Flowserve Baird 2026 Global Industrial Conference

Mike Halloran here with Baird, and we are pleased to welcome Scott Rowe and the Flowserve team with us today. Got a couple of the stragglers in the audience as well. What we are going to do here is pretty standard format. Scott is going to give some prepared remarks, not very long, and we are going to do a pretty lengthy Q&A session. If you have any questions, please raise your hand, let me know. Send me an email. Happy to respond to the email on here and make sure we weave any of your questions into the conversation with that. Scott, thanks for coming. Floor is yours.

Yeah. First, Mike, thank you for having me. Thank you for Baird for setting the conference up. It is always one of the best conferences of the year, so we are happy to be here and tell the Flowserve story. Maybe I will just start as quick backdrop, and then we will jump into Q&A. Flowserve is always on a journey. We are always aspiring to do bigger and better things. I would say Q3, we did our earnings call two weeks ago, we had a very strong third quarter. The bookings were fantastic at about $1.3 billion, record backlog, record aftermarket, and so we feel like our end markets are moving in the right direction and providing support. The business from the operating system that Flowserve has, the business continues to perform. So we have seen continued margin expansion.

We are now at several years of margin expansion in the business, and both the pumps and the valves are making tremendous progress. So we put out long-term guidance and long-term targets at the end of the fourth quarter last year, mid-single digit revenue growth into 2030, 20% operating income by 2030, and then double-digit EPS growth. I would just say right now, we still feel very good about our long-term targets. Everything is setting up structurally to continue to support that, and we look forward to working with their customers in the end markets that make sense to drive that growth and profitability.

Maybe we start at the high level before we dig into all the moving pieces going on right now, and for sure- There's a lot of moving pieces, for sure.

A lot of them, right?

I kept it very open at the intro.

You know what, it makes my job easier, right? Why don't we start with the margin journey, and then we'll talk about the confidence in the revenue framework, because I think we can then dovetail that into some of the shorter-term revenue dynamics from there. But this has been 100 basis points a year kind of margin story. It was a race to 16% kind of EBIT margins. You've surpassed that. Yeah. You are on a path for that 20%+ over this timeframe.

What are the pieces we are working on today to get to that 20%? How much is volume dependent? More importantly, what are the structural pieces you are trying to drive to get to that level?

Yeah, for sure. Yeah, so the last four years, every year we have made tremendous progress here. This year is no different. We are moving in the right direction. We have got to get to 20%+ in 2030. That is our goal. The last five-year plan we had, we delivered that early, so we are always leaning in. We are always trying to do things as best we can as an organization. If we go back a little bit, then we will answer what we are doing today, the Flowserve Business System, we kicked that off about three years ago. So 2023, we launched that. It has a pillar of operational excellence, portfolio excellence. We have got commercial excellence, people excellence, and then innovation excellence. The first two are the ones that are driving margin, so operational excellence and portfolio excellence.

On the operational excellence side, it is really driving productivity at the manufacturing sites, so really focused on getting the variances down, reducing our cost per standard hour, doing all the right things within the manufacturing side. We have made great progress there. On the portfolio excellence, it is 80/20. The 80/20 journey has also helped us drive margins really nicely. By definition with 80/20, you are cutting out products that might be lower margin, or you are exiting customers that might not be supporting your business in the best way, and you are focusing your resources on your A products and your A customers. We are now in the third year of that, and we are seeing tremendous results. Those two things alone are really driving nice margin expansion.

Then the third pillar, while it is not necessarily in the business system, it is getting supported by the business system, is the aftermarket. We have seen tremendous aftermarket growth. Aftermarket for us has higher margin content than our OE, or original equipment work. What we are seeing is the ability to drive that at, historically now over three years, we are driving it kind of mid to high single digits, outpacing the revenue from our OE. So we are getting a nice help with the aftermarket margins. We will continue to do that. If we now say, we are about 16% here in Q3, as we look forward to 20%, we need to deliver another 100 basis points every year to get to the 2030 target. The actions in front of us, we have got to continue the operational excellence journey. I would say, modest improvement will continue there.

The 80/20 is still something that we believe will drive margin expansion. We kind of think of that framework about 100 basis points a year on the original equipment type margin. We've got a pricing initiative that we're kicking off or have kicked off already, and we believe that that'll start to drive margins. The other one is with the effectiveness of the operational excellence and the improvement in productivity and leaning out our manufacturing facilities, combined with the complexity reduction of 80/20, we're freeing up capacity within manufacturing. Now we're going to pick up something we've always done, kind of one or two facility consolidations a year. We're now starting to see more meaningful consolidations. When we do that, we see substantial margin increase as we eliminate that manufacturing overhead and really drive scale into our best manufacturing facilities.

We think that's a really nice lever for us as we go forward. I'd say, overall, we have confidence in our margin progression. We've demonstrated it now for four years in a row. We've got to keep going, but we've got plans that we're executing to across the business.

It certainly sounds like most of that's in your control versus- Yeah, within our control.