Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Flowserve Corp  (NYSE:FLS)
Q2 2019 Earnings Call
Aug. 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Flowserve 2019 Second Quarter Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. [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.

John E. Roueche -- Vice President of Investor Relations and Treasurer

Thank you, Paulette, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's 2019 second quarter 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, 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 and contain forward-looking statements. These statements are based upon forecasts, expectations and other information available to management as of August 1, 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 measures 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.

Robert Scott Rowe -- President and Chief Executive Officer

Thanks, Jay, and good morning, everyone. Flowserve delivered solid second quarter financial results building on the momentum of the first quarter. We continue to make progress on our Flowserve 2.0 transformation journey, and we are 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 program to drive growth, lower costs and deliver operational improvements throughout the company.

Flowserve 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 60 and 200 basis points, respectively. Adjusted EPS of $0.54 increased 32%, both sequentially and year-over-year.

Reported EPS of $0.44 included transformation and realignment costs of $0.08 and below-the-line foreign exchange impact of $0.02. 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 $2.05 to $2.20. Turning now to our segments. FPD's first half performance continued to validate our decision to combine our pumps platform and leverage its scale and better serve our customers.

FPD's 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 and leverage drove a 230 and 210 basis point improvement in adjusted gross and operating margins, respectively. With the multiyear realignment program now largely complete, we are optimistic about the opportunities ahead for this segment. Our legacy IPD facilities continued to show improvement this past quarter, and we are 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 and higher mix of lower-margin project work in a slowdown in short-cycle MRO activity. As a result, adjusted growth in operating margins decreased year-over-year by 190 and 110 basis points, respectively.

However, we fully expect the FCD 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 Lenander who has led the FCD segment for the past 4 years. John retired earlier this month, and we wish him well in the next chapter of his life. Turning now to our overall bookings 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 3 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 drove 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, and 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 and fluctuations in commodity pricing. Original equipment orders grew nearly 12% over prior year and over 7% sequentially, accounting for 54% of bookings 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 relationships, 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 projects 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 increase Flowserve's 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 are 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 at Flowserve to better meet our customers' challenges.

Turning to our aftermarket franchise. We continue 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 Flowserve 2.0 growth initiatives, coupled with the increased customer spending we see, 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 end market perspective and starting with our largest market, oil and gas. Second quarter bookings increased 22% year-over-year driven primarily by FPD's 30% growth with FCDs contributing a 6% increase.

Both LNG and midstream pipeline awards represented over 5% each of Flowserve's bookings this quarter. Two of our largest awards in the quarter are 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 strike zone initiative where we are 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 debottlenecking 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 project in run rate investments in FCD's 16% growth, which included an $11 million 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 opportunities, including ethylene crackers and derivative facilities. Challenges in our power markets continue where second quarter bookings declined 4% year-over-year. We were pleased that FCD 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 industrywide 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 in 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 in general industries declined 13% year-over-year, including nearly 3% of currency headwind. FCD's 5% increase was more than offset by FPD's 19% decrease primarily due to lower distribution activity that was negatively impacted by oil price volatility 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 and Europe. Turning to total bookings by geography.

We delivered 49% growth in the Middle East and African markets where we're seeing a significant increase in project activity. We 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 Lee to cover our financial results in greater detail, and then I'll return for closing remarks before we open the call up to questions and answers. Lee?

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

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 $0.54, in line with our expectations, and keeping us on pace to deliver another year of substantial adjusted EPS growth. On a reported basis, second quarter EPS was $0.44, which included $0.08 of realignment and transformation charges and $0.02 of negative below-the-line currency impact. For the first 6 months of 2019, our adjusted EPS of $0.95 is 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 Flowserve's 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 FPD's 230 basis point improvement to 33.6%, which included continued operational improvement, cost control and leverage from our pumps combination. Partially offsetting FPD's strong performance was a 190 basis point decline in FCD's adjusted gross margin to 31.4% primarily due to higher sales mix of lower-margin project work as well as lower percentage of MRO and aftermarket sales. Reported gross margin increased 270 basis points to 32.1% on improved operational execution, decreased realignment items and the impact of 2018's loss on an asset sale.

Second quarter adjusted SG&A declined $7.6 million to approximately $214 million. As a percentage of sales, adjusted SG&A 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 SG&A 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 drove a 200 basis point improvement in adjusted operating margin to 11.3%. FPD's 12.1% adjusted operating margin increased 210 basis points year-over-year, which was partially offset by FCD's 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 in net reduction in adjusted items.

