Q3 2019 Earnings Call
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Corporation.
Hi, My name is studying I'll be your operator for today's call at this time all participants are they left.
Leader, we will conduct a question and answer session.
A question and answer session.
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Oh, Hi, Jay Roueche, Vice President Investor Relations you.
You may begin.
Thank you Jimmy and good morning, everyone. We appreciate your participation in our conference call today.
<unk> blood serves 2019 third quarter financial results.
Joining me this morning, our Scott Rowe, well service, President and Chief Executive Officer, and Lee I heard senior Vice President and Chief Financial Officer.
Following our prepared comments, we'll open the call for questions, but as a reminder, this event is being webcast an audio replay will be available.
Please also note that our earnings materials do and this call will include non-GAAP measures and contain forward looking statements. These statements are based upon forecasts expectations and other information available to me that's about as of October 31st 2019, and they involve risks and uncertainties many of what's your beyond that.
Today's control.
We encourage you to fully were review our safe Harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results both of which are included in our press release and earnings presentation and are also available on our website at <unk> Dot com and the Investor Relations section.
I would now like turn the call or the Scott Rowe well served as President and Chief Executive Officer for his prepared comments, great. Thanks, Jay and good morning, everyone. We appreciate you joining our call today.
Most of again delivered good quarterly result, while continuing to make progress on our Pulitzer a few porno transformation journey.
As we approach the halfway point that strategic program I'm encouraged by the increasing momentum were seeing it or operation and that our financial results.
Additionally, our employee engagement and enthusiasm to drive sustainable changes.
At the parent at all levels of our organization ultimately, we expect to build an organization capable of performing at a high level in any business environment.
We are well underway to making that a reality.
Let's turn to the financial results for the third quarter.
We executed well delivering 4.6 per se revenue growth improvements and adjusted gross and operating margins Sixtyv at 100 basis points respectively.
And adjusted EPS of 59 cents, a 20% increase over the prior year.
Well certainly reported EPS was 52 cents up 31 cents year over year, and representing nearly 90% of our adjusted earnings.
Mr quite a significant improvement in our quality of earnings.
As a result of our strong performance that part 2019, we increased the lower end of our adjusted EPS guidance range to $2.15, while keeping the upper end in place at $2 or 20 cents.
We feel confident in our ability to deliver the full year within this range.
I'd also like to highlight our free cash flow improvement, we continued to make progress in this area and have now delivered over $120 million more and year to date free cash flow and last year.
Better operating income reduced realignment spending improved working capital management and disciplined capital spending all contributed to the cash flow growth.
Moving now to our segment.
The operational improvements in FCD continue to flow through the segments financial performance.
Third quarter FTD grew revenue by 5.4% year over year and delivered a 24% increase in adjusted operating income.
Adjusted gross and operating margins, both improved 200 basis points.
I'll have performance included a 2% aftermarket mix shift benefit it was primarily driven by ongoing improvement initiatives.
Including continued progress in legacy ITD facilities.
Ongoing value engineering, and our product portfolio improved planning processes.
Better productivity and inventory management as well as initiatives to drive lean manufacturing deeper into our operating footprint.
After the third quarter bookings increased 6.3% year over year, Despite 330 basis point to currency and divestiture headwinds.
Turning now to FCD.
The third quarter, largely played out as expected and how we communicated on our second quarter call.
FTD continues to be impacted by the slowdown occurring the north American short cycle MRO business.
And the distributor Destocking that began earlier in the year.
Third quarter revenues were essentially flat sequentially and I'm pleased that FCB is adjusted gross and operating margin improved by roughly 150 basis points compared to the second quarter, considering the mix in the market dynamics were largely the same on.
On a year over year constant currency basis, FTD grew its top line by 4.9%. However, a higher percentage of revenues were derived from larger original equipment project as opposed to higher margin short cycle MRO work. After the margins were negatively impacted by this mix shift on a year over year compare.
Listen as adjusted gross margins declined by 300 basis points.
With more focused on controlling our costs were able to limit the impact on operating margins to decline of 250 basis points compared to 2018 third quarter.
The continued slow down in the North American MRL in distribution business also had an impact on FCD third quarter bookings bookings in the quarter decreased 10% year over year, including approximately 2% of negative currency impact the end markets that typically have the highest exposure to this type of work saw the biggest impact.
