Flowserve Corporation (FLS) Earnings Call Transcript & Summary

I'm really excited for our next presenter. Next up, we have Flowserve. Based in Irving, Texas, Flowserve is a leading manufacturer and aftermarket supplier of comprehensive flow control systems. The company operates in 2 segments. Flowserve Pump Division and Flowserve Control division. Flowserve's portfolio of products consist of pumps, valves, seals and automation that serve various end markets including oil and gas, chemical, power generation, wallet management as well as certain general industrial industries. Today, it's our privilege to have Amy Schwetz, Flowserve's CFO, to represent the company. Amy joined the company in 2020. Prior to joining Flowserve, Amy was at Peabody where she had various -- held various positions with increasing responsibilities and accumulating a CFO there. Flowserve has 130 million shares, trading at around $92 for a $12 billion market cap. Pro forma for the acquisition of Trillium and Valves division, which was announced recently, $1.3 million of net debt and the company's total enterprise value is $13.2 billion. Amy, do you have any opening comments before we go to questions?

I'll just maybe start with a couple of things. One, Simon, thank you for hosting us again. We wish we were with you, in-person. We had flights booked and the weather didn't necessarily cooperate as we look to travel this weekend. So thanks for accommodating us virtually. I have to say in your opening remarks, it's pretty exciting to see where Flowserve has gone over the last 12 months. I was there with you in-person last February at the symposium and those market cap and enterprise value numbers sounded a little bit different. And so we're excited about the progress that we made over the course of 2025 and really excited about continuing to add value for our shareholders in 2026.

Great. Let's just start with your last guidance for 2026. The company sees organic sales growth of 1% to 3%. What end markets are you seeing strength and weaknesses? And I know 20 -- 80/20 has suppressed some sales growth, when would that come to an end?

Yes, you're absolutely right. So if we look at our organic sales growth, particularly in the first half of the year, very muted. And so 80/20 represents about a 200 basis point headwind for us in the first 6 months of 2026. And so we're looking at really flattish revenue, organic revenue in the first half of the year and maybe in the first quarter, even flattish, flattish to down, as we make our way through the second cycle of 80/20. As we progress through 2026, we see that outlook changing based on what we see in the project funnel as well as our strong aftermarket franchise that we have in the business. There's areas of our portfolio that are performing extremely well in the current environment. I'm sure we're going to talk about power gen and nuclear. And so I'll highlight that, and we'll talk about it more later. General industries has become a real strength for us. And so we see the project funnel as we look at industries like water, mining, pharmaceuticals as being a fast grower in 2026 as well. And then as we look at our more traditional markets like chemicals, pretty flat outlook for 2026. It's an area that we saw some growth in 2025, off of a muted base, but we don't see that market taking a back -- a step back, but we see that as being relatively muted. And really, with respect to our Energy business, that's primarily downstream aftermarket business. And so in that, we're less focused on kind of the outlook of the industry and more focused on our ability to continue to keep our downstream customers up and running and our ability to capture market share.

Great. Aftermarket bookings and revenues has been a bright spot for the company for the past few years. What's driving the strength in aftermarket? What initiatives are in place to maintain that pace of $600 million per quarter in bookings. And can the company maintain this pace despite weaker OE bookings?

It's a real source of pride for us, Simon, within the organization, and it's not happened by accident. It's something that we recognize kind of going as far back as our 2023 Investor Day, when we talked particularly in FPD about our focus on aftermarket and how we serve our customers. And so I'll start out with something that's really core to Flowserve, and that's our network of Quick Response Centers around the globe, which give us that proximity, the relationship with our end users and put us -- and put Flowserve in a position to be first to mind to those customers for their aftermarket needs. But it doesn't really end there. We recognize that within aftermarket, the mantra is really speed matters. And that is everything from speed to quote, to speed to delivery that constant interaction with our customers, and that's an area that we've invested in over the last several years in terms of quoting tools to assist our sales engineers in the field, which has taken our quoting time in some instances from a couple of days to a couple of hours or maybe even less than that in terms of what we're looking at. So it's been a concerted effort, over time. I would say the other piece of this that has really changed with the way that we look at the aftermarket business, and we've talked a lot about this, and it feels like it's going back in history here, but the reorganization that we did a couple of years ago to really couple our aftermarket business unit under the same umbrella as our product business units has really led to that connectivity when we're doing original equipment bids to understand what that aftermarket annuity looks like to set the sales team up to serve that aftermarket, immediately after that equipment goes into service, and to make sure that we're making the right decision in terms of how we quote and how aggressive we get in the original equipment based on that aftermarket annuity.

