Flowserve Corp. (NYSE:FLS) Q4 2014 Earnings Call February 18, 2015 11:00 AM ET
Executives
John E. Roueche, III - Treasurer & Vice President-Investor Relations
Mark A. Blinn - President and Chief Executive Officer
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
Michael S. Taff - Chief Financial Officer & Senior Vice President
Analysts
Charles D. Brady - BMO Capital Markets (United States)
R. Scott Graham - Jefferies LLC
Alan Matthew Fleming - Barclays Capital, Inc.
Nathan H. Jones - Stifel, Nicolaus & Co., Inc.
Andrew Obin - Bank of America Merrill Lynch
Steven M. Fisher - UBS Securities LLC
Chase A. Jacobson - William Blair & Co. LLC
David L. Rose - Wedbush Securities, Inc.
William Bremer - Maxim Group LLC
Joseph C. Giordano - Cowen & Co. LLC
Operator
Welcome to the Flowserve fourth quarter 2014 earnings conference call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I will now turn the call over to Jay Roueche, Vice President of Investor Relations and Treasurer. You may begin.
John E. Roueche, III - Treasurer & Vice President-Investor Relations
Thank you, operator, and good morning, everyone. We appreciate you joining us today to discuss Flowserve Corporation's 2014 fourth quarter and full-year financial results, which we announced yesterday afternoon in our press release and Form 10-K filing.
Joining me on the call this morning are: Mark Blinn, Flowserve's President and Chief Executive Officer; Tom Pajonas, Executive Vice President and Chief Operating Officer; and Mike Taff, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call up to your questions, and instructions will be given at that time.
Before turning the call over to Mark, let me remind you that this event is being webcast and a slide presentation is available. An audio replay will also be accessible approximately two hours following the conclusion of this live call.
Please also be aware that this call and the associated earnings materials contain forward-looking statements that are based upon forecasts, expectations, and other information available to management as of February 18, 2015. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. And, except to the extent required by applicable law, Flowserve undertakes no obligation and disclaims any duty to update any of today's forward-looking statements.
We encourage you to fully review our Safe Harbor disclosures contained in yesterday's press release, slide presentation, and our Form 10-K filing as well as other filings with the Securities and Exchange Commission for additional information. All of these documents, including the live webcast and replay, are accessible on our website at Flowserve.com in the Investor Relations section.
I would now like to turn the call over to Mark Blinn, Flowserve's President and Chief Executive Officer, for his prepared comments.
Mark A. Blinn - President and Chief Executive Officer
Thank you, Jay, and good morning, everyone.
Overall, we delivered strong operating and financial results for the fourth quarter, which ensured a solid full year 2014. We operated at a very high level throughout the year, and I am pleased that our employees have strengthened their customer focus and demonstrated commitment to raising the bar through our Performance Culture initiative. These efforts are delivering value for our customers and ultimately for our shareholders.
Equally important, I believe our actions in 2014 will better position the company for 2015 and beyond. Even though Flowserve is currently operating at its highest level of performance, there remains heightened market uncertainty following the rapid decline in oil and headwinds from the strengthening U.S. dollar. While we can't influence the markets, we are focusing on what is within our control, namely, continuing to deliver for our customers, operational excellence, tight cost control, pursuing disciplined investments to drive sustainable long-term growth, and returning capital to our shareholders. This formula served us well in the past market cycles, and we believe it is the logical course now. Additionally, we expect this current market environment will provide us additional opportunities to grow our market leadership from a position of strength. With the strong results and improvements that we've delivered over the past few years, we have full confidence in Flowserve's operating platform.
In light of recent commodity price movements, I believe it's important to clarify our exposure to oil and gas. In 2014, what we label oil and gas represented about 43% of our consolidated bookings. Our largest oil and gas exposures are in the mid and downstream markets, accounting for roughly 75% to 80% of our total oil and gas exposure.
Even more relevant, the over 80% of our company's revenue is aftermarket in what we call run-rate original equipment, which both entails serving existing permanent assets in place and relying more on maintenance budgets than capital spending. We expect current price levels will significantly reduce demand for new upstream oil and gas projects, as we've seen from recent customers' CapEx announcements. However, this type of project represents only a modest portion of our total oil and gas exposure. Considering the oil price decline is not primarily a demand issue, but rather supply driven this time, our midstream and downstream customers continue to operate their facilities at high utilization rates, and their out-of-service cost far exceeds that of proper repair, maintenance, and replacement that our aftermarket and run-rate activities represent.
This is not to suggest we're immune to market dynamics and commodity price. However, we believe the current market and its impact is very different from 2009, when virtually all industries were impacted. And we continue to believe our company's overall diversification remains one of our greatest strengths. For instance, many of the industries that comprise the other 57% of our consolidated bookings can actually benefit from lower oil and gas prices.
Additionally, in 2014 we experienced solid activity levels, demonstrated by a book-to-bill of 1.06 and a near $150 million increase in backlog. On a currency neutral basis that better indicates actual activity levels, bookings grew about 8% for the year, including over 11% in the fourth quarter, with December serving as our strongest bookings month. I believe our employees' focus on serving the customer led to this strong performance.
Our full-year bookings growth was primarily driven by our oil and gas and chemical markets and to a lesser extent general industries. Geographically, we delivered growth in all regions except Asia-Pacific. Strength in North America continued through the fourth quarter. And while Europe declined in the quarter, it follows several prior quarters of year-over-year growth, implying it is mainly a timing issue. The Middle East returned to growth in 2014 following two challenging years, and we expect the region to continue investing to increase higher-value downstream production.
Growth in Latin America for the year was driven by a very strong fourth quarter. As Tom will mention, this required some significant redirection on our part. And we believe political and currency challenges may continue to present headwinds for certain national oil companies.
Asia slowed in 2014, representing our only regional market that declined for the year. We continue to expect long-term growth in Asia, and our objective remains to further increase our presence.
Turning to our end markets, while the visibility into our oil and gas customers' spending plans for 2015 remains limited, as I previously mentioned, we believe the announced CapEx reductions will have a lesser impact on our aftermarket and run-rate activity and midstream and downstream spending in general as opposed to upstream CapEx driven projects. Long term, we believe in the upstream markets, and will continue to pursue growth opportunities in this area.
We see growth prospects from our chemical markets in 2015 and would highlight the ethylene expansion in the Gulf Coast region as a leading indicator, since those projects have yet to significantly reach procurement stage for many of our offerings. While power markets have been competitive over the last few years, we continue to expect Asian investment to support growth.
