Q2 2019 Earnings Call
Welcome to the flow served 2019 second quarter earnings Conference call. My name is Paulette and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded I will now turn the call over to J. Hirsch Vice President of Investor Relations and Treasurer, you may begin.
Thank you Paul and good morning, everyone.
We appreciate you participating in our conference call today to discuss Flowserves 2019 second quarter financial results.
Joining me. This morning are Scott ROE well served as President and Chief Executive Officer, and Lee Eckert, Senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call for your questions and as a reminder, this event is being webcast and an audio replay will be available.
Please also note that our earnings materials do and this call will include non-GAAP measures that contain forward looking statements. These statements are based upon forecasts expectations and other information available to management as of August Onest 2019, and they involve risks and uncertainties many of which are beyond the company's control.
We encourage you to fully review, our safe Harbor disclosures as well as the reconciliation of our non-GAAP measure to our reported results both of which are included in our press release and earnings presentation and are available on our website at Flowserve Dot com and the Investor Relations section.
I'd now like to turn the call over to Scott ROE plus serves president and Chief Executive Officer for his prepared comments.
Thanks, Jay and good morning, everyone also delivered solid second quarter financial results building on the momentum of the first quarter. We continue to make progress on our full serve 2.0 transformation journey and we're seeing good results from each of the different work streams in the program.
Our associates engagement remain high and they have fully embraced our strategic programs to drive growth lower costs and deliver operational improvements throughout the company.
Also 2.0 is becoming the way that we operate our company each and every day.
Let me begin with some highlights of the quarter before turning to our segments and markets in detail.
We delivered second quarter revenue growth of 1.7% or 6.2%, excluding currency and divestiture impacts.
And drove adjusted gross and operating margin improvement of 16, and 200 basis points respectively.
Adjusted EPS of 54 cents increased 32% both sequentially and year over year reported EPS of 44 cents included transformation and realignment costs of eight cents and below the line foreign exchange impact of two sets.
With our solid first half results, including the bookings and backlog growth combined with our expectations to continue to drive further operational and productivity improvements we increased our full year adjusted EPS guidance range to 2.5 to two to one.
Turning now to our segments.
EFT PD is first half performance continued to validate our decision to compound our pump platform and leverage its scale and better serve our customers.
FCD bookings increased 5.7% in the second quarter or 10.8%, excluding the impact of currency and divestitures.
And are up 14% for the first half of 2019.
Operating improvement in leverage drove a 230 and 210 basis point improvement in adjusted gross and operating margins respectively.
With the multi year realignment program now largely complete we are optimistic about the opportunities ahead for this segment.
Our legacy IP facilities continued to show improvement this past quarter, and we're gaining traction on our transformation initiatives and lean implementation at the site level. These efforts are expected to drive further improvement in planning manufacturing productivity supply chain and inventory management.
FCD delivered a solid quarter with 8.7% bookings growth, including 3.2% of negative currency impact.
Margins were negatively impacted in the quarter due to shipping a higher mix of lower margin project work and a slowdown in short cycle MRO activity.
As a result, adjusted growth and operating margin decreased year over year by 190, and 110 basis points respectively.
However, we fully expect the FTD team will deliver another solid full year performance as we focus on growing our valve platform for the future.
I would also like to thank and recognize John Andr, who has led the FCD segment for the past four years. John retired earlier this month and we wish him well in the next chapter of his life.
Turning now to our overall booking and end markets.
Second quarter bookings increased 6.5% to $1.1 billion.
Including sequential growth of 3.6%, reaching the highest level in over three years.
Excluding the impact of currency and divestitures.
Second quarter bookings increased 11.1%.
The combination of our growth oriented transformation initiatives and improved energy infrastructure investment through a project wins across all our core markets.
While we had a few larger awards exceeding $20 million during the quarter. The vast majority of the bookings were smaller in size.
Looking forward, we expect our markets to remain healthy near term, we expect another solid quarter of bookings in Q3 as global projects continue to move toward award.
However, we do recognize and remain vigilant of the ongoing uncertainty due to geopolitical volatility global trade disruptions in fluctuations in commodity pricing.
Original equipment orders grew nearly 12% over prior year and over 7% sequentially accounting for 54% of booking and reaching the highest level since 2015 second quarter.
With larger projects beginning to ramp up we expect the pricing environment to remain highly competitive for this type of work for both pumps and valves.
However, with improved market visibility, we have been and will remain disciplined in our project pursuits.
We are committed to building a quality backlog, while targeting prospects based more on customer relationship.
