Q4 2019 Earnings Call
Oh, sorry fourth quarter, you're ending 2019 earnings call. My name is probably won't be your operator for today's call.
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A question and answer session.
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And since being acquired.
I'll now turn the call over to Mike My one director Investor Relations you may begin.
Thanks, Paul that and good morning, everyone. We appreciate your participating our call today to discuss loves her fourth quarter and full year 2019 financial results.
Joining me this morning, her Scott Rowe clubs, <unk>, President and Chief Executive Officer, Jay Roueche, <unk>, [laughter] favour interim Chief Financial Officer.
Following our prepared comments, we will open the call for your question, but as a reminder, this or that is being webcast at 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 statement.
These statements are based upon forecasts expectations and other information available to management as of February 18, 2020, and they involve risks and uncertainties many of which are beyond the company's control.
We encourage you to pull the review our safe Harbor disclosure and the reconciliation of our non-GAAP metrics to our reported results both of which are included in our press release and earnings presentation that are available on our website at <unk> Dot com and the Investor Relations section.
I'd now like turn call over to Scott Rowe closer President and Chief Executive Officer purse prepared comments, great. Thank you Mike Good morning, everyone and thank you for joining today's call both our fourth quarter Mark a strong finish to 2019 as we exceeded our initial for your expectation and continued to make significant progress.
Well, it's sort of coupon of transformation.
I first want a letter of quote cover Sofia two liters know how much I appreciate their efforts and contributions in 2019, we have asked a lot from our team and they continue to rise to the occasion.
Despite the challenges in 2019 arcane delivered on our performance improvement program continued to support our customers and created value for our shareholders since initiating our transformation strategy are employed the demonstrated increasing ownership of the program and our overall employee engagement has reached the highest level since I've been a closer.
I'm confident that we're building a culture of accountability respect and truck as we drive sustainable improvements and create an enterprise capable of performing in any market environment.
Before turning to our results I'd like to talk briefly about China, and the Corona virus situation.
We have 780 associates based in China, and our number one focus is their safety and that of their family.
We are actively monitoring the situation and working closely with governmental health organization and all of Asia Pacific to ensure we keep our workforce as safe as possible.
We have a large manufacturing complex in Suzo, which is about 450 miles east of move on Additionally, we have several smaller cure he's in the region as well its sale and administrative office.
All of our Chinese facilities are now operational and back to work after a government mandated extension to the lunar new year holiday.
We also have a large supplier network in China that provides products to our global quota of operations. This suppliers have also been impacted by the virus in the mandated corn team throughout China.
While we have a flexible global supply chain, we do expect at the extended shutdown in China will have some impact our near term supplier deliveries.
We do expect the situation in China to have an impact on our ability to support our customers and defer some revenue in the first half of this year.
Finally, we believe this epidemic will have a short term impact on the demand for our products and services, but it's still too early to tell the magnitude at this time.
We are fully focused on doing everything we can to minimize the impact of this situation.
Let me now turn to the financial highlights for the fourth quarter and the full year.
Both are delivered fourth quarter, adjusted EPS of 66 cents and $2 a 20 cents for the full year high end of our revised guidance range and a 26% improvement over full year 2018, the quality of our earnings continue to improve as transformation and net realignment charges of 36 billion.
As a 19 represent 59 million decrease versus prior year.
Operating margins were roughly flat in the fourth quarter year over year, reflecting the higher sales mix of original equipment and larger project work.
Our original equipment bookings growth rate up 13% in 2019 was more than four times greater than our aftermarket bookings growth rate on a positive note that outsized growth in OE bookings will continue to drive growth in aftermarket for years to come.
On a full year basis growth and operating margins improved 101 hundred 50 basis points respectively.
Respectively.
As the progress of the transformation initiatives more than offset the mixed challenges.
We continue to target significant opportunities to drive further margin improvement through lean focused productivity initiatives designed to value product cost reduction improved manufacturing planning supply chain management in June that cost control.
Our continued focus on cash flow improvement drove quotes or free cash flow conversion, 85% of our adjusted net income a significant improvement versus 46% in 2018.
On a GAAP basis, our cash conversion was 97%.
Increased operating income reduced realignment and transformation spending improved working capital management and disciplined capital spending all contributed to the increase in our cash flow.
Moving now to our segment.
FTD continue to drive operational improvements in the fourth quarter reflected by solid operating leverage on 11.6% sales growth. Despite a 3% mix shift towards original equipment and increased project work, our transformation driven productivity improvements drove adjusted gross and operating margin improvement.
Sixtyv in 50 basis points, respectively.
For the full year FDD delivered impressive $70 million improvement in adjusted operating income on $83 million of increased revenue.
Full year bookings growth of 9% drove a 21% increase in backlog positioning SPD well for revenue growth in 2012.
Turning now to FTD fourth quarter bookings and operating results continued to be impacted by the north American slowdown in short cycle MRO activity and slower distribution orders.
Despite the resulting mix shift towards lower margin OE work I'm pleased with the teams cost control focus which held adjusted operating margin declined to 60 in 40 basis points for the fourth quarter in full year, respectively.
