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Flowserve Corp  (NYSE:FLS)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to the Flowserve's 2018 Fourth Quarter Earnings 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. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Jay Roueche, Vice President of Investor Relations and Treasurer. You may begin.

Jay Roueche -- Investor Relations

Thanks Paulette, and good morning everyone. We appreciate you participating in our call today to discuss Flowserve's fourth quarter and full year 2018 financial results. Joining me this morning are Scott Rowe, Flowserve's 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 the 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 and contain forward-looking statements. These statements are based upon forecasts, expectations and other information available to management as of February 21st, 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 and the reconciliation of our non-GAAP metrics to our reported results, both of which are included in our press release and earnings presentation and are available on our website at flowserve.com in the Investor Relations section.

I'd now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer for his prepared comments.

R. Scott Rowe -- President and Chief Executive Officer

Thanks, Jay, and good morning everyone. Thank you for joining today's earnings call. Flowserve finished 2018 with a strong fourth quarter. We continued to build on the operating improvements from prior quarters, delivered enhanced earnings and grew the business with our third consecutive bookings quarter over $1 billion.

I am pleased with the progress we are making in our Flowserve 2.0 transformation journey and the increased engagement of our associates. We have better visibility, a defined improvement plan called Flowserve 2.0 operational momentum and we are beginning to execute at a higher level company wide. Let me begin today by providing some comments on our fourth quarter and full year results our operations and our end markets.

For the fourth quarter we delivered adjusted EPS of $0.58, which represents growth of over 16%, both on a year-over-year and sequential basis. For the full year, Flowserve delivered adjusted EPS of $1.75, which is at the high end of our revised guidance, representing approximately 29% growth compared to full year 2017. We successfully avoided the operational issues that were encountered in 2017, and we improved the performance in each of our segments throughout the year.

One area of intense focus in 2018 was margin expansion. For the quarter, we increased adjusted gross and operating income margin by 300 and 170 basis points respectively. For the full year, we delivered a 90 basis point improvement in adjusted gross margins and a 100 basis point in adjusted operating margin. Our progress with margin expansion is driven primarily by our actions within the transformation program and specifically from the commercial and operations work streams.

Turning now to our markets and bookings. The overall conditions in our end markets remained generally stable in the fourth quarter despite the volatility in commodity prices. While the quarter did not include any individual large projects, we did book a number of $5 million to $15 million awards across each of our end markets and again saw growth in our aftermarket bookings.

Bookings of $1.05 billion were the highest level we've delivered since 2015. Year-over-year represents an increase of 6% including headwinds from currency and divestitures of approximately 4%. For full year 2018, bookings were over $4 billion and were up 5.7% compared to 2017. The general health of our markets coupled with the growth initiatives, we've implemented thus far as part of our transformation are key drivers of these results.

During the quarter we delivered strong results in our aftermarket franchise with the highest level of bookings since 2014, representing growth of nearly 15% year-over-year or over 18% on a constant currency basis. This quarterly performance helped drive full year aftermarket bookings to a year-over-year increase exceeding 10%. The commercial intensity program embedded within Flowserve 2.0 has our aftermarket organization focused on growth and further capturing the opportunity inherent in our large global installed base. Additionally, our customers appear more focused on facility maintenance, facility efficiency and meeting regulatory requirements than we have seen in the past few years, leading to additional opportunities for growth.

Turning now to our bookings by end-markets and starting with our largest market, oil and gas. Bookings in the fourth quarter increased 14% year-over-year driven by EPD where we continue to capture downstream investment including highly engineered products critical to refining modifications for clean fuel production. Additionally, one of our strike zone initiatives that we've discussed previously, is our focus on North American pipeline projects.

In 2018, this commercial focus drove several wins across segments including roughly $20 million in the fourth quarter and we have a good line of sight into a number of additional opportunities in the first half of 2019. For the full year, oil and gas bookings were up 8%. Based on our customer discussions and the status of their pre-FEED and FEED activities, we expect increased investment in 2019 for both upstream and downstream oil and gas despite recent oil price volatility.

In Chemicals, our quarterly bookings increased approximately 3% year-over-year. An 18% growth in FCD and a 3% increase in IPD which more than offset the decline in EPD. On a full-year basis we delivered growth of 6% with all segments contributing. We remain confident in the North American ethylene project pipeline and we also expect increasing investment in Asia and the Middle East as oil majors and national oil companies increasingly pursue integration of the petrochemical value chain.

The power market remains our most challenged industry where fourth quarter bookings declined 17% year-over-year although EPD was essentially flat. For the full year power declined about 11% with only IPD delivering growth. We continue to have muted expectations in the power markets near term due to industry wide headwinds. Fossil opportunities in Asia remained challenged and competitive. Nuclear build in Asia continues while Western nuclear new builds are limited and most of the opportunities lie in extending the life of existing facilities, upgrades and maintenance. However, concentrated solar power continues to be a niche opportunity for Flowserve in the growing renewables market where we have a differentiated technical offering.

General industry bookings increased 13% year-over-year this quarter primarily driven by FCDs growth of over 40% and strong distribution activity. EPD also contributed nearly 11% growth. This end market includes the mining and pulp and paper industries which contributed quarterly bookings growth of 50% and 30% respectively. Although both markets represent less than 5% of our overall mix. For 2018 general industry grew over 12% year-over-year. Lastly, the water industry, which represents the smallest category we breakout on a stand-alone basis declined 19% year-over-year in the fourth quarter, representing 3% of our total bookings. For all of 2018 water increased approximately 3% compared to 2017 due to strong performance in EPD with several larger flood control awards.

Looking at bookings by geography, we delivered solid quarterly and full-year growth in most regions. Compared to the 2017 fourth quarter, North America was up 11% while the Middle East and Africa increased 16% and Asia-Pacific was up 21%. Europe decreased 6% while Latin America decreased 15% of a very low base. For the full year North America, Europe and the Middle East and Africa increased mid to upper single digits, while Asia Pacific and Latin America each contributed 3% growth.

Let's now turn to our performance by segment. I'll start with IPD where we continued to make good progress. The segment delivered reported and adjusted operating margins of 9.6% and 10.2% while making significant strides in the operational turnaround in the reduction of past due backlog. We are encouraged with this step-up in performance, but recognize that much work remains to drive the consistent operational excellence, on-time delivery, and customer experience that is needed and expected.

We believe that continuing to improve our performance will get us closer to achieving the desired mid teens operating margins from the industrial product portfolio. While the quarter's results were buoyed somewhat by fourth quarter seasonality, we are encouraged with IPD's progress and continue to believe we are on the right path. EPD also had a solid fourth quarter. Bookings in this segment increased 12% year-over-year, including 20% aftermarket growth. Additionally, we made meaningful progress on past due backlog and improved adjusted gross and operating margins by 200 basis points and 250 basis points respectively year over year.