Our ability to offer a differentiated solution and where there's a high probability of aftermarket services.
We remain optimistic in the progression of the cycle, where we are seeing a significant number of new project in LNG midstream oil and gas and global chemical markets.
These projects will provide opportunities to strengthen our installed base and ultimately drive aftermarket growth.
As part of the transformation growth initiatives, we are increasing our collaboration across our segments leveraging the power of a flow control pure play to better support our customers and increased closer as capture of expected large project investment.
We launched the concept at the end of last year and we are pleased with the results that we're seeing in 2019 in fact in the second quarter. We received a large LNG award that was comprised of valves pumps and seals and the associated services that come with it.
We are actively pursuing other projects, where we can bring the full technology portfolio eflow serve to better meet our customers' challenges.
Turning to our aftermarket franchise, we continue to roll the rollout of the commercial intensity initiative in the quarter driving increased aftermarket capture and producing our fifth consecutive quarter with bookings over $500 million.
Our efforts resulted in a constant currency increase of 4.5% versus prior year.
We expect that the ongoing implementation of the closer 2.0 growth initiatives, coupled with the increased customer spending we see we will continue to drive aftermarket growth as many of our customers have increased their focus on the efficiency of their facilities and the upgrades required to meet regulatory challenges.
Now from a served an end market perspective in starting with our larger largest market oil and gas.
Second quarter bookings increased 22% year over year, driven primarily by Fps, 30% growth with FTD is contributing a 6% increase.
Both LNG and midstream pipeline awards represented over 5% each of flow serves bookings this quarter.
Two of our largest awards in the quarter related to a north American LNG project and a crude oil pipeline award in Texas.
Both LNG and midstream pipelines are part of the transformation strikes don't initiative, where we're seeing tremendous success, when we focus the resources and technology available to Flowserve.
Additionally, we continue to benefit from global IMO 2020 investment in refining de bottlenecking and efficiency upgrades.
Regionally North America, and the Middle East delivered a number of orders in the $5 million to $10 million range across the downstream and upstream markets.
North American upstream has recovered modestly since the first quarter slowdown, but it is not back to the levels that we experienced in 2018.
Our chemicals markets remained strong in the second quarter, delivering nearly 3% growth, including 3.7% of currency headwind.
Growth was driven primarily by smaller projects and run rate investment and FTD, 16% growth, which included an $11 million Project Award in Europe .
We continue to believe that the strong pipeline investment expected in North America Asia, and the Middle East will present near term market opportunities.
Including ethylene crackers and derivative facilities.
Challenges in our power markets continued where second quarter bookings declined 4% year over year. We were pleased that FDD received a $20 million award for our concentrated solar power project in the Middle East, which is a growing niche power market for us where we have a differentiating offering for pumps valves and seals.
Overall, we expect industry wide headwinds to continue in traditional power markets for the near term.
We do continue to see opportunities related to fuel switching new build nuclear in China and competitive fossil fuel development in Asia.
We also continue to support existing nuclear facilities with maintenance upgrades and life extensions, which drove a $4 million aftermarket award for Us in Asia Pacific This quarter.
Second quarter bookings and general industry has declined 13, 13% year over year, including nearly 3% of currency headwind.
FTD, 5% increase was more than offset by ft. At PV is 19% decrease primarily due to lower distribution activity that was negative negatively impacted by oil price volatility till city and higher levels of inventory at our partner locations.
General industry bookings also included increased pump and paper activity, while mining food and beverage in agriculture declined.
Although combined these markets currently represent less than 5% of our overall bookings.
Lastly, representing our smallest market water bookings increased 12% in the second quarter, including small project Awards in North America in Europe .
Turning to total bookings by geography, we delivered 49% growth in the Middle East and African markets are seeing a significant increase in project activity.
We're also grew 11% in Asia Pacific and 2% in North America. This growth was partially offset by an 11% decline in Europe , and a 4% decrease in Latin America.
I'll now turn the call over to lead to cover our financial results in greater detail and then our turn for closing remarks before we open the call up to questions and answers Lee.
Thanks, Scott and good morning, everyone.
As previously mentioned, we are pleased with our strong performance in the second quarter. We delivered adjusted earnings per share of 54 cents in line with expectations and keeping us on pace to deliver another year of substantial adjusted EPS growth.
On a reported basis second quarter EPS was 44 cents, which included eight cents of realignment and transformation charges and two cents of negative below the line currency impacts.
For the first six months of 2019.
