BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - FLOWSERVE CORP

Explicit Guidance:

• Long-term Targets: Confirmed commitment to FY2030 targets established in FY2023: mid-single-digit revenue growth (4–6%), 20% operating income margin, and double-digit EPS growth.
• Margin Expansion Path: Anticipating approximately 100 basis points of margin expansion annually from FY2024 through 2030 to reach the 20% EBIT margin goal from current levels of ~16%.
• Backlog Conversion: FY2024 backlog conversion rate expected to remain in the mid-70th percentile range for FY2025, with potential slight deviation due to nuclear project timing and Middle East delays.
• FY2024 Guidance: No specific full-year 2024 revenue or earnings guidance provided in this call; explicit FY2027 framework to be released at year-end Q4.

Business-Segment Outlook:

• Aftermarket Growth: Projected to continue growing at mid-to-high single digits, outpacing Original Equipment (OE) revenue growth; focus on increasing capture rates and margin contribution.
• Power Sector: Expecting sustained tailwinds in both traditional (coal/gas) and nuclear power. Nuclear bookings anticipated to reach ~$100M+ quarterly, with specific momentum expected in 2027–2030 from life extensions and re-rates.
• Refining & Middle East: Q3 impact of ~$100M in lost aftermarket MRO work expected to persist into the near term; however, 2027 outlook is constructive driven by pent-up maintenance, turnaround delays, and an estimated $50M+ in repair/rebuild work from conflict damage.
• Europe: Forecasted to remain flat (roughly 0% growth) due to lack of major chemical project investment; activity remains primarily aftermarket-driven.
• North America: Strong project funnel expected through 2027, driven by power, general industries, and new refining projects (including a dormant refinery acquisition and a Greenfield refinery).
• Portfolio Rationalization: Continued execution of "80-20" strategy (cutting lower-margin products/customers) will create short-term revenue headwinds through 2026, abating by 2027, while driving margin expansion.

Market and Competitive Outlook:

• Pricing Power: Launching a new "pricing engine" for 2027 leveraging analytics and algorithms to optimize pricing across aftermarket mechanical seals and parts; confidence remains in ability to pass on inflation and tariffs.
• Nuclear Market Share: Holding 75% installed base globally; positioned to capture share in upcoming Greenfield projects in Eastern Europe (Poland, Romania) and India, and potential US unlocks in 2027.
• Energy Security Trends: Anticipating increased capital expenditure globally on energy security, including new pipelines, LNG terminals, and storage facilities outside the Middle East due to geopolitical shifts.
• Competitive Landscape: View the pump and valve market as fragmented; M&A pipeline remains healthy with focus on strategic, programmatic acquisitions ($200M–$300M revenue range) that integrate well into the operational excellence framework.

Macro / Industry Outlook:

• Geopolitics: Middle East conflict continues to suppress immediate aftermarket utilization; recovery tied to ceasefire and stability, with significant project reactivation expected in 2027–2028 for redundancy and infrastructure rebuilds.
• Refining Cycles: US refining utilization remains at record highs; expects 2025 turnarounds to be lighter in spring but heavy in fall, with 2027 seeing a significant ramp-up in maintenance spending due to deferred turnarounds.
• US Nuclear Regulation: Anticipates cost-certainty frameworks and utility agreements unlocking 1–2 Greenfield nuclear projects (AP1000) in 2027, following delays related to mid-term elections and construction cost concerns.
• SMRs (Small Modular Reactors): Not part of the FY2030 material booking timeline; substantial bookings expected post-2028 as technologies mature and move toward commercialization.

Strategic Initiatives:

• Trillium Valves Integration: Synergies expected to elevate post-acquisition margins above the current blended rate; acquisition is margin accretive over time via 80-20 portfolio optimization and capacity consolidation.
• Manufacturing Consolidations: Expecting more meaningful facility consolidations (beyond the traditional 1–2 per year) in the coming years to eliminate overhead and improve scale/margins.
• Supply Chain & Tariffs: Active pivot of supply chain to minimize tariff impacts and optimize cost locations; leveraging AI to improve supply chain efficiency and reduce complexity.
• AI Deployment: Rolling out AI tools to 11,000 of 18,000 associates for individual productivity; targeting process optimization wins in finance, supply chain, and admin to reduce waste and improve throughput.

Risks and Headwinds to Outlook:

• Middle East Volatility: Unpredictable timing for the return of aftermarket MRO work and project reactivation in the region; potential for further delays in project conversion.
• Nuclear Cost Overruns: Construction cost overruns in US Greenfield nuclear projects remain a risk to utility participation and timeline certainty.
• Geopolitical Supply Chain: Disruptions in the Strait of Hormuz or broader Middle East conflict could impact logistics and project execution globally.
• Portfolio Headwinds: The 80-20 rationalization strategy will continue to reduce revenue base through 2026 as lower-margin assets are exited, requiring offsetting volume growth.
• Refining Maintenance Timing: While pent-up demand exists, uncertainty remains regarding the exact timing of 2027 turnarounds depending on refinery operators' ability to run hard.

Management Tone on the Future:

• Confidence: High confidence in achieving FY2030 long-term targets despite near-term headwinds; described the margin journey as "structural" and "in control."
• Caution on Timing: Explicitly cautious regarding specific timing for nuclear awards and Middle East reactivation, noting these are "wild cards" dependent on external geopolitical and regulatory resolution.
• Capital Discipline: Emphasis on maintaining investment grade status as a "governor" on M&A spending; proactive capital allocation toward share buybacks ($75M YTD) and strategic, high-accretive acquisitions.

Miscellaneous:

• Capital Allocation: Share repurchase program active with $75M executed in Q3; intent to continue opportunistic buybacks during stock price dislocations.
• M&A Criteria: Targeting programmatic deals ~40% larger than Trillium ($400M purchase price) to further expand power sector presence and leverage existing operational excellence systems.
• SMR Strategy: Engaged with 12 distinct SMR providers for prototype flow control solutions, positioning for future commercialization despite no immediate revenue impact.