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Good day, and welcome to the Flowserve Fourth Quarter and Year End 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Ezzell, VP, Investor Relations, Treasurer and Corporate Finance. Please go ahead. Thank you, and good morning, everyone. Welcome to Flowserve's fourth quarter 2024 business update. I'm joined this morning by Scott Rowe, Flowserve's President and Chief Executive Officer and Chief Financial Officer, Amy Schwetz. Today, Scott and Amy will provide an update on our overall business performance, highlights from the quarter. Following their comments, we'll open the call for questions. I'll ask that you please keep the one question and one follow-up question and then return to the queue. Turning to slide two, as a reminder, our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties and these are discussed in our SEC filings, which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release today's earnings presentation both of which are on our website. With that, turn it over to Scott.

Thank you, Brian, and good morning, everyone. I'll begin on slide three. We delivered strong results in the fourth quarter capping a year of improved execution and significant progress towards our 2027 targets. Bookings were nearly $1.2 billion for the quarter with strong growth in both original Adjusted gross margins expanded 300 basis points to 32.8%, This marked the eighth consecutive quarter of year-over-year margin expansion And with additional leverage from SG&A, we delivered adjusted operating margins of 12.6% in the quarter. Book to bill was 1.0 times as we continue to drive revenue conversion while exiting the year with near record backlog of $2.8 billion. Our disciplined focus on working capital supported strong operating cash flow of $197 million in the quarter. Operationally, performance in the quarter was largely as we anticipated, when we provided our third quarter update in October. Those strengthening of the US dollar drove an incremental currency translation headwind along with higher interest expense related to the Mogus acquisition. Amy will provide more detail on this later in the call. Overall, our team executed to our plan delivering improved results in the quarter and completing an outstanding year for Flowserve in 2024. Turning to slide four, Q4 bookings grew 13% versus last year, driven by continued strength in our in-market and strong execution by our commercial teams. We continue to see robust growth from our strategy with 3D bookings representing 31% of our total awards for the quarter. We generated $618 million of aftermarket bookings which was the third consecutive quarter above $600 million We are laser focused on continuing to grow our aftermarket franchise our dedicated aftermarket teams are driving higher levels of service and value to our customers at margins accretive the full serve portfolio. Fourth quarter original equipment bookings grew 14% versus last year with a healthy mix of activity across traditional process industries as well as within new energy markets. Our largest award in the quarter was approximately $60 million in order to supply pumps for a new nuclear power plant in Europe. For the quarter, nuclear awards totaled more than $110 million representing the second consecutive quarter of nuclear bookings greater than $100 million Our power bookings, which included both traditional power and nuclear, were up more than 40% versus the prior year period. The power end market continues to be a significant opportunity Infosso participates in virtually all forms of power generation, from traditional hydrocarbon power like coal and combined cycle natural gas to nuclear and newer energy technologies like concentrate solar power or battery storage. Our next largest project awards were in the range of $10 to $15 million Our selected bidding approach to large projects continues to deliver growth with our preferred customers and products at margins that create more value for Post Serve. Additionally, we continue to see strength in our foundational core business of Aftermarket? MRO, and short cycle activities, driven by stable asset utilization rates at our customers' operations and improved capture rates across our expansive installed base. Turning now to slide five. Looking back on 2024, meaningfully grew bookings, expanded gross and operating margins, generated strong adjusted EPS growth and delivered substantial cash flow. Reflecting the strong execution and hard work of our associates around the world. Relatives took significant steps in 2024 to strategically position the company enable further value creation for our customers and shareholders. The MoGas acquisition, which we completed during the fourth quarter, expands our offering and exposure to mining and minerals. An important and growing end market that enhances our diversification efforts. We also launched the Closer Business System a comprehensive framework to further improve our execution with consistent operating processes across the Flowserve enterprise. We made significant progress last year in the areas of operational excellence, and portfolio excellence. Our eighty twenty framework, Both of which are improving the way we run our company, and delivering margin expansion. Let me now address our 3D strategy in the market outlook for 2025 we turn to slide six. Our significant progress in 2024 gives us further confidence in our ability to deliver on our 2027 targets. And we fully anticipate continuing with this momentum in 2025. Our 3D strategy is well positioned to deliver growth and capitalize on macro trends including ongoing energy transition as well as global regionalization. Diversification and decarbonization remain critical strategic initiatives for Proserve in 2025. We expect to build on the strength of 2024 where diversified and and decarbonization bookings grew 36% driven by nuclear, and new energy activities. On digitization, we believe we have the most advanced monitoring and prediction system within the flow control space. We continue to demonstrate the value of our digital capabilities on a regular basis with our customers improving their overall operability and reducing the cost to run their assets. In the year, we increased Red Raven monitoring assets by 14%. We believe there are scaled pathways to utilize the predictive capabilities that our domain expertise provides to generate recurring revenue and position ourselves for even higher aftermarket capture rates in 2025 and beyond. Our 3D strategy continues to be the right one in today's environment and we expect to see strong 3D growth trends 2025. Turning to slide seven. With strength in our traditional and 3D oriented end markets, our outlook remains constructive for projects, MRO, and aftermarket activity Across industries, and end markets. These opportunities continue to support our long term organic target of 5% growth.