Our adjusted EPS of 95 cents.
This 40% above prior year.
In addition, our reported EPS is approximately 93% of our adjusted EPS, a meaningful improvement from 32% last year as we continue to improve closer its quality of earnings to reduce realignment and transformation expense.
Second quarter revenues were $990 million, an increase of 1.7% versus prior year and up 11.2% sequentially in line with normal seasonality.
On a constant currency basis, and excluding divestiture headwinds.
Organic revenues grew over 6% year over year.
Second quarter aftermarket sales increased 2% or 5.4% on a constant currency basis to $498 million or 50% of our sales mix similar to prior year.
Turning to our margins.
Second quarter, adjusted gross margin increased 60 basis points to 32.5%.
Driven by EFI. These 230 basis point improvement to 33.6%, which include a continued operational improvement cost control and leverage from our pumps combination.
Partially offsetting SPD strong performance with a 190 basis point decline in FCD is adjusted gross margin to 31.4%.
Primarily due to higher sales mix of lower margin project work as well as lower percentage of MRO aftermarket sales.
Reported gross margin increased 270 basis points to 32.1%.
On improved operational execution decreased realignment items and the impact of 2000 eighteens loss on an asset sale.
Second quarter, adjusted SDMA declined $7.6 million to approximately $214 million as a percentage of sales adjusted SNA decreased 110 basis points to 21.6% as a result of focused cost control and modest revenue growth leverage.
On a reported basis second quarter estimate decreased $17 million, including approximately $10 million reduction in adjusted items versus prior year.
With our solid adjusted gross margin improvement as well as ongoing tight cost control, we drilled a 200 basis point improvement in adjusted operating margin to 11.3%.
FP these 12.1% adjusted operating margin increased.
210 basis points year over year, which was partially offset by STS 110 basis point decrease.
Although FCD still delivered a respectable adjusted operating margin of 14.6%.
Reported operating margin increased 510 basis points, which benefited from continued operational improvements as well as approximately $30 million net reduction in adjusted items.
Our adjusted tax rate was 26% at the low end and our full year adjusted tax rate guidance of 26% to 28%.
Turning to cash.
First half operating cash flows increased $100 million versus prior year, including earnings growth and approximately $80 million improvement in working capital.
Which drove our cash balance to approximately $600 million or roughly $80 million higher than last year's second quarter balance.
Additionally.
Primary working capital as a percent of sales declined 160 basis points to 28.5%.
While we've made some early progress on working capital, we still need to continue to drive improvements in our inventory in order to cash processes until they're sustainable systemic and embedded into our operating cadence.
Capital expenditures for the second quarter or approximately $15 million. We also returned $25 million to shareholders through dividends and repaid $50 million of long term debt.
In July of this year Flowserve entered into a new $800 million five year senior credit facility, replacing the one that has supported us since 2012.
Our new facility provide flowserve with the liquidity and flexibility to support the commit to support the company over the coming years.
We're very pleased with the outcome of the new agreement and I want to thank our banking partners for their support and ongoing strong relationship.
Turning to our outlook for the remainder of the year.
With our strong first half results and expectations for the second half of the year, we increased our full year adjusted EPS target range between $2 and five and 2020 cents per share.
The adjusted EPS target range excludes the expected 2019 realignment transformation expense of approximately $50 million as well as below the line foreign currency effects and the impact of other discrete items, which may occur during the year.
As a result, we also increased our reported EPS range between $1.75 and $1.90 per share.
Essentially we expect this year's reported EPS to equal or exceed the adjusted EPS, we delivered in 2018.
We also tightened our expected revenue growth of 45% from the prior range of 46% due to continuing strong us dollar where we now expect full year currency headwinds of 2% versus prior expectation of 1.5%.
We also faced an additional revenue headwind of roughly a half a percent from last year's business divestitures.
Whoever.
Our total organic revenue growth, excluding the impact of FX and last year's Divestures range at the high end of our original range now narrowed to 6.5% to 75% for the full year 2019.
As I indicated last quarter, our revenue growth for the year, we'll see a higher percentage of sales from larger project original equipment work as a growth and in our short cycle MRO business has decelerated in recent months.
Net interest expense for the full year is expected to between 55 and $57 million.
With an adjusted tax rate of 26% to 28%.
From a 2019 full year cash uses perspective, we expect to return approximately $100 million through dividends to our shareholders capital expenditures are expected in the $90 million to $100 million range. We also continue to reduce our long term debt within our credit facility. During the remainder of the year and we expect to cover expected to contribute approximately $20 million to our global pension plans mainly to cover ongoing service costs as US plan remains largely fully funded now let me now turn it back to Scott for his closing remarks, great. Thanks Uli.