FTD fourth quarter sequential performance was encouraging where they drove an $11 million increase in adjusted operating income at $15 million, an increased revenue and adjusted gross and operating margin increases of 200, and 260 basis points respectively.
FTD its fourth quarter constant currency bookings were down approximately 5% year on year, but were roughly flat for the full year end up from the third quarter.
The decrease was primarily driven by chemical and general industries, which included distribution booking.
Partially offsetting the declines was at 37% increase in power bookings year over year, including a $12 million Award in Asia Pacific.
We expect the North American Tomorrow bookings to remain challenged in the first half a 2020 and returned to growth in the second half of the year.
Turning now to our consolidated bookings and served end markets fourth quarter bookings increased 0.7%.
Billion, 50, or 1.7% on a constant currency basis.
Given the increased market uncertainty during the fourth quarter, we were pleased to achieve the seventh consecutive quarter with both bookings over a $1 billion and year over year bookings growth.
At Pts original equipment bookings increased nearly 13%, which drove our overall growth in was primarily driven from mid and downstream oil and gas in chemical markets.
The quarter included one refinery award north of $30 million and a number of smaller projects and upgrade work in the $5 million to $15 million range.
While it certainly in the macro environment continues to dampen overall demand and delay funding for some large projects our discussions with customers as well as the reported capex budgets indicate that energy infrastructure projects will progress in 2020.
We continue to expect moderate growth this year, primarily in downstream oil and gas LNG and chemical markets.
For the full year 2019, our bookings increased approximately 9% on organic basis.
Driven primarily by 13% growth in original equipment bookings.
We expect our transformational growth initiatives, such as strike zone, and commercial intensity to drive market share gains in the current environment.
Additionally, through the power of a pure play we believe we can build upon our comprehensive flow control portfolio and provide more complete solutions to our customers.
Turning to aftermarket fourth quarter constant currency bookings decreased 1.8% there was a tough compare compete a tough compare period as the 2018 fourth quarter represented the highest level of aftermarket bookings at both served since 2014, however on a sequential basis, our aftermarket bookings grew five.
5% for the full year.
Constant currency aftermarket bookings grew 2.9% on SPD is 4% growth.
Our commercial intensity program continued to gain traction and grew our share of customers maintenance spending.
We expect 2020 to provide an opportunity continue to grow our aftermarket franchise through the combination of larger installed base our customers increased focus on efficiency supportive regulatory changes in execution of our proven growth initiatives.
Let's now turn to our end markets, starting with our largest market oil and gas.
Fourth quarter bookings increased 6% year over year, including about 1% negative currency impact driven by mid single digit growth in both SPD and FCD. The quarter included the previously mentioned refining award of over $30 million in several smaller project awards totaling roughly $70 million.
Chris, including LNG midstream pipeline and downstream oil and gas projects across Asia Pacific The Middle East and North America.
For the full year oil and gas bookings increased approximately 11% driven by SPD is 14% growth.
On a constant currency basis chemical bookings were roughly flat in the fourth quarter with SPD, 20% growth offset by FCB is 22% decline.
Activity in the Gulf Coast continued.
PD captured a small project and we continued to see a pipeline of future opportunities.
For the year bookings increased 4% on FTD strong 10% growth.
The downstream outlook for 2020 look solid based on Capex projects and the forecasted global demand that's expected to continue to drive investment in Asia, Middle East and North America.
Our power markets provided opportunity in the quarter with bookings up 13%, including a concentrated solar power project award of $12 million in Asia Pacific.
Following years of decline our power market 2019 delivered 10% bookings growth with FCD contributing 19%, while FTD was up 6%.
Although we're not forecasting this type of growth in 2020, we will continue to support our global fossil fuel a nuclear installed base with maintenance upgrades and life extension and look to participate in fuel switching opportunities in North America, Europe as well as limited new build projects primarily in Asia as we've.
During the quarter concentrated solar power continues to provide opportunities and the renewable arena, where closer of offers a differentiated set of products across our pump valve and field.
General industries in specifically distribution continued to face headwinds from the MRO slowdown in North America.
Fourth quarter bookings decreased 8% year over year, driven by FTD, 13% decline with at PV down 5%.
As a reminder, roughly 40% of FCD bookings come through distribution.
In addition to the impact from distribution de stocking. We also saw a decrease bookings in other general industry markets, including mining marine pulp and paper and food and beverage.
While our average agriculture markets contributed solid growth.
For the year general industry bookings were down, 7%, driven primarily by distribution mining and marine market.
Finally, representing our smallest market water bookings decreased 29% in the fourth quarter, while full year 2019 marks the third you had a row of low single digit bookings growth. We continue to view this market opportunity positively with a solid pipeline of desalination in water management projects on the horizon.
Turning to fourth quarter bookings by geography.
Europe delivered 17% growth with Asia Pacific in Latin American contributing growth of 11% and 8% respectively.
North America, and the Middle East Africa were both down roughly 9% for the full year bookings increased in all regions other than Europe, 6% decline the Middle East Africa increased 24% with the remaining regions growth in the five to eight percentage range.