We are fully focused on leveraging the full capability of our engineered pump portfolio to better serve our customers and ambitiously grow our business. FCD continues to perform at a high level, this segment has consistently delivered strong operating performance including this quarter's adjusted gross margin expansion of 100 basis points to 36.3% even as revenues declined 5% on a challenging compare. Throughout 2018, we improved our ability to deliver predictable financial results and limited much of the quarterly operating income variability that we've seen in the past. We have an extensive val portfolio and we are well positioned to take advantage of the expected increase in project activities during 2019.

I'll now turn it over to Lee to discuss our financial results in greater detail and then I'll return for closing remarks before we open the call to Q&A. Lee?

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Thanks, Scott and good morning everyone. Looking through our financials as Scott highlighted, we delivered adjusted earnings per share of $0.58 in the fourth quarter and $1.75 for the full year, in line with our revised guidance we provided as part of our third quarter results. On a reported basis, fourth quarter EPS was $0.48, which included realignment and transformation expense of $0.13, a penny of below the line currency impact and $0.04 of benefit related to US tax reform.

Fourth quarter sales of $987 million decreased 4.6% versus prior year, which included approximately 4% of headwinds from currency and divested assets. Sequentially fourth quarter revenues increased 3.6%. As we discussed previously, our traditional seasonality marked by a strong fourth quarter top line was muted somewhat in 2018 due to the new accounting standard implemented at the beginning of the year. For the full year, revenues were $3.8 billion, an increase of 4.7% compared to 2017, with all segments contributing to year-over-year top line growth.

Turning to our margins. Fourth quarter adjusted gross margin increased 300 basis points versus the prior year to 33.7%, which is the highest quarterly level since 2015. IPD's 830 basis point year-over-year improvement represented over half of the increase. Additionally, as our transformation initiatives are taking hold, we continue to focus on project execution, disciplined cost control and improving the quality of our backlog.

On a reported basis, the 300 basis point gross margin increase was driven by essentially same factors as realignment expenses were roughly $11 million for both 2018 and 2017's fourth quarter. For the full year adjusted gross margin improved 90 basis points year-over-year to 32.3%. Fourth quarter adjusted SG&A increased a modest $3 million due to elevated corporate cost for discrete litigation accruals and expenses, sales commissions and medical claims.

On a reported basis fourth quarter SG&A was further elevated due to transformation expense, which we expect to see decline in future periods. For the full year however adjusted SG&A as a percentage of sales declined 20 basis points to 22.8%. With strong gross margin improvement and an ongoing focus on cost control, Flowserve's fourth quarter adjusted operating margin increased 170 basis points year-over-year to 11.9%. IPD's significant 950 basis point improvement coupled with EPD's 250 basis point increase more than offset FCD's decline and higher corporate costs. On a reported basis, operating margin increased 80 basis points where improved operating performance more than offset an 8 million increase in adjusted items primarily related to transformation costs.

For the full year 2018, adjusted operating margins improved 100 basis points to 9.8%. Our reported effective tax rate of 18.1% benefit from the true-up associated with last year's US tax reform accrual. On an adjusted basis, the effective tax rate for the quarter was 26.1%. For the full year, our adjusted tax rate of 27.1% was in line with our guidance of 27% to 28%.

Turning to cash, our fourth quarter operating cash flows were again seasonally strong at $164 million, primarily due to working capital improvement, and building upon the progress of the preceding two quarters. Our free cash flow in the quarter was $130 million, or roughly $1 per share, representing a conversion rate well above 100% of our reported and adjusted net income.

Capital expenditures for the quarter and year were $34 million and $84 million respectively. We continue to pursue IT investments in the quarter that support and enable our Flowserve 2.0 agenda, we continue to invest in various growth and restructuring initiatives. For the year we returned approximately $100 million to our shareholders through dividends, and repaid $60 million of term debt. With our strong fourth quarter cash flow, we ended the year with solid cash balance of $620 million, an increase of $90 million from the end of 2018 third quarter. As I mentioned, we delivered modest primary working capital improvements during the fourth quarter, with working capital as a percentage of sales of 27%, representing both year-over-year, and sequential improvement of 90 and 190 basis points respectively.

As I shared with you at our Analyst Day in December free cash flow conversion and growth is a significant opportunity for Flowserve. We certainly acknowledge much work remains to achieve the consistent level of cash flow conversion that we believe Flowserve can and should ultimately deliver. A number of our Flowserve 2.0 transformation initiatives are focused on obtaining the systems and process improvement tools directed at all aspects of both the order to cash, and sales and operational planning processes. We expect additional progress in 2019 and beyond, as we continue to target our longer-term aspiration of a 100% plus free cash flow conversion.

Turning to our 2019 outlook. We are targeting full-year adjusted EPS of $1.95 to $2.15 a share on expected revenue increase of 4% to 6% including approximately 2% of expected headwinds due to currency and divested businesses. This level of performance would very much keep us on track with our longer-term 2022 targets we laid out in December. The adjusted EPS target range excludes expected realignment and transformation expense of approximately $65 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, tax reform laws et cetera.

Our outlook assumes that volume, price and productivity will offset the potential incremental headwinds in 2019 due to inflation, FX, merit and the unplanned increase in research and development and IT investment. Both the reported and adjusted EPS target range assume current FX rates and commodity prices. Our expectations are based on 2018 year-end backlog, anticipated booking levels and the continuation of our current market conditions. Net interest expense is expected in the range of $55 million to $57 million with a tax rate of 26% to 28%.

Additionally, we expect traditional back-half weighted seasonality similar to the 2018 quarterly phasing of cash flow and earnings. From a 2019 cash usage 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 expect full-year debt repayment of approximately $60 million and to contribute approximately $20 million to our global pension plan mainly to cover ongoing service cost as US plans remain largely fully funded.

Now let me turn it back to Scott for his closing remarks.

R. Scott Rowe -- President and Chief Executive Officer

Thanks, Lee. As we wrap up, I would like to spend a few minutes on our 2019 outlook and the progress of our transformation efforts. Many of you joined us at our Analyst Day in December when we laid out our transformational initiatives and the longer-term expectations in greater detail. For those who may have missed it, the presentation and audio from the event are still available in the Investor Relations section of our website.

To summarize the key takeaway, we are executing our multi-year transformation with a sense of urgency. We're changing the culture, improving employee engagement, simplifying our processes and creating an operating model that will weather different market conditions. Our long-term focus at Flowserve is to grow the business, expand our margins, improve return on invested capital and enhance the organizational health of the Company.