As I wrap up I'd like to spend a few minutes on our outlook and the progress of our transformational efforts, we are well into the closer 2.0 transformation program that commenced in early 2018, I am very pleased with the momentum that we are building on the multi year journey to drive the cultural and operational improvements necessary to better serve our customers our employees and our shareholders.
Over the last two months I've spent significant time meeting with our associates and leaders from around the globe I couldn't be more pleased with the progress that we're making and their willingness to take on the challenges of this transformation.
They are informed engaged and empowered to drive the changes at all levels of Flowserve.
The engagement level of our workforce has improved dramatically in the past two years and the overall health of Flowserve is significantly better than where it was in the past we are spending a lot of time investing in our leaders and creating a performance based culture today. Our transformational program is largely internally led and is being executed by our frontline leaders from around the globe.
We are encouraged by the results that we are starting to deliver in the areas of our business, including strong bookings and backlog growth consistent margin improvement increased manufacturing productivity reduced working capital and lower past due backlog.
Even more encouraging there is still significant opportunity ahead for flowserve.
Much work remains on the path to our 2022 targets that we presented last year, but we are instilling the culture developing the processes and changing the operational model to create sustainable long term value.
As we approach the middle innings of our transformation I am confident that we will build on the momentum that we have created and continue to drive further improvements outflow serve.
Operator, we have now conclude our prepared comments and we'd like to open the call for questions.
[noise].
Paula.
[noise].
Thank you.
We will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key.
If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from Andrew Kaplowitz from Citi. Please go ahead.
Hey, good morning, guys.
Hey, Eric Gordon.
Scott can you can talk about the cycle as you see it you haven't recorded a 1.1 billion in booking since early 2015, but yet many of your peers have been talking about project delays and obviously, we've seen a short cycle slow down you can do your feeling your general industrial business. So can you give us some perspective on the booking cycle as flow through the <unk>.
Well sort of see that you think there's a good enough pipeline out there.
Could sustain or grow from this level of bookings for the next few quarters and how much of a higher level of bookings is actually come your could come from self help you know with the initiatives that you have such a strikes on commercial intensity.
Yep, So youre our project outlook still remains really positive and so I've talked about that now for probably two quarters, we still feel very good about the health of the project pipeline and the project portfolio.
The LNG markets are robust and I'd say, that's got at least another year or two of activity, our midstream oil and gas markets are very active and we've had some great awards this quarter and we expect further awards here in the next 12 months. There and then petrochemical is is strong as well and so I think from a project standpoint, you know, we're still seeing a lot of activity and we expect project work in the second half of the year to be pretty robust for us the concern and it's very similar to what I talked about at the end of the first quarter would be more of that North American MRO business and so this is primarily the distribution network that services some of the more of the upstream markets, but also some of the midstream and that's where we've seen a slowdown and you can see that in our general industries category, where bookings were down 12% year over year, but I'd say, that's where we're putting the most focus on transformation rights. Our commercial intensity is meant to attack and and really address that MRO type business and.
I would say that we're trying to offset the negative.
The negative market sentiment there with the internal actions, but overall I feel reasonably positive with the markets.
And again I think the projects will continue here for at least another year.
And our outlook for Q3 and Q4 remain solid.
And just following up on that Scott can you give us more color into your margin progression in FCD mentioned, it's sort of like a slowdown impacting margins segment, but you know you just said that general industrial business was weak last quarter also so what changed this quarter and should we still see a CD on a generally upward margin trajectory for the second half from 19.
Yeah, you know certainly we never want to go backwards and margins and for the first time FTD kind of took a big step backwards.
It's really being impacted by the mix within our OE business and that's the slower in MRO work that comes through the North American distribution and so its not shown in aftermarket it's more in that OE side, and they always pivoted to the project and the differential in margins between projects and MRO is pretty significant and so we've looked at it in great detail, we know which products it is which facilities and unfortunately with North American distribution. There's just a lot of products on the shelf from a lot of activity last year and that that that inventory has got to bleed off over the next quarter or two before we start to see active bookings there.
I don't expect that situation to get worse, but I also don't expect significant improvement to probably 2020 as the inventory levels start to get them.
Got it thanks.
Our next question comes from Deane Dray from RBC capital markets. Please go ahead.
Thanks, Good morning, everyone.
Good morning, Andy.