I'll now turn the call over today to cover our financial results in greater detail and then our turn for some closing remarks before we open up the call to an AG. Okay.
Thank you Scott good morning, everyone.
We're very pleased with our solid finish the year that Scott highlighted we delivered adjusted earnings per share of 66 cents in the fourth quarter, which brings our full year adjusted EPS $2.20. This.
This performance exceeded our initial guidance given last February and reach the high end of our revised guidance range that we provided after the third quarter.
Importantly, the quality of our earnings improved significantly during 2019.
Well it serves reported full year EPS of $1.93 represented 88% of our adjusted EPS compared to just 52% in 2018.
On a reported basis fourth quarter EPS increased 10% to 53 cents and included realignment transformation and voluntary retirement expenses of eight cents as well as five cents of below the line currency impacts.
Fourth quarter sales of 1 billion out $7.
Increased 8.2% versus the prior year or 9.3%, excluding the impact of foreign exchange headwinds. It was our highest quarterly level of revenue in two years.
The fourth quarter sales increase included strong OEM and aftermarket growth of 11.3 and 5.3% respectively.
SPD was the primary contributor with OEM and aftermarket growth of 22 and 6% respectively.
For full year 2019 revenues were $3.9 billion, an increase of 2.9% compared to 28 same and inline with our most recent 2019 guidance, excluding currency and divestiture headwinds the increase for the full year was 6.2%.
Turning now to our margins fourth quarter adjusted gross margin decreased 50 basis points.
FP. These 60 basis point increase was more than offset by FC These honor and 50 basis point decline.
For the full year. However, adjusted gross margin increased 100 basis points to 33.3%, which includes SPD is 230 basis point increase from transformation, driven topline operational and productivity improvements.
Partially offsetting that PB strong full year performance was the 120 basis point decline enough Cvs adjusted gross margin.
FCB manage the business well on fourth quarter, However, generating a 200 basis points sequential improvement and adjusted gross margins on modest sequential revenue growth.
Mix continued to be more heavily weighted towards project work as MRO and distribution headwinds persist as Scott mentioned earlier.
Flowserves full year incremental margins were substantial as adjusted gross profit increased $75 million on just a $112 million of sales growth.
On a reported basis Flowserves fourth quarter gross margins increased 10 basis points to 32.7%, primarily due to $7 million of lower realignment expense versus prior year.
Full year reported gross margin improved 180 basis points to 32.8% driven by SPD strong performance other transformational initiatives and a 26 million dollar reduction realignment expenses.
Fourth quarter adjusted SGN I as a percent of sales declined 60 basis points year over year the 21.6%.
On a reported basis SGN I as a percent of sales also decreased 60 basis points, primarily due to tight cost control as realignment and transformation expenses were roughly flat year over year.
On a full year basis, adjusted EPS Gionee declined 50 basis points as a percent of sales and reported thus gionee expense declined $44 million and 29 team and was 180 basis points lower as a percent of sales compared to the prior year.
Fourth quarter, adjusted operating margin decreased 10 basis points to 11.8%.
As SPD is 50 basis point improvement was essentially offset by FCB is 60 basis point decline.
Again, the mix impact as the primary reason for the variance.
For the full year. However, adjusted operating margin increased 150 basis points to 11.3% behind FP. These strong operating leverage.
Reported fourth quarter operating margin increased 60 basis points, while fuel for the full year reported operating margin increased 380 basis points to 10.3%.
Our adjusted tax rate for 2019 was 24.8%, which was modestly better than our last revised guidance range of 25% to 27%.
Turning to cash our cash flow from operations was again seasonally strong during the fourth quarter at $169 million the quarter accounted for half of our full year operating cash flow of $313 million.
The keys to this $122 million year over year increase where our strong earnings improvement.
Lower realignment and transformation outflows and our continued progress on working capital.
In total our cash flow from operations improved by over 60% compared to 28 pain.
Hello serves full year free cash flow of $247 million increased over 130% year over year.
Our performance generated free cash flow conversion, representing 97% of our reported earnings and 85% of our adjusted earnings.
By 2018, we maintained a disciplined approach to our capital expenditures from kept the total spend the $66 million and 29 pain.
While we still have work to do on our cash conversion, we do feel very good about the progress towards our longer term targets.
A key component of our cash flow improvement is the demonstrated incremental progress we've made in working capital management.
For instance, in the fourth quarter, we delivered five days of the DSO improvement compared to the 2018 fourth quarter.
When we have driven eight days of improvement versus the 2017 fourth quarter.
Inventory of shown progress as well with terms of 4.3 times and 29 theme versus the 2017 level of 3.3 times.
We will very much remained focused on driving sustainable systemic improvements within our inventory and cash order to cash processes as we drive towards our long term goals.
And we fully expect Spike further progress in our working capital position and 2020.
Closer a finished 2019 with a cash balance of $671 billion up $51 million over 2018, and up $124 million against the 2019 third quarter.
During the year, we paid down $105 million of that and we returned $115 million to shareholders through dividends and share repurchases.