Fourth quarter bookings strength reflected nuclear activity in China as well as solar investments in Africa and Latin America. The growth and quality of our backlog and its broad exposure to industries and geographies increases my confidence that Flowserve's diversified model is the right one to pursue.
I also want to emphasize the highly synergistic nature of our original equipment and aftermarket activities. Our 200-year-plus history of installed base provided the opportunity for us to grow and build the $2.1 billion aftermarket franchise as well as the run-rate business.
Likewise, our aftermarket capabilities and our global footprint now serve as a competitive advantage when selling original equipment, and then the process repeats. These two aspects of our business truly do leverage each other, and they are critical together for our ongoing success.
In addition to solid bookings, Flowserve drove meaningful gross margin expansion, which drove operating margin improvement in 2014. This level of operational excellence demonstrates the success of the initiatives we've undertaken to drive results from within the four walls of Flowserve. The progress we've delivered provides the foundation that underlies our disciplined, profitable growth plans for 2015 and beyond, including R&D expansion, new product development, aftermarket acceleration, leveraging the recent SIHI acquisition, and increasing market share. As top line growth returns, Flowserve has good opportunities for SG&A leverage that would provide further operating margin growth.
Even in the current macro environment, we have industry-specific plans to grow our business, including in chemical and emerging market power. And with our solid capital structure, we will continue to evaluate and pursue disciplined M&A opportunities. And I am confident that our operating excellence strategies, including One Flowserve, and our culture of continuous improvement has positioned us to capture synergies across our business, drive further margin expansion, expand organically, and leverage our operating platform to efficiently integrate any bolt-on acquisitions. We will remain committed to disciplined, profitable growth and long-term value creation for our shareholders.
And in periods of market uncertainty, we will focus on the areas we can control. We believe we can capture more value from our $2 billion-plus aftermarket franchise, which has consistently demonstrated resiliency even through challenging project environments. Our diverse geographic and end-market exposures should again serve us well as we flex the business to areas with greater market opportunities when others are challenged. While we will take advantage of opportunities to adjust our cost structure and operating platform, our vision is long term, and we will remain focused on investing in the business and our people while we advance our culture of performance.
In summary, we expect to profitably manage and grow our business to create long-term value for you, our shareholders.
Let me now turn the call over to Tom.
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
Thanks, Mark, and good morning, everyone.
I'm also very proud of the performance we delivered in 2014. We continued to strengthen our operational foundation, building upon our long-term strategy to increase our operating excellence, efficiency, and flexibility. As Mark indicated, the Flowserve engine is operating at a very high level. This is a clear testament to our employees and their embrace of our strategic vision, execution focus, and service to our customers.
We were very pleased with our ability to flex the business across Flowserve's diverse end market and regional exposures while tightly controlling our cost structure. Although the larger project work did not materialize during 2014, which limited our revenue growth, we still delivered meaningful margin improvement at both the gross and operating line, largely just from the run-rate business and aftermarket franchise. In fact, we reached the top end of our three-year margin target in spite of the continued project delays and increased macro uncertainty in some of our markets. The operational performance we delivered truly highlights the competitive advantage that exists in Flowserve with its diverse end markets and geographies.
While pleased with the operating levels we have obtained, I am also confident that potential for further improvement remains. Our culture of performance positions us to capture additional identified opportunities through quality initiatives, project management, supply chain, low-cost sourcing, and new product introductions, to name a few.
Our continued effort will enhance our performance, better serve our customers, drive profitable organic and inorganic growth, and ultimately deliver long-term value to our shareholders. Over the last three years, we have made investments and progress to increase our operating platforms, low-cost manufacturing capability and flexibility. This effort results in an improved ability to shift with the changing activity levels within our served regions and end markets.
Latin America in 2014 is a market that epitomizes this flexibility. For instance, we experienced lower activity levels from certain customers in Venezuela and Brazil during the year, which would have otherwise presented headwinds for us. However, we successfully shifted meaningful parts of our Latin America business to Mexico, Colombia, Argentina, and Chile, which overcame the other countries' decline and drove solid results for the region.
Turning to our growth outlook, our strong fourth quarter bookings reflected solid activity levels across all of our end markets with the exception of water, which is only a modest exposure for us. We ended the year with a backlog of $2.7 billion, a near 12% constant currency increase over 2013 year-end levels. More importantly, the quality of the backlog continued to improve throughout 2014, which provides our confidence in reaffirming our 2015 targets today.
As you have heard, we intend to continue to drive growth in our aftermarket franchise. In 2014, our initiatives to greater utilize our aftermarket business delivered strong full-year bookings, with growth of nearly 9% on a constant currency basis, including the fourth quarter's record level bookings of over $550 million.
Our aftermarket footprint and capabilities also provide a competitive advantage when pursuing original equipment work, where we delivered constant currency bookings growth of over 7% during the year. With the larger OE projects still on the horizon, we again derived the vast majority of our OE bookings from run-rate activity.
Turning to our end markets in more detail, oil and gas growth continued in the fourth quarter, as bookings increased over 12% on a constant currency basis, even with the sharp oil price decline that was occurring during the period. We also saw the continuation of 2014's year-long trend with increased aftermarket bookings in the southern U.S. and Gulf Coast regions during the fourth quarter, as downstream players were catching up on prior deferred maintenance.
As Mark discussed, with most of our oil and gas exposure in the mid and downstream markets, we expect less of an impact from the oil price. While we recognize the overall pressure being exerted across all phases of the oil and gas industry, we continue to have opportunities in selected regions for upstream, midstream, and downstream work, particularly in our run-rate and aftermarket businesses.
Upstream OE project work, which represents a modest exposure for us, faces the most risk at current commodity levels. And this portion of the market has certainly seen some increased delays and cancellations. However, even with our upstream work, we continued to see aftermarket activity mainly from our exposure to oil sands production and FPSO vessels.
Of course, we do not say that we are immune to the commodity price or the energy complex, but we do feel pretty well positioned overall and even expect some of our other industry exposures to benefit from these low prices, such as the chemical and power markets.
As the energy markets digest the current conditions, our improved operations and the flexibility I spoke of earlier provide opportunity to capitalize on the investment that does take place around the world. For instance, Mexico plans to increase its production. The Middle East desires to climb the value chain further into refined products and clean fuels, as well as other refining activity in certain Asian markets provide just a few examples.