Including a 21% decrease in general industries, a 10% decline in chemical and a 7% decrease in oil and gas.
Partially offsetting the declines was 61% increase in power bookings year over year.
We expect the North American MRL bookings to recover in time, but we have yet to see a positive inflection for the FCD business.
Turning now to our consolidated bookings and end market.
Third quarter bookings increased 1.3%.
Through a billion zero two.
Or 4.1%, excluding the impact of currency and divestitures and represents a book to bill of 1.03.
This marks the sixth consecutive quarter, which we've delivered bookings over $1 billion combined with year over year bookings growth.
This level of performance continues to be driven by our growth oriented transformation initiatives and greater collaboration across our pump valve and feel private products as we leverage the power of the pure play.
On a year over year basis, nearly half of our bookings have come from customers through purchase more than one flowserve offerings.
Our year over year bookings growth in the third quarter was driven by smaller projects and upgrade work.
In the quarter closer to book to project above $15 million inside.
There are four of these larger awards in last years numbers.
We do expect the progression of energy infrastructure projects to continue however, there is more uncertainty at the macro level than earlier in the year.
Refining LNG and chemical end markets remain encouraging as large project in APC backlog continue to move toward equipment order placement.
The current macro environment makes the timing of large project toward more difficult to forecast.
Whether it's the commodity pricing trade dispute Brexit or issues in the middle East the increased uncertainty in the current geopolitical situation has direct driven delays in capital spending.
The good news as we have not seen nor do we expect significant project cancellations.
We believe the opportunity set of global project will move forward, especially for our refinery and chemical plants as they are driven by increased global demand.
Our original equipment bookings have grown by 13% year to date, we're capturing our fair share of the opportunities that are out there and our teams are focused on building a quality backlog to drive market growth in the market region and with the customer base we pursue.
Turning to aftermarket third quarter bookings of nearly $500 million were essentially flat versus prior year on a constant currency basis.
Our commercial intensity program, which is a critical components of a month or 2.0 growth growth initiatives helped offset the short cycle market slowdown in North America as we continue to increase our share of our customers maintenance spend.
We fully expect to drive growth in our aftermarket franchise through the combination of our growing installed base.
Customers increased focus on efficiency regulatory changes in execution of our proven growth initiatives.
From a served market perspective, and starting with our largest market oil and gas.
Third quarter bookings decreased 6% year over year, including 2% negative currency impact.
Driven by mid single digit declines in both FTD and FCD. The 2018 compare paired with challenging as last year's third quarter provider highest level of oil and gas bookings of the year.
Oil and gas markets remained active particularly in the middle East in Asia Pacific with a number of $5 million to $10 million downstream and upstream awards across both segments driven by refinery upgrade and clean fuel projects.
Including ongoing work related to IMO 2020.
North American oil and gas remains more challenged due initially the upstream spending discipline, which has impacted the regions and MRO activity and distributor stocking orders.
We did however receive another north American pipeline award this quarter, thanks to our strikes owed efforts.
Our constant currency chemicals bookings increased 11% in the quarter driven by App Pds, 24% growth, partially offset by FTD, 10% decline.
The quarter included a small project award to FTD in the Gulf Coast.
We see a strong pipeline for near term opportunities in the Gulf Coast region, and expect similar opportunities to come in Asia, and the middle East driven by forecasted global demand growth.
Our power markets increased 45%, primarily due to the lower 2018 compare which was our lowest power bookings totaling over five years.
While challenges in our power markets continue we're pleased with two awards in the $5 million range, representing a combined cycle plant in North America, and a coal fired plants in Europe .
We also remain focused on the concentrated solar power market.
With a closer power of a pure play differentiating offering a pump bow conceals provides opportunities in a growing market.
We continue to support our global fossil and nuclear installed base with maintenance upgrades and life extensions and look to participate in fuel switching opportunities and North America in Europe , as well as a limited new build projects that primarily in Asia.
Third quarter bookings and general industry has declined 1% year over year, including 2.5% of currency headwind.
CD, 21% decline was largely offset by PD is 11% growth.
At PV continues to build its global distribution channel and the third quarter included solid growth in Europe Middle East in African markets.