Our adjusted tax rate was 26%, at the low end of 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 percentage 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 and order cash processes until they are sustainable, systemic and embedded into our operating cadence.

Capital expenditures for the second quarter were approximately $15 million. We also returned $25 million to shareholders through dividends, and we paid $15 million of long-term debt. In July of this year, Flowserve entered into a new $800 million 5-year senior credit facility replacing the one that had supported us since 2012. Our new facility provides Flowserve with the liquidity and flexibility to support the company over the coming years. We are 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 $2.05 and $2.20 per share. The adjusted EPS target range excludes the expected 2019 realignment and transformation expense of approximately $50 million as well as below-the-line foreign currency FX 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 to 4% to 5% from the prior range of 4% to 6% due to the continuing strong U.S. 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 0.5% from last year's business divestitures. However, our total organic revenue growth, excluding the impact of FX and last year's divestitures, remains at the high end of our original range now narrow to 6.5% to 7.5% for the full year 2019. As I indicated last quarter, our revenue growth for the year will see a higher percentage of sales from larger project, original equipment work as the growth in our short-cycle MRO business has decelerated in recent months. Net interest expense for the full year is expected to be between $55 million and $57 million with an adjusted tax rate of 26% to 28%.

From a 2019 full year 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 continue to reduce our long-term debt within our credit facility during the remainder of the year. And we expect to contribute approximately $20 million to our global pension plan, mainly to cover ongoing service costs as the U.S. plan remains largely fully funded. Let me now turn it back to Scott for his closing remarks.

Robert Scott Rowe -- President and Chief Executive Officer

Great. Thank you, Lee. As I wrap up, I would like to spend a few minutes on our outlook and the progress of our transformational efforts. We are well into the Flowserve 2.0 transformation program that commenced in early 2018. I am very pleased with the momentum that we're building on the multiyear journey to drive the cultural and operational improvements necessary to better serve our customers, our employees and our shareholders. Over the last 2 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 are 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 2 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 and 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 in 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'll build on the momentum that we have created and continue to drive further improvements at Flowserve. Operator, we have now concluded our prepared comments, and we'd like to open the call for questions. Paulette?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Andrew Kaplowitz from Citi. Please go ahead.

Andrew Kaplowitz -- Citi -- Analyst

Hey good morning guys.

Robert Scott Rowe -- President and Chief Executive Officer

Good morning.

Andrew Kaplowitz -- Citi -- Analyst

Scott, can you step back and talk about the cycle as you see it? You haven't recorded $1.1 billion in bookings since early 2015. But yet, many of your peers have been talking about project delays. And obviously, we have seen a short cycle slowdown that you're feeling in your general industrial business. So can you give us some perspective on the booking cycle as Flowserve sees it?

Do you think there's a good enough pipeline out there where you could sustain your growth from this level of bookings for the next few quarters? And how much on a higher level of bookings is actually coming or could come from self-help with the initiatives that you have for the strike zone and commercial intensity?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. So our project outlook still remains really positive. And so I've talked about that now for probably 2 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 2 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 strong as well.

And so I think from a project standpoint, 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 that North American MRO business. And so this is primarily the distribution network that services some of the -- more of the upstream market 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 our bookings were down 12% year-over-year.

But I'd say that's where we're putting the most focus on transformation, right? So our commercial intensity is meant to attack and really address that MRO-type business. And I would say that we're trying to offset 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 remains solid.

Andrew Kaplowitz -- Citi -- Analyst

And just following up on that, Scott, can you give us more color into your margin progression in FCD? You mentioned the short-cycle slowdown impact in margin segment, but you just said that general industrial was weak last quarter also. So what changed this quarter? And should we still see FCD on a generally upward margin trajectory for the second half of '19?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. I would say, certainly, we never want to go backwards in margins. And for the first time, FCD kind of took a big step backwards. It's really being impacted by the mix within our OE business. And that's the slower MRO work that comes through the North American distribution. And so it's not shown in after work. It is more on that OE side, and the OE is pivoted to projects. 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 product 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 inventory has got to bleed off over the next quarter or 2 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 till probably 2020 as the inventory levels start to get down.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thanks. Good morning everyone.

Robert Scott Rowe -- President and Chief Executive Officer

Morning.