Key global megatrends of energy security, regionalization, and electrification continue to attract significant global investment. Our overall twelve month project opportunity funnel is roughly flat to last year, However, the funnel remains at an elevated and healthy level particularly in some of our strongest end markets, and with more projects in the smaller to midsize range. The opportunity funnel in power is up more than 20% versus the prior year period, driven by the increased need for new power generation on the back of data center growth and electrification trends. We expect the world's existing traditional process industries to remain at solid utilization levels and we believe we are well positioned to capitalize on these aftermarket opportunities as we have demonstrated over the last several quarters. Moving to slide eight. Innovation remains critical to differentiate our products in the market as we leverage technology to deliver our 3D strategy. During the year, we introduced eleven new products to the market. To highlight an example of how our innovation supports our we are collaborating with a customer in Denmark on the world's first molten hydroxide energy storage plant called the Molten Salt Storage or Moss Project. The MOS process heats sodium hydroxy over 1300 degrees Fahrenheit. The heated salt then generates steam, which can be converted to electricity. Specialized flow control equipment is essential in this severe service high temperature environment. Additionally, this technology can be used in concentrate solar power, carbon capture, is potentially used in future applications like small module nuclear reactors. We also launched another innovative offering enabling emissions reduction of up to 80% through our gas pack

Thank you, Scott, and good morning, everyone. First, let me echo Scott's comments. We are very pleased with our results in the quarter and for the full year. And are excited about the opportunities to further accelerate our progress in 2025. Turning to the fourth quarter in greater detail on slide ten. We delivered another strong operational performance with nearly $1.2 billion of bookings adjusted operating margin of 12.6%, $0.70 of adjusted earnings per share and $197 million of operating cash flow. Relative to our plans coming into the quarter, the underlying operations were in line with our expectations. Beyond our operational performance, adjusted EPS was negatively impacted two cents by foreign currency translation. In addition, MoGas and the related interest expense was not included in our guidance shared in October. In the quarter, MoGas was roughly neutral to our adjusted operating profits. MoGas adjusted operating profit in the quarter was negatively impacted by the with higher margin shipments occurring in October prior to the acquisition's close. This led to lower sales and fixed cost absorption in our results. I'll share more in a minute about the strong outlook we have for MoGas in 2025. Acquisition related financing costs negatively impacted earnings by about $0.02 For the quarter, overall revenues grew 1% versus last year. The MOGUS acquisition contributed approximately 300 basis points to sales growth while foreign currency translation negatively impacted reported sales growth by about 100 basis points. Sales growth was muted in the quarter due to the meaningful percentage of completion revenue from Phase one of the Jafara project in last year's fourth quarter. Which did not repeat in the fourth quarter of this year. Aftermarket revenues grew 4% in the quarter which was partially offset as expected by original equipment revenues down 2 percent. Shifting to margins, we've generated an adjusted gross margin of 32.8% representing a 300 basis point year over year increase. And our fifth consecutive quarter of sequential margin improvement. The launch of our flow serve business system, which includes our operational and portfolio excellence efforts, positions us well to deliver continued gross margin expansion. Fourth quarter adjusted SG and A increased $12 million versus last year. Largely due to adding MoGas in the quarter, along with the phasing of incremental corporate R and D investments. Adjusted operating margin increased 210 basis points versus the prior year period to 12.6% our best of the year and representing our highest quarterly incremental margin of the year at more than 175%. Adjusted operating income was $149 million a 22% increase versus last year. Our adjusted tax rate for the quarter was in line with expectations at 21%. Compared to the prior year fourth quarter adjusted tax rate of 8%, which benefited from the release of certain valuation allowances this year's fourth quarter tax rate was more in line with our structural rate. The change in tax rate versus fourth quarter last year negatively impacted adjusted EPS by approximately $0.13. With these items combined with the additional modest headwinds in other we delivered adjusted earnings per share of $0.70 for the fourth quarter. Turning to our segments. Starting with FPD on slide eleven. The strong momentum continued in FPD with bookings increasing 13% versus last year. As expected, FPD sales declined 5% in the quarter due to a combination of the phasing of large projects, in the last year comparison period, and the negative impacts of foreign currency translation. Despite the sales decline, FPD generated adjusted an an increase of 450 basis points versus last year. Coupled with meaningful SG and A leverage, FPD delivered exceptional adjusted operating margin of 17.5%. A 570 basis point increase versus last year. We are very pleased with the significant progress FPD has made this Here. For the full year, FPD's adjusted operating margin of six and was within the targeted range of 16 to 18% which we set