As many of you know about 40% of FTD sales go through the distribution channel and much of that is categorized in general industries. So the distributor Destocking activity. We've experienced was the primary caused the decline in general industry category. In addition, FTD percentage decline was also impacted by a large 6 million dollar.
Our marine project that was booked last year that did not reoccur.
Lastly, representing our smallest market water bookings increased 7% in the third quarter, including two desalination award, which totaled over $40 million combined.
And two awards for water management, North America, each in the $5 billion range.
Turning now to bookings by geography.
The strength in the Middle East Knapton markets continued with 38% growth and third quarter and is up over 40% for the year driven by significant refining and chemical investment.
North American Asia Pacific, both delivered low single digit bookings growth, while Latin America was flat.
Europe remains our most challenged region overall with bookings down 19% year over year.
I'll now turn the call over the lead to cover our financial results in greater detail and then I will turn for some closing remarks before we open the call to acuity.
Thanks.
Thanks, Scott and good morning, everyone.
Our financial results for the third quarter reflect the progress we're making in our closer of 2.0 transformation journey.
Adjusted earnings per share a 59 cents.
20% year over year, and about 10% sequentially on the year to date basis, our our adjusted earnings per share has increased approximately 32% to $1.54 per share.
Our reported EPS for the quarter was 52 cents.
What's included six cents of realignment and transmission charges and the penny of negative below the line currency impacts.
Looking at the first nine months of 2019, our reported EPS of $1.40 increased 97 cents or over three time VPF from last year.
And the represent over 90% of adjusted 2019 bps.
On a year to date basis.
We have reduced after tax adjusted items by $78 million versus prior year.
This reduction demonstrates our continued focus on improving the quality of our earnings.
Revenues in the third quarter were $997 million, an increase of 4.6% versus the prior year.
Excluding the impact of foreign exchange and divest or headwinds.
Organic revenues grew 7.4% year over year.
Third quarter aftermarket sales increased 6.7% or 9.4% on a constant currency basis to $488 million and represented 49% of our total sales essentially the same percentage as the prior year.
Turning to our margins third quarter adjusted gross margin of 33.8% increased 60 basis points year over year, and 130 basis points sequentially.
SP. These 200 basis point improvement year over year was a key driver as we continued to deliver operational and productivity improvements, including the further leveraging the combination of our pump business that we implemented earlier this year.
Partially offsetting SPD strong performance with decline assay. These adjusted gross margin year over year to 32.8%.
As Scott discussed.
Cdis based market and mix headwinds for much of this year consisting of strong growth in larger project oriented work offsetting a cyclical decline in MRO activity.
FTD, However did improve with adjusted gross margin sequentially by 150 basis points in the third quarter on a modest sequential revenue decrease.
On a reported basis.
Floaters gross margins decreased 110 basis points to 33.5% driven by essentially the same factors I discussed as well as approximately $5 million of lower realignment spent in 2019.
We remain focused on managing our cost structure and are pleased that our third quarter adjusted EPS DNA with essentially flat with prior year at approximately $220 million, even as we believe our bookings and revenues growth in the quarter.
As a percentage of sales adjusted estimate decreased 50 basis points to 22.1%.
On reported basis third quarter estimate decreased approximately $16 million driven primarily by the lower adjusted items versus prior year.
At the operating level, our adjusted operating margin improved 100 basis points to Twoq to 12% as result of our strong adjusted gross margins and tight cost management.
SPD, 13% adjusted operating margin increased 200 basis points year over year, which was partially offset by SPD is 250 basis point decrease.
On a sequential basis, both segments adjusted operating margins improve including FCD by 150 basis points.
We reported operating margin increased 450 basis points year over year.
Which benefited from continued operating improvements in sales leverage as well as approximately $33 million reduction adjusted items.
Our adjusted tax rate was 25.9% at the low end of our prior full year adjusted tax rate guidance of 26% to 28%.
Considering our adjusted tax rate through nine months with 25.8%.
We revised our full year tax guidance yesterday to a new range of 25% to 27%.
Turning to cash.
Operating cash flows through the first nine months of 2019 increased $180 million versus prior year, driven by our earnings growth as well as improve working capital management.
While we have demonstrated incremental progress in our working capital management, we expected over more improvement overtime and are confident in our ability to achieve our goals.
A key enabler to truly embedding sustainable systemic improvement within our inventory order cast processes will be implementing enterprise wide systems and processes and as the journey, but I am pleased with results we delivered thus far.