Right. About 6 months ago, you laid out the market opportunity for nuclear. Flowserve booked about $400 million in nuclear orders in '25, about 8.5% of total booking. As we look into 2026, what's a good -- what's the company outlook for nuclear order? Is $400 million a good run rate for the company?

Yes. So I would say, over time, we see that run rate escalating from the $400 million that we saw in 2025. If you ask me a 24-month number, I would feel a lot better and more confident saying that we would be higher than that $400 million on a run rate basis because these orders can be quite chunky and obviously, are very complex and can change. But this nuclear component, and I would say the power element of our opportunity funnel has grown at double digits year-over-year. So this is really an exciting opportunity for us within the nuclear side of our business. We continue to serve that installed base on the aftermarket side. That's about $100 million plus a year of just sort of routine maintenance that we see. And then there's 2 other areas or maybe 3 other areas that we're starting to see work within the nuclear industry. The first is on new builds and actually both 2024 and 2025, have seen bookings from new builds that have been announced in Europe. We see more of those to come in that region in 2026. We also have seen life extensions play a pretty significant role in our -- in what our bookings look like from nuclear. And so as electricity generation needs have grown, we've seen decisions made on plants that were set to close that have now extended past their original expected useful life, and that results in a pretty substantial amount of work that needs to happen within those facilities. And we've seen a lot of that happen within North America. And then the final piece that I'll touch on, which is really nascent, but something that we're continuing to follow closely and work with partners is around SMRs. And so we were really pleased to announce in 2025, a couple of relatively small, but we felt the meaningful footholds in the SMR space around bookings for prototypes. And so we continue to watch that space and be excited about it.

Can I get an understanding how that order flow to revenue for the company than nuclear orders how much nuclear revenue do you generate now? And how meaningful can -- how big can this business be in 5 years?

Yes. So as we think about the nuclear business today, we're low single digits in terms of percentage of revenue. So think maybe 3% to 5% of our revenue right now is generated from our nuclear business. In 5 years, I think that, that number is going to grow somewhere to 7% to 10% of total revenue for Flowserve, could tick higher depending on what's going on at that point in time. And then if we look out longer as we start to see sort of that big opportunity that awaits us in probably the second 5 years of the next decade, I think that, that percentage of revenue could grow as high as, call it, 15% based on our existing product portfolio.

Now the nuclear margins, how does that compare to your corporate average?

Yes. So this is one of the reasons why we're so excited about this piece of the business. Obviously, quality matters substantially in this space. And so this isn't an area where we see subpar margins on the original equipment side. So we see OE margins at our sort of corporate gross margin and operating margin average and with the aftermarket that clearly ticks higher. So on par with the rest of our aftermarket business are slightly higher, but this is a very accretive business for us over time from a margin perspective. .

Amy, you mentioned fleet -- existing fleet life expansion, the U.S. nuclear fleet are seeking what 8-year license extensions. What is Flowserve's share of the existing U.S. and European fleet that you currently service? And what's the estimated replacement and upgrade market for these products?

Yes. So it's a pretty exciting opportunity that's out there in terms of just our existing installed base. So in the third quarter, we lined out what the opportunity is that exists out there for us over the next decade within the nuclear flow control space. It really does start with our installed base. So today, Flowserve is in about 75% of the nuclear installations around the world. We have equipment. Now some of that -- some of those countries, we don't anticipate that we're going to participate in their new build out if that occurs. So for example, China, Russia, we have Flowserve content in those countries today. We continue to service China on the aftermarket side, but don't necessarily expect to participate in the new builds. Obviously, with sanctions in play, Russia is not part of our revenue base today. But the opportunity for us in terms of the North American installed base is is substantial. So we really play in all the plants that exist in North America today. And so something we're really excited about continuing to service that portfolio. Same is true with respect to Canada. And so as we look at those upgrades, it can vary in size kind of anywhere between the $20 million and $50 million mark in terms of upgrade of those facilities. And so a pretty substantial opportunity for us as it flows through the system.