In the chemical market, fourth quarter bookings increased over 15% on a constant currency basis. New capacity projects in North America continued to advance with six of the 12 planned ethane crackers currently under construction, with the remainder in various stages between feasibility to permitting.
As discussed, the pace of bidding activity has been deliberate by our customers and most of the opportunities are still ahead, but these could remain tempered by the general macro conditions. We continue to expect to participate in these new capacity additions on the Gulf Coast as the procurement process has yet to reach the stage that includes many of our products.
In the Middle East, expansion efforts continue. Meanwhile, Asia and Latin America are reassessing their chemical plans based on slower economic growth there and competing opportunities in the U.S., while some European capacity is expected to utilize U.S. ethane.
In January 2015, we increased our chemical presence substantially with the acquisition of SIHI. While it is still early days, we believe the integration process of this business is progressing well and that our potential to leverage top line and cost synergies is significant. We are excited about the possibilities with SIHI as part of Flowserve.
The power market delivered particularly strong fourth quarter bookings, with a 19% increase over last year. Strong nuclear activity in China and solar projects in Africa and Latin America provided part of the pickup. North America power remains challenged for most fuel sources given the current slower growth environment and ongoing regulatory uncertainty. However, the low price of natural gas and the announced CO2 reduction guidelines are helping drive the U.S. combined cycle market, subject to adequate pipeline capacity.
Longer term, we still believe that new generation is required globally. China, India, and Russia are indicating they will pursue fossil-based projects. Our recently completed Block III in Coimbatore, India will provide a platform to capture power market opportunities in their country. Parts of Europe are even investing in fossil-based projects as certain countries retreat from nuclear power. The Middle East also sees increased needs both in conventional and solar power.
Nuclear power remains in transition. But China, Russia, and South Korea see continued development, and there are discussions on new capacity in some regions of Europe. India's new proposed agreement with the U.S. that will limit nuclear suppliers' liability could potentially be a meaningful catalyst for work in that country.
Europe's aging fleet also may provide us future work as life extensions over the next several years take place. Following their new safety standards, Japan is getting closer to restarting a portion of its nuclear capacity, which has been idle since 2011. Finally, natural gas combined cycle plants remain a global opportunity.
Wrapping up, we believe that Flowserve's high level of operational performance and diverse exposure provides us a level of resiliency and flexibility to adjust to target and capture market opportunities where they occur even in times of increased uncertainty. We will execute initiatives to accelerate our aftermarket and chemical growth and target opportunities in emerging power markets such as India and China, regional upstream oil and gas opportunities, particularly in the Middle East, and then mining. In addition, I am also confident that our operating platform supports our acquisition strategy of efficiently integrating bolt-on businesses to drive long-term profitable growth.
With that overview, let me now turn it over to Mike Taff.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thank you, Tom, and good morning, everyone. Mark and Tom have discussed our operational overview and business outlook in detail. So let me finish with a quick discussion of our financial results. Our results finished at the upper end of our preview range that we provided in late January. I'll provide some additional details, then discuss the 2015 guidance.
As you have heard, Flowserve finished 2014 performing at a high level. With sales of nearly $1.4 billion in the fourth quarter, we grew constant currency revenues by over 5%. For the full year, constant currency revenues were up modestly, but this level was below our original expectation. Essentially, large project opportunities did not occur when anticipated. We divested the Naval business and experienced some customer-directed shipment delays, which all had an impact on revenue recognition.
Turning to margins, 2014 was the first year that each quarter delivered gross margins over 35%, exceeding even our expectations. For the fourth quarter, gross margin was 35.2%, an improvement of 130 basis points from the prior year. For the full year, our gross margin improved 110 basis points over prior year, averaging the fourth quarter level at 35.2%.
SG&A dollars decreased for both the fourth quarter and full year by nearly $9 million and $30 million respectively. As a percentage of sales, SG&A declined by 60 basis points in the quarter and by 30 basis points for the full year to 18.2% and 19.2% respectively. We will continue to work towards our goal of lowering SG&A as a percentage of sales to 18% over the next few years.
Solid gross profit improvement combined with a reduction in SG&A drove a 200 basis point improvement in operating margins for the fourth quarter to 17.3%. For the full year, we delivered a 90 basis point improvement in operating margins to 16.2%. This level reached the top end of our goal we originally set in early 2012, which was to increase operating margins 150 to 250 basis points by the end of 2014.
Below operating income, our fourth quarter tax rate of 29.4% and full-year rate of 28.4%, both which were generally in line with our original tax rate guidance of 30%.
Turning to cash flows, we finished the year strong, reflecting the typical seasonality of our business. Flowserve generated $445 million in operating cash flows in Q4 alone, an increase of nearly 18% over prior year. For the full year, our cash flow from operations of $571 million represents a 17% increase over 2013 levels. While I am pleased with this strong performance, we will stay focused on improving Flowserve's cash generation. Our goal remains to consistently generate free cash flow near our net income level.
Our capital expenditures for the year of about $133 million was well below our last updated forecast, as some of our spending on the new Chinese valve facility slipped into 2015. However, even at the reported level, our spending level was above our rate of depreciation. This investment demonstrates our commitment to invest in organic opportunities for the long-term growth of our business, including increased capabilities to serve the emerging regions.
Returning capital to shareholders is also a key priority. And in 2014, we returned $332 million to shareholders through dividends and share repurchases, representing about 64% of our net income. This was a result of our strong cash flows and as we increased allocation to repurchases at attractive values in the final quarter of 2014. We maintained substantial financial flexibility at year end, with a gross leverage ratio of 1.3 times EBITDA and well within our stated one to two times range. This capacity in our range enables us to pursue investment opportunities that generate long-term profitable growth such as the recent SIHI acquisition.
Turning to working capital, Flowserve made modest progress. We reduced our dollar inventory by $60 million. Inventory turns improved to 3.6 times, a 0.1 turn improvement over 2013, and we increased our on-time delivery and drove the past-due backlog below 4%.
Our focus on receivables produced a two day DSO improvement versus 2013 levels. With our project management team focused on improving the working capital processes across our operating platform, I remain confident that Flowserve will make meaningful strides in 2015 towards reaching our targeted DSO level in the mid-60 days.
Moving to our 2015 outlook and EPS guidance, we are reaffirming our full-year adjusted EPS guidance of $3.60 to $4.00 a share. This range includes $0.20 per share of above-the-line currency impact using year-end 2014 foreign exchange rates. Obviously, the dollar has strengthened from year end. And should this level continue throughout 2015, it would result in an impact larger than $0.20.