At September Thirtyth, our cash balance was approximately $550 million, roughly 17 million higher than last year's third quarter balance.
This year over year improvement comes after approximately $140 million that certain third quarter cash expenditures for example.
During the quarter retired $75 million, a debt returned about $30 million of capital to shareholders through dividends and share repurchases and back to $90 million and capital expenditures and contributed 14 million to our youth pension plan.
Turning to our outlook for the remainder of the year.
We are pleased with our strong results for the first nine months of the year and expect solid performance again in the 2019 fourth quarter.
As such.
We increased the low end of our full year adjusted EPS target range by 10 cents.
And now expect between 215 to 20 per share for 2019.
This range excludes approximately 2019 realigning the transformation expense of approximately $50 million as well as globalized warranty currency effects and the impact of potential other discrete items, which may occur.
Also increased our reported EPS range between $1.85 of $1.90 per share.
We expect these results based upon full year revenue growth of approximately 2.5% to 3.5%.
Including increased full year headwinds now expected from currency of approximately 2.5% and roughly half a percent due to last year's business divestitures.
Turning to our expected cash usage in the fourth quarter.
The following year to date debt payments of $105 million and pension contributions of $20 million during the first nine months.
We have already met our commitment in these areas and do not expect any further payments this year.
We do anticipate returning approximately $35 million to shareholders through during the fourth quarter through dividends and share repurchases.
And we'll continue to invest in our business to capital expenditures during the fourth quarter, although we have reduced our full year expected spend to 70 $585 million as we remain disciplined in our approach.
Now, let me turn it back to Scott for his closing remarks.
And finally.
I'd like to wrap up by spending a few minutes on our outlook and the progress of our transformation efforts as our guidance indicates we expect to finished 2019 on a strong note.
We are confident in our ability to deliver to the new guidance range, which represents adjusted EPS growth of over 20% year over year, and nearly 60% better than 2017 by first year closer.
Yearend 2019 will also mark the halfway point of our multiyear closer of 2.0 transformation journey.
I am extremely encouraged by the progress we have made today, but even more optimistic about the opportunities that remain in front of US we've made significant investments to drive cultural and enterprise changes in our employees a truly resin to the challenge embrace the changes and they continue to drive results.
I am impressed and encouraged by the level of excitement in the progress that we're making within our global operations.
To maintain the momentum we will continue to have a dedicated transformation team throughout 2020.
I expect significant progress and 2020 with our operational initiatives, while continuing to focus on growing the company. We're laying the manufacturing foundation to significantly improve our deliverability of products and dramatically reduce our cost to produce we are well underway to fully transforming closer and I look forward to continue deliver increased value.
Through our employees, our customers and our shareholders.
As we continue the transformation journey.
Operator, we have now concluded our prepared comment it would now like to open Caldwell.
Thank you we will begin the question answer session. If you have your question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the Paul Sarran are the hash key.
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Tom phones.
And our first question comes from Joe Giordano.
Hey, guys good morning.
Good morning, Jeff.
Hey, so.
Good quarter, Nic the stock down more than the more than the industrial sector. So I'm, assuming that a lot of that has to do with really negative short cycle comments, we've heard from other companies over the last couple of days todays today as well, but our sense is that there's just this.
There is this belief that orders next year or face. This real cliff. So I know you guys had been very kind of dogmatic about making sure. What you say publicly is something you're very comfortable delivering on but as we stand today. Looking forward is is what our growth of like flatten off next year like is that it within the realm of realistic possibilities I think thats a major.
Good thing that people are struggling with right now.
Yes, well I'll start with a very short answer not get the commentary, but I think it is absolutely something that that we can do and if we add to pick today and we're in the middle of our budget process right now, but if we had the pick today I'd say flowserve grows in the bookings range or in bookings next next year and growth over 2019.
So I just given some of the color there right I mean, there's no doubt where we are in a challenging and uncertain market environment, but when we looked at 2019 and we've made incredible progress right. Our original equipment in our project bookings are up 16% on a constant currency basis, we've been able to grow the overall aftermarket by 5%, but we're also dealing.
