BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - FLOWSERVE CORP

Financial Performance:

• Recorded a record third quarter with approximately $1.3 billion in bookings.
• Achieved record backlog and aftermarket revenue; aftermarket growth is running at mid-to-high single digits, outpacing Original Equipment (OE) growth.
• Operating margins reached approximately 16% in Q3, driven by four consecutive years of expansion; the goal is to reach over 20% by 2030.
• The acquisition of Trillium Valves closed in Q2, currently showing margins slightly below the blended average but expected to become margin-accretive through synergies and portfolio optimization.
• Generated strong free cash flow, enabling $75 million in share repurchases year-to-date.

Guidance and Future Outlook:

• Maintains long-term targets of mid-single-digit revenue growth, 20% operating income, and double-digit EPS growth by 2030.
• Expects another 100 basis points of margin expansion annually through 2030.
• Anticipates 2027 to be a strong growth year, driven by the realization of the record backlog and deferred maintenance spend in the refining sector.
• Revenue framework includes embedded pricing contributions and growth from power market tailwinds.

Business Segments and Product Lines:

• Pumps & Valves: Both segments showing significant progress with structural margin expansion.
• Aftermarket: Higher margin content than OE; focus on improving capture rates across the installed base.
• Power Sector: Strong participation in traditional power (coal/gas) and nuclear; holds an installed base in 75% of global nuclear reactors.
• New Initiatives: Launched a new "pricing engine" using AI and analytics to optimize pricing, specifically targeting the aftermarket business for 2027.
• M&A: Closed Trillium Valves acquisition; pipeline remains healthy with targets around $400 million purchase price for similar power-sector assets.

Market and Competitive Landscape:

• Energy Security: Global retooling of refining, midstream, and downstream networks is driving bookings, particularly in North America and Asia-Pacific.
• Middle East: Business impact is negative (~$100 million YTD decline) due to conflict-related delays and reduced MRO; however, a project funnel remains robust, with over $50 million in repair/rebuild work visible and further growth expected post-ceasefire (2027-2028).
• Refining: High utilization rates in the U.S. have delayed turnarounds, creating pent-up demand and emergency repair work.
• Nuclear: Projected growth lanes include existing reactor life extensions (U.S. focus) and new Greenfield projects (Eastern Europe, India, U.S.); Small Modular Reactors (SMRs) are positioned for commercialization beyond the 2030 horizon.
• Europe: Market remains relatively flat with a heavy chemical mix; aftermarket focus dominates.

Risks and Challenges:

• Geopolitical Conflict: Instability in the Middle East continues to delay project execution and reduce utilization rates for aftermarket services.
• Project Delays: Significant portion of the project funnel in the Middle East has been pushed to 2027 or later.
• Nuclear Construction Risks: U.S. utilities remain cautious regarding cost overruns in new nuclear projects; commercialization timelines may extend beyond 2027.
• 80-20 Portfolio Actions: Strategic exit of lower-margin products and customers creates short-term revenue headwinds that must be offset by growth elsewhere.
• Maintenance Scheduling: Current high utilization of refining assets delays necessary turnarounds, though this is expected to reverse in late 2026/2027.

Management Commentary and Tone:

• Tone is confident and constructive regarding long-term structural trends, despite short-term geopolitical disruptions.
• Management emphasizes that margin expansion is driven by controllable levers (operational excellence, portfolio optimization, capacity consolidation) rather than just volume.
• Scott Rowe highlighted the "FlowServe Business System" (operational, portfolio, commercial, people, and innovation excellence) as the primary engine for future performance.
• Confidence is high in the power sector's durability as a growth engine through 2030.

Analyst Questions and Answers:

• Margin Drivers: Confirmed that 100 bps annual margin growth relies on operational excellence (productivity/cost reduction), 80-20 portfolio optimization, and manufacturing capacity consolidation.
• Revenue Framework: Management clarified that the mid-single-digit growth target includes approximately 1-2 percentage points of embedded price increases.
• Middle East Impact: Quantified as a ~$100 million revenue drag; forecast indicates recovery once conflict stabilizes, with significant repair and redundancy spending expected post-2027.
• Nuclear Cycle: Detailed that while current bookings ($100M+/quarter) are strong, the bulk of revenue realization for new Greenfield reactors is expected in the 2028-2030 window, with SMRs contributing later.
• AI Adoption: Discussed internal AI deployment with 11,000 of 18,000 employees using an internal firewall-secured platform for productivity and process optimization in supply chain and finance.
• Capital Allocation: Reaffirmed commitment to investment-grade status; M&A will be targeted and programmatic, prioritizing strategic fit in growing sectors.

Other Key Points:

• The company operates a "race to 16%" EBIT margin strategy which has been surpassed, setting the stage for a "race to 20%+" by 2030.
• Manufacturing facility consolidation is accelerating, moving from 1-2 per year to more meaningful deals to eliminate overhead and increase scale.
• The 80-20 portfolio strategy is entering its third year, yielding tangible margin results by focusing resources on top-tier products and customers.
• Share repurchases totaled $75 million in Q3, with a disciplined approach to capital allocation balancing M&A and buybacks.