As our fourth quarter results demonstrate, our actions are beginning to bear fruit. While we are improving, we still have a long way to go, but we are committed to implementing lasting change to create sustainable long term value. As we previously announced beginning January one of this year, we combined our IPD and EPD segments into one Flowserve pump division. This new operating and reporting segment further simplifies and standardizes our operating model. While we do expect to drive modest cost savings as a result, the real catalyst for the combination is to drive productivity and value for our customers. The initial response from our customers has been very positive. We fully expect to see this new organization will greatly enhance our customers' experience with Flowserve.

Turning to our expectations for 2019. We remain confident in the stability and continued growth of our end markets. Our growth-oriented transformation initiatives provide the opportunity to outperform the underlying markets, while our cost and operational initiatives can further drive margins. We believe that we have the opportunity to grow adjusted EPS nearly 20% again year-over-year when we use the midpoint of our guidance. The transformation activities that are under way give us confidence that we can produce that sizable improvement.

With the traction we gained in 2018 on our operational improvements, we are confident that we can deliver on our 2019 targets. While we have delivered some initial financial benefits from transformational program, we are still in the early days. With each quarter we expect to gain momentum, which will put us on the path to reach the longer-term targets we laid out in December. I'm very pleased with the progress that we have made including the ongoing engagement and commitment of our associates. We are taking the right actions to build the performance and accountability driven culture to create value for our customers and our shareholders alike.

Operator, we have now concluded our prepared comments and we'd like to open the call to any questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operators instructions) And our first question comes from Jeff Hammond from KeyBanc. Please go ahead.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys.

R. Scott Rowe -- President and Chief Executive Officer

Hi, Jeff.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hey, so just maybe you could talk about the disparity between aftermarket growth in OE and how you think, you know, those trends as you look at visibility shape up as you move through '19?

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Sure. Let me start with aftermarket, then I'll hit the OE. We're really pleased with the growth and what's happening in the aftermarket program. And as I talked in December at the Analyst Day, we've watched what we're calling commercial intensity and essentially what that is and we went through it again in December, but you know what that is, is really looking at, what do we have from an installed base perspective, where our QRCs are and really maximizing the opportunity at each of those locations. And we launched this in the summer of last year and we're really seeing very positive results. We've now done pilots in each of the major geographies, we're pretty much in place and live across all of North America, most of Europe and we've just started in Asia Pacific.

And so, this commercial intensity program is really helping us to grow the business. On top of that, we are seeing some macro trends that are helping us in the aftermarket side as well. And what that is, is just after several years of delayed spending on maintenance, and the focus on reliability we are seeing a renewed effort and renewed spending in maintaining equipment and making sure that they're using our parts and our service.

So, the aftermarket growth has been really positive and we definitely expect that to continue as we go forward. On the OE side, it really hasn't been bad, it's just lower than what we're getting with the aftermarket side. And what I would say is, as we transition into 2019, our OE visibility, particularly on the project side is significantly higher than what we had at the beginning of last year. So our project pipeline is reasonably full. What we're seeing from the big customers that report externally is that, their capital is at or above what they are stating for -- at or above for '19 over what it was in '18. And then when you look at the EPCs, their backlogs are higher than they were over last year as well. And so, our project pipeline remains really healthy, and we feel good about the MRO in the aftermarket side. So we're encouraged about our growth activities and prospects in 2019.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay, great. And then it sounds like you're making progress on past-due backlog, can you just let -- give us a sense of where you're at and kind of getting that fully caught up and kind of fully behind from here. Thanks.

R. Scott Rowe -- President and Chief Executive Officer

We are making progress on past-due backlog. And in the fourth quarter we made significant progress. And so, I'm not going to say we're completely out of the woods here because we're not, we would have liked to make a little bit more progress in the fourth quarter than we did. But what I'd say is, on the IPD and the EPD side, we took a big chunk of past-due backlog down.

We hired a new Vice President of Operations in July, we formed a new manufacturing organization in 2018 and all of that reorganization, the talent improvement and the focus is absolutely driving the right result and as you know and most people listening to the call, the past-due backlog was really a headwind in hurting us in lots of different ways. It's hurting our customer relations, it's hurting us on revenue. It was incurring more costs and hurting on the gross margins and then it hurt us on the working capital with built up inventory and delayed receivable collection. And so, getting this behind us is a huge focus. And what I'd say is, we're in a substantially better place than we were in 2018, and while we're not quite to the level that we expect or we want, we are actually really close to where we need to be. And so, as we go forward really, we'll shift our -- we're not going to let up on the focus of past due backlog and on-time delivery, but we're really going to start focusing on lead times for our products and making sure that, we can be extremely competitive, getting our products in front of customers at the time they need it.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay, that's good to hear. Thanks, Scott.

R. Scott Rowe -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from John Walsh from Credit Suisse. Please go ahead.

John Walsh -- Credit Suisse -- Analyst

Hi, good morning.

R. Scott Rowe -- President and Chief Executive Officer

Yeah, good morning, John.

John Walsh -- Credit Suisse -- Analyst

So, I guess could you talk a little bit about what you're seeing out there in terms of pricing and maybe provide some context around material costs. I know obviously you talk about productivity in there as well and there is general inflation, but, maybe just trying to isolate pricing by itself and kind of the price material cost equation.

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Yeah, sure. Let me just -- I'll say general comments and I'll get real specific on our pricing side. Generally speaking, and as you saw throughout 2018 we were able to grow margin because we're on the right side of the price cost curve. It's as I discussed before, we did several price increases at the beginning of '18, which offset the inflation in tariffs and other headwinds that we had in the global environment. And so, we feel really good that we've got the right focus and the attention on that.

Now as we switch to pricing for 2019, we announced our price increase actually in December of last year. And it is fully in place today across all of our products. And what -- the big question now is, just how sticky is that and how much can we get. But what I'd say, at Flowserve, we're in a privileged position of having great brand recognition and being on AVLs around the world. We've got to translate that into better pricing.

And so, we're going to be pretty aggressive on the pricing side as -- again as evidence that we've already announced our price increase and we're locked in. And then the other thing we've done is, in the Flowserve 2.0 transformation office, one of the work streams is focused and is all about pricing. And so, when I talk about general price increases, that's great, but it's really there to stay current with inflation and what's going on. On the strategic side of pricing, we're getting a lot more analytical and sophisticated about making sure that, our price distribution internally is where it needs to be and that we're capitalizing on all the opportunities that we have.

And so, that work is now starting to come through and we're seeing positive results of the analytical aspect of pricing within the transformation. But I'll just say for 2019, we feel really good. We're going to be on the right side of the price cost equation. What I would say is, it's still a volatile environment in terms of tariffs and trade and things like that. And so, it's obviously something we're staying very current on and we're staying abreast of. But right now given everything we know, we're in a good position with our newly announced pricing and we'll move forward. And then just the last thing I'd just say, just like when we think about our competitors, it's still not an environment that, I really like and we're seeing -- we're seeing other competitors, not necessarily follow suit. And so, when we see that, we're prepared to walk away from some of the business that doesn't make sense for us or doesn't give the margins that we want.