With that North American upstream correction, that's impacting that the valve business and clearly hurting us on that distribution channel and drive and some adverse mix. There and then you look geopolitically, we've got uncertainty at almost no I'm not going to say at all time high but it is certainly at a high level, where you've got Europe with Brexit and some of the Spanish stuff going on to get us.
China trade, you've got middle Eastern intentions, and then you've got that the Latin America stuff as well, but I think when we think about 2020 I'd say the best way to characterize characterize it is we think we're going to grow but we don't think we can grow at the rate that we grow 2019 started to say, it's a growing environment, but it did.
Celebrated problem from where we are now, but we still think 2020 to growth year and so when you look at our project pipeline to our funnel.
We've got good opportunities in refining petrochemical and LNG, we just moved removed to our flow for CRM, almost a year and a half ago. So now we've got good visibility to that but I'll say, our 12 month bundle has come down in the last kind of four to six months, but it hasn't come down significantly, it's only come down a little bit or.
Very modestly so we still feel good about that the project funnel on the aftermarket side, we must continue to grow that we've got a continued to capitalize on the installed base and then within the transformation right. We've got two major initiatives around growth in one is commercial intensity, we basically that's making sure that we get our entitlement on the installed base.
And basically defining our playbook to capture that installed base or working with our customers and then the other one strikes sellers and instructor and we've had tremendous when we booked over $100 million on on pipeline Awards. We expect pipeline to continue into 2020, we do have other strikes on initiatives as well and so as those kind of play through we've got it.
Ability to take market share and grow with that and so again I feel reasonably good about our ability to grow I. Just don't think that will be at the rate that we grew in 2019.
Okay, Thats really helpful commentary there.
Lee you mentioned cash and Thats been that's been a really nice improvement there for you guys for a couple of quarters now how much of this is still you guys manually manually doing the work everyday with Jim.
How and where are you kind of in that systematic journey.
Thanks, Joe I think we're making significant progress it's still obviously a manual effort, but there are number of out say capabilities that are coming online one I'm, particularly excited about for the first time, we're launching I'll say, a new tool, where I can see roughly 90% of my invoices and one system. So as you know.
We've got over 40, ERP and so we basically launched in the last month, the new tool that nothing those access to our customers and other invoices all the ranging across our business. So now we had a tool will now be got execute and use it and so weve launched change management and training session. So people understand what's there and how to data might.
Okay and figure out what's past deal and how to club. In addition, we're continuing to move collections efforts.
To our shared services operation and hungry and that also is driving more efficiency Scott will talk about inventory at all.
Inventory side again, it's not a perfect world, but I'd say, probably the best way to describe it is both on a AR and inventory. We're we're driven significant process change and now we're in kind of the process adherence phase and on the next phase will be automation and while we've got some tools that are starting to automate and give us better visibility I feel very good.
Good that we are using different process, that's going to absolutely drive result, and we're getting procedural adherence now around the world and so I think this is an area. We've made really good progress and I would say we can continue to make progress as we are hearing to process and we start to automate more and more.
If I could just sneak in one last quick one I mean, given the short cycle weakness and we've already seen it hit FCD on the distribution side.
If that accelerates if there's more if weakness in in those markets gets worse, how much of the how much margin do you think you can neutralize at this point I guess, you've already had a lot of the impact if we see volume decline further and can you can you offset that negative impact.
Kind of set the scene for everybody on that and I'm going to talk more about our ability to get orders and then I'll I'll go to margins, but so so basically our valve businesses.
About 40% or distribution in a big chunk of that as than North America, and so what's happened with the upstream side of the business with the upstream pulling back we've got distributors that have carry and their views of the I'm talking about the stocking distributors that carry our valve in the upstream side and the downstream side and so basically as they get the signals were.
<unk> rig count comes down to production and completion start to come off they really begin to clamp down on there on their inventory levels and so we saw that really start in Q2 and then in earnest in Q3 now that de stocking, though actually has decelerated and then what we need is if the environment stays the same.
That our business actually has some tailwind because they've got to order product to deliver that and so I actually feel okay that I don't see that you another step down in less activity in North America took a dramatic change to even worse than I don't think anybody's predicting that I think most people are saying that 2020 will be similar to the activity that we're in now.
And if thats the case, we actually would get a little bit of a tailwind in terms of bookings for FCD now, let's just say that doesnt happen and things get worse.