out to deliver by 2027. FPD continues to generate benefits from a more selective approach to bidding while also driving productivity through our operational excellence program. We expect to see further margin expansion in in 2025 from the continued maturity of these programs and our eighty twenty complexity reduction program. Turning to slide twelve, FCD including Logus delivered sales and booking growth of 15% and 11%, respectively. Mogus contributed eleven points of sales growth in the quarter. In FCD, aftermarket bookings increased twenty while while original equipment bookings were up 8% driven by strength in both general industries, and oil and gas. FCD adjusted gross and adjusted FCD adjusted gross and adjusted operating margins were 31.8 and 15.3% respectively for the quarter. A sequential improvement versus the third quarter. Mogus was a slight drag for FCD's margins in the quarter given the timing and mix of shipments and related under absorption that I mentioned earlier. Absent MoGas, FCD's underlying operational margins were roughly flat Year over year. FCD exits 2024 with improving momentum. We're benefiting from solid revenue conversion, improved mix, and enhanced execution. We are focused on expanding FCD margins and driving growth as we leverage the Flowster business system to improve execution, while also accelerating opportunities through the integration of Moogus. Turning now to cash flow on slide thirteen. During the quarter, we generated very strong cash from operations of $197 million bringing our full year cash from operations to $425 million as a percent of sales, fourth quarter adjusted primary working capital 28% on par with last year. We continue to see improvements in our cash conversion cycle which improved by roughly one day in 2024. Working capital efficiency is a continued area of focus for our team. And while we have seen the benefits of improving our operations management system, We see more runway ahead as we leverage the Flowserve business system, to drive a standard inventory strategy. For the full year, with capital expenditures of $81 million we generated strong free cash flow of $344 million our highest level in more than a decade. Free cash flow conversion ratio of 99% was significantly higher than our target of 85% or more for the year, and a strong indicator that our efforts in this area have momentum. Other sources and uses of cash during the quarter included increasing our term loan in conjunction with the Mogus acquisition, and a combined $37 million for dividends, and a term loan reduction. Turning to our 2025 outlook on slide fourteen. As Scott outlined, we are well positioned to once again make significant progress towards our 2027 targets. In 2025, we expect organic sales growth of 3 to 5% which reflects the strong momentum from 2024, a healthy starting backlog, supportive end markets, and further advancing of our eighty twenty effort. We expect reported net sales growth to benefit roughly 300 basis points from the Mogus acquisition. Currency will somewhat offset sales growth, as we continue to see headwinds from the stronger US dollar. Based on recent prevailing foreign currency exchange rates, we expect reported sales to be negatively impacted by approximately 100 basis points. We anticipate a full year book to bill ratio of over 1.0 given the constructive market backdrop. Turning to profits, we anticipate continuing to expand gross and operating margins as we drive higher volumes and leverage our eightytwenty program. To reduce costs through a more simplified product portfolio. Mogus is also expected to drive profit growth in 2025. Our guidance assumes MoGas operations will benefit adjusted earnings by an estimated $0.16 which includes $7 million of in year cost synergy benefit. Incremental interest expense related to financing the acquisition is expected to partially offset the operational benefits. Overall, we expect adjusted earnings per share of $3.10 to $3.30 This includes absorbing an estimated five cent head win from foreign currency translation. At the midpoint, our adjusted earnings guidance represents an increase of 22% versus the prior year. In contrast to 2024, we anticipate the profile of our 2025 quarterly revenue and earnings results will be similar to historical trends With first quarter earnings the lowest, and fourth quarter earnings the highest, The impact of MoGas, including the benefit of synergies, along with the benefits from our portfolio excellence initiative, will accelerate through the year. We expect first quarter sales and earnings to be similar to the first quarter 2024. As strong aftermarket growth is offset by lower percentage of completion revenue, on a year over year basis. Turning to capital allocation on slide fifteen. We continue to leverage our framework to deploy excess cash to the highest long term Return. Our board has authorized a quarterly dividend of $0.21 per share. We also expect to leverage our cash to repurchase shares to offset equity compensation. We are focused on continuing to invest in the business for growth. Both organically and through M and A. actively review opportunities We have a strong M and A pipeline and continue to would accelerate our 3D strategy further diversify the portfolio, leverage our scale, and drive both margin and EPS expansion. For the year, capital expenditure investments to further grow the business and drive efficiency in our operations are expected to be $80 million to $90 million As I close, let me reiterate how proud I am of the Flowserve team. We delivered significant value in 2024 across all metrics. Bookings, sales, earnings, and cash flow. Our 2025 guidance is another step towards unlocking further value creation for our shareholders. With that, let me now turn the call back to Scott.