And I think that's a little bit of a change from where we were certainly in 2017 or maybe 2018. But I also believe that the marketplace in general is moving in the right direction on pricing. And I think we're moving into a good spot for 2019.

John Walsh -- Credit Suisse -- Analyst

Great, that's good color. Thank you. And then maybe just a follow-on here. As we think about the incremental margin that you're expecting in 2019, I guess at the segment level, you've been executing in like a low 40s in the last two years, is that still the right zip code to think about for 2019?

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Well, we don't give guidance on the segment level. And so, I think what you can look at is the general 2019 guidance on the revenue side and the EPS. And it implies that you are continuing to expand margin through 2019. And so, with the transformational activities around supply chain and cost takeout and the pricing that we discuss, we fully expect to increase gross and operational margins throughout the year.

John Walsh -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Our next question comes from Deane Dray from RBC. Please go ahead.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning everyone.

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Hi Deane.

R. Scott Rowe -- President and Chief Executive Officer

Hey Deane, good morning.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, maybe to follow up on that price cost discussion. Scott, when you talk about having put price increases in December, did you think the fourth quarter benefited at all from some pull-in from the first quarter, we've heard a number of companies seeing that people trying to avoid those price increases. Any sense that happened this...

R. Scott Rowe -- President and Chief Executive Officer

Yeah, Dean, it's a great question. And it's actually what we expected and it didn't happen. So, we were fully expecting to see a little bit of an uplift, particularly on the valve side, on the FCO side with some pull-in business and it just -- it didn't materialize. Now we gave more than the December window and so we're getting some benefit of that in January, but certainly have not seen an out-sized uplift because of the price increases going in place.

Deane Dray -- RBC Capital Markets -- Analyst

So how -- that's really interesting. So how precisely can you gauge whether an aftermarket order is coming in, I guess, it would be -- would it be because of it's coming in at the old price or is there just -- is there any way you can be more precise in knowing orders coming in like organically into the fourth quarter as opposed to trying to avoid a price increase.

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Yes, it's a really good question. One of the reasons we set up the pricing work stream in the transformation was because we didn't have the analytics and the visibility to really understand this as well as we want. And so what I'd say at Flowserve is, we're getting a lot better at understanding the nuances on this, where we can really see it though is with our distributors and the ones that -- particularly the ones that stock product, right. And so there, we've got some history with them and we can see what they've historically done when we announced price increases, and that's both on the valves new and the aftermarket and we can get a little bit of that with our parts business with your preferred partners. But what I'd say is that, the visibility isn't as good as what we'd want and part of that transformation effort is to really get more sophisticated in analytical with our whole pricing.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. That's a really helpful answer. And that just begs the question of how has the first quarter started out in January, if you could?

R. Scott Rowe -- President and Chief Executive Officer

Yeah. So right now, we wouldn't have gone out of the guidance that we did if we didn't have a good data point here in January. And so, I would say normally we would expect a slowdown in January on bookings a little bit, but right now, out of the gates, things look pretty good both on the aftermarket and the OE side and we feel reasonably confident in the first half of the year that we'll continue to grow the business. I'd say the only concern that I have for '19 is -- and I talked about this before the project business, we have good visibility on and we see projects being awarded in our bookings for projects going up throughout the entire 2019.

Where the concern could be is on the MRO or the base of the aftermarket business in the second half of '19. And so, that's what we're watching really carefully, but right now at least the preliminary signals at the beginning of the year are still positive that the base business or the MRO business is still continuing at a healthy rate.

Deane Dray -- RBC Capital Markets -- Analyst

Good to hear. And just last question for Lee. I hate to put you on the spot, but working capital a percent of sales in that 27% range did not improve year-over-year. Scott mentioned that you've got that drag from past due backlog, it's still inflating some of your receivables. But what is the target? And how quickly can you ramp down that percent of working capital for 2019?

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

So you definitely put me on the spot Deane. And a scenario that continues to be a frustrating area for all of us. As we've talked about at the Analyst Day and what we talked about on every earnings call, it is a significant focus. We're very focused on cash, working capital and cash flow during the year, one of the things that we are doing is changing our incentives to drive better working capital performance during the year, historically a lot of our incentives were more year end focused. So you'd have this big push at the very end, but during the year you would not have the intensity around it.

We've expanded our incentive plans to include more leaders around working capital. So we are I think pulling all the levers that is required to do it, but as we've talked about at the Analyst Day, there are a lot of challenges given our systems and our processes and a lot of the Flowserve 2.0 is about putting plans in place to address those and puts systematic fixes in place. So we're not going out with a percentage of how much working capital we're taking out. I will tell you it is -- we have internal aspiration and targets that we are going to make major steps in driving reduction.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

R. Scott Rowe -- President and Chief Executive Officer

Both in -- I'd say both in inventory and receivables.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from Scott Graham from BMO Capital Markets. Please go ahead.

Scott Graham -- BMO Capital Markets -- Analyst

Hi, good morning.

R. Scott Rowe -- President and Chief Executive Officer

Good morning, Scott.

Scott Graham -- BMO Capital Markets -- Analyst

I've got some -- a couple of questions around the sales guidance, which organically looks like up 6 to 8. And I guess, what I'm wondering is there is a reason that you went out with a number that large, and certainly understand the last couple of quarters' bookings. But also, if you take a peek at the fourth quarter sales, those probably could have been a little bit better, whether that's a shipment issue or what have you. So I'm just -- two questions around the revenue guidance is; number one, what kind of gets you to the high end versus the low end? And number two, there's an assumption in there of significant amount of book-and-ship business, and I'm just hoping you can give us some data points around that assumption.

R. Scott Rowe -- President and Chief Executive Officer

Sure. Scott. Yeah, it's a great question and I think where we get confidence is our backlog is up year-over-year, and so we had good bookings in Q3, we had good bookings in Q4. A lot of the bookings that came in Q4 were a little bit further in the quarter like booked in late November and December, rather than the beginning of the quarter. And so, we've got pretty good visibility for revenue growth in the first half of 2019. And so, I feel good about that and then kind of like the market comments that I just said is, we're tracking some good project work in 2019. And additionally, the health of the MRO business, which is very much a book and ship business throughout the year has started off 2019 in a healthy place. And the last kind of data point here is, while we have made significant improvement in past due backlog, there is more work to come and by clearing that and getting to the place that we need to, get our revenue into a place that gets you right there within the guidance. And so, we feel reasonably good about the revenue guidance.