Deane Dray -- RBC Capital Markets -- Analyst

Hey Scott, I would love to follow up on Andy's questions and this whole sort of industrial short-cycle pressure is -- been happening to everyone. So there's no surprise that it manifests in your business. And you gave really good color in terms of what you're seeing and 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.

Robert Scott Rowe -- President and Chief Executive Officer

Sure. I'd say it progressed 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 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 level of activity in it for the back half of the year. And so that's already baked in, and we don't have any uplift in that guidance.

So I would say, as 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 we start to move up from where we are. I'd say -- the other thing I'd just add is, this is -- it's something that's happening to everybody. As you said, it's that short-cycle industrial, and 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 some 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 shelves. And so we get good visibility with our partners and their inventory levels. And 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.

Deane Dray -- RBC Capital Markets -- Analyst

That's real helpful. And given that bookings were one of the positives I hear in your results, I'd love to hear more color on this large LNG project because it does sound like the perfect win here. You had pumps, valves, seals and services. So what was different about the selling proposition for this win versus what Flowserve 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?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. So unfortunately, I can't speak to the details because our customers don't -- haven't allowed us to do that yet. And hopefully, we'll get a press release out on this shortly. But what I would say is, it's absolutely a flagship award for Flowserve. And it's the first time where really we put the efforts of strike zone across all of our products and the whole portfolio to bear.

And what we saw is when we do that early in the process, so pre-FID and in 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 and we do that early, then we can have incredible opportunities to get a bigger share of these projects and then a bigger share of partnering with them throughout start-up commissioning 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 of the pure play. And it also just validates the efforts in 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. We've 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 pretty big and growing market.

Deane Dray -- RBC Capital Markets -- Analyst

Yes. So congrats on the team on that one. And just a clarification and then last one from me is, could you explain in a bit more detail the aftermarket discussion that you have? You hinted at it that there's some assurances that you'll 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 is?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. So ideally, we would like to sign -- like on a greenfield facility, ideally, we would love to sign the long-term life cycle agreement while we're in the process of negotiating the front-end valve. We haven't done this on this award, but what I would 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'll get aftermarket on that. But I highly anticipate that we will have a long annuity here on the aftermarket sides on both pumps and services in this facility.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

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

Nathan Jones -- Stifel -- Analyst

Good morning. This is Adam Farley on for Nathan. So you sound pretty confident in this late-cycle project work. Could you just provide a little bit more color along the lines of this -- -- of the long -- of the late-cycle projects? We have heard from some companies that projects are starting to slip to the right. I mean there's a little bit of a pause given the macro uncertainty. I mean are you seeing this anywhere in any of your end markets?

Robert Scott Rowe -- President and Chief Executive Officer

So I think we -- we're always concerned. And there's a lot of negativity in the backdrop. But I'd say, for us, in Q3 and Q4, the project work should absolutely continue. And so these are projects that are already through FID or nearing FID. And I would say, the Middle East is incredibly active. North America is active, and Asia Pacific is active. And so we feel really good about our Q3 bookings.

We feel pretty good about Q4. And I would say, as we get further out, then the confidence starts to go down. Certainly, the backdrop with oil and some of the other commodity pricing provides concern here and will potentially delay some of the larger awards. But I think, overall, for us, we've got reasonable visibility in the projects in Q3 and into Q4.

Nathan Jones -- Stifel -- Analyst

All right. That's helpful. And then just turning to free cash flow and working capital. You made some improvements there, but just provide 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.

Robert Scott Rowe -- President and Chief Executive Officer

Yes. I'll start and then I'll let Lee give some details on the receivable side and maybe inventory. But this is an area that we've been focused on since I've been here. 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, though, 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.

And so I feel really good about that. On the receivable side, Lee is leaving that -- leading that, and we're seeing good progress there. What I would say, both that inventory receivables are 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, and our leaders very much understand the importance of driving working capital. And I'm very pleased to start to see the movement here on the year-over-year numbers. Lee, do you want to add anything on overdrawn on receivables?

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

Yes. Just build on what you said. I think the key thing that Scott already kind of ended with was awareness. I recently spent time in India, 3 of our facilities, and they're talking about receivable improvement. They're 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 a start. One of the major strategies we have at Flowserve is try to consolidate our collections work.

I would say, beginning of the year, we have roughly about 30% of our collections worked at our shared services operation. Our goal is to get to around 60% of the year. By doing that, we get a lot more transparency and insight, what's going on, on our receivable performance and what's going on with customers. We're also trying to build out tools to get better insight across looking at our invoices and understanding what is past due and which ones are not being paid.