The adjustment in our guidance for 2015 excludes primarily the dilutive impact of the recent SIHI Group acquisition and any below-the-line currency impact.
Similar to recent years, 2015 should reflect our traditional seasonality, with earnings more weighted to the second half of the year. Additionally, we expect the first half of the year to experience the largest year-over-year comparable challenge due to the stronger U.S. dollar, last year's $12.6 million first quarter gain on the sale of Naval, and potential oil and gas spending pressure.
We remain committed to executing on our strategy of efficient capital deployment, including annually returning 40% to 50% of our two-year average net earnings to shareholders, in the form of dividends and share repurchases. At year end, $464 million remained available under our current share repurchase plan authorization. As evidence of our commitment, earlier this week our Board approved a 12.5% increase in the quarterly per share dividend to $0.18 per share for the next quarterly payment. This represents our fifth consecutive annual double-digit increase in our per share dividends.
Including 2014's carryover amount, we expect to invest $150 million to $160 million in capital expenditures during 2015. At this level, we will continue to profitably grow our business organically and to further increase our capabilities around the world.
On a final note, we announced this morning that I will be leaving Flowserve in the coming weeks. I have very much enjoyed my time with the company, and I am proud of the finance team we have in place today and their many accomplishments. However, as some of you know, I have maintained my residence in Houston throughout my three-plus year tenure at Flowserve, commuting back and forth each week.
I believe that as Flowserve enters this new phase of its growth plan, this serves as a good time for new finance leadership to take the helm as I return to my family full time and pursue future endeavors back in Houston. Clearly, I will continue to do whatever is needed to ensure a smooth transition and I will remain a proud Flowserve shareholder as I believe this company has a very bright future ahead.
Let me now return the call to Mark.
Mark A. Blinn - President and Chief Executive Officer
Thank you, Mike.
On behalf of the Board, the senior management team, our employees, shareholders, and other Flowserve constituencies, we very much thank you for your service with the company. You're leaving the finance organization in better shape than you found it, and we very much appreciate the finance leadership team you have assembled. Our leadership team is confident they will rise to the occasion as we patiently search for our new CFO. Our standards will be high, looking an operationally focused financial leader who has bandwidth for further career progression. It has been a pleasure working with you, and we wish you all the best in the times ahead.
Operator, we will now open up the call to any questions.
Question-and-Answer Session
Operator
Thank you. And our first question comes from Charlie Brady from BMO Capital Markets. Please go ahead.
Charles D. Brady - BMO Capital Markets (United States)
Hi, thanks. Good morning, guys.
Mark A. Blinn - President and Chief Executive Officer
Good morning, Charlie.
Charles D. Brady - BMO Capital Markets (United States)
Mike, sorry to see you go, but I totally understand the reasons why you're doing that.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thank you.
Charles D. Brady - BMO Capital Markets (United States)
A quick question on IPD and the bookings that were down. I know in the slides, you talked about some of the end markets. But maybe you can go into a little more detail on what you're seeing just within industrial products. And on the flip side of that, obviously the margins there were pretty strong. Can you talked about what drove the margin performance there, anything one-off that pushed it higher that may not in the near term?
Mark A. Blinn - President and Chief Executive Officer
So, Charlie, just some of you folks may have had difficulty hearing that. The question was around IPD bookings Q4-over-Q4 and then the margin improvement. So if you look year over year, it was really the compare to 2013. We had some smaller projects that booked in the IPD segment in the oil and gas in the fourth quarter of 2013. And if you look at the bookings quarter by quarter, a small amount like that can have an impact. It's better to look at the full-year trend. Remember, as we came into 2014, we said good progress on the margin improvement. Now we need to start working on growth, and I think the SIHI acquisition is a great example of that.
As to the margins, the primary impact is what we set out a number of years ago is to improve the business, which has been a priority. In fact, it's probably fair to say that's been a priority for the last three years at Flowserve is to improve the platform, and in fact you saw that. There was a little more aftermarket. And also keep in mind with the Innomag acquisition, we had purchase price accounting in Q4 2013. That was a much smaller impact in the improvement. But in fairness on the compares, you need to consider that as well.
Charles D. Brady - BMO Capital Markets (United States)
Thanks, and just one quick follow-up. In relation to Brazil specifically, are you guys seeing any customer issues down there? There was another company out today talking about some E&Cs have gone bankrupt. They've taken an accounts receivable hit. I was just wondering if you guys have looked at that. And within the backlog, is there anything in it that's maybe at risk because of what's going down in Brazil specifically with what the government is doing down there with anti-corruption? Thanks.
Mark A. Blinn - President and Chief Executive Officer
Again, we're still optimistic on that region in the world long term. Keep in mind, they've got quite a few reserves and they do need to monetize them, and we're there to support them. But in the short term, we do continue to monitor that. And we haven't had a material impact in our financial statements, but that's certainly something that's ongoing down there.
As Tom talked about, we have that from time to time. You see that in Latin America. There can be impacts down there, but we are able to shift. You do have – while you have challenges there, you have strength in Mexico. But we certainly monitor that very, very carefully and our exposures as well, and I haven't seen anything impact yet, but we're keeping an eye on it.
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
And I would add to that, Mark, that obviously Petrobras is going through a reassessment of some of their projects based on some of the issues that they've had with the FTCA, which has been publicized in many of the papers.
Charles D. Brady - BMO Capital Markets (United States)
Thanks.
Operator
Our next question comes from Scott Graham from Jefferies. Please go ahead.
R. Scott Graham - Jefferies LLC
Hey, good morning.
Mark A. Blinn - President and Chief Executive Officer
Good morning, Scott.
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
Good morning, Scott.
R. Scott Graham - Jefferies LLC
Mike, the best of luck to you. You're definitely one of the good guys out there.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thank you.
Mark A. Blinn - President and Chief Executive Officer
We agree with you.
R. Scott Graham - Jefferies LLC
I'm sure. I'm just wanted to ask you, Mark, about the bookings. You've indicated that December was the strongest month of the quarter, which obviously for a lot of us gives us the wow, why's. Just can you talk about what areas of the company was stronger in December? And then maybe as we turn the calendar, if I could attach this question onto that, what do the oil and gas bookings look like now halfway through the first quarter?
Mark A. Blinn - President and Chief Executive Officer
We don't give intra-quarter indications. We'll wait until things pan out because, as you saw in the last quarter, we saw a lot of activity at the end, in the last month. This is similar in what we've talked about before. By that time we get to the bidding phase of a lot of these projects, typically there has been a substantial amount of investment. And so as that activity was working through last summer, it continued to follow through.