I would say that the valve business or FCB is taking the appropriate cost actions within North America adept at facilities that deliver product there and we would continue to do that and so the team as well versed on the levers to drive cost control will continue to pull those as the market goes down, but I'll, just say I don't see that as a likely scenario.
I actually see flat to slight growth in the MRO business of of FTD.
Thanks, guys.
Our next question comes from Andrew Kaplowitz.
Hey, good morning, guys.
Hey, Andrew good morning.
So just following up on your comment about expecting overall order growth for 2020 again, not achieved down too much but.
Much incremental visibility do you have from your project pipeline versus your own initiative GE did suggest that your funnels come down, but maybe you can comment on your conviction on the conversion funnel that you're seeing today versus your internal estimates and how additive.
Right now on and commercial intensity into bookings now and expected in 2020.
Yes, so no doubt that the funnel as come down again slightly it hasn't come down dramatically, but I just think as we kind of mature with the transformation and in our process adherence what are the things that we're trying to do is developed playbook can develop competency and all of our functions and I've actually been really really apply.
Impressed and kind of the last two years of of how our commercial teams and our operations teams are working together and what I'd say as we're still kind of middle innings on that and we still have significant opportunity to do better sales and operational planning do a better job at reducing our lead times do a better job driving cost down through a better.
Rob of getting the right products in front of the right people and so I just say, there's still a lot of self help that we can do here, we track wins and losses, we track Miss opportunities, let's just say unfortunately that list as far lager that I wish it were and Theres every quarter, we've got things and we go gossip, we've just done some things a little bit differently, we could capitalize on that.
So the project so back to the question right. The project funnel still looks good it's a huge number out there I still believe we can drive your market share when and if you combine those two together we feel comfortable in our ability to grow in 2012.
Wait and sort of related question.
The sort of feedback around FCP margin.
In terms of it sort of pulled back here in Q4.
As possible if I step back and just thinking about the mix issue that you have now and that you could have does it will lead continues to ramp up in PD.
How easily Chinese Yuan set that mix headwind as you go into 2020 with these initiatives you've talked a lot about lean.
Kind of interest to you already having the business from lead.
Yes, no. It's a really good question I think.
The headwind is real right and so just go back to what I said on we've got OE bookings that have grown 16% constant currency or aftermarket is going to 5% and so by definition, we've got higher margins in aftermarket and that and our OE business and with those diverge a growth rate is absolutely puts pressure on them.
And what we've got to do is offset that with the things that we're doing in the transformation with supply chain savings that value engineering, the manufacturing productivity, the lean and all that.
Since I think thus far we've done that are really good job of that so even with the mix changes were still continues to be able to drive margin certain side and that FTD has gotten hit a little bit harder with the that mix change, but I think we still have a huge opportunity set in the transformation in my prepared remarks I said.
We're about 50% complete with that as we turn it into the second half of transformation a lot of the initiatives around operations in driving costs down in which will ultimately help us on the margin side.
Thanks, guys good quarter.
Thank you.
Our next question comes from John Walsh.
Hi, good morning.
Good morning Gov.
Hi.
So I just wanted to touch a little bit again on capital allocation in kind of the forward look I think.
You said in the prepared remarks 35 million to be returned in Q4, it's kind of given where your dividends sets that seems like we're going to see some more share repurchase which is something we hadn't seen in a while if I caught that comment correct.
Now, let me add to that so Hadley, yes, John that is correct. We bought about 100000 shares in the third quarter and our goal is basically to offset some of the dilution. So what's happening with our long term incentive plan. So thats. The main focus as we were looking at the share count than we wanted to normalize a little bit for some of dilution and taking place.
Got you, Okay and then.
I guess, maybe Scott can you talk a little bit about what you're seeing on price cost. Obviously, you know last couple of quarters, you've gone out selectively in certain product categories to get price kind of an update on what youre seeing there.
Yes. So is this as a reminder, we did two pretty significant price increases. The in 2019, one was at the beginning of the year and then one kind of into in the into Q1 and I feel reasonably good about our ability to stay on the positive Taglich asked but obviously you know with FTD margins pressures, we've got to do more there and so were we continue.
Due to Relook our pricing.
We will do another annual price increase at the end of this year, what I'd say a deal it's a combination of tariffs and inflation and so we've got to make sure that we offset that and so part of the transformation as a pricing work stream and bringing that analytical rigor to how we price and how we think about pricing. So I think we'll continue to do good things.