The upside would mean we need to book some projects earlier in the year and then with the new accounting standard, the over time or percentage of completion accounting we're picking up that revenue earlier than what you would have historically done with the units of completion accounting. But I think if we can get some of the -- and when I say larger projects I'm thinking kind of $15 million to $30 million ones. if we get those secured then there is some real nice revenue uplift throughout the year there. And that would put us on the high side.

Scott Graham -- BMO Capital Markets -- Analyst

And you are working on those projects. Is that on a pre-FEED or FEED basis?

R. Scott Rowe -- President and Chief Executive Officer

As I said before, we feel really good about the project pipeline right now. And so, a lot of these are into FEED. They're at the EPCs and quite frankly a lot of them are out in the tendering and we're bidding on them right now. And so, we've got a healthy list of projects. And again, these aren't the mega -- we are not looking at a $100 million big project like we've announced before, but we're seeing a robust list of anything between kind of $15 million and $30 million with a few that are between the $30 million and $50 million range. And securing a few of those will put us more to the high side of that revenue guidance.

Scott Graham -- BMO Capital Markets -- Analyst

That's great. Thank you. And then if I could just ask a second question about our old friend, IPD, which really surprised me, I suspect others. I'm sure that it wasn't all pushing out the past due backlog for the delta in the margin. Could you give us a couple of things that really went right in the business beyond the past due backlog reduction?

R. Scott Rowe -- President and Chief Executive Officer

No, it's, Scott, it's a really good point. And we delivered the 10% adjusted OI, it's kind of -- we had communicated publicly kind of mid to high single digits. So this is above kind of what we expected. What I would say though is the IPD team with David Wilson leading the charge here, has just done a really good job throughout the year, putting the systemic and the structural things in place to move our margins back into somewhat acceptable territory.

And a lot of that is the past due backlog reduction, but a lot of it is, we took some hard cost reduction activities throughout the year, but particularly in Q2 and Q3. We also divested a business that quite frankly was not performing well and was in a high-cost region and the effort and the cost to turn it around was not worth the time or the effort and the distraction to do that. And so, I think the combination of your cost reduction clearing the past-due, the divestiture and the business and then just -- what I'd just say and it's going to sound probably not -- it's not the most sophisticated answer. But this is -- it really is blocking and tackling, and so we've got some really, really good products within the IPD portfolio. And it's -- how do you capitalize on those products and make sure we're getting them to our customers and getting the margins that we deserve. And how do we de-emphasize some work that wasn't making money and not doing the right things. And so, moving away from that and really starting to focus on the place that we can create value and make money for Flowserve and for our investors.

And I'd just say, David brings that great perspective and the balanced approach that allowed us to move margins forward throughout the year. Now what I would say is, I do want to caution right, we're probably not going to have a Q -- I'll say, we will not have a Q1 that we're going to generate 10% adjusted operating margin, but we're not going to be back to the levels that we had in 2018. And so, we have made a step change improvement for the year, we do expect to go forward, our target in this business remains a mid-teens type business that would generate the proper return on invested capital in the industrial space.

And in order to achieve that, there's still some operational work that has to be done. There's further cost reductions, we've got to move the consolidation the pump platform together and get some other cost take out, we've got to be more disciplined on our pricing in our order execution. And then we've got to continue to improve the operational controls at the manufacturing side and the operational locations within the business. But, great progress in the fourth quarter and while margins have come down a little bit in Q1, we fully expect to capitalize on this momentum and keep moving the IPD business forward.

Scott Graham -- BMO Capital Markets -- Analyst

Thank you, Scott.

Operator

Our next question comes from Andrew Obin from Bank of America. Please go ahead.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Hi guys, good morning.

R. Scott Rowe -- President and Chief Executive Officer

Hey, good morning.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

I just want to clarify if I've heard it correctly that you guys said that, you have more confidence in large project orders in 2020 versus MRO sustainability into second half, is that correct?

R. Scott Rowe -- President and Chief Executive Officer

Well in 2019, right. So, for 2019...

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

2019, I apologize.

R. Scott Rowe -- President and Chief Executive Officer

Yeah, for 2019, yeah, we feel, no, we feel really good about the pipeline and the projects. And again the large operators have communicated publicly their capital spending and you can see in the EPCs backlog that those projects are through FID and they're starting to move forward. And so, we're in the middle of transacting and quoting for a number of large projects and we feel pretty good about the health of these projects. Now that can change and things do change, but everything we're seeing today, I would say that the 19 project portfolio is better than where we were at in 2018 at this time. And then just to be super -- so just I want to finish on the MRO side. What I said on the MRO side is, we currently -- fourth quarter and our January data point look really good. And so, what we're seeing is continued MRO spend and like you know, the MRO spend can be cut off immediately. And so, if we have risk, what I'm concerned about is a potential slowdown in the MRO business in the back half of 2019. But right now, everything we see and where we were at the end of Q4 and what we've seen at the beginning of this year, all looks good, that the MRO spending is relatively healthy and combine that with our internal initiatives then we should be able to grow the MRO spend as well.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yeah, I guess the reason I asked because one of your competitors sort of highlighted the fact that they actually expect bookings to accelerate into 2020. And I guess they felt quite a bit better about MRO. But, I think they were highlighting sort of petchem and LNG into 2020. Can you just talk about how much visibility you have on a longer-term basis because these are very long-winded cycles and I'm just wondering if you guys could actually see acceleration in bookings on OE work into 2020 if that's a possibility?

R. Scott Rowe -- President and Chief Executive Officer

Yeah, I really -- we're very focused on '19 here at Flowserve, and I would just say our lens and window is not as great as it needed to or should be, but I will answer the question and again, right now what we're seeing and I would say on the oil and gas side, primarily refining and the midstream space plus the chemical space, there are a lot of project opportunities that go from '19, '20 and into the 2021. And what's happened is, there's been a significant under-investment over the last four years. And so, at some point that catches up. We showed this in our pressure curves in the December Analyst Day.

And so, if you believe the pressure curves and this kind of under-spending theory and that demand stays somewhat constant or grows a little bit, then you get increased capital into 2020. Now what I would say is, I'm not going to go a 100% and commit that 2020 is going to be a great number, but right now the project portfolios look pretty good and then things are lining up to continued health in bigger projects and infrastructure spending for the '19 and '20.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

And how are you thinking, just to follow-up because the same competitor highlighted, the fact that they sort of need to hire more engineers and field technicians. I would imagine you have plenty of sort of roof capacity to meet the growth, but do you have the people and where do you get them?