Hey, Scott would love to follow up on Andys questions.
And this whole sort of industrial short cycle pressure is been happening to everyone. So there is no surprise that manifests in your business.
And you get really good color in terms of what you're seeing in the expectations for the channel.
What might be helpful is how did it progress during the quarter and then any commentary about July and if I could start there. Thanks.
Sure I'd say, if progress is not as well as we would have expected in Q2.
We knew we had a concern with the bookings in Q1, and then I'd say in Q2. It just it did not improve at the rate that we were expecting.
I don't want to give any color on July or the third quarter, yet, but what I'd say is our guidance has this this level of activity in it for the back half of the year and so that's already baked in that we don't have any uplift in the in that guidance. So I would say is the north American markets start to improve which I think we saw a little bit of improvement in June if they continue to move forward in the back half of the year. Then then we start to move up from where we are.
I'd say the other thing I'd just add as you know this is.
It's something that is happening to everybody as you said, it's that short cycle industrial end, it's the North American upstream business, that's pulled back now since December .
It won't stay down forever right. There's a lot of activity that has to happen. There are things that are going to have to move forward with and so it comes back and it's just more a question of timing and for US probably the biggest single thing is just inventory on the distributor shelf and so we get good visibility with our partners and their inventory levels and as as we start to see that come down our bookings will increase here and we'll start to generate revenue pretty quickly because it's very short cycle work.
That's real helpful and given that bookings were.
One of the positives here in your results I'd love to hear more color on this large LNG project because it does sound like the perfect. When here you had pumps valves seals and services. So what was different about the selling proposition.
For this win versus what the flow serve 1.0 was doing.
Is it maybe a little bit on pricing and what does it say for a project like this about the aftermarket opportunity.
Yes, so unfortunately, I can't speak to the details because our customers on a haven't allowed us to do that yet hopefully we'll get a press release out on this shortly but what I would say is absolutely a flagship award for Flowserve and it's it's the first time, we're really we put the the efforts of strike zone across all of our products in the whole portfolio to bear and what we saw was when we do that early in the process. So pre up by D. and then the concept phase and we can start to partner with our customers about how we can bring better efficiencies in the pumps, the right isolation and flow of control with our valve, making sure we have the proper barrier and safety with our seals business and then assuring them that our aftermarket will be present and help them with reliability and uptime. When we do all that we do that early then we can have incredible opportunities to get a bigger share of the project and then a bigger share of partnering with them throughout startup coming.
Running and through the operations and so we're super excited it's definitely a flagship award it exemplifies what we've been talking about on power the pure play and it also just validates the efforts and the transformation office and so like we've talked about on the midstream pipeline. LNG is also a strike zone market for us and so this is one we've been focusing on weve been making sure that we have the right portfolio, we've been enhancing our technology to better serve this market and this is just a great win for us in a in a pretty big and growing market.
Yes, so congrats to the team on that one and just a clarification and then last one from me is can you explain it a bit more detail. The aftermarket discussion that you have you hinted at it that there's so much ciaran says that you will be participating in the aftermarket is that a formal process is there how does it differ from project to project in terms of how realistic the aftermarket opportunity US yes. So ideally we would love to sign like on a Greenfield facility Ideally, we would love to sign the long term lifecycle agreement, while we're in the process of negotiating the front end valves. We haven't done. This on this award, but what I'd say is I've got about a 90% confidence rate that we will get the long term service agreement for pumps valves and seals here and just it's because we've got we'll have the installed base and all the original equipment. We are picking up the installation commissioning work and so we will get aftermarket on that but I highly anticipate that we will have.
A long.
Intuity here on the aftermarket sides on both pumps and services in this facility.
Our next question comes from Nathan Jones from Stifel. Please go ahead.
Okay, Hey, Adam good morning.
So you still pretty confident as late cycle project work.
Could you just brought a little bit more color.
Along.
The lines of the <unk> of the long.
Cycle projects, we have heard from some companies that projects are starting to slip to the right.
It was a little bit of a pause given the macro uncertainty I mean are you seeing this anywhere in any of your markets.
So I think we're always concerned in there is there is a lot of negativity in the backdrop, but I'd say for us in Q3 and Q4. The project work should should absolutely continue and so these are projects that are already through half I'd or are nearing f. I'd and I would say the middle East is incredibly active North America is active and Asia Pacific to active and so we feel really good about our Q3 bookings we feel pretty good about Q4, and I would say is as we get further out than the confidence starts to go down.