And then on the kind of the project side of that we are seeing I'd say, a little bit more disciplined on the pub pricing and so you know as public providers and that the bigger ones that provide the project stuff.
I think everyone's getting a touch more disciplined I'm not going to say, we're getting unbelievable discipline in pricing, but I do think it's improved with the capacity levels coming up.
And then where I'd say the concerns still is on the valves side and so that the engineered valve side particular.
It's just an area that that prices is not where it needs to be and so we're focused on that but we're probably more focused on how to take cost out to to make sure that we're not eroding too much margin there, but overall I feel reasonably good at our ability to get price, we've been able to move it up this year that will do will be pretty aggressive that the the ended the year. The first part.
2020 on it.
Great. Thank you for the color.
Thank you.
Our next question comes from Jerry.
Thank you good morning, everyone.
Hey, Dan good morning.
Lots of good color, if you're just step back a year ago, plus as to what issues you were addressing on the call.
And now it's just getting to be such a more refined story and you really pushing the team and you can hear it in the cadence of of.
Both the answers, but also on the outlook.
And on that point I was really interested it feels better d. and there's no doubt about that.
Good.
So I love hearing the fact that you do kind of a post mortem on.
Business lost and.
In reference to the answer on the value pricing. When you look like a perino chart of the businesses business that you've missed is it price is it product specs as a delivery just.
Where does the biggest issues on.
It has to change.
Yes, I don't want to give our road map to our competitor so I'm going to be a little careful on the answer here, but I would say, it's a little bit of everything but the ones that frustrate me or the self induced ones right, where we're not communicating are we didn't do the right thing or we over spec something and made our product at a higher cost than that.
Needed to be to our competitor or we do.
Got Super Conservative on lead times, and we weren't able to deliver on that but I would say that the list. Unfortunately again is longer than we would like and there's lots of reasons. There are focused though is to mitigate the ones that we can control and making sure that we've got type correspondents and cooperation between our sales in our operations.
Team and Jeff by doing that deed, we've got pretty significant opportunity and so we're going to keep working that and again as we mature with our playbooks and moving through the flow sort of 2.0 I have no doubt that we continue to make progress in our ability to capture more market share as we go forward.
That's real helpful. Unlike a year ago, there was lots of consternation about past due backlog and that doesnt seem to be an issue anymore is that all been put to bed.
Yes, we're never satisfied right and.
I'll say, we're not delivering on time, 100% of the time, but it is not the issue that it was when I came to Flowserve and so the operational teams are doing a really good job. We're definitely focused on our deliverabilities, but I would say like theres more work to do the right and so as we kind of get better and on time delivery than we shift our focus to lead time.
And making sure that we can be even more competitive on lead times and we are today, but in terms of talking about it on an earnings call past due backlog is not a topic for a discussion, but it's always something that we're going to work on the continued to get better outflow Sir.
All right Thats good to hear and just last topic for me I wanted to go back to one of Joe's.
Questions about de stocking and this really has to be one of the most overused term set we've heard companies talking about or blaming.
The short cycle pressure that they're seeing.
To us when we hear destock it means the sell in to the distributors is less than the sell through and this typically can't happen for multiple quarters. If it does that usually a falloff in demand.
But but your answer really was calibrated where you're looking at the sell in versus sell through so if you just clarify for this quarter do you think that has been at a stage where that they have to replenish and what kind of volumes might you see out of this replenishment.
Yes, So Q3 was definitely down for us through the distribution channel and I am speaking predominately about on the valve business and so there's no doubt that they are destocking in the third quarter into your plate that can't continue in a reasonably stable environment and so we think at some point, we start to get more.
Orders and I would say, we are getting orders from our stocking distributors there does not as as high as we've seen before and they are significantly down from even the early run rates in 2019 or certainly on the year over year comparisons, but I think if you go to think about the north American activity and with we've got stability.
In terms of production completions and in both the gas in the oil side, then that's going to be a little bit of a tailwind for us.
Hopefully and kind of a Q1 Q2 timeframe in 2020.
That's real helpful. Thank you.
Our next question comes from Nathan Jones.
Hi, Good morning, this is Adam Farley offer nation.
Okay, Hey, Adam.