R. Scott Rowe -- President and Chief Executive Officer

Yes. So, right now with the -- we're communicating a reasonably moderate growth level of 5% to 7%. We have plenty of people, we've got plenty of capacity and that is not a concern for us right now. Yes, there are some very niche aspects in our business that have grown at an outsized -- outsized than others. And so, that's an area where we've got to do some selective hiring. But in general, this is not a concern for us at Flowserve.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

And I'll just sneak one more in, I apologize. Just in terms of the mix OE and aftermarket, are you guys being more selective on OE in Q4, is that part of what happened in Q4?

R. Scott Rowe -- President and Chief Executive Officer

Well, I would say we started, being more selective on the OE earnestly at the beginning of last year. And so, what I'd say is, we have been selective. I don't think it's necessarily a cause for a little bit lower OE. I'd say some of that was just timing of orders and some of it could be to just selectivity. So, we have raised our margin expectations and we've raised our price and when those things happen, we're not going to win some of the awards that, that potentially could have come our way.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Terrific. Really appreciate your time. Thank you.

R. Scott Rowe -- President and Chief Executive Officer

Great. Thank you.

Operator

Our next question comes from Brett Linzey from Vertical Research Partners. Please go ahead.

Brett Linzey -- Vertical Research Partners -- Analyst

Hi, good morning everyone.

R. Scott Rowe -- President and Chief Executive Officer

Good morning Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

Hey, just wanted to come back to the aftermarket, I mean, very solid bookings in the quarter, I mean, historically those aftermarket bookings tend to ship in the quarter, but you had -- sales only up modestly. So just trying to understand the disparity there, it's been wider than it has been in quite some time. Is it the nature of the work, are customers ordering further outs pre-order ahead of price, any color would be helpful.

R. Scott Rowe -- President and Chief Executive Officer

Yes, again, the MRO bookings and the aftermarket bookings in the fourth quarter were fantastic. Well, I'd say, a lot of that came in a little bit later in the quarter and so we didn't get to do the book and ship that we wanted. But the backlog is up and we feel very good at converting that, it's typically very short cycle work within like you said it's within a three month window. And so, I would expect us to convert on the backlog and see nice growth in the aftermarket side of our business.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, good. And then maybe just shifting back to free cash flow, specifically working capital inventory and some on the asset side, it sounds like, plans are under way, you guys are making progress there to address some of those issues. But you are guiding for fairly strong sales for the year, which typically require some working capital build. So I guess in that context, do you think that working capital assets can be a source of cash this year given that balance?

R. Scott Rowe -- President and Chief Executive Officer

I'll let Lee take this one.

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

So Brett, the way we're modeling right now, we're really driving to improve the velocity of those. At a minimum it would be nice to keep at least somewhat flat, but it could be slightly a burn depending on where the sales end up. So we are focusing on as I said the velocity and the turnover of both AR and inventory and obviously managing our payables correctly. So it would be nice to drive the growth and minimize the cash burn associated with that.

R. Scott Rowe -- President and Chief Executive Officer

Yeah, so really what we're trying to do is, if we can bring down the velocity on those two, then it will offset the need of working capital build with the growth of the business. So I would say it's probably not going to be a source of cash, but this is a huge opportunity for Flowserve. We've got a lot of attention and focus on it. What I would say is, in that some of the numbers don't necessarily show this, we've actually made tremendous progress in the back half of 2018. And so, we fully expect to continue on that progress. And then the other thing I want to highlight and Lee said this earlier, historically at Flowserve, we've been very focused on working capital at the end of the year and while that's wonderful for one data point, it really doesn't drive what we want to do, it doesn't get the cash freed up throughout the year. And it really doesn't help you on your long-term return on invested capital metric.

And so, we have really put the attention and focus of doing better on working capital throughout the year. And in fact, we're changing our incentive plans for 2019 to be an average rather than an end point. And so, I think we should see demonstrated improvement quarter-over-quarter on the working capital metrics throughout '19.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. And then maybe just one housekeeping. You mentioned in the release, normal seasonality of the business, but it does sound like the savings maybe further in toward the back half. Is there any framework, you can give us or guidepost, be it percent of the year, first half, second half to help us kind of calibrate things here for Q1, Q2.

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Sure. So what we said and I'll just reinforce is that, I would use 2018, as the guidepost for earnings and cash. Our expectation is that year-over-year -- year-over-year each quarter you will see an improvement, and I would use that as the baseline. The other thing I would just kind of maybe highlight from a modeling standpoint, and Scott hit about this -- hit on this a little bit earlier is, we acknowledge that the first quarter of 2018, we did not have a -- we had a horrendous cash working capital quarter. We know that going into the first quarter this year, there is some seasonal build, but we don't expect it to be to the full extent that happened last year.

We are, like Scott mentioned, we put quarterly targets in place, we have an eye on it, we talk about it. In January we're talking about and February that, we cannot have this huge outflow of cash in the first quarter, like we did last year.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. I appreciate the color.

Operator

Our next question comes from Nathan Jones from Stifel. Please go ahead.

Nathan Jones -- Stifel Nicolaus -- Analyst

Good morning, everyone.

R. Scott Rowe -- President and Chief Executive Officer

Hey, good morning Nathan.

Nathan Jones -- Stifel Nicolaus -- Analyst

Going back to -- a few questions here on the bookings, after market bookings at nearly $550 million in the quarter is pretty close back to previous peak levels on the aftermarket bookings side, you guys have talked about commercial excellence initiatives to try and drive better penetration into your current installed base. Can you maybe talk about if you're seeing any benefit from that or if, getting back to this level is purely market lift and potentially there's some further upside from these commercial excellence initiatives or if that's already started to be embedded in this bookings number?

R. Scott Rowe -- President and Chief Executive Officer

Yeah, so the initiatives within the transformations called commercial intensity and we are definitely seeing an uplift due to commercial intensity. So it's both the internal efforts with combined with some release of MRO and maintenance spending at these large installations. So I don't know, it's hard to say is it 50-50, is it 70-30, but it definitely is a combination of the internal efforts and the market. And what I would say is, we've got really good visibility and I showed this in his example in December, where we have a pilot in a target account, we are tracking to the uplift that I shared in December at those specific sites, which is mid-teens type growth improvement.

So we've validated that, this commercial intensity program is incredibly effective. And like I said, in December, there's really nothing novel or innovative about this, but it really is providing structure and process for our leaders out in the field to make sure that we're fully capitalizing on our installed base and then our service capability. So just by doing that and putting this operating system in place, we're seeing this healthy uplift.

Now we're not going to get that across every single location. But for the sites that we've designated as this is an opportunity, we are seeing the demonstrated kind of a mid-teens growth. And so, I would expect that to continue throughout 2019. And I said this a little bit earlier, that North America we've gone live, we've now gone live in Europe and we're probably at about a 60% deployment and we've just started the process in Asia Pacific and the Middle East. But we're getting good uptake, the team is incredibly focused. And I think really what it does is, it puts that aftermarket group now very focused and aligned to growth rather than just focusing on the margins and the delivery.