In addition, we invested $66 million in our business through capital expenditures.
This amount was less than originally planned.
But we observed but our focus was on the right value added investments that have enterprise wide applications like IP systems.
Lastly, we also contributed $37 million to our pension plans keeping the us plan fully funded.
Turning now to our 2020 outlook, we are targeting full year adjusted EPS of $2.30 to $2.45 on an expected revenue increase of 3% to 5%.
We're not expecting any material currency impacts this time.
The adjusted EPS target range excludes expected realignment of transformation expenses of approximately $40 million as well as below the line foreign currency effects and the impact of potential other discrete items, which may occur during the year, such as acquisitions divestitures special and.
The tax reform laws et cetera.
Our outlook assumes that transformational initiatives combined with volume price and productivity improvement will more than offset the expected incremental headwinds due to the original its original equipment mix shift inflation merits and the planned increase in research.
In development and IP investments.
Both the reported and adjusted EPS target range also assume current foreign currency exchange rates and commodity prices.
Our expectations are based on our 2019 year end backlog anticipated bookings levels and the continuation of current market conditions.
We further expect that net interest expense will be in the range of $45 million to $50 million and we'll have an adjusted tax rate between 20, 426%.
In terms of phase them as many of you know flowserves results are normally back half weighted because of seasonality.
In 2020, we expect more second half waiting unusual due to the uncertainty that currently exist on China and the associated potential headwinds that will likely process from us over the next several months and as Scott noted, we will very much continue to monitor the situation in China closely.
From a 2020 cash usage perspective, we expect to return approximately $100 million to our shareholders through dividends.
Our current estimate for capital expenditures in Mumbai, VB 100 million dollar range, but unlike prior years, we will continue to be prudent with our capital spending and we'll reevaluate planned investments throughout the year.
We also expect to repay the modest amount of debt coming due in 2020 and plan to contribute the equivalent to our service costs and our global pension plans.
And finally as a reminder, our cash flows during most years are also very feasible in back half weighted as they were in 2019.
Traditionally and on 2020, we expect to use cash and the first half the year and the be cash flow positive during the second half primarily in Q4.
Closely now.
We anticipate maintaining a very active investor relations calendar again in 2020.
Mike and I are headed the Florida later this week for cities Global Industrials Conference, then Scott and I will be in Canada. Later, this month visiting with current and potential shareholders bear.
And we'll close out February at the Gabelli pump valve and water Symposium in New York City.
We very much value, our time with our shareholders and investors and we look forward to seeing many of you during the year with that let me turn the call back Scott for his closing remarks, great. Thanks Jay.
I'd like to wrap up by spending a few minutes talking about the journey that we have been on over the last three years oppose serve in how the transformation will continue to provide support in 2020.
I'll start with the progress we've made since 2017.
Falling three consecutive years of sequential revenue decline closer returned to growth in 2018 and 19 in be fully expect this trend to continue in 2020.
Our year end 2019 backlog is up 14% compared to prior year, which provides a solid starting point for 2020.
While each of the end markets have unique cyclical characteristics overall, we believe the some of our customers Capex Capex budget will be flat to slightly increased over 2019 levels beyond the market. We also expect further results from our growth oriented transformation initiatives, which have driven outperformance in the prior.
Two years.
We have also delivered better margins through significant improvements in our global operations and better cost management over the last two years, we have driven strong margin improvement on modest revenue growth.
Our adjusted gross and operating margins have increased 190, and 200 basis points respectively.
Full year 2017.
Our focus on working capital improvement has driven a 100 basis points decline as a percentage of sale and a growing environment.
The combination of growth and margin improvement has restored flowserves return on invested capital to a reasonable level, which is now a 530 basis points from 2017.
What is most promising is that we have substantial opportunities ahead of us to continue to build on the momentum that we have created in the last three years.
It was clear to me in my early days at full serve that the transformation, but also need to focus on the culture and the organizational health of the company.
The transformations created and align plan improved communication and provided a voice for our associates.
I am confident that we're making significant progress with our culture.
Employee engagement scores are at all time highs our voluntary attrition is down significantly and we are attracting top talent in the marketplace.
As our 2020 guidance indicates we are expecting another year of growth further operating improvement in continued progress toward our long term targets.
Since 2017, our adjusted EPS has grown over 60% or 25% annually.
Based on our solid backlog project pipeline market outlook and the continued traction of our transformation initiatives, we fully expect that will deliver solid adjusted earnings growth in 2020.
The fourth of 2.0 transformation very much remains the catalyst to driving our improved results in 2020.
Im extremely encouraged by the progress we have made today in the opportunities that remain ahead of us.
With solid growth the last few years in steady margin improvement, we feel optimistic with where we are and I believe we're on the right package to achieve the longer term targets. We introduced in December 2018.
In addition to improvements in the income statement metric metrics, we've made great progress in our free cash flow conversion and our 2019 return on invested capital grew to nearly 13%.
While we are pleased with the performance to date, our transformation efforts in 2020 do involve some heavy lifting.
The dedicated transformation office will remain in place throughout this year as we continue to drive sustainable process improvement culture deep into the enterprise with further manufacturing improvement.