The thing that we need to keep an eye on, Scott, going forward is some of the projects. And you've already seen some in the news that aren't at the bidding phase but are still in the conception phase or in the early phases that they may say hey, look, we've going to delay this, or you saw the big project in the Middle East, the LNG one, where they said they were going to cancel it. So it's usually the longer lead times that we tend to take a look at. So that's in effect what you saw is they don't turn these projects on a dime, especially when it comes to bidding our equipment because there has been a lot of investment at that point in time.
Also, I think it's fair for everybody to keep in mind. Here we are on the other side of discussion, where there was frustration over the last couple years as when are the big projects coming, when are the big projects coming. The fact is we haven't been real reliant on these big projects for a couple of years. We saw one I think back in 2012. In the third quarter, we saw a couple of other smaller ones. So as you look forward, we haven't been reliant. We were looking for them to come.
What does this environment mean? It means it's going to remain competitive in pricing. I do think as suppliers look out there, they're going to try to get visibility as we are, and it could put some pressure on pricing on some of these projects as well. They'll certainly continue to take a long-term view, but that's the lay of the land.
So what that indicates in December is, as it is in our industry, when there's even an abrupt change like that, it's not that everybody stops in their tracks because there has been so much. There are reasons these facilities are getting built. There are usually secular drivers that are behind them, and they follow through on their commitment. What comes into play are projects that are on the horizon.
R. Scott Graham - Jefferies LLC
Okay, fair enough. So then essentially – and I want to read this carefully. You're essentially saying that your first half is much more difficult comparables due to the: A), FX environment; and B), the consternation that you're expecting in the first half surrounding the decline in oil prices. So what I think I hear you saying, without you having said it specifically, is that you are concerned about oil and gas bookings in the first half of the year.
Mark A. Blinn - President and Chief Executive Officer
It's some that are on the project side. It's something we're definitely going to monitor on a big portion of our business. You're going to have your seasonality trends around maintenance, as for example in the United States they start repurposing some of the facilities for different types of gas during the course of the year, some of the brownfield opportunities. Keep in mind, refiners are starting to see an advantage right now on the downstream side because you have low oil. And if you think about Midwest refiners, they have an opportunity because of the limited transportation, and you can't export out of United States, to really make good profit on refined product at this point in time.
The other thing to consider, Scott, is there are projects that are still occurring in the Middle East and various parts of the world that are ongoing. And these are clean fuel requirements. For example, we talked about before; in certain parts of the Middle East, they supply into regions of the world that now require reduced sulfur content, so they have to get these facilities in place.
The message here is certainly short term, people can defer some spend. We saw that happen in times past. On the margin, some of these complex projects, like LNG is a fairly complex project. They may say look, we need to see how the various constituencies of oil are going to play out over a period of time. Let's reevaluate this. But the core processes, the core refinery, the core production where it makes sense and it's financially viable will continue. So the world's not going to shut off the oil and gas spigot. So hopefully that's helpful. But we have seen in the past and this is our commentary; everybody can pause a little bit short term. A quarter or two in our industry is okay. These are long-term projects.
R. Scott Graham - Jefferies LLC
Okay, I guess what I was just trying to get out was that the full-year guidance did contemplate some type of change in the bidding environment and the booking environment for oil and gas, and I think I'm hearing you say that. So...
Mark A. Blinn - President and Chief Executive Officer
The guidance was based on what we knew in January. The variables are – and if you could tell me where currency is going to go, you and I could do very well on currency trades. But it is what we saw at that point in time. And if you think about it since January, if anything, oil has stabilized a little bit. But it certainly did consider that; it considered what we've experienced before over the short term. But it also considered a couple other things. We have a higher backlog coming into this year than we did last year. And that is intact and we know we're going to deliver that over the period of time. It also considered that we have a good program in place around driving our aftermarket growth.
It also considered factors that we have been working a lot on our sales organization to get additional penetration in the business. We have plans. We're not going to sit still and necessarily just wait and see what the market does. We're going to focus on what's in our control, and that is further penetration in the sales organization. We've been developing products in R&D and bringing them to market that have driven revenue growth. We've been growing our aftermarket business. We're looking at all channels to market in terms of how we can enhance them. So our guidance does include that because we have a lot of plans in place that we intend to execute this year.
Operator
And our next question comes from Andrew Kaplowitz from Barclays. Please go ahead.
Alan Matthew Fleming - Barclays Capital, Inc.
Guys, good morning. It's Alan Fleming in for Andy today. How are you?
Mark A. Blinn - President and Chief Executive Officer
Doing fine, thanks.
Alan Matthew Fleming - Barclays Capital, Inc.
Mark, maybe I can ask you a question more broadly on backlog. You guys did a nice job growing backlog in 2014 while I think, like you said, there was very little contribution from the large OE project-based business. And then I think you touched on December being the strongest month for you in the quarter. So maybe you can just talk about your confidence broadly in being able to grow overall backlog in 2015. And is that something that you think you can still achieve on the strength of the aftermarket and the run-rate business?
Mark A. Blinn - President and Chief Executive Officer
Where we have confidence is on what I just talked about, and that is to continue to penetrate on the aftermarket side. One thing to always keep in mind with aftermarket, although we haven't seen a lot of projects, is there is a small component that is tied to projects that are called commissioned spares. But in general and you look at our underlying aftermarket trends, and it's really around strategic initiatives that we have, the other aspects I mentioned earlier around really the work we're doing on our sales organization that just started a year ago in terms of how do we better penetrate markets; some of the initiatives we have that we've talked about in the chemical industry, in the power industry as well. So those aspects give me confidence.
What I will tell you what we're uncertain of is where some of these project opportunities are going to pan out over a period of time. Again, we haven't been highly reliant on them, but they are out there and we do plan our business around them. That's the area where as you look over the horizon, we need to get better visibility into, especially the ones that, as I talked about, are probably more costly. And the returns on investment may be a little bit longer in those. But there are still plenty that are right down in the middle of the alley. What I talked about in the Middle East, if you actually heard, in Saudi they talked about their commitment to investment in the Middle East.
And I think that's a message for everybody is I don't think anybody views that demand is going to be significantly destroyed over the next five to 10 years. As a matter of fact, I think the views are that demand is going to continue to grow, and supply is going to have to respond to it. So people think about that because you can't turn a project on a dime. If you decide you want to put it in place, you're not going to have it in place nine months from now or a year. These projects take many, many years.