Certainly the backdrop with oil and some of the other commodity pricing provides concern here and we will potentially delay some of the larger awards, but I think overall for US we've got we've got reasonable visibility into projects in Q3 and into Q4.
All right. That's helpful. And then just turning to free cash flow and working capital.
I'll just make some improvements there.
Just a little more color on how you view working capital performance and maybe where are you in terms of.
Implementing structural processes and technology into working capital management.
Yeah, I'll start and then I'll, let Lee do some details on.
What I would say is I'm very pleased with the progress we made I'm also a little frustrated that it's taking this long to get to where we are.
I think from a systemic standpoint that we're putting the process in place certainly on inventory and inventory planning that will sustain this momentum and continue to move inventory down even further in fact feel really good about that on the receivable side leaves, leaving that are leading that and we're seeing good progress there.
What I would say both that inventory receivables is just the fragmented nature of Flowserve and just the disparate locations that we have has made this incredibly challenging but we're starting to make good progress in our leaders very much understand the the importance of driving working capital and I'm very pleased to start to see the movement here on the year over year numbers.
How do you think we're going to receive yeah. Just not only is that I think the key thing Thats got to be kind of ended with was awareness I recently spent.
Time in India at three of our facilities and they are talking about receivable improvement or talking about inventory improvement and that didn't exist. A few years ago. So awareness is I would say very high.
Across the company, which was it was a start.
One of the major strategies, we have.
I would say began the year, we had roughly about 30% of our collections work in our shared service operation our goal to get around 60% of the year by doing that we get a lot more transparency and insight what's going on our receivable performance and what's wrong with customers. We're also trying to build our tools to get better insight across looking at our invoices and understanding what is past due and which ones are.
Not being paid in the process of building much better power B. I tools around understanding what is late providing that information to our sales organization, which we didn't have in the past are saying now here the customers that are delinquent or have issues with us that are preventing them from paying so were slowly building out the process the where the awareness is clearly there we're trying to catch up with the tools and the ownership and as we shift our collections with the shared services. We expect to also improve that performance.
Okay. That's really helpful. Thank you.
Thank you.
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, John .
I guess, just a question around pricing.
You've been talking about positive momentum on the aftermarket side. The last couple of quarters, one of your European competitors actually mentioned some capacity tightening.
So just wanted to get your view on the pricing landscape and kind of what your view is on if we're actually starting to see industry capacity tighten a little bit.
Yes, so it's really not a lot of different than my commentary in Q1, and so we hit our pricing very early in the year right. So we actually started in December and we did a second price increase kind of late Q1, and so for that work that is a priceless works so that would be our MRO valves, our spare parts some of our services and service contracts and then some of the smaller pumps.
Very confident that we're ahead of that price cost curve and that we're doing really well. Unfortunately, a lot of that through that distribution channel, which we talked about that is now off and lower than we expected. So if that comes back then we start to see more margin and mix on the higher prices side.
What I'd say is I am very happy to hear our peers starting to talk about price. That's the first time I've seen that since I've been talking about now for three quarters.
And what I'd say is we're starting to see a little progress on pricing for our bigger projects, but they still remain highly competitive and so I do believe though as capacity begins to fill across the peer group in both pumps and valves I think we're going to see more people getting more disciplined in that project pricing, but honestly in Q2, I think it was still pretty competitive on the larger projects and so for whatever reason the bigger the project.
The more excited people get and the more discounts seem to be provided and so thats an area of concern what I would say is we're incredibly focused on our pricing. It's part of our commercialization work stream and it's an area of intense focus and so we'll remain very selective on our project.
And we're going to make sure that they provide the margins that that full serving our shareholders deserve and will continue to focus on this as we move through the back half of the year through the transformation work stream.
Great. Thank you and then maybe a follow on for Lee around free cash flow.
The last couple of quarters, you've been talking about this kind of 75% plus conversion.
You know anything to call out in terms of.
Cadence in the back half.
Sure. So just remind everybody so free cash flow in the first half of the year was $24 million, which was up $113 million versus prior year.
Improving working capital quality earnings free cash flow conversion is a high priority for the business as I mentioned on the last quarter last call.
We had really strong first quarter cash flow, but a benefit from some accrual timing that reversed out in the second quarter, but we were really pleased with our 130 million improvement in the first half of the year and we've got really good line of sight to that 75% conversion.
Great. Thank you.
And our next question comes from Joe Giordano from Cowen. Please go ahead.
Hi, guys good morning.
Hi, Joe.