Product design to value supply chain improvements in DNA cost reductions.
We will wind down the designated transformation team at the end of 2020 as our functional leadership continues to assume greater responsibility and ownership of the program.
Im confident that we'll continue to capitalize on the great progress that we have achieved to date.
We are moving closer to a higher level and I have no doubt that this will be reflected in our metrics our service levels to our customers and value creation for our shareholders.
Operator, we're now concluded our prepared comment and we'd now like to open the call to any questions.
Thank you.
We will now begin the question answer session. If you have a question. Please press Star then one attach council.
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John.
Our first question comes from Andrew Kaplowitz from Citi. Please go ahead.
Good morning, guys.
Hi, adding into good morning.
So Scott obviously, good execution this quarter, but I just wanted to focus on your comments that you still see modest from growth in 2020 led by refining chemical analysis.
On the Tibet content comes from all your self help initiatives and then you'd project pipeline last quarter I think went down a little bad to continue to drop a little in Q4 get and macro uncertainty or did stabilize at this point.
Yes, sure Andy I'll I'll take this one.
We are still committed the growth, but obviously that the marketplaces is remaining highly volatile and certainly the impact of the current a virus is not going to help.
I'll just kind of hit a couple of things that you talked about first the project pipeline.
What we're seeing then Q1 is relatively stable from what we saw in Q4, which as you said was slightly down from a from a year ago, but it still incredibly healthy and so for us it's more about the ability to win selective projects that are out there. We had a nice nice project awards in Q4, we've got visibility to project Awards.
In Q1 and that pipeline across that the downstream space LNG has got a lot of opportunities in the LNG spot and then the midstream spot as well and so we feel really reasonably well about the project side in the project bookings I'd say that the big challenge. The one we faced in the back half of.
Last year, as our MRO bookings and that that that book to ship business and so that's the one we're watching carefully it's primarily North America.
And I just with the distributor Destocking.
Yes, I expect that to pivot to growth, but that that turned to growth is now continuing to move out I was thinking probably earlier in 2020, a month or two ago and now it would be probably more in the second half of a 2020.
That's helpful. Scott and maybe the follow up would be around margin than the impact of off of what you just talked about stuff I look at 2020 looks like you have relatively modest margin improvement in 2020 at the midpoint of the range, maybe just talk about the puts and takes CRM add 2020 margin and you haven't stopped.
The mission of the tailwind median price versus cost did pretty yellow check on your progress toward the 15 at 17% margin goal. So how do we think about that longer term goal going a little harder in this environment. We've got the mix headwinds maybe modestly lower growth, we can talk about that.
Sure Let me talk about the.
The 2020 guidance first and as you alluded to it that the challenge here is that the headwind next right. It's the aftermarket versus the OE and in my prepared comments I talked about the OE growth being four times higher than that of the aftermarket and just quite frankly, we just we didn't anticipate it when we put our long term.
From targets out and we really didnt anticipate the magnitude to the impact when we put our 2019 guidance out and so that headwind of the margin you're differential between OE and aftermarket is really what's holding the margins back we feel confident and our ability with transformation to continue to move our.
Our disease up but overcoming the headwind to mixes is becoming a challenge and so thats why 2020, probably a little softer and we're not showing the improvements that we made the 19 are from 18 to 19, but same time, we're we're still committing to margin growth and then let's switch to the long term target.
The yellow check Mark on operating margins is just a recognition that if you did a linear kind of mapped to the 15%. We're a little were below what that expectation is that like I said previously we did not anticipate that the mix changing so dramatically when we laid out the operating margins.
But at the same time, yet, we're not giving up on Ness and so we still believe we can get to 15% OAI margins. We just unfortunately is not going to happen in 2020 at the pace that we thought what we do need to do it just continue to make progress on the transformation and I'd just say we've got I said this in the remarks, we have we have we thought so.
So many opportunities the manufacturing productivity is moving really well supply chains, moving really well designed to value really hasn't made its way into the financials, yet and we see an impact of that later this year and into 2021. So there's still a lot of levers for us to move margins up we just have to execute on the transformation and our playbook.
Thanks, Scott next quarter.
Thanks, Andy.
Our next question comes from Deane Dray from RBC capital markets. Please go ahead.
Thank you good morning, everyone.
And then murdered.
Hey, just give us shut out here to Jay for wrapping up the second stent as interim CFO. So thanks for all you help there Jay.
Have been into them.
I appreciate the recognition decade, he's doing a great yet.
Yes, Sir Hey.
Maybe just a follow up on Andy's question, there and the explanation on the mix because you did you clarified this in and our take on this is kind of a high quality problem to have so much OE bookings, but just want to make sure that your degree of confidence in winning the aftermarket is there any.
Any.
Talk about your win rate in the aftermarket how often the customer chooses flow served to replace Flowserve.
In the market than just what spend your experience there.
Sure. It is it is critically important that we continued to grow the aftermarket I'll just I'll start with that and as you said it is a high class problem right. If we're growing both the aftermarket and the OE. Then then I'm OK growing nearly three or four times as much well not okay. As if we're losing share in market in aftermarket or not growing yet.