Alan Matthew Fleming - Barclays Capital, Inc.
Okay, that's helpful. And then maybe I can follow up with a question about your mix because I looked at your slide deck. And I see that in recent years, the mix has trended something like 10% to 15% of the OE business, whereas traditionally I think it's been closer to 20%. So will that dramatically change in 2015 as you think about it? Will it actually maybe even – will that 10% to 15% go down a little bit as you wait for some of these larger projects to hit? Maybe you can just talk about the mix as you guys are expecting it to play out in 2015.
Mark A. Blinn - President and Chief Executive Officer
Forecasting mix wouldn't make any sense at all. That will depend on the markets, our presence, the aftermarket. When we look at a project, we think about the long-term opportunities around that project and our ability to deliver. I think the important thing for you to consider relative to a couple of years ago is we have a stronger operating platform that we think we can be very competitive on projects. So what we're going to do is be opportunistic. We don't want to govern any of the mix. We don't want to constrain any of the mix. What we want to do is be balanced and grow this business profitably. It wouldn't make any sense to forecast mix at all.
Operator
And our next question comes from Nathan Jones from Stifel. Please go ahead.
Nathan H. Jones - Stifel, Nicolaus & Co., Inc.
Good morning, everyone.
Mark A. Blinn - President and Chief Executive Officer
Hi, Nathan.
Nathan H. Jones - Stifel, Nicolaus & Co., Inc.
If we could, just talk a little bit about the project work on the Gulf Coast that you're waiting for. You talked about the six ethylene projects that are currently under construction. They must be getting closer and closer to being bid out to I guess the pump guys first.
Can you talk about the expectation that you have on when those are going to be let out?
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
So the question was what's the expectation on the Gulf Coast projects. I would say a couple things. There have been about 12 ethane projects. About six are currently under construction and we've been participating in those. And there are six more that are under various stages from feasibility to permitting, so those are yet to come from an OE standpoint.
And I would say the second thing is we've been particularly strong in the Gulf Coast and southern U.S. in our aftermarket business both on the oil and gas and chemicals, so that's come through very nicely for us. So I would say those are the two primary drivers in that region.
Nathan H. Jones - Stifel, Nicolaus & Co., Inc.
Could you then talk about, just for everyone's education a little bit, the cycle that progresses after those ethylene projects with the chemical plants that need to be built after that, and how long that cycle lasts for you guys?
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
Ethane is one thing in the stream. It starts obviously with oil and natural gas, and then it's broken down into different constituents, of which ethane is one of those. And then it goes on to further processing. So I would say we have further opportunities for further processing on the chemical side of the business.
You've also seen us mention the fact that on the ethane that, for the most part, the Europeans use naphtha, which is their process that they have going into their chemical plants. We even see a potential for exporting that and them turning some of their plants over to U.S.-based ethane. So there is a continuing process for downstream further refinements of these chemicals.
Nathan H. Jones - Stifel, Nicolaus & Co., Inc.
And just one question on margins. You did comment that 35% gross margin was better than even your expectations for the year. Is that a level that you think is sustainable long term, taking out the noise I guess in the near-term from oil prices, something that you think can expand or something that you think is not sustainable?
Mark A. Blinn - President and Chief Executive Officer
So if you look at the base operations of the business, what is primarily reflected in that gross line is the operational improvement that you've certainly seen in the business. And, Nathan, you've got to take mix aside because project work tends to have lower gross margins but ultimately benefit, so mix neutral. And you're right around the noise in the pricing environment and everything. But underlying that is an improvement in the operations. And the reason we think it's sustainable is because we still have some opportunity to improve it. I would tell you we're about 60% through our five-year journey, about three years into bringing this company to the level of performance that it needs to be and that we can see.
I also – I think we've talked about from time to time. We have some under-absorption in our factories that we're going to start to get at as well. You do that after you get the operations up and running and we're going to look at that going forward as well. So those are just two examples of things that we think we're going to focus on to drive overall margin improvement. And if you look at margins overall in the business, we got a little benefit from fixed cost leverage last year in the SG&A line. So as we drive our growth initiatives over the next couple of years, that should benefit for us.
Thomas L. Pajonas - Executive Vice President and Chief Operating Officer
One thing I would add to Mark on the absorption side, we've had a whole program on the lead center and the secondary manufacturing center, which is all about shifting our manufacturing base around the world to low-cost centers. So we now have in place, as you've seen previously, a strong Indian component in our Coimbatore facility. We have Santa Clara in Mexico as a core. We have India and we're beefing up – excuse me, we have China. We're beefing up China further with further capital spend, as Mike mentioned, on the valve side. So we've got a good low-cost sourcing platform. And now we're moving with LPO/SPO strategy those products around the world, which should bode well for the future.
Mark A. Blinn - President and Chief Executive Officer
So that's three examples of why we have confidence.
Operator
And our next question comes from Andrew Obin from Bank of America Merrill Lynch. Please go ahead.
Andrew Obin - Bank of America Merrill Lynch
Yes, guys, congratulations on a great quarter and sad to see Mike go.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thank you.
Mark A. Blinn - President and Chief Executive Officer
Thank you.
Andrew Obin - Bank of America Merrill Lynch
Thank you for all the help over the years.
Mark A. Blinn - President and Chief Executive Officer
Mike is a good executive and a good friend.
Andrew Obin - Bank of America Merrill Lynch
Just a question on market share and pricing dynamics because what we've been hearing this quarter from some of your competitors is their numbers have not been as good as yours. People are talking about pricing pressure, some talking about repricing of the MRO. Can you just describe what it is you are seeing in terms of your tier versus maybe people who are not as strong? What are you hearing about customers, about pricing, the business model? And what are you seeing in terms of market share?
Mark A. Blinn - President and Chief Executive Officer
I think it's tough to calculate share because share gain and loss is determined on every project that you bid relative to a competitor, and we win some and we lose some. But as my comments earlier, what I will tell you is the industry always looks at its capacity over the long term and with the uncertainty that I've talked about over the horizon. So we see the activity levels over the short term, then they'll look at their capacity, their load over a period of time, and they can do a number of things. They'll either book their capacity to make sure that it is absorbed, or they may look at their capacity and say can we rationalize some of it, or they'll do both. So it's really going to depend on each company out there over that period of time. Obviously, we're going to look at both, so I think from that standpoint.