Nathan Jones -- Stifel Nicolaus -- Analyst

Okay. So that sounds like you think that there is upside on the aftermarket side to where the previous peak levels came in. On the OE project side, I mean, when we're in 2016, when you start getting these $5 million to $15 million or $15 million to $30 million projects, there's generally not a whole lot of margin associated with those and they absorb fixed costs. As we're coming out into a better demand environment, are you starting to see that the margin profile that you can bid these projects that improve, are you starting to see pricing on these things improve. Do we still need to soak up more industry capacity before you can really start to see those move?

R. Scott Rowe -- President and Chief Executive Officer

Yeah, it's a really -- it's a fair and a good question. And historically right on large projects you attract a lot of different -- a lot of attention and there's a lot of different bidders to the EPC forcing the pricing down. Again, I said this a little bit earlier, we are very focused on moving our margins up and we're not afraid to walk away from something that's not going to meet our margin threshold or the margin that we think we deserve, we're booking and executing these larger type work. And so, we've turned work away and we're going to target areas, and we're going to target partners where we know we can make the margins that we need to make. And when we look at the project portfolio and the things that we're tracking to in 2019, they all have a higher margin than what we've accepted over the last couple of years at Flowserve.

Nathan Jones -- Stifel Nicolaus -- Analyst

Okay. Then maybe just a quick one on the backlog quality. I'm sure you don't want to talk about what the exact margin and kind of things are in backlog. But could you maybe talk a little bit about how much better the margin is in backlog are now than at the end of '18 than they were at the end of '17. And if you expect that quality in backlog, that margin profile in backlog to continue to improve as we go through '19?

R. Scott Rowe -- President and Chief Executive Officer

Yeah, I'm not going to give any numbers on that, but it's certainly implied in the guidance, right. And so you can see in the guidance that we're uplifting the margin percentage with -- where we landed on the EPS guidance. And I said this a little bit earlier, but in -- we really started to be selective and focused on margin in our backlog and really focused on pricing at the beginning of '18. And I would say throughout the year, we got better and better and so every quarter we've been able to get more confident in building that margin in backlog. And so, we've got some pretty good momentum here.

And I would say, this really -- what I'm talking about is that really applies more on the pump side than the valves side because the valves have historically kept reasonably good margins even throughout the cycle. But on the pump side, we definitely expect to continue to expand margins given what we've booked thus far. And I don't see that changing here at the beginning of 2019.

Nathan Jones -- Stifel Nicolaus -- Analyst

Okay, that's helpful. Thanks very much for taking my questions.

R. Scott Rowe -- President and Chief Executive Officer

Thanks, Nathan.

Operator

Our next question comes from Charley Brady from SunTrust. Please go ahead.

Charley Brady -- SunTrust -- Analyst

Hey, thanks, good morning. Just kind of back on Nathan's questions on large projects out there. I guess more appropriate kind of medium-sized projects, is the -- we're just hearing that the pricing competitiveness is still really, really tough out there and relative to what a normal margin might be considered is still may be anywhere from 500 basis points to 700 basis points delta. I'm just wondering, is that something you're still seeing? Is that pressure lessening in all? Or is it more confined to certain areas and other areas you're really not seeing that sort of pressure.

R. Scott Rowe -- President and Chief Executive Officer

No, there is definitely pricing pressure out there. And what I would say is, when you get an EPC that's launching five different bidding process and we've got a bunch of people competing then the margins are not going to be very good. Where we have some proprietary technology and we're able to leverage that and then selectively add in other pumps and valves around that, then our margin profile moves up and it's in a much better place. And so, part of our efforts within the transformation is to really get more proactive about our planning.

I've talked about sales and operational planning before, but we've implemented now a CRM system, we now have global visibility to demand and we've got a much better understanding of where our capacity is. And so, we can make more informed decisions and be more selective about what we want to take and not want to take. And so, while some of these projects are going to command or get a lot of attention from our competitors and drive prices down, we're not necessarily going to compromise on that and we're going to go find the ones where we think we can make the right money and where we can provide either the right solution or the right technology that brings Flowserve the value that it deserves in these projects.

Now the other thing, I'd say is, when we look about, and I'm thinking more on the pump side here, if we look across the peer group and where folks are, we are starting to see some capacity fill up. And I would expect the pricing should continue to improve throughout 2019. But what I'd say is, there is -- there are still projects and some activity out there that -- that is not what I would have expected because I would have expected more discipline on pricing with the peer group here at the end of '18 than we saw.

Charley Brady -- SunTrust -- Analyst

Yeah, that's really helpful. Thanks. And then just one more from me on IPD. So the margin, I guess, the margin obviously in the quarter was a lot higher than we expected and I know you commented on that. I'm just to trying to understand how much of that, I guess margin lift was due just from flushing out the past due backlog versus I guess the core business operations for lack of a better term.

R. Scott Rowe -- President and Chief Executive Officer

Yeah, and I don't want to get in too many specifics, but I mean, clearly it was a combination of all three things, right. It was the margin improvement, there was definitely some seasonality with the fourth quarter just -- in fact that we're still focused on end of year rather than all quarters, so we had a little bit of that. And then we've got some operational improvement and then we have this divestiture that was a low margin to losing margin business that came out of the system. And just the combination of all of that and then back to what I said earlier that you know just the blocking and tackling and the basic fundamentals of running a business in the proper manner is allowing us now to get our margins into a much healthier place. What I'd say is, 10% was better than we had expected, right. We had been saying kind of mid to high single digits. And so, we definitely had some wins in the quarter, but we feel really good about the sustainability in '19 over the full year to continue to grow the full-year margins within that platform.

Charley Brady -- SunTrust -- Analyst

Great. Thank you.

Operator

Our next question comes from Joe Giordano from Cowen. Please go ahead.

Joseph Giordano -- Cowen and Company -- Analyst

Hey, guys. Good afternoon.

R. Scott Rowe -- President and Chief Executive Officer

Hey, Joe.

Joseph Giordano -- Cowen and Company -- Analyst

So, I just want to start on cash. In the quarter I think some of the -- on the operating cash flow side, some of the variance versus where many of us might have been seem to be unlike the accrued liabilities paid down rather than like a traditional working capital account. So one, is there anything like, we should note in that account going forward? And then Lee, just like on your longer term 100% conversion, how should we think about that? It's obviously a big move from where we are today, like how linear should that kind of the be or is it going to be kind of a step change toward as we get closer to 2022 how do you kind of foresee that?