And now we're in the process of building so much better power BI tools around understanding what is late, providing that information to our sales organization, which we didn't have in the past, and saying, now here are the customers that are delinquent or have issues with us that are -- and preventing them from paying. So we're slowly building out the process. The awareness is clearly there. We're trying to catch up with the tools and the ownership. And as we shift our collections work to shared services, we also expect to also improve that performance.

Robert Scott Rowe -- President and Chief Executive Officer

That's really helpful thank you.

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

Thank you.

Operator

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

John Walsh -- Credit Suisse -- Analyst

Good morning.

Robert Scott Rowe -- President and Chief Executive Officer

Morning John.

John Walsh -- Credit Suisse -- Analyst

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 I 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.

Robert Scott Rowe -- President and Chief Executive Officer

Yes. So it's really not a lot of difference in 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 the work that is a priceless work, 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 is 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 would 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 it now for 3 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 valve, I think we're going to see more people get 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 that's 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 Flowserve and our shareholders deserve. And we'll continue to focus on this as we move to the back half of the year or through the transformation work stream.

John Walsh -- Credit Suisse -- Analyst

Great. 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. Is that still the right bogey? And anything to call out in terms of cadence in the back half?

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

Sure. So just to 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. Now as I mentioned on the last quarter -- last call, we had really strong first quarter cash flow. But the benefit from some accrual timing, that reversed out in the second quarter. But we are really pleased with the $113 million improvement in the first half of the year, and we've got really good line of sight to that 75% conversion.

John Walsh -- Credit Suisse -- Analyst

Great.

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

Thank you.

Operator

And our next question comes from Joe Giordano from Cowen. Please go ahead.

Joe Giordano -- Cowen -- Analyst

Good Morning. I just want to clarify something you said on FCD margin. You said that you're not expecting kind of an improvement until 2020 and some of the distribution kind of frees up a little bit. But are you talking like from 2Q? Or are we 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 year back half, it's something like high 18s, low 19s. So how should we think about second half in that business year-on-year?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. So from the second quarter gross margins, we don't expect gross margins to go down from where we are right now. And so the -- in the progression there really depends on how North America responds and if we're able to get more products to our distribution in that 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.

Joe Giordano -- Cowen -- Analyst

That's 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. Is that just kind of timing? Is that step up to compensate in the back half? Or how should we think about that?

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

Yes. So this is Lee. So as I -- in my prepared remarks, we are focused on driving SG&A down as a percentage of sales year-over-year. That corporate line that you see is it really reflects, I would say, unallocated corporate costs. As I mentioned on previous calls, it's about $100 million of costs that's unallocated. They represent legal costs, some Board costs, some 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.

Joe Giordano -- Cowen -- Analyst

Okay. And then one maybe more higher level on the business. For LNG, I know like we've talked in the past like the leverage you have to that has historically been lower than something like a refinery because certain product categories on like power pumps and stuff like that, that you don't have. Is there ways for you, given how you're 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 project?

Robert Scott Rowe -- President and Chief Executive Officer

Sure. I think through the power of the pure play, that's absolutely how we raise the content. And so we can get valves fold in and get seals locked in, and 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 focus is within our new product development, and we continue to add more cryogenic products, both on the pump side and the valve side, to make sure that we've got a bigger entitlement on each of the LNG trains.

Operator

Our next question comes from Walter Liptak from Seaport Global. Please go ahead.

Walter Liptak -- Seaport Global -- Analyst

Hi thanks good morning. All right. I wanted to ask you an LNG question, too. And it's a good that you've got some LNG projects that are moving forward, and I wonder if you could maybe give us some insight on to like your win rates because there have been a small number of projects that have moved forward. Kind of how do you think about the market share on those wins? And then the second half of the question's, there's a bunch of projects that look like they could go FID and provide visibility into 2020. And have you done the value-added selling or the pre-FID selling on those LNG projects, too?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. Sure. I don't want to get into specific win rates 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 in 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 of the pure play.

We are engaged in other of those type of discussions, but they're way up front in that concept phase. And at this point, I just -- I'd 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 one of the things that we're trying to do is to get more involved with operators and our customers and licensors 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.

Walter Liptak -- Seaport Global -- Analyst

Okay. All right. Sounds good. And then I guess -- and just switching gears to the pipelines, the midstream. And is that where you were talking about in the third quarter, fourth quarter, you've got visibility but 2020, you're 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?