Thanks, Amy. Before we open the call for questions, questions, let's go to slide sixteen. We made tremendous progress in 2024, and we believe 2025 represents another meaningful step towards delivering our 2027 financial target. Our end markets are healthy and growing. Our 3D strategy is working. Our execution has improved significantly and we are seeing the early benefits of our postal business system. Overall, we are pleased with the remarkable progress in 2024. But we know there is more opportunity in front of us and our work is not done. Our 2025 guidance represents another step in to achieving our 2027 targets and I have more confidence today than ever before in our team and our approach to deliver these results. We are excited about the journey ahead and have a clear roadmap deliver significant value for our customers, our associates, and our shareholders. Operator, we'll now open the call for questions. Thank you.

Thank you. If you would like to ask a question, function is turned off to allow your signal to reach our equipment. Again, you may press star one to ask a question.

We'll take our first question from Nathan Jones with Stifel. Good morning, everyone. I guess Morning, maybe. I I guess I'll start with a question on the aftermarket bookings. They've certainly ramped up over the last few years and to our two levels You know, higher than the than the ever been historically. I wonder if you could just talk a little bit more about the the strategies that you've deployed to really drive the after market capture rates to drive the the growth in bookings around aftermarket to start with? Thanks. Sure. Yeah. We're super excited about the aftermarket bookings. $618 million in the quarter. It's, you know, several quarters in a row now that we've been over $600 million and I don't know if that's the the new four, but I would say certainly a a $550 number would be the floor on on aftermarket bookings. And, you know, as you said, Nathan, this is absolutely a result of the good work from the teams. And so we have a a massive installed base of both pumps and valves. We've got a great local presence with our quick response centers. We've got strong customer relationships. And what we're really focused on is that high level of customer service The the mantra within our teams is speed wins. And so we focus substantially on reducing the cycle time of our quotes reducing the cycle time of getting parts to our customers, reducing cycle times of repairs and just being available to service them. And so we've got a A nice record that we use within the aftermarket teams. We can see that the capture rates are are continuing to move up, and we're confident that we can continue to make progress with this. And then I just add that the the Mac utilization around the world on these, you know, big plants and infrastructures are at a relatively high level. And we expect those levels to to maintain in 2025 and beyond. And so we we like where we are with aftermarket. We've got aggressive growth targets on all of our aftermarket type businesses, and we feel like if we keep executing like we are, we'll continue to move that capture rate up. Awesome. I guess my follow-up question is gonna be around the the eighty twenty framework, your core initiatives.

