I'd say we got a really good asset. It's a brand name that's highly recognized. It fits the 3D strategy well. And we're very disciplined in our -- the ability to get this done. So all the stars kind of aligned for us in terms of this one. While we haven't done -- this is the first relatively large M&A that we've done or that I've done at Flowserve, We have done a lot of niche technologies, right? So the Clariter one on recyclable plastics. We bought Chart's hydrogen pumping technology to get us in hydrogen distribution. We bought some technology on energy recovery devices to do desalination in other energy recovery work to drive energy consumption down on a flow loop. We did a technology investment for LNG, and so cryogenic pumps. And so we've done a lot of really good things, but all less than kind of $10 million. So as we think about M&A going forward, first of all, we've got to integrate the land. So that's step number one. We're confident that we can do that. As we kind of move throughout the year here, we'll continue to kind of keep our process open. We'll continue to look at things. The thing -- what are we interested in? Anything supporting the 3D strategy makes a ton of sense for us. Rounding out our nuclear portfolio would be something that we're very interested in. Continuing to move into the gassier side, so think hydrogen and CCUS, with different technology there is super important for us. And so anything that fits in that space on the pumps, the valves and mechanical seals, we'll do that. We would grow our seal business in any form and shape that we can. It's a relatively consolidated market. There are some niche players that do things differently than us that we are interested in that would bring accretive margins into the portfolio. What I would say, generally, it's -- there's a lot out there right now. We're looking at a lot. We will remain financially conservative and disciplined on the approach. We want to get through some integration on and some quick wins with the land interaction -- or integration, sorry. And then I think you'll see us ideally kind of once a year do something of relatively small to moderate scale, but adding deliberately to the portfolio.

And just maybe the remaining couple of minutes and hopefully we have time, can you -- just outside of process, what do you see in your portfolio, sort of more economically sensitive parts of the portfolio? Are you seeing any business related to reshoring? And I'm sort of thinking water and semiconductor fabs in the U.S., probably it's in your wheelhouse. Can you comment, what are you seeing outside sort of processing chemicals?

Yes. So I think -- I mean the semiconductors is a great example. And so we have a small business -- well, it's not small. We have rather a reasonably sized business in Germany called SIHI, and they do vacuum technology. And so historically, we've been doing other general industries, like think like plastic bottles, thin-film coating on solar panels. But that technology works in semiconductors. And so we're doing some things a little bit different with the product to open up our aperture into semiconductors. And that reshoring is happening big time, right, both in America and Europe. They want out of Taiwan. They want out of China. They want to bring that here.

And you're having those conversations?

We are having those discussions today. We are in some semiconductor business, but not fully. What it requires though is a significant commitment to the service side, which we know how to do, and we've just got to continue to ramp up our capabilities there. And so I would say 2 years from now, you'll see us as a much bigger player there. There are only 2 competitors in the space. We like the dynamics there. The capacity is incredibly full. And so we've got a really nice position to move in here. And so that's one. And then I'd just say just general industries are all looking at getting -- whether it's full reshoring or investing in their domestic assets, we're seeing that across all of this, whether it's a pharmaceutical, a food and beverage, other specialty industries. They want the capacity in the region that they're going to serve, and they're willing to pay more money to get it out of Asia and expand that capacity. And so we're benefiting from that.

So in the remaining time, are there any questions from the audience? Yes? We -- there is a question. Can we give the mic? Sorry.

Just on competitive landscape in flow control, one of your competitors, a smaller one got acquired by a bigger -- I mean Neles. It's been about 1 year now. So maybe you could talk about how it has changed the competitive landscape now it's part of the bigger company? And second one, on flow control, again, Rotork, another competitor of yours, has been more vocal around methane opportunity in there. So maybe you could talk about what are you seeing.

Yes. So on the -- both of those are on the valve side. And so that landscape is highly fragmented. And so Neles did a nice acquisition earlier. And I'd just say, the more consolidation of the valve space, the better for us. And so we welcome that. We're obviously doing the Velan acquisition. There's other things that are on the market and will continue to get consolidated, and that's good news for the industry. And so we like to see that. On the Rotork side and methane, the methane is important, right? Any emissions reduction is huge. We do that both on the valve, and so think about packing and sealing on the valve stems. We've really put effort into our technology to minimize any emissions on the valve side. And then the other side where we get that is this mechanical seal between the pump and the motor. And so reducing emissions is really, really important. People are spending money to do that, so replacing their valves or replacing their mechanical seals to have a better barrier there. And we're right in the middle of it as well. We've been less public on it just because it's not that big of a niche for us, but it is something that we're excited about in any of those changes in regulation, like emissions regulation changes only benefits us as we go forward.

We are out of time. All right. Thank you very much...

Well, thank you, Andrew. I appreciate you having us. It's great to be here in London.

Great. Thank you. Yes.