Robert Scott Rowe -- President and Chief Executive Officer

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 of the large pipeline work. So thus far, we launched this initiative about a year ago, and we've booked $120 million over the last 12 months in midstream pipeline.

We believe the outlook for the remainder of the year is reasonably healthy. We don't have another incredibly large award in the kind of $20 million, $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 2 quarters, we feel good about midstream pipeline.

Walter Liptak -- Seaport Global -- Analyst

Okay. All right great.

Robert Scott Rowe -- President and Chief Executive Officer

Okay. I'll pick you up sometime.

Walter Liptak -- Seaport Global -- Analyst

Thank you.

Operator

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

Brett Linzey -- Vertical Research -- Analyst

good morning all right. Just I 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 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?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. I'll let Lee walk through our revenue guidance here in the back half.

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

Yes. So just to answer your question directly, we're now expecting around 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, we're pretty much flat year-over-year. So we feel good about our revenue guidance if we could -- we should be able to convert the backlog and get the same amount of book and burn that we've had historically.

Brett Linzey -- Vertical Research -- Analyst

Okay. Great. And then just thinking about the Q4 to -- or Q3 to Q4 progression, from a growth standpoint, but also margins, anything to be aware of from a modeling standpoint and the way all levers aftermarket mix hits both those quarters?

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

Sure. I'm glad you brought that up. So just to remind everybody, we remain highly focusing on spending 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 5 quarters. 4 out of 6 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 in OE being up 20% year-over-year.

So as I discussed in the first quarter call and discussed in my prepared remarks, we expect the sales mix the rest of the half year to shift toward the OE in the project worked with the strong bookings that we have. And so the result is that we're going to see an increase in OE sales, which is going to help drive earnings and 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 a heavy aftermarket mix.

Brett Linzey -- Vertical Research -- Analyst

And is that a Q3 comment? Or just kind of the back half as a whole?

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

I would say it's the back half.

Brett Linzey -- Vertical Research -- Analyst

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 were in the $20 million range. Could you just quantify that? And then just any visibility on the timing when those went out.

Robert Scott Rowe -- President and Chief Executive Officer

LNG award was right at $30 million. Our big midstream pipeline award was about $20 million, and then we had a nice concentrated solar power award in the Middle East, that was around $20 million as well. So that's kind of -- when we talk about large projects, that's kind of the size that we like. And we can bring our technology and get the margins that we deserve in that kind of range.

Brett Linzey -- Vertical Research -- Analyst

Okay. I appreciate all the color.

Robert Scott Rowe -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Steven Fisher from UBS. Please go ahead.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning. I just wanted to follow up on your recent comment there a couple of questions ago about the midstream where you said there's lots of activity I think in the $10 million to $15 million range after this big $20 million to $25 million, 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 really going well this year. It's bound to slow down?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. No. That's a great point because I probably didn't answer as well as I should. 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. 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 million to $15 million work, and we believe we'll get our share of that. We just don't have great visibility to 2020. When you look -- when you step back and look at the macro, you'll know there still needs to be pipeline buildout certainly in North America and then in other parts of the world. And so I would expect the international opportunities to start to come through in 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 in what we're chasing and looking at and talking to our customers.

Steven Fisher -- UBS -- Analyst

Got it. That's helpful. And then is there any connection on the MRO piece in North America tied to oil and gas directly or indirectly? And is there any assumption that, that would have to pick up in, say, the fourth quarter to kind of get your FCD margin back up?

Robert Scott Rowe -- President and Chief Executive Officer

Yes. No. The -- our distribution channel is largely oil and gas. Now there's others that's -- there's refining, petrochemical and others, but a big portion of that is the oil and gas market. And so we need oil and gas to pick up in the back half of the year, the more the upstream side. And as that happens, we start to move up in our bookings and certainly in our revenue because it's a such a short-cycle business there.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

John E. Roueche -- Vice President of Investor Relations and Treasurer

Robert Scott Rowe -- President and Chief Executive Officer

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

Andrew Kaplowitz -- Citi -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Nathan Jones -- Stifel -- Analyst

John Walsh -- Credit Suisse -- Analyst

Joe Giordano -- Cowen -- Analyst

Walter Liptak -- Seaport Global -- Analyst

Brett Linzey -- Vertical Research -- Analyst

Steven Fisher -- UBS -- Analyst

More FLS analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.