One of the well, the comments are in

slide that I found interesting was that you don't expect it to really be a negative headwind on the sales side. Pretty much every company I've covered that has deployed this kind of system has always seen a headwind to revenue. From getting out of products that that aren't profitable or getting out customers that aren't profitable. It's accretive to EPS to to see those headwinds in sales. I'm just wondering if you can comment on and maybe why you're not seeing a revenue headwind from these eighty twenty initiatives, if that's something that we should expect in the future or or just your approach to that thing? Sure. Let me let me provide a little context first just to get everyone kinda grounded. I know that you're you know this well on the eighty twenty journey, but Just as a reminder for for everyone else, we we launched three of our business units within eighty twenty last year. We call our initiative core for complexity reduction because essentially that's what you're doing. You're using a Pareto type approach to reduce the complexity in your business. And, you know, flow service has been around for a long, long time, and we have a lot of complexity. And so this initiative and and this effort is something that's that's really impactful to Flowserve, and we've got high expectations as we go forward. As as we think about the two business units that are now kind of year into this. You know, what we're seeing is skew reduction magnitude of of ten to fifteen percent in the year. Ethan, as you indicate, like, that is gonna be a, you know, a little bit of a a headwind to our revenue as those SKUs are out of our offering. The philosophy is that we take those resources that were you know, used to sell that product or that channel to market and we're we're repositioning them to our best products and our best customers. And at this point, at least in 2025, we feel like that that revenue impact is negligible as we start to invest in our best products and our best customers. And so you know, we're one year in with two business units. We're that's how we see things today. You know, and I think we'll be able to maintain that into 2025. As we kick off two more business units in 2025, you know, we'll we'll see the dynamics of you know, what the data shows us and what we think the revenue impact will be But, again, that probably won't show up until 2026. And then on the margin side, you know, I'll add that in the two business units that are now kind of a full year in here, you know, we we fully expect in 2025 hundred basis points in the gross margin level because of the the efforts that that we're doing with eighty twenty. And I in closing on eighty twenty, I'll just say, you know, we are following the methodology very rigidly, and we are on track with our expectations and what know, other companies have done when they when they use the eighty twenty framework. And so we're pretty excited about this. Yes. We'll see modest improvements in 2025, and we'll start to accelerate those improvements in 2026 and beyond. And, you know, just reiterate that we remain confident that the that this initiative, which we put under our portfolio excellence, will continue to drive kinda 200 basis points plus as we we reach our long term goals of 2027.

Yeah. And, Nathan, I might just add there that as we talk about about sort of negligible impact I think another way to say that is it's factored into our organic revenue guidance, that we've put out of 3 to 5%. So what would a 3% year look like? And it could look like more more revenue loss from from eighty twenty. That doesn't necessarily sacrifice our potential to reach our EPS guidance.

Makes perfect sense. Thanks very much for taking my questions.

We'll take our next question from Deane Dray with RBC Capital Markets.

Hey, you. Good morning, everyone.