But also another thing to keep in mind around these projects is there are technical capabilities, delivery times, quality. All these things that we talk about still factor in. I will tell you for the most part customers value that a great deal. The one exception I've always pointed out is in the Middle East. A lot of it really does come down to price. But increasingly, they're getting focused on your ability to respond, respond with quality, and be able to support it over a period of time.
So what I don't want to suggest as you look at project opportunities is that all things are equal. I've always maintained we have good competitors out there with certainly good capabilities. But increasingly these are things that customers are looking at when they let out opportunities. Because a customer could save X% on the price of the equipment but if it's not on time, if it's not quality and you can't support it, it becomes far more expensive than your savings.
Andrew Obin - Bank of America Merrill Lynch
So let me ask you another question. I think it's no secret we're quite a bit more bearish on the end market than you guys are. But the question I have, given your exposure to energy, and that is your core business, if things weaken beyond what you guys expect, you do have obviously, given your performance in the previous downturn, I think your cash flows will remain quite robust. Would you consider investing more in energy to take advantage to bulk up your business during a downturn? I'm talking about M&A.
Mark A. Blinn - President and Chief Executive Officer
Absolutely, if it makes sense for our shareholders, absolutely we would because nobody on this phone call or any other phone call believes energy is going away. And again, it's interesting how these conversations change so quickly. We were apologizing for not having enough exposure to upstream, and now all of a sudden nobody is interested in it. We are very interested in it because we think long term that's going to return a tremendous amount of value.
So your point is right. These are times, and let's go back to our statement. In our tone more than anything, what you hear in the confidence is the strength of our platform, what we've been able to accomplish, the performance level, and then we'll focus on what's within our control. And to your point, that is something that is certainly within our control. And it gives us the opportunity with a strong platform, a strong balance sheet, we're delivering, we're returning value to our shareholders. So we don't have to trade things off. We can play offense in this type of environment, and one of those components of offense is going to be the inorganic opportunities.
Operator
And our next question comes from Steven Fisher from UBS. Please go ahead.
Steven M. Fisher - UBS Securities LLC
Great, thanks. Good morning.
Mark A. Blinn - President and Chief Executive Officer
Good morning.
Steven M. Fisher - UBS Securities LLC
Mike, best wishes certainly. And can you maybe clarify the FX impact? I know you said the current rates would have a bigger than $0.20 headwind. Can you maybe just give us some order of magnitude of that impact if the current rates hold? And are you planning on any kind of offset to those incremental headwinds if they do materialize?
Michael S. Taff - Chief Financial Officer & Senior Vice President
I'll jump in real quick. Roughly, you can do the math. Last year's average currency versus the guidance range, it would be another $0.08 to $0.10 of impact, absent any change. But it's important to take a step back because there has been a lot of focus with multinationals around currency impact. And it is certainly out there, but there are other sides to that equation. If you think about it, for example, the acquisition we just made in SIHI, our German manufacturing now there has become much more competitive. These things will sort themselves out over time. So currency tends to have a short-term impact, and folks that are focused on the short term will certainly be aware of that. But long term what it does do is it balances out our manufacturing and certainly makes it more competitive.
I just want to remind everybody of that because I don't want everybody to get short-term focus. There's a lot of noise in that around the world. But it does give multinationals the opportunity to leverage some of their now lower cost capacity with very competitive products out in the global arena.
Steven M. Fisher - UBS Securities LLC
Great, that's helpful. And then, Tom, I know you said it's early days on the SIHI integration. But I was wondering if you're seeing any opportunities to reduce that $0.25 dilution impact this year
Mark A. Blinn - President and Chief Executive Officer
No, this is Mark. We're still working through all that. A lot of that is purchase price accounting. But also there are some cost synergies we're going to bring to it as well. If you think about it, I think I mentioned on the call and it was early days, but they have some good capacity that we're actually going to be able to leverage. So when you looked at our acquisition multiple and our forward multiple, a lot of that was the opportunity to take some cost synergies. And there's a short-term cost to that but a strong long-term benefit.
Steven M. Fisher - UBS Securities LLC
Okay, great, thanks very much.
Mark A. Blinn - President and Chief Executive Officer
Sure.
Operator
Our next question comes from Chase Jacobson from William Blair. Please go ahead.
Chase A. Jacobson - William Blair & Co. LLC
Hi, thanks for taking my questions.
Mark A. Blinn - President and Chief Executive Officer
Sure.
Chase A. Jacobson - William Blair & Co. LLC
I guess most of my questions have been asked here, but one clarification. On the revenue guidance for down 1% to up 3%, does that include the currency headwind?
Mark A. Blinn - President and Chief Executive Officer
It includes the year-end rate, but as Mike mentioned, not any adjustments up or down since then during the course of the year. We have to pick a point in time because otherwise every day the guidance range could change with the volatility of the dollar index. So we picked a point in time towards the end of the year. But that range does include that. It does not include the impact of the CE revenue.
Chase A. Jacobson - William Blair & Co. LLC
Okay. And then, Tom, I think you mentioned that there's potential for further actions on the cost side. And you talked about a few things like low-cost sourcing and project management. I was wondering if you could give any more color there, and how quickly Flowserve could react if we were to enter a period where the CapEx environment from your major oil and gas and energy customers was going to remain lower for longer than just 2015.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Obviously, we've been working on cost reduction plans for the last several years, which is one of the reasons why you see some of the margins the way they are. But relative to, for instance, low-cost souring, as I mentioned earlier, we do spend a lot of time looking at our manufacturing network of almost 70 plants in determining what is the most efficient way of manufacturing that product as we get a project in. And there's an expertise there and confidence that we continue to hone in and result in additional reductions. Mark mentioned absorption. We're looking at obviously that on a regular basis.
Our supply chain, we spent a lot of time looking at China and India and developing that in Eastern Bloc countries the supply chain, so we have a very aggressive supply chain program going on. Project management, a couple years ago we put that in full force effect to take a product/manufacturing business and turn it into a very responsive customer-focused, project management driven organization. And we've made progress, but we have a lot to go on that in terms of schedule development and core execution. And so I feel very comfortable with where we are at there, but we have things to go there.
We started to shift from Six Sigma quality initiatives more to Lean initiatives in the business, and we're in the early stages of shifting to Lean. So as Mark indicated, there are a lot more levers to pull in the business. I mentioned just a few of those. But I can certainly go through different lists here. Notwithstanding, all the work that we've done on the sales side to drive alliances differently and re – I would say constitute our sales force to go after our chemical and industrial business differently.