Hey, I just wanted to clarify something you said on FCD margins, you said, you're not expecting kind of an improvement until 2020 and some of the distribution kind of freeze up a little bit but are you talking like from Twoq, you or are you talking year on year, because obviously, that's a business that steps up materially in the second half typically and if we look at last last year back half something like high 18, low nineteens. So how do you how should we think about second half and that business year on year. So from the second quarter gross margins. We don't expect gross margins to go down from where we are right now.
And so that in the progression there really depends on how North America responds and if we're able to get more products through our distribution in that general industries.
The general industries category, and so right now we feel reasonably good that it steps up in Q3 and Q4, but I think it is dependent on the activity that we see in North America.
Okay, Thats fair enough and then the corporate line was.
One that was kind of brought up by a couple of people as being pretty light in the quarter or is that just kind of timing does that does that step up to compensate in the back half or how should we think about that yeah. So this is like so as my prepared remarks, you know we are focused on driving SDMA down as a percentage of sales year over year that corporate line that you see is really reflects I would say unallocated corporate costs as I mentioned on previous calls it's about a $100 million of cost not allocated to represent legal costs and board costs and CEO costs and that number does bounce around from quarter to quarter, but overall, we expect it to be roughly around $100 million for the year.
Okay, and then one maybe.
More higher level on the on the business for LNG I know like we've talked in the past like.
The.
The leverage you have to that has historically been lower than something like a refinery because.
Certain product categories on Karl pumps and stuff like that that you don't have.
As there are ways for you given how you use having some success here and it's a market that seems to be doing pretty well is there ways for you to kind of raise your content on some of these projects.
Sure I think through the power of the pure play that's absolutely how we raise the content and so we can get valves pulled in and get seals locked and then we're done we're doing really good things there. The other thing is just expanding the portfolio through our R&D and new product development and so the LNG focuses within our new product development and we continue to add more cryogenic products. Both on the pump side in the valves side to make sure that we've got a bigger entitlement on each of the LNG trains.
Okay. Thanks, guys.
Our next question comes from Walter Liptak from Seaport Global. Please go ahead.
Hi, Thanks, good morning.
Well one thing I wanted to ask.
LNG question too.
And it's good that you've got some LNG projects that are moving forward and I Wonder if you could maybe give us some insight onto like your your win rates because there have been.
Small number of projects that have moved forward.
How do you how do you think about the market share on those wins and then.
The second half the questions. There's a bunch of projects that look like they could go if I'd and provide visibility into it.
2020, and have you done the value added selling or the pre f. I'd selling on those LNG projects too.
Yes, sure I don't I don't want to get into specific win rates on a on a category, but what I'd say is we have been doing reasonably well with LNG and but it's been a little bit under the radar because we're getting kind of around $10 million of awards and we would get a pump award or just a valve award and that kind of $8 million to $10 million range and so we've been reasonably successful thus far.
This is the this quarter was the first time, we've been able to really bring all of the assets and technology that Flowserve has together into a single award and so that was roughly $30 million for us.
And again, a flagship award to talk about on power the pure play.
We are engaged in in other of those type of discussions, but they are way up front in that concept phase and at this point I, just I would be reticent to commit to when do we see another one of these type awards.
But just because we don't know the timing for sure but what are the things that we're trying to do is is to get more involved with operators and our customers and licensed stores and really make sure that our technology is part of that package and.
Part of the solution for providing a better service to our customers in the long run.
Okay, all right sounds good and then.
I guess, just switching gears to the.
The pipelines the midstream.
And is that where you were talking about in the third quarter fourth quarter, you've got visibility, but 2020 or not so sure because I think some of the pipeline spending comes to an end in the back half of this year do you have any visibility into 2020.
Yes, let me just I'll talk a little bit about Q2, and then I can go into kind of the back half of the year.
We received a really nice award here in North America on a crude oil pipeline.
We're very excited about it it's a big number for us and.
It's a flagship award to really get us back into the Interstate or the large pipeline work.
So so thus far we launched this initiative about a year ago, when we booked $120 million over the last 12 months in midstream pipeline.
We believe the outlook for the remainder of the year is reasonably healthy yet we don't have another incredibly large award and the kind of $20 million to $25 million range, but we've got a lot of activity in the $5 million to $10 million range and our outlook for Q3, and Q4 remains robust in midstream.
I do believe that starts to slow down in 2020.
But certainly for the next two quarters, we feel good about midstream pipeline.
Okay, all right great and okay.
I'll take the rest offline. Thank you.
Thank you.