Hey. Maybe we start on the twenty five guide

with the expectation that you think you'll be above one on book to bill, just how calibrated are you on that so far? I mean, you do have some good earnings visibility on some of these longer cycle projects. So is there a front log that's giving you that confidence that you'll be able to and and do you have confidence in maintaining the streak of over a billion dollar of orders and know, at some point, Yeah. Is that going to come to an end and and maybe some observations there? Sure. I just hit the aftermarket in great detail. So I'll focus on kind of the OE and the projects. You know, our our forward when we look at our forward funnel within our CRM system, it's essentially flat year over year. It doesn't give us substantial cause for concern. It's at a very elevated level. I would say oil and gas is a little bit down power's up substantially, chemicals down just a fraction. General industries up. With all of that said, you know, we feel like we've got great visibility to to the project universe out there and driving growth within the o e bookings. And, you know, as I said previously, the app very confident in our ability to continue to grow that. And so right now, you know, everything we see is a a book to bill over 1.0. You know, the mega trends that we continue to refer to are decarbonization. You know, and despite some of the rhetoric maybe in the US kinda shifting away from that, we're we continue to see a lot of projects in the decarbonization space. We book carbon capture fourth quarter. We've got carbon capture visibility in Q1. We've got more carbon capture for the rest of the year. There's other things in in decarbonization that we're pretty excited about. The nuclear outlook is is incredibly strong on the power side. So the power and electrification continues to go forward, and so we've got great visibility there. And then general industry and kinda run rate business for us has been reasonably strong as well. And so know, when we think about the megatrends and the end markets, it's all relatively stable. You know, the the soft spot, we've said this before, is is chemicals in Europe, That remains a little bit soft. We're kind of a a year and a half now with that softness, and so I I would expect at some point, we start to see an inflection to growth. And then, Dean, maybe the last thing I'll add is, you know, what we saw with the the January order rate was was reasonably healthy. Our run rate business, our aftermarket business both in in North America, Europe, and and around the world is is all looks good, and we've got, you know, real nice visibility to project type awards. And so yeah, at this point, you know, it's a dynamic world out there. There's a lot of things going on, whether it's in the political arena or or, you know, the geopolitics. But, you know, we we've got good visibility to us to sustainable growth rate and and, at this point, committing to to book to bill over 1.0. That's really helpful. And Amy knows this would typically be the time I would ask about free cash flow, but it was really strong in the quarter. So that I think I'll leave that one there. But, Scott, you mentioned the geopolitical side. Just is there anything as you see the businesses today that would be impacted on tariffs and just in terms of what headlines you've seen, any kind of preparation, a playbook that you have

that would that that you need to have to put into play here. Sure. I you you know, we've obviously gone through this once before with the Trump administration in the first pass. And then, you know, quite frankly, the the Biden administration moved tariffs up even further So we've got a a good view of of what to do with the tariffs. You know, it's obviously a a very dynamic situation, and there's still some uncertainty in terms of exactly what happens. But what I you know, what I would add is that we are incredibly confident in our ability to manage this. You know, it Flowserve historically has not been the most nimble company I believe we're changing that pretty dramatically. We've got great visibility, not only to our where our supply chain is coming from, but also what the impact would be at a product line level in any tariff scenario. And so that visibility is allowing us to move much quicker in terms of actions, and actions would be, you know, repositioning the supply chain, raising prices as as we feel impacted. And so our teams are are very geared up with this. We've modeled out more scenarios than I want to talk about on the call. But I'd say given what we know today, we feel really good about our ability to manage this. And then just maybe some grounding for for others Two thirds of our revenue is outside of the US. And for the work that is in the United States, we still have a significant manufacturing presence in the US in all of our products. So pumps, valves, and seals, And our exposure in the US is more supply chain related than finished goods, and so where we're getting impacted is is our importing of castings and forgings and and bar stock. And so we'll continue to work through this. At this point, I feel very confident in our ability to do that. And the impact historically has been, you know, very moderate to a a very low number Obviously, with the new scenarios, that goes up, though. Appreciate all that, caller. Thank you.

We'll take our next question from Mike Halloran with Baird.

Hey, good morning, everyone.

Good morning, Mike. So Just just talking through a couple things here. First, when you look at the 100 to 200 basis points plus you threw out on the slide on you know, the eighty twenty and then the commercial excellence program you're about to launch. I know you guys said on the prepared remarks, we're like 200 plus. But when you think about those, just a reminder, how much of that is embedded in what's previously embedded in the guidance for 2027. And then also a reminder, what is the volume component of that 2027 guidance we sit here today or the revenue growth component? In other words, how much is firmly within your control versus market factors Sure. So maybe starting with