So this is a major initiative for us within the transformation. The biggest kind of program that we have around this is called commercial intensity and essentially the commercial intensity program as is truly defining.
The market segmentation for aftermarket, where our installed bases and making sure we're moving our customers up the value curve of our aftermarket services and so we know we have to have continued to make progress here, we know there's a bigger prize.
I think I wouldn't say, we lost share in in 2019, but it wasn't a great year for growing the aftermarket business for us. So we're doubling down on the program and we do expect to continue to make progress here in 2020, and if we can do that that's been a lot of the financials really start to.
To come up in a in a much better at a higher at a faster rate.
Alright, Thats really helpful. I am glad you're giving us a frank assessment here on that because it doesn't feel like it's just distributor destocking.
Because our experience has been that you get a fall off and MRO in especially on oil and gas in.
Bob peak oil prices, because refiners, just run flat out and they delays.
The the service and where you would see more aftermarket so is that bend the expectation here.
Yes, I mean, there's no doubt that operators are getting savvy are about what to spend in wind to spend it and so there are driving cost reductions there driving further productivity and as you said when they're making good money. They don't back off and you know in stop operations until we did see that in in 2019, but theres.
Such a prize here for a stayed right our installed base is significantly large it's the largest on the pump side and so we just need to make sure. We're defining those opportunities that our team is really focused on on gaining that aftermarket. So I think regardless of the environment through the commercial intensity program and some of the other initiatives that we have we've got to be.
Focused on growing yes, and getting our title Medicare and the one quick one one clarifying point I'd make Dan I know you know this but for other people on the phone the MRO Thats really impacted FCB is showing up as in the OE bookings as opposed to an aftermarket bookings.
That's a good clarification.
And then just as a follow up when I look at the.
The 2020 assumptions the Capex increased kind of jumps off the page and how much of this is a catch up because you said you did less than 2019 venue planned where is that going and just the reflection of this will weigh on your cash conversion.
And just some considerations there as well.
Sure. So just a couple of grounding comments. So we finished the year at 66 million in Capex and in 2019 that was down from the guidance that we gave at the beginning of the year, we put the guidance out for 2020 at $90 million to $100 million.
I would just say nothing changes here right. So we've been incredibly disciplined on our capex spending since I've been here. The focus is on enterprise wide IP systems, it's on manufacturing productivity and then a little bit on just that the safety in the upkeep of the facilities themselves will continued to be very Jude.
Dishes and scrutinize the capital that goes out to our operating entities.
I would expect that this range is it's a good range and what it is more moving more money into the enterprise wide IP systems and I'd, just say last year quite frankly, we clamped down at the end of the year, just because we hadn't progress that the programs as much as we needed to before we were able to really.
The spending but really nothing has changed in our thinking I think 90 to 100 is the is a really good kind of run rate for us as we project forward into the next couple of years.
And just to comment on how that weighs on your conversion.
Yes, I think we've factored that into the free cash flow conversion, we still think a 100% achievable even in that range.
That's exactly what I wanted to hear thank you.
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi, good morning.
Hi, Joe Thank you Doug motive.
I guess, maybe more of a clarification question to start with but just looking at your shippable backlog you have for 2020 that you called out in the K looks like you have pretty good visibility.
What you expect to ship.
Seem to imply that the book and burn is down kind of low single digits for the year, you've obviously made some comments around the timing of your distributor partners and how the channel is going to look but one is that math right and you know kind of 40 is seeing that would give you that down low single digits for book and burn yes.
There has got our revenue conversion table here I'll, let him take and then I'll add any concert sure John No no year over year. Your math is absolutely right.
With with our backlog up year over year by 14% and with us expecting to converts 88% to 9% of that during the 12 months of 2020 that would suggest that revenue from backlog year over year will be up about 12% and so far.
For our guidance at the high end of our guidance for assuming that that kind of book and ship book and burn work will be relatively flat and then for being the low end of our revenue guidance of 3%.
Book and burn work could could decline up to 4%.
And clearly if we if we see a return.
In the MRO distributor type business.
Could provide upside to us.
Great and then you called out kind of the the cadence through the year on the each two versus the each one.
Just thinking about this first quarter and the Corona virus impact than anything else. I mean is there any other finer point you'd like to put on the quarter just from a modeling perspective, so that we're all dialed in correct on how to think about the phasing of the year.
Yep.
We'll see how the actual year plays out, but but if our thinking about it I would probably take the average.
2019, and 2018 spacing and kind of split the difference on that throughout the year.
Okay, and then if I could just sneak one more in a different way has said that as Q1 Q1. This year will look a lot like tier one last year, yes.
Got you okay.
And then obviously one of your competitors in the space has taken the opportunity to accelerate some restructuring actions.
You guys have called out.
But what you're doing this year in terms of realignment in transformation, but.
Do you feel any sense of urgency to kind of accelerate the plan at all or kind of steady as she goes.
Relative to how you were thinking about the cadence of realignment and Flowserve two data.