R. Scott Rowe -- President and Chief Executive Officer

So, let me answer the second question first. And so, I think one of the things on cash conversion that we're trying to improve upon is, I would say is, first the gap between reported and adjusted earnings. As part of my prepared remarks, I highlighted that, right now we've roughly adjusted -- adjustments roughly around $65 million, that is significantly lower than where it's been. And so, and the first things is really trying to improve the quality of earnings and have fewer adjustments. So it's an area -- so that's part of it.

The second part of it is obviously the working capital performance. And just continued and expanding our margins. So I wouldn't necessarily say it's linear, but we expect to do significantly better in '19 than we did in '18. And just having fewer adjustments is a step in the right direction. And as I talked about earlier, improving our working capital performance is also another step in that. So we hope to get to there sooner, we're not waiting to 2022 to get to 100%, but we're going to be -- we are looking to make it, I would say, a relatively step function improvement in '19 and '20.

Joseph Giordano -- Cowen and Company -- Analyst

Okay. And was there anything in that accrued kind of category that we need to...

R. Scott Rowe -- President and Chief Executive Officer

Yeah, I mean, there was some adjustment around pensions, the discount rate change and that lowered some of our liabilities. But it really didn't have, I would say, an immediate P&L impact. The discount rate lowered that liability and there have been some adjustments around some environmental accruals and so forth. So I wouldn't point to something that is significant.

Joseph Giordano -- Cowen and Company -- Analyst

Okay. And then on margin, I mean, two things here, one on IPD, obviously you just -- we don't want to be in a situation where it's a big surprise positively in 4Q and then it sets up to be a surprise negatively in 1Q, just given where we're coming from on a comp basis. So historically it looks like 200 basis point to 300 basis point kind of sequential move from 4Q to 1Q it seems like an average before things kind of went haywire. How would you kind of handicap that now? And then like broadly with margins, I just want to get a sense of what kind of savings are you baking in, into your 2019 from like the restructuring efforts, I guess the incrementals inclusive of savings seem fairly modest given that kind of organic growth. I'm just trying to gauge your conservatism in that margin number.

R. Scott Rowe -- President and Chief Executive Officer

Yes. So let me talk about the first quarter first. And Lee kind of said this earlier, I think as you think about our earnings and revenue over the different quarters, I think using 2018 is the good go by in terms of what to think about. On IPD specifically, it was a big quarter as what we had expected. And Q1 will not be as good, and so it's going to come down, I'm not going to give you exact number, but it will definitely come down.

But when we think about year-over-year, we do expect to continue to grow the IPD margins. And quite frankly all of the platform margins. And then the second half of the question was, remind me, what did you want in the second half there, was that more on the full-year right?

Joseph Giordano -- Cowen and Company -- Analyst

Yes, I was just curious like, in your earnings guidance, how much like savings are you baking in from like the restructuring efforts that you've done in 2018 and you are planning on doing in '19. And this is like incremental seem even at the high end below 40% or so, which seems conservative based on the 6% to 8% organic growth for you guys. So just trying to gauge...

R. Scott Rowe -- President and Chief Executive Officer

Yes, that's a fair question. I will just say, the way I look at it is, I look at EPS from 2018 to kind of what we're guiding at the midpoint and it's a 17% growth. And so, that doesn't feel conservative at all to me. I get where you are going on when you kind of back into that incremental margin and what the basis point improvement is. But what I'd say is, we feel pretty good about the guidance. We think it is aggressive, but we also think it's achievable.

We said this a little bit last year right, we're not going to put something out that we don't think we can make and quite frankly our internal plans and everything that we're trying to do would be higher than what we're putting out in the guidance for 2019. But we have got a lot of good momentum, we're doing the right things and if we can move margins up higher and at a faster rate then we're not going to let off of that.

Everything is wired around the transformation program, right, so the pricing work stream, the operational work streams around supply chain, cost takeout and the other things are all in full motion and we're going to execute those as fast and as furious as we can throughout the year in 2019. And we're making good progress on this.

Joseph Giordano -- Cowen and Company -- Analyst

Thanks guys.

Operator

Our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Hi good morning guys or I guess good afternoon. Thanks for fitting me in.

R. Scott Rowe -- President and Chief Executive Officer

You're right in below the wire here.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

We appreciate it. Scott, a lot of ground has been covered already, but I guess one thing that sticks out on some of your aftermarket commentary is that, I think we came off a pretty strong second half in '18 in terms of turnaround activity in refineries, the calendar looks good for the first half of '19 as well. But I would imagine at some point you hit tough comps, is that part of, some of that second half apprehension in the MRO sustainability?

R. Scott Rowe -- President and Chief Executive Officer

Yeah. I think that's certainly factored in, and then just quite frankly, we just don't have the long-term visibility on MRO spending, right. We don't get a lot of communication here and it's hard to track it. Like I said earlier, what we hope though is that, the market and the spending levels increase and then what we do know is that our commercial intensity program are going to drive your growth above what we have had historically and expand our market share of what we have from the installed base.

So we've got that working for us and quite frankly just the question is from an customer standpoint how much spending and availability is there in the back half of 2019.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

And I guess that's kind of the corner (ph) or the center of the question is, are you getting a sense in the marketplace that customers have caught up from unsustainably low levels of spending to where they are overspending near-term and growing from this level is not as obvious. (multiple speakers)

R. Scott Rowe -- President and Chief Executive Officer

No, that's not what I am telling. Yeah, let me be really clear. You know everything we are seeing right now points to continued growth, right. The fourth quarter was good, the data point in the first quarter is solid. And so, we fully expect that MRO spending maintains or continues to grow. What I'm just implying is like if there were risk and pulling us down to the lower side of what we guided, then it could potentially be a slowdown in the '19 MRO, back half for the year MRO spending. But right now, we are not seeing that, we're not seeing it, but we just don't have that visibility that it continues in the back half of '19.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it, that's helpful. And then just one cleanup question for Lee around free cash. Lee, if I assume that you guys are -- call it working capital neutral, which would be some good progress given the level of growth that you're expecting in '19. Just between restructuring and pension that it kind of brings you down to somewhere in the neighborhood of 75% conversion, is that a good starting point or is there anything else on discrete line that we should be aware of?

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

I think our aspiration is to be better than that.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Okay. Got it.

Operator

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.

Duration: 72 minutes

Call participants:

Jay Roueche -- Investor Relations

R. Scott Rowe -- President and Chief Executive Officer

Lee S. Eckert -- Senior Vice President, Chief Financial Officer

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

John Walsh -- Credit Suisse -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Scott Graham -- BMO Capital Markets -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Brett Linzey -- Vertical Research Partners -- Analyst

Nathan Jones -- Stifel Nicolaus -- Analyst

Charley Brady -- SunTrust -- Analyst

Joseph Giordano -- Cowen and Company -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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