the eighty twenty work and and what we're seeing with that. As we laid out our 2027 targets, we didn't dig sort of 200 basis points from portfolio management, and I would think of eighty twenty as the process that we're using to drive that portfolio management improvement. I think we've we've also made it pretty clear with the 2027 targets that we don't intend on stopping there. And so we we felt confident in November as we started to see the results of of eighty twenty that really that 200 basis points becomes a 200 basis points plus related related to these so we're we're bullish on the on the benefits that we could see from them. Then I think the other 200 basis points that we that we saw as we looked at is we looked at our ability to hit those long term targets was really around operational operational excellence. And and so I think we've made tremendous progress on the OpSec excellence side, particularly if you look at at the results that we've seen running through the FPD segment, We've laid the groundwork for that within within FCD. And so I think, really, the the top end of our range, if you look at kinda where we where we wanna be from an OI segment, I would think of that as the operating, the operating leverage from volume that that we would anticipate getting. So overall, just to reiterate what what Scott said in his remarks, what I've commented on, We feel really good about hitting these these 2027, 2027 targets. And and we think we have the tools in place to do it.

Thanks for that. And and then maybe a question on the guidance then and making sure I understand the cadencing. So if I heard the prepared remarks correctly, first quarter revenue and earnings are rough similar to last year. Just making sure on that. And then as you think about the year, is this cadencing expectation for relatively normal seasonality, relatively normal or balanced conversion on on some of these some of the backlogs through the year. Any other nuances we should think about through the year and and any thoughts on the corporate expense side?

Sure. So a a little bit to unpack there. I'd start with, you know, kinda as we think about 2025, you're right that we look at that phasing as being closer to our historical seasonality. And and I say that it's being impacted by a a couple of reasons from from an earnings perspective. Perspective. To start with, we we've commented throughout kinda 2024 on the phasing of that large deferral contract that we that we shipped across 2024 into a certain extent recognized revenue in 2023. So the first quarter of last year was our highest revenue quarter. From that, and so that that does impact what we see in in the first quarter. Secondarily, I think we've got the impacts of of eighty twenty. That are impacting our profit profitability and will ramp throughout the year. And the third is really around MoGas that I expect that that as we progress through the year and begin to recognize synergies to get to our ultimate run rate, kinda that fifteen to fifteen million dollars plus of of of synergies that will see the fourth quarter be our be our best quarter of the year. And so those are those are the things that are working that that I see playing out over the course of the year. And I do wanna comment on the first quarter overall from the standpoint that you will see improvement embedded in the quarter from an operating performance perspective. We expect that gross margin will be improving again year over year to reflect the programs that that we've made part of the way that we run the business going forward. But we see a a few things embedded in there that are gonna be offsets, and that's really around the additional interest Six cents from from MoGas, which is roughly two cents a quarter, so eight cents for the year. And and the ramp up of those synergies. Oh, and then I'll just touch briefly on on corporate expense. Sorry. I think overall, we see corporate expenses being neutral in total over over the course of of 2025. So similar levels to what we see and saw in 2024. The phasing of that can change based on based on the the lumpiness of some of those expenses, but overall, in total, that number will be pretty close to what we saw in 2024.

Appreciate it. Thanks, Amy.

Our next question comes from Joe Giordano with TD Cowen.

Hey, guys. Good morning. I I wanted to unpack that corporate I wanted to unpack that corporate expense a bit. Mentioned it's tied to, like, specific r and d. And things like that. I mean, it it was definitely higher, and now we're saying that 2025 is neutral. One I just wanna know what's kind of What's what's causing this ramp? How long does it kinda stay at that level? When you say it's neutral in 2025, like, the 2024 number had, like, $12 million of you know, of of extra cost from asbestos. Is it, like, you're saying it's gonna be equal to that, inclusive of that extra twelve, and then we'll see what asbestos is? For this year? Thanks.

Sure. So the the corporate cost just in general in terms of the basket of costs. So corporate cost that we do not allocate out to the out to the divisions, So thank you in terms of in terms of corp dev, r and d costs that are not necessarily attributed specifically to to either segment And it also includes elements of of incentives, including both annual incentives and NAIP in the mix, and it does include the IVNR true up that we do every year. We have included a a placeholder for IVNR in the third quarter of this year. And so absent that, I would anticipate the cost would go down year over year over year, Joe. But I think one thing to point out just about these elevated costs is given that incentive element, as we look at 2023, and 2024, as the company has began to perform close to targeted levels, both share based compensation, which includes a performance component, and annual incentives are higher than what we might have seen in 2022 and 2021.