Turning to midstream I know, it's a strike soon focus for you guys you guys mentioned, a pretty nice progress toward there.
Could you brought any color on how that market's doing.
Appreciate any deceleration and projects or any projects getting pushed to the right.
Yes, it's a really good question because at some point, they're not going to keep spending the capital that they are but I. We've got good visibility into kind of Q4 and early 2020 on net.
So I feel reasonably good about our ability to continue to get midstream work, both the pipeline side and the storage side and what I'd say is we're starting to win the work with our entire portfolio. So you'll really bearing that the power of the pure play.
Leveraging the efficiency technology that we have with the pump side and this is a space that we really weren't and before and so we're absolutely taken market share and.
We feel very good about your ability to do that and when work and I would say expect more more awards for us, but not naive to think that that this does slow down at some point, but I would say for the next six months, we still see pretty significant opportunities and pipeline and then I think you're going to see some store.
Let's build out in kind of if you go one more step down stream you start to see some capital spending there and then the other thing I'd add as we hadn't really focused on the the midstream side globally. We're more the initiative on strike zone was very much a north American focused initiative, we're now starting to migrate that around the world and.
Again, I think we're we're looking pretty good for some midstream pipeline awards globally here as well.
Okay. That's helpful. And then just shifting to your water business, specifically desalination and I know, it's a small part of the business portfolio.
Tied to the energy markets.
Let me just some color on how you view the business what are the opportunity sets were just any color would be great. Thanks sure gas that we had a press release.
About a week ago on two nights awards in the middle East that to real and their IP project and that came to the Saudi Arabia and so for US desalination is a nice market and where we have the technology is the in the pump side and so our efficiencies allow operators to.
Keep their energy costs down, which is the largest cost of doing desalination and so we've got some preferred technology, there and it works real nicely. What we're trying to do is do more of a pure play opportunity with desalination and so we've got pressure exchange technology, We've got about technology and what we wanted to do is ultimately start to put more.
Our products and services around desalination, but as you know water and particularly drinking water is a huge issue for for the entire globe and we feel very good about the outlook with deep validation projects and so we're going to keep working hard. This is one of our strike zone initiatives and that will keep working hard to.
When more than our share on on de Sal.
Okay, great. Thank you.
Our next question comes from Brett Linzey.
Hi, good morning, guys.
Hey, just wanted to come back to the pump combination of the two segments sounds like you've made some very good cost traction on a lot of this initiative what did you realize from us saving standpoint year to date and how much more savings do you think you can read out of that as we as we look into 2020.
Okay.
The one part you said on a saving standpoint.
Correct, just okay, yes, no other stock.
When we bought the pumps together really wasn't the cost side. It was it was more about the customer and so what we're seeing now as a concerted front with our pump team talking to customers properly and really balancing the supply on the demand more appropriately than we were in so I'd just say with the two different platform.
As we did not have the collaboration of the cooperation as you would expect from two entities even within the same company. So thats now completely changed in that teams working incredibly well together, we are definitely seeing cost savings right. So theres no doubt right. We have a one team versus two until we got immediate SNA savings there, but I'd say.
Probably the bigger prize will be kind of that in 2020 and beyond as we really start to rationalize more of the engineering function in more of the footprint to operate in so I think we definitely captured savings, but I'd say users more savings that will drive gross margin expansion here.
As we look into the future.
They are able to quantify which is what you're targeting there for 2020, no I really don't want to do that and particular will come out with guidance as we always do at the end of the fourth quarter and then we'll talk about what 2020 looks like from a margin perspective.
Okay, Great and then just one follow up is good to see positive free cash flow here in Q3.
Conversion, starting a little bit light about 50% as as a percent of adjusted net income.
In terms of the 75% conversion target for the year.
Change in that thinking now.
Hey, Brett this is like no. We are we still Seattle line of sight to the 75% communicated earlier in the air Natco working too and just in general.
There is a significant more focus on cash and importantly in cash and so the metric that we look at very closely and no still feel good about 75.
Okay Thats great color there. Thanks.
Great. Thank you.
Okay.
We have no further questions at this time.
R&D will we greatly appreciate everybody joining us today and certainly if you follow up questions don't hesitate to call, Mike Malone or myself and we look forward to seeing you have some investor conferences in the of the weeks and months ahead and thank you all again.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.