Mark A. Blinn - President and Chief Executive Officer
Let me just give you an overall summary I think around short term. Our focus is we're going to continue to invest to grow this business because this is not the type of market that anybody wants to abandon by any stretch of the imagination. Now to your point, are there some high-return cost actions that we can take that we plan to do? Absolutely, I think we've started talking about that last summer that over time, we have the opportunity to reduce our under-absorption, to certainly reposition capacity and take advantage of that. If the market dictates, you accelerate those things. If the market is strong, maybe you smooth them out over a period of time because remember; at the end of the day, we still have to take care of our customers.
Operator
Our next question comes from David Rose from Wedbush Securities. Please go ahead.
David L. Rose - Wedbush Securities, Inc.
Good morning. Most of my questions have been answered, so I just have one. And by the way, Mike, you will be missed as well.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thank you.
David L. Rose - Wedbush Securities, Inc.
I appreciate all your help throughout the years. Your assumption on margins, can you provide us some basic assumptions in terms of material inflation or deflation? Are you expecting any tailwinds? Are they embedded in your margin assumptions?
Michael S. Taff - Chief Financial Officer & Senior Vice President
Do you mean going forward or...
David L. Rose - Wedbush Securities, Inc.
Yes.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Obviously, we haven't given margin guidance beyond where we were. And keep in mind, we set out margin guidance three years ago, and we're basically a year ahead of schedule. And what that means, that's what gives us confidence to start going on to our other initiatives, driving growth, and some of the other things that I've talked about here.
But as you look forward, that's an aspect of it around material cost, keeping in mind, and we've talked about this before. We don't use a lot of base raw material and therefore take direct commodity risk. Typically, especially on the large lead-time projects, we're sourcing components, and those components are oftentimes priced contemporaneous with bidding the project. So we know the margins at that point in time. It's not to say were immune from commodity costs, certainly on some of our shorter cycle where we use bar stock on our seal faces, but you can adjust price fairly quickly. So what you've seen in our history is there isn't a tremendous amount of commodity exposure to our benefit or to our detriment. Typically, that's in our supply base.
David L. Rose - Wedbush Securities, Inc.
Perfect, thank you.
Operator
Our next question comes from William Bremer from Maxim Group. Please go ahead.
William Bremer - Maxim Group LLC
Good morning, gentlemen. All the best, Mike, I appreciate your time.
Michael S. Taff - Chief Financial Officer & Senior Vice President
Thanks, Bill.
William Bremer - Maxim Group LLC
My question is based upon the $2 billion-plus franchise in the aftermarket. Mark, what's possibly the next step there? You're doing a fantastic job worldwide with your QRCs, servicing your end markets. Is it possible maybe you go into maybe an additional leverage there of that base to other maintenance functions, possibly pipeline integrity for the downstream? Is that like the next step here?
Mark A. Blinn - President and Chief Executive Officer
I think we want to continue the steps. So if you look at the compound growth rate over the last couple of years, actually through the cycle, we want to continue those steps as well.
I think some of the investments we're looking at, if you think about it, is to continue to index and inventory our installed base. There is a lot of installed base out there that we need to understand where it is and take care of it. That's what our customers want. And actually, if you think about it, that's one of our big investments this year. I talked about we're going to continue to play offense and grow. That's one of the things we're looking at because if we know where it is, then we can call on it and take care of it. That's core.
The other things to look at in our business as well as is asset monitoring, some reliability. We've been starting to scratch the surface on that, continuing to drive more of that in our business. And some of the other – as our products get more complex, also keep in mind around that business with the SIHI acquisition, we're going to look for ways to better support those products with our aftermarket business.
So we've certainly been very pleased with the growth over the last couple of years, but we do have some initiatives where we're really trying to enhance the growth in that business, I think one of the best of which is going to be finding out where we can serve our customer with our own product that, if you think about Flowserve, our product has been around for 150 years. I'm not saying they all have a 150-year life, but there are quite a few of them that have been out there many, many years that we need to go and take care of.
William Bremer - Maxim Group LLC
Thank you, gentlemen. That's all I have.
Mark A. Blinn - President and Chief Executive Officer
Sure.
Operator
And our next question comes from Joe Giordano from Cowen. Please go ahead.
Joseph C. Giordano - Cowen & Co. LLC
Hi, guys. Thanks for taking my question. Building on the last one there, how would you judge your aftermarket capture rate versus a year ago? And are you gaining only on your installed base, or are you picking up share on other competitors' installed base, and what's the competitive dynamic there?
Mark A. Blinn - President and Chief Executive Officer
I think we talked about this before. Our primary opportunity is really around the customer who is doing the work themselves, is bringing that in-house, having us do it. And with the advent of a lot of their maintenance folks starting to retire, that is going to present an opportunity; also being as responsive as what we call the local machine shops, the local repair shops. But it's not only just about service and repair. It's also about going in there and talking about performance. How do we increase and improve performance in the product?
I think the real opportunity as we look forward is what I commented on earlier, and that is getting a better handle of our installed base around the world. And we're going to have to invest in resources this year to do that because it takes people, it takes systems to do that. But we think there's going to be a high payoff on those investments in years to come.
So I'd say the existing installed base is still an opportunity. The strategies have been paying off around how we improve reliability in the systems. And our timeliness and responsiveness are going to be what present and have presented the opportunity around our customer maintenance, their capabilities in-house, and also responding to some of the local repair shops.
Joseph C. Giordano - Cowen & Co. LLC
I agree. That's great color, thank you. And then lastly from me, if we look at the top end of your organic guidance on the revenue side, 3%, what needs to happen to hit something like that? And what level of project activity maybe on a year-versus-year basis are you contemplating in that scenario?
Mark A. Blinn - President and Chief Executive Officer
Part of what we look in that is, again, we came in with, and I believe this was already currency adjusted to year-end rates, $150 million more backlog. So if you're just planning that on and nothing else were to occur, that would drive near to the top end of our growth.
So with that, there is some forecast around project opportunities similar to last year. A lot of our run-rate business is brownfield, but some of it does attach to new CapEx spend. So I'm not suggesting it's just as easy as just executing on our backlog, but the fact is that does give us a revenue tailwind. So what we're going to have to do underneath that is continue to drive our aftermarket business, penetrate additional areas on our run-rate business, and the projects that are out there that are going to continue to forward, execute on them, get them and execute on them.
Operator
Thank you, ladies and gentlemen. We have reached our allotted time for Q&A. This concludes today's conference. Thank you for participating. You may now disconnect.
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