That's fair. Then just if I could follow-up on some of the in process r and d that you bought on the cryo side of things. Where are those today in terms of, like, commercial deployment?

Sure. Yeah. We we remain very excited about the the LNG market in general. You know, obviously, with the the new administration, there's there's new life to new build LNG in the United States. We've got a very global look on the LNG side, and we're we're able to put a lot lot of our valves and other product in there And so, you know, now, obviously, we have to commercialize our pump That is making, you know, very good progress, and you know, I would say it's somewhere kind of in the second half of the year. We've gotten through our testing protocol, and we're starting to to bring that to market. On a positive side, we're already seeing our ability to support the aftermarket business in LNG. And so the technology that we've developed we're now out there, repairing and, installing some of our product in replacement opportunities on existing LNG. And so already starting to see revenue come in the door on the back of of this technology acquisition, and we're confident that over the long term, this will be a a really nice addition to the overall portfolio supporting what we believe is a a really strong end market for us.

Okay.

We'll move to our next question from Brett Linzey with Mizuho. Hey, good morning all.

I wanted to come back to the the SKU reduction. You you noted that two business units are underway. I think commensurate ten percent to fifteen percent. Reduction there. Two more being reviewed this year. Where do you see the reduction ultimately landing as the at the end of the program on a on a SKU basis? And should we think of potentially more benefit above just eighty twenty practice as you get better throughput on know, what would be a more standardized simple simplified SKU count?

Sure. Let me just start. I'll I'll answer this q first, and then we'll talk about

just the other benefits related to eighty twenty because there's a long list to that. But on the on the SKU, the first two business units, again, they're about a year through the program now, and what we're seeing is that ten to fifteen percent reduction the the data in year two, that number only gets bigger. And so there will be further reduction as we go forward. Don't think we're gonna double the size of the SKU reduction, but I think you could see those numbers going up to kind of a fifteen to twenty percent within each of those first business units. And so you know, we'll continue to follow the methodology Every time you recut your quads, you're moving products and potentially customers out of the mix and repurposing your resources to the ones that that create value for for the enterprise. And again, we'll we'll follow that pretty religiously as as we go forward. There's a lot of little caveats in terms of aftermarket and, you know, a a a a product that supports one of your best customers. You maybe keep that a little bit longer as you're repositioning them to a a different type of a product. Then to the second part of your question, which is a really important one, as we continue to reduce complexity, there there's all kinds of knock on benefits. And whether that's your your overhead type cost in the manufacturing or in the quoting side, that starts to get a lot a lot simpler because you're you're quoting less products and you're more focused on your best products. You can start to drive efficiencies in these different kind of work centers or or different population groups. And then on the shop floor, we haven't modeled any of this to date, but we do believe and we've seen other companies that do get a productivity uplift with the simplification of what's going through the manufacturing process. And so there's a ton of knock on benefits. You know, it goes all the way through the process. From quoting to engineering, the shop floor, your supply chain gets simplified as well. And so as we continue to to work through the initiatives, we'll continue to make sure that we are getting the benefits in each step of the the manufacturing process.

That's very very helpful. Maybe just one on inventory. So it still looks pretty lean to us. What's your assessment on inventories in the channels? And I and I guess if we're entering a a modestly more favorable operating backdrop for just traditional energy deregulation, etcetera, Should should we look to to the channel to maybe gain some comfort holding more inventory over the next couple years or

still stay pretty lean. Yeah. I'll I'll keep this discussion in the US because that's where we typically will see our stocking distributors. The stocking distributors have pulled back on inventory pretty they've they've managed their working capital very well. They put a lot of pressure on us to to reduce our lead times and and be there, you know, for them in a much quicker response. And so I I think at this point forward, you know, my view with that would be that their inventory does start to come up. I think the the North American outlook across the energy sector and across some of the General industry is is remains relatively bullish. And so I would expect a a little bit of inventory build here in the coming quarters. I I I wouldn't expect anything crazy, like, you know, like, a fifteen to twenty percent build, but I I don't think they're cutting inventory And again, I would expect modest growth on inventory levels as we progress forward.

Appreciate the insight. Best of luck.