One more question related to nuclear. You recently acquired Trillium Valve division, which adds about what $200 million in revenue to Flowserve with high-teens operating margins. What attracted you to Trillium? And why is it a strategic fit for your company? And then you didn't disclose cost synergies in your last -- during the announcement, what kind of cost synergies you're expecting to extract from this acquisition?

Yes. So this is what we're really excited about, Simon. Trillium Valves is -- has a really substantial foothold in the power generation segment broadly. And so about 70% of 2025 bookings were in power. Over half of that or 40% of total bookings were actually in the nuclear space. And so as we talk about the opportunity that exists for us in the future in terms of nuclear, this is a nice complement to our product portfolio, which is already pretty substantial. And so as we think about what the opportunity exists like out there. We've said per nuclear reactor, about $100 million of opportunity for each new reactor over the next decade, Trillium increases that content by 15% to 20%. And so you can see kind of what that does for us. We're playing with the same customers. We're talking to the same parties. Have an installed base that overlaps. But in terms of the content, it's incredibly complementary. So you referenced $200 million. That $200 million marker out there gives us the opportunity to address some 80/20 elements that are going to be important to us in terms of integration of Trillium into the Flowserve portfolio, and that's going to be at high teens EBITDA margins. And so accretive to Flowserve's overall margin. This is an acquisition that we actually are doing for market foothold reasons. We like the position that it gives us with the market and how this will allow us to serve our customers. So it's not one that we actually justified on huge cost synergies. That said, we believe that they are there. We think that this made sense to Flowserve, specifically, in terms of an acquisition because of the opportunity to address, both at administrative costs, supply chain, taking a look at footprint over time, there are going to be opportunities there, and we're going to look to further educate the market on our views on those in sort of upcoming events.

Great. I'm going to pause here to see if we have any questions from the audience?

Amy, you've done extremely well. Congratulations to all of your teammates. You had another deal with another company from -- let's that place called Houston. And when your stock is where it is today, the investment bankers, if I look over your right shoulder, I see them in the Street there trying to race up to your door with proposals for financing. I know you don't have a high debt to EBITDA, but what's your current thinking about locking in some 0 up 30 type debt to do your next transactions.

Yes. So I think we're pretty excited about the strength of the balance sheet today. We think we're in a good position to really look to grow. And we've got ideas of how we can do that organically. Trillium is a great example of a way that we look to do that inorganically. We also announced the small transaction in December of an aftermarket services company based out of the U.K. We're going to be disciplined in the way that we allocate capital. We think that credit markets are open to us, but we do intend to protect our investment-grade balance sheet. But we think inorganic growth makes a lot of sense. And I think you saw with the transaction termination. We immediately brought $265 million of cash onto our balance sheet as a result of that break fee. And the team got busy allocating capital in the back half of the year in ways that we think added a lot of value. Over the course of of 2025, we bought back $250 million of shares at about $52, $53 a share. We sold our asbestos liability, which from the CFO's perspective really cleaned up what needs to happen from a capital allocation standpoint going forward, improves our free cash flow. And then you saw us announce these bolt-on transactions over the course of December and January. I'm not going to say that we're going to be that busy going forward as it was in the back half of 2025. But I think it gives you a good idea of both the way that we think about M&A in terms of adding value, but also some other uses and things that we look at and that we're pretty holistic when we've got capital to allocate. And I'd just say that in addition to credit markets being open to us, our free cash flow generation has been improving over the last couple of years. It's going to be -- it's going to continue to be a focus of ours in terms of making both improvements in profitability, which is the best driver of free cash flow, but also making sure that we're making the improvements that we want to see in working capital management.