Yes, we're since I've been here Weve focused on on cost control and the transformation has both growth and cost initiatives and so we've been looking at debts from the very beginning at this point im not going to say were dramatically accelerated accelerating anything, but what you can see NRK and in the press release.
As we did do a voluntary reduction at the end of.
2019, there what I'd say it was that a us specific program. It was an elegant way that to get some folks that were close to the retirement age through to voluntary select and move out and that was a win win for them and for the company. So we've done that and then last year, we took a lot of actions at the facility.
Is that were impacted by the MRO slowdown primarily in the valves side, but also a little bit in our overall aftermarket organization. So I would say a 19, we were pretty aggressive is probably not the right word, but we were definitely following that any slowdown in taking cost actions.
Ill also add that the realignment spending in 2020 that the vast majority of that would be head count reductions rather than major facility moves. So at this time, we're not going to accelerate dramatically, but we're not slowing down on our and improving our overall cost structure and our cost position and so we'll continue to take action.
And did I feel pretty good about the level of costs in the organization and if we need to do something more dramatic or quicker. We have got that fully identified now within the transformation and as you said it really is just an acceleration of the plan rather than going back to the drawing board and figuring out where we need to take cost out.
Great. Thank you appreciate it.
Yup.
Our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.
Hi, good morning, guys.
Hi, Josh Josh.
Yes, Scott just.
First question on kind of closer 2.0 initiatives.
Maybe trying to back into a little bit of it for for 2019. It looks like if you had to gas externally what.
The amount of discrete savings were from from that versus volume leverage it looks like something in the neighborhood of maybe 3 million Bucks.
Is that could be right or wrong, but like should we think about kind of a similar level of.
Yes cost reductions, whether its restructuring or.
Other productivity is being the above and beyond operating leverage type numbers for for 20 or is that number.
Grower shrink so just we don't we don't disclose kind of how much we're getting from transformation versus other things, but I think your comment on the levels of 19 versus the level of 20 is probably accurate right and we've got a very similar planned for 2020, we had for 2019 and again.
We are keeping that the full transformation in place for 2020 and I would expect you are the same level of savings and results. This year as as we achieved last year.
Got it that's helpful and then on on some of these kind of larger projects that are starting to come out of funnels and get booked.
LNG is the LNG is probably as good a starting point is any I guess, how do you feel about your win rates.
Thing that we should keep in mind in terms of where your strengths are in product categories that are more or less concentrated in the stuff that is exiting funnels right now the type of projects being book being a flow sort of heavy project or kind of a flow sort of light project.
Sure on that on the project front, where we do really well as when operators need to reliable products for a long period of time in a severe application. So if you think kind of the high spec refining the LNG application. The the large midstream pipeline, where where efficiency of pumps is really critical or anything.
On the isolation of the control side, that's a critical service and so a lot of these big projects have categories of of really important pumps and valves and in those we do very well.
Well, we're excited about 2020, I'd say that refining in the downstream side Theres still more work to common based on regulation and IMO 2020 until we've got good visibility to international Park at projects there on the chemical and petrochemical side. We believe 2020 grows over 2009.
Teen and so we're excited about that we see opportunities, there and North America, and international and the Middle East and Asia Pacific on the LNG front half I'd, probably a little bit lighter than 2019, but for us where we do well with our valves there we don't necessarily do too well.
With the pump, but there are key customers and key opportunities, where we feel pretty good about winning our share of business and in 2020. So overall again, our project pipeline looks reasonably healthy it didnt change in the last three months and our sales team and the discussions with customers remain optimistic.
Got our ability to to win and and drive growth here.
Perfect. Thanks, Scott.
Our next question comes from Joe GR Dano from Cowen. Please go ahead.
Hey, guys.
Hi, Joe.
So I know you don't want to get into us hard numbers on current of IRS, but Scott maybe can you talk us through like how you thought this how you thought about this internally like we have to hair cut here on.
Tissue on our suppliers getting to us late and we have to discount here for.
Actual demand changes in projects, taking longer and how long you have that bleeding through the model. Just so we can kind of get a sense of even if we're not getting hard numbers like how the big buckets shaped up for you. Yes, I can give you a two numbers that will help for sure. So so first of all our Chinese operations on a revenue basis account for kind of 3% to 4% of our total.
Our revenue so it's it's not huge but it's still a meaningful level of of revenue.
More importantly, as the supply chain. So the supply chain is just under 10% of our global supply chain and so as we think about disruption and returning to kind of normal operations.
I'm confident that we get through this it's just more where I'm not as confident as the timing of the recovery.
Our operations are fully back to work as of last week, we've got about 75% of our people back to work, we expect to get that number up by the end of this week.
Good supply chain side, it's been a little bit the information scarce not all of our suppliers are back to work due to the quarantines in the shutdown, which I think that's where we've got a little bit more uncertainty in terms of the timing of the recovery.
At this point, knowing what I know today I fully expect for us to catch up by by the end of Q2, and then were normal operations by your into second half and I'd love to be a little bit more optimistic on that but that the hang up as just on the supply chain and no. We just don't have a great deal for all of our suppliers and we.