Our next question comes from Brett Linzey from vertical research. Please go ahead.
Hi, good morning, all.
Hey, just just wanted to come back to the sales guide you mentioned some of the uncertainty from a macro standpoint, the weaker upstream and some of the destock, but you're you're holding the organic guide here I guess in terms of that big ramp in the back half is it just confidence around backlog and deliverables and I guess, if so what percent of the backlog do you need to ship in the second half to hit the plan.
Yes, I'll, let Lee walk through our revenue guidance here in the back half, yes. So just to answer your question directly we're now expecting runs between 60 and 65% of our backlog to convert.
Our backlog is up 14% since year end and it's actually up 18% year over year. So based on what we've got line of sight on we expect roughly between 60 and 65% and then basically the book and burn is the balance and right now were pretty much flat year over year. So we feel good about our revenue guidance. If we can we should be able to convert the backlog and get the same amount of book and burn than we've had historically.
Okay, Great and then just thinking about the Q4 to Q, our Q3 to Q4 progression.
From a growth standpoint, but also margins anything to be aware of from a modeling standpoint, and the way OE versus aftermarket mix hits, both those quarters.
Sure.
Glad you brought that up so just to remind everybody we remain highly focusing on expanding our expanding our margins driving year over year margin expansion is important to us in order to drive shareholder value.
We've seen great progress over the last five quarters four out of six of our Flowserve.
2.0 initiatives are around margin expansion our growth initiatives that we've talked that Scott talked about has resulted in OE bookings being up 17% in the first half and our backlog an OE being up 20%.
Year over year.
So as I discussed in the first quarter call and discuss in my prepared remarks, we expect we expect the sales mix the rest of the half year to shift towards the OE in the project work with the strong bookings that we have and so the result is that we are going to see an increase in OE sales, which could help drive earnings obviously build our installed base, but there will be some downward pressure on margins versus what we've seen say in the first quarter, where we had that we had a heavy aftermarket mix.
And is that is that a Q3 comment or just kind of the back half as a whole I would say, it's the back half okay.
And then just one quick follow up could you just put a finer point on what the size and scope of the large projects were in the quarter. I think you mentioned a few words on the $20 million range could you just quantify that and then just any visibility on timing when those let out.
LNG Award was it was right at $30 million, our big Midstream pipeline more it was above $20 million and then we had a nice concentrated solar power award in the Middle East that was around $20 million as well okay.
That's kind of when we talk about large projects. So that's kind of the size that we like.
And we can bring our technology and get the margins that we deserve and that kind of range.
Okay.
I appreciate all the color. Thanks.
Our next question comes from Steven Fisher from UBS. Please go ahead.
Hi, Thanks, good morning.
Hi, just wanted to good morning, just wanted to follow up on your recent comment there a couple of questions you know about the midstream.
Where are you said.
There's lots of activity I think in the $10 million to $15 million range. After this big 2025 range, but then you said that would slow down in 2020.
What tells you that that will slow down on the smaller side in 2020 is it that your customers are already telling you. This or is it just sort of assumption that hey, it's going really well this year, it's bound to slowdown.
Yeah, no that's a great point, because I, probably didnt answer that as well as I said. This is the reason I think it slows down a bit is just we don't have visibility beyond this year on that on the pipeline work and so typically this is a little bit shorter cycle type work and it gets built pretty fast and.
We can ship within 12 months and so for US we've got visibility in Q3 and Q4 on midstream work. It's all again kind of that 10 to 15 million dollar work and we believe we'll get our share that we just don't have great visibility to 2020.
When you look when you step back and look at the macros out there still needs to be pipeline build out certainly in North America, and then other parts of the world and so I would expect international opportunities to start to come through 2020, and probably some other big ones in 2020 that we just don't have visibility to right. Now. So I don't think I don't necessarily believe midstream comes down dramatically in 2020, we just don't have a lot of visibility right now and what we're chasing and looking at and talking to our customers.
Got it Thats helpful and then.
Is there any connection on the MRO piece in North America tied to oil and gas directly or indirectly and so is there any assumption that that would have to pick up in and say the fourth quarter.
To kind of get your FCD margins back up you know that our distribution channel is largely oil and gas now, there's others that theres refining petrochemical and others, but a big portion of that is the oil and gas markets and so we need oil and gas to pick up in the back half of the year on the more of the upstream side and as that happens we start to move up.
In our bookings and certainly in our revenue because it's such a short cycle business there.
Got it thanks a lot.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
[noise].
[noise].
[noise].
[noise].