Amy, thank you very much. Very interesting project you have. I've been watching your stock in the couple of times it's been going down. But today, it bounced back. Can you explain to me the reason, please?

So I think that this is a hard thing to do as a CFO, but I tried to look at the trends over weeks and months versus days and hours in terms of what's happening with the share price. I think that if we look at what's happened in our shares since, call it, October of 2025 to where we're at today, I think a few things have happened. I think, one, the investment community is starting to understand that some of the improvements that we've made in the business over the last few years are sustainable. And so as we look at our margin progression and where we've been and where we're going to, we've seen really steady progression and year-over-year margins. You've also see us do that as we've undertaken other strategic activities. And so I think that the investor base has has gotten used to and believes that we are -- have some ability to multitask in terms of how we think about just taking care of the base business and the opportunity that provides in addition to doing things that are more strategic. And then finally, and this maybe gone in reverse order here, but I think that as we think about growth in the future, our nuclear business and the foothold that we have in sort of fueling this nuclear renaissance, we've made that clear to investors in terms of the opportunity that, that presents. And so as we look at putting out targets for 2030, it's becoming clear to our investor base what are the areas that we can grow the business. And so our traditional markets, our performance in the aftermarket are something that they should expect us to do, but this nuclear opportunity is really something that could allow us and will allow us to grow at a rate that's greater than what you might expect to see just based on our traditional markets.

Maybe speaking of your 2030 target, you just achieved your 16% to 18% adjusted operating profit margin 2 years early. Congratulations. Now for your 2030 target, you introduced mid-single-digit organic sales growth and about 20% adjusted EBIT -- adjusted operating profit margins. That implies about a 320 basis point improvement from today's level. What are the drivers of that margin growth? And what are 2 or 3 assumptions in that model that can -- that if wrong would make the 20% unachievable?

Yes. I would say, Simon, more of the same. And so we've got a playbook that we started executing a few years ago, and we're going to continue to work that playbook. And it really all starts with the business system within Flowserve. And so I'll start on operational excellence. We're going to continue to keep the organization focused on this, trained on this. We're pretty excited that our Operational Excellence Academy within Flowserve is trained over 4,000 associates over the last few years in areas around operational excellence, like materials management, like problem solving, that really gets to making decisions at the right level of the organization. I will add to that over the last couple of years and into the future. We continue to make moves and make improvements in our strategic roofline. And so slowly and methodically taking a risk-based approach, we have removed capacity from the system and transition work to where it strategically makes sense, whether or not that's in close proximity to our customers, in strategic places or whether or not that's in low-cost countries. And so that's going to continue over the next 5 years. We've talked a lot about portfolio excellence in 80/20. Those efforts continue and start to become a little bit difficult to sort of unwind from operational excellence because the 2 are related. You free up shop floor capacity, and that allows you to either move things in or move things out from a roofline perspective. We're simplifying the jobs that the teams are doing on the shop floor making those things clear and we're cutting off the tail of underperforming products. And so those 2 pieces, combined, are really the blueprint for our margin expansion. I'll add to that, that our continued focus on aftermarket is something that from a mix perspective, has been a pretty powerful tool for us in terms of expanding margins. And so you're going to continue to see us do the right things in terms of investing in the original equipment installed base so we can grow that aftermarket over time. I'd say what is new or what is the piece that we're focused on at the enterprise level a lot is around commercial excellence and how do we grow the business at that mid-single-digit CAGR given the outlook in some of our industries. And I think we've talked about nuclear, that's a big piece of that. Some of that 2030 revenue is actually already embedded in our backlog and certainly, we'll add to that over the next couple of years. But also how do we use data, a data-driven approach to continue to drive more growth from a commercial perspective for Flowserve. And it's something that I know Scott and I and our divisional presidents are really excited about leaning into this growth aspect of the business. as we make our way to 2030.

Well, our last minute, I want to check with the audience one more time, see if any more questions. Amy, this has been a lot of fun. Thank you for joining us today. We hope to have you in-person next year.

Absolutely. Look forward to seeing you in New York next year, Simon.

Thank you, Amy.

Thank you.