And they come back now we're also aggressively looking at how do we moved some of that product into our other geographies and unimpacted areas and so again I feel confident with our global operations. We can shift suppliers, we can chip production if needed.
But it is going to have a short term impact care, whether it's three to six months, we're saying it's somewhere in that range.
But it's not it's not major I gave you the numbers in terms of magnitude and certainly by the second half of the year, we're back to normal.
So fair to say wait what you're not doing is having a one Q impact internally and then assume that things are rocking and rolling back to normal on.
On April 1st.
That's not yet our view right now is this goes it goes into Q2, and it's primarily to supply transat.
Okay.
That's helpful is the current is the guidance right now kind of assume that you maintain this streak of 1 billion plus bookings per quarter or is there risk that one Q slips under that number.
No. We're still we are still drive into a $1 billion the quarter I think thats.
$1 billion plus per quarter, I think thats, a safe estimate right now.
Great. Thanks, guys and just take just one more on the cardiovascular our guidance has everything that we know about krona virus into the guidance now as well. So so that does account for the anything that we would have anticipated with the impact in China.
Thanks.
Thank you.
Our next question comes from Andrew Obin from Bank of America. Please go ahead.
Hey, guys. Thanks for fitting man.
Good morning.
Just a question on FCC margins.
Through the year or so.
Just as the comps get easier in the second half of 20 to 20 is it reasonable to assume that FCB margins will start going back up again as you fully sort of incorporated the mix change.
I sure hope so.
Thats good Thats what were drive into obviously I mean, we're at a we're at a low point on on FTD margins and so we were doing a lot of analysis to make sure that we're not doing anything that's impacting the margins from a cost standpoint, our our labor productivity.
But I guess as this thing moves forward and you look at the year over year comps I mean, we should be getting better.
The big issued as we've talked about the big driver here is getting the mix shift normalized a little bit more away from the OE and getting that MRO business up and as Jay pointed out earlier that MRO business is showing up in OE CDEL see it in the aftermarket OE split.
Gotcha. So theres just the question is what dollar growth is on OE versus our MRO.
The second question is on cash.
No.
Longer term what are the big levers you still have left.
And the company what are the big buckets to continue to improve.
Cash conversion because I would say that has been one of the most among long was the margins both big changes here under your leadership, but what else is left and what do you think cash conversion can go.
Sure I mean, the big driver still working capital and I'm pleased with the progress that we've made on working capital, but we're not close to where where we need to be and so we finished the year at kind of the endpoint was the 27% and as a reminder, we shifted our incentive plans to focus on the average of each quarter.
Until what we did the shares we did a really nice job, making sure that we are driving working capital down every quarter of the year. So Q1, two and three were off substantially better than last year and historically what was happening as we would do really well in December but every other month in the year, we weren't making progress are working cap.
It'll so this year, we did that and as a result, our cash flows improved pretty dramatically, but we're still at kind of 27% in so we need to take significant steps forward, there and I'm I'm confident that we're making progress our inventory velocity improved by about four days, our dsos improved does get the number.
Eight days on DBSO.
We'll continue to make progress as our systems in our visibility to both inventory and receivables gets better and so thats probably the number one driver that's going to continue to move cash we'll remain disciplined on on Capex and so I'm not worried about that and then we can continue to expand margins and we've got nice cash flow growth year over.
A year and as we think about the buckets, where this working capital stock isn't a specific geography that a specific industry or was it a little bit of everything it's a little bit of everything and is it too much inventory in the system, it's too much receivables in the system and we have opportunities across the globe, yes. It really.
I wish we pray to this and we looked at every single site now on working capital I wish there are two or three areas that we to just attack, but unfortunately it is as Jay said it is across the board now the good news as we again, we've made really nice progress and almost every location, but it's just been kind of slow incremental progress rather than.
And some some big steps, but I firmly believe we continue to make progress here, you'll see another nice movement in in 2020 on working capital and that's going to help us with the with the cash flow.
Thats good quarter guys.
Thanks, Thank you.
Our next question comes from Brett Linzey from vertical research. Please go ahead.
Hey, good morning, guys, Hey, Brad how are you.
Good.
Just wanted to follow up on the on China and the current of ours. One more time here are you assuming in the guide that Theres near term pressure.
Q1 into Q2 here in the fully recoup is in the second half or Youre contemplating some of that profit actually slips and the nextshares is simply a loss sale.
No no Brett as as our we've said in our prepared comments and as we did in the press release.
We expect a headwind to be in the first half the year, which will make the phase in the first quarter or little bit lighter than normal and then we expect to be up and running back to normal in the second half the year and be able to make that up.
Okay, Great and then just back to free cash flow. So with the pension contribution that you expect and Capex stepping back up and sorry, if I missed this should we expect the conversion level.
Slightly better than the 85% you did this year given all you're doing on the working capital side.
I'm not going to necessarily set out new guidance metrics that weve been published already but very much our focus is continuous improvements.
All the way through 2022 to where we're headed our long term targets.
Okay, Great I'll pass along thanks.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
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